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Focus List — Less is More

By Elliott H. Gue on Nov. 26, 2013

Weatherford International (NYSE: WFT)

Weatherford International is the smallest of the Big Four diversified oil-field services firms– a group that includes Baker Hughes (NYSE: BHI), Halliburton (NYSE: HAL) and Model Portfolio holding Schlumberger (NYSE: SLB)–but the stock offers the best upside potential in the near term.

The company posted solid third-quarter results, led by an improvement of 30 basis points in its international operating margins.

Management also highlighted its industry-leading expertise in artificial lift, a suite of services and equipment that help to bolster reservoir pressure and stem decline rates in mature oil wells. The company estimates that about 25,000 wells worldwide use electric submersible pumps that are ripe for replacement by Weatherford International’s superior technologies–an opportunity in excess of $3 billion.

And by the time Weatherford International files its annual report in February 2014, the company should be able to remove language about the shortfall in its accounting policies. The resolution of the accounting problems that have plagued the firm in recent years should help to reduce its effective tax rate to about 25 percent from more than 50 percent in 2013.

Meanwhile, Weatherford International and the US government appear closer to settling allegations that the oil-field services company violated the Foreign Corrupt Practices Act (FCPA). Once approved by the courts and the Securities and Exchange Commission, this agreement will involve a fine of $253 million and the appointment of an independent compliance monitor.  

Although regulatory fines are never good news, this settlement should allow management to focus on growth opportunities rather than a government investigation.

We also like management’s plan to divest five noncore business lines that last year generated $1.2 billion in revenue and use the proceeds to pay down debt.

And the stock trades at an undeserved discount to its peers. Shares of the three largest oil-field services firms trade at an average of 1.9 times their trailing 12 months of revenue, compared to a multiple of 0.8 for Weatherford International.

With its accounting issues in the rearview and demand for artificial lift expected to drive results, the stock appears overdue for a rerating and could appreciate to the mid-$30.00s per share.

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