Investors Are Looking Beyond Accusations at Halliburton, for Now

The headlines about Halliburton Co. have been splashed across the political pages. But to really understand the story, you need to take a peek at the stock tables.

The giant Houston-based company, whose executive suite was occupied by Dick Cheney before he moved on to the job of vice president, has been reeling from accusations that it overcharged the Army by tens of millions of dollars for meals being eaten by U.S. troops abroad, as well as for gasoline that it shipped to Iraq.

At the same time, Halliburton finds itself the subject of a Justice Department probe into possibly corrupt practices in Nigeria, where it allegedly was involved in the payment of $180 million in bribes to win a contract for a natural gas project.

Not surprisingly, Democrats on the stump have tried to make hay of all this. For instance, Sen. John F. Kerry of Massachusetts, the front-runner for his party’s presidential nomination, has accused Halliburton of “shameful war profiteering.”

Yet while the company’s reputation may be getting dragged down, its share price is going straight up.

Investors on Monday boosted Halliburton’s stock to $30.49, its highest level in 2 1/2 years. The stock closed Friday at a still-heady $29.65.

Investors have been impressed by three developments.

The first is that Halliburton is close to settling long-standing asbestos litigation. The deal, which the company announced in December, could cost it about $2 billion. But Halliburton has budgeted for that amount. And the prospect of putting the asbestos matter behind it and removing a cloud of uncertainty “is the big driver of the stock,” says James Wicklund, an analyst at the Houston office of Banc of America Securities.

The second factor behind the rise in Halliburton shares is the bright outlook for oil and gas drilling around the world. Experts foresee global rig activity increasing 25% this year, with major expansions in Asia and North America.

Halliburton, one of the world’s top providers of technical services for petroleum exploration, is well positioned to cash in on the trend. Its energy services group was responsible for more than 40% of Halliburton’s $16 billion in revenue last year and 85% of its $720 million in operating income.

With numbers like that, all the allegations about filching the government amount to “just noise,” says Joe Agular, an analyst at Johnson Rice & Co. in New Orleans.

This is not to suggest, however, that the Halliburton operations being scrutinized by government investigators are unimportant. Quite the opposite.

The third force behind the increase in Halliburton’s stock, after all, is the tremendous growth in its war-related contracts. In the final three months of last year, Wicklund estimates, activities in Iraq generated 40% of the company’s revenue and 18% of its profit.

In all, Halliburton has landed about $9 billion in U.S. government contracts in the Middle East.

Even as questions began cropping up about what it charged the government for gasoline, the company was awarded a $1.2-billion pact to rebuild the oil wells and energy infrastructure in the southern part of Iraq. (Parsons Corp. of Pasadena was given an $800-million contract covering Iraq’s north.) Halliburton also has received a long-term, $1.5-billion deal for the maintenance and supply of the U.S. Central Command.

Going forward, the company’s Kellogg Brown & Root engineering and construction division is expected to bring in two-thirds of Halliburton’s total business, relegating energy services to a lesser role.

The corporation’s success, of course, will depend heavily on the outcome of the inquiries and audits being conducted in Washington and Iraq. Specifically, Halliburton’s contracts for Army meals and oil-field infrastructure promise to provide earnings of about $50 million. But if the company wins awards for good performance, its profit could increase to about $150 million.

For its part, the Pentagon appears to be coming down on the company’s side. Defense Department Comptroller Dov Zakheim testified to Congress last week that Halliburton managers were “doing their best to do the right thing” in assisting the audits. He suggested that the basic issue lay with the subcontractors that Halliburton was using in the Middle East -- not with the corporation itself.

Meanwhile, the company has agreed to refund more than $30 million to the Pentagon, pending a final government audit of the meals contract. It also has gone on a public relations offensive, paying for a 30-second television commercial in which its chief executive, David J. Lesar, touts the company’s record and paints Halliburton as the victim of scurrilous political attacks.

“Will things go wrong?” Lesar says in the ad. “Sure they will. It’s a war zone. But when they do, we’ll fix it.”

The company had better hope so. If it doesn’t, the stock tables may start taking a cue from the front page.

*

James Flanigan can be reached at jim.flanigan@latimes.com. To read previous columns, go to latimes.com/flanigan.