Smith International Earnings Up

Smith International, Inc.

Smith International has announced record earnings of $209.8 million, or $1.00 per diluted share, for the third quarter of 2008. The results include a non-recurring charge of $4.7 million, reflecting uninsured property losses and clean-up costs associated with hurricanes experienced in the U.S. Gulf Coast area. Excluding non-recurring items, the Company reported net income of $211.9 million, or $1.01 per diluted share. Net of charges, after-tax earnings grew $28.6 million, or 16 percent, on a sequential quarter basis.

During the third quarter of 2008, the Company completed the W-H Energy Services ("W-H") transaction which contributed to the sequential earnings growth. The operations have been reflected in the accompanying results for the period subsequent to the August 25, 2008 closing date. However, if the acquired operations had been included for the entire reporting period, the Company’s revenues would have approximated $3.07 billion for the September 2008 quarter.

Revenues for the three months ended September 30, 2008 were $2.85 billion, 14 percent above the second quarter of 2008 and 27 percent higher than the prior year period. Excluding the impact of the acquired operations, consolidated revenues grew eight percent on a sequential quarter basis and were 21 percent higher year-on-year.

Net of acquisitions, the majority of the sequential quarter revenue growth was reported in North America, influenced by the seasonal drilling recovery in Canada and higher U.S. distribution sales volumes associated with increased infrastructure investment for unconventional oil and gas projects. Excluding the impact of acquired operations, business revenues in markets outside North America grew five percent, attributable to increased activity levels in key growth markets including the Former Soviet Union (FSU), West Africa and the Latin American region. The sequential revenue comparison was influenced by weather-related work disruptions in the Gulf of Mexico during the month of September which resulted in an estimated $40 million revenue decline and a five-cent reduction in after-tax earnings.

Commenting on the results, Chairman and CEO, Doug Rock stated, "The integration of our August 2008 merger with W-H Energy Services is progressing exceptionally well. The merger was accretive to Smith's third quarter 2008 earnings and will again contribute to earnings growth in this year's fourth quarter. We expect the fourth quarter of 2008 to be another record revenue and earnings quarter for Smith and, as a result, we are increasing our 2008 yearly earnings guidance to $3.83 to $3.88 per share.

"Looking toward 2009, we feel the negative investment sentiment towards the oil and oil service industry is characteristic of panic rather than reason. Oil prices at $60 per barrel are more than six times their 1998 low point and natural gas prices are nearly three and a half times their 1998 low point. There’s plenty of profit potential at today’s industry price structure, which is why capital will continue to flow into the oil and gas industry in proportionate and available quantities. Today’s high oil and gas production depletion rates will assure relatively tight supply and demand balance, even with flat to somewhat negative demand growth."

Margaret Dorman, Executive Vice President and Chief Financial Officer, commented, "We're pleased with the overall operating results for the quarter - particularly the contribution from the W-H Energy operations. Consolidated operating margins were comparable with the June 2008 quarter, as weather-related work disruptions in the U.S. Gulf of Mexico impacted offshore business volumes and resulted in lower M-I SWACO margins. Smith continues to be well-positioned from a financial perspective - our balance sheet is strong and our leverage is at a very manageable level."

As a result of Smith’s recent organizational restructuring, business operations are being reported using three operating segments: M-I SWACO, Smith Oilfield and the Distribution segment. The M-I SWACO segment includes our majority-owned joint venture operation which provides drilling and completion fluid systems, solids-control and separation equipment, waste-management services and oilfield production chemicals. The Smith Oilfield operations provide three-cone and diamond drill bits, drilling tubulars, borehole enlargement tools, turbine motors, directional drilling, measurement-while-drilling and logging-while-drilling services, as well as completions, coiled tubing, wireline and drilling related services. The Distribution segment includes the Wilson distribution operations and a majority-owned interest in CE Franklin, Ltd., a publicly-traded Canadian distribution company. All prior periods have been recast to conform to the new segment presentation and Corporate cost allocation methodology.

The M-I SWACO segment’s third quarter revenues totaled $1.36 billion, six percent above the June 2008 quarter and 23 percent higher on a year-on-year basis. The sequential revenue growth was attributable to the increased number of land-based drilling programs in Canada, the FSU and the Central U.S. - which resulted in incremental demand for base fluid products. The growth in M-I’s land-based business operations was partially offset by a reduction in offshore sales volumes. Offshore revenues declined modestly from the June 2008 quarter as increased spending in the West Africa region was more than offset by a 19 percent reduction in U.S. deepwater revenues associated with weather-related work disruptions in the Gulf of Mexico.

The Smith Oilfield segment reported revenues of $724.2 million, 22 percent higher on a sequential quarter basis and 26 percent above the September 2007 period. The sequential and year-on-year revenue improvement was attributable to the addition of the W-H Energy operations. Excluding the impact of acquired operations, base business revenues outside the United States grew 11 percent over the June 2008 quarter, influenced by the seasonal drilling recovery in Canada and strong growth in the North Sea and key Latin American markets.

Lower sales of drill pipe and premium tubular goods in the U.S. market, which declined 47 percent on a sequential quarter basis, more than offset the impact of business expansion outside the United States. After excluding the impact of acquisitions and tubular sales, which are expected to improve in the fourth quarter of 2008, sequential quarter revenues increased six percent. The period-to-period improvement primarily reflects seven percent growth in drill bit business volumes and, to a lesser extent, increased demand for fishing and remedial service offerings.

The Distribution segment reported record revenues of $760.9 million, evidencing 24 percent sequential and 36 percent year-on-year top-line growth. The sequential revenue improvement was primarily attributable to the energy sector operations which grew 30 percent over the June 2008 quarter. The period-to-period increase reflects strong demand for line pipe and other operating supplies associated with increased activity and new infrastructure investment in the U.S. market and, to a lesser extent, the seasonal drilling recovery in Canada which favorably impacted the level of drilling and completion activity.