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Why Weatherford International Stock Tumbled More Than 25% in August

By Matthew DiLallo – Updated Sep 7, 2018 at 9:49AM

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Concerns about the balance sheet of the oil-field services company weighed on its price last month.

What happened

Shares of Weatherford International (NYSE: WFT) continued selling off in August, plunging another 25.5% for the month, bringing its year-to-date decline to nearly 50%. Driving the downdraft was the fallout from the oil-field services company's lackluster second-quarter report, which increased concerns about its financial situation.

So what

Weatherford International reported its second-quarter results near the very end of July. While the company's net loss came in a bit lighter than analysts had feared, cash flow missed the mark due to some "seasonal trends [that] worked against us this quarter," according to CEO Mark McCollum. However, the company continues to aim toward its objective of breaking even on a cash flow basis this year. And it plans to keep selling assets so it can trim its large debt load.

A silhouette of two people near some oil pumps at sunset.

Image source: Getty Images.

That balance sheet concern led Moody's to affirm Weatherford's credit rating -- which remains in junk territory -- as well as its negative outlook on the company.

In a note published last month, a credit analyst wrote: "Weatherford's high financial leverage and significant refinancing needs will continue to present elevated credit risk through 2019. While the company is making progress in improving profitability, cash flow, and liquidity, a slow recovery in oil-field services demand and pricing will prolong the company's business transformation and deleveraging process."

That slow recovery in the oil-field services market also weighed on Weatherford's stock last month. Pipeline constraints in the Permian Basin are already causing oil companies to reduce their activity there and shift to other regions, which will impact services company profitability over the next year.

That's clear by the comments of oil-field services giants Halliburton (HAL 1.87%) and Schlumberger (SLB 0.74%) in September, as both issued warnings about the impact this would have on their industry. In Halliburton's case, it said that the slowdown in the Permian, as well as some slower-to-develop work in the Middle East, would knock $0.08 to $0.10 per share off its earnings in the third quarter. Meanwhile, Schlumberger's CEO said that "these [pipeline] challenges will likely have a dampening effect on production growth, wellhead prices, and investment levels in the coming year."

Now what

Despite these issues, McCollum recently said that he expects the company's full-year EBITDA to nearly double from last year's level, and grow by the mid-teens in the third quarter. That puts it on a path to deliver sustainable free cash flow in the future. However, while McCollum remains bullish on the company's future, Weatherford has a long hill to climb, which is why investors should continue avoiding this oil-field services stock until it proves its turnaround plan is working. 

Matthew DiLallo has no position in any of the 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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