When the 2007 economic crisis went full scale, several companies saw their stock plummet together with the global market. Dropping from a historic high of $40 to $10 in less than six months, Weatherford International (WFT) is a clear example. After a small rebound, stock value entered another negative trend returning to the $10 mark at the end of 2012. However, market performance improved throughout 2013, reaching $17 per share. The positive trend caught the attention of several new and old gurus. Dodge & Cox is currently the largest shareholder, with a position consolidated through four purchases during the last quarter of 2013 and first of the current year. Mario Gabelli (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) hold important shares as well, with positions dating back to 2009, making the stock a case study for long-term investment.
The Good Times Keep on Rolling
Weatherford International announced on February that remediated material weakness for income tax accounting, reduced net debt by $687 million, and generated positive free cash flow of $298 million in the fourth quarter of fiscal 2013. Also, revenue for the fourth quarter of 2013 was $3.74 billion compared with $3.82 billion in the third quarter of 2013 and $4.06 billion in the fourth quarter of 2012. Nonetheless, full year financial indicators reported improvements across the board.
Weatherford International partnered the Alamo College to provide job training using a $1.5 million Skills Development Fund grant from the Texas Workforce Commission. The project will provide the company with trained and competitive human resources. Also, being a manufacturer and provider of equipment and services for drilling, completion and production of oil and natural gas wells, Weatherford International’s long-term performance depends on successful research and development.
Some of the latest product introductions announced by management are the Reveal 360, an imaging technique that removes the blind spots from wireline wellbore images; and the RipTide RFID, the drilling industry’s most advanced concentric underreamer. Another important step is the agreement with CurTran LLC to use, sell and distribute LiteWire, the first commercial scale production of a carbon nanotube technology in wire and cable form.
Good Prospects, Fragile Standing
Future prospects continue to improve, as management decided to move Weatherford International’s base to Ireland. The decision is in response to Switzerland’s policy changes concerning executive pays. The move allows the company “to operate at the lowest possible cost while enhancing the company’s ability to retain, as well as further attract, the best women and men in the industry,” Weatherford chairman, president and CEO Bernard Duroc-Danner said.
Weatherford International's growth prospects are abroad. Mexico, Russia, China, Australia and Saudi Arabia hold the greatest potential related to cost reductions and improvements in capital efficiency. Additional opportunities will appear in Iraq as projects reach completion and become operative during 2014. Also, outlook for activities in North America contemplates a depressed natural gas environment overshadowed by the predominance of oil activity in Canada and the U.S.
Currently trading at 16.78 times its consensus earnings, Weatherford International is at the industry average. And, although the company’s balance sheet has shown improvements during the last year it is far from healthy. Debt continues to rise while revenue has stagnated and cash flow remains negative. Most important, management expects to widen operating margins after relocation is complete.
Last, Weatherford International sold its pipeline and specialty services business to Baker Hughes (BHI) last month. The transaction is an important sign of the troubles faced by current finances. Also, it is a clear return to the basics and divestiture of non-core activities. In the end, the company is not performing well, and even when prospects are promising, risks associated with this stock remain varied in type and important in size. Hence, it is not recommended to take a position in the company.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.