The first-quarter earnings report for the fourth-largest energy services provider, Weatherford International (NYSE:WFT), was not flawless in terms of growth or margins. What was, and is, more important is that the company has very clearly put itself on a path of serious self-improvement and is remaking itself into a high-margin provider of services with relatively little overlap with the big three -- Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), and Baker Hughes (NYSE:BHI).

With this progress, the penalty to Weatherford's earnings before interest, taxes, depreciation, and amortization multiple no longer seems as appropriate, and these shares continue to look undervalued as an improving play on unconventional reservoirs.

Performance is always at least a little relative
Weatherford's reported results may not seem to explain the big move in the shares for those readers unfamiliar with the story. After all, Weatherford reported 6% year-over-year and and 4% quarter-over-quarter revenue declines. That's not so impressive next to Schlumberger's +5%/-6%, Halliburton's +5%/-4%, or Baker Hughes' +10%/-2%. It was, in fact, actually short of the sell-side target by about $110 million (or 3%).

The bigger story was modestly better-than-expected margin performance, a very welcome sign of stability in a business that has seen years of turmoil, disappointment, and "wait until the next quarter." Operating income did fall 10% year over year but rose 13% from the fourth quarter; and the operating margin was about a quarter-point higher than expected.

Again, this is all about meeting expectations and changing the tone, as Weatherford's absolute margin performance (8%) trailed Baker Hughes' (10.6%), Halliburton's (13.2%), and Schlumberger's (19.3%). Then again, if you look through to the "new Weatherford" margins, you see a much more competitive 15% or so operating margin.

While the increase in net debt was a little disappointing, the company is more than halfway through its workforce reduction. And management sounded very confident about earnings potential for the remainder of the year.

A sizable shift in strategy and focus
Weatherford had built up a portfolio of synergistic technologies for unconventional oil and gas reservoirs that was more oriented to production than stimulation. That's fine, but what wasn't fine was the fact that Weatherford's areas of strength were in low-margin businesses, whereas Schlumberger's strengths were in the high-margin areas (Halliburton and Baker Hughes are roughly in the middle).

Management is in the process of moving aggressively to change this through a program of divestitures, spinoffs, and related moves. What will remain is a core of five businesses, with about 60% of revenue coming from businesses with good margins and minimal overlap with the big three. All told, Weatherford will shave away about a quarter of its past revenue but improve EBITDA margins by nearly 25%.

The top of the stack
Well construction and production will lead the new Weatherford. Well construction will likely supply about 40% of revenue, and Weatherford has long had a strong focus on well integrity. The company operates a virtual duopoly in tubular running services (one of the highest-margin businesses in energy services) with Frank's International -- Baker Hughes holds less than a 10% share and Schlumberger and Halliburton hold even less. Weatherford is also a share leader in cementation and has strong positions in liner hangers, expandables, and related products.

Production is the second part of the one-two punch where Weatherford really excels. This segment chips in around 20% of revenue and is built around Weatherford's leading share in rod lift. Baker Hughes and Schlumberger are both much stronger in electric submersible pumps, and GE bought Lufkin to enter rod lift, but rod lift is better suited to enhancing oil production in areas like the Bakken.

The rest isn't bad either
Behind those two businesses, Weatherford will have its formation evaluation business. While the company has some attractive low-diameter logging tools for wireline, it is a distant laggard against the big three. Likewise, the company's logging while drilling and lab services businesses aren't leaders; but it is hoping to grow with differentiated offerings like its Azimuthal gamma ray technology, which basically uses the detection of potassium, uranium, and thorium to help identify hydrocarbon deposits.

Stimulation and completion are somewhat less exciting. Weatherford has a lot less exposure to fracking (around 10% to 12% of revenue) than Baker Hughes, Halliburton, or Schlumberger. It's completion business is more competitive (third-largest after Halliburton and Baker Hughes) and higher-margin, but it's about a quarter the size of well construction in terms of revenue.

The bottom line
There have been many false starts at Weatherford over the years and a lot of seemingly unnecessary delays when it came to cleaning up the accounting and restructuring the business to be more profitable and productive. Now management appears to be serious, and the "new Weatherford" is looking like a much more interesting, more competitive, and more profitable player in the energy services space.

For those who believe Weatherford really has turned a corner and can now justify a 9 times EBITDA multiple, in line with long-term sector averages, the fair value jumps to more than $25. Weatherford has certainly earned a degree of skepticism, but the potential value in the shares from this turnaround does argue that investors should take a closer look today.