Baker Loses $270 Million in 2nd Quarter
Reflecting the harsh prospects in the oil industry, Baker International Corp. said Wednesday that it sustained about a $270-million loss in its second fiscal quarter due primarily to a write-down of corporate assets.
The loss, which represents a dramatic 27% reduction in Baker’s net worth, is expected by some oil analysts to signal another wave of accounting adjustments by other oil service firms to reflect the continued declining value of their business in the wake of plummeting oil prices.
Jim Crandell, an oil service analyst with Salomon Brothers in New York, said that Baker was the first major oil service company to begin the last significant round of industry-wide asset write-offs in 1983, when the Orange-based firm wrote off $100 million.
“Baker is the first major oil service firm to take a write-off as a result of the deteriorating conditions we have seen in 1986 . . . . Clearly there are others that will follow,” Crandell said.
Max Lukens, Baker’s chief financial officer, said that Baker decided to bite the bullet after seeing an almost 45% decline in operating oil rigs in the United States so far in 1986, as the companies that normally buy Baker’s drilling equipment have sharply cut back on oil exploration and production. Since the end of December, he pointed out, the domestic oil rig count has shrunk from about 2,000 to 1,034 rigs, and is likely to remain at about 1,000 for the next two years.
Lukens said that the announced write-down effects corporate assets that principally include property, plant and equipment, excess costs of prior acquisitions and inventory surpluses. In addition, he said the company is writing off the costs of operational restructurings and plant shutdowns and $80 million in corporate good will.
While Baker operates facilities worldwide, Lukens said that the write-downs were “largely” taken domestically, where the cutbacks in new oil production have been most severe.
Baker has responded to its shrinking market by consolidating operations, mothballing some manufacturing plants and laying off personnel. In the past 90 days, Baker laid off 2,000 workers, including some in its corporate group in Orange, leaving a total worldwide work force of 17,500. Lukens said the layoffs will save Baker between $50 million and $60 million a year in payroll and associated costs.
In another move to offset the write-downs, Baker said it will “replace its major pension plan” and reap a one-time gain of $70 million.
Despite the huge write-downs, Baker later this month expects to report “nominal operating income” for the second quarter ended March 31.
In fiscal 1985, ended Sept. 30, Baker had net income of $87.7 million, up 24% from $70.6 million the year before, largely as a result of the company’s efforts at consolidating facilities, increasing its market share and paying down debt to reduce interest costs.
But for the first fiscal quarter, ended Dec. 31, the company sustained an 8.4% decline in earnings to $16.3 million, from $17.8 million a year earlier. “Markets did not materialize as we expected in 1985 (and) intense competition will erode profits even further,” Baker President James D. Woods warned company shareholders at their annual meeting in January.
Nonetheless, securities analysts said that just by operating in the black, Baker is in better shape than many of its competitors. “They have earned profits while other companies have lost money in the past two years,” said Craig Schwerdt, senior vice president at Morgan Olmstead, Kennedy & Gardner in Los Angeles.
Analysts said that Baker has the advantages of a broad array of oil drilling products, capable management and relatively little debt, and thus probably will survive the current oil industry depression.
“Baker is a very strong company with a strong balance sheet. They will clearly be one of the surviving companies,” said Jeff Freedman, a securities analyst with Smith Barney, Harris Upham & Co. in New York.
John Wellemeyer, an oil service analyst with Morgan Stanley, said he applauded Baker for taking the write-down, which he called “the recognition of reality.”
“I don’t think it (the write-down) will impair in any way the company’s ability to do business or service its customers,” he said. He added: “My calculations show the company should be able to maintain its dividends at the current level (of 92 cents a share). The management seems committed to maintain it.”
Wall Street was not shaken by Baker’s anticipated loss. At the close of trading Wednesday on the New York Stock Exchange, Baker’s stock was selling for $13.125 a share, up 50 cents from Tuesday’s close. Analysts attributed the slight gain to investors’ favorable reaction to Vice President George Bush’s announced intention to discuss oil prices with Middle East officials.
Schwerdt said that in writing down its assets and retrenching, Baker is sensibly “following their customers, who are reducing and pulling in their belt buckles.”
He said Baker could be taking its cue from the major oil companies, several of which in recent weeks have announced that they will be cutting their exploration and production budgets on the average of 25% to 30% for this year. He pointed out that at the same time Baker was reporting its write-down Wednesday, Standard Oil Co. announced that it was cutting its exploration spending for 1986 by half, down from $915 million in 1985. Standard cited the dramatic declines in crude oil prices in making its decision.
