After marking what was for many a record year in 2001, many oil-service companies presented a more cautious outlook for 2002 at the annual Howard Weil investment conference in New Orleans last month. A marked decline in gas drilling in North America is a key concern. For the larger service and supply companies (the majority of whose activity takes place outside the U.S.), Argentina and Venezuela remain real problems in light of economic troubles in the former and political unrest in the latter. "Our outlook remains the same. We expect North American activity to bottom out this summer," said Michael Wiley, chairman and chief executive of Baker Hughes Inc. The Houston-based company reported 2001 revenues of $5.4 billion and its operating profits doubled for the second consecutive year. All six of its divisions reported record-high profits and the company as a whole achieved its goal of reducing debt by $1 billion. Baker Hughes' goals now are to grow revenues and margins, and return more than the cost of capital through all the cycles of the energy business. Indeed, managing the cycles was a common catch phrase at the conference, as was the goal of keeping a clean balance sheet that is simple to understand, no doubt an understandable reaction to the Enron-Andersen debacle that has caused investors to seek safety and quality in their stock picks. Doug Rock, chairman of Smith International Inc., emphasized performance in light of a worldwide rig count that has dropped dramatically. "Our first-quarter top line will decline about 4% below last year, which isn't too bad if you consider the rig count has dropped 19%. We have experienced no significant pricing deterioration, even though U.S. rig activity is down. I expect the rigs to come back by the end of the second quarter." Last year, Smith made 15 niche acquisitions. Rock expects additional opportunities this year. Capital expenditures are expected to be $75 million in 2002, versus $109 million last year. Although acquisitions create a new size, they also bring other benefits, said J. Michael Talbert, chairman and chief executive of Transocean Sedco Forex Inc. "Size brings us diversity in types of rigs. It allows us to substitute certain rigs for certain customers and regions, upgrading to give them a better or newer rig capable of deeper-water drilling. Last summer we mobilized two rigs to India, for example, and we've been busy there ever since. That allows us to earn a higher margin and gives the customer a modern, more efficient rig." Talbert thinks the deepwater and midwater markets in the Gulf of Mexico are currently oversupplied, but dayrates are holding up. "Our goal now is to improve our balance sheet. We've reduced our debt by $400 million since the merger, and we expect a big decline in capex now that our new-build program is over." The company has also retired $1.2 billion of old R&B Falcon high-yield notes and reduced its average weighted cost of capital, he added. "We wanted to divest noncore assets but as the market softened last year, the buyers disappeared." Many executives and investors at the conference expressed skepticism that high oil and gas prices are sustainable in the near term. Noble Drilling Corp. chairman Jim Day remained cautious. "We are getting a near-term oil-price bounce due to events in the Middle East, but I don't like it. The real driver for our business is rig utilization. If it nears 100%, that's when you get real leverage of your business." Like most executives, Day emphasized that the company has clean finances and strong performance. "We have a straight-forward balance sheet with no off-balance-sheet financings or trigger clauses. Our return on capital employed exceeds our cost of capital." Based on customer comments, he added, U.S. rig activity appears to have bottomed and customers may bump up their drilling activity later this year. -Leslie Haines