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Weatherford International Q2 Earnings: Still Stuck in Neutral

By Tyler Crowe – Jul 31, 2017 at 10:35AM

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For every positive sign the market gives off, there is a negative one preventing Weatherford from generating income.

For those investors that have been hoping to see a turnaround in Weatherford International's (NYSE: WFT) quarterly earnings results, this wasn't the quarter they were expecting. Even though the company did show some signs of progress with deals and agreements with other businesses, they have yet to translate to revenue for Weatherford. Here's a review of the company's most recent earnings results and what kept the company from a positive result this past quarter.

Rig workers threading drill pipe

Image source: Getty Images.

By the numbers

Metric Q2 2017 Q1 2017 Q2 2016
Revenue $1.36 billion $1.38 billion $1.40 billion
Operating income ($39 million) ($52 million) ($66 million)
Net income ($171 million) ($448 million) ($565 million)
EPS ($0.17) ($0.45) ($0.63)

Source: Weatherford International earnings release.

Weatherford has significant exposure to the North American oil services market. Hearing that, it's safe to assume we would see a substantial increase in revenue and earnings in North America thanks to increased drilling activity and a general tightening of this particular market. That isn't quite the case with Weatherford, though, because Weatherford has a huge presence in Canada. The second quarter is always a slow quarter in Canada because of the spring break up -- the time of the year when the ground thaws and many provincial governments ban heavy equipment on roads to prevent road damage. Excluding seasonal impacts and the planned divestment of its pressure pumping business, Weatherford's North America revenue was up 37% year over year.

Around the rest of the world, Weatherford's results aren't that different from the rest of its oil services peers. Some parts of the world -- Mexico, Argentina, Persian Gulf, Sub-Saharan Africa -- hit the low point of the cycle and are on the upswing, while others -- Brazil, North Sea -- still haven't found traction in this low commodity price environment. The largest influence on these operational results was a $42 million write down of Weatherford's business interests in Venezuela. Both Schlumberger (SLB -2.00%) and Baker Hughes, a GE Company reported similar write downs this past quarter as the oil industry there is a shell of what it once was. Excluding the impact of Venezuela, the international market posted a modest gain.

WFT operating earnings by business segment for Q2 2016, Q1 2017, and Q2 2017. Shows a big year-over-year gain for North America and a large decline in Latin America, but flat results everywhere else

Source: Weatherford International earnings release. Chart by author.

Weatherford's cash flow woes continued into this quarter, as has been the case for some time. To be fair, it did narrow its cash burn from $179 million in the prior quarter to $62 million, but management is still shelling out big bucks for debt service ($107 million), legal settlements ($30 million), and restructuring costs ($40 million). Weatherford remains in compliance with its debt covenants if that is any reassurance, but any company that has to remind investors consistently that it is in compliance with its debt obligations isn't a good sign.

What management had to say

CEO Mark McCollum took the reigns at Weatherford at one of the most challenging times for both the individual company and the oil services market in general. Not only does he have to reinvigorate the company's portfolio of products & services to start generating a positive return, but he has to do so at a time when the market is in a state of flux. Here's what McCollum thinks the market will look like for a while and how Weatherford needs to respond. 

We believe our industry will remain range bound within this 'medium-for-longer' price level for some time, until production growth is moderated. In the interim, we expect continuous short-term cyclical fluctuations. Adapting to this likely new paradigm, our industry must transform itself. We will continue to push innovation, both from a technical and a business model perspective, and we will deliver operational excellence to bring the cost of production down to a point at which all participants can make a decent return.

What a Fool believes

While Weatherford's second quarter earnings show a company that seems perpetually stuck in neutral, there are a couple of things that have happened in recent quarters that could be decent catalysts. One is the company's OneStim joint venture with Schlumberger that should help better utilize the company's pressure pumping equipment and inject the business with some needed cash. Weatherford has also signed some significant ventures with rig company Nabors Industries and oil & gas giants Saudi Aramco and Gazprom. Saudi Aramco and Gazprom are deep-pocketed customers, and having deeper ties to them should lead to significant revenue down the road.

To make these deals profitable, though, the company needs to keep cutting costs. It's incredible to think how much management has reduced its labor force and costs already, but that hasn't been enough to improve profitability that much. Until we see Weatherford translate higher revenues to positive earnings and free cash flow, this stock remains a risky one and investors may want to wait before taking any action.

Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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