Weatherford: Crisis Value

Summary

Weatherford remains a turnaround play in the improving oilfield services sector.

The sentiment on the stock is extremely negative.

The earnings report provides a catalyst that Weatherford will join the sector in improving results.

The big deals in the Permian Basin a few weeks back should benefit the domestic oilfield services companies. The sector moves continue to suggest a ramp-up in spending to drill shale wells as the Permian Basin became profitable during the downturn at oil prices below $50/bbl.

One struggling company that could benefit the most from a ramp-up in capital budgets from E&P firms is Weatherford International (NYSE:WFT). Down near $5 due to heavy debt loads, the stock isn't for the risk averse.

Negative Sentiment

According to the NYSE (via WSJ), Weatherford has the sixth largest amount of shares shorted. Most of the top shorted stocks saw additional shorts for the period ending January 13. Weatherford was no exception, with an additional 4.3 million shares shorted, bringing the total to 106.9 million.

The negative sentiment is further highlighted by StockTwits where posters are sometimes 50% bearish on the stock. Some of the most popular stocks will have bearish ratios below 5%.

Source: StockTwits Sentiment

Maybe a better way to highlight the negative sentiment on Weatherford is the call by Barclays. The firm turned bullish on the oilfield services, but the company actually downgraded Weatherford to Equal Weight.

Even more interesting is the call for a $7 price target, suggesting roughly 35% upside from the current price. One has to be irrationally bearish on a stock to suggest avoiding 35% upside. Especially considering some of the call is related to management changes that most investors thought were a must anyway.

Beat Down

Deriving a valuation for Weatherford is difficult considering the large debt load and negative earnings. Even more concerning is that Halliburton (NYSE:HAL) is still pricing the oilfield services company into the red.

Clearly, Weatherford would have limited value to equity investors if losses and negative cash flows are sustained due to pricing pressures. Remember though that Halliburton needs to eventually focus on profits.

Losing upside pricing to force Weatherford into bankruptcy isn't helpful to Halliburton. Weatherford would restructure, cut debt, and come back a stronger competitor.

As well, the WSJ reports that drilling costs for crews and supplies are up between 10% and 20% over the winter. Such a move helps Weatherford and doesn't support the negative thesis presented by possibly some select pricing issues in pressure pumping.

The oilfield services company reports after the close on February 1. The forecast is for a $0.34 loss in Q4. The more crucial number is the estimated Q1 loss of $0.26.

Weatherford needs to at least maintain the expectations for the sequential improvement, if not lower the Q1 loss estimate. The market will not focus as much on the absolute amount as the path towards profits.

Takeaway

The key investor takeaway is that the sentiment on Weatherford is extremely negative pushing the stock towards multi-year lows. Other sector stocks are trading towards multi-year highs providing a huge turnaround opportunity if the company can show improving results similar to other sector players.

After all, the price target suggests Weatherford is still trading at a crisis value when the crisis is disappearing.

Disclosure: I am/we are long WFT.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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