Weatherford International: Probably Due For A Pullback (NASDAQ:WFRD)

Weatherford International plc (NASDAQ:WFRD) has been on another nice run, but I think the visible things are already priced in, and even with recent improvement in revenue and other metrics like adjusted EBITDA and adjusted EBITDA margins, it is due for a breather, and based upon past corrections, it could be a fairly steep one before the company begins its next run to the upside.

Both Drilling and Evaluation and Well Construction and Completion improved in revenue and adjusted EBITDA in the reporting period, while PRI was up in revenue but down in adjusted EBITDA.

I think all of these segments should continue to grow in 2023, and with an improved product over service mix for PRI, it’s likely to turn positive going forward.

With some of the stronger numbers in its latest earnings report, I think it’s going to be hard for the company to maintain the momentum it has recently had.

In this article we’ll look at some of its recent numbers, the probable correction in its share price coming soon, and what the prospects are for 2023.

Recent numbers

Revenue in the third quarter was $1.12 billion, up 19 percent from the $945 million in revenue generated in the third quarter of 2021. For the first nine months of 2022 revenue came in at $3.1 billion, compared to revenue of $2.68 billion in the first nine months of 2021.

Net income in the reporting period was $28 million or $0.39 per share, compared to net income of negative $(95) million or $(1.36) per share in the third quarter of 2021. Net income in the first nine months of 2022 was negative $(46) million or $(0.65) per share, compared to net income of negative $(289) million or $(4.13) per share in the first nine months of 2021.

Adjusted EBITDA in the third quarter of 2022 was $214 million, up 20 percent year-over-year. Adjusted EBITDA margins were up 160 basis points sequentially to 19.1 percent.

Free cash flow in the reporting period was $133 million, up $74 million sequentially. The primary reasons for the increase were improved receivables and inventory management, lower interest payments, and the increase in adjusted EBITDA.

Cash and cash equivalents at the end of the third quarter of 2022 was $933 million, down $18 million from the cash and cash equivalents of $951 million at the end of calendar 2021. The company had long-term debt of $2.37 billion at the end of the reporting period, down approximately $52 million from long-term debt of $2.42 billion at the end of calendar 2021.

Breaking it down by segment

Drilling and Evaluation

Revenues in Drilling and Evaluation [DRE] for the third quarter of 2022 were $348 million, up $31 million or 10 percent sequentially. The biggest contributor in DRE for the quarter was managed pressure drilling and drilling services in the Asian, Middle East, North African, and North American markets.

Adjusted EBITDA in DRE was $85 million, up $16 million or 23 percent sequentially.

Well Construction and Completion

In its Well Construction and Completion [WCC] segment the company generated revenue of $391 million, up $8 million or 2 percent from the prior quarter.

Adjusted EBITDA in WCC was $78 million, up $11 million or 16 percent sequentially.

Product and Intervention

Revenues in Product and Intervention [PRI] were $357 million, up $12 million year-over-year or 3 percent sequentially. That was primarily attributed to higher artificial lift activity in the North American market.

Adjusted EBITDA in PRI was $66 million, down $2 million or 3 percent sequentially. The decline in adjusted EBITDA was from unfavorable product over service mix.

Share price thoughts

A little over two years ago in early November 2020, WFRD was trading at a low of approximately $1.75 per share and didn’t stop rebounding until it hit about $40.00 per share on April 18, 2022, before correcting to about $17.00 per share on July 7, 2022. From there it once again began a nice upward move, hitting its 52-week high of $51.625 on December 27, 2022.

With the stock making that type of upward move without much pause, and based upon moderate guidance going forward, I think the stock is once again primed for a correction. While WFRD has shown momentum in revenue and is improving on the bottom line, it still needs to sustainably improve in that area in order to get the real big move that probably awaits it, although that’s not likely to come before the latter part of 2023 or the first half of 2024.

The most likely scenario I see for its share price is to take a big dip, and from there begin another one of its big runs. The next upward move is probably going to be incremental, over time, as most of the recent ones have been.

Even so, if it can continue to improve its margins it could surprise with a steeper increase in its share price than I’m looking for at this time.

Conclusion

Weatherford has been improving on the margin side of the business recently, and when combined with increasing momentum in revenue, it has driven the share price of the company up significantly over the last six months or so.

While the improvement in its performance has shown in the numbers, it hasn’t, in my opinion, been enough to drive the share price to the level it’s trading at now.

For that reason, with the stock in need of taking a breather and growth probably going to moderate in 2023, the share price is ready to take a hit. Assuming that’s how it plays out, I think it’ll take a little time to recover to its current price level, and from there grow at more of an incremental pace afterwards, based upon the visibility we now have.

Management guidance is for revenue to grow in the double-digits in 2023, and margins to continue to expand and cash flow to be strong through the year. It could definitely play out that way, but my thesis is there remains enough headwinds and lack of clarity at the macro-economic level to slow down the expected growth, and that’s what I think will happen, at least in the first half of the year.