哈里伯頓 (HAL) 2002 Q4 法說會逐字稿

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

Thank you. Good morning and welcome to Halliburton's fourth quarter 2002 earnings release conference call. Today's call is being web cast and a replay will be available on our website for the next seven days. Joining me today are Dave Lesar, our Chairman, President and Chief Executive Officer, and Douglas Foshee, Executive Vice President and Chief Financial Officer.

Following our prepared remarks, we will take questions from the investment community. We will limit each caller to one question in order to maximize participation in the time allowed. Before turning the call over today for opening comments, I'd like to remind our audience that some of today's comments may include forward-looking statements reflecting the company's view about future events and their potential impact on financial performance.

These matters involve risks and uncertainties that could impact the company's operations and financial results as discussed in Halliburton's filings with the SEC. With that, I'll now turn the call over to Dave Lesar. Dave?

Thank you, Cedric and good morning to everyone. Today, as I usually do, what I'd like to do is briefly address the operating highlights for the quarter and make some comments about the full year, talk about our competitive position, talk about some key management changes that we have recently announced, and give you an update on our noncore asset disposition program that we undertook in 2002. From an operating highlights standpoint, I guess my view is that overall, given what was available to us in the marketplace, we really had a great quarter.

Our fourth quarter net loss from continuing operations was 129 million, or 30 cents per diluted share, but as we indicated in the press release, we issued earlier today, the bulk of that comes from an additional charge related to asbestos, as we look toward getting to the -- closer to the finish line on that. [INAUDIBLE] we have included in tables 1 through 10 in our press release a series of information that will reconcile our GAAP results to the pro forma results. Doug and I will continue to refer to pro forma numbers during this call. That being said, our fourth quarter pro forma results from continuing operations were $105 million, or 24 cents per diluted share.

Highlights for the quarter include our Energy Services Group revenues being up 2% sequentially, while U.S. rig activity was down 1%. Excluding the effect of $21 million worth of gains in the third quarter, and a $5 million loss in the fourth quarter, as we exit a series of integrated solutions projects, the Energy Services Group operating income was up 9% sequentially. Improved results at Sperry Sun and Landmark helped offset significant pricing pressures in the U.S., and the effects of the tropical storms in the Gulf of Mexico and, of course, the continuing turmoil in Venezuela, which is one of our large countries of operation.

Also, a highlight is that Sperry Sun's annual revenues exceeded $1 billion for the first time. Sperry Sun becomes a fourth product service line for the Energy Services Group now to hit a billion dollars in revenue. Landmark turned in another record quarter in terms of revenue and operating income, both for the year and the quarter. Subsequent to the end of the year, and furthering Landmark's market leadership, Shell has now selected Magic Earth to provide the industry's leading volume visualization and interpretation software, and other Magic earth-related software and services. So a big win for Landmark and Magic Earth.

In relation to our E and C businesses, KBR ended the year with a backlog of $9.8 billion, an increase of over $300 million for the year in a market that has not seen a lot of work being bid. I think more importantly to our investors, the mix of our backlog has changed significantly during the year. With our government services backlog up over 40%, our onshore operations up 10%, and that was offset by a 40% decline in our offshore operations which reflects the decision that I talked to you about in the middle of last year, to no long longer pursue higher risk lump sum offshore EPC contracts, because the industry is just not rewarding contractors in that particular piece of the market for the risks they're taking.

In addition, subsequent to the end of the quarter, Marathon has selected KBR as the engineering procurement and construction contractor for its Baja, California, Regional Energy Center, which will be located in Tijuana, Mexico. Also, as I've done in previous calls, I would like to give you some information on how we compare to data reported by our competitors, which will show our continued industry leadership. As I said earlier, excluding the impact of our wind down of integrated solutions projects, the Energy Services Group operating income increased 9% on a sequential basis, compared to declines of 16%, 6%, 5%, and 20% for four of our competitors, and an increase of 6% for another competitor.

Moving on to revenue comparisons comparisons, our Halliburton energy services revenues in the fourth quarter increased by 2% sequentially, compared to declines of 8%, 2%, and 1% for three or four of our competitors and flat results for another competitor. Our pressure pumping revenues increased 1% compared to flat performance by our principal competitor there. Baroid's sequential revenues increased 1%, compared to a 2% increase for our principal competitor in the fluids business. Combined drilling systems and fluids, our sequential revenues increased 3% compared to a 3% decline for one of our competitors. In the drill bit area, security DBS's sequential revenues decreased 13% compared to a 1% decrease for one of our competitors and flat results for another, and I'll talk a little bit about why I believe that's more of a one-off than it is anything else in just a few minutes.

In the completion products area, our revenues were up 2%, as compared to declines of 15%, 8%, and 2% for three of our other competitors. And logging sequential revenues declined 1%, compared to a 3% increase by one of our competitors. Let me also make some remarks about our product service line margins for the year, because I think it's important to put those in context also. During the year, our pressure pumping margins dropped 5.2 percentage points, compared to our competitor's nine percentage point decline. However, I think that the thing you should take away from this is that it shows the large upside margin potential that we have to an increase in North America drilling that I believe is going to happen toward the back half of this year.

Baroid's margins dropped 2.9 percentage points year on year, as both pricing and performance issues impacted Baroid's results. I believe the pricing issue will take care of itself, as drilling recovers. We have made a management change in mid-2002 to address the performance issue, and I don't believe that that will recur. For the year, SDBS, the drill bit business margins dropped 2.1 percentage points, as pricing pressures and the cost of us gearing up for major new contracts, as well as the impact of business in Venezuela hurt SDBS's earnings.

Security was particularly hard hit in the fourth quarter because it has a large market share in Venezuela, and that probably was the one product service line that got hurt by far the most, in terms of what we saw from an impact in Venezuela. Also, SDBS late in the year won two large supply contracts for two of the large integrated oil companies, and we had to start gearing up in manufacturing bits for those contracts, although the revenues did not come through in the fourth quarter and will come through in the early part of 2003.

