By Andrew Park
Oil-services giant Halliburton is getting hammered almost daily, from Democratic stump speeches alleging it's the beneficiary of Bush Administration cronyism to newspaper headlines accusing it of bilking the military in Iraq for everything from gasoline to mess-hall meals. Even Doonesbury is piling on: In a recent strip, a U.S. soldier orders a "Halliburger with cheese." Price: $30.
Yet leave it to bullish investors to look beyond the latest blows to this already controversial company. Since the beginning of the year, Halliburton (HAL ) shares are up $5.18, or 19.9%, to close at $31.18 on Feb. 19, compared to a 3.2% rise in the Standard & Poor's 500-stock index. And some believe Halliburton has room to grow: 19 of 27 analysts surveyed rate the stock a buy or a strong buy, with a median price target of $35.50 a share. Says S&P's John Kartsonas: "Bad publicity is not what drives earnings or a stock price."
Investors are focused on Halliburton's business of helping find and produce energy, which last year accounted for 43% of the Houston company's sales and 100% of its operating income. With oil prices at $35 a barrel and optimism about a global economic recovery running high, Wall Street has rediscovered names like Halliburton, Schlumberger (SLB ), Baker Hughes (BHI ), and BJ Services (BJS ). The Philadelphia Oil Services Index (^OSX ) has risen 27% since bottoming out in November and underperforming the market in 2003.
PROFITING FROM UNCERTAINTY.
Longer term, the outlook appears even more promising. While commodity prices aren't likely to remain in the stratosphere –- Cambridge Energy Research Associates predicts the average price of West Texas crude to fall to $29 a barrel this year and $26.25 in 2005 –- the oil industry should continue to benefit from jitters about geopolitical threats to supplies and price discipline on the part of producers. On Feb. 10, OPEC voted to cut output quotas come Apr. 1, indicating a desire to avoid overproduction and keep prices strong.
Moreover, optimistic energy outfits are raising capital spending at least 5% to 7% this year, which bodes well for services companies, says Kartsonas. Much of that spending will go toward increasing production in overseas markets (where Halliburton has a solid presence) and boosting U.S. natural gas supply, which fell 3% in the fourth quarter compared to the year before.
At El Paso Corp. (EP ), estimated gas reserves have been slashed 41%, and at Royal Dutch/Shell (RD ), they've been cut 20%. "Things look damn good," says Marshall Adkins, an oil-services analyst with Raymond James & Associates in Houston who does not cover Halliburton.
Halliburton looks especially good to some as it inches closer to resolving its massive asbestos liability, which it inherited in the 1998 acquisition of Dresser Industries. On Feb. 11, a federal judge in Pittsburgh threw out a motion from insurers that sought to dismiss Halliburton's Chapter 11 reorganization plans for several of its subsidiaries.
The plans are the linchpin of Halliburton's proposed $4 billion global settlement with asbestos plaintiffs. The deal, which could be complete by yearend, would shield Halliburton from future liability and could free its shares to trade even higher, says Kartsonas. "People were afraid of how much Halliburton would have to pay," he says. "I think investors are [now] more comfortable at putting some money in Halliburton."
Still, there's those nasty headlines. Ever since the last Presidential campaign, Halliburton's connections with Vice-President Dick Cheney, who served as CEO from 1995 to 2000, have raised eyebrows. With Halliburton taking a major role in the U.S. operations in Iraq last year, allegations of favoritism and poor oversight have mounted (see BW Online, 2/20/04, "Halliburton's Rising Cost for Bush").
AUDITS AND INVESTIGATIONS.
First came complaints about Halliburton's no-bid contract to help rebuild Iraq's oil industry, worth more than $2 billion. Then came claims from the Defense Dept. that Halliburton may have overcharged it by $61 million for delivering fuel to Iraq.
A wider audit found Halliburton also may have overcharged for food service for U.S. troops. Halliburton denies wrongdoing, but it's no longer operating the fuel-delivery contract, and this month it suspended bills for food service worth some $174.5 million pending an investigation.
It doesn't end there: Halliburton also recently admitted that two employees took $6.3 million worth of kickbacks in connection with work in Iraq, which it immediately repaid. And it's involved in a Justice Dept. probe of bribery allegations related to a natural gas plant being built in Nigeria.
"WHAT WE KNOW."
The negative attention has gotten so bad that Halliburton just launched a new TV commercial featuring CEO David Lesar that it hopes will rebut the attacks, which it calls politically motivated. "We're serving the troops because of what we know, not who we know," Lesar says twice during the ad.
Investors are likely to stick with Halliburton unless the problems continue to mount, says Stephen Gengaro, an analyst with Jeffries & Co. "Any of the numbers we've seen are, in the grand scheme of things, not all that meaningful," he says.
Ironically, the arm of Halliburton generating most of the heat, its engineering and construction subsidiary Kellogg Brown & Root, is the one that it might be better off without. While KBR has landed more than $5 billion in contracts in Iraq, helping Halliburton boost revenues 63% during the fourth quarter, its 2.2% profit margin badly trails the company's 5.5% average.
Halliburton says it has no plans to spin off or sell KBR, but some analysts say its shares would perform better minus the unit. "Over time, a separation of the two businesses would create more shareholder value," says Gengaro. And that, not happier headlines, is what Halliburton investors seem to care most about.
Park is a correspondent in BusinessWeek's Dallas bureau
Edited by Beth Belton