A Safer Energy Play
10/29/2008 10:00 am EST
Elliott Gue, editor of The Energy Strategist, says Weatherford International won’t be hurt by a slowdown in oil and gas exploration.
Weatherford International's (NYSE: WFT) traditional business strengths involve squeezing more oil out of existing fields or carrying out drilling projects on mature fields. Simply put, Weatherford is more heavily focused on development spending than exploration spending. In fact, [in a recent conference call,] the company noted that its contracted business in 2009 has no material exposure to exploration work.
Small independents operating in markets such as Africa and the North Sea are most likely to cut their spending plans. Established integrated oil companies and state-owned national oil companies typically don't change their spending plans on a dime; they're less sensitive to commodity prices and have little or no need to access the credit markets.
Weatherford obviously has heavy exposure to independents in the US and Canada, because these firms dominate the drilling scene. But internationally, management estimated that only about 20% of its business is with independents.
Weatherford did express a bit of near-term caution concerning Russia. CEO Bernard Duroc-Danner stated: “Given the level of taxation, royalties, in Russia, unless that changes, it’s clear that the cash flow of our clients is being squeezed. So the prognosis on Russia is not as strong in 2009 as it was, clearly.”
Just as with the North Sea and Africa, 2009 looks to be somewhat of a transition year for Russia. It appears that growth might slow and pause in 2009 under the current tax and royalty structure there.
That said, we very much doubt the Russian governmentwill allow a major retrenchment in their largest industry. There could well be some royalty and tax breaks in the pipeline in Russia that could help shore up or reaccelerate activity levels.
Weatherford didn’t temper its outlook for international growth in 2009. This is a major distinction to Schlumberger’s (NYSE: SLB) CEO Andrew Gould who essentially refused to predict international growth in 2009 due to the lack of visibility.
The first question Weatherford's management fielded during the conference call was to explain why it didn’t see a need to get more cautious on 2009 international growth. The answer was simply that most of the company's 2009 projects have already been negotiated and signed. The CEO estimates 80% to 100% growth.
There will absolutely be some slowdown in international growth in 2009, and North America faces some near-term headwinds. However, the issue appears to be more of a pause in growth rather than an outright collapse in spending. Spending from large national and integrated oil companies looks relatively solid.
Weatherford will benefit from its heavy exposure to development rather than exploration work. Meanwhile, Weatherford is trading at less than seven times next year's earnings estimates, the cheapest valuation in roughly a decade. This more than prices in any slowdown in demand for services overseas. Buy Weatherford at the current fire-sale prices. (It closed Tuesday above $13—Editor.)