Sometimes I wish I could invest in companies like this, unfortunately I could be administering one of  their contracts this year.  I actually have to disclose assets at the end of each year.

Wall Street Journal
April 15, 2006
Pg. B1

Halliburton To Sell A Piece Of KBR On Stock Market

Unit May Benefit From Boom In Energy-Construction Needs; Factoring In the Iraq Probes

By Russell Gold

Kellogg Brown & Root is the subject of various congressional and government probes. Now, investors will get their own chance to dig into the controversial Halliburton Co. unit.

Halliburton filed plans with the Securities and Exchange Commission on Friday to sell just under 20% of its Kellogg Brown & Root engineering and construction division in an initial public offering of stock. The unit has garnered headlines from multiple inquiries, including a Justice Department investigation into alleged bribery in Nigeria and various probes into its work supporting the military in Iraq.

Despite the flurry of inquiries, good demand is expected for the IPO. The reason: KBR, which builds complex projects like chemical plants and gas terminals, is in a strong position to benefit from the global boom in energy infrastructure.

Halliburton spokeswoman Cathy Mann said in an email that the company has let investors know about the investigations for some time and that the company pushed ahead because "we believe the IPO market is attractive." She added, "the market has had the opportunity to absorb our ongoing disclosure."

Some Prefer Google, Some Prefer ... KBR is going public; above, a gas processing plant it built in Australia.

Investors are expected to focus on KBR's business, rather than the many inquiries. The global energy industry is stretched thin and demand for fuel is still rising.

After years of underinvesting, the industry is on a spending spree -- and KBR stands to benefit as one of the industry's top construction firms. It has more than half of the global market share for building liquefied natural gas, or LNG, facilities, a red-hot market expected to double in size by 2012. It is also a dominant builder of gas-to-liquids and ethylene plants. KBR's backlog of work in this sector was $5.4 billion at the end of the year, more than double the year-earlier amount, according to the SEC filing for the IPO.

"It is certainly a good time to be selling a stake in an engineering and construction company," says Michael Gardner, a portfolio manager at Cambiar Investors LLC in Denver. Cambiar Investors owned 2.2 million shares of Halliburton at the end of December, the last time the figure was disclosed.

The IPO will unwind part of a deal that Vice President Dick Cheney did when he was Halliburton's chief executive. In 1998, the oil-services company acquired Dresser Industries Inc. and its M.W. Kellogg unit and combined Kellogg with Halliburton's Brown & Root unit to form KBR.

Halliburton plans to sell just under 20% of KBR. Analysts figure that KBR is valued at about $4.7 billion. Halliburton filed to sell an estimated $550 million of KBR stock, but analysts say it will likely fetch closer to $900 million.

The most important effect of the IPO is that it would set a market value for KBR. Currently, Halliburton trades at a discount to other major oil-services companies because investors know it isn't a pure play. For example, shares of competitor Schlumberger Ltd. trade at a price-to-earnings ratio of 25 to 1, compared with a 19-to-1 ratio for Halliburton.

By setting a price on the KBR slice of Halliburton, the IPO would effectively reveal the market value for the rest of Halliburton. Once that is done, many on Wall Street believe that Halliburton will look undervalued relative to its peers. Dan Pickering, president of Pickering Energy Partners in Houston, estimates the combined value of Halliburton and a separated KBR should be about $90 a share in several months, compared with $77 a share today.

That is one reason Matt Kelmon, president of Kelmoore Investment Co. in Palo Alto, Calif., snapped up 140,000 Halliburton shares in February for his Kelmoore Strategy Fund, making it the fund's largest position. "I believe potential downsides are in the stock price already and it's the reason its not already $100," he says. Halliburton closed Thursday up 0.6% at $77.12. (The stock market was closed Friday in observance of Good Friday.)

What of all the KBR investigations? There certainly could be some embarrassing developments down the road. KBR was the military's largest contractor during the massive U.S. troop mobilization in Iraq, doing everything from delivering mail to running dining halls in a war zone. The company's procurement work has been routinely pilloried by military auditors for not adequately documenting its purchases. But Pentagon brass have stood by their contractor and handed out nice bonuses to KBR.

Halliburton and its KBR unit also face a Justice Department foreign-corrupt-practices investigation into its dealings with former Nigerian dictator Sani Abacha. (The SEC is also looking into those dealings.)

KBR was part of a consortium of four engineering firms that built a giant LNG plant on the Nigerian coast. Investigators in the U.S., France, Switzerland and Nigeria are probing whether a suspect $132 million payment by the consortium was used to bribe Nigerian officials and enrich consortium officials.

Halliburton has severed ties with employees and contractors involved in the affair, including former KBR Chairman Albert J. "Jack" Stanley. In addition, the Justice Department has an antitrust investigation open to determine whether Mr. Stanley coordinated bids with competitors going back into the 1980s.

A lawyer for Mr. Stanley declined to comment.

Halliburton warned investors in its KBR stock registration that an outcome of the multiple investigations could be being barred from future U.S. government work. But losing the government work wouldn't hurt KBR too much. Last year KBR recorded a whopping $8.1 billion in revenue from government contract and civil infrastructure work, but only $331 million in operating income. By comparison, its higher-margin energy- and chemical-construction unit recorded $2 billion in revenue and $116 million in income.

Meanwhile, the government work is declining while the construction work is expected to pick up quickly.

"The LNG business is booming," says Paul Kuklinski, president of Boston Energy Research, "that is the main growth engine, the sizzle for KBR." Boston Energy is an independent research firm and Mr. Kuklinski doesn't own any Halliburton shares.

It is unlikely any potential government penalty would affect KBR's ability to serve as a global engineering and construction firm.

Still, Halliburton warned investors that the government could restrict its future use of "agents," such as the British lawyer who handled the $132 million payments and is under investigation. Losing the use of these agents, the company said, could put them at a "competitive disadvantage" in bidding on and executing energy-construction projects.

Halliburton has agreed to indemnify KBR from certain fines and penalties arising from the bribery investigations. KBR, however, is on its own if other damages arise, including nongovernmental lawsuits.

Still, some investors would just as soon steer clear of both Halliburton and KBR.

"We've stayed away from the Halliburton name because of all the baggage," says John Mentzer, vice president of Fulton Financial Advisors in Lancaster, Pa. "We have a very conservative clientele that pays attention to the names we're using. If we are going to go into something controversial, we better have a good reason."