And those 3 are on vacation!
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Stone Fox Capital, Stone Fox Capital (1,541 clicks)
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Weatherford: Don't Expect A Buyout
Sep. 10, 2015 6:37 PM ET | 2 comments | About: Weatherford International Ltd. (WFT)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
•Investors shouldn't expect a buyout of Weatherford for numerous reasons.
•The stock offers some compelling valuation scenarios with the ability to take market share while the sector leaders are tied up in mergers.
•The high debt level is a troubling situation if the industry doesn't rebound.
The recent merger mania in the oilfield services sector has some analysts predicting that Weatherford International (NYSE:WFT) is the next target. The fourth largest provider has long been a laggard in the sector making it a prime target, but doubts exist on whether it is a true target now.
Before the downturn, Weatherford was making impressive progress in turning around the business and focusing on profits. The company turned in a solid $1 of EPS in 2015 and greatly improved margins. The latest corporate shuffles question whether the company has been left out in the cold on a premium offer or if anybody would want to tackle the debt load.
Size Issues
Weatherford as a buyout target is now difficult to comprehend. Several reasons exist suggesting a buyout is increasingly difficult.
First and foremost, Weatherford has $10 billion in annual revenues and a market cap of roughly $7.6 billion. Both numbers make it a difficult merger target. Second, the top three plays in the oilfield services sector are already involved in large mergers requiring an outsider to make an offer. Third, the massive sizes of Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) after completing the recent mergers places Weatherford at a sizeable disadvantage.
Assuming Schlumberger completes the merger with Cameron (NYSE:CAM) and Halliburton closes the Baker Hughes (NYSE:BHI) deal without divestitures, both corporations would have revenues in excess of $50 billion. Of course it only takes one company willing to pay a premium for Weatherford, but the above points suggests finding a buyer is difficult now.
Opportunity Exists
While doubting the scenario where a company outside the industry wants to pay over $10 billion to purchase a distant third player in the international oilfield services sector, some opportunity exists with the stock.
As 2014 was ending, Weatherford grabbed a PS multiple similar to Baker Hughes. The company produced back to back quarters of solid profits showcasing the turnaround in place. Now that Baker Hughes got a huge premium from Halliburton that has propped up the stock, the PS multiple is now 50% lower. In essence, Weatherford would need to double to equal the levels of Baker Hughes.
WFT PS Ratio (Forward) Chart
Of course, investing isn't that simple. Weatherford still has net debt of $7.2 billion and faces a challenging environment to reduce debt levels.
Takeaway
The combination of high debt levels and a greatly reduced list of potential acquirers makes Weatherford an unlikely buyout target. The stock though offers some value as the oilfield services laggard makes progress in restructuring domestic operations. With the big players busy with the DOJ and working on integration plans, Weatherford has the opportunity to profitably grab market share.
Buy the stock on valuation, but don't expect a buyout any time soon.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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Around 48000, but only 3 actually do any work..hahaha
How many people do they have left working for them.
17905