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Leading oilfield services’ company  Weatherford International Ltd.’s (WFT - Analyst Report) first quarter 2012 adjusted earnings of 25 cents per share came in below the Zacks Consensus Estimate of 28 cents. However, the results jumped substantially from the year-earlier earnings of 7 cents, mainly on positive contributions from all its segments.

Total revenue increased 26% year over year to $3,599.0 million, but failed to meet the Zacks Consensus Estimate of $3,664.0 million.

Operational Performance

North American revenue climbed almost 30% year over year and 3% sequentially to $1,754.0 million. Artificial Lift, Wireline and Completions made strong contributions. However, these positives were partly tempered by the performance of Stimulation, Drilling Tools and Fishing, which were adversely affected by the timid natural gas environment. The segment posted an operating income of $359 million compared with $283.0 million in the year-ago quarter.

Middle East/North Africa/Asia revenue increased 5% year over year to $605.0 million. However, sequentially, it declined with decreases in Completions and Wireline as well as the expected seasonality in China. The segment’s operating income jumped substantially to $48.0 million from the year-ago level of $10.0 million.

Europe/SSA/FSU posted revenue of $569.0 million, up more than 11% year over year. The segment’s operating income shot up 50% year over year to $60.0 million. Although the segment registered a year-over-year jump, it experienced a sequential drop in revenue as well as in the operating income owing to the normal winter seasonality in the North Sea and Russia.

Latin American revenue surged 64% year over year to $671.0 million. However, it dropped 8% from the preceding quarter. Operating income expanded significantly to $87.0 million from the year-ago level of $21.0 million.

Liquidity

As of March 31, 2012, Weatherford had $339 million in cash and cash equivalents and long-term debt was $5,989.0 million, representing a debt-to-capitalization ratio of 37.6% (versus 39.7% in the fourth quarter of 2011). Weatherford spent approximately $483.0 million in capital expenditures during the first quarter of 2012. The company had earlier highlighted that it expects to spend between 10% and 15% of its revenues over this year.

Guidance

The company expects its second quarter 2012 adjusted earnings per share between 24 cents and 26 cents. With respect to 2012, the company maintained a positive but careful outlook for its North American business. The company believes that the depressed natural gas environment will likely be overshadowed by the predominance of oil activity in Canada and the U.S. and anticipates modest revenue and operating income growth compared with 2011.

Weatherford foresees sustained growth and expanding margins in its Latin America region, underpinned by improvements in Brazil, Colombia, Mexico and Venezuela.  

The company also expects improvements in the Eastern Hemisphere in 2012, with increases in Europe and Russia, as well as stronger activity levels in Iraq, Kuwait and Saudi Arabia, Australia and China. Weatherford also expects continued recovery in the Middle East/North Africa/Asia Pacific region aided by contributions from the completion of hostile as well as fresh contracts with healthier terms and pricing in the second half of 2012.

The effective tax rate is expected to be approximately 35% for this year.

Our Recommendation

Although we remain optimistic on Weatherford’s operational and financial leverage to international growth in 2012, the company’s debt-heavy balance sheet, its weak capability to generate free cash flow as well as competition from larger peers such as Schlumberger Limited (SLB - Analyst Report) are causes of concern.

Weatherford holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. Consequently, our long-term Neutral recommendation remains unchanged at this stage.

The world’s largest oilfield services provider, Schlumberger, recentlyreported first quarter 2012 earnings of 98 cents per share (excluding special items), beating the Zacks Consensus Estimate by a penny. The quarter’s results also showed a steady improvement from the year-earlier profit of 71 cents per share. The year-over-year increase was aided by strong performance in global exploration and deepwater activity as well as efficiency in operations.

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