Smith International, one of the nation’s leading oil well equipment makers and an Orange County presence for 52 years, said Tuesday that it is closing its Irvine drill bit plant and moving its headquarters to Houston.
A total of 456 plant workers and 30 corporate staffers will be affected by the California pullout, which will be completed by March 31, 1989, said Smith President Doug Rock.
Most of those workers will be laid off, Rock said, although the company will offer some employees transfers to Houston or Ponca City, Okla., where Smith operates another drill-bit plant. Rock said 90 new professional positions will be created in Houston and 200 assembly jobs will be added to the Ponca City operation.
“We’d like to hire as many people as we can from Orange County,” said Rock.
At the height of operations in 1981, the Irvine plant employed about 4,000 workers.
Terminated employees will receive severance packages, including 30% completion bonuses to ensure adequate staffing through late February, when layoffs are scheduled to begin, Rock said.
Smith, which as recently as the early 1980s ranked as one of Orange County’s largest employers, was crippled in recent years by the collapse of the domestic oil industry, an ill-timed takeover attempt and a patent infringement lawsuit. The firm filed for bankruptcy in 1986 and emerged from reorganization proceedings last New Year’s Eve a much leaner operation.
The company said it decided to pull out of California to cut costs after initial indications that the oil industry was poised for a comeback this year failed to materialize.
“It’s with deep regret that we’re closing our Irvine operation,” Rock wrote in a letter distributed Tuesday to the company’s Orange County employees. “We’ll offer incentives to transfer, but there may not be jobs for everyone.”
Costs associated with the move will result in a significant charge to third-quarter earnings, said Loren Carroll, Smith’s chief financial officer. Jeffrey Freedman, an analyst with Smith Barney, Harris Upham & Co. in New York, estimated the cost at $20 million, which Carroll said was “in the ballpark.”
But the closings eventually will save the company $13 million to $14 million annually in reduced operating costs, other analysts said.
“It doesn’t make a great deal of sense for them to be in three locations any more, and it certainly doesn’t make a lot of sense for them to stay in Orange County,” said Vishnu Swarup, an analyst with Prudential-Bache Securities in New York.
Oil prices have dropped 35% since April, causing a reduction of oil exploration activity. In addition, expensive rent and relatively high wages in Orange County have combined to make operating costs prohibitive for Smith.
“They had a three-year lease on the (Irvine) plant which they were renegotiating, and it was just too expensive,” said James L. Carroll, a securities analyst with Paine Webber, a New York brokerage.
Plant Closings Inevitable
As part of its earlier restructuring, Smith had sold its Irvine plant to Hillman Co. in 1986 for $46 million and then leased it back from the Newport Beach development company. Hillman Co. eventually intends to build office buildings on the site, Carroll said.
Smith’s pending pullout signals the virtual end of an era for the Orange County oil services industry, which had its origins in the great Southern California oil booms of the late 19th and early 20th centuries.
Analysts said the plant closings were inevitable. “We have seen many oil service companies pull out of their home bases and move to the heart of the oil patch . . . in Houston,” Carroll said. “This is a trend that has been going on for some time.”
Baker International, another large oil services company and Smith’s archrival for years, packed up and left Orange County for Houston in 1986 when it merged with Hughes Tool Co. to become Baker-Hughes.
Only one oil field equipment firm, Varco International Inc. of Orange, remains in the county.
At its peak in 1982, Smith posted earnings of $132 million on sales of $1.2 billion and had a worldwide work force of 14,000.
But the company suffered big losses from a failed attempt to take over Gearhart Industries Inc., a Ft. Worth oil services firm, in June, 1985. And Smith, like other oil equipment and services firms, was a casualty of the collapse of oil prices in 1986.
The company filed for bankruptcy in March, 1986, after being hit with a $205-million judgment resulting from a 14-year patent infringement suit filed by competitor Baker International.
That judgment eventually was reduced to $90 million as part of the bankruptcy reorganization plan, under which Smith shed all but its core businesses and slashed its work force to the current level of 2,850 workers.
Since the reorganization, day-to-day operations have been jointly handled by Rock, who lives in Houston, and Loren Carroll, who works at the Irvine headquarters.
Carroll said he will keep his position until March, but he does not plan to relocate to Houston.
Smith’s chairman and chief executive since April has been Robert Sutherland, who also serves as executive vice president of Industrial Equity (Pacific) Ltd., a New Zealand investment company that controls about 36% of Smith stock.
Earlier this year, the company’s restructuring effort began to pay off. Smith reported earnings of $481,000 on revenue of $77.6 million for the first quarter. Many analysts had been expecting a loss for the quarter and the year.
Since then, however, crude oil prices have dropped from about $18 a barrel to $13. The U.S. rig count, which tracks the number of oil wells being drilled, has fallen below 1,000--its lowest level since World War II.
In December, 1981, the peak of the domestic drilling boom, more than 4,500 rigs were at work. Declining exploration activity has a devastating effect on companies like Smith, which supply the bits, pipe, chemicals and services need to drill and complete new wells.
“This had not been expected,” said Freedman, the Smith Barney analyst, of Smith International’s plant closing. “But it is, I think, the correct decision. There has been no recovery in the oil industry.”