This article was originally published by TheStreet on December 11, 2014
By Sarfaraz A. Khan
NEW YORK (TheStreet) - Weatherford International (WFT) , the smallest of the big-four oil field services companies that includes Schlumberger (SLB) , Halliburton (HAL) and Baker Hughes (BHI) , has been eyeing a turnaround to improve its profits and financial health.
Although Switzerland-based Weatherford is moving in the right direction, it carries its fair share of risks in terms of debt and book value. For these reasons, investors are better off staying on the sidelines on this stock.
Weatherford has seen the fastest growth in revenue among the big-four oilfield services companies, but this growth has come at a cost -- a large pile of debt. The company's debt, minus cash reserves, more than doubled during the five years ending 2012 to $8.3 billion. Currently, its balance sheet is between 1.8 and 4.2 times more leveraged than its three closest competitors in terms of debt-to-equity ratio.
But Weatherford has been selling non-core assets, which are around six times less profitable than its core business units, to strengthen its balance sheet and improve its profitability. The company's net debt has already fallen by around 10% in the first three quarters of this year to $8.1 billion. In a recent report, Oppenheimer's analyst James Schumm wrote that the net debt would fall to around $6.7 billion by the end of this year.
Further, Schumm predicts that Weatherford could sell assets worth $500 million next year. This will bolster its cash reserves in what could be a rough market for oilfield services stocks in 2015 amid the persistent weakness in oil prices that have fallen by around 30% over the last three months.
It also helps that Weatherford is expected to generate positive free cash flow next year, as opposed to the last couple of years when its cash outflows have been greater than its cash inflows from operations. Schumm says that this will be largely due to fewer "one-off items" in next year's results that have been dragging down its earnings per share and free cash flows. He forecasts free cash flow of around $350 million in 2015.
Add proceeds coming from the sale of $1.75 billion of assets to the equation, and Weatherford will end the current year with nearly $2 billion as cash reserves, which will increase to $2.3 billion by the end of 2015, according to Oppenheimer's estimates. This could put Weatherford in a better position to benefit from the $36 billion Halliburton-Baker Hughes merger.
To address the antitrust concerns related to the merger, Halliburton has said that it could sell nearly $7.5 billion of revenue-generating assets. This could be a "rare opportunity for Weatherford" to make a high-value acquisition, Schumm wrote.
To address the antitrust concerns related to the merger, Halliburton has said that it could sell nearly $7.5 billion of revenue-generating assets. This could be a "rare opportunity for Weatherford" to make a high-value acquisition, Schumm wrote.
That said, despite growing its cash reserves and lowering its debt, Weatherford's financial health will still be far from pristine.
Even if the company manages to reduce its net debt to less than $6 billion by the end of 2015, its long-term debt to equity ratio, according to data provided by Oppenheimer, will be between 1.8 times and 3.7 times greater than those of Schlumberger, Halliburton and Baker Hughes. Weatherford's leverage metric will also be 1.4 times greater than the current industry's average, according to data compiled by Thomson Reuters.
Given that oilfield services stocks could be the hardest hit in 2015 due to the ongoing weakness in oil prices, investors should avoid stocks with weak balance sheets, said Goldman Sachs's Nov. 28 report by various energy analysts, including Waqar Syed who covers Weatherford.
In a worst-case scenario, then, the decline in Weatherford's shares could be greater than that of its three bigger rivals.
To measure how low a stock can potentially drop, the current and the lowest price-to-book value over the last few years can be used. In Weatherford's case, its current price-to-book value is 34% greater than its lowest levels over the last five years, which also means that it has room for a drop of around 26%. By comparison, Schlumberger, Halliburton and Baker Hughes could drop by between 7%, 17% and 24%, respectively, using the same calculation for each. 
WFT Price to Book Value data by YCharts
WFT Price to Book Value data by YCharts
Kelley Hughes, Weatherford's spokesperson, declined to provide any comments. The company's shares have fallen by over 52% this year.
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