Halliburton considering sale or spinoff of subsidiary KBR

Unit under investigation concerning Iraq contracts

September 24, 2004|By BLOOMBERG NEWS

Halliburton Co. said yesterday that it might shed the subsidiary being investigated for possible overcharges on a huge military services contract in Iraq because the business is a drag on its share price and profit.

A sale or spinoff of KBR would end Halliburton's business in Iraq, where at least 45 employees supporting U.S. troops have been killed. Iraq contracts worth as much as $18.6 billion have made Halliburton and its former chief executive, Vice President Dick Cheney, a target for criticism by Democrats, including presidential candidate John Kerry.

All or part of the unit, previously known as Kellogg Brown & Root, would be sold or spun off unless Halliburton's stock ceased to be undervalued relative to shares of other oilfield contractors, Chief Executive Officer David J. Lesar told analysts and investors yesterday at a meeting in Houston. He said KBR could be shed through a sale of shares to the public.

Lesar, 51, said the sale could take place once Halliburton gets final approval of a $4.2 billion asbestos settlement for KBR and another unit that was in bankruptcy reorganization.

The unit has had losses for three straight years.

"With the problems they've had with KBR, it's not surprising" Halliburton would seek to sell the business, said Barry Borak, director of energy research at Foresight Research Solutions LLC in New York.

Halliburton has said that the engineering and construction unit's profit from feeding and housing U.S. troops in Iraq accounts for about 2 percent of the contract's revenue. The Pentagon said last month that it might withhold 15 percent of payments on the KBR contract because of inadequate documentation of costs.

KBR's Iraq contracts, which helped Halliburton surpass Schlumberger as the world's largest oil-services company by sales last year, have become fodder for Democrats criticizing the Bush administration.

On Sept. 17, Kerry accused the company of profiting in Iraq "at the expense of American troops."

Halliburton's headaches related to KBR extend beyond public criticism. A delayed KBR project to help develop two oilfields off the coast of Brazil had a $200 million loss in the second quarter. KBR also is partner in a Nigerian joint venture that is being investigated by U.S. officials and a French magistrate for payments related to a $5 billion liquefied natural gas plant.

Separating from KBR would help Halliburton boost profit margins and boost its stock price, said Robert MacKenzie, an analyst at Friedman, Billings, Ramsey & Co. who rates Halliburton shares "outperform" and doesn't own any.

Halliburton's stock trades at about 20 times the company's estimated 2005 earnings per share. New York-based Schlumberger is at about 27 times estimated earnings per share, and Baker Hughes is at 25 times.

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