For the year, Sperry Sun's margins actually increased 1.3 percentage points, even in a relatively tough back half of the year, as the industry embraced its new technology, and I think more importantly, margins in what was a relatively tough fourth quarter for everyone, for Sperry Sun was 16%. For our completion products business, year-over-year margins increased 1.8 percentage points, as we continued to focus our completions business on the high pressure, high-temperature markets where we have a large market share. For the year, Logging's margins dropped seven percentage points, a significant pricing pressure impacted earnings in the logging area.

And Landmark's margins for the year were up 3.7 percentage points, as it continued to consolidate its leading market positions. So I think that will give you a flavor for the -- how the relative product lines did during the year where the front half of the year was pretty good, and the back half was more difficult. Also, I want to take a brief moment to review some of the key management changes that we've recently announced. As you know, Doug Foshee will step up and take on the role of Chief Operating Officer and continue to report to me.

I think Doug has done a fantastic job as our CFO over the past year and a half, and together with his prior experience as the CEO of an energy company, I think he's very well suited to assume the role. Also, as we've announced, beginning on March 3rd, Chris Gaut will become the company's Executive Vice President and Chief Financial Officer. I know many of you know Chris and have a lot of respect for him and we're very much looking forward to having Chris come on board and join the Halliburton team.

As you know, Chris is a 20-year energy finance veteran. He's got a great proven track record in corporate finance. He understands the energy business. And I -- and as I know you know, is very focussedfocused on driving greater shareholder value. And I believe, as I said, will be a fantastic addition to Halliburton's management team. Also in December, Ed Ortiz who was the CEO of the Energy Services Group, retired, planned retirement after many, many years with the company.

John Gibson who is President of HES and before that, President of Landmark, has succeeded him as the CEO of the Energy Services Group. John has exhibited great leadership over the years and I know will provide a charismatic style of leadership that will continue to drive the Energy Services Group in the right direction. Many of you also know Tim Probert who had a long career with Baker Hughes, and then was the CEO of Input Output. He has also joined Halliburton as the Senior Executive who will be running our drilling information and evaluation businesses which includes Sperry Sun, Security DBS and Wireline Logging. Tim is well-known in the industry and has got a great track record.

In addition, Lew Watts, who was the Director of Shell's intergas and power business has also joined Halliburton as a Senior Executive in our solutions group. Lew is recognized in the industry for not only developing new products, but also delivering great results for Shell and is a very customer-focussedfocused individual. So I think, as you know, we have gotten questions over the past year about a brain drain in Halliburton, and I think the, you know, I've tried to address it by telling you that that's not happening, that, in fact, our turnover has been very low. In fact, we've had a historical low for the past couple of years in 2002.

But I also think by the fact that we can attract this caliber of talent into Halliburton, I think should give you comfort that people see this as a great place to come in and build a career. And I think between the in-house management team we've had, and the caliber of external hires that we're now bringing into the organization, I believe we've got one of the best management teams in the industry today. Let me talk a little bit about noncore asset dispositions. As I've discussed with you throughout the year, both business units undertook a strategic review to identify assets that no longer fit their businesses.

Subsequent to the end of the quarter, we've sold our Mono pump business for 23 million in cash and 3.2 million shares of National Oilwell. With the sale of Mono pump and other pending sales we are currently negotiating, we will achieve our goal of raising $500 million from noncore asset divestitures. At the end of the quarter, our liquidity was strong at $1.1 billion in cash. So to recap, in light of current industry conditions, I'm very, very pleased with the performance of the Energy Services Group segment, particularly when compared to the results from our competition.

KBR's gross margins are not yet where I really would like them to be, but I am seeing improvements coming in certain key areas and product lines. Both government services and infrastructure had a very strong quarter at KBR. Offshore had a major achievement with the successful completion and commissioning of the FPSOC eagle for Shell petroleum in Nigeria. So I think the key issues to leave you with before Doug goes into more detail, I think, are the following: One, that we had very good comparative revenue growth; I believe that we had better margin performance than most of our competitors; we are more closely and clearly down the road toward getting a resolution of our asbestos situation; and I think we had a stable backlog growth in our E and C business in what was arguably a difficult market in 2002. So I think we come out of the year in pretty good shape.

But I'll have Doug go through some things in more detail. I'll come back and give some comments about where I see 2003 going, and then we'll open it up for questions.

Thanks, Dave. My comments are going to include updates on the company and segment results. Liquidity and some of the other key financial items. A wrap-up on our corporate reorganization, the SEC investigation, and the asbestos global settlement.

Talking about our operating results, I want to stress again that these pro forma numbers exclude the items as outlined in our press release. Total company revenues of approximately 3.3 billion for the quarter were up 6% year-over-year, and 12% sequentially. International revenues were 68% of the total in the fourth quarter, compared to 66% in the third quarter. Operating income was $233 million, a decrease of $52 million or 18% year-over-year, and up $13 million or 6% sequentially. Income from continuing operations was $105 million, or 24 cents per diluted share. Now I want to give you a little more detail by segment on our operating results. In the Energy Services Group, quarterly revenues were $1.7 billion, a 10% decrease year-over-year and a 2% increase sequentially.

The year-over-year revenue decrease is attributable to the decline in U.S. activity, pricing pressures, and importantly, our contribution of Halliburton subsidy assets to SubSea 7. These previously consolidated assets and results of operations are now reported on the equity method. And the sequential increase in ESG revenue is due to increased business activity in HES and Landmark as compared to the third quarter. HES fourth quarter revenues of $1.6 billion fell 5% year-over-year, and were up 2% sequentially.

