Smith International Officials See Recovery on Horizon

After years of floundering in financial darkness, Smith International officials say the company will finally see some light by early next year.

The oil-service company, crushed by the multiple blows of the oil slump and a $205-million court judgment that pushed it into bankruptcy, sends its reorganization plan to federal bankruptcy court in Los Angeles on Thursday for final action.

If approved--and company officials say there is no reason to believe it will not be--Smith will be out of bankruptcy, and business as usual at the Newport Beach-based company should resume with the New Year.

“Business has already turned around,” said Loren Carroll, Smith’s chief financial officer. “We’ll have an earnings release out next Tuesday. . . . There will be a profit on this earnings release.”

In addition, Industrial Equity (Pacific) Limited, an Australian investment company, bought 275,000 shares of the company’s common stock just last week. Carroll called the purchase a sign that Industrial Equity thinks Smith stock “is a very good investment.”

And some industry analysts contend that the oil-drilling slump is easing because the price of crude oil has nearly doubled--from about $10 in July, 1986, to about $20 last week. That could be good news for Smith.

‘Pretty Rosy Picture’

“I think it’s a pretty rosy picture,” Carroll said. “I think it looks a hell of a lot better than it looked a year ago.”

Some analysts, however, disagree with Carroll’s assessment.

“There’s very little interest in oil-service companies right now, especially ones in financial troubles such as Smith,” said M. Craig Schwerdt, a Los Angeles-based analyst with the brokerage firm of Morgan, Olmstead, Kennedy & Gardner.

Schwerdt, who said he has not talked with Smith officials in the past three months, like many analysts stopped following Smith after the oil-service company filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code in March, 1986.

Smith filed the petition after a federal judge hit the company with a $205-million judgment for infringing on a patent held by arch-competitor Hughes Tool. The patent battle took 14 years to resolve.

“We loathe to recommend stocks in Chapter 11,” Schwerdt said. “That’s why we have Smith on the back burner. . . . If one wants to take a long view of Smith, considering that oil is in the process of turning around . . . buying at these prices might not be a bad deal.”

Guardedly Upbeat

James L. Carroll, a New York-based oil-services analyst with the brokerage firm of Paine Webber, acknowledged that “the whole (oil-service) industry has been losing money, and Smith has been following the trend.” But he said he remains guardedly upbeat about Smith’s future.

“We have the stock coded as neutral,” said Carroll, who is not related to Smith’s chief financial officer, Loren Carroll.

“I feel optimistic about the company’s business prospects. . . . If you take a very long-term viewpoint and didn’t worry about how volatile the stock will be as it comes out of bankruptcy, it could be quite a good investment,” the Paine Webber analyst said.

He said that, excluding extraordinary gains and losses, Smith should lose about $2 per share in 1987--a total of about $45 million. Analyst Carroll said he expects Smith to come close to breaking even in 1988 and the company to earn as much as 75 cents a share for 1989. Loren Carroll would not make any earnings projections for his company.

But Robin Shoemaker, an analyst with the brokerage firm of E. F. Hutton, said in a recent investment newsletter that Hutton has increased its earnings estimates for Smith to reflect a 15% price increase in drill bits in North America. Drill bits are Smith’s principal oil-field product line.

“We now estimate that Smith will have earnings of 25 cents per share . . . in 1988,” Shoemaker said in the newsletter. “Our previous earnings estimate for 1988 was a loss of 35 cents per share. Our 1987 per-share projection remains a loss of $2.25 versus 1986’s reported $6.56 loss.”

Hutton recommends Smith stock “for investors who are cognizant of risks accompanying such a situation,” Shoemaker wrote.

Two major questions remain, though, according to Paine Webber analyst Carroll: “Will Smith get its debt structure to a point at which the company is really viable?” And, “Will they get out of bankruptcy?”

On Oct. 16 Smith common stock closed at $9 per share. On Black Monday, when the Dow Jones industrial average dropped a record 508 points, Smith dropped to $8 per share.

On Oct. 28, it closed at $4.75.

But the company’s common stock has been creeping up ever since, and it regained considerable ground last week. Between Oct. 30 and Nov. 6, it gained 87 1/2 cents per share, closing at $7.375. The stock’s 52-week high was $10.875, and its low was $4.00.

Still, Jeffrey Kilpatrick, president of Costa Mesa-based Newport Securities and an analyst who follows Orange County stocks, is not convinced. Although he concedes that Smith “has really cleaned up its act,” he still considers the company “a crap shoot.”

“They have operations and creditors under control,” Kilpatrick said. “They’ve been given a second chance to save the company. Their biggest hope is that the economy and the market give them a chance to do that.”