Halliburton Fans Spy Opportunity in Iraq Crisis

Terror attacks don't scare backers of the big war contractor and oil-services giant.
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As Iraq seethes with danger, big war contractor


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is attracting swarms of defenders -- on Wall Street.

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

Thirty Halliburton workers die. Another seven go missing.The company expresses sadness, even anger. But the wareffort 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 safetythreats grow, one expert sees little threat toHalliburton's financial well-being. David Edwards ofHeron Capital Management believes that others --including U.S. taxpayers -- will end up eating thesoaring costs instead.

"They'll go back to the Pentagon and say: 'Pay usmore money. We're clearly in danger over here,'" saysEdwards, who owns stock in Halliburton and other oilservice names. "A lot of the terrorism has relativelylittle economic impact on the companies."

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

Big Tent

Halliburton relies on more than 24,000 employeesand contractors -- equal to roughly 25% of its globalworkforce -- to satisfy huge, and sometimescontroversial, contracts with the federal government.In addition to supporting military logistics,Halliburton workers drive trucks and work to restoreIraq's valuable oil assets.

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

"The world has been made aware of the threat inIraq to civilian contractors supporting the troops andIraqis only recently," says Wendy Hall, director ofpublic relations at Halliburton. But "our employeeswere prepared from day one with the knowledge of thedanger and the price that they could pay for theirwork in Iraq."

Halliburton hasn't disclosed just how much it paysits Iraq-based employees to compensate them for thehuge risks they face. But the

Associated Press

this week said the company has offered workers $80,000tax-free -- and up to 50% more with overtime pay -- tospend a year in the country.

And the costs hardly end there. Yet another newsagency, London-based


, recently saidthat more than half of all expenses for companiesoperating in Iraq stem from protecting and insuringtheir workers there. Indeed,


went on tosay, life insurance premiums for particularlyhigh-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 toreally 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


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, business has rarely looked better.

Granted, Halliburton has attracted some prettyugly headlines. Some accounts claim that the company robbedAmerican taxpayers by overcharging for gas deliveriesto 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 haseven been accused of wasting money on monogrammedtowels that in some cases cost seven times as much asordinary 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 fueldelivery project to the only bidder that qualifiedand, by shifting some of that business away from thefirm into more affordable Turkey, actually savedtaxpayers $164 million. He also viewed Halliburton'sdecision to bill for meals ordered -- rather thanthose actually delivered -- as perfectly justified.

"We consider it worth noting that estimating therequired number of meals is no simple task," wroteRussell, who has an outperform rating on Halliburton'sstock. "We would further guess that the soldiersinvolved would much rather KBR overestimate thenumber of meals that will need to be served upon anygiven day, rather than underestimate."

Russell also says Halliburton's early work in Iraqwas performed under a pre-existing contract thatshould 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 towelswould stop, or at least deter, the stealing of towelsby locals from its facilities in the Middle East," hewrote. But "we are not certain if the use of themonogrammed towels did, in fact, deter stealing."

Defensive End

Indeed, on Wall Street, Halliburton has plenty ofdefenders.

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

"After a careful review of the controversialissues related to Iraq, we are confident thatHalliburton is unlikely to face any fines or penaltiesas a result of the recent government audits," Halleadwrote in March. "Halliburton appears to beattractively valued for large-cap oil serviceinvestors willing to stomach the periodic headlinerisk associated with the Iraq work."

SIG Susquehanna analyst, Kevin Wood, takes a similarstand on the company. He says the "sensationalheadlines

have little substance." He believes thatinvestors should buy the stock on dips. He also saysthey'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 unitspressured for years by asbestos liabilities. Secondly,it relies on huge volumes of Iraqi work that isdiscounted by long-term investors as temporary innature.

Low Margins

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

Still, the Iraqi projects are expected tocontribute around 24 cents a share, or 18% of annualprofits, to Halliburton's bottom line this year andnext, Russell calculates. And Wood, for one, seesplenty of value in the KBR unit -- even afterexcluding the temporary business in Iraq.

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

Halliburton is headed to court next month inpursuit of a final settlement that, if reached, couldfinally resolve the asbestos issue later this year. Inthe meantime, the company will continue to generatehuge sales -- although smaller profits -- for itsdangerous work in Iraq.

Just this week, in fact, the company reiteratedits 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 ourtime giving recruits all the reasons they should


accept this job," Hall says. But "we continue toprocess several hundred personnel per week to deployto the region."

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

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

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