Within the PSLs sequential revenues increased with pressure pumping up 1%. Sperry Sun up 4%, completion products and services up 2%, and Baroid up 1%. These increases were partially offset, as Dave mentioned earlier, by a 13% decrease in security DBS due to reduced activities and delays in coring jobs during the fourth quarter, a softening of drill bit prices in the land base market in North America and the impact of the unrest in Venezuela. Logging revenues were down 1% sequentially. And on a geographic bases, sequential revenues were up in all regions, except for North America, which was down about 6% due to lower activity and [INAUDIBLE].

North America revenue was also adversely impacted by about $23 million due to Hurricane Lily in the Gulf of Mexico, about the same as the impact of Hurricane Isadore last quarter. The Europe-Africa region increased by 14%, primarily due to increased pressure pumping activity in Algeria, Nigeria, Norway and Angola and increased Sperry Sun activity in Norway. Asia Pac Revenues increased 18% primarily due to export sales and [INAUDIBLE] equipment into China and increased Sperry Sun revenue in Thailand and Australia. Revenue increased 3% in Latin America, with increases in Mexico offsetting lower activity in Venezuela and Brazil. Middle East revenues were about flat sequentially.

Talking about other ESG revenues, which is Surface, SubSea and Landmark, sequentially, revenues for the remainder of ESG were up $8 million, primarily due to a 25% increase in Landmark revenues, related to software sales, which was partially offset by a decline in our SubSea operations due to the work off of some contracts which weren't transferred into SubSea 7. Operating income for the Energy Services Group was $216 million, a year-over-year decrease of 18% due to lower activity within HES, primarily in the U.S. As well as pricing pressures. Excluding the impact of integrated services projects that Dave mentioned earlier, ESG operating income increased 9% sequentially.

On the same basis, HES operating income increased 4%. Improved operating income in Sperry Sun, pressure pumping and logging more than offset lower results for the rest of HES, and geographically, lower margins in the U.S. were due to reduced activity in higher discounts, partially offset by improved results in the Asia Pac region. In addition, operating income was negatively impacted by issues in Venezuela, by over $3 million for the quarter. In terms of operating income in the other ESG segment, that segment increased $12 million primarily due to contributions from Landmark, partially offset by lower operating income from SubSea.

Now, switching over to KBR, our engineering construction group, revenues for KBR increased 30% year-over-year to $1.6 billion. Operating income was $39 million, an increase of $25 million sequentially, primarily due to government services work in the UK, and progress on our infrastructure product service line on the Alice Spring to Darwin rail line project in Australia. Operating margins of 2.4% have improved compared to second and third quarter margins of 1%. Although KBR didn't meet second half guidance of 3%, we hope to continue the fourth quarter momentum of those margins into 2003.

The Barracuda Caratinga project in Brazil remains a very challenging job for the E and C group. The project continues to experience significant cost increases and time delays which we believe are largely the responsibility of our client. The Barracuda project is now 63% complete and we've recently completed a reforecast of the cost to complete the project and have identified significant additional claims. Based on this review, we've increased our total unapproved claims used to calculate the net loss by $81 million, bringing total unapproved claims on the project to $182 million.

We've submitted a claim to our client, which is substantially in excess of this amount and, in fact, is more than three times this amount. While we believe we have a legally valid claim significantly in excess of our recorded costs, and we will aggressively pursue this claim, there's always risk in pursuing claims of this type. Also, we can't rule out the possibility that there may be further charges or accruals on this project prior to completion.

However, if we're ultimately successful in our pursuit of the claim, as we believe we will be, we won't suffer an economic loss on this project. And when I say we won't suffer an economic loss, that means we won't suffer a loss as was recorded in the second quarter of 2002. Now, talking about other financial items. General corporate expenses were $31 million for the quarter, which included severance costs of $10 million related to the reorganization, and $9 million specifically related to the legal reorganization. We expect normalized corporate charges to be about 17 to $20 million a quarter in 2003, and just as an aside here, and for comparative purposes, for 2002, Halliburton's general corporate expense was $65 million for the year, that compares to our two primary competitors, one of whom was $150 million for the year, another of which was over $600 million for the year.

I think that's an important consideration, as you compare our operating margins by TSL. Interest expense of $22 million for the quarter benefited from some prior period accrual adjustments, and we expect interest expense to be about 28 to $30 million a quarter for 2003. Foreign currency loss was $13 million for the quarter, primarily related to issues in Latin America, mostly due to an unanticipated currency devaluation in Brazil, but also including issues in Venezuela. Other nonoperating loss for the quarter was $12 million which comprised a $9 million loss related to the disposition of ShawCor stock received in the sale of our investment in Bredero Shaw, and a $4 million impairment of another preferred stock investment.

Talking about tax rates, excluding the impact of the impairment loss on Bredero Shaw, and asbestos charges, our effective tax rate for the quarter was 41%, and 39.7% for the year. The rate was up slightly during the quarter due to excess foreign tax credits which we don't believe we'll be able to utilize in the future. Capital expenditures for the quarter total $200 million, down $28 million year-to-year, and up $40 million sequentially. We continue to invest a significant portion of our capital in HES, primarily for directional and LWD tools.

In addition, DML had about $50 million of expenditures for infrastructure improvements at our Devenport shipyard during the fourth quarter, and I'd remind you that we own 51% of DML. And for the year, total capital expenditures were approximately $764 million, compared to last year's total of 797. I think it's important to know here that in spite of a year of tightened liquidity and a lot of focus on asbestos, we continued to invest in our business.

Depreciation, depletion and amortization expense was $109 million for the quarter, down 26 million sequentially. The prior year DDNA of $141 million included goodwill amortization of 10, and -- $10 million, $8 million after tax, or about 2 cents a diluted share. Total DDNA for the year was $510 million, compared to 530 in 2001. The prior year DDNA included goodwill amortization of $42 million, or $34 million after tax, 8 cents a diluted share. With regard to backlog, we ended the fourth quarter with a total company backlog of $10 billion, which was flat compared to the third quarter.

