After a $297 million net loss in 1998, it should come as nosurprise that Baker Hughes is cutting capital spending this yearand will not be out shopping for assets or new combinations likemany other industry companies. Drilling activity continues to plumbnew depths (figuratively, not literally), reaching a record lowlast week with 498 rotary rigs operating in the U.S.

But the $600 million spending cut planned by the Houston-baseddrilling services company is huge by any standard. That’s the levelBaker Hughes CEO Max L. Lukens said his company is targeting thisyear. By September, its capital spending program will be less thanone-third what it was in 1998. Most of the cost cutting is comingfrom staff reductions that will leave Baker with about 7,000 feweremployees 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 drillingmarket the company is busy trying to digest its merger with WesternAtlas. Baker Hughes expects to save about $135 million as a resultof merger consolidation.

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

“If you don’t drill, supply will eventually decrease. It’s assimple as that,” said Lukens. “We had a severe reduction indrilling activity. As good as technology is to offset costs, itcannot 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 forthe first time last Friday to 498. That’s off five rigs from 503the previous week. In addition, the Gulf of Mexico rig count(included in the U.S. count) dropped six to 96. The Canada rigcount 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 ayear ago when 1,019 rotary rigs were working.

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