Weathering the Storm
03/05/2008 12:00 am EST
Elliott Gue, editor of The Energy Strategist, says one oil services firm is uniquely well-positioned to profit while its competitors deal with slowing growth and price wars.
The basic bullish case for the services firms remains intact longer term, but I just don't see a great deal of near-term upside.
The only exception is Weatherford International (NYSE: WFT). Weatherford's international growth story appears to be intact, and I see a real case for owning the stock while avoiding the other international names for now.
The basic problem is that demand for offshore oil and gas exploration and development remains strong, but there just aren't enough drilling rigs out there to handle all of the projects. Therefore, services firms such as Schlumberger (NYSE: SLB) have stated that they see their international growth constrained by the lack of rig platforms available to pursue projects.
So, based on what I'm hearing, I’m looking for the services firms to enter a soft patch over the next six months or so. That means there's risk they could be forced to cut prices to win business.
It would seem ridiculous to believe that Weatherford could somehow thrive while all its competitors are trying to talk down analysts' earnings estimates and warning about platform issues. Yet Weatherford says it's looking for growth rates of close to 40% over the next two years in its international markets, [double Schlumberger’s projections].
Weatherford has room to grow by simply taking proven, existing technologies and selling them into new markets. I also see Weatherford entering the sweet spot of its growth cycle right now. Consider that just three years ago, Weatherford had far greater exposure to the North American market; its international operations were still relatively small.
As Weatherford began to expand internationally, it hired new employees in global markets and spent considerable sums building its presence. With the base of international revenues still small, these startup costs were high relative to international revenues.
But that investment is beginning to pay off. Weatherford's international revenue base is now closer to $4 billion annually, more than half the company's total sales. Weatherford has finally achieved critical mass in its international business.
At any rate, I see Weatherford's international expansion strategy as uniquely sustainable in the current environment. Because the company isn't overly dependent on offshore rigs for its growth, Weatherford should be able to survive the 2008 platform problem and what I suspect will be a temporary slowdown for the industry.
For now, I think Weatherford's superior growth prospects will spell major outperformance for the stock. In fact, that's already happening; since the beginning of 2008, Weatherford is down less than 1% against a 14% loss for Schlumberger.
Despite that outperformance, Weatherford is still cheap, trading at around 15.9x 2008 earnings estimates compared with 17.5x for Schlumberger, even after the latter's recent slide. The stock rates a buy under $72. (It closed below $68 Tuesday—Editor.)