哈里伯頓 (HAL) 2002 Q3 法說會逐字稿

Good day and welcome to today's Halliburton Company third quarter 2002 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I want to turn the call over to the Vice President of Investor Relations, Mr. Cedric Burgher. Please go ahead, sir.

Thank you, Steve.

Good morning, and welcome to Halliburton's third quarter 2002 earnings release conference call. Today, joining us are Dave Lesar, Chairman, President and Chief Executive Officer, and Doug Foshee, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll take questions from the investment community, and in order to achieve maximum participation in the time allowed, we do ask that each caller be limited to one question. This call is being recorded by Halliburton and with the exception of any participants questions asked during the Q-and-A session, the entire call including the Q-and-A session is material copyrighted by Halliburton. It cannot be recorded and rebroadcast without Halliburton's express written permission.

Before turning the call over to Dave for opening remarks I'd like to remind our audience, in accordance with the Safe Harbor provisions of the private securities litigation and reform act of 1995, Halliburton Company cautions some statements made today which are forward-looking or provide other than historical information involve risks and uncertainties that may impact the company's results of operations. For more complete description of some of these risks, please refer to Halliburton's form 10-Q for the quarter ended June 30, 2002, and Halliburton's form 10-K for the year ended December 31, 2001.

Dave?

Thank you, Cedric. Good morning, everyone. Today, like I usually do, what I'd like to start with is a brief address on our operating highlights for the quarter. Talk about our competitive position, give an asbestos status update, and talk about our progress in terms of non-core asset dispositions, and then I'll turn the call over to Doug. He'll go over things in a little bit more detail.

I'm sure as you're all aware this quarter was a difficult business environment in the energy industry. As you can tell from our press release this morning, and as you'll hear more from myself and Doug during the call, we believe we have surpassed our competition in many areas in markets we serve in terms of revenue or operating income increases. Our third quarter reported gap net in gam was $94 million, or 22 cents per diluted share. However, this included during the quarter a pre-tax translation adjustment loss of $18 million, on the sale of Bredero-Shaw. This item as well as the restructuring charge of $11 million during the quarter will be excluded from the discussion that we'll have on comparative results. And in addition, all of the sequential comparisons will exclude the effects of the various pro forma adjustments we discussed in our second-quarter call. To help you reconcile all of this, we have included tables in the press release that we issued this morning, to assist you in reconciling the reported earnings and the pro forma earnings that we'll talk about. Therefore, after the restructuring charge we talked about it the second quarter, and the CTA on the Bredero-Shaw, our pro forma results in operations were $119 million, or 28 cents per diluted share.

If you look at the highlights for the quarter, the energy services group, their operating income increased by 33% sequentially, with Halliburton Energy Services increasing 27% sequentially, and Landmark up over 30% sequentially. The balance of the increase was obviously then in our Subsea operations. KDR was awarded $1.6 billion of backlog in the government services product line. Also, subsequent to the end of the quarter, and not included in the $1.6 billion number, KBR has received an additional $570 million of new contract awards.

As I've done in previous calls, I'd like to give you some information on how we compare to some of our competition, and how some of our individual product lines did, which I think will show our continued industry leadership.

Overall, Halliburton engine service revenues in the third quarter remain flat on a sequential basis, compared to decreases in the two of our competitors of 1% and 5% and increases in two other competitors of 1% and 3%. So basically, we were in the middle in terms of revenue.

One of our other competitors did have an 8% increase, but this was impacted by significant acquisitions that they had made.

In our pressure pumping area, revenues increased 2%, compared to an increase of 5% for one of our principle competitors. However, specific to the U.S. and Mexico, which are important operations for us, even considering the significant acquisition by this competitor, our operations were flat and theirs were down 1%, but that shows what you is happened to pressure pumping business in North America. For [Bay Roy] it's sequential revenues declined 2%, compared to 6% decrease for the principal competitor.