The Energy Services Group portion of that backlog was about $200 million, and I'd point out here that beginning with the first quarter 2003 report to you, we're only going to provide feedback going forward on the backlog as it relates to KBR, given that that is where the bulk of our backlog exists. Approximately 37% of the backlog is for lump sum or fixed fee contracts, and about 43% of the total backlog is expected to be performed in the next 12 months. Of the lump-sum contract backlog, 39% of the total relates to onshore, 25% relates to offshore and the balance is in -- mostly in government operations. Firm orders were 8.7 billion at the end of the quarter, the remainder of the backlog mostly relates to government awards not yet funded with the bulk and support contract in future years representing the majority of the balance.

KBR ended the year with $9.8 billion in backlog, an increase of over 300 million for the year. As Dave previously indicated, the mix of backlog changed significantly throughout the year with government services up over 40%, onshore operations up over 10%, and offshore operations down more than 40%, reflecting our decision to no longer pursue the higher risk lump-sum offshore [INAUDIBLE] contracts. New awards during the quarter totaled $1.1 billion and included a $400 million contract with BP Sonatrach and our onshore product line for development of a gas field which includes pipelines and a gas-processing plant.

A $130 million contract with BP in our onshore product line for engineering procurement and construction of a major expansion of their largest single olefin sites on the Texas Gulf coast, a cost reimbursable design build contract valued in excess of $100 million for construction of the new U.S. embassy compound in Cabul, Afghanistan, and two contracts from the U.S. Department of State for security upgrades and general construction work at multiple facilities of at least $70 million. Subsequent to the end of the quarter, as Dave mentioned, Marathon picked KBR as the EPC contractor for the Baja, California Regional Energy Center near Tijuana.

Now I want to take a minute to update you on several key issues affecting our debt and liquidity. Total debt at December 31, 2002, was $1.5 billion. During the quarter, our 51% owned and consolidated joint venture, DML, grew down $66 million on an approximately $125 million credit facility, which expires in 2009, to fund a design, development and construction of an upgraded submarine facility. Halliburton Company is not a guarantor of this credit facility. DML currently operates the Devenport Royal dockyard in Plymouth, England which principally provides repair and refitting services for the British royal Navy's fleet of nuclear submarines and surface ships.

Our debt to cap at the end of the quarter remained low at 26.5%, and we continue to maintain our investment grade ratings by both S&P and Moody's. In addition, no further amounts were received from our accounts receivable facility since the second quarter of 2002 and we repaid $20 million to the facility during the fourth quarter. Total amount outstanding under this facility at year-end was $180 million. As Dave mentioned, we ended the quarter with $1.1 billion in cash, up from 586 million at the end of the September. Our working capital position remains strong at $2.3 billion and our cash position today remains at about 1.1 billion.

During the quarter, we sold the common stock of ShawCor, received during the sail of Bredero Shaw for $62 million in cash. Subsequent to the end of the quarter, we sold Mono pump to National Oilwell for $23 million in cash and 3.2 million shares of National Oilwell stock. We do expect to monetize or position in National Oilwell within the next 12 months. With the sale of Mono and other pending sales we're currently negotiating, we'll achieve our goal of raising $500 million from noncore assets divestitures, and we're still working on a couple more noncore divestitures which we hope to finalize later in the first half of the year. Additionally, we continue to have $350 million in availability under an unused committed line of credit that expires in mid-2006.

Finally, head count was around 83,000 at the end of the quarter, which was down 2,000 year-over-year. In connection with the reorganization in 2002, we incurred pretax restructuring charges of $29 million during the quarter, which brings the year-to-date restructuring costs to $107 million. This amount is higher than previous guidance due to additional facility consolidations and closures, legal fees associated with the legal reorganization, and costs associated with additional executive retirements, and employee terminations.

During the fourth quarter also, we were informed that the SEC had formalized its investigation of our disclosure and accounting for cost overruns on certain engineering construction jobs. To our knowledge, the investigation hasn't expanded beyond these matters. We believe that a formal investigation is a necessary step towards a resolution of the matter and this allows the SEC to obtain additional information from third parties, as well as, assuring the company's continued cooperation. We look forward to resolving this issue and continue to work with the SEC to do that. Now I'd like to switch gears and talk about asbestos for a second.

One of the issues that we highlighted last quarter as an open item was how we were going to account for asbestos in the fourth quarter of this year, this quarter. And there were two possible alternatives. One was that the global settlement by the end of the fourth quarter would be probable with probable being defined by GAAP, or two, that we would still be working on the global settlement, but it would not yet rise to the level of probable as that is defined in GAAP. If you'll recall in the second quarter of the year, we accrued a liability associated with all of our asbestos exposure, a gross liability of $2.2 billion, and an insurance receivable of $1.6 billion for a net exposure of $600 million.

You may also recall that that was a point in a range provided by a third party with the top end of that range being $3.45 billion, and an insurance number associated with the top end of the range of $2.1 billion for a net liability of $1.35 billion. And then finally, the third point is the global settlement with a liability there of $4 billion an insurance receivable of $2.3 billion for a net exposure of $1.7 billion. Given that we could not deem the global settlement probable under GAAP, and considering all of the points in that range, this quarter we chose to accrue our asbestos liability at the top end of the range of the third-party report.

That results in a change of the net liability from $600 million that was previously on the books to $1.35 billion, or a net change in the balance sheet of $760 million. Now, let me switch from the balance sheet to the income statement. We took a pretax charge during the quarter related to asbestos of $781 million, it had about a 15% tax benefit associated with it so that the after-tax number was $660 million. Of that after-tax 660, about 210 related to KBR, and $450 million related to asbestos in our discontinued operations.

