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Weatherford International (WFT)Stock (Energy Industry, Oilfield Services Industry)
 With oil prices way over $100/bbl, demand for new technologies to aid in exploration and production is high. Indeed, Weatherford has spent much of its recent energies on developing and implementing technologies to maximize the output of mature wells while expanding in the Middle Eastern market that demands such technologies. In the equally hot deepwater oil exploration market, however, Weatherford could be lagging; only 25% of its 2006 capital expenditures occurred in the U.S.[2], where deepwater exploration is taking off. On the flip side, Weatherford's conservative approach to investing in expensive new technologies could hedge against oil price fluctuations, since a significant drop in the price per barrel would greatly damage revenues for a company whose services are based upon complicated equipment and techniques. In 2008, demand for oilfield services due to sky-high oil prices has greatly increased day-rates and profits. Weatherford's competition includes Schlumberger, Halliburton, Baker Hughes, and the newly formed industry giant Transocean. [edit] Business FinancialsWeatherford offers its services to a number of major, national, and independent oil and gas companies; no one company makes up more than 10% of its revenues. The company has two main business segments; products in each are generally designed for more complex oilfield operations, as Weatherford's strategy is to keep a strong patent-portfolio and take advantage of growth in areas with high demand for newer technologies, specifically in the Eastern Hemisphere.
Source: 2006 Annual Report[3] The high demand for exploration and intervention technologies due to high oil prices in recent years has driven up day rates, making the company's Evaluation, Drilling, & Intervention segment much more profitable than the Completion and Production segment. In 2005, Weatherford acquired Precision Energy Service and Precision Drilling international, adding to Weatherford's drilling and wireline services portfolio. The acquisition accounts for the expense in the "Exit Costs and Restructuring Charges" section of the graph above. More of these expenses can be expected for 2007, as Weatherford announced in September that it would exit Cuba, Syria, Iran, and Sudan in compliance with international sanctions against these countries. Most analysts do not believe that these discontinuations will have meaningful effects on the company's operations. Weatherford takes most of its revenue out of North America. From 2Q06 to 2Q07, however, the company grew by 38% in the Middle East, North Africa, and Asia, and 42% in West Africa, Europe, and CIS, as opposed to 5% for North America and 16% for Latin America[4]. This can be attributed to the company's expansionary spending in the Middle East as well as the industry's growth in Russia (part of the CIS, or Commonwealth of Independent States).
Source: 2006 Annual Report[5] In the second quarter of 2008, WFT's net profit doubled year-on-year while revenue increased 23% to $2.23 billion.[6] [edit] Trends and ForcesAs an oilfield services company, Weatherford's fate is intimately connected to the fate of the oil industry as a whole. [edit] Demand for Weatherford's Expensive Technology Depends on High Oil PricesOil futures have been trading over $100/barrel throughout 2008. As oil prices go up (and stay up), oil companies like Exxon, Shell, Chevron, and BP all have greater incentive to increase production; price shifts have been a major driver of demand for exploration and drilling, and, thus, Weatherford's business. Rising oil prices could mean that oil is getting more difficult to obtain, and there are many analysts who believe we are near, or even past, peak oil production. Most easy-access oil reserves are nearing maturity, and oil companies are looking in two directions to increase production and take advantage of the current price level: mature extraction and deepwater exploration. [edit] Weatherford Leads in Mature Well ExtractionMany companies are attempting to extract more oil than before from existing wells, using complex new technologies - this is the primary driver of increased investment in Middle Eastern oilfields. Most of the more accessible reserves in the region have already been developed, but companies are now looking to get more out of them, and to extract from more difficult terrain. Weatherford's product line is focused on providing the equipment and services needed to extract from the more complex geological formations that made draining a reserve previously impossible. This makes the company a potential beneficiary from the current price level. Declining oil prices would be a major threat to the company, however, as its focus on extraction from geologically and, therefore, economically difficult formations means that falling oil prices would decrease demand for the services that Weatherford offers. [edit] A Lack of American Investment Could Damage WFT's Deepwater OpportunitiesIn the offshore sector, there is a growing industry interest in deepwater and ultra-deepwater drilling, due to declining production rates in more shallow reserves. While Weatherford has been investing in producing deepwater technology, the company's heavy investment in the Eastern Hemisphere has crowded out its ability to grow its bases in North America; though 38% of the company's revenues come from the U.S.