Why Weatherford Might Still Be A Takeover Target

The level of merger and acquisition deals have been heating up in the last few days and the energy sector is getting some of the action. For example, Energy Transfer Partners (NYSE:ETP) just announced a buyout of Sunoco, Inc. (NYSE:SUN) for about $5.3 billion. With oil trading for over $100 per barrel, and many cash-rich energy companies reporting solid profits, there is little doubt that more deals will be made later this year.

Weatherford International, Ltd. (NYSE:WFT) appears to have both substantial challenges as well as upside for the stock. This company provides maintenance and drilling services to many leading oil and gas companies around the world. Weatherford is focused on offshore international projects and this has led some analysts to believe that the company could be a takeover target. A company like Halliburton (NYSE:HAL) might be interested in acquiring Weatherford because it would give the company increased exposure to the growth in offshore drilling. However, one analyst at Credit Suisse (NYSE:CS) recently stated that the chance of a takeover has been reduced. This also prompted a price target cut from $27 to $24 per share, however, that would still provide gains of about 75% for Weatherford shares from current levels. The statement from Credit Suisse did not give details on why it believes the chance of a buyout is reduced, but one factor could be the fact that the company announced a restatement of earnings. The company stated that the restatement could involve about $225 to $250 million in adjustments. Once the restatement is complete, it might be one less factor for an acquiring company to deal with in pursuing a potential buyout. Another factor could be the debt level, which is about $7.89 billion. Whether or not a deal occurs, Weatherford shares appear to offer real value at just around 11 times earnings. Plus, the stock is trading at a small premium to book value, which is $13.04. Once the restatement is complete, the shares are likely to see a bounce, and perhaps even a little takeover potential premium.

Key Data Points For Weatherford From Yahoo Finance:
Current price: $13.86
52-Week Range: $10.85 to $22.76
Dividend: none
2012 Earnings Estimate: $1.22 per share
2013 Earnings Estimate: $1.68 per share
P/E Ratio: about 11 times earnings

Halliburton is a major provider of services to oil and gas companies. It has a strong balance sheet and about $26 billion in annual revenue. This gives it the strength and size to make acquisitions in the future. Halliburton shares appear undervalued at just about 9 times earnings and risk-averse investors might prefer Halliburton shares over Weatherford because of the strength of its balance sheet.

Key Data Points For Halliburton From Yahoo Finance:
Current price: $34.06
52-Week Range: $27.21 to $57.77
Dividend: 36 cents per share, which yields 1.1%
2012 Earnings Estimate: $3.52 per share
2013 Earnings Estimate: $3.97 per share
P/E Ratio: about 9 times earnings

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please consult a financial advisor before making investments.