In the area of drill bits, security DBS their sequential revenues increased by 6%, compared to an increase of 2% for one of their competitors and 8% for another. In the combined drilling systems and fluids business, our sequential revenues were down 1%, compared to flat performance by our primary competitor. In the completion products area, revenues were up 3%, compared to declines of 3% in 16% for two competitors and 8% increase for another. In logging our sequential revenues were down 8%, compared to a 1% decline in one of our competitors.

Landmark continues to very much add to its industry leading position. This quarter it added significant new contracts, including new field exploration, [Anadarko] and Tullow Oil, in addition, PetroBank has selected Landmark drilling software for all of it's planning, execution, and analysis of its well construction process.

On an overall basis, while the worldwide rate count increased 9% sequentially, we really haven't seen a corresponding increase in revenues due to much lower pricing in the U.S., change in activity mix, and political unrest in South America, and the impact of course of the tropical storms we saw at the end of the quarter and the beginning of this quarter in the Gulf of Mexico.

That being said, although HES revenues were flat sequentially, it's operating margins increased $27 million sequentially, as we focused on the most profitable work that was available. Margins increased from 10.2% to nearly 13% during the quarter.

Now let me talk a little bit about asbestos. As you know, the bankruptcy court in the Harbison-Walker case issued a temporary restraining order stating all future litigation on more than 200,000 asbestos claims pending against us. The hearing on that stay in the bankruptcy court occurred this morning, and that stay has been consensually extended now until December 11th. As we have previously announced, we are in settlement negotiations for a global rep resolution of all asbestos liabilities, not those merely relating to Harbison-Walker. We continue to pursue a global resolution of our asbestos liabilities, but I do need to point out that these negotiations involve difficult and complex issues, and there's no assurance that we'll be able to reach an acceptable agreement. However, personally, I'm pleased that Halliburton and the asbestos claims committee deem progress sufficient at this point in time to support an extension of the stay. Having said that, I don't want it's in our best interests at this point in time for me to get into any details of the status, including the timing or status of the negotiations, or try to put a handicap on the likely outcome.

Let me talk now about the non-core asset dispositions. As I told you in our last call, both business units are undertaking a strategic review to identify the assets that we no longer belief fit into our core businesses. During the quarter, we finalized the sale we had of Bredero Shaw. In addition, during the quarter we sold an investment in one of our integrated solutions projects for $130 million.

At the end of the quarter, our liquidity was very strong, with $586 million in cash. And as of this morning, we have approximately $700 million in cash. We remain spot on target to raise a total of $500 million in asset sales of non-core assets by the end of the year.

In light of the current industry conditions, I'm very pleased with where the company is and specifically the performance of the energy services group. Especially when compared to how some of our competition did. KBR has showed some improvement, but continues to perform significantly below my expectations. We'll talk about that a little bit further as Doug gets into the details.

So at this point in time, let me turn the call over to Doug. He'll talk about more detail on our operations. Doug.

Thank you, Dave.

Good morning. My comments today are going to include updates on the company and segment results, our corporate reorg, the SEC preliminary inquiry, liquidity, and finally asbestos.

Moving to our operating results, I want to stress again these pro forma numbers exclude the items Dave previously mentioned. Total company revenues of approximately $3 billion for the quarter were down 12%, year-over-year, and 8% sequentially. International revenues were two-thirds of the total in the quarter, compared to a similar two-thirds last quarter. Operating income was $220 million, a decrease of $134 million or 38% year-over-year, and an increase of $59 million or 37% sequentially. Income from continuing operations was $119 million, or 28 cents of diluted share.

Now let me give you more detail by segment on our operating results.

In the energy service group, quarterly revenues were $1.7 billion, a decrease of 20% year-over-year, and 5% sequentially. The sequential decrease is attributable to the contribution of Halliburton subsea assets to Subsea 7, these previously consolidated assets and results of operations are now reported on the equity method. The year-over-year decrease is due to the decline in U.S. activity and lower prices.

HES Halliburton Energy Services third quarter revenues fell 13% year-over-year and were flat sequentially at $1.5 billion.

Within the product service lines, sequential revenues increased with security DBS up 6%, completion products up 3%, and pressure pumping up 2%. Logging was down 8, [Bay Roy] down 2, and Sperry-Sun was flat for the quarter.

