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Weatherford May Know Which Way the Wind Blows

A possible spin-off of its drilling products unit could help Weatherford ward off the cyclical blues.

Weatherford International's

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recent string of acquisitions is only part of Chairman Bernard Duroc-Danner's plan to increase shareholder value.

As early as the end of this year, Duroc-Danner's strategy could include spinning off Weatherford's drilling products division,

Grant Prideco

, into a separate company.

The move would separate Weatherford's highly technical well completions business from the more mundane drill pipe manufacturing, sales and distribution division.

"The two directions we're going in make it a natural to spin off

Grant Prideco," says Bruce Longaker, Weatherford's chief financial officer.

And the idea has support among shareholders and analysts.

"I think it's pretty sensible," says John Raitt, an analyst at

Harris Associates

, a Chicago-based money-management firm and Weatherford shareholder. "They are two very different businesses."

"The market gets to own the business that it wants and hopefully realize a higher stock price as a result," adds Dan Pickering, head of oil service research at

Simmons & Co.

, a Houston-based investment bank specializing in energy. And the market has shown it will pay a higher multiple for oil service companies known for their technological prowess, Simmons says. Simmons hasn't performed underwriting for Weatherford.

Meanwhile, the other piece of Duroc-Danner's strategy continued last week when Weatherford agreed to acquire struggling oil service equipment provider

Dailey International

(DALY:OTC BB) for $195 million in Weatherford stock. This transaction is part of a spate of joint ventures, acquisitions and exclusive licensing arrangements Weatherford has made since December in a bid to beef up its product lines.

Weatherford's Grant Prideco was part of


, which acquired Weatherford a year ago. In September,


changed its name to Weatherford International. This division is the world's leading manufacturer of drill stem and tubular products, including drill pipe, well casings and drill pipe collars and connectors.

But it's plagued by the oil business' cyclical nature. This division, which accounted for about 33% of Weatherford's $2 billion in revenue last year, was especially hard-hit by last year's drop in oil prices. The drastic declines in rig counts drove down demand for all kinds of drill pipe. In the first quarter, Weatherford's drilling products division reported a 53% revenue decline to $88.5 million from $190.6 million a year earlier.

Weatherford International's Revenue
1998 $2 billion total revenue by business segment

Source: Weatherford International

To be sure, the drill pipe business can generate solid returns and healthy cash flow at certain points in a cycle, says Raitt at Harris Associates. Traditional value investors could be attracted to the cyclical drill pipe business spin-off.

Yet it has retarded Weatherford's price-to-earnings ratio, says a New York-based hedge fund manager and Weatherford shareholder who declined to be named.

Based on 1998 earnings before charges, the Big Three oil service providers,


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Baker Hughes


, are trading at higher earnings multiples than Weatherford. At Weatherford's current price of 32 1/2, it trades at 17 times its 1998 earnings of 1.96 per share. Schlumberger trades at 24 times its 1998 earnings, Halliburton is also at 25 times and Baker Hughes is at 28 times.

Meanwhile, revenue at the well completion and oilfield services unit, the company's biggest, fell 28% in the first quarter to $165.3 million from $229.8 million a year earlier. Most of this division's products and services are used in the production phase of the well's life cycle. While few new wells are drilled in industry downturns, oil companies try to squeeze more production out of existing wells, creating work for this division. It accounts for nearly half of the Houston company's revenue.

The current industry slump is the main hindrance to spinning off Grant Prideco sooner rather than later, says Longaker, the CFO. He'd like to see further signs of improvement in the drilling market overall before any spin-off takes place. Those signs include an increasing order backlog, and an increase in the order intake.

"We don't need the profitability back totally," he says, "but we need to see signs" that the improvement is here to stay. "We think we're getting to the point where we'll start looking at

a spin-off again toward the end of the year."

If Bernard Duroc-Danner has his way, Weatherford's value will increase simply by taking away the most cyclical part of the equation.