Weatherford's Seemingly Long, Drawn-Out Turnaround Notches a Downgrade

With Weatherford International Plc WFT's restructuring expected to stretch out to multiple years, Citigroup handed it a downgrade. 

The oil drilling contractor's free cash flow is unlikely to materialize until 2019 or even later, and the valuation is unappealing, said analyst Scott Gruber. 

Citi's view stands in contrast to a view expressed by Bernstein last week that recovery may be on the horizon for Weatherford. 

Citi downgraded shares of Weatherford to Neutral with a $4.20 price target.

At the time of writing, the shares of Weatherford were up 0.75 percent at $4.03.

Citi is reducing its 2018 EBITDA estimate for Weatherford by 10 percent, primarily due to poor margins in the MENA region, Gruber said. (See Gruber's track record here.)

The company's turnaround plan targets $1 billion of operating income growth, but it was short of details beyond the initial $300 million, the analyst said. 

Limited cost cut options are available after multiple restructurings, Gruber said. Therefore, operational efficiency improvement and share gains are important to Weatherford, but their execution is uncertain, he said. 

Given that free cash flow could be limited through 2020, Citi said the company may have to carry out major asset sales to reduce its debt. Weatherford is now aiming to reduce leverage, rather than net debt, according to Citi. 

The appointment of Halliburton Company HAL executive Mark McCollum as Weatherford's CEO in March has not worked magic for the company, Gruber said. .

"WFT at 12.2x '18 EBITDA and 9.5x '19 EBITDA is not discounted versus peers despite the balance sheet risk," the analyst said of Weatherford's valuation. 

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