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Baker Hughes Trimming Down, Planning Recovery

Baker Hughes Trimming Down, Planning Recovery

After a $297 million net loss in 1998, it should come as no surprise that Baker Hughes is cutting capital spending this year and will not be out shopping for assets or new combinations like many other industry companies. Drilling activity continues to plumb new depths (figuratively, not literally), reaching a record low last week with 498 rotary rigs operating in the U.S.

But the $600 million spending cut planned by the Houston-based drilling services company is huge by any standard. That's the level Baker Hughes CEO Max L. Lukens said his company is targeting this year. By September, its capital spending program will be less than one-third what it was in 1998. Most of the cost cutting is coming from staff reductions that will leave Baker with about 7,000 fewer employees on its staff this year compared to 1998.

"We should not be busy in the acquisition phase this year," Lukens said, noting that in addition to the depressed drilling market the company is busy trying to digest its merger with Western Atlas. Baker Hughes expects to save about $135 million as a result of merger consolidation.

Despite the cutbacks, Lukens said the company actually will increase spending on research and development to prepare for a recovery. Like most other industry officials speaking at the Howard Weil Energy Conference in New Orleans yesterday, he said he expects a market recovery soon, possibly within six months for the gas industry and certainly by year end for oil, meaning gas prices will average more than $2/Mcf and oil will rise to more than $18/bbl.

"If you don't drill, supply will eventually decrease. It's as simple as that," said Lukens. "We had a severe reduction in drilling activity. As good as technology is to offset costs, it cannot offset production declines of this magnitude," said Lukens, adding he expects to see a turnaround in the rig count by mid-year.

Meanwhile, the Baker Hughes U.S. rig count slipped below 500 for the first time last Friday to 498. That's off five rigs from 503 the previous week. In addition, the Gulf of Mexico rig count (included in the U.S. count) dropped six to 96. The Canada rig count dropped 26 to 68, making for a North American count of 566, down 31 from the previous week and off 453 from the same time a year ago when 1,019 rotary rigs were working.

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