Recommendation Updates

Follow the latest news on active Turnaround Letter purchase recommendations.

Mid Cap / Energy

Weatherford Reports Modestly Better Operating Results in 2Q17 But Lots of Noise

On July 28th, Weatherford reported a 2Q17 non-GAAP adjusted net loss of $247 million, or ($0.24)/share, compared to a $253 million loss, or ($0.28)/share a year ago. These results were scrubbed of numerous charges and one-time events: $127 million of non-cash income related to the fair value adjustment for its outstanding warrant, $29 million in charges, $13 million in net other income, and a $35 million reduction in net income from a change in treatment of their Venezuelan contract, as the related revenues will probably not be collected. While the excluded costs were real, we look through them to get a clearer sense of whether the underlying business is improving. At the segment level, comparisons looked better due to some year-ago one-time gains and other changes that affected comparability. The full release can be viewed here.

Revenues of $1.36 billion declined 3% from a year ago. Revenues were about 7% below analysts’ consensus estimate of $1.46 billion but adjusted earnings were 14% ahead of the ($0.28) consensus. Weatherford’s turnaround depends partly on higher revenues (from more drilling activity, tied to oil prices) and partly an efficiency/margin improvement story. WFT shares fell about 2.5% on the day.

At the operating segment level, results were better than a year ago. In the North America segment, revenues of $475 million grew by $76 million from a year ago, and operating profits grew by $103 million (the first profitable quarter since 4Q14). Much of the profit increase resulted from the closure of the U.S. pressure pumping business which was producing large losses. Excluding the impact from the pressure pumping business, revenues would have increased 37%.

International Operations revenues, net of the Venezuela effect, were down 7% from a year ago. Operating profits, excluding the large one-time gain last year from a favorable settlement of their disputed Zubair contract, increased to $21 million from $2 million.

Land Drilling revenues of $101 million were down 7% from a year ago, and operating profits declined by $3 million, to a loss of $20 million. Notably, however, Ebitda (earnings before interest, taxes, depreciation and amortization) turned positive given the lower cost structure and higher drilling rig utilization.

Weatherford is optimistic that they can sell the international land rig business (110 rigs) for a decent price by year-end. The turnaround is in its early stages, and we like what we see so far. New CEO Mark McCollum is clearly making changes to the company, with much more to come. On the conference call, he spoke about improving nearly every aspect of the business: working capital, service quality, operating integration, go-to-market processes, back office processes, better/faster technology advances, more operational efficiency, among other changes. 

Stable or rising oil prices would likely bring more drilling activity and would probably propel WFT shares higher. We think the company can make large profit improvements even with oil and gas prices staying stable around their current levels ($50 oil and $3 natural gas). Several new deals, including the OneStim joint venture with Schlumberger which is likely to close this year, along with agreements with Saudi Arabia and Russian gas company Gazprom Neft, show a willingness to creatively explore growth and profit improvement opportunities.

The company continues to burn cash, and its debt increased modestly to $7.7 billion from $7.5 billion on March 31, 2017. This was partly offset by $584 million in cash (up about $38 million from last quarter). Weatherford expects to finally be cash flow neutral in the fourth quarter. CEO McCollum pledged to reduce debt by half by the end of 2019, with 1/3 of reduction coming from cash from operations and 2/3 coming from divestitures.

Sometime in the fourth quarter, the company will present the results of its current broad portfolio review. We expect this to include overall strategy, the plan for each segment and some targets for revenues, profits and cash flow. McCollum seems very capable and we anticipate the event will be positive for the stock. The turnaround is in the early stages and we remain optimistic about Weatherford’s future. We continue to rate WFT shares a BUY up to 10.

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In nearly every case, the shares of a company in bankruptcy become worthless. In very rare cases, however, they can become great investments. W.R. Grace (NYSE:GRA) shares produced a 75-fold return, as an example. With California utility PG&E (NYSE:PCG) now in bankruptcy, the range of possible outcomes for its equity is wide.

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In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple.  We thought it might be useful to describe this measure and why we like it.

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Turnaround Letter Stock Pick Named Top Performer of 2017

 

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What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."