The energy industry has come into the spotlight recently as crude oil and natural gas prices have retreated.
Most oil stocks have pulled back as investors have embraced the new normal of lower prices as demand concerns have remained.
This performance also explains why many companies in the oil services industry have not done well this year. SLB, formerly known as Schlumberger, has retreated by over 17.5% this year, while Halliburton, Weatherford, and Tenaris are all in the red.
This article explains why I’d select Weatherford International instead of Baker Hughes and SLB.
Oil and gas service industry
Most people know oil and gas companies like ExxonMobil, Chevron, Shell, and BP. These are popular names because of their retail outlets worldwide.
However, the oil and gas industry is much bigger than these. As I have written before, there are master limited partnerships (MLPs) like Energy Transfer, Williams, and Enterprise Product Partners that do the hard work of gathering, processing, storing, and transporting oil and gas, through pipelines.
The other important industry in the sector is known as service. These giant companies provide services, equipment, and technology for drilling and processing oil.
SLB is the biggest company in the industry with a market cap of over $70 billion and a presence in most countries with these resources. It does services like well construction, interventions, abandonment, training, and reservoir characterisation.
SLB is known for its defiance of Russia, a country that most Western companies have abandoned in the past few years following its invasion of Ukraine. The firm’s annual revenue have jumped from over $23 billion in 2020 to over $35 billion in the trailing twelve months (TTM).
Baker Hughes, which was acquired and then spun-off by General Electric, is another large player in the industry. Its oilfield services include project evaluation, drilling, completions, processing, subsea solutions, and well interventions.
It also provides software and analytics, measurement and testing solutions. Its annual revenue has soared from over $20 billion in 2020 to $27 billion in the TTM.
Weatherford International is a smaller rival to these companies. Its solutions include well construction and completion, cementing, pressure control, and rig management. Its annual revenue has also jumped from over $3.6 billion to $5.4 billion in the same period.
To a large extent, Weatherford is not a well-known company outside of its industry. Yet it provides its solutions to some of the leading firms in the sector, like Aramco, Exxon, Shell, and Petrobras.
Weatherford has better metrics
A closer look at the three companies shows that Weatherford is a better one to invest in. First, a look at the total return in the last five years shows that the Weatherford stock price has jumped by over 83% while SLB and Baker Hughes have risen by 30% and 77%, respectively.
Most of Weatherford’s growth happened in the last three years as the total return rose by 451% while the other two rose by 57% and 64%, respectively.
The most recent results showed that its revenue for the second quarter rose by 10% to $1.45 billion. This growth happened after securing several large deals from companies like Bapco Upstream, Equinor, CPOC, and ENI.
SLB also had a good quarter as its revenue rose by 13% YoY to $91.4 billion, while Baker Hughes grew by 13% to $7.5 billion.
While BKR and SLB are doing better in terms of revenue, Weatherford is beating them in terms of profitability. It has a forward EBITDA growth of 24.40%, better than SLB’s 17% and BKR’s 19%. Its CAGR EBITDA growth of 44% is higher than the other twp’s 27% and 18%.
Additionally, Weatherford has a higher EBITDA margin of 23%. It also has a lower short interest at 1.4%, which is lower than SLB’s 2.74% and BKR’s 1.8%.
Weatherford stock is cheap
Additionally, there are signs that Weatherford is a relatively cheap company. It has a trailing twelve-month price-to-earnings ratio of 14, lower than the S&P 500 index’s average of 21.
Its forward P/E ratio of 13 is also lower than the other two companies. Most importantly, the forward EV-to-EBITDA ratio of 5.59 is also lower than that of Baker Hughes and SLB.
Most importantly, the company has restructured its balance sheet after going bankrupt in 2019. It has become a leaner and more profitable company, regularly beating analyst estimates. Just recently, S&P Global upgraded its credit rating to BB- from B+.
On the weekly chart, we see that the Weatherford stock has pulled back by about 30% from its highest point this year. It has also moved below the 50-week moving average.
In the near term, I expect the stock to have some volatility as traders eye the changes in price movements. In the long-term, I suspect that it will bounce back and retest the highest point on record at around $140.
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