Weatherford International is an international oilfield services company with its eyes on the Middle East, with 26.8% of 2009 revenue coming from its Middle East/North Africa/Asia region. Weatherford has been investing in building low-cost bases of local employees to appeal to the increasing number of oil and gas companies that are entering the area. The company has established itself as a contractor of equipment designed for complex, expensive oilfield operations; for example, the company is a leader in rotary steering systems, which are designed to help get drills into hard-to-reach places.
Weatherford has spent much of its recent energy on developing and implementing technologies to maximize the output of mature wells, especially for use in the Middle East. Besides developing technology, another industry trend has been deepwater oil exploration, in which Weatherford could be lagging; only 18% of its 2009 capital expenditures occurred in the U.S., where deepwater exploration is taking off. On the other hand, 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. When oil prices rise, demand for oilfield services increases to match the desire for more reserves. With oil rising as high as $145.85 per barrel in 2008, Weatherford has been able to increase its day-rates as well as profits. Weatherford's competition includes Schlumberger, Halliburton, Baker Hughes, and the newly formed industry giant Transocean.
Weatherford offers its services to a number of major, national, and independent oil and gas companies. Besides Petroleos Mexicanos (“Pemex”) accounting for roughly 13% of Weartherford's 2009 revenues, no other individual customer accounts for more than 10% of the company's consolidated revenues. Weatherford provides products that 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. Previously it divided its business operations formally by two segments: Evaluation, Drilling, & Intervention Services, and Completion & Production Services. Now, the company reports its operating results in four geographic segments: North America, Mid. East/North Africa/Asia, Europe/West Africa/Former Soviet Union, and Latin America.
In 2005, Weatherford acquired Precision Energy Service and Precision Drilling international, adding to Weatherford's drilling and wireline services portfolio. The acquisition accounts primarily for the expense in the "Exit Costs and Restructuring Charges" section. Additionally, this includes costs attributed to exiting Cuba, Syria, Iran, and Sudan in compliance with international sanctions against these countries in 2007.
On March 1, 2011, Weatherford announced its decision to reinstate previously issued financial results for years 2007, 2008, 2009, and the first, second, and third quarters of year 2010, effectively reducing previously reported net income by $500 million, including $460 million from intercompany errors and $40 million in foreign tax assets. Subsequently, the value of Weatherford stock shares declined significantly, opening at $19.77 per share on March 2, from the closing price of $23.52 on March 1. On March 18, 2011, professional corporation Brower Piven announced the commencement of a class action lawsuit on behalf of purchasers of common securities of Weatherford. Weatherford is accused of violations of the Securities Exchange Act of 1934 due to their misstatement of information and failure to disclose their improper accounting.
4Q 2010 Summary
On January 25, 2011, Weatherford International reported its fourth quarter 2010 earnings of $0.21 per diluted share, with income of $156 million, excluding an after-tax loss of $210 million primarily related to tax reorganization in migrating Latin America operations out of United States holdings, in an effort to strengthen global tax planning. The company had revenues of $2.9 billion, the highest in company history, an increase of 20% over the same period in 2009. Internationally revenues increased 15% from the third quarter in 2010, with Eastern Hemisphere revenues increasing 10% from the third quarter in 2010 and North America revenues increasing 14% from the third quarter in 2010. Weatherford expects earnings per share of $0.27 in the first quarter of 2011, and maintains a strong outlook for the international markets in 2011.
3Q 2010 Summary
For the third quarter of 2010, Weatherford had revenue of $2.5 billion, an 18% increase from the same period in 2010. International revenues decreased 6% year-over-year--a 9% increase in the Eastern Hemisphere region was unable to offset a 36% decline in Latin America. Operating income was $279 million, an 86% increase year-over-year, due to growth in operating segments and a $63 million increase in gain from a revaluation of their acquisition of the Oilfield Services Dvision of TNK-BP.
2Q 2010 Summary
For the second quarter of 2010, Weatherford had revenue of $2,438 million, a 22% increase from the same period in 2009. International revenues increased 7% year-over-year--North America revenue grew 61%, offsetting the 12% year-over-year decrease in revenue in Latin America due to decreases in project-based activity in Mexico, as well as the seasonal decrease in Canada. Operating income was $308 million, a 14% increase year-over-year. Weatherford's income during the quarter was $80 million, or $0.11 per diluted share, an increase of 10% over the second quarter of 2009.
1Q 2010 Summary
For the first quarter of 2010, Weatherford had revenue of $82 million, a 4% increase over the same period in 2009, due to strong contributions from the Integrated Drilling product line, which offers project management services to clients and provides a wide array products and services needed to drill and complete a well. Operating income, on the other hand, decreased $194 million, a 62% decrease from the same period in 2009. The losses were due to increased corporate expenditures from higher costs from pricier optimization initiatives and restructuring charges.
For 2009, Weatherford earned a total of $8.83 billion, compared to its 2008 total revenues of $9.60 billion. This had a substantial negative effect on its net income. Between 2008 and 2009, Weatherford's net income declined from $1.35 billion in 2008 to $280 million in 2009.
|Weatherford Financials by Segment ($ Thousands)|
|Mid. East/North Africa/Asia||2,368,118||2,391,520||1,823,769|
|Operating Income (Expense)||703,855||1,978,549||1,624,336|
|Mid. East/North Africa/Asia||441,974||561,012||416,263|
|Research & Development||-194,650||-192,659||-169,317|
|Exit and Restructuring||-100,566||-39,857||-30,787|
|Europe, FSU, West Africa||18%||16%||15%|
|Middle East, North Africa, and Asia||27%||25%||23%|
|Artificial Lift Systems||16%||17%||18%|
|Stimulation & Chemicals||8%||7%||6%|
|Re-entry & Fishing||6%||7%||8%|
|Pipeline & Specialty Services||2%||3%||2%|
As an oilfield services company, Weatherford's fate is intimately connected to the fate of the oil industry as a whole.
Oil futures stayed under $80/barrel throughout 2009 after moving to over $145/barrel in 2008. Though prices are not the historic levels of 2008, oil prices continue to move up (and stay up). As they do, 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. Thus, when oil prices rise, along rises the demand for oilfield services such as those that Weatherford provides. With oil rising as high as $145.85 per barrel in 2008, Weatherford has been able to increase its day-rates as well as profits.
Many 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.
In 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 in 2009 it accounted for 31% of Weatherford's revenue. 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.
Turbulence 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., 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.
Whether 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.
The 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. 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, more than Weatherford's 33%. 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.
|2008 Revenue||2008 Operating Income||2008 R&D Expenses||2008 Gross Profit||2009 Revenue||2009 Operating Income||2009 R&D Expenses||2009 Gross Profit|