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Weatherford's Tax Issues Shouldn't Obscure A Good Story
Energy services provider Weatherford (NYSE:WFT) can try investor's patience a fair bit. Not only does the company have a below-average record within the industry in terms of returns on capital, this is a story where the words "it's always something" seems to especially resonate. That said, the company's overseas leverage is appealing, as is the company's weighting towards oil-heavy services, and the valuation is compelling.
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Not Many Operational Surprises in the Fourth Quarter
Weatherford reported "preliminary" fourth quarter results that included 10% sequential revenue growth, with 15% growth overseas and 5% growth in North America. Although Weatherford's domestic growth was fairly consistent with the Big Three ((Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), and Baker Hughes (NYSE:BHI)), the international growth here was pretty solid - especially in Latin America (up 23% sequentially).
Margins were an interesting story. Operating income (adjusted) rose about 17% sequentially, which was a bit below most expectations but not bad on a comparative basis. Ironically, while the Weatherford story is often about its strong overseas business, its international margins don't really pop out against the likes of Baker Hughes or Halliburton. That said, strong results in North America and Latin America helped offset some weakness in Europe and Asia. (To know more about income statements, read Understanding The Income Statement.)
Embarrassing Accounting Issues
For the second time in less than a year, Weatherford has announced an accounting restatement tied to tax recognition issues. This time, it looks like the restatement will stretch back to 2007 and involve about $225 million to $250 million.
Operationally, this is not going to make much of a difference. Likewise, the Street is not going to care about the actual numbers - historical numbers just don't matter to most institutional investors apart from regional operating margins and so on. Nevertheless, this issue does ding the credibility and reliability of management, and calls its diligence into question. It's also an unneeded distraction at a time when the company is looking to complete some sizable asset sales and close the gap on the Big Three.
A Strong Name for the Present Environment?
While many investors fret about the potential impact of weak natural gas prices on drilling and fracking activity, Weatherford looks to be in good shape. Weatherford is the leader in artificial lift - a service/process that increases the flow of oil or other liquids from a well. That's about one-quarter of its North American business and a service that should be in demand as companies look to boost their oil and liquids production with oil prices above $100.
By comparison, Weatherford is less exposed to pressure pumping. While pressure pumping is less than a quarter of its revenue, it's a much, much larger part of Halliburton's business (around half), a sizable part of Baker Hughes' business and more than one-third of Schlumberger's revenue base.
While drilling activity may abate a bit this year (at least natural gas drilling), I wonder if Weatherford will still look for some selective deals. The company may want to think about adding a drilling fluids management company like Newpark Resources (NYSE:NR) or Basic Energy (NYSE:BAS) and/or some well servicing capabilities.
The Bottom Line
Weatherford looks like a good play on two of the more popular trends in energy today - overseas production growth and heavier exposure to oils/liquids. Even applying a discount to Weatherford's long-term average enterprise multiple suggests undervaluation in the shares today. With fair value looking to be somewhere in the low to mid $20's, Weatherford may well be a name worth grabbing as a play on high oil prices. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Not Many Operational Surprises in the Fourth Quarter
Weatherford reported "preliminary" fourth quarter results that included 10% sequential revenue growth, with 15% growth overseas and 5% growth in North America. Although Weatherford's domestic growth was fairly consistent with the Big Three ((Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), and Baker Hughes (NYSE:BHI)), the international growth here was pretty solid - especially in Latin America (up 23% sequentially).
Margins were an interesting story. Operating income (adjusted) rose about 17% sequentially, which was a bit below most expectations but not bad on a comparative basis. Ironically, while the Weatherford story is often about its strong overseas business, its international margins don't really pop out against the likes of Baker Hughes or Halliburton. That said, strong results in North America and Latin America helped offset some weakness in Europe and Asia. (To know more about income statements, read Understanding The Income Statement.)
Embarrassing Accounting Issues
For the second time in less than a year, Weatherford has announced an accounting restatement tied to tax recognition issues. This time, it looks like the restatement will stretch back to 2007 and involve about $225 million to $250 million.
A Strong Name for the Present Environment?
While many investors fret about the potential impact of weak natural gas prices on drilling and fracking activity, Weatherford looks to be in good shape. Weatherford is the leader in artificial lift - a service/process that increases the flow of oil or other liquids from a well. That's about one-quarter of its North American business and a service that should be in demand as companies look to boost their oil and liquids production with oil prices above $100.
By comparison, Weatherford is less exposed to pressure pumping. While pressure pumping is less than a quarter of its revenue, it's a much, much larger part of Halliburton's business (around half), a sizable part of Baker Hughes' business and more than one-third of Schlumberger's revenue base.
While drilling activity may abate a bit this year (at least natural gas drilling), I wonder if Weatherford will still look for some selective deals. The company may want to think about adding a drilling fluids management company like Newpark Resources (NYSE:NR) or Basic Energy (NYSE:BAS) and/or some well servicing capabilities.
The Bottom Line
Weatherford looks like a good play on two of the more popular trends in energy today - overseas production growth and heavier exposure to oils/liquids. Even applying a discount to Weatherford's long-term average enterprise multiple suggests undervaluation in the shares today. With fair value looking to be somewhere in the low to mid $20's, Weatherford may well be a name worth grabbing as a play on high oil prices. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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