Oil Mergers Keep Service Firms in Hole : Market Depressed as Companies Acquire Crude in Board Room

Times Staff Writer

Oil-field-service company executives who chanted "stay alive till '85," following the collapse of the market for drilling equipment and services three years ago, are finding little solace this year.

The volatile mergers and acquisitions reshaping the nation's oil companies are gobbling up billions of dollars once spent on exploration. Depressed oil prices and a glut of natural gas is further battering all but the strongest and most innovative oil-service companies.

"All this talk about how great it (restructuring) is for the industry doesn't create one new barrel of crude oil," said Jerry Neely, chairman and chief executive of Newport Beach-based Smith International. Smith, which makes drilling equipment, lost $10.3 million in the first quarter of this year, contrasted with net income of $3.3 million a year earlier.

Neely says 1985 "will not be a particularly good year for Smith," especially since many oil companies are giving top priority to paying down the enormous debts they took on to defend themselves against hostile takeover bids.

In the last 18 months, major U.S. oil companies spent about $56.6 billion on acquisitions and stock purchases, according to a recent report by the investment firm of Morgan Stanley.

"Dollars are being taken away from exploration and funneled into servicing debt," said Henry DeNero, a partner in McKinsey & Co., a consulting firm.

Gene Kinney, editor of the Oil & Gas Journal, a trade publication, said in a recent interview: "The concern now is that the money stockholders receive in these buy-outs is not going back into the oil industry. This 'de-capitalization' is a major factor in the failure of the drilling industry to recover from its slump."

Kinney estimates that U.S. oil companies will spend about $35 billion in 1985 on drilling, exploration, production and offshore lease bonuses to replenish reserves. This compares to $39.8 billion spent in 1984 and $39.4 billion in 1983.

Analysts said the amount spent by oil companies on takeovers and defense strategies nearly equals the record $58 billion pumped into drilling and exploration at the peak of the drilling frenzy in 1981.

Atlantic Richfield's recent decision to cut its exploration budget by 30% to 35% to $900 million as part of its extensive corporate restructuring is just one example of reduced oil company spending. Throughout the oil industry, merged companies are consolidating operations and trimming exploration expenses.

In December, 1984, Gulf Oil and Chevron separately operated 49 rigs in the Gulf of Mexico and Louisiana state waters. A spokesman for the the combined companies said the total rig count has since declined to 32 working in the area.

"There is a drop, but it's (also) due to the low price of oil, the soft natural gas market and the lack of really good prospects to drill right at the moment," said Keith Owen, a Chevron spokesman.

Industry analysts agree that uncertainty about federal tax proposals affecting drilling, depressed oil prices and a surplus of natural gas contributes heavily to the industry's reluctance to drill for new supplies.

Outside investment in oil exploration by individuals and institutions has virtually dried up since changes in the federal tax laws reduced the tax write-offs for drilling programs to about 35% from up to 70% at the height of the domestic drilling boom.

"The only money available to the (service) industry is cash flow from (oil company) operations," said James Lesch, chairman of Houston-based Hughes Tool.

Hughes Suffered Loss

Last year, Hughes predicted a moderate drilling increase in 1985 based on what oil companies said they planned to spend. Instead, rig activity slipped about 10% below last year's level. Hughes wrote off $174.3 million in excess capacity in calendar 1984, reporting a net loss of $133.8 million on revenues of $1.2 billion.

Although oil companies are spending about 15% less on exploration this year than last, not every company embroiled in a fight for independence has turned its attention away from the oil patch. And industry executives said not every dollar spent on stock repurchases would have found its way into oil service company coffers.

Phillips Petroleum, which recently took on an additional $4.5 billion in debt to thwart T. Boone Pickens Jr.'s attempt to gain control of the Bartlesville, Okla.-based company, is cutting elsewhere to maintain its exploration and production budget at last year's level.

"We still plan to spend $1.4 billion on exploration and production in 1985, but we are being more selective in our spending," said Dan Harrison, a spokesman for Phillips. He said the company is selling about $2 billion worth of assets and cutting operating expenses by $200 million in 1985 and $300 million in 1986 to help reduce its $7.3-billion debt.

For Phillips and the other major oil companies intent on making the most of their tight budgets, the days of buying a half dozen drill bits off the back of a pick-up truck are numbered, according to Ed Williams, vice president of corporate development at Smith.

Buying in Bulk

Exxon, intent on cutting costs, is buying a six-month supply of drill bits at a time to get the best price. In the past, bits were purchased as needed.

Uncertainty created by the oil industry restructuring colors every day for companies such as Smith. Smith's sales force has problems figuring out whom to talk to in a newly merged company, and Smith executives can no longer depend on oil company forecasts to make key decisions. "I recently called up six major oil companies to ask for copies of their 10-year forecasts," Williams said in a recent interview. "All but one company--Conoco--told me they aren't doing long-range forecasts anymore."

In the late 1970s, oil-service companies, buoyed by promises of $70-a-barrel oil, scrambled to build equipment to serve 5,000 domestic drilling rigs. Today, with U.S. oil prices hovering around $27 a barrel, a lean corps of service companies are fighting for the business generated by about 1,900 active drilling rigs. Price discounting is rampant and many companies say they are selling some products at cost.

Industry executives are in agreement that the companies destined to survive are those that offer drillers high-technology products designed to improve performance and cut costs.

Because of its state-of-the-art products line, New York-based Schlumberger, the industry leviathan, has risen above the oil industry's restructuring.

Can Weather Storm

"Our philosophy is to offer something that is needed even in bad times," corporate spokesman Seth McCormick said. Company officials told a recent gathering of industry analysts that its $4 billion in cash gives Schlumberger the strength to weather even the worst of times.

Unlike its money-losing brethren, Schlumberger's income rose 11% to $1.1 billion in 1984, on revenues of $6.4 billion. McCormick declined to discuss how the oil industry restructuring has affected its business, saying "client relationships are sensitive."

The service companies, which once garnered profits from supporting expensive, deep natural gas drilling operations, are facing disappointments on that front as well. On May 2, Omaha-based Internorth and Houston Natural Gas agreed to a $2.3-billion merger that would create the longest gas pipeline in the United States. Two months earlier, Houston-based Coastal Corp. and American Natural Resources of Detroit announced their own $2.5-billion merger.

Not only do these consolidations mean reductions in exploration and production budgets, but industry analysts say there is a 2 trillion-cubic-foot-a-year surplus of natural gas in the United States. If Canadian supplies are included, the surplus, or "gas bubble" as it is called, soars to 4.5 trillion cubic feet.

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