Also, in discontinued operations for the quarter were other legal fees related to the global settlement of $23 million, so that the total after-tax income statement treatment for discontinued operations was $473 million. That should reconcile the numbers for you. There's one left remaining, and that is the difference between the pre-tax charge of $780 million, and the income statement, and the balance sheet change pre-tax of $760 million. The difference between those two numbers is the normal asbestos activity during a quarter. That is, things like defense costs, insurance, and settlement costs. So hopefully, that reconciles the rather complex treatment for asbestos during the quarter.

Now I'm going to read back from the script so that I make sure this is outlined properly. In the fourth quarter, our accrual for asbestos liability net of insurance recoveries increased $763 million to 1.35 billion. Our gross liability for asbestos litigation claims and our estimated insurance recoveries were 3.4 billion, and 2.3 billion respectively. Total asbestos claims outstanding at the end of the year were 347,000.

On December18th, we reached an agreement in principle which we have announced publicly that if completed would result in a global settlement of all of our asbestos and personal injury claims. The agreement covers all pending and future personal injury asbestos claims and other claims against DII, KBR and their subsidiaries, as well as, Harbison Walker claims. As a result of this agreement and principle, we adjusted our asbestos liability to $3.4 billion and increased insurance recoveries to 2.1 which resulted in a net pretax charge of $780 million or $664 million after tax in the fourth quarter. Of this amount, $232 million, or $212 million after tax, was charged to the engineering construction group and $549 million or $452 million after tax, was charged to discontinued operations.

Should the proposed global settlement become probable under statement of a financial accounting standards Number 5, we would adjust our accrual in the future for probable and reasonably estimable liabilities for current and future asbestos claims. The settlement amount would be up to $4 billion, consisting of up to 2.775 billion in cash, 59 and a half million Halliburton shares and notes with a present value expected to be less than $100 million. Assuming the revised liability would be $4 billion, we would also increase its probable insurance recoveries to $2.3 billion. The impact on our income statement would be an additional pretax charge of $340 million pretax, $299 million after tax. This accrual, which has embedded in it a value of $1.1 billion using our stock price at December 31, 2002 of $18.71, would then be adjusted periodically based on changes in the market price of the company's stock until the common stock is contributed to a trust for the benefit of claimants.

I also wanted to just give you a brief update on what's happening with regard to the global settlement. As we released on the 18th, the Harbison Walker stay was continued until March 21st. There is a deadline in there for us to have at least 75% of the definitive settlement agreement signed. We think we'll meet the deadline. We have started in the last several weeks do diligence on at least those claims covered by agreements that we already have signed. We won't make our March -- our initially intended March filing of the prepack and we are now targeting a second quarter 2003 filing. And with that, I'll turn it over to Dave to make some closing comments.

Thank you, Doug. Our fourth quarter results, as I said, were better than the 22 cents per share estimate that I gave you in the end of our third quarter and when we did our third quarter conference call. Despite the very tough economic conditions that were there, not only in broader industry, but also in the oil field services industry. As I predicted at that time, there was a disconnect between oil and gas prices, and our customers' spending, and that disconnect really continued during the fourth quarter.

The worldwide rig count remained flat during the quarter, and although oil prices were favorable, continued economic and, more importantly, I believe, political uncertainties, adversely impacted our customers' desire to start spending. That being said, I am very pleased that despite this difficult cycle, our Energy Services Group in particular turned in a strong quarter and a strong year.

As I said earlier, the E and C business has demonstrated progress, especially in the fourth quarter, and being able to generate both higher revenues and operating income, and our government operations and infrastructure businesses, I think, are clearly headed in the right direction. At the same time, we were achieving these positive operating results, as Doug has indicated, we've also made substantial progress towards a global settlement that if we do get it completed, will permanently resolve all of our personal injury asbestos liability for the company. As he said, we've got a lot of work to do on this.

To make sure that we can get the complete -- the transaction completed, and of course, that completion is by no means assured, but we have put a lot of work into it, and I think getting to where we are, which was a huge achievement in 2002. As Doug said, we also have enhanced our cash position, and we've got the company now reorganized into two separate business lines, where I believe we can continue to increase our competitive edge in each of the markets that we compete in.

When you combine our company's operating performance during this difficult environment with the achievements that we had during the year, I can't help but come away feeling very proud and very optimistic about the future of our company. As I look at 2003, there are, however, several significant uncertainties that remain that make it more difficult to predict industry trends and more specifically, our company's performance. These include, of course, the tension in the Middle East, most significantly, a possible war in Iraq. The continued political and economic instability in Venezuela and certain other countries around the world affection the ongoing threat of terrorism.

Our first quarter is typically our lowest earnings quarter due to seasonality in our Energy Services Group and a delay in budget funding of our customers in their drilling programs. In addition, the strikes in Venezuela, I believe, will have a much larger negative impact in the first quarter than we experienced in the fourth quarter. Accordingly, we expect our earnings per share from continuing operations for the first quarter to be 18 cents or higher, excluding the impact of any divestitures in the global asbestos settlement.

The major factors contributing to the difference between the fourth quarter and the first quarter are the normal seasonal declines that we always see in Landmark's operations, their fourth quarter is always the best quarter, the first quarter is always their worst and then a decline of operations in our SubSea 7 business. SubSea 7's fourth quarter typically is one of its highest quarters, and the first quarter, because of weather problems we typically experience in the North Sea is one of its lowest quarters. In fact, we are expecting and projecting a loss in SubSea 7 operations in the first quarter due to weather, weather downtime, as opposed to a profit in the fourth quarter.

Also, as Doug mentioned earlier, we'll have an impact of interest expense that will cost us about a penny in the first quarter, and then as I have indicated, I think we will have more impact in the first quarter from Venezuela than we had in the fourth quarter. If you look at the full year and assume an average increase in the U.S. rig count to about 975 rigs and a slight decrease in the average international rig count, I believe that our earnings per share from continuing operations for 2003 will be $1.10 or above, again, excluding the impact of any global settlement on the results of our operations.

