Minority Stake in KBR Will Be Sold

By Renae Merle
Washington Post Staff Writer
Saturday, January 28, 2006

After considering a sale, Halliburton Co. said yesterday that it plans to spin off a minority stake in its subsidiary Kellogg Brown & Root Inc., the largest American contractor in Iraq.

"We believe the IPO market in general and the public market for engineering and construction companies in particular is very attractive," David J. Lesar, Halliburton's chairman, president and chief executive, said in a conference call with analysts.

The deal could be worth billions for Halliburton investors. It also could give the oil-services company some distance from the controversy that has surrounded KBR for nearly three years, including accusations that it received preferential treatment because Vice President Cheney once served as Halliburton's president and that it overbilled the military for work in Iraq.

The company said in September 2004 that it planned to sell or spin off its construction and engineering arm. Under the plan announced yesterday, Houston-based Halliburton said it would sell a 20 percent interest in KBR, which reported $10 billion in revenue last year, half of it in Iraq. Halliburton would likely sell its remaining shares after the IPO, industry analysts said.

The company said it also may still sell parts of the unit but didn't say which ones. "In response to interest we have received, we may consider selling system pieces of KBR, but we would not expect such sales to change our IPO plans," C. Christopher Gaut, Halliburton's executive vice president and chief financial officer, said in a conference call with analysts.

Halliburton's oil-services business, which accounts for the other half of its revenue, has been thriving amid the continuing energy boom, but its stock has been dragged down by KBR, industry analysts said.

After the IPO, Halliburton will be measured against competitors in the oil-services market, including drilling. That should cause a spike in its stock price, analysts predicted. "Right now they trade at a discount," said Mark S. Urness, industry analyst for Calyon Securities Inc. Added Robin Shoemaker, of Bear Sterns & Co.: "Oil services is today and always has been the more profitable, the stronger business."

Halliburton will be selling a stake in a business that helped make it a household name, the sixth-largest Pentagon contractor last year, with $5.8 billon in prime contracts, but also the target of criticism. KBR has been a lightning rod since 2003 when it emerged as one of the first American contractors in Iraq, tasked by the Army Corps of Engineers with rebuilding Iraq oil fields under a no-bid contract. It also collected billions from a supply contract, called the Logistics Civil Augmentation Program (LOGCAP), that it won competitively. The profit margins on both were small, according to company securities filings.

Company officials said yesterday that most of the billing issues have been resolved.

The controversy won't scare Wall Street, industry analysts said. "I don't think it will cause investors to take pause; it should be successful IPO," said Urness of Calyon.

The attraction for investors will be energy services, not KBR's Iraq work, which will begin to decline as troop levels fall, analysts said. About 25 percent of KBR's revenue is from energy services, including building liquefied natural gas terminals. With the price and demand of natural gas increasing, the demand for converting natural gas into liquid and loading it into tankers is forecast to grow significantly.

"I think the investors today are very eager for investment ideas in energy, broadly speaking," said Shoemaker of Bear Sterns. "I expect there to be a great deal of interest in KBR's IPO." Shoemaker pointed to the performance of KBR's competitors in this market, including Fluor Corp. and Jacobs Engineering Group, which were trading at about $57 a share six months ago, and have risen 53 percent and 40 percent respectively.

Halliburton's stock closed up $3.78, or 5 percent, at $78.93.

Staff writer Justin Blum and staff researcher Richard Drezen contributed to this report.

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