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Leading oilfield services company Weatherford International Ltd. (WFT - Analyst Report) reported preliminary third quarter 2012 adjusted pre-tax earnings of $264.0 million, down from $288.0 million a year before. The decline takes into account charges for the reduced value of inventory and for professional fees related to tax remediation efforts. The Switzerland-based firm has been unable to report net income for the period due to unresolved accounting problems.

Over the last five years, Weatherford is subject to incremental expenses owing to the ongoing process. The company is expected to file its second quarter accounts with U.S. securities regulators by the end of this month.

Though the total revenue in the quarter increased 13.3% year over year to $3,818.0 million it missed the Zacks Consensus Estimate of $3,944.0 million.

Operational Performance

North American revenue climbed 6.5% year over year to $1,725.0 million. Sequentially, it increased 3.7%. The improvement was driven by the higher level of operating activity in Canada for seasonal recovery even with a lower number of rigs compared to last year. However, lower U.S. land rig count, continued oversupply of hydraulic fracturing capacity and the adverse effects of Hurricane Isaac partly impacted the results.

The segment posted an operating income of $297.0 million compared with $352.0 million in the year-ago quarter.

Middle East/North Africa/Asia revenue increased 22% year over year and 7.7% sequentially to $699.0 million. The growth was broad-based and came from increased operations in Iraq, Saudi Arabia, Australia and Oman. The segment’s operating income jumped to $33.0 million from the year-ago level of $17.0 million.

Europe/SSA/FSU posted revenue of $626.0 million, up nearly 7% year over year but down 4.1% sequentially. The segment’s operating income increased 16.0% year over year and decreased 15.3% sequentially to $94.0 million. The annualized strong performance was primarily backed by robust activities in Romania, Kazakhstan, Kenya and Congo. However, lower activities in Russia, Tanzania, the UK, and Caspian partly offset the growth.
 
Latin American revenue surged 29.7% year over year but decreased nearly 2% from the preceding quarter to $768.0 million. Operating income expanded to $97.0 million from the year-ago level of $70.0 million and from the preceding quarter of $91.0 million.

Liquidity

As of September 30, 2012, Weatherford had $366.0 million in cash and cash equivalents while long-term debt was $7,300.0 million. Weatherford spent approximately $572.0 million in capital expenditures during the third quarter of 2012.

Guidance

The company expects fourth quarter 2012 earnings per share of 20 cents. However, the Zacks Consensus Estimate was 28 cents for the said period.

The company maintained a positive but careful outlook for its North American business for 2013.

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 for the next year, with increases in Europe, Sub-Saharan Africa and Russia. Weatherford also expects continued recovery in the Middle East/North Africa/Asia Pacific region.

Our Recommendation

We maintain our long-term recommendation on Weatherford International Ltd. at Underperform following the delay in reporting income taxes due to a material weakness in internal controls.

We expect investor sentiment toward the company to remain lukewarm, considering Weatherford’s recent accounting hiccups, which has forced the company to defer its income tax reporting. The company’s strategy of rapid penetration into new international markets will take some time to translate into results.

The company’s competition from much larger peers such as Schlumberger Ltd. (SLB - Analyst Report), Halliburton Co. (HAL - Analyst Report) and Baker Hughes Inc. (BHI - Analyst Report) are also a cause of concern.

Weatherford retains a Zacks #5 Rank, which translates into a Strong Sell rating for a period of one to three months.
 

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