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Leading oilfield services company Weatherford International Ltd. (WFT - Analyst Report) reported its preliminary second quarter 2012 adjusted pre-tax earnings of $276 million – up from $176 million a year before – on the back of record high sales. Total revenue in the quarter increased 24% year over year to $3,778.0 million and beat the Zacks Consensus Estimate of $3,652.0 million.

The Switzerland-based firm has been unable to come out with its net income for the period due to unresolved accounting problems.

Operational Performance

North American revenue climbed almost 25% year over year to $1,676.0 million. However, sequentially, it declined by 4%. The sequential decline was mainly attributable to a low level of operating activity in Canada due to an extended spring breakup, which impacted all the product lines negatively.

Further, performance of Stimulation and Chemicals were partly tempered by the timid natural gas environment. The segment posted an operating income of $271 million compared with $244.0 million in the year-ago quarter.

Middle East/North Africa/Asia revenue increased 8% year over year and 10% sequentially to $668.0 million. The growth was broad-based and came from increased operations in China, Turkmenistan, Iraq, Oman, Saudi Arabia and Australia. The segment’s operating income jumped to $44.0 million from the year-ago level of $34.0 million.

Europe/SSA/FSU posted revenue of $652.0 million, up nearly 10% year over year. The segment’s operating income increased 35% year over year to $120.0 million. The strong performance of this segment was primarily backed by robust activities in the U.K., Russia, Kazakhstan and Congo.
 
Latin American revenue surged 57% year over year and increased more than 16% from the preceding quarter to $782.0 million. Operating income expanded significantly to $104.0 million from the year-ago level of $50.0 million.

Liquidity

As of June 30, 2012, Weatherford had $381 million in cash and cash equivalents and long-term debt was $7,311.0 million. Weatherford spent approximately $554.0 million in capital expenditures during the second 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 third quarter 2012 earnings per share between 30 cents and 33 cents. With respect to the balance of 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 Latin America, underpinned by improvements in Argentina, Colombia, Mexico and Venezuela.  

The company also expects improvements in the Eastern Hemisphere in 2012, with increases in Europe, Sub-Saharan Africa and Russia. 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 in the range of 37-39% for this year.

Our Recommendation

Although we remain optimistic on Weatherford’s operational and financial leverage to international growth in 2012, its weak incapability to generate strong free cash flow as well as competition from larger peers such as Schlumberger Ltd. (SLB - Analyst Report), Halliburton Co. (HAL - Analyst Report) and Baker Hughes Inc. (BHI - 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.

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