Weatherford Seen Target After Accounting Lapses: Real M&A
Weatherford International Ltd. (WFT) is shaping up to be a takeover target with accounting issues that wiped out half its market value on the verge of being resolved.
The world’s fourth-largest oilfield services company has slumped 53 percent since March 2011, when it disclosed income- tax errors and weaknesses in its internal controls. The decline left Geneva-based Weatherford valued last week at 5.1 times its estimated 2013 earnings before interest, taxes, depreciation and amortization, a cheaper multiple than 90 percent of similar- sized peers in the oil and gas services industry, according to data compiled by Bloomberg.
With Weatherford planning to submit restated financial statements soon that will put the tax issues behind it, Dahlman Rose & Co. said the $9.2 billion company could lure acquirers with its low valuation, global presence and product lines. Halliburton Co. (HAL) may be attracted by Weatherford’s leading position in artificial-lift pumps used to draw oil out of the ground, said Capital One Financial Corp. General Electric Co. (GE), which built an oil and gas services division through acquisitions, also could be a buyer, according to Oracle Investment Research.
“We are closer to the end” of the accounting issues, bolstering Weatherford’s allure as a takeover candidate, James Carroll, a fund manager for Loomis Sayles & Co. in Bloomfield Hills, Michigan, said in a telephone interview. “Fundamentally, the company has some very attractive businesses that would be of interest.”
Loomis Sayles oversees about $182 billion, including Weatherford shares.
Christine Mathers, a spokeswoman for Weatherford, declined to comment when asked about the prospects of the company becoming a takeover target.
Weatherford provides a variety of services and equipment to drill and complete wells for producing oil and gas. The company was incorporated in Bermuda and run from Houston until 2009, when it relocated to Geneva for a more favorable tax rate. Weatherford is listed in the U.S. and Switzerland.
Generating most of its revenue from outside the U.S. and Canada, Weatherford is the world’s largest provider of a service known as artificial lift, which uses pumps, plungers, gas- injection and other methods to boost the flow of oil in a well that has lost pressure over time.
Weatherford disclosed in March 2011 that it identified “material weaknesses” in its accounting system that the company said would result in adjustments of about $500 million to its financial statements for the periods from 2007 to 2010. Weatherford has since said it plans to file amended financial results for 2011 and must still finalize reports for the second and third quarter of this year.
After naming a new chief financial officer and putting in new accounting procedures, Weatherford has said it will release final revisions to past numbers no later than Dec. 17.
Weatherford’s market value was as high as $19.8 billion in the weeks before its accounting disclosure, and has since plunged by more than half. At last week’s closing price of $10.99 in New York, the company was valued at 5.1 times estimated Ebitda for 2013, including net debt, data compiled by Bloomberg show. That’s 26 percent less than the median multiple of 6.9 times among oil and gas services, equipment and rig- rental companies with a market capitalization greater than $5 billion, the data show.
“The stock has been unusually depressed lately because it’s had to restate taxes,” James Crandell, a New York-based analyst at Dahlman Rose, said in a phone interview. The accounting cloud “has hurt it significantly, and it’s a very big deal that it’s now out of the way.”
Today, Weatherford shares fell 0.6 percent to $10.93.
The resolution of Weatherford’s tax issues, combined with the low valuation, could make the company vulnerable to a hostile bid from suitors attracted to its range of products and footprint in countries around the world, Crandell wrote in a Dec. 5 note.
Luke Lemoine, an analyst at Capital One in New Orleans, said Halliburton could be attracted by Weatherford’s leading position in artificial-lift work. That business generates steady profits, compared with the more volatile results from equipment and services related to hydraulic fracturing, which caused a number of service companies to miss estimates lately, he said. Halliburton, the world’s largest provider of fracking services, has a market value of $31.3 billion.
Tara Mullee Agard, a spokeswoman for Houston-based Halliburton declined to comment on whether the company would consider a bid for Weatherford.
GE also could be interested in Weatherford to bolster its position in the oil-services industry and compete more directly with Schlumberger, said Laurence Balter, who helps manage $100 million, including Weatherford shares, at Oracle Investment Research in Fox Island, Washington.
GE, the conglomerate with a market value of $225 billion, built up its oil and gas business with the help of acquisitions in a six-month period ending in March 2011. Purchases included Dresser Inc. for $3 billion and the well-support division of John Wood Group Plc for $2.8 billion. In July, the company projected the unit will have $15 billion of revenue this year.
“It wouldn’t be that large for GE in general, but for the oil and gas division it would be a great way to really shoulder against Schlumberger,” Balter said in a phone interview. “The valuation is there; the current market prices are begging for an offer.”
Sean Gannon, a spokesman for GE Oil and Gas in New York, said the company doesn’t comment on market speculation. GE Chief Executive Officer Jeffrey Immelt told analysts in September that the company is focused on acquisitions of $1 billion to $3 billion. “We like our execution on these focused acquisitions,” he said.
James Wicklund, an analyst at Credit Suisse AG in Dallas, said it’s unlikely Weatherford will receive takeover offers. Instead, buyers may be drawn to some of Weatherford’s parts, such as its artificial-lift division or rental-tools business.
“There’s a long list of people who would be interested in the pieces,” Wicklund said. “But keep in mind, the pieces they want most are the pieces Weatherford is going to be least interested in selling.”
While Weatherford’s valuation is low, a prospective buyer may want to wait to make a bid until the company improves operations and reduces its debt, said Andrea Sharkey, an analyst for Rye, New York-based Gabelli & Co., a unit of Gamco Investors Inc., which oversees about $36 billion and owns Weatherford shares.
Weatherford’s $7.3 billion in long-term debt is equivalent to more than two-thirds its market value.
Still, for a potential buyer convinced the company has put its accounting issues behind it, Weatherford could offer good value, said Joe Hill, an analyst at Tudor Pickering Holt & Co. in Houston.
“Weatherford suffers from a whole lot of ‘restatement- itis’ that should give any buyer a pause,” Hill said in a phone interview. “But the price is right. It’s just whether or not you believe the numbers.”