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Oil-service provider

Baker Hughes


laid out a revamped business strategy Monday in an effort to grapple with historically low oil prices and projected double-digit revenue declines this year.

In a major shift, Baker stated public goals to increase returns on capital, which have lagged peers. Part of its new strategy entails shifting corporate overhead expenses to division heads in a bid to force managers to focus on costs. Major cuts in its capital budget and more layoffs before March 31 also are part of the plan.

Houston-based Baker on Monday reported that fourth-quarter net income plunged nearly 95% to $6.1 million, or 2 cents a share, down from $114 million, or 35 cents a share, a year earlier. Excluding special charges, earnings per share were 14 cents in the most-recent quarter, below the

First Call

consensus estimate of 17 cents per share. Revenues fell 10%, to $1.4 billion from $1.6 million.

Special charges amounted to $58 million, or 12 cents per share, on a pretax basis. Included in that total was a $23 million severance expense, $17 million in merger-related costs and a writedown of $18 million on oil and gas property investments. Baker closed its acquisition of

Western Atlas

in August.

Baker's stock climbed 1/16 to 16 15/16, despite a downgrade from

Morgan Stanley Dean Witter

to outperform from strong buy. Morgan hasn't performed underwriting for Baker.

Like the rest of the oil-service industry, Baker is aggressively cutting its workforce and strategizing to uphold shareholder value. Even the oil companies on which it relies for revenue are slashing their own budgets. Max Lukens, Baker's chairman, president and chief operating officer, said during the company's conference call that he expected oil-company spending to remain depressed for at least this year's first two quarters.

Baker's own spending plans are based on average oil-company spending decreases of 20%. The combination of some recovery in Asia and well depletion rates, or the rate at which an oil reservoir is drained, "should balance the markets more quickly than anyone expects," Lukens said. And though that balance may happen within 18 months, the short-term outlook is "challenging, to say the least," he said.

Baker has cut its workforce quickly and deeply. By March 31, the company will have let go another 2,450 workers, bringing the total cut to nearly 7,000, or 18% of its total workforce, which hit its peak of 36,500 in last year's second quarter. Though the layoffs likely will end this quarter, "we'll always be ready to go deeper if warranted," said Eric Mattson, Baker's chief financial officer.

Lukens stressed the key areas on which Baker will focus. Most surprising were the targets for return on capital that Lukens laid out. Baker historically has underperformed peers


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in this area, says Jamie Stone, who follows the oil-service sector at



Baker "has a huge task in front of them to pull up the returns of the entire business," Stone says. "One of the ways they can do it is to measure each division." Stone has a hold rating on Baker; Schroder has not performed underwriting for the company.

But the challenge at the company is to get everyone behind the idea, he adds. Changes in financial measurements or incentive programs that also include a shift in corporate cultures are often difficult.

Part of how Baker will get everyone involved will be to shift general and administrative expenses to the division level, which will help get the entire company to focus on capital returns, Lukens said.

This model seems awkward at first glance, says Robert Trace, who follows the industry at

Southcoast Capital

. It may become tough for Baker to push corporate costs down to the divisional level, he says, although the key is that the company is taking steps to cut costs. He has a hold rating on BHI; Southcoast is not an underwriter.

Another focus is realizing the merger savings laid out when it acquired Western Atlas. Its 1999 plan incorporates $135 million in merger savings, and the combined company is already seeing synergies in technical and operational areas. Through managing costs as well as business size, Baker plans to reduce its operating cost base by $600 million this year compared with 1998.

Generating cash and reducing debt is also a key area of focus, Lukens said. To that end, it will cut capital spending this year 46% to $700 million from $1.3 billion in 1998. New technology will not be put on the back burner, however, Lukens said; the company will continue to fund these efforts. New seismic technologies are expected to contribute to profitability this year.