WFRD - Weatherford: The Turnaround Is Happening Fast

2023-07-07 04:42:29 ET

Summary

• Weatherford International, an oil and gas industry service provider, is showing signs of a turnaround with increased production and activity, and a seven-year contract with PDO for its ForeSite technology.
• The company has seen three consecutive years of positive free cash flow, with a 258% increase in share price over the last 12 months, and is diversifying its markets and revenue streams.
• Despite risks such as energy price downturns and geopolitical uncertainties, WFRD's improved operations and reduced debt offer a good risk/reward ratio, making it an attractive investment opportunity.

Investment Summary

Serving over 75 different countries Weatherford International plc ( WFRD ) operates as an equipment and service provider to the oil and gas industry. Offering drilling & evaluation services to cementation products and intervention and service tools WFRD has exceeded expectations and grown impressively over the last few years. Although revenues aren't where they used to be back in 2013 and 2014, the turnaround seems to be happening and WFRD offers a good risk/reward ratio.

Last quarter highlighted the initiatives that WFRD is taking to ensure they continue upwards, securing several contracts, most notably a 7-year contract with PDO for the industry-leading ForeSite technology they have. With increased production and activity across the business, I think they are gathering momentum right now that will carry them for years to come. I am rating WFRD a buy at these price levels.

Positioning Themselves Efficiently

A complete shift away from oil and natural gas shortly is not very likely. It would require massive changes and investments to replace non-renewable energy sources, which are not currently feasible. Transitioning the entire energy system we have built up over many decades will be a complex and time-consuming project.

Moreover, natural gas in the US is displaying resilience, with an anticipated 3% increase in 2023 compared to the previous year. This contradicts the idea of an immediate transition to a greener society, indicating that the shift will take time and careful planning.

2022 ended up being the third consecutive year of positive FCF for the company and in those years they managed to generate FCF above their last 2 decades combined. That tells a lot about the recent performance they have had and in my view has been a crucial factor for the share price running up 258% in the last 12 months.

As the new management team stepped in back in Q3 of 2020 they have managed to turn the company around and I think that is the story here we should be focused on. The management helped get WFRD trading on the NASDAQ and refinanced $1.6 billion in debt and has soundly improved the financial state of the company. They have even recently been able to start senior notes repayments and repurchases. Before the management shift the company was in a tough financial spot with a lot of debt. The new priorities shifted to making sure that WFRD maintains a solid financial position and can grow through the cycles and offer shareholders value. WFRD is getting back to its former self and once again generating revenues above $10 billion and generating value for its shareholders. With their comprehensive offerings to the industry, they can serve a variety of companies which is helping them build up solid revenue streams.

As the new management team came into place, the company has been able to diversify the markets they operate in and right now doesn't rely on a single region for revenues. That can also be said for the segments of the business, They are very equally distributed and generate around 30% each. This seemed to have helped WFRD streamline some of its operations and help funnel more cash flows, which in 2022 amounted to $299 million, or a margin of 8.9%.

Looking ahead, the company is prioritizing expanding margins as they improve its processes and build up a differentiated technology portfolio. This should provide sustainable and consistently positive cash flows for the company. Those prospects I think have helped grow the share price over the last 12 months, but still, with a p/e of 12, I find it an intriguing buying opportunity.

Quarterly Result

Looking at the last quarter , WFRD had another successful quarter as they are returning to where they once were. The revenues grew by 26% YoY reaching $1.1 billion and the operating income made big leaps too, growing 928% YoY. Where I had my focus though was the increasing cash flows the company is continuing to have. Cash flows reached $27 million, and although it's a QoQ decrease, the first quarter of the year is usually the slowest in terms of this.

Q

It's reassuring to see that the growth was had across all the segments and parts of the business. This tells me that the measures that the new management team is putting into place are working. Apart from that, a growing demand was seen in the Latin American region too, where revenues grew 40% YoY. With the performance of the quarter, the FCF conversion remained at 10% and there seem to be better times ahead. The guidance for Q2 is that cash flows will be around $50 million and that FY2023 will yield better FCF than FY2022. This would mean the fourth consecutive year of positive cash flows and opens up the opportunity for a potential dividend and share buyback program in a few years as WFRD becomes further integrated with its new business model.

Risks

When considering risks, drilling activity and energy prices remain at the forefront. The company has experienced bankruptcy in the past during an energy price downturn. Geopolitical uncertainties related to Russia-Ukraine and China, along with labor inflation and supply chain disruptions, also pose potential challenges. The company's exposure to Russia may impact its performance negatively.

But with the new management team they have made significant improvements to the operations of the company and also the balance sheet. Debt has significantly decreased from the highs of $7.5 billion back in 2018 and now is just above $2 billion. That together with a solid cash position of $833 million gives WFRD some flexibility in terms of making investments and growing their asset base, whilst not risking overleveraging themselves. But WFRD still trades quite high on a p/b metric, with the forward multiple being 5.37 at the time of writing. I think that as time goes on further improvements are made that will go down and reflect the work the management team is putting in.

Valuation & Wrap Up

I think that Weatherford International plc is a very exciting opportunity right now as it presents itself as a turnaround as a new management team stepped in back in Q3 2020. The company was previously heading towards bankruptcy and with the new approach, the team and they have made significant improvements. 2023 is set to be the fourth year of consecutive positive cash flows.

I think that with a p/e of 14, you are paying a little bit above the sector's average, but it's a premium worth paying as WFRD is growing quickly and efficiently. They can justify the valuation in my opinion. Looking at Q2 for 2023 the FCF will remain in focus but also demand from selected regions like Latin America and Europe. Right now I think that WFRD offers a good risk/reward ratio and I will be rating them a buy as a result.

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