Loooking at Orange County’s Past Year Sheds Light on ’86 : Oil Services
Orange County’s oil service companies, which already have weathered a persistent worldwide oil glut, aren’t likely to find much cheer ahead in 1986.
“1985 was bad (and) 1986 is going to be worse,” said Kevin Simpson, a securities analyst with Drexel Burnham Lambert Inc. in New York.
During the coming year, crude oil and natural gas prices are expected to continue dropping, forcing domestic drilling to fall by at least 10% from 1985’s already depressed levels. Oil tool manufacturers are expected to feel the pinch especially hard.
“If oil prices weaken and (if) you have weak gas prices, there certainly is not much incentive to explore,” said Herbert Hart, an analyst with S. G. Warburg, Rowe & Pitman, Akroyd Inc. of San Francisco.
The oil drill makers have already been hit hard. And while two Orange County companies managed to post profits during 1985, their earnings were minuscule contrasted with preglut days.
For Varco International, a unique top-drive drilling machine that helps its users cut their drilling costs was a major factor in producing the company’s third-quarter profit, its first black ink in 14 quarters.
During the first nine months of this year, Orange-based Varco sold 35 of its top-drive systems, which at about $500,000 each accounted for $14.7 million in revenues during the period. The company estimated that it would sell 10 systems in the final quarter of the year.
And Baker International Corp., also headquartered in Orange, posted an annual profit on modestly increased sales, a situation analysts attributed to the company’s aggressive cost-cutting measures over the past few years. However, 1986 is not projected to be a rosy year for the company.
“For Baker, I’m looking for moderately lower earnings next year, but better than what one might expect in the current environment,” said Drexel Burnham’s Simpson.
Like many energy analysts, Simpson believes that Baker’s financial strength and large market share will keep it in the black throughout 1986 and may even allow it to acquire weaker companies.
Smith International, a Newport Beach company whose major product is oil rig drill bits, lost $58.3 million during the first nine months of 1985.
And Smith’s future literally hangs in the balance as preparations get under way for a federal court trial to determine how much Hughes Tool will receive in damages as a result of Smith’s defeat in a 13-year-old patent infringement suit. Hughes has asked the court to award it $1.2 billion.
While 1986 is shaping up as another rough year, relief may be in the offing in 1987, when surplus domestic natural gas production capacity is expected to drop, sparking new drilling activity, said Jeff Freedman, of Smith Barney, Harris Upham & Co. in New York.
“I think the oil services industry has another year,” Freedman said. “I’m hoping that mid-1987 will represent the low point and then we can look at a better industry from 1987 and beyond.”
One company that took a battering in 1985, but stands poised for a return to profitability next year, is Fluor Corp., which this year endured a dramatic and expensive restructuring in response to changing market conditions.
During 1985, the Irvine-based company shed itself of assets and operations that it views as unrelated to its primary businesses of engineering, construction and mining. Fluor, which this month reported a net loss of $633.3 million during fiscal 1985, wrote off $400 million worth of assets during the year ended Oct. 31.
Facing the reality that the large engineering and construction projects that it once specialized in are largely things of the past, Fluor is pursuing less glamorous projects such as automobile plants and sewage treatment facilities and is penetrating new markets, including factory automation and telecommunications.
“One thing you can say about Fluor is that they have done a very thorough job of getting their house in order,” Hart said. “They have made the right moves--perhaps a little slower than the guys on the street would have been happy with, but they will get there.”
