Melissa Davis

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Halliburton Shrugs Off Bribe Probe

Melissa Davis

New questions about Halliburton (HAL Quote) keep bubbling to the surface.

The Securities and Exchange Commission has launched a formal investigation of the company for possible violation of antibribery laws. The probe focuses on payments made years ago in Nigeria by Kellogg Brown & Root, a division that -- thanks to controversial contracts in Iraq -- currently generates the bulk of Halliburton's revenue.

Separately, a congressional watchdog is making fresh suggestions that Vice President Dick Cheney's office may have improperly favored Halliburton for multibillion-dollar oil projects in Iraq. Cheney spent five years as Halliburton's CEO before joining President Bush's campaign in 2000.

The company's stock, down 17 cents to $19.02 on Monday, barely registered the latest wave of headlines.

"The impact of these investigations on what analysts think the company is worth is pretty small," explained Peter Cohan, a Massachusetts investment strategist with no position in the stock. "That's sort of the bottom line: None of these things matter very much."

Happy Jack

Halliburton disclosed the new SEC probe when the market was closed in observation of the death of former President Ronald Reagan on Friday. The company said that both the SEC and the Department of Justice -- together with a French magistrate -- already had been questioning payments related to the Nigerian natural gas project before the regulatory probe turned formal.

Government officials "have met with Halliburton to discuss these matters and have asked Halliburton for cooperation and access to information in reviewing these matters in light of the requirements of the United States Foreign Corrupt Practices Act," the company stated. "While Halliburton does not believe it has violated the [act], Halliburton's own internal investigation of these matters is ongoing, and there can be no assurance that government authorities would not conclude otherwise."

The Wall Street Journal elaborated on Monday. The newspaper reported that federal regulators are scrutinizing more than $100 million in payments -- including $5 million to a former KBR executive -- made in the 1990s by a joint venture partially owned by KBR. Authorities are seeking to determine whether the payments were bribes, offered to win contracts in Nigeria, or legitimate business expenses.

The Journal specifically highlighted millions of dollars that may have wound up in a Swiss bank account controlled by former KBR Chairman Albert J. "Jack" Stanley. Stanley retired from Halliburton in December, the Journal stated, but continues to serve as a consultant for the company. The newspaper also reported that French officials remain focused on $180 million in payments made by KBR to a company run by Jeffrey Tesler, whom Halliburton has portrayed as a legitimate business agent who collected a standard 2% fee for securing the multibillion-dollar natural gas project.

"As anyone who does business in Nigeria knows, one needs an agent in Nigeria," Halliburton CFO Christopher Gaut told investors last week, according the Journal report.

News of the formal SEC probe came just days after Democrat Henry Waxman of California, ranking minority member of the House Committee on Government Reform, demanded fresh information about Cheney's relationship with Halliburton. In a letter dated Sunday, Waxman asked the vice president for any communication from his office related to the company's big contract -- awarded outside the competitive bidding process -- to restore and operate Iraq's lucrative oil business.

Waxman sent his eight-page letter after a briefing last week that, the lawmaker believes, offers new evidence that Cheney's office was more involved in the Halliburton contract than the vice president has claimed. He pointed to information provided by Michael Mobbs, a special adviser to the undersecretary of defense for policy, and an email from the Army Corps of Engineers mentioning "coordinated" activity by the vice president's office, in an effort to support his theory.

"Mr. Mobbs informed us that he briefed your chief of staff, Mr. [Lewis] Libby, and other senior White House and Administration officials about the proposal to award the contingency contract to Halliburton without giving other companies an opportunity to compete," Waxman wrote. "According to Mr. Mobbs, this briefing occurred before the contract was awarded and was provided so that Mr. Libby and the other officials would have an opportunity to object."

But government authorities failed to intervene, Waxman wrote, despite questions raised about the legality of the contract by both the Army Materiel Command and the General Accounting Office. Like many Democrats, Waxman is challenging the process that allowed Halliburton to secure the big Iraqi contract -- valued at $7 billion -- without competition from its peers.

Seasonality

Wall Street appears far less concerned. At least five major analysts have upgraded Halliburton's stock to the equivalent of buy since last fall. And even those with hold recommendations cite reasons, outside government probes, for their more cautious view.

Prudential analyst Grant Borbridge simply believes that positive developments -- including an asbestos settlement and future earnings growth -- already have been figured into Halliburton's stock price. Meanwhile, SIG Susquehanna analyst Kevin Wood believes that oil service firms are good long-term investments. However, he suspects that Halliburton and two of its competitors -- Baker Hughes (BHI Quote) and Weatherford International (WFT Quote) -- could be "stuck in a negative trading pattern" right now due to fears about falling oil prices and the historically weak seasonal performance of oil service stocks in general.

Cohan, for one, is convinced that analysts will remain focused on Halliburton's fundamentals -- rather than its negative headlines -- as long as Cheney stays in office. He sees the potential for downside in Halliburton's shares, however, if the vice president gets replaced.

Cohan feels there is a possibility that Bush could choose a running mate without Cheney's Halliburton baggage or that the president could simply lose the November election altogether. If so, he says, the Halliburton investigations could start to heat up.

"One of the things that's keeping a floor under the stock is the current structure in the White House," Cohan said. "As long as Cheney is vice president, I would expect the downside for Halliburton investors would be limited."

In the meantime, Cohan says, the constant barrage of headlines seems to have helped -- rather than hurt -- Halliburton's shares. He points out that the stock has tripled off its 2002 lows and has risen about 50% since the start of the Iraqi war alone.

Cohan suspects that Halliburton's business in Iraq has clearly helped. But he still sees the potential for backlash in the future.

"Stock prices are not just a function of earnings potential," he reminded. "Particularly in the short term, they are a function of perception -- which would be hurt if Cheney were no longer in the White House" and a "more thorough and aggressive investigation of Halliburton" resulted.