Sole Survivor : Varco Is Last Oil Equipment Firm in County Where 6 Once Stood
At the height of the oil boom in 1981, there were half a dozen oil equipment manufacturers based in Orange County.
Soon there will be just one: Varco International.
“I guess we are the last of the Mohicans,” Varco President George Boyadjieff said. “We’re glad to be in Orange County and we plan to stay here.”
Varco is the lone survivor of an oil industry depression that has seen such industry giants as Fluor and Baker International (now Baker-Hughes Inc.) abandon their Orange County drilling equipment manufacturing. Other companies have also left or closed shop over the years, among them Scientific Drilling, N.L. Shaffer and Martin-Decker Corp.
And finally, this week, Smith International Inc. said it has decided to idle its Irvine plant, leaving 486 Orange County employees with uncertain futures.
In Varco’s case, however, both company officials and analysts assert that the company’s presence in Orange County is secure and that Varco’s current business condition should enable it to successfully weather the oil industry collapse.
In fact, after years of losing money, Varco has assembled three consecutive profitable quarters, largely as a result of one product: the top drive drill.
“Varco is profitable today because they are one of the most innovative companies in the industry,” said James D. Crandell, a securities analyst with Salomon Brothers, a New York securities dealer.
“Without the top drive, they’d certainly be losing money today,” he said.
The top drive drill is a drilling technique introduced in 1982 that saves time and money by more efficiently extending pipe. Analysts estimate that the top drive, which is now used only on offshore wells, can reduce the cost of drilling by 25% to 40%.
The top drive now accounts for about 75% of Varco’s business. The company also manufactures automated roughneck machines that handle pipe, replacement parts, pipes and tools.
The top drives are made at the company’s plant in Orange, where the company has been headquartered for 15 years. Varco has other manufacturing facilities in Houston and the Netherlands and a contract with a Mexican company to make Varco pipe.
The company employs about 500 people, 150 of whom work in Orange.
Boyadjieff said that while Varco has drastically reduced its Orange County work force it has never considered shutting down altogether. He placed a high value on the region’s skilled labor force.
But neither is further plant expansion a possibility here.
“We do a lot of product development and engineering,” Boyadjieff said. “It’s important for us to be able to attract skilled engineers. We don’t find Orange County to be any hindrance. But we would not expand here because of the cost of labor.”
In fact, Varco’s evolution to its present more streamlined shape closely follows the experience of other Orange County manufacturing companies. Where once it employed 1,000 workers making basic oil tool products, the Orange plant is now used mostly to make Varco’s sophisticated top drive. In addition, Orange serves as the company’s brain center, where engineers hope to come up with the next hot Varco product.
The more basic equipment is now made in Houston, Mexico and the Netherlands. The Netherlands facilities were acquired in a recently completed $23-million purchase of two units of Houston-based Baker-Hughes.
Like so many other companies in the industry, Varco is a shadow of its former self. Profits peaked in 1981 at $22.3 million on $193.7 million in revenue. But in 1984, the company lost $17.8 million.
Nonetheless, Varco has been more fortunate than others. The offshore drilling business--Varco’s principle market--has fared better than land rig operators.
Just before the collapse in oil prices in late January of 1986, there were 505 operating offshore rigs worldwide, according to Kenneth Miller, a securities analyst with Shearson Lehman Hutton. Today the number has dropped by about 20% to 410.
By comparison, the worldwide land rig count has dropped from 3,100 to 1,806 over the same period.
As a result, Varco’s business improved in recent years. For the fourth quarter of 1987 and the first half of this year, Varco sold about 30 top drive systems, accounting for 75% of the company’s business.
In the second quarter of 1988, Varco sold $11 million worth of top drives, up from $3 million for the same period a year earlier.
“They are in reasonably healthy financial condition,” Miller said. “They have positive cash flow and they don’t have any significant debt to pay down. So they’re doing OK. Not great, but OK.”
The Baker-Hughes acquisitions should enable Varco to adapt its top drive technology to land rigs in the event of a recovery in that market, analysts said.
But while Boyadjieff said the cost of the acquisition would be minimal and spread over 10 years, some analysts warned that those costs, combined with a recent slowdown in top drive orders, would be enough to push the company back in the red, starting with the third quarter.
Critical to Varco’s future health, analysts said, will be stable oil prices in combination with its ability to come up with new products.
“There is no question that the companies that come up with further technological innovations will continue to find good markets for their products,” said Dennis Eklof, a director of Cambridge Energy Research, a consulting firm in Cambridge, Mass.
“The boom associated with the top drive is over,” Miller said. “In the end, the key is that oil prices will have to increase steadily for (Varco’s) business to continue to improve.”
And most analysts agree that isn’t likely to happen anytime soon.
Still, Boyadjieff remains upbeat. “We can definitely weather this storm. We have no bank debt. Nobody is breathing down our neck, we have $10 million in the bank and our business is currently profitable. We are more concerned about future acquisition opportunities than surviving.”
