Focused Cost Management Will Sustain North American And European Operations

Key Takeaways

• Weatherford is facing declining activity levels and revenue pressures, especially in Mexico, North America, and Europe due to market and operational challenges.
  
• Strategic divestitures aim to improve capital efficiency, with a focus on cost management to maintain EBITDA margins despite overall revenue declines.
  
• Weatherford faces revenue declines due to market softness, trade tensions, and economic uncertainties, affecting EBITDA margins and threatening financial stability.

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 International is experiencing a significant decline in activity levels, particularly in Mexico, where year-on-year activities decreased by approximately 60%, negatively impacting anticipated revenue streams.
  
• The North American market, which continues to trend downward, and a softer European market due to operator cutbacks in the U.K., are exerting pressure on revenue growth.
  
• Recent U.S. tariffs alongside retaliatory tariffs are creating considerable uncertainty and could potentially lead to demand destruction and impact client spending plans, further affecting revenue.
  
• Weatherford's recent divestiture of the Argentina Pressure Pumping and Wireline businesses may improve their capital efficiency, but will also lead to reductions in revenue and EBITDA.
  
• Despite expected revenue declines, Weatherford anticipates maintaining EBITDA margins in the low 20s, underscoring a strong cost management focus to defend margins in a challenging environment.

Weatherford International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Weatherford International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Weatherford International's revenue will decrease by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.8% today to 10.6% in 3 years time.
• The bearish analysts expect earnings to reach $514.5 million (and earnings per share of $7.69) by about July 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 price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the US Energy Services industry at 11.3x.
• 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 7.79%, as per the Simply Wall St company report.

Weatherford International Future Earnings Per Share Growth

Risks

• A notable risk is the significant decline in activity within the Mexican market, down approximately 60% year-over-year, coupled with softness in North America and Europe. This has already impacted revenues and could continue to do so if the trend persists.
  
• Weatherford faces increasing challenges due to prolonged global market uncertainty and lower customer spending, which can lead to further reductions in revenues and potentially affect EBITDA margins.
  
• Recent U.S. tariffs, along with retaliatory measures, contribute to market uncertainty and could result in demand destruction, which threatens both revenues and net margins negatively.
  
• Divestitures in Argentina have streamlined the portfolio but also reduced revenues and EBITDA from those operations, indicating that similar future actions could lead to further decreases in overall earnings.
  
• The uncertainty surrounding potential economic downturns, exacerbated by global trade issues and increased supply from OPEC+, could force customers to cut back on capital expenditures, adversely impacting revenue and overall financial performance.

Valuation

• The assumed bearish price target for Weatherford International is $59.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Weatherford International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 $59.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.8 billion, earnings will come to $514.5 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of $52.73, the bearish analyst price target of $59.0 is 10.6% 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.