Weatherford: Is A Turnaround Possible?

Weatherford International Ltd. (NYSE:WFT) lowered its fourth-quarter EPS guidance to $0.05-$0.08 in spite of achieving strong third quarter financial results with total revenue of $3.8 billion. The company was expected to generate a higher EPS in its fourth quarter of around $0.26, but due to the effective applied tax rate of 50% and production disruption in the Middle East, the EPS range has gone down. Another reason for narrowing its EPS range in the fourth quarter is that in November the company paid $253 million to settle charges claimed by the U.S. government over bribery and sanction-related issues, including exporting oil and gas equipment to Cuba, Iran, Syria, and Sudan.

Although Weatherford lowered its EPS range for the fourth quarter, the company is still optimistic about its financial performance this year. To improve financial performance, the company has planned to reduce its workforce by around 7,000, which is around 10% of the total workforce. The workforce reduction will be done in parts and is expected to be completed by the first half of this year. As a result it will save $500 million annually for the company, which in turn will improve its free cash flow structure going forward. Moreover, to continue improving its operational excellence, Weatherford is focusing on its core businesses and decided to divest non-core businesses such as drilling fluids, well heads, testing, and production services this year. The divestments are expected to reduce the company's total long-term debt as the total proceeds will be used to pay down debt. During the fourth quarter of 2013, the company divested its Borets joint venture to support debt repayment activity. With this sale, Weatherford gained $400 million; with that, along with its strong cash flow, it successfully reduced its net debt by $700 million during the fourth quarter of 2013.

While continuing with the divestment, the company will separate its land rig business in its fourth quarter of 2014. That business contributes around 50% to the company's non-core business lines. Weatherford has planned to spin out its land rig business through initial public offering (IPO), which is expected to be completed by the fourth quarter of this year. With this divestiture and the spin out plan, the company is expected to continue reducing its total debt liability by $3 billion to $5 billion by the end of 2015. That in turn will help to build a strong balance sheet and improve earnings for the company. Looking at current activity, Weatherford expects to witness an EPS of between $1.10 and $1.20 with the estimated effective tax rate of 25% to 35% for 2014. With the estimated lower effective tax rate, substantial reduction in cost of operation and debt level will help to meet its projected EPS range along with the improve cash flow structure this year.

The artificial lift system: Still a bright spot for the company

Weatherford is one of the leading providers of artificial lifts, and holds one-third of the total U.S. artificial lift market. With the help of Weatherford's artificial lift system the oil producing company can capture more resources and enhance their reservoir recovery.

Artificial lift systems are primarily used in oil wells to increase the reservoir pressure toward the surface. This technique is useful when the natural pressure under the reservoir is not enough to push the oil up. Oil-producing companies use artificial lifts to recover the reservoir oil and ensure stable long-term production of the oil-producing wells. In the U.S., 96% of the oil wells require an artificial lift from the start. Global revenues for artificial lifts will reach $16 billion by 2018 with a compounded annual growth rate (OTCPK:CAGR) of 9.5% from 2013 to 2018. Markets in Europe, South and Central America, the Middle East, and Africa are expected to grow by 2018. As Weatherford has a strong presence in these regions, I expect the company will witness solid quarters ahead.

The company's artificial lift system comes under the completion and production segment, and it helps to reduce the maintenance cost while increasing the well's production life. This segment contributed 39% of the total revenue in the third quarter, a key driver of revenue growth. As a result, during the third quarter of 2013, the company's North American segment revenue improved by 4% through strong performances of artificial lift techniques compared to the previous quarter. Currently, more than 80% of its U.S. pressure pumping has a long-term contract, and with that Weatherford continues to increase its North American artificial lift market share. With the projected market revenue growth of this technique in North America and internationally, Weatherford should improve its top line.

Apart from Weatherford's artificial lift system, the company has also improved its other core businesses. In the well construction segment, it received a $1.5 billion long-term multi-year contract for well construction for all its operating regions. So, the company's improving core business line shows that the guidance toward a better EPS range will be achievable.


Although the company has gone through many challenges and financial obligations, Weatherford's focus on its core businesses will be a better solution in coming quarters. Moreover, reducing debt and heading toward a strong cash flow structure will enable the company to sustain its long-term growth prospects. Thus, I recommend investors hold their positions and wait for the expected turnaround in the coming quarters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.