Halliburton's Costly Day in Court - TheStreet

Halliburton's Costly Day in Court

Strong top-line growth is offset by various weaknesses and legal bills.
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Even sweetheart deals in Iraq couldn't save

Halliburton

(HAL) - Get Report

from a sour third quarter.

The Texas oil services giant, once led by Vice President Dick Cheney, failed to meet even the lowered guidance of 27 cents a share it issued less than three weeks ago. Despite a 39% surge in revenue -- fueled by government contracts in the Middle East -- the company posted a third-quarter profit of just 21 cents a share, missing Wall Street estimates by 7 cents.

An unexpected courtroom loss, weathered just five days ago, accounted for the miss.

"When we issued revised guidance on Oct. 9 ... we expected to win the case," senior Halliburton leaders acknowledged on Wednesday. "Legal fees in that case were large, but we expected to win."

Instead, a Houston jury sided with a local man who originally set out to hunt for religious artifacts but decided he'd rather drill for oil instead.

Scott Van Dyke "was searching for Noah's Ark and met the Turkish president," the

Houston Chronicle

explained last week. Van Dyke "told the Turkish leader that his lifelong dream was to be an oilman. ... The Turkish president ... told Van Dyke he should go to Kazakhstan and seek his fortune, which he did."

Afterward, the newspaper reported, Van Dyke secured permission to explore near the Caspian Sea but needed a partner to provide financing and other assistance. Halliburton reportedly stepped in with an offer but ultimately backed out -- after gaining access to confidential information -- a few years later. In the end, another company without direct ties to Halliburton wound up with the oil-rich property.

Van Dyke, represented by a prominent attorney who helped negotiate Texas' multibillion-dollar lawsuit against the tobacco companies, was seeking nearly $700 million in lost income from Halliburton and several other entities. Instead, he scored a verdict promising him about 10% of that amount -- or $77 million including attorney's fees -- that knocked 11 cents from Halliburton's third-quarter earnings.

Although Halliburton has already taken a charge to cover the full $77 million, it vowed Wednesday to continue its legal fight.

"Halliburton intends to file post-trial motions to seek a reduction or elimination of the award," the company announced when releasing third-quarter results on Wednesday. "If the verdict becomes a judgment, Halliburton intends to appeal the case."

Heating Up

But Halliburton could face even bigger legal charges ahead. As early as the fourth quarter, the company plans to take a pretax charge of $1 billion if it can finally cap its exposure to asbestos-related claims. The company, which last December arranged a $4 billion deal to settle the lawsuits, admitted Wednesday that the stakes -- and the number of claims -- have since gone up. All told, the company now faces 435,000 lawsuits from plaintiffs seeking damages for asbestos-related problems.

By now, experts believe, a global asbestos trust -- involving multiple industry players -- is probably too far behind schedule to help Halliburton out.

"Halliburton has already made significant progress which may culminate in the company accomplishing its own asbestos reorganization by the end of this year," Kevin Dann & Partners wrote on Friday. But "we believe it may be too late for Halliburton to benefit from the anticipated asbestos legislation next year."

Nor does the firm expect Halliburton shares to rally after it solves its asbestos problems on its own.

"Although closing this difficult asbestos-related chapter in the company's history should be a catalyst for the stock price," the firm wrote, "we believe most of the upside is already factored in the stock."

Halliburton shares have already surged more than 60% since this time last year. But the third-quarter miss nibbled away at that gain. The stock, which opened unchanged at $24.08, had fallen 1.6% to $23.69 halfway through Wednesday's session.

Inconsistent

Despite robust top-line growth, Halliburton showed clear weaknesses in some areas. The unfavorable jury decision pushed the company's Landmark energy services division from a modest year-ago profit to a $52 million loss. And the company admitted that its performance, in general, was hurt by weaker pricing and customer activity than it had expected. The company, which believes this trend will continue through the rest of the year, scaled back its fourth-quarter guidance on Wednesday to "at least 30 cents per share." On average, Wall Street was expecting a nickel more from the company in the final quarter of the year.

Halliburton's brightest news stemmed from its controversial contracts in Iraq. During the latest quarter, revenue at Halliburton's KBR division surged by 80% from a year ago, hitting $2.3 billion. And the division's third-quarter profit more than tripled. All told, the company's Iraqi work contributed a full nickel, adding nearly 20%, to third-quarter earnings.

"KBR operating income for the third quarter of 2003 was $49 million, a $37 million increase over the third quarter of 2002, due to increases from government services activity in the Middle East and ... the United Kingdom," Halliburton stated in its release.

Later, during a conference call with analysts, Halliburton CEO Dave Lesar fiercely defended the company against recent media claims that it has unfairly benefited from its close ties to the vice president.

"When I see the allegations repeated day after day in the press, I am offended," Lesar stated. "It is obvious that these attacks are unwarranted. ... We have served the military for over 50 years and have no intention of backing down at this point.

"We will continue to present the facts. ...

And in the long run, facts will prevail over fiction."