Halliburton seen spinning off KBR
Feb. 27, 2004
By Lisa Sanders, CBS.MarketWatch.com###
DALLAS (CBS.MW) - While the probe into Halliburton's Middle East business practices continues to gather steam, investors are largely shrugging it off.
The Houston-based oil-services company's shares actually rose 2 cents to $31.04 Tuesday after the Pentagon said it opened a criminal probe of Halliburton on Jan. 29. Defense Department auditors found subsidiary Kellogg, Brown & Root may have overcharged the U.S. government as much as $61 million for gasoline delivered to Iraq via a Kuwaiti subcontractor.
Halliburton may be exploring either a spinoff of its KBR unit or the sale of parts of KBR to escape the political heat and maximize shareholder value, analysts say. In 2002, the company separated its Energy Services Group and KBR, its engineering and construction group, into two businesses. See archived story.
Wall Street considers the oilfield-services division the crown jewel of Halliburton.
"Are Wall Streeters buying Halliburton because of the engineering and construction group or the energy-services group? It's clearly because of the energy services group," Fulcrum Global Partners Wesley Maat said. "My preference would be to see them split into two companies."
Halliburton spokeswoman Wendy Hall said via e-mail that the company is not contemplating "any significant change in our business at this time. We are concentrating on resolving the asbestos liability and strengthening our franchises in Halliburton's Energy Services Group and KBR." Halliburton is trying finalize a roughly $4 billion settlement of workers' asbestos-injury claims.
Put on notice
In a Feb. 20 filing with the Securities and Exchange Commission, Halliburton warned investors that allegations regarding its government-services work could be a risk to the business and its operations. Halliburton acknowledged some of the scrutiny owes to Vice President Dick Cheney formerly being its chief executive.
"In part, because of the heightened level of scrutiny under which we operate, audit issues between us and government auditors...are more likely to arise, are more likely to become public and may be more difficult to resolve," the company stated in the SEC filing.
"As a result, our ability to secure future government contracts business or renewals of current government contracts business in the Middle East or elsewhere could be adversely affected."
Jim Wicklund, an analyst at Banc of America Securities, said Halliburton might be thinking of selling the government services division of KBR.
"They had no intention of selling (government services) six months ago, but they're getting so much flack for it," he said. "They are not as solidly dedicated to keeping government contracts because of all the political headlines."
Wicklund said that Halliburton isn't booking any reserves to cover the allegations of overcharging because the company believes the government will pay for the services.
"If the U.S. decides not to pay them, they have mirror contracts with their suppliers," he said. Halliburton "can tell their suppliers they're not paying because they're not getting paid either."
Maat said he sees "no compelling reason" to keep the engineering and construction business, given that oilfield services produces much higher margins. In the third and fourth quarters of last year, oilfield services' margins topped 13 percent. Comparatively, margins from Iraqi work were 3.8 percent in the third quarter and 2 percent in the fourth quarter.
And the beleaguered unit doesn't provide the earnings balance it used to, he said.
"Historically, engineering and construction services is a business that's counter-cyclical to oil services, which has helped steady earnings," he said. "But over the past decade, that has been less so, and it's added to Halliburton's earnings volatility at times."
Shareholders would benefit, Maat said, adding Halliburton has not commented "about their commitment (to separate KBR) or the potential timing."
"It's clearly crossed the mind of Wall Street -- having Halliburton as a pure oil-services play like Baker Hughes (BHI: news, chart, profile) and now Schlumberger (SLB: news, chart, profile)," Maat said.
Both Wicklund and Stifel Nicolaus analyst Gary Russell say that Halliburton wouldn't do anything with KBR until the asbestos settlement is resolved. That's expected to happen by mid-year.
"They should get rid of it and they will, all in due time," Russell said. "Eventually, investors will force the sale. The CEO will have little to say in the matter, but I'm sure he will agree. I hope they keep the liquefied natural gas piece because it has the most growth prospects."
Russell said that shares haven't reacted to what's happening in Washington because "most of the allegations...are either untrue or very much baseless. Most sophisticated investors are aware of that and understand that."
On Tuesday, after news of the criminal investigation, Deutsche Bank Securities analyst Michael Urban recommended that investors buy Halliburton shares on any weakness.
"Allegations such as these are likely to continue to surface from time to time," Urban wrote in a research report. "We believe the market will continue to largely shrug them off as politically motivated."
Lisa Sanders is a Dallas-based reporter for CBS.MarketWatch.com.