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You'd think asbestos-exposure verdicts totaling more than $130 million against Dallas-based Halliburton (HAL
) might have a negative impact on the oil-patch giant's stock. Think again. Since the latest Texas jury verdict in December, shares of Halliburton have rebounded by about 50%, to $13 a share, from a 52-week low of $8.70.
Driving the run-up: The company rushed forward with a plausible strategy to deal with the lawsuits. Plus, rumors spread that President Bush would propose limiting corporations' exposure to asbestos litigation in his State of the Union address. After all, Vice-President Dick Cheney used to be CEO at Halliburton. However, the State of the Union address came and went on Jan. 29 with no such proposal in it.
Still, with Halliburton trading at a mere 12 times the consensus estimate of 2002 earnings of $1.06 a share, should investors consider diving in with hopes of scooping up a bargain? Only if they have a long time horizon and a stomach for risk, analysts say.
SMALL CLAIMS IN COURT Halliburton argues that asbestos claims won't ruin the company's finances. Ole Slorer, who follows Halliburton for Morgan Stanley Dean Witter, agrees. He estimates that future asbestos claims against the company will be less than $1 billion, or $2.30 a share. That's well under Halliburton's insurance coverage for asbestos claims, which the company says is substantially more than $2 billion, or $4.60 a share.
Slorer also notes that the average cost per claim has come down significantly over the years, partially due to effective claims management. Plaintiffs began filing claims in 1976, but the cumulative average gross cost per claim (before insurance, but including legal defense costs) was down to $746 as of the end of 2001, compared with $2,231 in 1993, when Halliburton began compiling such figures, says Cedric Burgher, the company's vice-president for investor relations.
Still, despite the long odds against high-dollar judgments and Halliburton's aggressive litigation strategy, nothing is blocking further jury awards, and settlements could still be substantial. In addition to the Texas rulings in December, a Mississippi jury handed down a $21.3 million verdict against Halliburton in October.
APPEALING. Certainly, the recent jury awards are unusually high for asbestos lawsuits, legal experts say, as only a handful of claims filed ever reach trial. "These large jury verdicts are of concern, but we don't think they'll hold up on appeal," says Burgher. Still, the possibility poses a risk to the oil company's near-term stock performance.
In December, CEO David J. Lesar said Halliburton would appeal the rulings and announced that the company has more than $2 billion in liability insurance. Since then, the company has focused on strengthening its balance sheet by raising cash and reducing debt. Halliburton masterfully deflated rumors in early January that it intends to file for bankruptcy because of exposure to asbestos litigation -- a fate several other industrial companies weren't able to escape last year.
In addition to managing asbestos lawsuits, Halliburton has been busy growing into the world's top provider of oil-field services, ahead of another global player, Schlumberger (SLB
). With operations in more than 120 countries, Halliburton offers a variety of products and services, including those related to drilling for oil and gas. Oil-field operations account for roughly two-thirds of the company's revenues.
Halliburton also runs a vast engineering and construction business, which makes up the remaining third of revenues. Past projects included natural-gas processing facilities and chemical plants, as well as prisons, stadiums, and highways.
MIXED SIGNALS. In the fourth quarter, Halliburton recorded net income of $139 million, or 32 cents a share, on revenue of $3.17 billion, compared with $5 million, or 1 cent per share, on $3.19 billion in revenue a year earlier. Strong gains in its engineering and construction business were offset by reduced drilling activity in North America as commodity prices fell. When prices for crude oil and natural gas drop, oil explorers and producers scale back on drilling activity, which hurts companies like Halliburton.
Despite all of Halliburton's efforts to highlight its earnings, investors get shaky when juries approve multimillion-dollar awards against companies. Halliburton has been wrestling with asbestos claims for 25 years. It owns or once owned subsidiaries that manufactured or sold products containing asbestos fibers before the general discontinuation of the material in the late 1970s. Known for their flexibility and resistance to heat, products containing asbestos eventually were linked to cancer, among other ailments.
Most of Halliburton's current asbestos troubles stem from its $7.7 billion acquisition of Dresser Industries in 1998, a deal supervised by then-CEO Cheney. Dresser products that contained asbestos were used in boiler rooms, refineries, chemical plants, and other broad industrial applications. (Halliburton is suing Harbison-Walker Refractories, a former Dresser unit, in an attempt to force the company to continue to assume responsibility for some claims.)
THE BIG QUESTION. While rating agency Moody's Investors Service in late January cut its long-term credit rating for Halliburton two notches, to Baa2 from A3, citing the company's share price and reduced financial flexibility, Halliburton's debt is still investment-grade. And the company's balance sheet is strong. At the end of 2001, Halliburton had $2.8 billion in working capital and $290 million in cash. It had $700 million in undrawn committed credit and over the past year has reduced its total debt-to-capital ratio to 24%, from 40%. That's more in line with its energy peers. Standard & Poor's recently reaffirmed Halliburton's long-term credit rating at A-.
Most analysts think this oil company can deal effectively with its asbestos woes. And yes, the stock is cheap. Halliburton shares have shed nearly two-thirds of their value from a 52-week high of $49.25 in May, 2001. "The market is discounting a far greater liability for Halliburton from asbestos [litigation] than is most likely ever going to be realized by the company," says Arvind Sanger, an analyst who covers Halliburton for Deutsche Bank. "I don't think they will pay present-value terms."
Yet the uncertainty surrounding Halliburton's asbestos litigation remains a significant question mark. Investors spooked by such liabilities recently dumped shares of Dow Chemical (DOW
) and 3M (MMM
), sending their values tumbling. For some, Halliburton might hold some sway for the long haul. But until the asbestos concerns settle down, the possibility of more large jury awards and out-of-court settlements could make this stock too hot to handle.
Wee covers financial markets for BusinessWeek Online in New York Edited by Beth Belton
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Copyright 2002, Bloomberg L.P.
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