Melissa Davis

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Halliburton Fans Spy Opportunity in Iraq Crisis

Melissa Davis

As Iraq seethes with danger, big war contractor Halliburton HAL is attracting swarms of defenders -- on Wall Street.

Recent weeks have highlighted the huge risks facing civilians in the U.S.-led rebuilding push. Every day seems to bring terrorist attacks resulting in casualties or frightening near-misses.

Thirty Halliburton workers die. Another seven go missing. The company expresses sadness, even anger. But the war effort marches on, and the company -- which delivers mail, prepares meals and launders uniforms for U.S. soldiers -- must continue to do its part.

For the big Houston-based oil services outfit, that means training new recruits to join a burgeoning Iraq unit. For investors, it means focusing on Halliburton's opportunities to boost profits -- and recognizing that the most tragic losses never really drop to the bottom line.

Indeed, even as Iraqi expenses mount and safety threats grow, one expert sees little threat to Halliburton's financial well-being. David Edwards of Heron Capital Management believes that others -- including U.S. taxpayers -- will end up eating the soaring costs instead.

"They'll go back to the Pentagon and say: 'Pay us more money. We're clearly in danger over here,'" says Edwards, who owns stock in Halliburton and other oil service names. "A lot of the terrorism has relatively little economic impact on the companies."

Although flat at $29.76 Wednesday -- and down 9% from last month's 52-week high -- Halliburton shares have climbed some 42% over the past year.

Big Tent

Halliburton relies on more than 24,000 employees and contractors -- equal to roughly 25% of its global workforce -- to satisfy huge, and sometimes controversial, contracts with the federal government. In addition to supporting military logistics, Halliburton workers drive trucks and work to restore Iraq's valuable oil assets.

But sometimes, they also disappear -- or even die -- in the process.

"The world has been made aware of the threat in Iraq to civilian contractors supporting the troops and Iraqis only recently," says Wendy Hall, director of public relations at Halliburton. But "our employees were prepared from day one with the knowledge of the danger and the price that they could pay for their work in Iraq."

Halliburton hasn't disclosed just how much it pays its Iraq-based employees to compensate them for the huge risks they face. But the Associated Press this week said the company has offered workers $80,000 tax-free -- and up to 50% more with overtime pay -- to spend a year in the country.

And the costs hardly end there. Yet another news agency, London-based Reuters, recently said that more than half of all expenses for companies operating in Iraq stem from protecting and insuring their workers there. Indeed, Reuters went on to say, life insurance premiums for particularly high-risk workers nearly doubled just last week, reaching $16,000 annually for a $200,000 policy.

Headline Risks

Yet to be honest, oil service analysts have yet to really dwell on the dangers in Iraq.

They talk about risks, of course, especially those associated with headline-prone Halliburton. But they tend to view the sector -- like the country it is rebuilding -- as a place of opportunity. Oil prices are high. Iraq is like a plugged-up faucet that's finally starting to gush. So for big service companies such as Halliburton and Schlumberger SLB, business has rarely looked better.

Granted, Halliburton has attracted some pretty ugly headlines. Some accounts claim that the company robbed American taxpayers by overcharging for gas deliveries to Kuwait in an effort to collect more on "cost-plus" contracts. They say Halliburton billed the Army for meals it never actually served to U.S. soldiers. They also insist that Halliburton won lucrative contracts in Iraq because of its ties to Vice President Dick Cheney -- the company's former CEO -- and sometimes skirted competitive bidding requirements in the process.

In fact, one analyst acknowledges, Halliburton has even been accused of wasting money on monogrammed towels that in some cases cost seven times as much as ordinary ones. But the analyst, Gary Russell of Stifel Nicolaus, last week shot down every one of those common complaints as mere myths.

He says Halliburton contracted out the Kuwait fuel delivery project to the only bidder that qualified and, by shifting some of that business away from the firm into more affordable Turkey, actually saved taxpayers $164 million. He also viewed Halliburton's decision to bill for meals ordered -- rather than those actually delivered -- as perfectly justified.

"We consider it worth noting that estimating the required number of meals is no simple task," wrote Russell, who has an outperform rating on Halliburton's stock. "We would further guess that the soldiers involved would much rather KBR overestimate the number of meals that will need to be served upon any given day, rather than underestimate."

Russell also says Halliburton's early work in Iraq was performed under a pre-existing contract that should have never been rebid. Moreover, he says that Halliburton has since lost at least one contract to a more expensive bidder despite any old ties to Cheney.

He even explains away the expensive towels.

"It was thought that the use of labeled towels would stop, or at least deter, the stealing of towels by locals from its facilities in the Middle East," he wrote. But "we are not certain if the use of the monogrammed towels did, in fact, deter stealing."

Defensive End

Indeed, on Wall Street, Halliburton has plenty of defenders.

RBC analyst, Kurt Hallead last month, blamed "political sniping" for depressing the company's share price. He downplayed the probes now facing Halliburton as routine ones that have scored headlines only because of Cheney's past involvement with the company. And he, too, recommends the stock.

"After a careful review of the controversial issues related to Iraq, we are confident that Halliburton is unlikely to face any fines or penalties as a result of the recent government audits," Hallead wrote in March. "Halliburton appears to be attractively valued for large-cap oil service investors willing to stomach the periodic headline risk associated with the Iraq work."

SIG Susquehanna analyst, Kevin Wood, takes a similar stand on the company. He says the "sensational headlines [have] little substance." He believes that investors should buy the stock on dips. He also says they'll be getting KBR, a huge source of revenue, absolutely free.

That's because for all its headlines -- and its multibillion-dollar contracts -- KBR is viewed as rather insignificant in the eyes of many investors.

To begin, it is one of two Halliburton units pressured for years by asbestos liabilities. Secondly, it relies on huge volumes of Iraqi work that is discounted by long-term investors as temporary in nature.

Low Margins

Granted, Halliburton is expected to generate $9 billion in revenue -- or 40% of the companywide total -- from KBR's work in Iraq this year. But the Iraqi contracts are hardly as lucrative as all the headlines might suggest. On average, analysts estimate, KBR earns just a slender 2% profit margin for its work in the violent country.

Still, the Iraqi projects are expected to contribute around 24 cents a share, or 18% of annual profits, to Halliburton's bottom line this year and next, Russell calculates. And Wood, for one, sees plenty of value in the KBR unit -- even after excluding the temporary business in Iraq.

"Our appraised value estimate of KBR assets is $1.2 billion," Wood noted. "We believe a sale or spinoff of KBR could unlock this value, but only once the asbestos issue is resolved."

Halliburton is headed to court next month in pursuit of a final settlement that, if reached, could finally resolve the asbestos issue later this year. In the meantime, the company will continue to generate huge sales -- although smaller profits -- for its dangerous work in Iraq.

Just this week, in fact, the company reiterated its commitment to working in the war-ravaged country. And it continues to attract fresh recruits despite the escalating violence.

"During the training process, we spend most of our time giving recruits all the reasons they should not accept this job," Hall says. But "we continue to process several hundred personnel per week to deploy to the region."

Edwards is looking far beyond the risks faced by companies like Halliburton. For months, the financial adviser has spent two hours daily reading news reports -- including many from foreign sources -- about the war in Iraq. And even he is stunned by the recent hike in danger.

He now fears that soaring oil prices and rising security costs could take a toll on America overall.

"Two weeks ago, Iraq looked like it had calmed down. Then all of the sudden, it explodes," he says. "What if Iraq were to spin out of control? What would that mean for the economy?"