Weatherford’s multi-year tax nightmare is coming to a close in 2013, after three restatements, several late 10-K filings, material weaknesses, and much angst from Weatherford investors. The CFO has been replaced, and the tax department greatly expanded, but the damage has been done.
The move to Switzerland in 2009 in an effort to improve the firm’s overall tax structure has been a miserable failure, with 2013’s tax rate expected to be around 34%-35%, but we expect it to trend down to 30% over time, a level that is still higher than Schlumberger’s rate. Furthermore, the restatements around the Iraq contracts follow similar losses on North African and Mexican contracts in the past, and while Weatherford may not be quite as aggressive on price going forward, its weak project delivery abilities will likely trip it up again.
As with all oil service companies, Weatherford could face difficult times if oil and gas prices witness a significant and sustained decline. More recently, though, the firm’s biggest challenges have been internal ones. Tax errors, contract overruns, and poor capital allocation as evidenced by numerous write-offs have all been recent headwinds. The company has made much progress on fixing its tax issues, and we think they will finally be resolved completely in 2013, but fixing its poor operational track record may take longer. Weatherford’s debt position leaves little room for error.
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