Weatherford Should Benefit From its Diversified Geographic Exposure and the Oil Market's Recovery 

Strategist

Andrew Bischof

Associate Equity Analyst

Yuyang Zhang

Weatherford is one of the larger oilfield service firms in an otherwise hyper-fragmented industry. However, in terms of size, it remains some distance from the industry’s Big Three: Schlumberger, Baker Hughes, and Haliburton. 

Weatherford's central goals remain debt management, margin expansion, and ultimately, ongoing positive free cash flow generation. Internal cost reduction will mostly derive from operational consolidation as management rightsizes operations for a business commanding $3 billion-$5 billion in annual revenue (compared with $15 billion, as seen in the years preceding the 2015 crash in oil prices). The firm’s many divestitures since 2018 year-end include infrastructure-related assets and historically unprofitable business lines, like surface data logging and lab services. Moving forward, management indicates each of its business lines must be independently profitable in each geographical region in order to avoid divestiture. 

Weatherford nevertheless maintains a diverse product portfolio targeting at least 16 different production applications. We expect cross-selling will be a key strategy moving forward as well operators' increasing prioritization of production optimization strengthens the potential value-add from service integration. 

As Weatherford progresses through its own internal optimization initiatives, management remains steadfast in its intention to target profitability potential over market share gains across regions. We expect this will stabilize the firm's through-cycle profitability in an otherwise volatile industry, though the strategy is not without possible drawbacks. Despite the currently favorable pricing environment, we expect price competition will remain prevalent over the long run, and prioritizing higher-margin projects may significantly reduce the number of contracts worth pursuing. It's also possible reduced market share may limit cross-selling potential over time. We nevertheless expect demand for oilfield services over the next five years will remain elevated, supporting profitable growth for Weatherford over the near to medium term.

Business Strategy & Outlook

We do not award Weatherford International a moat, as we don’t believe the firm will produce excess returns through the midcycle. Potential moat sources would include a cost advantage from operational efficiencies and pricing premiums due to superior intellectual property. In Weatherford’s case, we see evidence of neither. 

Weatherford is one of the larger players in the oilfield services space but remains a very small fish compared with the diversified service industry’s Big Three (Schlumberger, Haliburton, and Baker Hughes). Schlumberger and Haliburton each earn narrow moats from cost advantages, mainly due to economies of scale deriving from their immensity. Weatherford’s historical market share hovers around the low single digits in most of its business lines, placing it at a distant fourth compared with the Big Three. We expect a cost advantage from economies of scale will be similarly out of reach. 

The other potential moat source involves intangible assets—superior intellectual property can convey pricing power for some oilfield service firms, though the phenomenon is rare. In Weatherford’s case, we don’t observe technological IP that’s sufficient for the firm to command premium prices. Competition within the oilfield services space remains very high among large international players, and that’s before considering the myriad regional competitors in play. Price competition is thus very high—well operators are highly cost sensitive, and oilfield services are largely commoditized. In such a saturated market, a superior product can earn a pricing premium, but such competitive advantages are often short lived. Oilfield service providers are in a constant race toward the technological leading edge as they seek to appear differentiated to well operators (and ultimately win contracts). Every single service firm dedicates significant attention toward developing the latest and greatest product offering, so technological advancements often disseminate quickly throughout the space, challenging any one firm’s ability to maintain a consistent pricing premium over time. 

Moving forward, we expect continued operational optimization will drive long-run margin expansion, as Weatherford's product offerings are not sufficiently differentiated to warrant premium pricing. Weatherford competes with at least three large international oilfield service firms in almost every single product line, and that’s before considering the myriad regional and specialized competitors. 

All Weatherford’s products and services depend entirely on the level of capital spending by E&P firms. If E&Ps pull back on production investment, Weatherford’s business suffers (its year-over-year 2020 revenue decline of 29% coincides with a roughly one third reduction in upstream investment). Public E&P firms across North America have been exercising more capital discipline since 2019, a trend we expect will endure over the near to medium term. The overall reduced pool of potential revenue will exacerbate pricing pressure in an already competitive market, further weighing on Weatherford’s ability to command premium prices relative to its peers.

None

Economic Moat

Weatherford International PLC

Weatherford International plc provides equipment and services to the oil and natural gas exploration and production industry. It operates through three segments: Drilling and Evaluation, Well Construction and Completions & Production and Intervention. The Drilling and Evaluation offers managed pressure drilling, drilling services, wire line and drilling fluids. The Well Construction and Completions including tubular running services, cementation products, completions, liner hangers and well services. The Production and Intervention offers intervention services & drilling tools, artificial lift, production automation & software, sub-sea intervention and pressure pumping services. The company was founded in 1941 and is headquartered in Houston, TX.

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Weatherford International reports strong Q2 performance and outlines growth strategies

Weatherford International's Q2 2023 Earnings Call showcased strong financial performance, strategic focus on international markets, and investments in technology and infrastructure. The company aims for margin expansion and efficiency gains through pricing strategies, technology investments, and cost management.

Weatherford International reports strong Q3 earnings and international growth

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Weatherford International plc engages in providing equipment and services to the oil and natural gas exploration and production industry. It operates through the following segments: Drilling and Evaluation (DRE), Well Construction and Completions (WCC) and Production and Intervention (PRI). The DRE segment offers managed pressure drilling, drilling services, wire line, and drilling fluids. The WCC segment includes tubular running services, cementation products, completions, liner hangers, and well services. The PRI segment covers the intervention services and drilling tools, artificial lift, production automation and software, sub-sea intervention, and pressure pumping services. The company was founded in 1941 and is headquartered in Houston, TX.

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