OPEC Accord Fails to Cheer Southland Oil Service Firms
Southern California’s major oil service companies--Baker, Smith International and Varco--will not see any immediate increase in their business because of OPEC’s agreement last week to cut oil production, according to company officials and industry analysts.
The slump will continue, they say, because the oil companies that buy equipment from the three Orange County-based manufacturers will not begin new drilling until they are certain that the OPEC pact will hold and that the price of crude oil will stabilize at $15 to $20 a barrel.
And that, the officials and analysts say, means that oil drilling companies will take a “wait and see” attitude and delay any large capital investments in exploratory or development drilling at least until the end of 1986.
“I am not really confident we will see any material increases in drilling activity in the United States this year. There is immense skepticism within the whole industry,” said Kevin Simpson, an analyst with Drexel Burnham Lambert in New York. He predicted that, although the OPEC agreement will keep domestic drilling budgets from being reduced next year, foreign drilling will continue to decline through the first quarter of 1987.
But if members of the Organization of Petroleum Exporting Countries do adhere to the production cut, Simpson predicted that the “first evidence” of increased domestic drilling probably will come early next year, with the major impact on the oil service companies coming in 1988, as drilling intensifies.
“It’s not the time to pop the champagne cork and say ‘Happy days are here again,’ ” said Charles R. Bureker, vice president of investor research for Sutro & Co. in San Francisco.
Stock in the three Southland oil equipment makers jumped slightly last Monday and Tuesday, just after the OPEC production announcement, but the initial enthusiasm has faded.
Baker International, in Orange, saw its stock climb to $10.50 from $8.87 1/2 per share before falling again to close at $10 on Friday. At Varco International, also in Orange, the stock price edged up to $3 per share from $2.75 before dropping back to close Friday at $2.67 1/2. And at Smith International in Irvine--which is in the midst of a Chapter 11 bankruptcy reorganization--investors pushed the price of a common share to $2.87 1/2 from $2.25 early last week before it slipped to $2.62 1/2 on Friday. All three companies’ shares are traded on the New York Stock Exchange.
Baker International is expected to be the first of the Southland service companies to benefit from any increase in oil prices that comes from an OPEC production slowdown. Unlike most other oil service companies, 35% to 40% of Baker’s domestic business is derived from providing equipment to maintain existing oil wells, according to the company’s president and chief operating officer, James D. Woods.
If “harmony” persists among the OPEC nations for 60 to 90 days, Wood said, some oil companies will begin long-deferred remedial and maintenance work on operating wells to improve their production--and will begin buying the equipment needed to do so from Baker and its competitors.
Simpson, however, said he believes that Baker will be hurt by a reduction in foreign drilling and that any new maintenance business will “just help reduce the losses” that he expects Baker to sustain through at least the first half of next year.
Cut Work Force 20%
Over the last year, Baker has cut its worldwide work force by 20%, or about 5,000 people, and has written off assets totaling $340 million. For the three months ended June 30, the company posted a loss of $11.6 million, compared to net income of $23 million a year ago. Baker will regain its vigor only when its customers embark on new drilling, Simpson said.
The fortunes of Varco International, a drilling rig equipment maker that posted a $2.8-million loss for the first six months of this year, are tied even closer to a resurgence of oil exploration and development.
Wayne Whipple, an oil service analyst with Merrill Lynch, said there is a “vast oversupply” of oil rigs. The benchmark crude oil price will have to rise to about $20 a barrel and “the industry will have to perceive it will stay that high or higher” before oil exploration will start again in earnest, Whipple said.
$428 Million in Losses
Regarding Varco’s immediate prospects, Whipple said: “It is certainly going to be tough for the next year. I don’t think at this time next year there will be a higher level of drilling activity.”
Dick Kerston, Varco’s vice president of finance, also said he does not expect any near-term increase in Varco’s business. “We are not changing our strategies of belt-tightening and reducing costs in all areas,” he said.
Smith International, which lost $428 million in the last three fiscal years, is reorganizing under Chapter 11 after losing a patent infringement suit and being ordered to pay $204.6 million to rival Hughes Tool of Houston. Smith also has no plans to reverse its course of retrenchment.
Smith’s vice president and treasurer, Bob Gubrud, said he, too, is waiting to see if the price of crude stabilizes. He predicted that if OPEC can hold the price at $15, Smith’s business would “probably improve somewhat next year.”
However, Drexel Burnham analyst Simpson said he does not expect Smith to become profitable in 1987 or even 1988--even if oil prices start to rise. New price-cutting competition in the sale of drill bits--Smith’s staple product--will keep the company from earning enough to cover its costs, he said.
Nor is Irvine-based Fluor Corp. preparing to resume what once was its main business--the construction of oil refineries and other massive petrochemical facilities.
If increased oil production is at least five months away, Bureker said, large investments in oil processing facilities are even farther off.
Fluor officials stress, however, that as a result of a 2-year-old diversification program, the company no longer is as dependent as it once was on the price of oil.
Spokesman Rick Maslin said that currently, only 17% of Fluor’s engineering and construction workload is related to energy projects, with the rest consisting of contracts for general industrial and commercial buildings.
But if the oil industry rebounds, Maslin added, Fluor--which lost $633.3 million in fiscal 1985 and posted a $5-million loss for the first half of fiscal 1986--would be happy to do more energy projects.
