Standing orders for Varco International's popular top-drive drilling system, which last year brought in a third of the company's annual revenue of $60.6 million, will be filled by the end of March, and no new orders are pending, a company official said Monday.
The system, which drives the drill from the top of the drilling rig rather than the bottom, has been well received by the oil industry in the last few years because of its efficiency.
It is one of the latest victims of the collapse in crude oil prices, which has caused much oil and natural gas drilling activity to grind to a halt.
The unique system gave Varco an edge over domestic competitors in the oil tool business. Varco credited the system's strong sales for playing a major role in the dramatic improvement in the company's financial condition last year--an indication that the drying up of sales will hurt considerably this year.
The drop-off in orders for the device after a slight increase in the current quarter is directly related to the slump in oil drilling, said Dick Kertson, Varco's vice president of finance. He said the company expected a substantial drop in sales for the second quarter, which begins April 1.
Varco reports no plans to lay off any of Varco's about 400 employees because of the expected decline in shipments of the system. But the company will step up an aggressive cost-cutting program that has resulted in savings of about $15 million since mid-1984, Kertson said. He declined to specify cost-reduction measures that might be taken.
Although Varco currently has no new orders for top-drive drilling systems, which sell for about $550,000 each, Kertson said the company's salesmen have "several prospects" and are optimistic that new orders for the device will be booked and shipped during the rest of the year.
The disclosure comes on the heels of a vote last Friday by company directors to withhold dividend payments for the seventh consecutive quarter to holders of Varco's $2 cumulative convertible preferred stock. The vote came two days after shareholders agreed by a wide margin to accept common stock in place of cash dividends on preferred shares.
Two Directors to Be Chosen
Because Varco remains in arrears to the holders of its 500,000 preferred shares--which have a current market value of about $6.5 million--company rules require that two new directors representing those holders be elected to Varco's board at the regular shareholders' meeting in May.
As previously reported, Varco posted a net loss of $1.7 million in 1985, a sharp reduction from its net loss of $17.8 million in 1984.
However, Varco earned $504,000 during the fourth quarter, its second consecutive profitable period after enduring a 13-quarter losing streak. During the fourth quarter of 1984, Varco lost $1.8 million.
Although the company is projecting earnings for the current quarter, Kertson said uncertainties caused by the oil industry crisis precluded directors from approving cash or common stock payments to the preferred shareholders.
"I think that the board, looking at the current situation in the industry and the current weakness in the stock price, felt . . . that the appropriate action was not to pay any dividends at this time," he said.
Varco common stock closed Monday in composite trading on the New York Stock Exchange at $2.625 per share, unchanged from Friday. The company's preferred stock closed at $13 a share, down 62.5 cents from Friday.