stock could finally be ready to recover from a long case of asbestos poisoning.
A court order issued this week should act as the perfect antidote for the company's chronic asbestos-related problems. A bankruptcy judge on Monday approved a final settlement that paves the way for Halliburton to shed an asbestos-tainted division that has hurt the company for years. The settlement will bring in more than $1.5 billion from scores of insurance carriers to pay claimants seeking asbestos-related damages from Kellogg Brown & Root and other Halliburton subsidiaries.
Halliburton exposed itself to serious asbestos liabilities when acquiring Dresser Industries, which owned part of KBR, through a 1998 merger engineered by then-CEO Dick Cheney. KBR, a combination of former Halliburton and Dresser divisions, is now in the final stages of bankruptcy proceedings.
Barring any unexpected last-ditch appeals from insurance carriers, the new court ruling should allow Halliburton to conclude KBR's bankruptcy by the end of the year. Going forward, some believe, that should also enable Halliburton to rid itself of KBR altogether -- and the discount it has long placed on the company's shares.
Halliburton clearly welcomed the development, dubbed "an early Christmas present" by one analyst.
"Halliburton's employees, customers and shareholders are celebrating this positive news," CEO Dave Lesar said on Tuesday. "As final settlement agreements have been reached, we are delighted to bring closure to this issue."
The company's stock barely reacted, however, inching up just 24 cents to $41.20 late Tuesday morning. Some experts were quick to note that the shares have already enjoyed a strong run in recent weeks, following the re-election of President Bush and, with him, the company's former CEO. Still, they tend to doubt the rally is over yet.
Indeed, UBS analyst James Stone on Tuesday quickly raised his price target on the stock from $42 to $53.50 after hearing of the settlement.
"With asbestos out of the way, we see little reason why we should continue to value the company's oil services division at any discount to the five peer companies," explained Stone, who reiterated his buy recommendation on the stock. "We think
Halliburton compares very well in terms of margins and returns with the best of the peers."
Looking ahead, Stone expects Halliburton to shed KBR -- possibly through a partial stock offering -- as early as the first quarter of next year. He believes that such an arrangement would allow Halliburton to trade more in line with its oil-services peers, establish a stand-alone value for KBR and still participate in any future upside at KBR if the unit turns around.
In addition to asbestos exposure, KBR has been plagued by scandals associated with its work in both Nigeria and war-torn Iraq. It has been accused of bribery in the first and of overcharging the government in the second. It has denied any wrongdoing.
Analysts tend to back the company. Indeed, one predicted that Halliburton could see its stock jump again after a meeting this week on the company's battle for bonuses in Iraq.
"Halliburton is confident they can support expenses incurred to date, and that they have a reasonable chance of winning a substantial portion of the potential bonus award fees," wrote Credit Suisse First Boston analyst Ken Sill, who has an outperform rating on the stock.
Like Stone, Sill believes that Halliburton will continue to rise, climbing as much as 15%, until it closes the valuation gap between itself and its peers.
Even Massachusetts investment strategist Peter Cohan -- who is no fan of Halliburton -- viewed Tuesday's settlement as obvious good news. And he, too, predicted further upside if Halliburton manages to sell KBR, "because it has been a money-losing business plagued by investigations."
Still, Cohan sees risk in the stock. He points out that Halliburton's core oil-services business relies on big production companies that, so far, have remained "gun-shy" about significantly boosting their budgets out of fear that energy prices will fall.
However, he acknowledged, that situation could change.
"If you see companies like
loosening up their budgets," Cohan said, "then I would suggest that the sky's the limit on these oil-services stocks."
But Cohan would nevertheless bypass Halliburton, with all of its headline risk, for a company like
"Schlumberger has a reputation as the best oil services company with the most advanced technology," said Cohan, who in the past has performed consulting work for Schlumberger, though he has no financial stake in the company. "And it doesn't have the same burdens that Halliburton has."