On a geographic basis, sequential revenues in the Middle East and North America were up by 4 and 3% while all over regions were down by an average of 4%. Tropical storms in the Gulf adversely impacted revenue by over $25 million.

Sequentially, revenues for the remainder of ESG were down $80 million, and this again is due to the formation of Subsea 7 which is now accounted for on the equity method. Landmark revenues were up 5% sequentially.

Operating income for the energy services group was $223 million, a year-over-year decrease of 32% due to lower activity in pricing within HES. Sequentially, ESG operating income increased 33% due to the results in HES. Sequentially, HES operating income increased approximately 27%, due to the net pre-tax income of $21 million on integrated solutions projects during the third quarter. With the exception of [Bay Roy] and security DBS, all product service lines reported lower operating income for the quarter.

Operating income for the remainder of the segment increased $13 million, due to contributions from both Landmark and our surface Subsea group.

Now let me move over to KBR Engineering Construction segment. Revenues for KBR increase ked 1% year-over-year to $1.3 billion. Operating income for the quarter was $14 million, an increase of $5 million sequentially after excluding the second quarter loss on the Barracuda-Caratinga project in Brazil, and other pro forma items previously mentioned.

Operating margins of 1% remain significantly below our expectations. The low margins are due to higher than anticipated losses on several jobs during the quarter. We're disappointed that KBR margins for the second half of the year won't meet our 3% guidance, but we believe they will improve going forward although we realize we have a big hill to climb with you in terms of credibility.

With respect to the project in Brazil, we have recently filed a claim well in excess of our reported accounts receivable amount on the project, and there were no additional loss provisions recorded on Barracuda-Caratinga during the quarter.

General corporate expenses were $21 million, which including $4 million of expenses related to the reorg. Interest expense of $29 million was down a million dollars sequentially, and foreign currency gain was a million dollars for the quarter. Excluding the impact of the impairment loss on Bredero-Shaw and reorganize charges, the effective tax rate was 39%.

Cap Ex totaled $160 million for the quarter, down $64 million year-over-year and down $10 million sequentially. We continue to invest a significant portion of our capital and HES primarily for track and equipment and directional and LWD tools.

For the year, we now anticipate Cap Ex of approximately $700 million. This is higher than previous guidance, primarily due to the higher loss and whole replacement costs and some additional investment and integrated solutions projects. DD&A expense was $135 million for the quarter flat sequentially. The prior year quarter DD&A of $131 million did include goodwill amortization of $9 million.

With regard to backlog, we ended the quarter with a total of $10 billion, compared to $9.8 billion at the end of last quarter. About 34% of the backlog is for lump-sum or fixed-fee contracts, and 46% of the backlog is expected to be performed in the next 12 months. Of the lump-sum contract backlog total, 33% of the total relates to onshore, 26% relates to offshore, and most of the remaining balance relates to our government operations. Firm orders were $8.6 billion at the end of the quarter and the remainder of the backlog mostly relates to government awards not yet funded with the [Balkan] support contract in future years representing the majority of that balance.

During the quarter, as Dave mentioned, KBR booked $1.6 billion worth of new awards in the backlog, including in the government operations group, $785 million contract with the DOE, to manage the Los Alamos National Lab, this contract which includes a five-year base period with five one-year options has an approximate annual value of $145 million.

Also in government operations, KBR received a $289 million contract for additional work to provide support services for the U.K. Ministry of Defense and our Devonport dockyards. In addition to these awards, KBR has been awarded several contracts since the end of the quarter, which will be added to backlog in the fourth quarter. These include a significant new contract for development of an Algerian gas field, which includes laying pipelines and constructing a gas processing plant valued at approximately $400 million, a cost reimburseable designed build contract valued in excess of $100 million for construction of the new U.S. Embassy compound in Afghanistan, two contracts from the U.S. Department of State for security upgrades and generally construction work at multiple facilities of at least $70 million.

