Buy the Dip
As the global economy slows, the energy sector has suffered a selloff as anxious investors fret over weakening demand. In recent months, West Texas Intermediate crude, the US benchmark for oil prices, fell from a high of about $110 per barrel to its current level of about $85 per barrel, while the European benchmark Brent crude dropped from around $130 per barrel to $100 per barrel.
Despite these concerns, reports from the US Department of Energy and the International Energy Agency show global reserves of crude oil are down, even though energy demand is now projected to grow faster than previously estimated.
So this moment of weakness offers an excellent opportunity to pick up shares of energy-related companies such as Weatherford International (NYSE: WFT), which is currently trading near the bottom of its 52-week range.
In addition to a sluggish macroeconomic environment, Weatherford has also been navigating a tax accounting storm. In March, the company reported it would be forced to restate earnings as far back as 2007 due to an estimated $500 million in tax accounting errors related to weak internal controls. That marks the second time the company has had to contend with tax issues in less than a year.
While these tax problems have understandably shaken investors’ confidence in management—and claimed the job of the company’s chief accounting officer—they aren’t expected to have a hugely material impact on the company. And malfeasance doesn’t seem to be an issue here. Rather, with 543 subsidiaries and other assorted operations spanning the globe, the errors seem to stem from a misinterpretation of accounting rules. Tax reporting has also been complicated by the fact that Weatherford has changed its country of domicile twice over the past decade, moving from the US to Bermuda and then to Switzerland.
Nevertheless, Weatherford actually has a lot going for it.
The company is the leading supplier of artificial lift equipment, which is used to increase the flow of liquids from wells, boosting production from mature wells and allowing more residual liquids to be removed. The technology is also useful in extracting oil from unconventional wells, which are often in low-pressure environments. Additionally, the company has keenly focused on offshore oil projects around the world, which is a corner of the oil market that’s garnering increasing attention from major oil producers.
Weatherford has built a strong international business, particularly in Latin America where there have been a number of new oil discoveries, such as the vast Libra field off the coast of Brazil. The company also has a growing presence in Africa, which has become an increasingly attractive market following a series of major oil and gas finds over the past decade. In the Middle East, the company recently signed an $850 million long-term contract to provide services in Iraq.
Weatherford’s revenue growth has outpaced its industry peers over the past few quarters, which enabled earnings to jump 70 percent in the first quarter from a year ago. Meanwhile, shares of the company’s stock are trading at a discount on both a price-to-book and price-to-sales basis.
All it would take to spur the next ascent in Weatherford’s shares is a slight improvement in the global economy and energy prices. In the meantime, the company is also an attractive takeover target for its larger competitors, such as Schlumberger (NYSE: SLB) or even Halliburton (NYSE: HAL), which would love to get a hold of Weatherford’s proprietary technologies and book of business.
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