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Weatherford Int'l, Up 37% YTD, Is a Turnaround Story That's Not Over Yet

Although a high debt-to-equity ratio and negative free cash flow from operations are signs of trouble, the company's financial health could improve by the end of the year.

This is because Weatherford has forecast positive free cash flow from operations of $500 million for 2014. This is a big deal for the company since it has not generated any positive free cash flows in the last ten years. Moreover, the company will reduce its net debt by almost $2 billion to $7 billion by the end of the year.

To turn itself around, Weatherford has implemented massive cost-cutting measures, which includes elimination of nearly 6,600 jobs, or more than 10% of its work force, by the middle of 2014. The job cuts will generate annual cost savings of $500 million. The company has already completed 56% of its planned eliminations, which could result in an annualized pre-tax savings of $263 million.

Some of these job cuts are also related to the company's decision to exit from the less-profitable areas from around the world. The management has said that it has identified 50 such locations and will wind up its operations from these areas by the end of the first half of 2014.

Besides the cost cutting measures, the company has also started divesting from its non-core businesses with the sale of its pipeline operations to Baker Hughes for $250 million. This year, Weatherford expects to generate proceeds of $1.3 billion from asset sales. Then Weatherford will be able to increase its focus on its higher-margin core areas while strengthening its cash position.

Moreover, Weatherford's loss-making operations in Iraq are also nearing completion. The company has finished its two drilling projects, while its only remaining production unit at Az-Zubair oil field is 80% complete. The company's departure from Iraq could give a boost to its operations in the Middle East and will likely lead towards margin expansion.

Moreover, Weatherford has also said that it would "carve out" its land-drilling rig business through a spinoff or an initial public offering before March, 2015. This could also translate into a cash infusion of more than $400 million.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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