An Oil Services Firm on the Upswing
08/09/2007 12:00 am EST
Elliott H. Gue, editor of the Energy Strategist, says Weatherford International is poised for a rebound in North American drilling while it reaps the rewards of booming business overseas.
International [drilling] activity remains ultra-strong while still-weak natural gas prices continue to put pressure on activity in North America.
More specifically, Canada remains far and away the weakest market in the world right now, dragging down the results of just about any services firm with even a modicum of exposure there.
But the company that expressed the most optimism on Canada and drilling activity there was Weatherford International (NYSE: WFT).
CEO Bernard Duroc-Danner is projecting the Canadian market to bottom out in the fourth quarter of 2007 or early in the first quarter of 2008. But he seems far more confident in the oil side of the business than the gas side.
Weatherford is the most-exposed big services firm to Canada. This is mainly the result of its acquisition of Precision Drilling’s energy services division back in 2005.
But that exposure is clearly dropping. Management pointed out that 25% of Weatherford’s business was in Canada in the first quarter of 2006. In the most recent quarter, however, the nation accounted for less than 10% of the total.
Meanwhile, the real story for Weatherford remains markets such as Africa, the Middle East, and Asia. The company’s Eastern Hemisphere business posted year-over-year revenue growth of 40 percent, and management reiterated expectations that the level of growth would continue through the end of 2007.
When Weatherford bought Precision, it was able to use its existing sales force and relationships with foreign producers to push key Precision services to international customers. In my opinion, Weatherford’s acquisition of Precision has been among the very best in the energy services industry.
Some of the key services functions that Weatherford has been really pushing internationally are directional drilling, underbalanced drilling, and completion. These are services related to the drilling of nonvertical wells.
Years ago, most Eastern Hemisphere markets could produce prolific oil and gas reserves using simple, cheap, vertical wells, but that’s no longer the case. Directional drilling is now becoming the standard [and] a way to produce mature wells more effectively.
There are some key emerging technologies for Weatherford, [such as] solid expandables.
Weatherford’s solid expandables technology is a type of metal casing that can be placed in the well and expanded to fit the shape of the well itself.
[That allows] the entire well to be drilled with very little loss of diameter. This is just the sort of high-tech service function that’s in high demand right now, and Weatherford has a very real competitive advantage.
Oil reserves are getting more and more difficult, expensive and complex to produce, requiring far-more-advanced technology. Weatherford’s service offerings fit well with this theme.
I continue to recommend buying Weatherford at current levels. (The stock closed below $57 Wednesday—Editor.)