Now I want to take a minute to update you on several key issues affecting our debt and liquidity. Total debt at September 30 was $1.4 billion, which is down by $100 million sequentially, including a $75 million medium term note repayment. Our debt to cap at the end of the quarter was a conservative 25% and we continue to maintain our investment grade ratings at both Standard & Poors and Moody's. No additional amounts were received from our accounts receivable securitization facility in the third quarter.

As Dave mentioned, we ended the quarter with $586 million in cash of up from $383 million at the end of June. Our working capital position remains strong at $2.3 billion. Our cash total today is about $700 million, and we expect that to grow for the balance of the year.

We also anticipate additional asset sales by the end of the year of $220 million or more. If we meet this estimate, we will have achieved our 2002 goal of $500 million in non-core asset sales previously communicated to you.

$350 million of our $700 million in bank lines expired in August. The remaining $350 million facility, which is completely undrawn, has a four-year remaining term and currently we have no plans to draw under the facility.

Also, subsequent to the end of the quarter, we amended an agreement with banks under which $260 million of letters of credit have been issued. The amended agreement basically removes the ratings triggers. The revised agreements include provisions that require us to maintain certain ratios of debt to total cap, and interest rate coverage charge. This is an extremely positive event for us, as this facility is no longer subject to an external ratings trigger, but is based on our own internal financial results, which at the end of the day are under our control.

Finally, our head count was around $82,000 at the end of the quarter, which is down 1,000 sequentially, and down 6,000 year-over-year. In connection with the reorganize, we incurred pre-tax restructuring charges of $11 million during the quarter, which brings the restructuring costs to $78 million pre-tax. We estimate we'll have additional charges in the fourth quarter of about $12 million. As a result of these actions, we continue to expect annual savings from the corporate reorganization of $200 million starting in 2003.

On the SEC preliminary inquiry, we're continuing to be actively engaged in providing the SEC all the information they have requested. And I would point out that this continues to be a preliminary inquiry, and the scope of that inquiry has not changed.

A few asbestos details. In the third quarter, our net reserve went down approximately $17 million, to $585 million, due to litigation and settlement payments, net of estimate insurance recoveries. Our gross liability for asbestos litigation claims in our estimated insurance recoveries were $2.17 billion and $1.5 billion at September 30, 2002.

We've previously addressed asbestos with respect to the Harbison-Walker stay, and our pursuit of global settlement. Details regarding the number of claims filed and claims history for the quarter will be forth coming in the 10-Q that we anticipate filing in the next couple days.

And now I'll turn the call back over to Dave to make some closing comments.

Thank you, Doug.

I'm certainly grateful to all of the employees at Halliburton for enabling us to meet our goals for the quarter, and exceed our customers' expectations in the markets that we serve. Our third-your results also benefited from the corporate reorganization we've been going through because it reduced costs, and improved efficiencies in our operations.

As I said earlier, it was a disappointing quarter for me in our engineering and construction segment, but I look forward to better margins in the future. As we have seen in told you today, several of the awards at KBR received since the end of last quarter, I do believe that they'll be increasing opportunities for higher margins and additional operations and work in our government services business. In addition, we believe that there are also very good prospects in KBR's other lines, especially in the area of gas development, primarily L&G.

There does continue to be a disconnect, however, between the current level of oil and gas prices and the level of our customers' spending. Until the economic, political and weather-related uncertainties competing our spending of our customers becomes clearer, we expect oil field services activities to be essentially flat. However, we are optimistic that drilling, especially in the gas arena, should improve sometime next year.

As a result, we expect our fourth quarter operational performance to be flat within the energy services group, excluding any pre-tax gain or losses, from the disposition of non-core assets, and with reorganization costs we expect earnings per share from continued operations from the fourth quarter to be a minimum of 22 cents a share. In the quarter we improved our liquidity greatly through the sale of non-core assets and cash flow from operations. And we will continue to evaluate all of our strategic opportunities in this area. From an operations standpoint, I am very pleased with the relative performance of the energy services group in the current industry conditions. We are on course with significant initiatives, set out at the beginning of the year, and about continue to, cute very well the objectives we have in our core businesses. As I said, I think that given where we came through this quarter, with the diversion of the global settlement and asbestos, I really couldn't be happier at this point in time with where the organization is and we've certainly looked forward to getting this year behind us and moving forward.

