Gloomy Future for Oil-Services Industry Seen : Analysts Forecast Shakeout, Cutbacks

Plagued by declining crude oil prices, fierce price competition and nervous bankers, the oil-services industry will face a bleak 1985, company executives and securities analysts predicted Tuesday at an energy conference in Newport Beach.

The oil-services companies, which make oil and gas drilling equipment, say they are steeling themselves for an expected $3- to $6-a-barrel drop in oil prices this year, down from the current $28 per barrel. In the meantime, companies are cutting their profit margins to the bone to remain competitive.

“I expect a continuation of the horrible price discounting that has ravaged the profits of every company in our industry,” said Jerry Neely, chairman and chief executive of Smith International Inc. of Newport Beach.

Expect Some Bankruptcies

Analysts who track the nation’s drilling equipment companies said they expect many smaller, marginal oil-services companies to be forced into bankruptcy as the industry’s slump continues through the year. The larger companies will be forced to continue the cutbacks in employment, plant capacity and production that they began during the 1982 recession that followed a boom in domestic oil drilling.

Executives said they are scaling their operations back to serve an average of 2,300 domestic drilling rigs in 1985, down from the 2,800 rigs that were working in January, 1984. Since 1981, there has been a 34% decline in the total number of domestic drilling rigs, according to industry reports.

In response to the industry downturn, Smith recently laid off 750 workers in its Smith Tool division in Irvine and is selling its mining equipment business and focusing on developing new drilling equipment technology.

Neely said too many companies are making and selling the same kind of drilling equipment. “Customers are tough bargainers, but they will pay for technology,” Neely said.

Kevin Simpson, an oil-services industry analyst with Drexel Burnham Lambert Inc., predicted that bankruptcies in the industry will outnumber mergers in 1985. “The bankers are being pushed by the federal bank regulators to clean up their bad energy loans,” he said. This would force many smaller companies out of business.

Concern Over Loans

During the boom period of 1980-81, scores of banks lent hundreds of millions of dollars to the oil industry, based on predictions that oil would be selling for $50 a barrel or more by now. In recent months, federal bank regulators have expressed concern over the large number of non-performing energy loans and have encouraged banks to write them off.

Simpson said bigger companies, such as Smith and Baker International Corp. of Orange, will survive because they have strong credit lines and solid balance sheets. With fewer companies in the marketplace, “Smith is in a position, on a relative basis, to benefit from the pain and suffering of others,” he said.

He and other analysts said many independent oil drillers have nearly shut down operations while waiting to see how the new federal tax law proposals will affect drillers.