Weatherford Makes Other Oil-Service Stocks Look Good (Update 1)

NEW YORK ( TheStreet) -- The oil-service company that can't seem to find an accountant who can keep the beans counted, Weatherford International ( WFT), gave investors one more reason for frustration on Monday.

Weatherford said concurrent with its fourth-quarter earnings that it still hasn't remedied an accounting situation that it revealed about a year ago, in March 2011, and its previously reported financial results for the 2008 through 2011 period are still subject to restatement.

Even though Weatherford released the earnings on Monday, shares were down by 12% on Tuesday after the Presidents' Day holiday on Monday.

The Weatherford trading chart has been so choppy that the stock has been good for a short-term trade from time to time, but for long-term investors it remains the least reliable of oil-service large-cap stocks.

The original revelation of the internal control weakness at Weatherford caused shares to plummet. The negative catalyst was exacerbated by the fact that the oil-service company reincorporated in Switzerland several years ago to maximize tax efficiency, and the March announcement made clear that the company would be paying much higher taxes than it expected. In Monday's fourth-quarter announcement, Weatherford guided to a tax rate of 35% in 2012. This new tax rate was higher than the 28.5% rate that Dahlman Rose had forecast.

According to energy analysis firm Tudor, Pickering, Holt, Weatherford's 2006 tax rate was 28%; before it moved to Switzerland, and since 2003, the tax rate has always been 30% or less.

Weatherford said it expects the audit review to result in roughly $225 million to $250 million of aggregate net adjustments to previously reported financial results for the years 2010 and prior -- roughly two-thirds is attributable to fiscal years ending on or prior to Dec. 31, 2008.

In March, Weatherford had guided to adjustments of $100 million to $150 million, though that didn't include 2011 results for which the company now expects roughly between $490 million and $520 million in income tax.

Operating results in the fourth quarter included the highest level of revenue ever for Weatherford at $3.7 billion. There were no per share earnings results due to the tax situation. The company guided to continuing improvements in international activity and margins.

"The company maintains a positive but measured outlook for its North American business and expects modest profit improvement as compared to 2011. Internationally, the company anticipates continued growth and expanding margins in its Latin America region, underpinned by improvements in Argentina, Colombia, Mexico and Venezuela. Eastern Hemisphere is also expected to improve in 2012, with upticks in Europe and Russia, as well as continued recovery in the Middle East / North Africa / Asia Pacific region with positive contributions from new contracts with better terms and pricing and the completion of existing contracts," Weatherford said in a press release.

The situation for the company, though, remains tied to its accounting missteps, and with Schlumberger ( SLB), Halliburton ( HAL), and Baker Hughes ( BHI) all offering large-cap exposure to oil service without the ongoing Weatherford headaches, the stock continues to suffer, even if for some investors, including big hedge funds, Weatherford shares have been a value play .

Weatherford shares bottomed out in October 2011 at the same time as the energy sector trough, and it was a great short-term trade from the October low of $11 back up to the $18 range it reached in early 2012. However, if the shares have been a value play, investors have remained very fickle in buying shares of the oil-service company, and it's not just the accounting situation.

The company has a significant amount of debt relative to peers and rates as a bankruptcy risk, according to the bankruptcy red flag indicator Altman Z score. The actual risk of bankruptcy might be overstated, however; the risk that Weatherford would do a dilutive secondary offering if its shares moved up to the $20 range is one reason why investors continue to stay away from the shares as a long-term play.

Weatherford shares are down 30% in the past year, while they had risen 21% in 2012 ahead of the Monday announcement. It's year-to-date gain came down to 7% after the latest disappointment.

The oil-service sector has been in rally mode, with Halliburton, Schlumberger and Baker Hughes all gaining since the October bottoming out. Weatherford's commentary in its earnings release -- that North American growth has moderated and international remains on the rebound -- dovetails with the twin narratives in the oil-service sector. Halliburton, as the largest player in the North American pressure pumping market, faced heavy selling pressure in late 2011 as its shares hit $28, but has since rallied back from the worst-case scenario. Halliburton management said on its recent earnings calls that margins in North America are declining, but they won't collapse. It's shares are up 8% this year and roughly $10 since the October low. Halliburton, though, does also suffer from the Macondo oil spill overhang as the company and BP have yet to reach a settlement and a trial is expected to begin next week.

Schlumberger has rallied 16% this year, after providing an outlook in its fourth quarter report that focused on its core strength : exposure to the international recovery and less reliance on North America. While Schlumberger shares didn't gain directly from its 2012 outlook, shares have moved up steadily in early 2012 mirroring its peers and the broader market.

In the end, the point is that when it comes to oil-service stocks, Halliburton remains the direct bet on North American fears being overstated, while Schlumberger remains the purest play on the international story. Weatherford, on the other hand, seems like trouble compared to these "cleaner" peers. If it falls often enough to make its shares appear attractive based on market fundamentals, as it has several times in the past six months, that's one more sign of the fact that investors don't trust those running this oil-service company.

Schlumberger and Halliburton were both up 2% on Tuesday as Weatherford declined 12%.

The tax man taketh, and when it comes to Weatherford, the tax issue continues to be the biggest headline in a story that takes a lot more faith than investors are comfortable with.

-- Written by Eric Rosenbaum from New York.

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