In 2003, we're going to focus on, among other things, continuing to improve our operating results, and more importantly, our margins at both of our business segments. We want to try to get a successful completion of our asbestos global settlement, and continue to bring new technology into the market to increase our market share in a profitable way. That's one of the reasons that, as Doug indicated earlier, that even though we had a tight liquidity position, and we had a very difficult back half of the year for the industry, we made the decision to continue to spend our capital budget through this down trough because we believe so strongly that operations will be kicking back up in the back half of 2003.

And I think we will have both the equipment and the people available to take on that marketplace when it comes our way. I think that it achievement of these initiatives should continue to allow Halliburton to enhance its shareholder value in 2003. I think the addition of the new management has been very positive. And I think we're very well positioned as we move forward, not only for this year, but years into the future. All right. Let me stop at this point in time, and let's turn it over for some questions.

Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit 1 on your touch-tone telephone. We will proceed in the order that you signal. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press star 1. We will take our first question from John Dowd with Sanford Bernstein. Please go ahead.

Hello. Congratulations on some pretty solid operating results. I had a question on the income in HES. I was wondering if you could give us a little bit of an indication on what happened in North America, what happened outside of North America from an operating income point of view? Go ahead.

Yeah, HES, I guess probably the biggest single negative driver for HES was both activity and pricing pressure in the U.S. And that affected -- that probably disproportionately affected PSLs like those in our pressure pumping business. That was offset by continued great results by Sperry Sun, in spite of a very difficult market. And internationally, particularly, Sperry Sun had a great quarter.

We will take our next question from Jim Wicklund with Banc of America Securities. Please go ahead.

Yes. Good morning, gentlemen. This is Neil [Damon] for Jim Wicklund. My question is around your -- the agreements in place around the asbestos cases, I'm just wondering recently, has that changed significantly? And then also, can you give any color on the likelihood of the cases that you're going through now, the likelihood of these meeting the criteria of the insurance recovery?

Yeah, the nature of the -- the general nature of the global settlement agreement has not changed. As you recall, when we -- as you may recall, when we issued the press release back in December, we issued it based on the fact that we had signed letter agreements, detailed letter agreements with plaintiffs' firms representing in excess of 90% of existing claimants. Those detailed term sheets are now being converted into definitive settlement agreements and there are some changes. But the gist of the settlement agreement is the same. And then I guess your second question is whether we can give some color as to what we're finding in our review of existing case files. And I would say that given that the bulk of the settlement agreements with the very large claimant numbers have not yet been signed but are imminent, we don't have a sample set yet that's big enough to be statistically significant, it's just too early.

We will take our next question from Scott Gill with Simmons and Company. Please go ahead.

Yes, good morning, gentlemen. I was -- really wanted to ask a question to follow on to the previous one here. Doug, I was wondering if you can help us understand why the due diligence process is being stretched out beyond April 1? Is this more of an effort to, you know, renegotiate with the plaintiffs here or is this more being done to ensure collection from your insurers? I guess the follow-up to that would be: Does that termination clause extend until you get the due diligence done?

Okay, Scott, I guess first there is -- I don't think there's an attempt by either side to use your word, to renegotiate the deal. It is a very complex deal, and we have known all along that no one was going to allow us to look at their files, meaning the individual case files, until definitive settlement agreements were signed. And that process has just taken longer than we expected it to take. At the recent court hearing which we press released on on the 18th, I think we said that the Judge required us to submit an affidavit saying that we have at least 75% of the current claimants represented by -- executed definitive settlement agreements by March 14. We expect to meet that deadline.

That's really when the heavy lifting associated with the due diligence begins. And that, as we've said before, that involves, you know, 320 or a thousand or more individual claim reviews. We have large teams of people set up to do that. We expect to hit the ground running, but it can't be done in a couple of weeks, it's a longer process. And that has stretched out our ability to commit to a prepad by March.

the next question is from Ken sill with Credit Suisse First Boston. Please go ahead.

Good morning, gentlemen. I wanted to follow up or dig into the pressure pumping business. You mentioned there was some pricing pressure, one of your competitors made some comments saying that they had been hiring people in certain regions in the U.S., including land rig counts coming up. I'm curious as to what you're seeing in the field with pressure pumping, and if you could give us detail as to how much of your U.S. business is onshore versus exposed to what seems to be a continuing weak shallow water Gulf of Mexico market?

Ken, this is Dave. Let me take a shot at that one. You know, and let me try to maybe walk backwards through the question. We've always had a stronger offshore market than we've had onshore land market. Our focus in pressure pumping has always been on the big integrated majors and the large independents. We do not have, and have not focussedfocused our market share on the smaller independents. So that kind of gives you a sense of where our market share is spread out in the U.S. I was in Denver yesterday meeting with some customers, and meeting with our folks up there, and obviously, the Rocky Mountains and Halliburton, Denver runs to the West Coast and Rocky Mountains area, and I came away positively encouraged by what I heard from our customers in terms of their drilling plans. Clearly, you've got some weather issues to deal with at this time of the year, but the fact is that with gas prices where they are, especially what you net back to now in the western part of the U.S., I think that my view is that drilling is going to kick up in the middle to latter part of this year, will very much hold true.

As I indicated earlier, it's also true that with the rapid decline we had in the middle to latter part of last year, it did have an impact on margins and I think that that is one of the real quick upsides we have in our earnings capacity right now, is to restore those pressure pumping margins back to where they were a year ago. And that can come with relatively small increases in volume, as long as the available equipment is getting sucked up in terms of its utilization. We didn't go through any kind of major layoffs of our workforce in the U.S. as we went through the downturn last year, so we really don't see any need at this point in time to have to hire or add to our crews. I think we just kept people busy through the downturn, gave some folks time off, did some training, so I don't think we're going to be going through the cost of having to hire people or the gearup in economies of scale that you sometimes struggle through as an industry as the industry starts to turn back up. So I think we're really well-positioned there.

