Weatherford International Ltd. (NYSE: WFT) remains a battered stock, still down over two-thirds of a peak post-recession value from 2014 and 2011. But it has greatly participated in the oil recovery of 2016. A new Wells Fargo research report is calling for even more upside in the stock. The firm’s Judson Bailey and Coleman Sullivan raised Weatherford to Outperform from Market Perform following the OneStim transaction.

Wells Fargo also increased its valuation range to $7.50 to $8.50 from a prior $6.00 to $8.00. The analysts like the hiring of Mark McCollum as chief executive and now the formation of the OneStim joint-venture. This gives the firm greater confidence in improving operations and the deleveraging of the balance sheet long term.

At the midpoint of the new range, Wells Fargo’s valuation range would imply just over 35% upside from Friday’s closing price of $5.89. Weatherford’s shares were up handily on Monday morning, but what investors should consider is that most Buy and Outperform ratings at this stage in the eight-year-old bull market offer upside of 8% to 15% in upgrades for established companies.

The joint venture between Weatherford and Schlumberger late Friday was a positive outcome for Weatherford. It is said to provide an immediate cash infusion of $535 million and a 30% stake in what will likely be a
stronger number-two competitor to Halliburton in NAM pressure pumping/completion services.

Wells Fargo’s analysts value the OneStim joint venture at roughly $4 billion (so about $1.2 billion to Weatherford), with the potential for value uplift to $6 billion to $7 billion assuming Schlumberger improves utilization for Weatherford’s pressure pumping assets.

The team said of the balance sheet:

Although Weatherford still has a leveraged balance sheet and we are nervous regarding downside risk to international estimates in 2017 and 2018 stemming from lower oil prices, we are upgrading Weatherford to Outperform from Market Perform as we believe the combination of Mark McCollum as CEO and now the OneStim JV helps the company lay a solid long-term path back to profitability and balance sheet repair.

While acknowledging there is still work to do in a number of areas, we believe the joint venture interest represents an attractive asset that is likely to be monetized and help de-lever the balance sheet and that McCollum will provide the leadership to improve margins and cash flow as well as evaluate future strategic transactions.

The firm has not officially changed its earnings model yet, but the higher valuation range was taken higher on the expectation of Weatherford monetizing its portion of the joint venture by 2019 for $1.5 billion to $2.0 billion. The report said:

Our assumptions include the sale of international land rigs for $500 million, exercise of the warrants for $500 million in proceeds, and that OneStim is generating EBITDA of $1.1-1.4 Bn in EBITDA by 2019. Assuming this sequence and adjusting the balance sheet for the cash, we apply an 8-times to 9-times multiple to our 2019 EBITDA estimate (excluding the NAM completions business).

Schlumberger and Weatherford will each contribute all of their North America land pressure pumping, multistage completions, and pump-down perforating businesses. Schlumberger will pay Weatherford $535 million in cash. Wells Fargo’s base case is for Schlumberger to eventually buy Weatherford’s 30% stake.

Weatherford closed at $5.89 on Friday but was indicated up almost 8% at $6.36 in the early premarket trading on Monday. After more than an hour of regular trading, Weatherford shares were up 9.6% at $6.46 on more than 17 million shares.

Weatherford has a 52-week trading range of $3.73 to $8.49 and a consensus analyst target price of $7.46.

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