Oil Industry Woes Plaguing Baker
Although Baker International Corp. has already taken some strong medicine as conditions in the oil services industry have worsened, analyst Sam Albright of Kidder Peabody & Co. predicts further restructuring of Baker’s operations as the crisis deepens.
Widely considered one of the strongest players in this deeply troubled industry, the Orange-based company has already cut its worldwide work force by 20%, or about 5,000 people, over the past year. Moreover, the company has written off assets totaling $340 million, and during the three months ended June 30, it lost $11.6 million compared with net earnings of $23 million a year ago.
Despite the write-offs, the loss of operating profits means Baker now must quickly execute “increasingly bold and radical” restructuring moves, Albright said.
Among them, he said, could be the sale of assets at distressed prices, as well as additional joint ventures similar to one last year that involved the merger of Baker’s Milchem drilling fluids subsidiary with a unit of New Orleans Newpark Resources Inc.
Moreover, Albright said, Baker’s managers would not be above merging the entire company with a “strong competitor.” While odds of such a deal are fairly remote, at least for the near term, Baker’s managers are pragmatic enough to consider a merger if one was in the best interests of the company, he said.
Ron Turner, Baker’s vice president, said that while he couldn’t “assess the probability” of a merger, the possibility always exists. “I don’t think there are any current negotiations,” Turner said.
Since the beginning of 1986, Baker’s market value has fallen by nearly half. Traded on the New York Stock Exchange, Baker closed Friday at $9.25 a share, off 37.5 cents for the week. That compares with a 1986 high of $17.875 a share and an all-time high of $53.50 a share.
Currently, Baker is rated as a 3 on Kidder Peabody’s investment scale, which ranges from a very bullish 1 to a bearish 5 “ A stock that is rated as a 3 is expected to follow the market’s movement--something Albright notes is actually fairly good performance for an oil service issue these days.
Of the 15 oil service issues Kidder Peabody follows, all but three--Dresser Industries Inc., Schlumberger Ltd. and Baker--are rated at 4 or below, he said.
Baker could rise to as much as $18 a share in the unlikely event that oil were to return to $18 a barrel, but more than likely it will be three years before investors reap much substantial gain from Baker shares. On the other hand, Albright said, the downside risk is probably no more than $1 to $1.50 a share, even if oil drops to $7 a barrel.
Because no meaningful recovery is likely before the second half of 1988, Baker will continue to face continued hardship, although savvy management and a strong balance sheet should position it to be a winner by the end of the decade.
For the rest of this year, Albright estimates a modest income from continuing operations of 10 cents a share, or about $7 million. However, Baker’s Turner said that estimate may be too optimistic. 1986, he said, may actually produce a “slight operating loss.”
Either way, this year’s results will be off from the $1.25 a share, or $87.7 million Baker earned last year.
Albright predicts a loss of 30 cents a share, or about $21 million during 1987, but Baker should return to black numbers in 1988 with net earnings of 50 cents to 75 cents a share, or about $35 million to $52.5 million. By 1990, Albright said, earnings may range from $1.50 a share to $2 a share, or $105 million to $140 million in net earnings.
