Weatherford International

Weatherford's second-quarter revenue of $1.1 billion decreased 8% year on year, though unsurprisingly, disruptions in the Middle East played a role. Weatherford's drilling and evaluation segment unsurprisingly took the brunt of this disruption as producers focus on current assets.

Why it matters: Management already flagged the wartime disruption, and we don't think it alters our long-term outlook negatively. Instead, we think what matters most are the wins management highlighted in deepwater, as well as moving ahead of schedule in an Omani project. Despite the revenue headwind from the lump sum turnkey project lapsing in Saudi Arabia, we like Weatherford's discipline to maintain price and margin discipline at the cost of market share. Weatherford's expedited project execution also positions it to take more margin in integrated deals. We flag that despite the year-on-year and sequential revenue loss, Weatherford managed to defend adjusted EBITDA margin of 20.2% on a sequential basis. We think further evidence of discipline is also apparent in its acquisition of NCS Multistage at an attractive valuation, by our estimates.

The bottom line: We raise our fair value estimate for no-moat-rated Weatherford to $93 from $90 previously, mostly based on the acquisition of NCS Multistage. We think the acquisition creates nearly $200 million in shareholder value after giving effect to annual cost savings of at least $15 million. We also lower our Uncertainty Rating to High from Very High as we think the deal reduces some of Weatherford's cyclicality. Finally, we raise our Capital Allocation Rating to Standard from Poor as we think management has demonstrated discipline with the NCS deal and in its project selection. We point out that the deal also has further potential upside that we're not yet baking in given that management alluded to "at least" $15 million of annual savings. And we expect working capital to be a tailwind as collections from Pemex continue to improve.

We raise our fair value estimate to $93 from $90 previously, mostly based on the acquisition of NCS Multistage. We like the terms of the acquisition and think the acquisition creates nearly $200 million in shareholder value after giving effect to annual cost savings of at least $15 million. We value Weatherford at roughly 6.5 times and 6.0 times 2026 and 2027 EBITDA. While Weatherford still trades below peer multiples, we believe it deserves a modest discount to peers, given its subscale status, risk profile related to its Mexico customer concentration, and credit profile (though it's improving). Still, this is a very different company from its prior iteration.

We think the environment is becoming increasingly more constructive for Weatherford as we model a five-year top-line CAGR of 2%, primarily due to better pricing next year and offshore deepwater wins and tailwinds, and what it means for operating leverage. Still, we hesitate to model a meaningful structural change given the difficult operating environemnt.

We’re most bullish on Weatherford’s tubular running services offering, which should benefit from the growing offshore effort in the Middle East. The Middle East is Weatherford’s most promising region over the long term, and capacity expansions and strong gas activity underpin our outlook. We also believe deepwater projects in Latin America and Africa will benefit Weatherford’s top line over the long term, despite near-term headwinds. In Latin America, we like the lift opportunity forming from its installed base. We expect continued resilience here (product and intervention segment) as customers value service providers that can help maximize production with existing assets in a lower oil price environment.

Finally, we expect industrywide drilling and wireline needs to climb meaningfully higher by the end of the decade. We’re not expecting Weatherford to take a disproportionate share of upstream capital expenditure, even assuming a more favorable operating environment over the medium to long term.

We assign Weatherford a no-moat rating. Oilfield service companies typically earn moats through intangible assets from customer relationships, a track record of success in solving complex projects cost-efficiently, and through intellectual property.

Many of Weatherford’s products and service offerings are commoditized. Multiple peers have readily available substitutes that produce almost indistinguishable customer outcomes. So, price becomes a more important consideration for customers. Further, most oilfield contracts can last as short as a few weeks, with few lasting longer than five years. Short engagements give producers plenty of opportunities to switch providers, making it difficult for Weatherford to establish moaty customer relationships. Two of Weatherford’s focal business offerings, casing and tubing, and rental and fishing, are examples of nearly commoditized oilfield service offerings.

We think there’s a low chance that Weatherford will earn a moat in offshore tubular running services. Although Weatherford pioneered automated tubular running services, other firms' offerings have similar performance attributes and are included in a rig automation suite that Weatherford can’t provide. Weatherford is present at specific touchpoints in the well lifecycle rather than across the whole process.

Furthermore, Weatherford leads in highly fragmented, smaller addressable markets of roughly $3 billion to $5 billion. These markets account for a small fraction of the total global oilfield services expenditure. Larger integrated peers can cross-sell a far more comprehensive suite of solutions than Weatherford, which supports their reputation and promotes high utilization rates. Producers usually prefer to rely on a few global providers that can meet all their needs in various situations and geographies.

Other providers’ drilling services have superior technical expertise and intellectual property relative to smaller oilfield services firms like Weatherford, partly due to their larger research and design spending and partly from larger volumes of directional drilling. This has helped them accumulate more extensive and varied field experiences, which increases their customer know-how. Adopting and introducing innovative drilling technologies early gave other competitors a multiyear headstart in exposure and associated learnings with high-pressure, high-temperature environments and abrasive formations.

Some of Weatherford’s other competitors also have a wider product breadth. Producers appreciate product and service bundling as it usually leads to fewer moving parts and points of contact during their operations, which makes it difficult for Weatherford to carve a moat.

Similarly, earning a competitive advantage in casing and tubing services is difficult because it’s highly commoditized and fragmented. There’s low technical differentiation in having oilfield services workers stand at the top of a well while operating manual or semi-manual equipment. Fragmentation is common because smaller, local, or regional players can enter the market with relatively basic tools or personnel. Most oil-producing regions have dozens of local or midsize service companies offering tubing services.

A smaller subset solution within tubing and casing that Weatherford offers is tubular running services. Having premier tubular running capabilities generally isn’t a significant performance differentiator between supplier firms, as they have a relatively limited impact on reservoir productivity. Apart from certain automated services that aid in functions like pipe positioning, tubular running services are generally labor- and equipment-intensive rather than software- or intellectual property-driven. Since there’s minimal data or software integration with other solutions, it’s much harder to patent or protect any advancement and lock in operators. Low customer loyalty generally incentivizes vendors to compete on cost and availability rather than innovation. While portions of the business, like deepwater project work, do allow the service provider to take price given the inherent complexity, price competition for acceptable quality looms large during customer conversations outside of these projects.

While Weatherford is the global leader in casing and tubing services ahead of Expro, Weatherford lacks bundling opportunities with casing and tubing compared with larger competitors.

Finally, Weatherford lacks a significant electric submersible pump offering, whereas larger integrated competitors offer both high-end electric submersible pumps and rod lift and have a large installed base of equipment.

Weatherford is focusing on differentiated, niche markets, which should allow it to continue growing margins and free cash flow.

Management is paying a dividend and making opportunistic repurchases that should benefit long-term shareholders.

Tubular running and managed pressure drilling are much larger opportunities for growth and returns than the market is giving Weatherford credit for.

The market is extrapolating the benefits from higher commodity prices and what they mean for Weatherford's long-term pricing power.

Weatherford’s smaller product suite means it must focus on less desirable contracts compared with the Big Three oilfield services firms.

The market is underappreciating the downside risk from Weatherford’s concentration risk to Pemex, as well as its increasing bet on Russian oilfields.