Drilling Decrease, Discounts in Oil Services Market Lead to Losses for Smith, Baker
Reflecting depressed levels of oil drilling and price-slashing competition, Baker International Corp. reported a $273-million net loss Friday for its fiscal 1986 while Smith International Inc. posted a third-quarter loss of $64.4 million.
Baker, the Orange-based oil service company that recently announced plans to merge with Hughes Tool Co., said its loss for the fiscal fourth quarter hit $22.7 million. The company had reported net income of $26 million for the fourth quarter a year earlier and a net gain of $87.7 million for fiscal 1985.
At Smith, which is in a Chapter 11 bankruptcy reorganization after being ordered to pay a $205-million damage award to Hughes Tool Co. in a patent infringement case, the third-quarter loss included a $46-million writedown of inventory and capital assets. The Newport Beach-based oil service firm reported an $8.2-million loss in the third quarter a year ago. Smith’s third-quarter revenues were $90.3 million, down 48.5% from year-earlier revenues of $175.4 million.
For the first nine months, Smith posted a loss of $104.6 million, nearly double the $58.3-million loss it reported for the year-ago period. Nine-month revenues were $331.1 million, down 36.9% from $524.9 million.
At Baker, annual revenues of $1.5 billion were down 21% from $1.9 billion, while fourth-quarter revenue fell nearly 35% to $329 million from $504 million a year earlier.
Baker’s losses came despite a consolidation of facilities and a 30% payroll reduction in the past year. The bulk of the company’s annual loss came from a $340 million writedown of assets and inventories in the second fiscal quarter.
Wall Street analysts, however, said they were “not surprised” by Baker’s money-losing performance, attributing the loss for the final quarter to competition-forced price discounting and a sales slump because of severely depressed domestic drilling and a decline in international drilling.
Sam Albright, an oil industry analyst with Kidder Peabody & Co., said he believes the benefits of Baker’s cost-reduction program will be felt in later quarters, after the company absorbs the initial costs associated with the layoffs and plant closings.
Albright and other analysts also were optimistic that Baker will see a slight profit in about a year, especially if Baker and Hughes realize the $65-million to $85-million annual operating savings they expect from their $1.2-billion merger early next year.
Several analysts Friday pegged the potential savings from the giant merger even higher. “We think the combined Baker/Hughes can reduce costs by up to $100 million (annually) “ said James Crandell, a vice president and oil analyst with New York-based Salomon Brothers.
Another potential benefit of the merger, Crandell said, is that Baker and Hughes together will command a larger share of the market for drilling equipment and, as a result, prices for the products may start to rise. In recent months, he said, Baker has been forced to slash its listed prices by about 45%.
Herbert Hart, an oil service analyst with San Francisco-based Rowe & Pitman, said Friday that the Baker-Hughes merger also is promising for Smith’s future.
He said he believes that to overcome possible objections from federal regulators about elimination of competition among drill bit manufacturers, Hughes will quickly settle its litigation with Smith on terms that will enable Smith to survive.