So with that, let us stop the presentation and open it up for questions at this point in time. We'll let Cedric moderate it.

Thank you, today's question and answer session will be conducted electronically. To ask a question, press the star key followed by the digit one one your touch-tone phone. Again, that's star-one for questions. Please make sure your mute function is turned off to allow your signal to reach our equipment, and please limit yourself to one question. We'll pause just a moment to assemble the roster.

We'll take Paul McCrae, Wellington Management.

Good morning. You mentioned that Kellogg Brown & Root there are higher than anticipated losses, in several projects. But apparently do not include additional accruals on losses at Barracuda-Caratinga. Can you be more specific as to where those losses are?

Paul, I mean, I think you pointed it out correctly, there was no one significant job. But the losses did not include Barracuda-Caratinga.

I see. Okay. And just very briefly, that 22 cent estimate at the end of the comments, is that including or excluding the anticipated restructuring charges in the fourth quarter?

That is excluding.

Thank you.

Our next question, Dan Barrett, UBS Warburg.

Hi, guys. One quick question. The thing in the press release with regard to the integration -- integrated services projects, that helped drive -- that went from a loss last quarter to profitability this quarter, do you think that's sustainable?

And how much of that -- how much of the increases were attributable to that relative to the cost savings due to the restructuring?

Let me handle the initial part of the question. As you know, we've been building up a portfolio of integrated solutions projects for the past five or six years. And the impact on any particular quarter is a combination of earnings on those integrated solutions jobs, as well as the gains and losses on the management in that portfolio as projects are completed and then disposed of, and new ones start. And so it really is -- I wouldn't look it at on a quarter-to-quarter basis, being something that either will have a big plus or big minus, but over a period of time we certainly view it as something that adds to the overall portfolio we have and in this particular quarter it tended to be a plus for us, and then the last quarter it tended to be somewhat of a minus.

So I think that to some extent, it has a little bit of a nature similar to some of our E&C contracts in that you really can't predict from quarter-to-quarter, nor can you predict looking forward, when we may choose to either monetize one of those or the fact that the services in related work off one of them may be a boost to income. So I really don't want to get into conjecturing the sustainability, we view it as a great portfolio and one that will continue to add to the value of the company. But I don't want to get hamstrung into trying to predict when we may want to take some pluses or minuses from them.

Our next question from Terry Darling, Goldman Sachs.

Thank you, Steve. Appreciate that perspective on the integrated service but I'm still trying to understand what happened with the profitability X solutions sequentially. Doug, you mentioned $21 million plus this quarter, can you tell us what the minus was at the operating income line last quarter, can you also tell us what the sequential impact on revenues from that business were?

And if I'm guessing right here, it looks like nonetheless, you did have some sequential improvement in your margins on flat revenues. And I'm wondering if you can talk about where we are in terms of cost savings already being reflected in your results. Are we already seeing that or is that all still to come?

I guess the -- if you wanted to take out the effect of IF for this quarter, it would probably be in the range of 3 cents. I don't have the answer for you for last quarter, but we'll get those to you, Terry.

In terms of the cost savings, I would say that there are cost savings included in the third quarter, not yet the full impact. But I think you should see the most of the full impact of that $200 million annualized number in the fourth quarter results.

Our next question, Ken Sills, Credit Suisse First Boston.

Okay, I'm going to be the last one to beat on this horse. In integrated solutions, you did say that you recognized $130 million from the sale of one of the projects, future interest. I'm wondering what was the gain on that?

And then just a try to follow up Terry, trying to figure out what are the sustainable margins for the next quarter?

You obviously had much better. Is there any particular product line outside integrated solutions that saw substantial margin improvement?

Do you think sustainable in Q4?

Thanks.

