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We reaffirmed our Neutral recommendation on Weatherford International Ltd. (WFT - Analyst Report) on Jun 24, 2013, based on its leading position in the global oilfield services market along with its broad and technologically complex product/service offerings. However, Weatherford’s debt heavy balance sheet and weak ability to generate free cash temper our outlook to some extent. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.

Why Maintained?

We believe that Weatherford’s medium-term revenue growth will outpace 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. With respect to 2013, the company maintained a positive outlook for its North American business.

Weatherford believes that the depressed natural gas environment will likely be overshadowed by the predominance of oil activity in Canada and the U.S. Weatherford expects its earnings per share to improve considerably in 2013 and 2014. The company’s international businesses are likely to be the key growth drivers, with Mexico, Russia, China, Australia and Saudi Arabia leading the way. In 2013, the annual effective tax rate is expected to be about 34% compared with 92% at the end of 2012.

With respect to 2013, the company maintained a neutral outlook for its North American business and expects moderate growth in revenue and operating income. Weatherford foresees sustained growth and expanding margins in its Latin America region, supported by improvements in Argentina and Mexico. The company also expects improvements in the Eastern Hemisphere in 2013, with an upside in Europe, Sub-Saharan Africa and Russia, as well as stronger activity levels in the Middle East, North Africa and Asia Pacific.

On the flip side, Weatherford’s debt-heavy balance sheet, its weak incapability to generate strong free cash flow as well as competition from larger peers is a cause for concern. The company’s debt-to-capitalization ratio is 45.0%, significantly higher than its peer group average (29.6%).

Other Stocks to Consider

While we prefer to remain on the sidelines for Weatherford, there are other stocks in the sector that appear more attractive. These include Zacks Rank #1 (Strong Buy) stocks Oasis Petroleum Inc. (OAS - Snapshot Report), Sanchez Energy Corporation (SN - Snapshot Report) and Hornbeck Offshore Services, Inc. (HOS - Snapshot Report).


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