Weatherford International, Ltd. (NYSE:WFT) shares have been hard-hit in the past couple of weeks, but the sell-off seems unwarranted. This company is a leader in drilling services to many of the top oil and gas companies. Even though oil has trended lower in recent days, the energy sector remains very healthy and oil still trades for over $100 per barrel.
First, let's take a look at some of the negatives which might be responsible for the recent downtrend in the shares, and then we can look at a few reasons why the stock could be poised for an impressive rebound in the long-run.
I see two main reasons why investors have allowed Weatherford shares to trade lower, one is due to the overall change in the markets, whereby investors are quick to turn overly-cautious when bad news about the situation in Europe or economic data in the United States grabs the headlines. Since investors saw several unthinkable events transpire during the financial crisis, it has trained many investors to hit the sell button at the first signs of any trouble. The other reason for a sell-off in Weatherford shares is due to a recently announced restatement of earnings. The company stated that:
As a result of the continued material weakness over the accounting for income taxes, significant incremental work has been performed by Weatherford employees and external advisors during 2011 and early 2012, which management expects to result in roughly $225 million to $250 million of aggregate net adjustments to previously reported financial results for the years 2010 and prior relating to the correction of errors identified with respect to the company's accounting for income taxes.
While this restatement is enough to shake the confidence of some investors and perk up the interests of a few attorneys who specialize in securities litigation, it is not enough to derail the company from what is likely to be a promising future. Weatherford has annual revenues of about $13 billion, so a restatement of $225 to $250 million is a relatively minor issue. Here are a few reasons why Weatherford shares could be heading higher:
1. Halliburton (NYSE:HAL), another leading provider of services to oil and gas companies recently reported solid financial results. For the first quarter of 2012, net income was $627 million or 68 cents per diluted share on a GAAP basis. Results would have been 20 cents per share higher, but the company took a $191 million expense for liability relating to the oil spill in the Gulf of Mexico. If Halliburton is posting solid results, chances are good for Weatherford to do the same.
2. Weatherford is a world-class company and it deserves to trade at a significant premium to book value, but right now the stock is trading barely above book value, which is $12.73. It's also trading for a fraction of the 52-week high which is $22.76 per share.
3. While some oil service firms have focused on land drilling and on projects based in the United States, Weatherford is based in Switzerland and it is heavily focused on offshore projects and on international projects. This means Weatherford has less exposure to natural gas projects when compared to many other firms.
While Weatherford could move lower with the markets, the upside potential at current levels appears to outweigh the downside, so averaging into a position could lead to solid returns in the future.
Key Data Points For Weatherford From Yahoo Finance:
Current price: $13.84
52-Week Range: $10.85 to $22.76
2012 Earnings Estimate: $1.29 per share
2013 Earnings Estimate: $1.77 per share
P/E Ratio: about 10 times earnings
Key Data Points For Halliburton From Yahoo Finance:
Current price: $33.98
52-Week Range: $27.21 to $57.77
Dividend: 36 cents per share which yields 1.1%
2012 Earnings Estimate: $3.65 per share
2013 Earnings Estimate: $4.17 per share
P/E Ratio: about 9 times earnings
Data is sourced from Yahoo Finance.
Disclosure: I am long WFT.