NEW YORK (TheStreet) -- Weatherford International (WFT - Get Report) is riding high now, but it has suffered from overly aggressive expansion. The company made more than a hundred acquisitions to rapidly expand its business over the last two decades. Plus, it ended up badly damaging its reputation by violating U.S. laws. The company is now eyeing a turnaround by becoming a leaner, more profitable organization.
Weatherford stock was trading at $21.17 at noon Friday, up nearly 37% year to date and 49% over the past 52 weeks.
In the previous quarterly results, the company reported a fall in revenues and an increase in net debt. But it's doing well now because its poor performance is not as bad as it looks and because investors are more interested in its larger turnaround story.
I believe Weatherford's shares will likely continue going higher as its turnaround story unfolds. Weatherford has settled its legal cases with the government. The company has predicted positive free cash flows in the current fiscal year, a rarity for Weatherford, thanks to asset sales and cost-cutting initiatives. The company's legacy-loss contracts in Iraq are also nearing completion, which will help in margin expansion.
Moreover, the divestitures will allow the company to focus on its higher-margin core areas: oil wells. The company does well construction, completion, production and formation evaluation.
In the previous quarterly results, Weatherford's net revenue fell 6.3% from last year to $3.6 billion, while its operating income dropped by 53.4% to $130 million. The severe weather conditions in the U.S. and Russia, as well as seasonal drops in Australia, the North Sea and China, had an adverse impact. Weatherford also recorded restructuring charges of $70 million in the previous quarter, which were absent in the first quarter of 2013.
The big drop in earnings was partly due to some one-off items. In adjusted terms, the company's net income fell by 15% to $99 million. In the previous quarter, Weatherford generated negative free cash flows of $439 million. Due to the payment of $253 million related to the government investigation, as well as capital expenditure of $286 million, the company's net borrowings increased by $673.
The good thing, however, is that the company has finally settled its bribery and trade-sanction violation cases with the U.S. government. This matter, which has weighed on the company's stock, is now history.
One of the problems with Weatherford is its large pile of debt. The company's long-term debt now stands at $7 billion, unchanged from the same quarter last year. The company's debt to equity ratio is more than twice as large as its peers such as Schlumberger (SLB), Baker Hughes (BHI) and Halliburton (HAL).