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HALLIBURTON considers selling off KBR unit
HOUSTON
When Halliburton was awarded contracts worth more than $12 billion for work in Iraq, critics said that the company was using its political connections to reap big profits. But now, in a sign that those contracts are not providing the boon executives had expected from a subsidiary weighed down by other problems, Halliburton has said that it was considering a sale of the business.
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The unit, KBR, which provides military and oil field services, has been plagued by losses, investigations into its activities in Nigeria and Iran as well as sizable asbestos claims. Making matters worse, KBR's work in Iraq has not been as profitable as other activities and has contributed to a public relations nightmare for its parent. All of this has happened while KBR is seeking to emerge from bankruptcy protection.
The announcement Thursday by Halliburton, the military contractor and oil services company, reflected the extent to which KBR's problems have kept a lid on Halliburton's stock price and hindered its ambitions to benefit from elevated oil prices. In a meeting with investors, Halliburton's chief executive, David Lesar, said the company had become part of a "vicious campaign" of political attacks ahead of this year's presidential election.
Controversy is nothing new for the company that was run by Vice President Dick Cheney for five years until 2000. KBR has long been associated with the coziness of politics and business in the oil industry in Texas, and has become a symbol of the reach of American energy conglomerates into many politically unsavory areas around the world.
Still, Halliburton has been unable to avoid becoming a lightning rod for complaints about American corporations profiting from the war in Iraq, since it became known in March 2003 that the company had been awarded the largest contracts in that country.
Lesar, in a sign of the exasperation of Halliburton's management with such criticism, said that the company's employees "don't deserve to have their jobs threatened for political gain."
Among Halliburton's most pressing concerns are investigations by French, American and Nigerian officials into KBR's role in a payments scheme for its work on a liquefied natural gas project in Nigeria in the 1990s when Cheney was Halliburton's chief executive.
The Department of Justice is also investigating Halliburton's activities in Iran, where it operates through a loophole allowing it to remain there despite American sanctions limiting business in that country.
"All of the issues and attention and criticism of Halliburton has been on the KBR side," said Michael Urban, an analyst at Deutsche Bank who listened to Lesar's comments in Houston. "That's probably why the market values KBR at about zero and why it should go. It's about time."
Halliburton said it would separate KBR through a sale, spinoff or initial public offering, options that might allow Halliburton to retain some degree of control over KBR. Any eventual separation would depend on whether the unit continued to lag behind its peers in stock price assessments, it said.
In the second quarter, KBR reported an operating loss of $277 million compared with a loss of $148 million a year earlier, on revenue of $3.1 billion. Halliburton's other main line of business, its Energy Services Group, posted operating income in that quarter of $271 million, up from $36 million a year earlier, on revenue of $1.9 billion. Analysts say KBR has dragged down the shares of its parent. As recently as 2000, Halliburton's shares traded in the $50s.
On Thursday, its shares climbed 18 cents to close at $32.24, after investors reacted to Lesar's comments.
Separating KBR from Halliburton has been advocated by many of the company's investors for some time. The profit margins for KBR's work in Iraq are significantly lower than those at other parts of Halliburton.
KBR's liabilities from asbestos claims, a legacy of a deal overseen by Cheney when he led the company, have also weighed on Halliburton's stock price. Earlier this year, Halliburton won court approval of an asbestos settlement plan that would allow KBR to emerge from bankruptcy protection.
Investors have also grown uncomfortable with cost overruns at a project for Brazil's national oil company.
Then there is the continued criticism of Halliburton's connections to Cheney and its work in Iraq, which have led some investors to stay away from the company.
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