Weatherford's Earnings at Par, Misses Rev

Zacks

Leading oilfield services company Weatherford International Ltd.’s (WFT) second-quarter 2013 adjusted earnings of 15 cents per share came in line with the Zacks Consensus Estimate. The results also increased marginally from the year-earlier adjusted earnings of 14 cents. The earnings increased mainly due to the growth in international earnings.

The total revenue in the second quarter increased by 3.2% year over year to $3,868.0 million from $3,747 million in prior-year quarter but missed the Zacks Consensus Estimate of $3,874 million.

However, during the quarter, Weatherford set aside an estimated $153 million for the potential settlement of an ongoing US Government Investigation related to the Foreign Corrupt Practices Act and oil-for-food program in Iraq which ended in 2003.

Operational Performance

North American revenues decreased 8.1% year over year to $1,529.0 million. The relative decline in activity due to Canadian seasonal downturn was compounded by severe flooding that resulted in the loss. The Stimulation and Chemicals segment was also weak, with operating income of $167.0 million compared with $226.0 million in the year-ago quarter.

Middle East/North Africa/Asia revenues climbed 41.6% year over year to $919 million. The segment’s operating income jumped 175% year over year to $66 million. The growth is attributable to record revenues and operating income in Asia. Moreover, increase in Drilling Services, Well Construction and Artificial Lift product lines also contributed to the growth.

Europe/Sub-Sahara Africa/Russia posted revenues of $681.0 million, up 4.3% year over year. The segment’s operating income dropped 18.6% year over year to $83.0 million.

Latin American revenues plunged 5.5% year over year to $739.0 million. Operating income from this segment remained flat at $90.0 million compared with the year-ago level.

Liquidity

As of Jun 30, 2013, Weatherford had $295 million in cash and cash equivalents and long-term debt was $7,087 million. Weatherford spent $446 million in capital expenditures during the quarter.

Guidance

With respect to the second half of 2013, the company expects higher revenues and operating income from its North American business as a result of lower operating cost structure in the region.

Weatherford foresees sustained growth and expanding margins in its Latin America region, supported by improvements in Argentina and Mexico, in the fourth quarter of 2013.

The company also expects improvements in the Eastern Hemisphere in 2013, with upside in Europe, Caspian and Russia, as well as stronger activity levels in the Middle East, North Africa and Asia-Pacific.

The annual effective tax rate in 2013 is expected in the range of 27%-29%. Further cost reductions and improvements in capital efficiency measures imply a positive outlook for the company.

Our Recommendation

We remain optimistic on Weatherford’s operational and financial leverage to international growth in 2013. However, Weatherford’s debt-heavy balance sheet, weak free cash flow and competition from larger peers such as Schlumberger Limited (SLB) are causes of concern.

Weatherford holds a Zacks Rank #3 (Hold). However, other stocks in the oil and gas sector, such as Gulfmark Offshore, Inc. (GLF) and Dril-Quip, Inc. (DRQ), holding a Zacks Rank #1 (Strong Buy), are expected to perform better.
 

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