Ahead of the third quarter results, we are keeping our Neutral rating for Weatherford Interntaional Ltd (WFT) shares. This reflects the company’s sound position in the current tentative outlook for the North American market, given its growing presence in the relatively stable Eastern Hemisphere market. 

We particularly like the company’s international prospects. Growth would be driven by contract awards in key international markets such as Mexico, Algeria, Russia and the Middle East. We believe that the company will have significantly higher revenue and earnings from international operations compared to its peers over the next few years. 

Weatherford has been actively investing in its international growth program over the last few of years, with a spend of $2.3 billion last year and $1.6 billion in 2007. Given this major expansion effort, Weatherford was free cash flow negative in 2007 and 2008, funded largely through the debt markets. 

With the major expansion phase largely behind it, the company’s capex needs have reduced − this year’s capex budget is $1.4 billion, of which more than 85% is for the international regions. This should enable it to generate a significant amount of free cash flow this year and next. 

Overall, we think Weatherford is in a better position to weather the current downturn than many of its peers in the oilfield service space, given its strong international growth prospect. The key negative, in our view, is the current unfavorable macro backdrop, which is expected to continue drowning out the positives, at least in the near term.
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