I think, Ken, that Doug just said, if you would just try to totally exclude the integrated solutions impact for the quarter, which to some extent I don't think is fair because we do have a plus and minus, but as Doug said, if you look at the 28 cents that we have on a pro forma basis, probably 3 cents of that as Doug indicated could be pointed at as the integrated solutions impact, so if you exclude that and say we weren't in that business at all or didn't have that portfolio, then the earnings would have been something like 25 cents a share. If you look at the positive impact from individual product lines, as I indicated I think we had a better than expected performance side of [Bay Roy], and I think the margins on the pressure pumping area were higher than I would have expected in this marketplace, and I think both the management teams running those particular project lines did a great job in the quarter. But we are fighting a lot of discounting in the market today and we're fighting a -- an effort by our customers really not to make big, long-term commitments at this point in time. But I would say the pluses would have been fluids, and the pressure pumping area.

Next question from Scott Gill, Simmons and Company.

Good morning. I'd like to switch over to asbestos, if I could. If there were to be a global settlement, how much would the cost net of insurance be above the $585 million reserve already accrued?

And would you be required to recognize this on the balance sheet during the negotiations process, but prior to arriving at an agreement?

Scott, I think we said earlier we're not going to jeopardize our position in the negotiations by commenting publicly about it any more than we already have.

Okay. Could you at least address the accounting part of that, Doug?

I think your question was, would we be required to accrue a liability -- prior -- what was the question, Scott?

If the cost were to be more than the $585 million net, would you be required to recognize that before the negotiation was complete?

You're required to recognize the transaction when in the estimation of management that transaction becomes probable, as determined by FAS 5.

Okay.

And our next question from Jim Wickland, Banc of America Securities. Mr. Wickland? He has disconnected. Kurt Holland with RBC Capital Markets.

Hi. My question just coming back on the thing, more or less on the earnings for the fourth quarter, 22 cents, one thing I'm trying to rectify is you're basically saying that business trends will be flat on a quarter-to-quarter basis, at least in the ATS business line. So basically, you're looking for a decline in either margins in that group on a quarter basis or looking for decline in business in other areas. And if the ATS business from a margin standpoint is declining, is that necessarily mean that you guys are seeing some incremental pricing pressure going into the fourth quarter?

Yeah, I think the answer to that question, first of all, is I think what you heard Dave say in his comments was we expected just as we said last year, we -- excuse me, last quarter, we expected this quarter to be 20 cents or more. I think what you heard Dave say earlier was that we expected our performance in the fourth quarter to be at least 22 cents. And there obviously is some caution in that, given the current disconnect between the price accrual and natural gas and the activity levels of our customers. Which are at an historic disconnect. As we get clarity on that, our outlook may change, and if our outlook changes, we'll certainly communicate that to the market. But where we are now is at 22 cents or more for the quarter.

Our next question from Michael Irvin, Deutsche Banc.

Thank you. Good morning. Wanted to shift over to KBR, if I could. Wanted to understand -- you obviously said you expect that to get better going forward. Wonder if you can give me a sense of timing on the progress there, and if kind of the 3% margin numbers you talked about the past are still doable and over what kind of time line.

I think the 3% margins are certainly -- that would be our expectation, actually our expectation would be 3% or better. And we would expect that to be the goal for 2003. Don't know that we'll get there. In fact, I think we said on the call today we don't expect to get there in the fourth quarter, but we expect to see some improvement.

Thank you.

Our next question from Stephen Vengarro with Jeffries and Company.

Good morning, gentlemen. On the asbestos front, do you -- just sort of I guess from your standpoint and the way you think about it, with the election results Tuesday and Republicans gaining control and the speculation that tort reform it more likely, does that change your -- to a negotiating position and/or the direction of your asbestos suits at all?

I think, Steve, that it certainly is another element in the overall discussions, and negotiations, that we're having. And it's an element I don't think anybody expected earlier in this week. But at the end of the day, we will have to assess where the negotiations are. We'll have to assess what we believe is in the best interests of the shareholders. And make a determination at that point and time.

I have said all along that we do not want to embark on an asbestos resolution strategy that depends on something positive happening in Washington. But I think from the conjecture that have you seen in the last 24 hours, post-election, there certainly is more optimism around, maybe some sort of a legislative solution. All we're going to do is continue to monitor it and continue to aggressively have our discussions with the plaintiffs toward getting a resolution.

