R&B Falcon

(FLC) - Get Report

, saddled with debt, is mulling asset sales if it fails to raise capital for its aggressive rig-building program.

In a conference call Thursday, Falcon pledged no new capital expenditures for 1999, but remained committed to spending an already-planned $700 million this year.

Until drilling demand picks up, Falcon will cut costs and eliminate discretionary capital spending, said president and CEO Steve Webster. The Houston-based company has taken dozens of barge and jackup, or shallow-water rigs, off the market in recent months. In addition, over 1,300 employees were laid off, most in early January.

Although "we remain optimistic for market improvement later this year or in 2000, we are planning financially for a protracted downturn," said Webster.

Falcon, which has been building its deep-water drilling business through rig construction, became a dominant force in the shallow-water market through its December acquisition of

Cliffs Drilling

. But plummeting oil prices and the collapse of the shallow-water drilling market were a double whammy for Falcon. Its shallow-water customer base has greatly curtailed spending, and Falcon piled on debt at the height of the market, leaving itself highly leveraged and needing more cash than it has on hand.

Falcon said it could raise about $200 million through sales of assets not directly related to its drilling business if its financing alternatives fail. Those assets include certain supply boats, a "nonworking" semisubmersible drilling rig, its oil and gas producing division and new drilling equipment ordered for a rig project that was subsequently cancelled.

Webster expressed confidence that the company would pull together its byzantine financing plans to see the company through the end of its rig construction program. Those plans include complicated sale and leasing deals for two of its rigs under construction, through which the company hopes to raise $400 million.

The company's numerous rig-building projects include four drillships and three semisubmersibles, slated for delivery between now and 2000's fourth quarter. The cost for the projects is about $2 billion. Falcon said it spent $1.15 billion in 1998 and $120 million so far this year. The company didn't return several calls seeking clarification.

Bill Herbert, head of oil service research at

Howard Weil Labouisse Friedrichs

in Houston, estimates Falcon will earn $270 million before interest, taxes, depreciation and amortization this year. With cash interest expenses of $130 million, and another $50 million in outlays for maintenance, Falcon will have just $90 million in cash flow to fund its capital program, which is why raising additional funding is so important. (Howard Weil has not performed underwriting for R&B Falcon, and it doesn't rate individual stocks.)

But "we are concerned about this company's balance sheet in the present and in the expected market," Herbert says. "This is a company that we would urge investors to be very cautious about."

Yet some investors are hanging on. "We all know how deplorable the situation is today," says Seth Glickenhaus, a partner at R&B Falcon shareholder

Glickenhaus & Co.

With the caveat that he is optimistic about the industry as a whole, Glickenhaus says Falcon is likely to obtain financing.

Glickenhaus isn't the only one showing some confidence. Falcon's stock jumped 16%, or 13/16, Thursday to 6 1/16 on renewed faith in Falcon's financing plan, as well as on the fact that

Salomon Smith Barney

analyst Thomas Driscoll upped his natural gas price forecast for this year and next year.

Meanwhile, Falcon is close to signing a contract for the

Jack Bates

, a rig whose contract was

cancelled by

Mobil

(MOB)

in December for alleged performance deficiencies. Another contract, for the

Peregrine VII

, is now subject to possible cancellation since it's behind schedule and over budget. But if

Amoco

, now a part of

BP Amoco

(BPA)

, cancels the $114,000 per day contract, Webster said Falcon would likely be able to arrange better terms in a future contact.

On Wednesday, the company reported its fourth-quarter earnings, which included a multitude of special items.

Falcon earned $40.1 million, or 11 cents per share, excluding items, on revenues of $228.7 million, falling short of the 13 cent per share

First Call

consensus estimate. The quarter included a $32.5 million charge related to the cancellation of two rig conversion projects, an extraordinary loss of $2.2 million from the early retirement of debt and a $10.6 million charge for the impairment of oil and gas properties.

The quarter also reversed a $19.5 million charge associated with the recontinuance of its oil and gas operations and $7 million in merger costs accrued in 1997. In 1997, the company discontinued its oil and gas operations, but then didn't sell them, forcing it to recontinue these operations in its financial statements. Also, it recorded a gain of $5.7 million from the sale of an interest in a foreign offshore concession. Including special items, the company's net income was $15.1 million, or 9 cents per share.

In the year-ago period, the company reported a net loss of $124.1 million, or 75 cents per share, on revenues of $266.7 million. The fourth quarter of 1997 included a loss from discontinued operations of $36 million, merger expenses of $66.4 million and impairment charges of $56.7 million.