Monday, September 02, 2002

Cheney left Halliburton holding asbestos bag

The Associated Press

        DALLAS — In its first 75 years, Halliburton Co. grew to become a critical cog in the oil industry and a presence in construction circles, even as it remained unknown to most Americans. The company's profile has risen considerably since 1995, when it picked Dick Cheney as its top executive — but not always by choice.

        Halliburton has been in the news often this year, mostly for the wrong reasons. It lost $476 million through June. It is under attack from disgruntled investors who have seen the value of Halliburton's stock fall more than 70 percent since Cheney left in August 2000.

        The stock price collapsed under the weight of falling energy prices, accusations of shady accounting and lawsuits over asbestos.

        David Lesar, who took over the helm at Halliburton when Cheney left to become vice president, says the company's problems have been overstated. He predicts that higher energy prices will lift the company's fortunes.

        The Dallas-based company faces at least a dozen lawsuits and a Securities and Exchange Commission investigation for changing its accounting to book disputed amounts from cost overruns on construction projects.

        Halliburton officials say that most other large engineering and construction companies do the same.

        Analysts, however, are far more worried about Halliburton's potential liability for more than 300,000 pending claims by people who blame the company for their exposure to asbestos, a heat-resistant material with fibers that can cause lung disease if inhaled.

        The burgeoning asbestos problem has caused critics to question the hallmark of Cheney's five years at the helm of Halliburton: the $7.7 billion acquisition of rival Dresser Industries Inc. in 1998.

        The deal doubled Halliburton's size overnight and allowed it to claim it was the world's leading oilfield-services company. But most of Halliburton's current asbestos claims were inherited from Dresser.

        Lesar said Halliburton investigated Dresser's asbestos liability before the acquisition. The company just didn't count on a surge in asbestos claims, which he blamed on the bankruptcy of other asbestos defendants, leaving Halliburton as a tempting target.

        “It's easy to second-guess everything about the asbestos issue now,” he said.

        For many years, Halliburton settled cases for modest sums — 214,000 claims for $173 million, including $101 million paid by insurance, leaving Halliburton's out-of-pocket cost at $336 per claim.

        But last year, Halliburton was hit with verdicts in Texas, Mississippi and Maryland totaling $152 million. The last verdict triggered a sell-off that sent Halliburton shares plunging 40 percent in one day because investors feared it was the tip of the liability iceberg.

        Halliburton says the problem is manageable — a hired consultant said insurance would cover all but $602 million needed to settle claims through 2017. As part of the bankruptcy of a former Dresser subsidiary, Halliburton is negotiating with plaintiffs' lawyers to settle all current and future asbestos claims out of a special trust.

        “They have to come up with a settlement. If they can do that, clearly their share price is going to improve,” said Robin Shoemaker, an analyst for Bear Stearns.

        He warned, however, that “it could all unravel” if plaintiffs' attorneys reject a deal.

        In contrast to the years-old asbestos issue, the accounting controversy came out of the blue this spring. Instead of waiting until it was paid, Halliburton was booking as revenue disputed amounts that it expected to receive from construction projects with cost overruns.

        As of June 30, Halliburton was still trying to collect $193 million that it has already booked in recent years as revenue.

        Of $89 million revenue claimed from disputed cost overruns in 1998 — about half its net income for that year — Halliburton says it has collected $39 million, written off $19 million and is chasing the remaining $31 million.

        “They were covering up losses,” said Tom Fitton, president of Judicial Watch, a self-styled government watchdog group that is suing Halliburton and Cheney. “Halliburton engaged in stock fraud, and they need to be held accountable.”

        Wayne Shaw, an accounting professor at Southern Methodist University who has lectured investment bankers and regulators, said unhappy investors have a hard case to prove because the amounts involved were small — about 1 percent of company revenue since 1998.

        “It seems they were very aggressive in their estimates (of collectible costs) because you don't know what their recovery is going to be,” Shaw said. “But it's not clear that they took a 'wrong approach.”'

        Company officials defend their numbers and say they are cooperating with the SEC investigation.

        Cheney has not been contacted by the SEC, a spokeswoman said Friday. Cheney's only public remarks came three weeks ago in San Francisco, when he called Halliburton “a fine company” and declined further comment.

        Founded in 1919 by Erle Halliburton, the company started by helping operators drill oil wells.

        Today, it operates in more than 100 countries, doing everything from mapping underground oil reserves to building gas processing plants.

        “They're a strong international company, and the industry cannot operate without them,” said Michelle Michot Foss, director of an energy institute at the University of Houston.

        Halliburton has been a big government contractor for years, earning billions of dollars from various deals, including supporting U.S. troops from Bosnia to Uzbekistan. That part of its business, run from the Brown & Root Services subsidiary, is also under more scrutiny.

        Halliburton hired Cheney in 1995 to stand out from competitors Schlumberger Ltd. and Baker Hughes Inc. The U.S. energy industry was increasingly looking overseas for growth, and Halliburton believed Cheney's contacts in the Middle East and elsewhere would be invaluable.

        Since Cheney became vice president, Brown & Root won a no-bid, unlimited contract to support Army troops overseas and got a construction contract from the Navy even though it was under federal investigation for fraud on another contract. Brown & Root settled the fraud charges by paying $2 million.


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