Weatherford International (NYSE: WFT), a large multi-national oil service company, has clearly shown it can disappoint shareholders. High-profile accounting issues and legal woes have made many wary of the stock. But there is evidence that most of the troubles may be over. Can a return of investor trust take Weatherford shares higher? Or are more dependable competitors such as Baker Hughes (BHI +0.00%) or Halliburton (HAL +1.41%) better investment considerations? Let's take a look.
Weatherford's string of confidence destroying issues
Weatherford has reported some disturbing news over the last few years, with accounting problems being the most unsettling. Material inaccuracies were found in the company's income tax calculations in 2011. Though remedial actions were taken, the firm was forced to restate previous financial statements again when further errors appeared in 2012. There were also other bookkeeping missteps. A $79 million overstatement of a long-term contract in Iraq was unearthed in 2012. Correcting this miscalculation proved the project, formerly thought to be profitable, a money loser.
The accounting miscues alone would be alarming enough but Weatherford also faced serious legal challenges. Multiple investigations by The U.S. Department of Justice and the Securities and Exchange Commission, among others, looked into the company's participation in the United Nations' oil-for-food program with Iraq, possible improper sales within sanctioned countries, and potential non-compliance with the Foreign Corrupt Practices Act.
While this litany of issues has understandably pressured the company's stock, there are signs things may be getting better. Weatherford strengthened its accounting function, including the hiring of more than 25 highly qualified tax professionals, with no major problems reported since 2012. Progress has also been made on the legal front. The company recently resolved governmental investigations with a $253 million settlement.
Weatherford's results will ultimately decide
Without any accounting or legal overhangs, the oil service provider's results will end up determining its worth. Unfortunately, Weatherford's recent quarterly results weren't very good. Revenues were held flat and operating income declined 24%, year over year, but there were some bright spots.
Overseas business did very well. Revenues were up 17% in the Middle East and North Africa region year over year, and operating income jumped 92%. Sales and income from Europe, Sub-Saharan Africa, and Russia were the highest ever with revenues up 10% and profits increasing 17% from those areas.
Good international results couldn't offset tough conditions in North America, however. The region's quarterly revenues, accounting for over 41% of total sales, dropped 7% from 2012, and operating income fell 20% with intense pricing pressure and falling demand causing the slump.
Surprisingly, given Weatherford's travails, the stock seems reasonably priced. Trading with a market value around 9.16 times trailing 12-month operating cash flows and an enterprise value to revenue multiple of about 1.34, its valuation looks pretty close to industry averages. This may mean the company needs to both regain investor confidence and boost results to achieve a meaningful share price advance.
A dependable peer with excellent performance
Baker Hughes, another leading oil service provider, has proven it can post commendable results. The company recently reported record quarterly revenues that were up 8% year over year with net income rising 22%.
North American revenues, which account for around 49% of total sales, increased a strong 4%, and pre-tax profits grew around 2% -- excellent results in the listless but highly competitive U.S. land-based drilling market. The gains were helped by busier and more lucrative service activity in the Gulf of Mexico.
Baker Hughes' results outside of North America were exemplary. Sales increased 14% year over year, driven by worldwide growth. The international projects were especially fruitful with profits jumping 38%, helped by both more work and better margins.
Baker Hughes shares look conservatively priced, given the company's recent performance. At around 7.81 times trailing 12-month operating cash flow with an enterprise value to sales ratio of roughly 1.30, investors may be overly cautious about the company's reliance on North American oil exploration activity.
A top-notch firm with plenty of investor confidence
Halliburton shareholders don't seem to have many concerns. One of the world's largest oil service providers, its stock looks confidently priced. Trading at about 10.41 times 12-month trailing operating cash generation with an enterprise value of 1.83 times revenues, the valuation suggests ample investor conviction.
Recent results may show why. Halliburton posted record revenue in its latest quarter, up 5% from 2012, with a 16% increase in operating income. Sales gained due to improved demand in all international regions, headed by a record setting performance in Europe, Africa, and Russia. While strong execution worldwide helped boost income, improved profitability in North America was especially impressive.
Despite a North American revenue drop of around 2% year over year, the region's operating profit climbed a lofty 18%. Cost controls and higher drilling efficiencies more than offset pricing pressures from an intensely competitive environment. Halliburton expects even better returns in North America as more business in the Gulf of Mexico develops.
Final thoughts
Weatherford investors have endured a lot of disappointment but the worst could be over. The company may finally be able to go from fixing past problems to improving future results. But to ensure meaningful share price gains, the oil service provider will probably need to match performances posted by peers like Baker Hughes and Halliburton. While it's not clear if Weatherford can meet that challenge, it appears it will at least have the chance, which should be very good news for investors who've coped with the company's tainted and tumultuous past.
