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Halliburton: Halfway Home?


Halliburton Co. (HAL) has long been the kind of place where powerful people hung their hats, sometimes using their influence to help the oil-services giant in its quest for lucrative contracts. Its Brown & Root engineering unit was famous for flying Lyndon B. Johnson around Texas in its corporate planes. President George W. Bush's father, George H.W. Bush, once worked as an equipment clerk at Dresser Industries, which Halliburton bought in 1998. And, most famously, Dick Cheney filled the CEO job between gigs as Defense Secretary in Bush I and Vice-President in the current Bush Administration.

Lately all that political juice seemed to be of little help, however. Nasty headlines and angry shareholder suits thrust Halliburton into the controversy over corporate bookkeeping, as former Halliburton execs alleged that the Houston company cooked its books while Cheney was boss. The company says it did nothing wrong, but the allegations led to a Securities & Exchange Commission inquiry. Then there was a far more costly problem: an estimated 328,000 pending claims from workers exposed to asbestos.

Amid the gloom, Halliburton needed some good news--and now it appears tantalizingly close to getting it. As of Dec. 11, Halliburton was considering an offer from plaintiffs' lawyers that would have it pay $4.2 billion to settle all outstanding asbestos claims and shield it from any future suits, according to Dallas attorney Peter Kraus, who represents plaintiffs who have sued Halliburton. "There are still substantial issues to be worked out," says Kraus--including the ultimate value of the deal and the mixture of cash, stock, and insurance coverage that would be used to fund the settlement.

Halliburton is not out of the woods yet. It still faces the accounting questions, for one. And the company's basic business of providing sophisticated drilling services and equipment to Big Oil remains in the dumps. Through the first nine months of 2002, Halliburton lost $382 million, vs. a $670 million profit in 2001. Full-year losses are pegged at $280 million compared with a profit of $809 million in 2001, on 6% lower sales of $12.2 billion, says UBS Warburg analyst James H. Stone.

Still, an asbestos settlement would be a huge victory for CEO David J. Lesar. Following four costly jury awards in asbestos suits a year earlier, Halliburton's credit rating was cut, and the company had to fend off rumors of imminent bankruptcy. Halliburton had aggressively fought asbestos lawsuits for years, even before inheriting more than 200,000 claims through its $7.7 billion purchase of Dresser, which sold industrial equipment using the fire-retardant insulation. But the fear of more outsize jury verdicts appears to have driven the likely settlement.

To pay for it, Halliburton may have to discard one of its crown jewels, the engineering-and-construction unit now known as Kellogg Brown & Root (KBR), which built the Johnson Space Center in Houston for NASA and put out the Kuwaiti oil fires after the gulf war. Kurt Hallead, an analyst at RBC Capital Markets, says that KBR could be restructured through a bankruptcy filing and placed in a trust, with its proceeds helping to fund settlement costs over the next 15 to 20 years. Alternately, KBR could be sold, with the proceeds used for the same purpose. True, KBR is in bad shape right now. Demand has stalled for big oil-field developments, and annual sales, at $5.2 billion, are 20% less than in 1998. But KBR should recover when the energy business snaps back. Analysts say it could contribute $1 billion to a settlement trust.

Even before word trickled out of the settlement offer, investors were pushing the stock up--to about $21, from a 52-week low of $9 in July--on anticipation that the worst was over. "Asbestos was way overdone," says John K. Schneider, whose PIMCO Renaissance Fund added 1.6 million shares this fall, even though it later sold some. Lesar, who was not available to talk to BusinessWeek for this article, clearly hopes the recent spate of Halliburton-bashing is coming to an end. "I've seen words like `inappropriate,' `aggressive,' and `fraudulent' in discussing Halliburton and its management," he said in a July 24 conference call with analysts. "Get real."

But getting Halliburton back on track will take more than deft legal footwork. The problem: Oil services are hurting, the economy is in low gear, North American gas production is stalled, and some fear that oil could fall below $20 per barrel. So there is little incentive for Halliburton's customers to buy drill bits or pumping gear to boost output. A war in Iraq could disrupt supplies--but analysts say this would not bring a frenzied search for new oil. Instead, existing sources, such as Russia, would just pump more.

Lesar's recovery plan calls for chopping costs, selling noncore assets, and moving away from fixed-cost contracts, which contributed to this year's losses. Lesar has reorganized the company's eight business lines into two units, Engineering & Construction and Energy Services, cutting 1,600 jobs. Along with other cost-saving measures, the company expects to save $200 million a year. Halliburton is also retreating from risky offshore oil and gas business. While such projects carry bragging rights, most are done on a fixed-cost basis. Overruns are Halliburton's responsibility. Added costs at an offshore oil field in Brazil cost the company $119 million in the second quarter. Meanwhile, Halliburton is selling two offshore construction units, Halliburton Subsea and European Marine Contractors. All told, it expects asset sales to bring in $500 million.

Also still hanging over Halliburton is the SEC probe. Halliburton made an accounting change in late 1998 that allowed it to book certain revenues before clients had actually paid up. But not until 2000 did it reveal to investors that it had counted $132 million in such revenues. The company has said that such a small amount didn't need to be disclosed. Accounting experts disagree. But because there are no signs of fraud, they expect Halliburton to walk away with a slap on the wrist.

Halliburton still has political clout--it's just not clear how much. Lawrence S. Eagleburger, Secretary of State under the first Bush, is a director. And with a history of landing government contracts, KBR could prosper if the U.S. has to rebuild in a post-war Iraq. But with a legal victory apparently close, it now appears that any recovery depends as much on Lesar's management skills as on any favors it can wring out of Washington. By Andrew Park in Dallas, with Lorraine Woellert in Washington


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