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Weatherford (WFT) Cost Containment Efforts Remain in Place

On Apr 18, 2016, we issued an updated research report on Weatherford International Ltd. WFT, a leading oilfield services company.

We continue to believe that Weatherford’s medium-term revenue growth will outpace its peers, given its recovering margins and growing presence in the relatively stable market of the Eastern Hemisphere. We also remain optimistic about the company’s performance in North America, given its exposure to the prolific oil and gas shales and improved pricing across several product lines.

As a result of the persistent weakness in North American market conditions, Weatherford plans to further reduce its expenses. The company completed its previously stated target of 14,000 job cuts during the fourth quarter and intends to lay off another 6,000 personnel, mainly in the U.S., going forward.

Weatherford also shut six of its manufacturing and service facilities along with 90 operating facilities across North America during 2015. The closure of nine more manufacturing and service facilities in 2016 is also on the agenda. These measures are expected to help the company overcome the impact of the downturn as well as take advantage of the opportunity to develop a leaner structure and a tighter organization.

The measures undertaken by Weatherford to reduce costs both through direct cost reduction in view of the major downturn as well as streamlining the overall cost containment structure should result in a more efficient and better run company going forward. Further, cost reductions and improvements in capital efficiency will lead to a positive outlook on the company.

During the first quarter of 2016, Weatherford expects positive free cash flow from a methodical reduction in leverage, increased efficiency and lower cyclical and structural costs. The company has further reduced its capital expenditure guidance for 2016 to $300 million, which is 56% lower than the 2015 level. The company was successful in generating annualized cost savings of $1.4 billion in 2015.

While we believe that expenditure on exploration and production activities is gaining traction, this might be partially offset by competitive pricing and continued margin pressure from excess capacity. In addition, Weatherford could face a more adverse impact than its peers, if the North American market underperforms. This is because a significant portion of its revenues come from this region. Weatherford believes that the depressed natural gas and oil price environment will put further downward pressure on its earnings.

Finally, Weatherford’s debt-heavy balance sheet, its incapability to generate a strong free cash flow and competition from larger peers are causes for concern.

Zacks Rank and Stocks to Consider

Weatherford carries a Zacks Rank #3 (Hold). Some better-ranked players from the same space are Sasol Ltd. SSL, ReneSola Ltd. SOL and Vanguard Natural Resources, LLC VNR. Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
WEATHERFORD INT (WFT): Free Stock Analysis Report
SASOL LTD -ADR (SSL): Free Stock Analysis Report
VANGUARD NATURL (VNR): Free Stock Analysis Report
RENESOLA LT-ADR (SOL): Free Stock Analysis Report
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