Portfolio Optimization And Advanced Technologies Will Secure Future Success

Key Takeaways

• Divesting capital-intensive businesses and optimizing costs could improve margins, cash flow, and create a scalable, sustainable cost structure.
  
• Focus on advanced technologies and high-impact contracts in resilient regions could stabilize or increase revenues and enhance client efficiency.
  
• Declining activity, global trade tensions, and lower commodity prices threaten Weatherford's revenue stability and profitability, exacerbated by underabsorbed costs and strategic divestitures.

Catalysts

An energy services company, provides equipment and services for the drilling, evaluation, completion, production, and intervention of oil, geothermal, and natural gas wells worldwide.

• Weatherford has been optimizing its portfolio by divesting capital-intensive businesses in Argentina, which could lead to improved net margins and cash flow due to a higher-quality portfolio with lower capital requirements.
  
• The company is increasing its focus on advanced technologies like the ForeSite Power Regenerative variable speed drive and OptiROSS RFID Multi-Cycle Sliding Sleeve Valve, which should boost revenues by enhancing the operational efficiency and cost-effectiveness of its clients.
  
• Weatherford is committed to its buyback program, having repurchased approximately $152 million shares, which could improve earnings per share (EPS) by reducing share count and returning value to shareholders.
  
• The cost optimization program aims to enhance EBITDA margins by making the company's cost structure more scalable and sustainable, even amid potential revenue declines.
  
• Weatherford is actively pursuing high-impact contracts, particularly in resilient regions like the Middle East and Asia, which could stabilize or increase revenues despite broader market challenges.

Weatherford International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Weatherford International's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 11.9% in 3 years time.
• Analysts expect earnings to reach $629.1 million (and earnings per share of $8.83) by about April 2028, up from $470.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 6.7x today. This future PE is greater than the current PE for the US Energy Services industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Weatherford International Future Earnings Per Share Growth

Risks

• Declining activity levels in key segments and geographies, including a 60% drop in Mexico and a downward trend in North America and Europe, could adversely affect revenue and profitability.
  
• Retaliatory tariffs and global trade uncertainties may lead to demand destruction and spending slowdowns, particularly impacting revenue stability.
  
• Project start-up costs and partially underabsorbed headcount over Q1 have pressured EBITDA margins, indicating potential future challenges in maintaining profitability as revenue falls.
  
• Recent divestitures in Argentina, while strategically beneficial, will also contribute to revenue and EBITDA reductions, potentially affecting short-term financial performance.
  
• Lower commodity prices and the cautious spending environment, exacerbated by OPEC+ adding supply, put pressure on customer spending plans, which could lead to a significant slowdown in revenues in the second half of the year.

Valuation

• The analysts have a consensus price target of $76.125 for Weatherford International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $629.1 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.3%.
• Given the current share price of $43.6, the analyst price target of $76.12 is 42.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.