Lower Fair Value, Extreme Uncertainty for Weatherford
Higher financial leverage and low pricing on recent asset sales drove our reassessment.
We're lowering our fair value estimate for Weatherford (WFT) to $2 per share from $2.75 to reflect disappointingly low pricing on recent asset sales, among other factors. We are also increasing our uncertainty rating to extreme, owing to higher financial leverage at the lower fair value. Our no-moat rating remains in place.
Weatherford is the midst of divesting its land drilling fleet. It will sell 31 Middle Eastern rigs and associated operations for $288 million; the remaining 79 rigs are mostly much poorer quality and are exposed to weaker end markets, and therefore we estimate (roughly in line with management guidance) that they will sell for about $220 million. This cumulative $508 million is about $200 million below our prior estimates for the sale value of the land drilling business, accounting for about $0.20 per share of our lowered fair value estimate. This marks an ignominious end for Weatherford's drilling rig forays, given that the company purchased the business for $2.4 billion in 2005.
Beyond the land rig divestitures, Weatherford is planning other noncore divestitures to shore up its balance sheet. While we suspect the sale of the company's laboratory services business for about $200 million was a good deal (as hinted by management), we worry that subsequent divestitures may be conducted at more desperate pricing, especially given negative investor reaction to delays throughout 2018 in Weatherford's long-anticipated debt paydown. As such, we've trimmed the value that we forecast will be created from future divestitures.
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Preston Caldwell does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.