Halliburton in Iraq

According to this article (sub. required) from Fortune, Halliburton isn't really making that much money in Iraq.

It has all the makings of a delicious election-year scandal—Howard Dean has already weighed in—but there's just one problem: Halliburton doesn't stand to make very much money on its Iraq contracts. In fact, despite the allegations of cost overruns and overpriced fuel (you try moving trucks full of flammable liquid hundreds of miles through a war zone), Wall Street analysts like Morgan Stanley's Ole Slorer estimate that KBR—the division of Halliburton that's handling the work in Iraq—lost $63 million worldwide in 2003. "It's an insignificant part of the business," says Slorer. "While the contracts might be worth billions, that doesn't mean Halliburton is earning billions. The margins are very, very skinny."

Indeed, in the third quarter of 2003, Iraq-related work generated $900 million in revenues but only about $21 million in after-tax profits for KBR. That adds up to a not very scandalous profit margin of 2.3%. On the other hand, in 2004 the Houston-based company's energy services business should earn over $1 billion on revenues of $7.6 billion. That equals a 13% profit margin, and that's why Halliburton's stock tracks the energy sector, not the government services or defense groups. Winning all that government work may have generated headlines, but if anything, says Slorer, the ensuing controversy has depressed Halliburton's shares.

So why is Halliburton in this business at all? Plenty of people are asking that question. On Wall Street there's increasing speculation that Halliburton will spin off KBR later this year. "If KBR were managed as a standalone entity, it could achieve better growth," says Slorer. "It's too small a division to get the kind of management focus or capital it needs."

If business is so bad, why all the political outcry? Listening to the news, one would think that "Dick Cheney's old company" would be making a killing due to political favors, but that doesn't appear to be the case. From a business perspective, I wonder why Halliburton considers the work in Iraq worthwhile.