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B.A. in economics and MBA from top 10 business school. I have over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, a youth mentorship program that teaches investment management skills and ... more

3 Reasons Weatherford Could Be The Next Enron

Date: Thursday, January 7, 2016 10:58 PM EST

I have been following Weatherford International WFT for nearly a year now. In July I laid out four reasons it could be a great short play. Those very same reasons could make the company the next Enron. I am not suggesting that Weatherford has engaged in fraudulent activities. However, there are dynamics that make the two companies very similar. Below is my rationale.

Enron Was Dependent Upon High Energy Prices

Enron's business model was dependent upon high energy prices. The boring utility company jumpstarted its earnings and share price by entering the energy trading business. Profitability was primarily driven by high energy prices, particularly in California, where Enron had at one time had a substantial share of the market. According to an SEC complaint against Enron's Ken Lay, Jeff Skilling and Richard Causey:

If disclosed to the public, this sudden and large increase in trading profits, which exceeded $1 billion, would have made it apparent that Wholesale's revenues were tied to the market price of energy, meaning Enron was exposed to the risk of a decline in such prices. This would have revealed Enron as a speculative (and therefore) trading company. To conceal the ... volatility of Enron's trading profits, Skilling, Causey ... hid hundreds of million of dollars in trading profits in reserve accounts maintained on an internal Enron ledger.

Weatherford Is Dependent Upon High Oil Prices

Weatherford provides equipment and services for oil and gas exploration and production. The company markets everything from pressure drilling to production and completion services. Its revenue is highly dependent on the price of oil; oil prices have fallen over 70% since their peak in Q2 2014, and big oil has bought less of the types of equipment and services Weatherford provides.

Meanwhile, the company's revenue and earnings have been crushed. Weatherford's respective Q3 2015 revenue and EBITDA (ex-items) were off Y/Y by 42% and 61%. North America, where the company derives the lion's share of its revenue fared even worse; North American revenue and EBITDA were down 55% and 118%, respectively. Meanwhile, income from operations was negative for three consecutive quarters.

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Wendell Brown 4 years ago Member's comment

Oppenheimer just recommended this stock today, what do you think about that?

Shock Exchange 4 years ago Author's comment

What details did Oppenheimer give? The Shock Exchange's article is extremely detailed, with spot on analysis. WFT's bonds also trade at steep discounts, implying impending bankruptcy. SE would listen to bond investors before listening to an analyst who provides "de-facto PR" for companies.

Sasha Williams 4 years ago Member's comment

Interesting perspective.

Shock Exchange 4 years ago Author's comment

Thank you. SE