Description

Business Description

• Result of 250 acquisitions - now a leading provider of equipment and services to the oil and nat gas exploration and production industry operating in over 100 countries
• Provides a large portfolio of services and products including pressure pumping, directional drilling, and artificial lift
• Demand driven by (Rig count is an indicator of the level of spending):
  • Maturity of world's oil/gas reservoirs
  • Accelerating production decline rates
  • E&P service intensity increasing outside the US (e.g. NA is 5.5% of E&P, Latin America is 5% of E&P spending, EUROPE/SSA/FSU is 3%, MENA/Asia Pac is 3.5%)
  • More recently (E&P spending shift to Land and overseas due to Gulf)
  • Continued drilling of unconventional gas, expansion of deepwater drilling and provision for bundled packages (means the larger players win)
• Have a land orientation and a service concentration in well construction and products (only 1/3 is services)
• Heavily invested in Middle East, Latin America and Russia
• 40% USA, 16% Canada, 9% Latin America, 35% eastern hemisphere

Investment Highlights

• Business Strategy changes: Change in old strategy to grow at any cost to grow profitably - should bode well in valuation multiple as ROIC's should improve; the company is targeting over 20% ROC
• Leverage global infrastructure on investment made over the last several years
  • Volumes recover overseas and improve margins as pricing recovers (e.g. the company says they have $2bn of underabsorbed capital); CEO said they could accommodate another 50% (or $3bn in sales) with current infrastructure internationally
  • Segment SG&A increased 46% from $850MM in 2007 to $1.2bn in 2009
  • Company spent $7bn in capex from 2005-2009 and $4bn on acquisitions; have not seen the returns from these investments due to recession and possibly poor allocation of capital
  • 2009 international rev were up 18% (but growth was due to an acquisition in 09), while rig count was down 8%; operating income was 24% of revenues in 2008 down to 16% in 2009
    • The company made a conscious decision to maintain its international workforce and infrastructure and as a result is considerably underutilized; note that the company had significant startup and delay costs on project initiations; 2011 should be very strong
• Huge operating leverage when rigs return: North American rig count declined 42% in 2009 and revenues were down 38% while op margins decreased 82%; op margins declined from 25% to 7%;
• Significant pricing erosion in North America and the international markets in 2009 are behind them and should improve with improved volumes
  • NA should begin to show meaningful margin improvement (not only with improving rig count/volume but also as a result of restructuring - company had taken out $500MM in costs in 2009 in NA); Also note that HAL reported this morning and said that NA pricing and volumes have come back dramatically already
• Consolidation: Service company consolidation should help industry pricing (e.g. Baker and BJ's and SLB and Smith)
• Move towards Integrated project management (IPM) - favors companies with breadth, expansive geographic footprints, and integration capabilities; this has been a focus for the company on there international contracts
• Operating at trough levels (6-8 cents/share per quarter) considering peak earnings were at $0.55 in Q3 2008 or $2.20 annualized; believe they can get back to $2/share by 2012
• Major investment spending behind them (2010 capex expected at around $1bn versus previous highs to $2.5bn); should be in the $1-1.3bn range going forward
• Significant potential to grow share internationally
  • 2008 - 4.5bn in rev on industry spend of $100bn in North America; and internationally had $5bn in rev on $280-$300bn industry spend - the opportunity is to increase mkt share with new product lines that were born out of NA (e.g. as the rest of the world matures to technology developed in NA - WFT should continue to grow share)
• Valuation: $14.50, shares out: 746MM or $10.8bn mkt cap, $6.6bn net debt; $17.4 EV; 2012 earnings power over $2 or about $3.5bn ebitda so trades at under 7x p/e or 5x ev/ebitda
  • Assumes NA revenues returns to previous peak but margins remain well below peak at 18% versus 25%
  • Assumes International rev grow 50% from $6bn to $9.2bn with only 27% incremental margins; this seems very conservative given that the CEO told us he could add 50% more in rev internationally with his current infrastructure
  • PT: 15x 2012E $2/share is $30/share

Earnings Potential

• Trough: North America: negative; International: 10%
• Peak: North America: 29.8%; International: 25.2%
• Company believes next peak will be higher than previous peak given historical precedence and that international could be higher than North America; I don't give them credit for this but if you believe them - earnings power is much higher than my $3/share

• Execution and pace of market acceptance of new technologies
• cap allocation - outspend op cash flows over the last few years to build out international capabilities
• Cap structure - 3x levered at end of 2010
• Political risk working in countries like Russia, Iraq, Algeria, China, etc.
• Regulatory risks - spread of US regulation to other countries
• Currency risk - translation risk to US dollars should dollar strengthen significantly

 Catalyst

• - FCPA settlement
• - Meet EPS targets after five consecutive quarter misses

Catalyst