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Opportunistic but Defensive: Weatherford International

May 09, 2012 | About:
The broader market has held up well in April, despite less-than-encouraging news.

Stocks shrugged off a spike in Spanish and Italian government bond yields, weakness in some U.S. economic data and increased political uncertainty ahead of the French and U.S. elections.

But there’s been good news as well. U.S. retail gasoline prices, while still high, are actually flat to slightly lower on a year-over-year basis. U.S. oil demand recently ticked higher, a sign that Americans are growing accustomed to high gasoline prices.

I’m still looking for a deeper correction in the broader markets as summer approaches, with the S&P 500 falling 5 percent to 10 percent from springtime highs.

To insulate your portfolio, focus on safe-haven groups such as consumer staples and health care.

Weatherford International (WFT)'s first-quarter results fell slightly short of Wall Street expectations, but there was enough good news in the report to prompt a rally in the stock in the days following the release.

North American profit margins weakened across the oil services business, primarily because of a decline in margins in well stimulation, a business line that includes hydraulic fracturing services. Fracturing is crucial in the production of oil and natural gas from unconventional fields such as the Bakken Shale of North Dakota and the Marcellus Shale in Appalachia.

Depressed natural gas prices have slowed drilling activity in gas fields, though oil-directed drilling activity remains ultra-strong. In addition, the services industry overbuilt pressure-pumping capacity in recent years, leading to an oversupply of equipment.

Weatherford International is relatively insulated from these issues because its North American business is heavily leveraged toward artificial lift, a product category that boosts oil production from mature fields.

Meanwhile, the company’s international business is finally seeing a real turn in profitability. Several contracts the company signed in the weak commodity price environment of a few years ago expire by the second half of this year, and management expects to sign new contracts that carry higher margins.

About the author:

Elliott Gue
Investing Daily provides stock market advice and investment newsletters to help independent investors achieve a secure and rewarding financial future. The site’s coverage focuses on finding the most profitable emerging trends in the investment universe to bring investors pragmatic and in-depth coverage of the names that are taking advantage of these opportunities.

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