Baker Hughes Plummets After Discovering Costly Accounting Issues

The discovery may require restatement of prior financial results.
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Updated from 9:50 a.m. EST

Shares of

Baker Hughes

(BHI)

plunged more than 20% Thursday after the oilfield services company announced that it had discovered "various accounting issues" that would cost $40 million to $50 million.

The Houston-based company said the problems occurred at its

Inteq

drilling services unit and will likely require a restatement of its prior financial results. No further details were available and the company did not return a call for comment.

But the company will postpone its planned $200 million note offering, perhaps because "they probably don't want to be out there marketing at the same time there's negative news," said analyst Marshall Adkins of

Raymond James

. The company currently has $2.7 billion of long-term debt on its books. Adkins rates Baker Hughes a hold and his firm has not participated in underwriting for the company.

By midmorning Thursday, Baker Hughes' shares were down 5 3/8, or 24%, to 17 1/8. The company disclosed the accounting problem late Wednesday night. (Baker Hughes ended down 3 1/4, or 14%, to 19 1/4.)

Though this is the company's first widespread accounting problem, Baker Hughes is no stranger to bad news. "Baker Hughes has had an enormous amount of internal and operating problems over the last several years," said Michael Rabalais, an analyst at

Robinson-Humphrey

. "It's had more than its share of difficulties." Rabalais downgraded Baker Hughes to a market neutral from a market outperform on today's news. His firm has done no underwriting for the company.

Previous difficulties have related to the operations and management side of the company, including continuing troubles with the $3.3 billion all-stock acquisition of

Western Atlas

in 1998. Analysts believe that Baker Hughes paid too much for the seismic services company and Baker Hughes has had problems integrating Western Atlas into its operations. Many managers have left, including Richard White, a Baker Hughes vice president and president of

Western Geophysical

, a seismic services unit inherited from Western Atlas. White departed Nov. 1. Also Alton Brann, chairman and president of

Unova

, an industrial automation and data collection company spun off from Western Atlas in 1998, resigned from the Baker Hughes board effective Dec. 31.

The latest setback was a warning, issued at the beginning of December, that fourth-quarter results would be weaker than expected, primarily because of difficulties in its seismic and process businesses. The company will also take a pre-tax charge of approximately $130 million. The consensus estimate of analysts polled by

First Call/Thomson Financial

for the company's fourth-quarter earnings then plunged by more than a nickel, from 4 cents a share to a loss of 2 cents a share.

Adkins also revised both his estimate for fiscal year 2000 earnings to 45 cents from 70 cents and his estimate for fiscal year 2001 earnings to $1.10 from $1.45.

"It's a large company that has grown through acquisitions and exists in a volatile and tumultuous industry," Rabalais said. "It's difficult to run the company smoothly." At the same time, its main competitor,

Halliburton

(HAL) - Get Report

, which is as big and as complex as Baker Hughes, has had nowhere near the same amount of trouble. Baker Hughes' other rivals,

Schlumberger

(SLB) - Get Report

,

Weatherford International

(WFT) - Get Report

and

Smith International

(SII)

, have also avoided similar problems.