Weatherford International (NYSE: WFT) has quite a bit on its plate right now. Between its massive debt load and its recent decision to relocate corporate headquarters to Ireland for corporate tax benefits, there are plenty of things to keep management up at night. Unfortunately, changes like moving corporate headquarters distract from the real problem: growing the business and profitability. Let's take a look at what has been going on at Weatherford and what the company really should do to turn things around.
Tripping over a dollar to save a dime
The government investigation that led to Weatherford pleading guilty to violations in the Foreign Corrupt Practices Act last year left a pretty big stain on the company's earnings, and more than anything else it has been a distraction. As bad as these issues have been, though, something more problematic for the company has been the severe drop-off in operating margins over the past several years. This chart from Schlumberger (SLB -2.44%) goes to show that in the past two years, Weatherford's operating margin has fallen from 13% to less than 10% since 2011.
Source: Schlumberger investor presentation.
To be fair to Weatherford, it has been hurt by several aspects that have been out of its control, namely the Arab Spring. In 2010, over 50% of the operating income for its Middle East/North Africa/Asia Pacific came from four countries: Algeria, Yemen, Libya, and Iraq. Thanks to political turmoil, civil wars, and terrorist activity, these four have come to represent less than 5% of operating income since then. Also, Weatherford has seen some slumps from a downturn in capital spending from Mexico's PEMEX and Venezuela's PDVSA has not been paying its bills on time, if at all. These events have hurt Weatherford much more than its peers because some of its competitors have much less of its business coming from these parts of the world.
| Company | Percent of Revenue From Latin America, Middle East, North Africa & Asia-Pacific |
|---|---|
| Weatherford | 40.4% |
| Schlumberger | 40.9% |
| Halliburton | 29.2% |
| Baker Hughes | 28.9% |
Source: Corporate press releases.
One aspect that Weatherford could have controlled but hasn't is ballooning debt. Over the past five years, the company has more than doubled its debt load to $8.7 billion and now has a rather concerning debt-to-capital ratio of 51%, considerably higher than its peer average of 28.5%. That much of a drag on the balance sheet will do just as much damage, if not more, than any tax liabilities will.
Starting to see the forest for the trees
Weatherford's management isn't completely oblivious to these issues, and they are looking to shed some of what it is calling its non-core business segments and let go about 7,000 employees worldwide to make it happen. This will lead to the company focusing on five key segments:
Source: Weatherford International.
It may seem strange to create a business around one segment that loses money, but that is one of the byproducts of the flooded pressure pumping business in North America. Currently, Weatherford has about 85% of its North American pressure pumping fleet contracted out, but it expects that to be at full strength by the middle of the year.
What a Fool believes
The sale of its non-core businesses will mostly be used to pay down debt. Of all the things Weatherford could do with that, this is probably the best option. What management is saying right now makes sense, but it's one thing to say it and another to actually do it.
As an investment, it is probably best to stay away from Weatherford. Not only is it struggling with profitability and looking to do a major shift in operations, it is still trading at a premium to its oil services peers on a price to next 12 months' estimated earnings basis. If looking for exposure to the oil services market, it is probably best to look at other players in the space until Weatherford can settle into its new office location and hopefully into its more streamlined business model.
