A recent trio of asbestos-related verdicts may be enough to push Halliburton (HAL - Get Report) into a financial black hole. And, while few other oil service companies have Halliburton's potential level of exposure, the fear of costly litigation could be enough to push investors away from the sector.
Last Wednesday, a Baltimore jury verdict saddled Halliburton with $30 million in additional asbestos liability. While that alone may not seem terribly significant, as $30 million is pocket change for the company, the continued jury verdicts against the company are a real threat. Including the Baltimore case, Halliburton subsidiaries have lost three verdicts in three months, with liability pushing $125 million.
"Thirty million dollars, in the scope of things, is nothing," says Dan Pickering, director of energy research at Simmons & Co., a Houston energy investment firm, and a member of the TSC Energy Roundtable. "It's the data point and what it means that people are reacting to."
Halliburton shares lost 43% of their value Friday to close at $12, as news of the Baltimore verdict made the rounds.
The stock slips on news of the verdict
Asbestos litigation has already forced 25 U.S. companies into bankruptcy. More than 140,000 lawsuits have been filed, and surveys suggest the rate of filings will continue to increase for the next decade. Halliburton faces hundreds of thousands of claims with no way to estimate how many could potentially go to trial.
With such uncertainty and potential liability ahead, some argue predicting the future of Halliburton's shares is next to impossible. "There is too much uncertainty for a correct valuation to be determined," says Jim Wicklund, oil field services analyst at Banc of America Securities.
Halliburton maintains that the trial courts erred, and the company remains confident it will win on appeal. Management continues to say Halliburton's asbestos liability is under control. In fact, in an early Monday conference call, Halliburton management attempted to soothe nerves by reassuring investors that liquidity was not a problem and that they remain unconcerned about large out-of-pocket payments from asbestos liability. But most pundits say that's crazy talk.
"This is the scenario we worried about," says Pickering. "The company goes and says everything will be OK, and the Street sucks it up. And then the other shoe drops."
If the history of other companies burdened with such liability is any guide, even an asbestos jacket couldn't keep Halliburton from going up in flames if liability continues to mount.
"These verdicts will continue to pile up, and they could water-torture this company to death," says Bryan Dutt, principal and portfolio manager at Ironman Energy Capital and a member of the
Energy Roundtable. "Fair or not, the only reasonable conclusion is Chapter 11."
Fire and Rain
Even some fervent Halliburton bulls have turned pessimistic in the wake of last week's Baltimore verdict. UBS Warburg analyst James Stone, who earlier this year dismissed the asbestos threat as a mere irritant, lowered his rating on the stock Friday from strong buy to hold, citing asbestos liability as a significant threat to the company.
"If only 1% of cases resulted in jury verdicts of a similar magnitude and the awards were upheld at the appellate level, the future liability would be much greater than our previous expectations," Stone told clients Friday. If liability increases in that fashion, it "could cause the company to significantly increase its provisions and perhaps strain its future liquidity."
As Halliburton management attempted to soothe nerves on Monday morning's conference call, the stock may partially recover from Friday's drubbing. For most analysts, that would be a chance to further reduce positions. "If you look at other companies that have faced a similar asbestos situation, you don't see a sustained rebound," says Pickering. "The stock could easily be 10% to 20% lower from here without other news. And the next verdict will make it even worse."
Some still argue that Halliburton's core oil service business continues to lead the industry. While that may be true, it now seems irrelevant.
"This shackles Halliburton and its solid core business," says Pickering. "Right now, the direction of the business doesn't matter. The market has put a tight collar around the company's neck."
That suggests Halliburton isn't a place to play in the oil patch. "While the stock heavily discounts Halliburton's asbestos exposure, the specter of lawsuits spiraling out of control is likely to adversely impact the stock for the foreseeable future," Salomon Smith Barney oil field service analyst Geoff Kieburtz told clients Friday, when he downgraded the stock from buy to neutral.
On the Horizon
While the direct carnage in the oil patch appears limited to Halliburton, the company's trials may punish other players in the sector.
, a deepwater services company that owns offshore barges. Horizon stock was off more than 15% Friday on news that two employees filed an asbestos-related claim. While suffering no injury or illness, they claim "unsafe working conditions" as a result of possible exposure.
Many offshore vessels, especially barges, that were built before 1977 are likely to contain some asbestos. Horizon is currently assessing air quality on its vessels and has found no asbestos exposure to date.
"It appears the claim from the two individuals is about as legitimate as claiming unsafe offshore working conditions based upon the increased risk of drowning when one works offshore," notes Raymond James oil service analyst Jim Rollyson. "Unfortunately, the stench surrounding the Halliburton and McDermott asbestos liabilities is likely to drag down Horizon and other offshore construction companies over the near term." A McDermott subsidiary, Babcock & Wilcox, sought bankruptcy protection in February 2000 as a result of mounting asbestos claims.
If you want to play this sector, you should recognize that possibility. "If the working-conditions claim gains any credibility, it could change the nature of investing in the sector," says Dutt. "The nature of the oil services business makes it a hazardous business."
From the perspective of Halliburton shareholders, it's a hazardous place to invest, too.