Pentagon Audit Takes Aim at Halliburton

Even before the latest audit, the government was questioning whether KBR may have charged too much to feed U.S. soldiers and obtain fuel from Kuwait. But Wall Street analysts have largely downplayed the allegations and maintained their bullish stand on the stock.

Indeed, UBS analyst James Stone was quick to defend the company on Wednesday. He called the new government complaints "impractical" and went on to say that Halliburton enjoys continued support from its actual customer in Iraq, the Army Material Command. Thus, he dismissed the latest headlines as little more than "the same old song."

Meanwhile, Wachovia analyst Brad Handler on Wednesday initiated coverage of Halliburton with an outperform rating even as news of the Pentagon audit broke. Handler listed negative headlines as the "obvious" risk to his thesis. But he is nevertheless convinced that Halliburton will weather the storm and generate strong returns for its investors in the end.

"Behind the headline smoke, we see little financial fire," Handler wrote on Wednesday. "We have found KBR's rebuttals to accusations levied at it convincing."

Handler instead directed investors to focus on Halliburton's energy services business. He pointed to Halliburton as the leader in a pressure pumping business that, due to tightening capacity for pumping equipment in the U.S., could enjoy a nice pop. He also noted that Halliburton is a "relatively quiet No. 2" service provider, trailing only Schlumberger (SLB Quote), in the expanding oil markets of both Mexico and Russia. He even offered a positive outlook for the company's troubled KBR unit.

"We expect the headlines surrounding Halliburton to subside" after November's election, he explained. "And we continue to believe that KBR's Iraq work should yield some upside starting in Q4 2004 and into 2005."

But Gimme Credit analyst Carol Levenson is far more cautious. She pointed to KBR -- ncluding its billing disputes with the government -- as a serious threat to the company overall.

She insisted that "Halliburton's legendary financial strength has diminished markedly." And she continues to steer investors away from the company's debt.

"The company has some crucial liquidity maneuvers to negotiate to extend its expiring credit facility and obtain an additional securitization facility for KBR's government receivables," she wrote. "We don't believe current spreads adequately compensate investors for these risks."