Will Weatherford Continue to Underperform the Industry ETFs?

Weatherford International: Life after Its Credit Rating Downgrade

(Continued from Prior Part)

Weatherford International’s returns and key drivers

Oilfield equipment and services (or OFS) companies like Weatherford International (WFT) are affected by rig counts and energy prices. In the past year, the West Texas Intermediate (or WTI) crude oil price has dropped by ~11%.

Weatherford International has underperformed the industry ETFs. WFT’s one-year return of -61% net of dividends has been worse than the VanEck Vectors Oil Services ETF (OIH). OIH returned -29% in the past year. WFT comprises 3.6% of OIH’s portfolio.

The Energy Select Sector SPDR ETF (XLE), the broader energy industry ETF, has produced a return of -18%. Weatherford International has significantly underperformed the SPDR S&P 500 ETF (SPY), which has returned -1% during the same period.

WFT’s peer Superior Energy Services (SPN) has outperformed WFT, producing a one-year return of -36%, net of dividends. WFT also underperformed the US rig count, which fell by 55% in one year.

Weatherford International and crude oil prices

The correlation coefficient between Weatherford International’s stock price and crude oil prices from May 2015 to the present is 0.58. This indicates a relatively strong degree of correlation between crude oil prices and Weatherford International’s stock prices.

Analyzing WFT’s underperformance and its strategies

Several of Weatherford’s international rigs are idle, and its cash flows and EBITDA were negative in 1Q16. The company has almost exhausted its room for workforce restructuring, which had accrued savings in the past. The company has reduced its capex budget for fiscal 2016. Although the company expects to generate positive free cash flow in 2016, it has revised down its guidance.

The company’s Zubair EPF contract in Iraq has run into legal trouble. This can reduce WFT’s fiscal 2016 free cash flow forecast by an additional $150 million to $200 million. In addition, a significantly lower capex spend can impair WFT’s growth prospects.

On the other hand, Weatherford International plans to lower its net debt by 7% to $6.5 billion by the end of fiscal 2016. It is possible that Weatherford International may post a shaky performance in the medium to long term.

Browse this series on Market Realist:

• Part 1 - Is Weatherford International’s Share Price Weak?

• Part 2 - What Did Weatherford’s Management Say after Its 1Q16 Earnings?

• Part 3 - Analyzing Value Drivers for Weatherford International