Okay. Thank you.

And our next question from Robin Schumacher with Bear Stearns.

Yes, good morning. I was wondering if you could give us an update on the outstanding open claims at the end of the quarter, as you did in your last conference call. And specifically, address as to whether you recognized revenue in the third quarter on the claim that you had mentioned, that you had made on the Barracuda-Caratinga project.

I'll answer the second question first. We did not recognize revenue, any revenue, on the claim that was filed. We had -- we did accrue last quarter some revenue on that unimproved claim, but it was unchanged in the third quarter. What happened in the third quarter was we actually formally filed our claim with our client. And answer to your first question, first of all, all of those statistics will be out in the queue that will be filed in the next couple days up but total outstanding claims at the end of the quarter were 328,000.

Our next question from Kip Hebert, with Salomon Smith Barney.

Got a new nickname I guess.

Good morning, Kip.

I guess some other folks have mentioned, I'm a little bit challenged to reconcile the operating outlook that was given for the oil field and the 22 cents, even if we call this quarter 25 cents, excluding the integrated solutions. Maybe I can ask it a different way.

You said better than 20 cents for the third quarter, and you came out with what we want to call it 25 or 28 significantly better result. You give a 22 cent forecast for the fourth quarter. Are you suggesting you feel that there's a risk that some of the gains you made from the positive surprises you realized in the third quarter may reverse themselves?

How do we think about -- Dave did mention pricing and mix. Is that what you're thinking about here?

You can help us understand it better?

Yeah, I think, obviously causing some confusion, and let's kind of go back and lay it out. Our pro forma was 28. Three of it was integrated solutions related. And those may or may not repeat themselves. It really is a portfolio decision, and to some extent timing-related to when projects get wrapped up. If you look at what we set -- so that would take to you 25. If you look at what we said, is that ESG will be flat and we expect the KBR to be up a bit, which it doesn't seem to equate to 22, but as Doug said, we're just trying to build some caution into people's expectations because if you look at the marketplace today, you are not seeing any solidifying of pricing. You're starting to see -- or continue to see pressure on pricing, and we are basically trying to build some caution into what we see the potential results are going to be.

So I think your take on it in the second quarter, we -- the second quarter conference call, we had, we tried to build that caution in, and because of some positive things we exceeded that. I would hope that that would be the case in the fourth quarter, but I would not take away from our comments that we have had any slippage in terms of our focus on cost and efficiency. It's really just building some conservativism in because I'm concerned about the direction that the market may flow in the fourth quarter, just in terms of business available to us.

Our next question from John Down with [INAUDIBLE].

Good morning. You keep referring to the low level of investment by the E&P industry and I was wondering what you're looking at when you're arriving at that number. Looks like you'll have about your second-best revenue year in history. And when I look at the E&P companies in the first half, at least, it looked like they spent about 110% of cash from operations. I was wondering what you're looking at when you talk about that E&P discipline. And how you think that will change going into next year.

I think, John, it's part of it is you've got to look at the rate count, and of course the immediate pop to your revenues and to your operating income can come out of gas drilling in the U.S.. And that is something that isn't -- isn't terribly robust at this point in time. I don't deny your statistics in terms of spend. And we have had a good year from a revenue standpoint. As I said, we've been pretty excited about our performance that we've had during the year. The concern I have and I guess the caution that I'm trying to lay out there is that if you look at kind of the geopolitical world that the energy sector is operating in today, with concerns about the potential war in the Middle East, concerns about the sustainability of prices where they are today, there are a lot of projects being bid. There are a lot of projects that look like they're going to get the green light. But I guess based on my experience, when there's this much uncertainty in the marketplace, even though our customers may go ahead a and approve a capital budget spend for 2003, that looks like it may be up a bit, and that would be great, it's really the timing of that spending, especially on the bigger projects, that end up having a significant impact on our ability to grow revenues and the optimism by which we look at the marketplace.

