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Halliburton fires back Company says it did nothing wrong in Iraq; also says liquidity not a problem, has $1 billion in working capital Ray Tyson Petroleum News Houston Correspondent
Besieged U.S service company Halliburton has gone on the offensive, publicly refuting accusations surrounding its fuel and military food contracts in Iraq and assuring industry analysts that it does not expect additional “issues” to surface, or any government penalties related to its business activities in the war-torn country.
“I don’t expect we’re going to get fined. We haven’t done anything wrong,” Halliburton general counsel Bert Cornelison said in a March 12 conference call with industry analysts.
Halliburton, once run by Vice President Dick Cheney, also believes it has sufficient “liquidity” or working capital to stay the course in Iraq, despite a $2.5 billion payment it plans to make later this year to settle asbestos claims against the company.
“We will continue to have daily scrutiny and slapping at every aspect of our company from the critics,” said Randy Harl, president of Halliburton business unit KBR. “This is unprecedented for a U.S. corporation. We do not expect this … to stop until after the (presidential) election.” Is Iraq worth it? In light of a criminal investigation into Halliburton’s fuel contract and other unresolved issues that have damaged the company’s standing with shareholders, one analyst even questioned whether Iraq “was worth it.”
“We take our obligation very seriously and we’re going to perform,” responded David Lesar, Halliburton’s chief executive officer. “We will work with all government agencies to establish that our contracts are not only good for the United States, but also the company is the best and most qualified contractor to perform these difficult and dangerous tasks.”
Regarding the accusation that Halliburton overcharged the government $61 million for fuel supplies sourced in Kuwait and delivered to Iraq, the company said its critics and the media instead chose to ignore that Halliburton actually saved the government “well over $100 million” by supplying two-thirds of Iraq’s total fuel requirements through Turkey.
“KBR initiated the idea to source from Turkey as a second fuel supplier, as the Department of Defense wants to maintain two sources of supply (because) it’s too dangerous to supply south Iraq from Turkey,” said Chris Gaut, Halliburton’s chief financial officer.
He said that while fuel supplied from Kuwait did cost $1 more per gallon than in Turkey, “We purchased as much fuel from Turkey as possible and a much smaller volume from Kuwait, with the full approval and authorization of the U.S. military.” Company has tried to subcontract fuel delivery to local supplier Gaut said the company also “repeatedly tried unsuccessfully to transfer the fuel delivery mission to a local supplier because it is very dangerous for our people. For many months, no one … was able to find a replacement for Halliburton. But this should come as no surprise as the drivers transporting the fuel face the real risk of being killed or wounded and vehicles and contents being destroyed.”
As of March 18, Halliburton and its subcontractors have lost about 30 workers performing services under various government contracts in the Kuwait-Iraq area. Currently, KBR has more than 24,000 employees and subcontracted personnel working in the region.
Gaut said that KBR also was forced to purchase fuel from the only supplier sanctioned by state-owned Kuwait Petroleum Corp. He said fuel from Kuwait averaged $2.64 per gallon, adding that the expense includes not only the direct cost of fuel and the delivery itself, but also costs associated with waiting time for trucks, equipment and personnel.
“It appears other numbers that have been quoted are only the direct costs, ignoring the fact a given truck can only make two round trips per month from Kuwait to Baghdad as the equipment must wait for loading and security,” Gaut said. “It also ignores any overhead costs for personnel, equipment and other administrative-related expenses.” Cost of meals unresolved Halliburton acknowledged its disagreement with the government concerning bills for meals ordered and actually served to U.S. troops in Iraq. Until the issue is resolved, the company said it has suspended subcontractor billings for meals totaling $36 million and is voluntarily holding $140 million of subcontractor invoices for food services that already have been provided to the military.
“The preliminary results of our review of the meal issue indicate to us that the amount of dispute will be far less than the $176 million currently being withheld,” Gaut said.
Halliburton’s Cornelison said company auditors have reviewed “tens of thousands of invoices” and “we haven’t found any other issues to date. If we had found them, we would have notified the Inspector General’s office … just like we did the last time.” Liquidity concern in markets Despite the company’s recent assurance that it has the necessary liquidity to finish its work in Iraq, Halliburton’s contract problems have raised doubts in capital markets. In a Feb. 20 filing with the U.S. Securities and Exchange Commission, Halliburton warned investors that its ability “to secure future government contracts business or renewals of current government contracts business in the Middle East or elsewhere could be adversely affected.”
Nevertheless, while acknowledging “there is no dispute that our financing of the government work in Iraq has required a sizeable working capital investment,” Halliburton now says “we feel that we’ve got a very strong liquidity position” to cover both Iraq and its huge asbestos settlement.
Halliburton said it had $1.8 billion in cash at year-end 2003, plus cash available through its credit facility, a bond deal, an insurance settlement and other financial sources that would bring the total to roughly $3.5 billion. When subtracting the $2.5 billion asbestos settlement, that would give the company at least $1 billion in working capital. Halliburton said since entering Iraq about a year ago, its working capital investment exceeds $1.2 billion.
Gaut said that Halliburton expects its workload in Iraq to increase during the first half of 2004 and then possibly decrease during the second half. “If activity begins to decrease as we expect … then our working capital requirement will be reduced as well,” he added, “and that would improve our liquidity situation.”
In addition to providing fuel, food and housing for troops, Halliburton also was commissioned to douse well fires in southern Iraq and to bring some wells back into production. The company also inspected oil facilities and assisted in surpassing Iraq’s prewar oil production of 2 million barrels per day with 2.4 million barrels per day last December, three months ahead of schedule.
“I think that is a big untold story and something that gets lost in much of the media criticism that’s out there,” Halliburton’s Lesar said.
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