Varco Shares Drop 11% After Warning That Profits Will Dip

Varco International Inc. shares fell 11% Tuesday after the maker of oil field equipment said third-quarter earnings will be less than expected because of higher manufacturing costs and lower oil prices.

The stock closed at $6.38 a share, down 75 cents, after hitting a 52-week low of $6.13 earlier in the session. More than 2.36 million shares were traded, up from average daily volume of 920,629 over the last three months.

Orange-based Varco’s profit warning is the most recent in the oil industry. Baker Hughes Inc. and Weatherford International Inc. said they expected to miss third-quarter earnings projections as oil prices hover at near-decade lows.

“Anyone who’s got a valve or anything out there to replace is going to let it work a little longer before ordering a new one,” said Jim Wicklund, a Dain Rauscher Wessels analyst who has a “hold” rating on Varco.

Varco estimated order cancellations for the quarter amounted to $50 million, largely because an order for drilling-ship equipment was canceled, said Donald Stichler, Varco’s treasurer.

The company also said manufacturing costs were higher than expected for new products for offshore drilling systems.

Mid- and late-1999 will be worse for the company if oil prices don’t rise above $17 a barrel, Stichler said. Varco sells large equipment for drilling rigs on long-term contracts. Many of those contracts will be renegotiated after they expire next year.

The company said third-quarter revenue is estimated to be about $190 million, below expectations, though about 35% above the $140.4 million reported during the year-earlier period.