Halliburton revamps ailing engineering business

Halliburton Co, the world's biggest oilfield services company, announced plans yesterday to cut costs and improve profitability at its engineering and construction business. The move, first outlined by new Chief Executive Officer Dave Lesar during an October 24 conference call, will result in a $120 million charge after taxes in the fourth quarter.

In early afternoon trading The Dallas-based company's stock was down 13/16 or 2.15 per cent at $36-15/16. The stock fell 11 per cent on October 25 after the company told analysts that its earnings were being eroded by a lack of new engineering and construction orders.

Despite record energy prices, oil companies have been slow to invest in downstream refining and processing equipment, due in part to the wave of consolidation that has swept the industry. Halliburton Vice President of Investor Relations Guy Marcus said the reorganization would separate the company's engineering and construction business more cleanly from its oilfield services business and consolidate it under a single management team.

Up to now Halliburton's upstream engineering and construction business, which makes oil and gas production equipment, was part of the oilfield services division. Most of it will now be grouped with the downstream engineering and construction operations, which make refining and processing equipment for the oil and petrochemical industries.

Some analysts believe that Lesar, who took the top job at Halliburton from Vice President-elect Dick Cheney in August, could be preparing for a complete break between the company's two main business groups at later date.

"I would hope that they would take that step and either sell or spin off the engineering and construction business," said Banc of America Securities analyst Michael LaMotte. Marcus said the company was aware of rumours to that effect but declined to comment beyond saying that management would keep looking for ways to further enhance shareholder value.

Halliburton said it was aiming for a 3 per cent profit margin at the revamped engineering and construction business in 2001 and a margin of 3 to 5 per cent in the longer term. The fourth-quarter charge will include costs associated with a reduction in senior management positions.

Halliburton said it expected earnings for the fourth quarter, excluding the charge, of 25 to 27 cents, in line with the First Call/Thomson Financial consensus of 26 cents. Lamotte said he rated Halliburton's stock a Buy but preferred Baker Hughes Inc, which he rates a Strong Buy, among larger U.S. oilfield services stocks, even though it currently trades at a higher multiple of estimated future earnings.

"Baker Hughes is the purer oilfield play. The relative valuation does not warrant assuming the risk of Halliburton's non-oilfield operations," he said. Lamotte said the outlook for oilfield services was good, based on recent investment bank estimates that oil and gas companies will raise their exploration and production spending by some 18 to 20 percent in 2001.

So far this year Halliburton's stock has fallen some 8 per cent, compared with a rise of some 90 per cent for Baker Hughes and a rise of some 34 per cent for Schlumberger Ltd, the world's second-biggest oilfield services provider.