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Weatherford International targeted by activist investor

Q hits at ‘woefully inadequate’ attempts to turn round oilfield services group

Weatherford International, one of the world’s largest oilfield services groups, is being targeted by an activist investor after a decade of underperformance. 

Q Investments, a Texas-based hedge fund, has taken a small stake in Weatherford and urged the board to sell its assets or the entire company, before its “over-levered capital structure” destroyed “what remaining value the shareholders have left”.

Weatherford was often described as one of the “big four” international oilfield services companies, along with Schlumberger, Halliburton and Baker Hughes, but its performance has lagged far behind its peers since then.

In 2008 Weatherford’s net income was about $1.4bn, close to that of Baker Hughes at $1.6bn. Today its market capitalisation is about $3.3bn, while the equity in Baker Hughes, which last year merged with the oil and gas division of General Electric, is worth about $40bn.

Weatherford’s shares have continued to underperform the leading companies in the sector as crude prices have rebounded. Over the past 12 months, Halliburton’s shares have risen 10 per cent, while Schlumberger’s have risen 2 per cent. Weatherford’s have fallen by 16 per cent. 

Mark McCollum, a former chief financial officer of Halliburton, was appointed chief executive of Weatherford last year to turn the company round. In November he launched a “transformation programme” intended to improve operating earnings by $1bn a year, but analysts say investors have yet to be convinced that Mr McCollum can succeed.

Kurt Hallead of RBC Capital Markets in a note this month described the shares as “a special situations stock”, that investors would buy only if they believed the company could achieve the $1bn improvement in earnings, generate free cash flow and reduce net debt, which stood at $7.3bn at the end of March.

Brad Handler of Jefferies said: “Mark McCollum has a good track record, and is well respected in the industry. But it’s going to take a while to achieve the results he wants to see.”

Q, which specialises in distressed debt as well as activism, has previously targeted companies including Jones Energy, Citadel Broadcasting, Quorum Health and Houghton Mifflin Harcourt, pushing for moves including share buybacks, board changes and a takeover. 

Its stake in Weatherford is just 0.02 per cent, but the fund believes that other investors are also unhappy about the company’s performance and will join its campaign for change. It has invested in a mix of equity and debt as a hedge against a possible restructuring. 

In a letter to Weatherford’s board, the fund criticised the efforts by Mr McCollum to turn round the company’s performance as “woefully inadequate”.

Q wrote in its letter that if Mr McCollum failed to deliver his projected improvements in performance, “we believe the status quo would be unsustainable”.

In that case, the fund said, it would call for “a process to explore all strategic alternatives, including a focus on selling the company through an equity transaction”. It added: “We believe the most viable path would be to sell the entire company; however, we would be open to any and all alternatives”.

Weatherford declined to comment.

Investors’ faith in the company took a blow at the end of last year, when it announced that a promising-looking joint venture with Schlumberger in hydraulic fracturing in the US had been abandoned. Instead Weatherford sold its operations in that business to Schlumberger for $430m. 

Q argued in its letter that what it called “the current dilapidated financial condition of the company” masked its “underlying strong portfolio of businesses and technologies”. It pointed to the company’s pumps and other services as “crown jewel assets” that could fetch buyers. 

The fund is not calling for new board members yet, but said it was “incomprehensible” that six directors who were in place during the tenure of the previous chief executive Bernard Duroc-Danner were still on the board.