So I think just to restate and, we're in a great position. We have really performed well this year. Our product lines have essentially kept or gained market share almost across the board. Our margins are coming up. Our portfolio project is starting to mature after four or five years of building them, and I think we're very well positioned. However, we don't want expectations about what the general marketplace looks like to get ahead of the reality of the spending that our customers are doing, and therefore I just want to build a little bit of caution into people's view of the marketplace. I mean, whatever is out there in the market in the fourth quarter, we're going to get at or more of our fair share of that marketplace, and whatever it is, it is, and that is the same going forward, but we really have to be -- we've got to be real here in terms of what is out there. And our customers, I think our are little bit reluctant to commit to big spending at this point in time until some of the geopolitical types of things sort themselves out and they have a better view of what those geopolitical activities may do to their long-term view of pricing.

So we're well positioned. We're very optimistic. But we are probably more cautious than anybody else is because of the fact that there's a lot of variables out in the world today that didn't exist a year ago.

Our next question from Brad Handler with Blaylock and Partners.

Good morning. I was hoping you could speak more to your other regions that you mentioned were down 4% sequentially, perhaps just some regions that performed relatively better than that and some regions that were relatively worse.

I think if you look at the operations around the world, clearly, if you look at the major areas right now, west Africa is an area that has been a positive from a revenue generation standpoint in Angola but very disappointing in a mature base like Nigeria, as the country has run into budget problems and is having trouble funding their share of development costs, which has slowed down pretty dramatically a number of larger projects we're supposed to go forward this year. You look at South America. Although business is very good in Brazil, earlier in the year we had issues in Argentina that market is slowly starting to climb its way back. Our operations in Mexico are doing very well, but Venezuela is not because of the political issues down there. And that has had a -- that's had kind of a all-in net effect because of the size of the Venezuelan operations of being somewhat of a net negative.

The Caspian is another area where there were high expectations. Our business in Russia is booming at this point in time. And I view that as a real hot spot for us, as we go into 2003.

And then I think the Middle East, which has done okay, but because of the concern around whether or not there's going to be a war there, we're seeing our customers really pull their horns in a bit in terms of making long-term commitments as to what they're going to do, and then I would say Asia kind of goes up and down with the rig count. And at this point in time, that's a market that is down a bit.

So as you look around the world, it is almost really hard to generalize on a regional basis. You almost have to go country by country, and make your assessment on that basis.

We'll have time for one more call, one question.

And we'll take our final question, from William Furrow with WH Reese.

Good morning, gentlemen. And I don't mean to beat this issue into the ground, actually I do mean to.

You had suggested, I believe, in the Q-and-A that cost cutting will accelerate in terms of its income effect in the fourth quarter. Having mentioned a business dynamics, I would question whether or not there is a seasonal rise typically fourth quarter is a seasonal rise in spending as companies finish their budgeting process, are you not seeing that seasonal rise?

Or are you seeing greater than previously anticipated price competition that would somehow overcome the incremental quarter-to-quarter cost cutting benefits that additionally you might expect, and that might have some diminution in the fourth quarter outlook?

We're certainly not seeing any U.S. traditional seasonal increase at this point in time. If you look at gas prices, especially in the Rocky Mountains, they're basically pretty low at this point in time. Storage is basically at or above where people would think historically. The pipeline systems are full. And so you're back to people's prediction as to whether or not you're going to have winter demand, specifically for gas, that would drive drilling through the end of the year.

At this point in time, the combination of that lack of increase in drilling -- and we've had major customers shut rigs down, just within the last 30 days, in the Rocky Mountains, and tell us they're not going to start back up until the first quarter of next year. So that would indicate that I think you're going to have a dampening down of the normal seasonal, kind of activity here, and the knock on effect on that is basically more pressure on pricing, more competition for available work, which is why maybe I'm more cautious than some of the other calls you may have listened to over the past several weeks. But I think that at this point in time, that's the prudent thing to do. And as I said, not get expectations ahead of the reality of the market for the fourth quarter.

I'd like to thank you for joining us on today's call. A replay will be available on our website for the next seven days.

This does conclude today's conference. Thank you for your participation. You may now disconnect.