[7], only about 25% of its capital spending was directed to the region[8] - slightly more than enough for maintenance of existing capital. Since many of the more promising deepwater reserves are in the Gulf of Mexico, this could mean that the company is missing out on a large chunk of future industry activity. On the other hand, deepwater drilling is a very expensive technology; not investing in it could hedge Weatherford against the possibility of a sudden drop in oil prices. [edit] In the Middle East, Weatherford Faces Large Risks and Large RewardsTurbulence in the Middle East poses a threat to Weatherford because the region is a smoldering hotbed of drilling activity. The company has almost 75% of its workforce outside the U.S.[9], much of which is in the Middle East, and Weatherford's strong portfolio of complex extraction technology is a perfect fit for modern Middle-Eastern projects. Furthermore, its labor costs are lower because most of its workforce consists of locals, allowing the company to maintain lower prices than competitors who fly in expats to work. This makes Weatherford very appealing from an oil company's perspective, as lower operating prices mean higher operating margins - possibly a major advantage that the company has over competitors in the region. On the flip side, Weatherford's facilities, as "western establishments", would be likely targets for terrorist attacks. Aside from harming the employees at such facilities, terrorist attacks could slow production and effect costly damages to expensive equipment - all leading to declines in regional profitability. [edit] The Canadian Thaw Lowers Weatherford's ProductionStrong weather patterns tend to negatively affect the oilfield services industry's operations, as they can damage equipment, injure employees, and slow or stop production. Weatherford is most affected by the spring thaw in Canada, when Western Canadian provinces implement road restrictions that prevent the movement of the company's rigs. Spring 2007 was a particularly rough season for the company, as 2Q07 rig counts averaged 137, compared to 277 for 2Q06[10]. This can be attributed to the thaw lasting longer than usual: well into June. [edit] Renewable Energy Could Prove Harmful to WFT, in the Long-TermWhether it’s because of climate change fears, the rising price of oil, or the desire to separate energy needs from terrorist regimes, people are slowly becoming disillusioned by the world's dependence on oil and gas. Many developed, politically-progressive regions like Europe are beginning to transition away from these sources of energy, and towards renewable energy. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil, despite being about $100/bbl, is still less expensive than most renewables. Since emerging markets are where most of the future opportunities in the global economy lay, the oil and gas industry, including oilfield services companies like Weatherford, could continue to grow in conjunction with a growing renewables industry. [edit] CompetitionThe oilfield services sector includes such companies as Halliburton, Schlumberger, Baker Hughes, and Transocean. Schlumberger is the industry leader by market cap, though Transocean has the largest drilling fleet in the world - 146 drilling rigs, including 48 deepwater drills[11]. Transocean, however, only drills, while the others offer more complex services like intervention and evaluation. Baker Hughes, for example, along with its standard services, produces drill bits and drill fluids that many oilfield services companies use in their equipment. Baker Hughes is also investing heavily in its deepwater operations, making it a stronger player in the U.S. offshore market than Weatherford. Halliburton poses a greater threat to Weatherford than other companies, however, as it is well-established in the Middle East - it recently moved its headquarters and executives to Dubai. In 2006, Halliburton earned 38% of its revenues in the Eastern Hemisphere[12], more than Weatherford's 33%[13]. Both companies hold strong positions in the Middle East, but Halliburton's technology is more standard and less expensive than Weatherford's, making the company less vulnerable to a sudden drop in oil prices. With oil prices as high as they are, however, Weatherford's high-end services are in greater demand.
[edit] Recent EventsThe company announced 3Q 08 results on 20 October 2008.[14]
[edit] Notes
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