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Mesothelioma: A Killer
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NEWS ANALYSIS
By Stephanie Anderson Forest
A Thorn in Halliburton's Side
The Kellogg Brown & Root unit is putting a big hurt on the stock. Is a parting of the ways likely?
Chief Executive David J. Lesar might be right when he describes Halliburton Co. (HAL ) as "the most scrutinized company in the world." The $20 billion Houston giant has taken a public beating in the past couple of years over allegations that its Kellogg Brown & Root (KBR) engineering subsidiary overcharged the government on Iraq contracts and that some KBR executives bribed Nigerian officials, as well as for costly ongoing asbestos litigation. But in the eyes of some investors, the most damning thing about KBR is that it doesn't make any money.
For that reason, investors and analysts are betting that Halliburton will dump KBR within six months to a year. The unit is a poor fit with Halliburton's successful oil-services business, they say, and its weak performance explains why Halliburton trades at a significant discount to its peers. Says energy analyst Jason E. Putman at Victory Capital Management Inc., which holds some 2.3 million Halliburton shares: "KBR has become an albatross for them."
SYNERGY SHORTAGE. The 51-year-old Lesar, who took the reins at Halliburton when Dick Cheney stepped down to run for Vice-President in 2000, is being tight-lipped about KBR's fate. He was expected to address the issue at a Sept. 23 investor and analyst meeting, but some investors say that in private conversations Lesar has already admitted that he sees few synergies between Halliburton's oil-services business and KBR, its engineering and construction unit.
Lesar says that while the question has been posed to him in conversations with investors, he does not recall having such one-on-one chats. Through e-mail, he said: "After KBR emerges from bankruptcy and we resolve the asbestos issue, we will take a look at our entire business portfolio."
To many observers, shedding KBR should be a no-brainer. Its problems began long before the Iraq contracts made Halliburton a target of Bush Administration critics. KBR inherited the asbestos mess back in 1998, when Cheney bought Dresser Industries. As lawsuits piled up, KBR was forced to file a prepackaged bankruptcy last December. In July, Halliburton won court approval of its $4.2 billion asbestos settlement plan. The company now expects to emerge from reorganization in the fourth quarter with the asbestos headache gone.
COMPLEX AND DANGEROUS. Meanwhile, though, charges related to the litigation and losses on a huge project in Brazil led to a $292 million operating loss for KBR in the first half, on revenues of $6.8 billion. That comes on top of a full-year 2003 loss of $36 million, on revenues of $9.3 billion.
For all the headlines they've generated, many of KBR's $23 billion of government contracts only barely turn a profit. For instance, in the second quarter, KBR eked out an operating margin of 1.4% on its $1.7 billion of Iraq-related work. All told, KBR now has $11 billion of Iraq contracts. Margins are expected to fall even further in the near term, as a large oil field construction contract ends and work on smaller, less profitable job begins.
The work in Iraq has turned out to be far more complex, and dangerous, than the company envisioned. If KBR decides to bid for other contracts there, it will likely "jack the margins up significantly," Lesar said at a Lehman Brothers (LEH ) conference in New York on Sept. 7.
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SPREADING IT AROUND? Nevertheless, KBR remains under fire for charges that it has inflated its Iraq billing. The company has powerful enemies in Congress, including outspoken Representative Henry A. Waxman (D-Calif.), who has attacked Halliburton and its missteps in Iraq as "overcharging the taxpayers." Halliburton denies the allegations and, in fact, on Sept.
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