On the surface, this morning’s news from Weatherford International (WFT) looks like it’s being less than well-received. Dilution is afoot — a lot of it — and as a result, WFT stock is down about 14% over the course of the past two trading days (including Monday).
And yet, to the long-term investor who isn’t categorically risk-averse, this two-day drubbing may actually be an opportunity to scoop up some shares at bargain-basement prices.
The decision to be a buyer of WFT, however, has less to do with Weatherford itself and more to do with the long-term future of oil. If crude oil has any kind of bullish future, the current situation WFT stock is in may leave a lot of investors looking back a year from now thinking, “Woulda, coulda, shoulda.”
Weatherford Issuing Shares … Now and Later
For the unfamiliar, Weatherford International is an oil and gas service company, drilling wells, installing fluid pump systems, delivering sand-control measures, and offering a whole host of services that explorers don’t tackle themselves.
As has been the case for all other oil and has stocks, the past year or so has been nothing less than miserable for Weatherford, and by extension, miserable for owners of WFT stock.
The specifics: Over the past 12 months, Weatherford International has lost $1.0 billion on $12.8 billion in revenue, down significantly from 2013’s (the last “good” full year for oil stocks) top line of $15.2 billion and net loss of a palatable $345 million.
In other words, the company’s results are pointed in the wrong direction.
And the stock has paid the price for the company’s poor performance. WFT shares have fallen from a peak of $24.88 in July of last year to the current price of $10.12 … a painful 60% tumble.
It’s a tale being told by the entire oil and gas industry, of course. Crude oil prices have slumped from a July-2014 peak near $112 per barrel to the current price near $46, crimping margins for the entire industry, and forcing even some of the most prolific players into shuttering at least some of their operations until the oil glut crisis takes a turn for the better.
In other words, it’s been a trying time for all oil companies, including Weatherford International.
Weatherford International’s response to the implosion of the oil and gas industry can be considered defensive or offensive, and depending on whom you ask, it could even be both. According to this morning’s press release, the company will be issuing a combination of shares and convertible notes (notes that are guaranteed to convert to shares in three years or less) to the tune of $1 billion.
The fund-raising has been designated “to pre-fund potential acquisitions and for general corporate purposes.” Investors can reasonably assume the company is targeting acquisitions more than “general corporate purposes.”
As was noted, the steep decline from WFT stock sends a clear message that the market is less than pleased with the decision. To forward-thinking investors, though, one trader’s trash may be another man’s treasure. As painful as the idea may seem right now, if there was ever a time to do deals, this is it.
In Good Company
As a reminder, Weatherford International is hardly the only oil and gas name looking to buy its way out of trouble — by building scale — and set itself up for big-time growth once the oil market does rebound.
Royal Dutch Shell (RDS.A, RDS.B), for instance, is shelling out $70 billion to own British rival BG Group (BRGYY). And, though much smaller than the Shell/BG deal, Noble Energy (NBL) paid $2.1 billion worth of stock to own a somewhat desperate shale play known as Rosetta Resources.
More such deals are expected this year and next year, as the suppression of oil prices is not only keeping target-companies’ stock prices low, but it’s effectively forcing companies to be buyers just to survive. Bigger scale is about the only thing that will let oil and gas companies to have a shot at making any real money as long as oil prices remain tepid.
Bottom Line for WFT Stock
While the fundraising and inevitable acquisition(s) in the cards for Weatherford have dealt another blow to the price of WFT stock, it may be time for investors to stop asking how low crude oil prices can go, and start thinking about when and to what degree they’ll recover.
Once that starts to happen, the few companies that have mustered attractive M&A will be the first to emerge out of the ashes, and they’ll rise the most.
And yes, WFT is one of those names poised to ride that rebound rally whenever it materializes. At a forward price/sales ratio of 0.61, it would take very little forward progress for the company to swing to a relatively wide margin … even if few are thinking in those cyclical terms yet.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
