Weatherford International: Poised For Growth In The Energy Services Bull Market

seekingalpha05-28

Weatherford International is positioned well to benefit from multiple years of industry growth.Weatherford is experiencing strong demand for its key solutions.Weatherford has strategies in place to ...

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Weatherford is positioned well to benefit from the long-term expected growth for the Oilfield Services Market over the next six years. Weatherford's integrated contracts are a key driver of growth. Plus, WFRD has strategies to drive EBITDA growth going forward. The valuation is reasonable & should allow the stock to climb higher. Weatherford's Business Background Weatherford operates as an energy services company, providing equipment and services for oil, natural gas, and geothermal businesses. WFRD provides its equipment and services for multiple phases including: evaluation, drilling, production, and completion. The company divides its business into three segments. The Drilling and Evaluation [DRE] segment comprised 31% of Q1 2024 revenue and 56% of adjusted EBITDA. The Well Construction and Completions [WCC] segment comprised 34% of total revenue and 52% of adjusted EBITDA. The Production and Intervention [PRI] segment comprised 26% of total revenue and 31% of adjusted EBITDA. The remaining percentages are lumped into the 'All Other' category. It is important to note that Weatherford International and two affiliated debtors filed for Chapter 11 bankruptcy under U.S. law back in 2019. Weatherford expressed the following reasons for filing: difficulty cutting manufacturing operations, key employees leaving due to increasing losses, market headwinds, and struggles to sell assets and reduce debt. Although Weatherford experienced this major setback, the company has turned itself around in recent years. Weatherford achieved 12 consecutive quarters of adjusted EBITDA margin expansion on a year-over-year basis and 9 consecutive quarters of sequential EBITDA expansion. WFRD's outlook looks positive in 2024 possibly over the next several years. Weatherford's Growth Catalysts WFRD can benefit from the 4.5% annual expected growth for the global oilfield services market to 2032. This market is expected to grow to reach over $186 billion by 2032 from $130 billion in 2024. Also, the general global oil and gas market is expected to grow at a rate of 3.8% annually to reach $8.6 billion by 2030. A significant amount of the expected growth for the oil and gas market is being driven by higher demand for natural gas. This is because natural gas is a cleaner option over oil and gas for power generation, transportation, and industrial applications. But wait, there's more: The global oil and gas pipeline market is expected to grow at 6.5% annually to reach $53.54 billion by 2030. The growth for pipelines is being driven by increased energy demand and exploration for oil and gas reserves. Weatherford is likely to benefit from this growth as the company provides equipment and services for all of these markets. The company's successful Q1 2024 results were evident as Weatherford achieved an adjusted EBITDA margin of 24.7%. This was a significant improvement over the adjusted EBITDA margin of 22.7% from Q1 2023. WFRD now expects to hit a goal of 25% adjusted EBITDA margin for the entire year in 2024. At Weatherford's Q4 2023 earnings conference call, the company didn't expect to reach 25% adjusted EBITDA until 2025. So, margin improvements are accelerating faster than originally expected. Weatherford is benefitting from its 5-year contract award of $500 million from Petroleum Development Oman [PDO] to provide integrated drilling services. As part of the deal, Weatherford will provide a comprehensive set of technologies to deliver innovative solutions to maximize drilling efficiency. This contract builds on an ongoing project in this region to deliver 700+ wells over the next several years. This can provide ongoing growth for the DRE segment, which brings in the highest percentage of adjusted EBITDA. Another driver for future growth in the DRE segment can be WFRD's HB Spitfire tool, which provides wireline ballistic release technology to prevent wires from getting stuck and breaking. The tool allows operators to detach from a stuck tool string on demand by using switches. It also allows for an efficient retrieval of the tool string, preventing expensive fishing operations. Weatherford expects that most of its growth will come from the DRE segment, with revenue increases in the high-teens. This is important for margin expansion, since Weatherford generates a high percentage of adjusted EBITDA from the DRE segment. In the WCC segment, WFRD's XPress XT system can drive growth for the company. This is a pressure-balanced linear system which allows unrestricted pressures and flow rates during deployment. This de-risks liner installations by eliminating the need to preset the liner hanger or having a premature release of the running tool. The system was used recently for the first time in an offshore setting, which could be a new avenue of growth. The company got significant awards from XPress XT in Q1, which will probably continue as the year progresses due to the system's benefits. Weatherford's digital solutions can be a growth catalyst in the PRI segment. WFRD's customers can benefit from these digital solutions as they increase operational efficiency. One standout in the PRI segment is the ForeSight 5.3 production optimization solution which combines AI, autonomous control, and machine learning for