More than three quarters of the analysts following this energy company rate it a ‘Buy’. In the midst of a turnaround, the company looks cheap.
Weatherford International (WFT)
From The Turnaround Letter
Weatherford International (WFT) is an energy services company, helping oil and natural gas clients across the globe evaluate drilling locations, construct and complete wells and intervene to boost production as wells age. It also owns a small fleet of 110 land drilling rigs.
An estimated 90% of its revenues come from land-based activities. Since 1998, the company was led by Chairman and CEO Bernard Duroc-Danner, who became known in the industry simply as “Bernard” due to his large, highly-confident personality. Under Bernard, Weatherford grew rapidly to reach $15.3 billion in revenues in 2013, nearly a third the size of industry giant Schlumberger.
The flaws in Weatherford’s aggressive, debt-funded growth strategy were exposed by the collapse in oil prices in mid-2014. Its revenues fell by 62% and cash flow turned heavily negative. During the downturn, Bernard implemented several wide-ranging restructurings, including cutting staff by 43% and raising $1.1 billion in new equity. Yet, by late 2016, the share price had fallen by 85%.
Ongoing operational and fraudulent disclosure issues compounded Weatherford’s problems. Investors and creditors were rapidly losing patience, as Bernard’s growth-focused mentality was simply not geared to the new environment, and they were looking for more aggressive changes.
In November 2016, dramatic change arrived, when Bernard resigned from all positions other than an advisory-only Chairman Emeritus position. Finally free from his dominating personality, Weatherford is on a well-defined path to recovery. The new CEO, Krishna Shivram, who joined in 2013 as CFO from highly respected Schlumberger, is rebuilding the management team and emphasizing four priorities: 1) cutting debt by half, 2) refocusing on the company’s core expertise and divesting capital-intensive and non-core operations, 3) expanding its opportunity set with alliances and new sales channels and 4) getting “back to basics” to improve operational execution, accountability and service quality.
The turnaround is not without challenges, and so the shares are not without risk. Competition is fierce especially with the excess industry capacity. Weatherford produced an operating loss (adjusted for non-cash charges) of $706 million last year, and it carries $7.6 billion in debt (partly offset by $1.0 billion in cash).
However, its game plan looks promising, debt maturities are minimal through 2018, and cash flow is already showing significant improvement. Margins are likely to expand quickly with new revenues because the company’s cost structure will be lean. In addition, $1.7 billion in net operating loss carryforwards (NOLs) will largely eliminate any income taxes for several years. And if management can’t get results back on track, Weatherford could be an acquisition target for healthier competitors. We recommend purchasing shares of WFT up to 10.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, March 2017