I would hope that pricing would firm up as we get a little bit further into the year, and that's certainly our goal to lead the market in that way. And I think that when we can get those margin points back, especially in North America, it's going to add incremental revenue and profit to our bottom line very quickly.

And Dave, I'd just add one thing to that: I think our current estimate is that with regard to our pressure pumping business, in the U.S., we're currently sized from an equipment standpoint and from a people standpoint to be able to handle anything up to about a rig count of 1100.

We will take our next question from Kurt Hallead from RBC Capital Markets. Please go ahead.

Yes, good morning. The question I have relates to the KBR business on E and C. The sequential revenue growth was pretty strong. You mentioned here UK government services. I was wondering if you could provide a little bit more color on the contract awards or the revenue that you were able to generate for that business segment in the quarter and what we could expect on a go-forward basis, if that kind of trend will level off or drop or what we could expect going forward?

I think -- this is Dave, let me take a first shot at this also. We have spent, as you know, a fair amount of time as we went through last year, trying to refocus KBR into a business model where they have a backlog that's more repetitive and more predictable in terms of its ability to deliver consistent earnings to us. So if you look at the fourth quarter, most of the revenue kickup was in DML as we started some substantial work, as we indicated, both on an upgrade of the facilities, but also an upgrade of some of the submarines that have now come in for refurbishment. I think that the trend in 2003 for government services should continue.

I don't think we'll get as much of a kick out of DML going forward, but as the U.S. looks to deploy troops to the Middle East, obviously our log cap contracts that we have with the Department of Defense in the U.S. should be utilized to some extent, and I think that that will have an impact on revenues over the next several quarters. And then we've got several of the big larger onshore contracts that we got in the middle of last year in Algeria and Nigeria and a number of other places should also start to kick in in terms of higher revenue.

That will all be mitigated somewhat by the fact that we are running down our offshore business until the point where our customers realize that there needs to be another business model out there. We'll give a little bit of editorial comment on that, is that most of the senior customers I have now sat down with and explained the rationale for why we made a decision to exit the offshore lump-sum business, the response I'm getting back is that KBR can't do that, you guys are the big player in that industry, and we have to work together to find a way to make sure that KBR stays in that game and can make a profit at what we do.

I think it's also interesting to note that most of our major competitors that are in that business have taken now a similar approach that we have and I think with the exception of only one major contractor now, have essentially taken the same position that we have about taking on lump-sum offshore work. So I'm more positive six, six, seven months out from the decision, that we will be able to find a contracting strategy that will allow us to get back into that game in a big way. We have maintained that resource base, for instance, our engineering and procurement groups.

We are now basically utilizing on a basis of cost reimbursable work or doing lump-sum but on an engineering or procurement basis but not taking on the subcontractor risk. So we have maintained the skill base inside the company, and as I said, I think that as time goes on, our customers will work with us to develop a model that will allow us to again be a player in that business, but in a way that makes us profitable. I think the trend for KBR right now with the backlog it has, I think, is in a positive direction.

It's still not meeting the expectations that I've laid down for them, but I think they're going in a direction that should be able to achieve a reasonable rate of return for the amount of work we do, and the very limited capital that we have in that business.

We will take our next question from Jeff Hebert with Salomon Smith Barney. Please go ahead.

Thanks. I have a two-part asbestos question. Not fully aware of what all the requirements are to rate something probable, according to FASB, but would it be incorrect to connect the longer time it's taking to do due diligence and the fact that you weren't able to reach the probable hurdle in the quarter, and the related part of the question is: Assuming you meet the March 14 deadline, can you give us an updated target of when you think due diligence could be completed?

Sure. Well, let me address the issue of "probable." It's not -- it is at the end of the day, a judgment call, first of all. But there are several things that are part of that. One of them is, for example, you would have to have definitive agreements signed. You also would probably have to have mailed a disclosure statement and received back 75% of the ballots approving the transaction. You probably would also have to have final signed financing agreements put in place, and so, I mean, there are a number of things that from a GAAP standpoint, hurdles that we believe we would be able to get across to meet what is a very high standard of probability under GAAP. So that's the real reason.

It really didn't have -- it didn't have that much to do with the fact that we've had some delay in getting the definitive agreements signed. The other thing is that our due diligence, the second part of your question is now that the March 14 deadline is here, and assuming we meet that deadline, when will our due diligence be complete? I think I said earlier that our goal now is to have the prepack filed in the second quarter. So that gives you some idea. Within that, though, is pretty much dependent on when, after we get the settlement agreement signed, the plaintiff's files are furnished to us. As I mentioned, we have a small Army of lawyers prepared to start going through those files, but we're not in total control of that process. I hope that answers your questions.

We will take our next question from Terry Darling with Goldman Sachs. Please go ahead.

Thanks, I had one question for Dave and one for Doug. Dave, I'm wondering if you can be more specific on the revenue and margin assumptions in the $1.10 number for the full year 2003, the margin and revenue assumptions for the E and C business? And then for Doug: Presumably the performance HES operating margin sequentially in Q4 benefited from some incremental impact from the cost-savings initiatives, as well as, the lower depreciation that you talked about. I'm wondering if you can describe those, what the -- quantify those numbers for us, as well as, what depreciation ought to look like going forward. Thanks.

Terry, I'm going to let Doug handle both of those since he's got a lot of that stuff in front of him and he's, in particular, been focussedfocused on the plan for 2003.

I guess I would say first of all, Terry, the incremental improvement in margins in fourth quarter versus third quarter, if you take out the restructuring charges, related to the reorganization would have -- I can't give you an exact quantification, but wouldn't have been all that significant because a bunch of that cost was taken out by the time we had ended the third quarter. The DDNA change -- a lot of the DDNA change, of course, relates to the fact that we've sold what is now approaching half a billion dollars worth of noncore assets.

