Weatherford International (WFT) is an oilfield services company. In fact, it is calling itself a new breed of oilfield services company. It can assist with drilling, evaluation, completion, production or intervention of oil and gas wells. This breadth is the result of integrating 250 acquisitions in 13 years. Weatherford's focus is land-based. Weatherford reports revenues in two product lines: 1) Formation Evaluation and Well Construction and 2) Completion and Production. During the formation/evaluation cycle, Weatherford strives to "find the sweet spot". Well construction focuses on "securing well integrity". Completion's main goal is "maximizing performance". Production assists customers with "optimizing production".
Weatherford may well be one of the most hotly debated stocks in the oilfield services industry. I called Weatherford a roller coaster ride in December 2012. Weatherford's multi-year turmoil centered around tax accounting issues which required restatements back to 2007 (Weatherford refiled over 250 returns). Before the tax issues could be fully resolved, goodwill impairment charges resulted in substantial per share losses. Throw in a contract completion remediation for another hit. Lastly, a credit rating cut in December highlighted Weatherford's debt levels. Weatherford and its share price have taken a beating. As competitors Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI) found their stock prices climbing back to pre-crisis 2008 levels, Weatherford's price is stalled in a low-teens rut.
That was even before its fourth quarter reporting that missed EPS expectations by, to be polite, quite a bit - a mere $0.01 earned compared to the $0.17 estimate. Sadly, the big EPS miss occurred in the same quarter that Weatherford recorded its largest quarterly revenue stream in company history at $4.06 billion, thus facilitating 2012 revenues of $15 billion as the largest annual revenue stream. The miss was mostly due to the effective tax rate peaking at 92% instead of the projected 45%. The loss of $1.02 per share for 2012 overshadowed Weatherford's fourth year of consecutive revenue gain.
At the Howard Weil 41st Annual Energy Conference in March, 2013, Weatherford declared an "end to the noise". Management is purposely shifting to "a culture of cash" - a focus on capital efficiency and cash returns. With appropriately-staffed tax accounting professionals and honed procedures, Weatherford projects a 2013 annual effective tax rate of 34%, down from the 2012 rate of 50%. Its long-term objective is to manage its multinational structure in such a way as to incur a rate in the mid 20% range. That's an about-face from the 92% effective tax rate that hampered the fourth quarter of 2012.
Weatherford's core business focus is pointed to areas where it considers itself best-in-class. Weatherford claims it is unique because of its expertise in unconventional activity, aging reservoirs and well integrity. To its benefit, market saturation in these areas is low.
Weatherford's colors were set to shine bright in its 2013 first quarter earnings report on May 2nd. Yet, it missed again. Analysts expected revenue of $3.9 billion. Weatherford delivered $3.84 billion. Analysts expected earnings of $0.15 per share. Weatherford delivered just $0.03. Weatherford has missed expectations four quarters in a row.
The good news is the effective tax rate decreased to a goal-achieving 28%. Acceptable news is that an unexpected impact of $0.08 per share was from a foreign exchange loss related to the Venezuelan Bolivar's 32% devaluation in February. The miss also included $0.03 of after-tax losses from "old news" items such as the tax remediation and the contract remediation.
Weatherford maintained 2013 guidance of modest growth in North America, steady improvement in Latin America, a positive outlook for the Eastern Hemisphere and recovery in the Middle East/North Africa and Asian regions. Year-over-year revenue was up 7% for the first quarter. In fact, international revenues were up 17% year-over-year. It is appropriate to recall 2012 revenues were the largest in company history.
Weatherford's beaten-down stock price has rebounded almost 20% since December. In the past 90 days, analysts have adjusted 2013 and 2014 earnings estimates downward. Reflecting the challenges and mishaps of the recent past, the downward revisions and the quarterly misses, the stock price is trading at a deep discount to fair value based on long-term EPS growth projections.
Weatherford's management asserted there would be an "end to the noise" in March. In its recently released 2012 annual report, Weatherford pledged to "relentlessly" increase profitability. By all means, eliminate these last sour notes and let the good news crescendo.