Weatherford International plc

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 2/5

Weatherford International plc is an energy sector service company, primarily focused on providing drilling, evaluation, completion, and production solutions to the oil and natural gas industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Weatherford International plc (WFRD), a company that offers services and equipment across the energy production lifecycle, does not possess a sustainable economic moat, according to the provided resources. Its core operations are intensely competitive and lack unique advantages. Let’s break down the assessment.

Business Overview

Weatherford International is a global energy service company providing equipment and services for the oil and natural gas industry. It operates in over 75 countries. The company’s offerings cover the entire well lifecycle:

  • Drilling and Evaluation: This involves directional drilling, logging-while-drilling, measurement-while-drilling, and various remote-controlled systems
  • Well Construction and Completions: Services in this segment include well construction and completion, and offers casing, cementing, perforating, and well construction testing
  • Production and Intervention: This segment includes artificial lift, production optimization and control, pressure pumping, and reservoir stimulation services, among others.

WFRD serves a diverse range of customers, including integrated energy companies, national oil companies, and independent oil and gas producers. They are a component of the energy supply chain.

Competitive Landscape

The energy service industry is highly competitive. WFRD faces large and well-established companies, such as Schlumberger and Halliburton. In addition, it faces a challenge from smaller, niche firms. Pricing pressure is intense, and there is significant competition across all lines of business. Competition is largely based on price, service quality, and technology.

  • Technology changes rapidly in this space, making it difficult for any company to maintain a lasting lead.

The oil and gas industry is characterized by volatility and cyclicality, driven by macroeconomic conditions, political instability and global supply chains. This volatility has a direct impact on WFRD’s business, as energy companies frequently reduce their drilling and completions expenditures during times of low oil prices. Currently, there has been increased activity globally as energy supply has tightened.

  • Capital spending by the oil and gas companies is heavily influenced by commodity prices.

Financials

Here’s an analysis of WFRD’s financials in detail:

Revenues

  • The company had revenues of $1.3 billion in the three months ended September 30, 2023, 24.9% higher YoY from the $1.1 billion reported. The increase was a result of greater activity in North America and Middle East/North Africa/Asia
  • Revenues increased 13.4% in 2022 compared to 2021. Revenue growth has improved over the past two years as the industry slowly recovers from the impact of COVID, which saw steep drops in energy prices and production.
  • Drilling and evaluation represents the biggest portion of revenues followed by production and intervention and then well construction and completions, as per the company’s segment operations table.
  • Revenues are heavily dependent on prices in the energy markets, leading to significant fluctuations year to year.

Operating Margins

  • The operating income for the third quarter of 2023 was $248 million, with an operating margin of 19.1%.
  • Adjusted EBITDA margin was 21.9% for the same period.
  • EBITDA margins have fluctuated quite a lot during the last few years. During tough periods in the industry, they can go to low single-digits and in better periods, mid to high-teens.
  • Like the revenue growth, margins are heavily dependent on commodity prices and activity levels of its customers.

Earnings

  • Net income attributable to Weatherford for the first quarter of 2024 and second quarter of 2024 were $26 million and $173 million, respectively
  • For the nine months of 2023, net income was $174 million, which is a significant improvement from the loss of $456 million last year.

Balance Sheet

  • WFRD has 1.68 billion in cash and cash equivalents as of September 30, 2023.
  • The debt was at $2.2 Billion at the end of September 2023
  • In addition, WFRD has a large amounts of long-term debt, most of which have interest rates that increase with market rates.
  • It seems that the company is heavily laden with debt and requires significant amount of capex to sustain operations.

Cash Flow

  • As of the recent quarter, WFRD has posted a positive cash flow from operations.
  • After many years of negative operating cash flow, the company is showing a large and sustained positive cashflow.
  • The company has been using excess cash to pay down debt and to perform share buybacks.

What Makes WFRD Different

Weatherford does not appear to have unique differentiators over its competitors, nor does it appear to dominate in any particular region. The closest the company comes to having an advantage is its vast and diverse portfolio of offerings; However, that portfolio provides no advantage over the large, diversified companies such as Halliburton and Schlumberger.

  • The company is competing globally and on price.

Recent Problems and Controversies

  • The company has had several years of financial distress, and has gone through restructurings. As such it remains vulnerable to downturns in the market.
  • Recent reports and earnings calls have indicated a degree of stability and positive turn around. However, this change is still relatively recent and untested over a longer duration.
  • Russia-Ukraine conflict has also had an adverse effect on WFRD. As per latest reports, revenues have been affected in the Russian and Middle East markets and a write-off was made in the Ukrainian operations.
  • There has been a recent investigation into potential bribes in Angola, that has created uncertainty about the financial situation of the company. However the company is cooperating with the investigation and expects a resolution to it.

Moat Rating: 1/5

Justification: Weatherford does not possess any significant economic moat, as per above analysis. Its business operates in a highly competitive industry where differentiation is difficult, and therefore it is vulnerable to competitive pressure. The company’s brand is not especially strong, switching costs are low for customers, there is no network effect or a particular dominant market position. Although it has some geographic scale, it has intense competition and no clear advantage against other large providers. The long-term durability of high profits is not there.

Business Resilience

WFRD exhibits a mixed level of resilience.

  • On the upside, its diversified service portfolio and global presence help in mitigating risks of regional downturns.
  • On the downside, its significant debt load makes it vulnerable to any economic uncertainty. Also, the company’s dependence on commodity prices introduces volatility to cash flows and profitability.
  • The company’s turnaround is still relatively new and its future stability has not been fully tested.
  • Major geopolitical events, trade restrictions, political instability and currency risks in the markets the company operates, can have a major impact on earnings.

Understandability: 3/5

Justification: The business model is straightforward to describe on a high level; it is an energy services company providing equipment and related services. However, its financial statements and earnings tend to have various one time charges and adjustments, making it somewhat less simple to analyse in full. Also, the complexities in the energy market are not very easy to understand for someone who has not followed the oil markets for long.

Balance Sheet Health: 2/5

Justification: The company has a good current ratio but has a high debt. Furthermore, a lot of its debt are variable interest rate loans. The company’s equity is also a concern, given the many years it was operationally unprofitable and its negative book value. While some recent financial steps have greatly improved the company’s balance sheet, it does still retain significant risk. Overall, the balance sheet of the company is still not out of the woods, therefore warrants a low rating.