Some of those assets included oil and gas producing properties which of course carry a big DDNA load. In terms of guidance for 2003, with regard to depreciation, I think we would project, given all the assumptions that Dave sort of outlined in his dollar -- $1.10 or better number, something in the 125 to $135 million range for DDNA. And then I think the other thing you asked was what our expectations are for KBR in terms of operating margin in the plan? And I would say that, again, to give you a range of between two and a half to three and a half percent.

We will take our next question from Michael LaMotte with JP Morgan. Please go ahead.

Thank you. Quick question on government services in the Middle East. Dave, you mentioned in the meeting in New York that you couldn't really talk about any of the potential work regarding the military buildup in the Middle East. I was wondering if you were able to talk about that now?

Mike, basically we're under the same ground rules we were at that point in time, about the deployment and the task orders that we have received or may receive, but given the nature of that contract, as I indicated that day, when we can go public with something and give kind of a feel for where it may go, we'll certainly do that. But for this point in time, for national security reasons, we're -- and per the contract, we cannot communicate that with anyone.

We will take our next question from Wes Matt. Please go ahead.

Hi Dave, can you give us a sense in terms of international revenues you had mentioned that they're going to be down slightly in '03. What kind of assumptions are you assuming for Venezuela, Nigeria and the North Sea this year?

Sure, Wes. I think the one that I think is the hardest to predict, but has the most impact, of course, is Venezuela. As I indicated, I think the first quarter, in terms of impact on earnings, is going to be more than the fourth quarter was. I don't see anything happening down there right now that would indicate any significant turnaround in the first half of the year. The way things have gone, even if [Pedovasa] basically got put back in business today, so many of the decision-makers and so many of the people that keep contracts and let contracts, and more importantly, pay the service contractors, have been let go and terminated, that in my view, it would be irresponsible for our -- for us or the service industry to charge back in there until we had a better view as to who could give us contracts.

And as I said, more importantly, who could pay us for the service work that we did. So I think that's one that we really aren't counting on. And I think we'll continue to have a negative weighing down on international operations. The North Sea, I think, is also going through a pretty dramatic change right now. In terms of who your customers are going to be in the North Sea. You certainly have the impact of the tax change in the North Sea impacting activity in the back half of last year, that really isn't going to change as we get into 2003.

I think, though, that you are going to start to see some significant asset swaps, similar to what you've seen on the Apache BP for the 40s field, for instance. So I think as new players come in and look at what the major integrated's think are marginal plays, but the smaller companies and larger independents view as something with a serious application, a new technology, can be a very productive asset. I think you're going to see some upside for companies like Halliburton in the North Sea, but we're going to have to wait for those assets, which is to move forward. So I don't anticipate certainly 2003 to be a great year in the North Sea, but I think it is setting up in the future for kind of another area of high demand for the kind of high technology that we do.

And the country that you mentioned is Nigeria, and I think that's another one that is something that we've got to keep our eye on. Because the work is certainly there. Our customers are well-established there. But we, along with everyone else, are getting concerned about your ability to get paid on a timely basis. And, therefore, the impact on how you price and bid work there. So that's a country where we did not do very well in 2002 because of those related issues. We're expecting it to be marginally better in 2003, but my Nigeria is a country where the whole industry, in my view, does not get paid for the risks we take on and is something that we've got to get resolved with our customers.

We will take our next question from Robin Shoemaker with Bear Stearns. Please go ahead.

Yes, good morning. I wanted to ask you about one of your, I think my impression, one of your largest pressure pumping customers in North America, and that's El Paso, which last week announced they're dropping a lot of rigs and one I think you've had an alliance on in your pressure pumping area. Have you gotten an indication as to what level of business they'll be doing with you or -- and as kind of a corollary to that, since the rig count has been trending up, what level of rig count, how many more rigs would we need to see before you think there might be some leverage on the pricing side?

Robin, let me answer the El Paso question. I'll let Doug handle the rig count question. Clearly El Paso has been a company that has had a lot of rigs running in the U.S. historically, and we in terms of service work on those rigs, we have done the preponderance of their [INAUDIBLE] work, it's a big customer from that standpoint. I certainly read the papers here in Houston. They are laying rigs down and I think that their plans are to slash their rig count down, oh, I think 40 to 60% from where they are.

Our view is that El Paso has been and will continue to be a great customer, but given our position in the marketplace, we think we can redeploy that equipment elsewhere on a profitable basis if, in fact, those rigs aren't there to service. I mean, because those are mainly our land-based crews and we can just deploy those assets somewhere else. So yes, it would have an impact. Yes, we are starting to see them lay rigs down. But we have already factored that into the numbers that I gave you.

And I guess with regard to your question about rig count, as Dave mentioned, I think our plan assumes something like a 975 rig count in the U.S., which is about a 17% increase. I don't believe we think you have to get to a 17% increase before you begin to have pricing leverage, but that is always the $64 question in a rising market.

An analogy might be the Canadian market where one of our competitors has already announced a fairly significant price increase in the last 60 days. So I guess I would say we, you know, given our -- given our relative size, especially in the pressure pumping market, in the U.S., we would expect to be a leader on the way up.

Okay, with that, I think we have time for one more question.

We will take our last question from Jim Lewis with Morgan Stanley. Please go ahead.

Hi. The one question I had was related to the integrated service projects being unwound. What was the specific impact in the quarter of that process, and vis-a-vis last quarter?

It was -- last quarter was a $21 million gain. This quarter was a $5 million charge. So the net swing was $26 million. Okay. I want to thank you for joining us on the call today. A replay will be available for the next seven days.

This does conclude today's conference call. We do thank you for your participation and you may disconnect at this time.