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Fluorocarbon Feels Pinch of Cheap Oil

July 27, 1986|Robert Hanley

Though the most obvious local victims of the crisis in the oil patch are the badly battered oil services companies--such as Baker International, Varco International and now-bankrupt Smith International--at least one more local firm is feeling the pinch caused by cheap crude.

Laguna Niguel-based Fluorocarbon Co. relies upon the oil service industry for 7% to 10% of its revenues, and at least one analyst is lowering his estimates of year-end earnings accordingly.

Because it is now cheaper to import foreign oil than to produce oil here, domestic drilling activity has ground to a virtual halt. Since the beginning of 1986 alone, the number of working rigs in the United States has fallen 63%, according to industry sources.

And, when drilling stops, the companies which service and supply oil field equipment experience a slowdown.

Fluorocarbon manufactures a wide range of rubber and plastic products, including industrial seals, fittings and gaskets for use in a variety of applications ranging from aircraft and automobiles to oil-drilling equipment.

During the first quarter of Fluorocarbon's fiscal 1987, orders at two of its divisions which sell primarily to the oil services industry were off by a whopping 42% from a year earlier.

As a result, net earnings companywide fell 33% to $864,177, or 20 cents per share, from $1.38, or 32 cents a share, a year ago.

Although the oil tool makers account for a fairly small portion of the company's business, the sales shortfall had "a disproportionate effect" on overall earnings because other company operations have been fairly soft, said Ken Holland, Fluorocarbon's chief financial officer.

As a result of the poor first quarter, John Simon, who follows Fluorocarbon for Seidler Amdec Securities Inc. of Los Angeles, has dropped his estimate for Fluorocarbon earnings this year from $1.45 a share to $1.15 a share. When compared to the $1.28 a share Fluorocarbon earned from continuing operations last year, the new projections represent a 10.2% drop in earnings.

Traded over the counter, Fluorocarbon closed Friday at $14.875 a share, off 12.5 cents a share for the week and about midway between its most recent 12-month high of $18.25 a share and its low for the year of $12 a share. Not recommending either the purchase or sale of Fluorocarbon shares, Simon said he is "neutral" toward the stock these days.

Since the beginning of the year, Fluorocarbon has consolidated some of its operations and trimmed its overall work force by 16%, Holland said, and that should improve results of the upcoming second half.

While Simon agrees with Fluorocarbon that the consolidations are a step in the right direction, he nevertheless warns investors that "it would be imprudent to believe that such moves could make up for the shortfall in the first quarter."

In an interview, Fluorocarbon's Holland said net earnings for the quarter ending this week will be off from the 29 cents a share earned last year. Simon's bearish estimate, he said, is reasonable.

However, Simon's estimate of $1.25 a share in net earnings for the upcoming fiscal year, which is down considerably from his earlier projection of $1.60 a share, seems "a hair pessimistic," Holland said.

Among Fluorocarbon's brighter prospects, he points out, are increased orders from aircraft manufacturers at the company's plastics division, including new business from McDonnell Douglas Corp. expected to start showing up later this year and during the next.

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