Business Week on Halliburton and Iraq

Swopa notices this blurb from Business Week:

Pentagon officials plan to split the logistics contract, under which Halliburton has raked in roughly $15 billion since 2001, among four vendors, with bidding to begin on July 28. Halliburton, Vice-President Dick Cheney’s former employer, could still win a chunk of the new deal. Army officials say they’re happy with Halliburton’s services, but Defense Dept. auditors have questioned $1.2 billion in charges. Halliburton says its work has been “nothing short of amazing” and that opening up the contract for competitive rebidding is a routine Pentagon move.

He then reminds us that Business Week once wrote this:

The stock isn’t going gangbusters because of Iraq deals, shady or otherwise. Indeed, the $75 million in revenue that Halliburton has collected so far by putting out oil fires and repairing refineries in Saddam Hussein’s former turf will add insignificantly to its profits – perhaps a penny a share this year. Even if the contract eventually reaches $600 million, as projected by the U.S. Army Corps of Engineers, it’ll account for less than 4% of Halliburton’s annual revenue.

Current revenues can be a poor way of judging expected future cash flows. Iraq is mentioned a lot in Halliburton’s 10-K filing for fiscal year ended December 31, 2005:

We conduct business worldwide in about 100 countries. In 2005, based on the location of services provided and products sold, 27% of our consolidated revenue was from the United States, 24% of our consolidated revenue was from Iraq, primarily related to our work for the United States Government, and 10% of our consolidated revenue was from the United Kingdom. In 2004, 26% of our consolidated revenue was from Iraq and 22% of our consolidated revenue was from the United States. In 2003, 27% of our consolidated revenue was from the United States and 15% of our consolidated revenue was from Iraq … Our government services revenue related to Iraq totaled approximately $5.4 billion in 2005, $7.1 billion in 2004, and $3.6 billion in 2003 … In 2005, Iraq-related work contributed approximately $5.4 billion to consolidated revenue and $172 million to consolidated operating income, a 3.2% margin before corporate costs and taxes.

Swopa is correct about the role that the Iraq contracts have played in increasing Halliburton revenues, which rose from $16.3 billion in 2003 to $21.0 billion in 2005. Operating profits in 2003 were only $0.72 billion or 4.4% of revenue. In 2005, operating profits jumped to $2.66 billion representing a 12.7% operating margin.

Halliburton’s 10-K filing attributes much of the improvement in operating profits to developments with respect to its Energy Services Group (ESG):

ESG improved performance with a 26% increase in revenue and an 80% increase in operating income, compared to 2004. ESG operating margin (defined as operating income divided by revenue) increased nearly seven percentage points to 22.6% from 15.8% in 2004.

For companies with multiple lines of business, focusing on developments in one line may miss the big picture.