Leaner And Stronger Weatherford

Summary

Two years of losses, 10% reduction in workforce, and a bribery settlement are few of the highlights of the past few years of Weatherford.

However, the back office issues are behind the company now and Weatherford is making good progress on its planned non-core business divestitures.

As Weatherford continues to deliver on its transformation, there is significant upside to the company.

To say that the past two years have been difficult for Weatherford (NYSE:WFT) would be an understatement. Two years of losses, 10% reduction in workforce, and a bribery settlement are few of the highlights of the past few quarters of the Dublin based company. However, Weatherford's transformation is finally underway. Back office issues are behind the company now and divestitures are taking place. The company has cut down its capex, reduced workforce and management incentives are linked to returns. And finally, the company is getting help from improving stimulation markets.

Leaner and Stronger Weatherford

The Ireland based company, with majority operations in Houston, continues to slim down and focus on its core operations. The company is scrapping a number of unprofitable product lines and shifting focus to parts of its business, which have the biggest profit margins.

In the past few months Weatherford has announced to sell its pipeline specialty business to Baker Hughes (NYSE:BHI) for $250 million and its Russian and Venezuelan rigs to Rosneft for $500 million. Both these transactions are on track to be closed in the third quarter. Weatherford entered into an agreement with Rosneft to sell its land drilling and work over assets in Russia and Venezuela for $500 million. The deal includes the sale of 345 rigs in Russia (61-drilling and 284-workover) and 6 land drilling rigs in Venezuela. Post this transaction, Weatherford's Russian business will be halved, but the operations will be leaner and focused on the core business.

With both this Russian deal and the sale of the company's pipeline business, Weatherford continues to make progress on its stated strategy of divesting its non-core businesses. On completion of this transaction, WFT will be left with 115 international land drilling rigs, the majority of which will be in the Middle East. According to CEO, Bernard J. Duroc-Danner, the company's remaining 115 international rigs "are being prepared as planned for issuance in the public market in 2015 as an independent international drilling contractor."

The sale/divestiture of Weatherford's non-core businesses adds up certainty to the turnaround thesis. These assets were originally destined to be packaged into the rig IPO expected in 2015. However, investors had previously raised concerns about Russian rigs in the IPO, as these rigs are likely a profitability drag to the rest of the international drilling operations. These concerns are properly addressed now, as only top-quality assets are left behind. The sale should also enhance investors' confidence in Weatherford's execution abilities.

Rich Technology Portfolio

One thing that is important to mention here is that despite of its many challenges in the last few years, Weatherford never cut down on its R&D budget and developed new technologies that are only now being commercialized, with delays driven by back office distractions. These technologies require no additional investment and are quickly gaining traction among customers.

Results Further Enforce Turnaround Story

Weatherford reported 2Q14 adjusted EPS of $0.24, better than consensus estimates of $0.21 and ahead of company's own guidance range of $0.21-$0.23. Overall, revenues were in line, but margins were better than expected. As we have seen in the case of other major oilfield companies, including Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), and Baker Hughes, North America remains the hottest market globally. Weatherford's North America and Europe/Sub-Sahara Africa/Russia regions reported better than expected revenues and margins, while Latin America and Middle East/North Africa/Asia revenues and margins were on the lower side.

Higher activity levels, rising service intensity, a recovery from the seasonal Canadian spring break-up, and a lower operating structure are all expected to drive better 2H14 revenue and operating income in North America. Weatherford also expects Latin America margins to improve sequentially and reach high-teens from current levels of 12.4%. Increased activity in Argentina, Brazil, and Mexico is expected to drive better results sequentially in Latin America. Similarly, the company also expects to see some improvement in Eastern Hemisphere. Weatherford expects its core business margins to approach 20% by yearend from current levels of 16.5%.

Conclusion

Weatherford's strong quarterly results and positive guidance for the rest of the year are encouraging. The company is also making good progress on its planned non-core business divestitures. As Weatherford continues to deliver on its transformation, there is significant upside to the company. While investors remain a bit skeptical, I remain optimistic in substantial improvements in margins and cash flow generation. Weatherford's management has a high degree of confidence in achieving its goals and post second quarter results, investor confidence in management is also increasing.

It is encouraging to see WFT report a quarterly beat and issue positive guidance for the second half of the year. The company is executing its cost reduction program amidst a backdrop of market improvement for oilfield service activity in North America and the Eastern Hemisphere. Weatherford is also making good progress on its planned non-core business divestitures.

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