EUR 850.00 For Business Accounts Only

Morningstar | Weatherford Posts Solid 2Q Improvement, in Line With Peers

In line with peers, Weatherford achieved a solid second quarter, with revenue growing 1.7% sequentially and adjusted operating income improving to 2.4% from 0% previously. Also, management announced the sale of a portion of its land drilling business, which we see as a positive (albeit long anticipated) development. For now, our fair value estimate and no-moat rating remain unchanged.

Also as with peers, Weatherford's North American operations largely drove its improved result as U.S shale activity levels increased. The Western Hemisphere segment accounted for almost all of the sequential growth in operating income, with segment operating margins improving to 6.5% from 3.2% previously.

Management announced that it had made substantial progress in achievement of its transformation plan (targeting $1 billion in annualized operating income improvement by end of 2019), with achievement moving to 19% at the end of the second quarter from 10% and the end of the first. By this measure, about 75% of the sequential improvement in operating income was attributable to the transformation plan. Impressively (and unlike previous quarters), a large portion of the transformation benefits came from the sales/commercial category, which encompasses top-line improvements due to targeted pricing increases or market share gains. We had previously been skeptical about Weatherford's ability to achieve gains in this category, although we wonder whether Weatherford is merely capitalizing upon overall improving oilfield activity levels (as evinced by peers' progress in the second quarter).

The announced sale of the Middle Eastern portion of Weatherford's land drilling rig business is a positive development, in our view. However, we had also thought the Middle Eastern portion would be easier to sell, given the stronger drilling demand in that region. The key test will come now in the company's attempt to sell the remaining 70% of its rig fleet spread across several other markets, including those in areas such as Latin America facing more challenging conditions.