WASHINGTON, Oct. 26 (UPI) -- Iraq may still be in political turmoil, but reconstruction efforts were suppose to be a boon for contractors, most notably for Houston-based Halliburton. But getting projects in the tumultuous country isn't leading to a surge in profits for the company just yet.
The oil services giant that Vice President Dick Cheney once led reported Tuesday that it posted a net loss totaling $44 million in the third quarter. The head of Halliburton, Dave Lesar, said that the loss was due to the settlement for asbestos claims that has been plaguing the company over the past few years. But even without that one-off payment, the company is not finding it all that easy to make money from a surge in Iraqi projects.
The world's second-largest oil field services company and parent company of contractors KBR had to pay $230 million in settlement on the asbestos claims in the latest quarter ended September. The payment was the price to pay for Halliburton's decision to buy Dresser Industries in the 1990s, and inherit the asbestos and silica liability it had created.
But such legal costs should now be behind them, Lesar said in a phone conference with investors and reporters after the release of the latest report, adding that he was very optimistic about the company moving forward. Certainly, prospects for the politically well-connected contractor certainly look bright.
For the third quarter, revenue rose to $4.79 billion from $4.15 billion posted in the previous year, largely due to a surge in government contracts awarded to KBR, whose main client is the U.S. military including operations in Iraq. Meanwhile, profit from continuing operations reached $186 million, more than double its performance of $92 million a year ago, while the group's pretax operating income reached $342 million against $204 million a year ago.
The company, however, argues that the profitability of doing work in Iraq still remains shaky at best. For instance, KBR, which does the bulk of Halliburton's work in Iraq, posted a $50 million operating loss in the latest quarter, compared to a $49 million profit during the same period a year ago. The loss was largely due to $70 million in project losses, as well as $18 million in costs to restructure the company.
For Halliburton as a whole, meanwhile, even though Iraq-related contracts led to $1.4 billion in revenue in the third quarter alone, the work only led to $4 million in operating income, and that was before taking into account costs and taxes. Meanwhile, KBR pointed out that so far, 54 people who worked for KBR were killed in Iraq, and two are still missing. Nevertheless, KBR has clearly profited from doing business in the country, as work in Iraq alone has led to $5.2 billion in revenues so far this year, and it has been able to secure about $8.8 billion since the start of the invasion of Iraq over a year ago.
Another problem for KBR is increased criticism about the company's dominance in securing government contracts for Iraqi reconstruction in addition to allegations that it deliberately over-estimated costs to provide services in order to beef up its bottom line. In fact, the U.S. military is currently investigating into the matter, and the Pentagon is also looking into claims that KBR won contracts to rebuild the Iraqi oil supply network without competition, in addition to providing basic services to U.S. troops in the Balkans without contest.
While company officials declined to comment directly on the latest charges, they made clear that they believe KBR would win the bulk of contracts from the U.S. military, given its vast experience and track record. But when questioned about doing business in Iraq in coming years, a KBR executive said that while the company can more or less get any contract that's up for bidding, trying to go after everything would not be a good idea for a number of reasons. As such, the company plans to narrow down its contract bids and focus instead on sectors that it is particularly strong in.
Yet with all the criticism mounting regarding KBR continuing to mount, Halliburton is considering spinning off or selling KBR outright next year. At the very least, Halliburton said that KBR should slash costs by $80 million over the next year. But even if the company were to its ties to KBR, Halliburton would still continue to benefit greatly from government projects in the Middle East, namely through another subsidiary, the Energy Services Group.
ESG, which specializes in the drilling and exploration side of the oil business, posted record earnings in the latest quarter. ESG's operating income rose to $414 million, soaring from $244 million posted in the same quarter a year ago, with revenues increasing 17 percent to $2.1 billion. It was the subsidiary's best performance yet, and as oil prices are expected to remain high over the next few months, the Halliburton group said it expects ESG's profitability to continue to grow.
