Updated from 7:03 a.m. EST
The Scrooge just paid a visit to Halliburton.
Securities and Exchange Commission
this week cut a
Christmas rally short by formalizing its investigation into the company's accounting practices. The SEC will now deepen its probe into the "cost-overrun" accounting techniques adopted in 1998, when Vice President Dick Cheney led Halliburton as chief executive.
News of the investigation sent Halliburton's stock tumbling 4.9% to $18.55, as the market lost some confidence in the stock. Prior to the SEC's action, investors had been celebrating Halliburton's big-ticket gift to them: simple peace of mind.
This week, Halliburton agreed to pay $4.1 billion -- just shy of thecompany's entire net worth -- to pay off hundreds of thousands of asbestosclaims. Analysts freely admitted the settlement looked expensive. Butthey weren't letting sticker shock dampen their enthusiasm.
"While 'price for peace' is high, we believe that it is worth it forHalliburton's shareholders," UBS Warburg wrote in a research note Thursday."The settlement will allow the company to bring finality to this insidiousand open-ended problem."
Still, UBS is among a crowd of research houses still trying todetermine just how much that peace will cost Halliburton shareholders. Tosatisfy all current and future asbestos claims, as proposed under thesettlement, Halliburton must deliver $2.8 billion in cash and issue $1.2billion worth of new stock as well as a note valued at up to $100 million.
Of course, Halliburton doesn't plan to bankroll the entire package. Thecompany expects insurance carriers to pitch in with reimbursements --perhaps worth billions of dollars -- at some point.
But the size and the timing of those payouts remain in question.
"The insurance companies have become increasingly vocal andintransigent with regard to funding of asbestos settlements," Deutsche Bankwrote Thursday. "We believe that insurers may attempt to place onerousdocumentation requirements for individual claimants."
Under its proposed settlement, Halliburton itself must fund the trustthat will pay out claims to asbestos plaintiffs. The company can then seekto recover as much money as possible from its insurance carriers. Italready has the right to recoup the first $2.3 billion paid out by thecarriers, although the next $700 million will go into the trust for futureasbestos victims. Halliburton can also attempt to collect further paymentsfrom the insurance companies, but some of them are already strugglingfinancially.
In the meantime, Halliburton's balance sheet and earnings are going totake a hit. The company has only $600 million to put toward the cashportion of its obligation. It also must issue 59.5 million new shares thatwill dilute earnings by roughly 12%.
Under one worst-case scenario, painted by UBS Warburg, Halliburtoncould see earnings expectations drop from $1.16 to 78 cents a share in 2003and from $1.51 to $1.08 a share in 2004. But both assumptions includeabsolutely no insurance recovery.
"We do not think this will actually happen," stressed UBS, which ratesthe stock a buy. "We believe that Halliburton has a good shot at recoveringat least $2.3 billion from its insurers over the next several years."
But for now, Halliburton is faced with borrowing -- and paying intereston -- roughly $2 billion to satisfy the cash portion of its settlement.That additional financing could send Halliburton's debt-to-equity ratioflying from 33% to more than 45%. Already, terms of the settlement have putMoody's on edge.
The ratings agency this week placed Halliburton's credit under reviewfor a potential downgrade. A one-notch cut would immediately costHalliburton $151 million in collateral calls.
Again, insurance reimbursements could prove to be the wild card.
"We believe that, if the company is able to recover at least $1.6billion from the insurance companies, we would see no change in rating,"Bank of America wrote Thursday.
Those insurance recoveries would also boost the bottom line. UBSprojects that every $1 billion in insurance reimbursements, if used toreduce debt, would flow through Halliburton's income statement to result ina 9-cent hike to profits. Given the likelihood of at least some insurancerecovery -- and, more important, Halliburton's clean slate going forward --most analysts are hotly recommending the stock this holiday season.
Their cheerful outlooks differ sharply from the dark visions of a yearago, when massive asbestos awards took a 43% chunk out of Halliburton'sshare price in a single day.
"As a result of hundreds of thousands of asbestos cases that cametumbling through Halliburton's door, the company itself got sick with thesame illness that has bankrupted many companies in the past," CIBC WorldMarkets wrote Wednesday. "Unlike others, Halliburton was able to cureitself with a resolution that we think is a positive for both the companyand for shareholders."