'Praising' Weatherford: Not as Bad as It Used to Be

NEW YORK (TheStreet) -- The headline of this article were the exact words of TheStreet's Jim Cramer as he described Weatherford International (WFT) during the Lightning Round segment of Tuesday's "Mad Money." While it was not a full-blown endorsement for the No. 4 energy services giant, Cramer's reference did remind me of how Weatherford's management ruined this once-dominant company with its poor internal controls. And that's putting it mildly.

Not only has Weatherford been inundated with tax problems over the past several years, but the company has been accused of illegal dealings and corruption with countries such as Iraq under U.S. sanctions. Although there is now word that the company has reached a settlement with the U.S. government worth an estimated $253 million, it remains to be seen what the final outcome will be.

Now, I do need to point out that these sanctions date as far back as 2003. And to be perfectly fair, it's worth noting that Weatherford has cooperated fully with the government to bring closure to these matters. That we are still discussing them today speaks to the slow-moving process of our justice department. Fairly or unfairly, that's the bed Weatherford has made.

With better-than-expected results coming out from Schlumberger (SLB) and Halliburton (HAL), I do see an opportunity to capitalize on Weatherford stock, if/when these issues are put to rest once and for all. I appreciate that there are still plenty of risks here. But while Weatherford does have plenty of work to do to regain the Street's trust, it makes no sense risking potential value by waiting for proof that things have gotten better. The stock is already trading on low expectations, many of which were exceeded in the recent quarter.

Unlike, say, Baker Hughes (BHI), one of the things that has hurt Weatherford in the past has been management's inability to operate efficiently. But with a renewed emphasis on margins and operations, Weatherford took a meaningful step forward this quarter by posting a $22 million profit, or 3 cents per share.

On an adjusted basis, excluding out one-time items, Weatherford's earnings of 23 cents per share was actually good enough for a 2-cent beat, even though revenue was flat at $3.82 billion. The manner in which Weatherford was able to do more with less during the quarter was on par with Baker Hughes' results, from the standpoint of operational efficiency, that is.

Unlike Baker Hughes, Weatherford is still struggling to grow in North America, where it posted a 7% year-over-year decline. As with both Schlumberger and Halliburton, progress continues in international markets, particularly in Europe, Africa and Russia, which contributed to a better-than-expected 6% growth. But I believe management's restructuring plans, which include extensive cost-cutting measures, should spur more long-term profits.

Management also plans to divest some of the company's best-performing businesses. I'm not entirely on-board with this idea. While divestment strategies have worked for many other companies, including Halliburton, I don't see Weatherford as being in a position to sell off strong cash-flow generating assets, much less those producing close to $4 billion in annual revenue.

The good news: Divestments will allow management to focus on higher-margin businesses like pressure pumping, which is still strong here in the U.S. and a key component of hydraulic fracturing, or "fracking." The other potential benefit will be the company's plans to spin-off land-drilling rig contracting business into an initial public offering, of which the proceeds will be used to repay as much as $5 billion worth of debts by 2015.

Weatherford has more than its share of question marks. And making a play right here requires the belief that not only can management execute on its restructuring plans, but if/when this company does get back on track, the residual effects from past transgressions will be minimal. Given that the stock price is still down more than 65% from its 2008 high, I believe it's worth the risk, even if "not as bad as it used to be" might be as good as it's going to get for a while.

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

This article was written by an independent contributor, separate from TheStreet's regular news coverage.