Weatherford: Q3 Shows A Very Mixed Picture

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Weatherford International's Q3 revenue missed analyst expectations, but EPS beat estimates, showing mixed financial performance.Segment revenues remained flat, with minimal growth, and adjusted EBITDA...

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Hoptocopter Weatherford International plc (NASDAQ:WFRD) is a global oil and gas services company providing a range of drilling, field engineering and production optimization solutions. Most of the services in this industry are quite complex, and it is typical for a company to specialize in solutions that may not be as effective in all drilling conditions. Weatherford is best positioned in tubular running services and managed pressure drilling. The company had its latest Q3 report released on October 22nd, which leads me to not recommend this company as a buy given its current pricing. Let's start with preliminary expectations. Revenue missed analyst consensus by a little over $14 million in Q3. This brought revenue to $1409 million, from which it deviated only slightly in a negative direction. Earnings per share were much better, beating analysts' expectations at $2.06 instead of $1.65. On this basis, the picture still looks quite good to me. If you look at the company's Q2 presentation, you can see that it delivered roughly the results that management expected in Q2, so let's move on to the company's segments. Revenue from the different segments Revenue remained flat in all three main segments, with a slight increase. I do not consider this to be a good result, as management's expectations at the beginning of the year were still in the high teens and Q3 revenues were lower than they should have been for the annual guidance. Drilling & Evaluation segment looks like it had revenue of $435 million in the recent Q3 report, $427 million in Q2 and $422 million in Q1. This brings the total to $1,284 million, while the company does not expect growth in this segment for the next quarter.   Drilling & Evaluation segment for WFRD (Company Q3 Presentation) Production & Intervention also came in flat with $371 million in revenue, up 1% from the previous Q2, which is also in line with management's expectation if I just look at the previous quarter. But I also see it as weak compared to expectations at the beginning of the year.   Production & Intervention segment for WRFD (Company Q3 Presentation) Well Construction & Completions remained similarly flat compared to the previous Q2 quarter. It was only able to rise from $504 million to $509 million, primarily due to higher international Well Services and Liner Hangers activity.   Well Construction & Completion segment for WFRD (Company Q3 Presentation) Allocation of capital At the company level, adjusted EBITDA also failed to increase compared to the previous quarter, and decreased by 3%, due to lower MPD asset sales this quarter, an area in which the company has a strong position. In addition, also within the Drilling & Evaluation segment, international Wireline activity remained lower. Accordingly, the EBITDA margin was also lower, but still remained above 25%, which is better than the previous year. Operating income also declined somewhat, not significantly, but more to the point, it failed to grow materially and thus growth on an annual basis continues to slow. What is positive in the report is that net leverage is the lowest in the last 15 years (net debt/adjusted EBITDA 0.5x) If EBITDA grows, it could even be lower in the next quarterly reports. This has been confirmed by the international credit rating agency S&P, which upgraded the company's credit rating from 'B+' to 'BB-' this quarter, which could mean more flexibility and lower cost of capital for the company in the future. But I would add that this is still a speculative grade.   Net leverage for WFRD (Company Q3 Presentation) Subsequently, in addition to the balance sheet, the company's capital allocation decision will place more emphasis on shareholder returns in the form of dividends and share buybacks. Weatherford paid the first dividend payment in this quarter in many years, currently at $25 cents per quarter. On an annualized basis, that's $1, which at a current share price of $80, translates into a meager 1.25% annualized starting yield. This is a particularly low starting yield for the sector, as the sector average is currently around 3.88%. In addition, the company spent $50 million on share buybacks, which was approved in the previous quarter, using a maximum of $500 million over the next 3 years. With the share buybacks to date, it seems realistic that they will probably continue to buy back shares, with an expected quarterly spend of $30-50 million. That said, I prefer opportunistic buying when a company wants to create more shareholder value by only buying when the company is below fair value. Weatherford acquired Datagration Solutions, Inc. this quarter, a company with two core platforms:-PetroVisor platform, which supports financial and operational decision making-EcoVisor SaaS-based platform and ESG performance management solution Basically, this acquisition can increase efficiency in the longer term, but I don't think it will show up in the numbers in the short term. Under the capital allocation framework, the company spends roughly 5% of its revenue on capital expenditures. This year overall, it is holding that level. With $78 million spent in the third quarter, so far this year, it has spent 4.8% of its revenue on CapEx spending, which I expect to see a return on later. Outlooks Above, I have already started to explain what I expect for the next quarter and this year. I have summarized my expectations for this year in the table below.   Segment revenues for Weatherford (Data from company reports) The quarterly results are given broken down by segments. I have used the company's preliminary expectations for the fourth quarter. The company expects no growth in the Drilling & Evaluation segment, so I am expecting the same revenue as in Q3. In the Well Construction & Completion segment, it expects low single-digit earnings, so I have assumed 2% growth here. In the Production & Intervention segment, management expects low to mid single digits, so here I expect roughly 4% growth for the coming quarter compared to Q3. As far as the Other segment is concerned, Q3 results were very similar to Q3 last year, so based on that, I expect roughly 20% growth for Q4. This would therefore project total revenue of $1,454 million, up more than 3% from Q3. For the full year, this would translate into revenue of $5,626 million, which would be less than 10% growth over 2023, well below management's expectation at the beginning of the year. Management expects an EBITDA margin of around 25%. This seems realistic overall, as the EBITDA margin value varies by segment, but the Q3 result was similar at 25.2%. This would give an adjusted EBITDA of $1407 million this year, which is higher than the 2023 adjusted EBITDA of $1,186 million. This sounds good at first, but the bigger question is where the company's fundamentals would go from here because I see growth gradually slowing, and I wouldn't be surprised if we see a very low growth environment in the coming quarters. Key takeaways For me, the picture is a bit mixed on the Q3 results. I see the capital allocation moves as a good direction, the net debt / adjusted EBITDA ratio has been reduced nicely by management, but I'm not sure how much the share buyback is currently supporting shareholder value creation. As for the company's growth, Q3 didn't see much growth in either segment, revenue or adjusted EBITDA. I think this year's results could still be good, I expect roughly 10% growth in revenue, but the future growth outlook is a bit unclear, it's not clear enough which segments could grow more in 2025.  In terms of company valuation, in the oil and gas industry, I think companies that are either very stable and pay a good dividend or those that are very undervalued are a good buy. This company is neither of those things, so I think it's better to stand aside and not buy, even if I don't think the stock is overpriced at all. 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