proactive failure prediction which prevents ESP and rod lift failures. ForeSight 5.3 improves efficiencies and maximizes artificial lift run life while reducing the carbon footprint. Weatherford expects to achieve sustained growth in international land and offshore areas. Specifically, the Middle East and Latin America regions are expected to provide solid growth in the foreseeable future. The company is focused on the gas-rich regions of Guyana and the Eastern Mediterranean, growing unconventionals in the Middle East, and oil production in major deep-water basins. Weatherford expects that the increased adoption of managed pressure drilling and well life extensions via interventions will help drive the company's growth for onshore and offshore settings. Weatherford expects additional growth to come from plug and abandonment services, carbon capture, and geothermal projects. The company expects most of this growth to last through the end of the decade. Weatherford Is Valued Below Competitors I think that the EV/EBITDA ratio is the best metric to use for Weatherford, since the company is evaluated by how well it increases adjusted EBITDA. The EV/EBITDA ratio is a standard valuation metric for oil and gas related stocks. WFRD is trading with a forward EV/EBITDA of 6.6x. Here's how Weatherford compares to its competitors:   Company Forward EV/EBITDA   Weatherford 6.6x   NOV Inc. (NOV) 7.94x   TechnipFMC plc (FTI) 9.67x   Tidewater (TDW) 9.17x   Click to enlarge source: Seeking Alpha In general, all four companies are reasonably valued as their EV/EBITDA ratios are below 10. However, Weatherford stands out with the best valuation. WFRD is trading below the average forward EV/EBITDA ratio of 8.3x among these stocks. This leaves room for the stock to rise as Weatherford continues to grow. Here's a look at the company's projections for Q2 and the full year for 2024:   Weatherford's Q1 2024 Earnings Call Presentation Weatherford's projections above look attainable given the growth that the company is experiencing from the demand from the oil & gas industry. WFRD's key solutions are being demanded by drillers to increase productivity and to reduce costs. The company's projections for revenue growth look in-line with the Weatherford's covering analyst's consensus projections of 12% for 2024. Personally, I think WFRD can achieve 12% revenue growth for the year as demand for the company's solutions remains strong and due to the contracts that are already in place. The 12% expected revenue growth over 2023 would bring total revenue to $5.76 billion for 2024. Given, the company's expected goal of a 25% EBITDA margin, WFRD would bring in about $1.44 billion in EBITDA for the year. Weatherford's high ROIC of 18% is likely to help drive this margin growth. This would be about 26% higher over 2023's EBITDA. Given Weatherford's reasonable valuation, the stock should be able to increase approximately in-line with EBITDA growth. So, 26% higher than the current price of $115 gives WFRD a one-year target price of $145. Weatherford's Technical Perspective   Weatherford (WFRD) Daily Stock Chart w/ RSI (TradingView) The daily chart above shows the stock consolidating between the $109 and $130 price range. The stock recently pulled back after reaching the 52-week high of $129.70 after the Q1 earnings report. The pullback could be due to profit taking after the pre/post-earnings run up. The RSI is currently bearish as it dropped below the 50 level. However, the stock tends to bounce back up when the RSI moves into the 30 to 40 range, which is where it is right now. Possible catalysts for the stock to increase include new contract award announcements, new possible acquisition announcements, and positive future earnings reports. Some risks for the stock include an economic slowdown, which could depress the price of oil and natural gas. This could lead to drilling projects being put on hold, thus delaying Weatherford to obtain new contracts. A supply glut in the oil and gas industry could also depress commodity prices, which could negatively impact drillers and put delay projects and the need for Weatherford's solutions. This could occur if global production increased at a faster pace than consumption. Another risk is the threat of increasing net debt. Weatherford has net debt of $1.08 billion. The good news is that the company decreased net debt over the past 6 years. The company had net debt of $7.4 billion in 2018, which was one of the contributing factors for the company to file for bankruptcy in 2019. If the trend reversed and Weatherford returned to a high level of net debt, it would likely have a negative impact on WFRD and the stock. Weatherford's Long-Term Investment Outlook If the price of oil remains relatively steady as projections show, then Weatherford is likely to see steady growth. The price of Brent crude is expected to reach about $90 per barrel for the remainder of 2024 due to OPEC production cuts and geopolitical risks, according to EIA.gov. Increased production in response to higher prices is expected to get the price down to $85 in 2025. If the price of oil remains relatively steady as these projections show, it should be bullish for oil producers and Weatherford's business.  The long-term expected growth for the oil and gas industry and oil equipment/services industry is likely to lead to growth for Weatherford through the remainder of the decade. However, investors should be mindful that significantly lower oil prices can occur due to recession or supply gluts during this time period. 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