哈里伯頓 (HAL) 2003 Q4 法說會逐字稿

Good day and welcome to today's Halliburton Company fourth quarter 2003 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 2003 earnings release and conference call. Today's call is being Web cast and a replay will be available on our Web site. Joining me today are Dave Lesar, Chairman, President and Chief Executive Officer, Chris Gaut, Executive Vice President and Chief Financial Officer, John Gibson, Chief Executive Officer of Energy Services Group, Randy Harl, Chief Executive Officer of KBR and Bert Cornelison, Executive Vice President and General Counsel. On today's call Chris will discuss our overall operating performance, financial position and update you on the progress of our progress of the asbestos settlement and a few other important matters for the company. Next John and Randy will cover the business outlook and competitive position of the Energy Services Group and KBR respectively. Finally Dave will provide a few concluding remarks before opening up the call for questions. We will limit each caller to one question and one related follow-up in order to maximize participation in the time allowed.

As previously announced during the third quarter conference call in keeping with best practices and corporate governance, we will no longer provide EPS guidance. As you know we have provided expanded segment and geographic information in the tables with our earnings' release and we'll strive to continue improving the transparency of our reporting. I expect by now most of you have seen this morning's press release with our fourth quarter results. If you don't have a copy of our press release you may obtain it from our Web site at www.halliburton.com.

Before turning the call over to Chris, I'd like to remind our audience that some of today's comments might include forward-looking statements reflecting the company's view about future events and their potential impact on our performance. These matters involve risks and uncertainties that could impact the company's operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form-10K for the year ended December 31, 2002, as amended and supplemented the September 30, 2003 Form-10Q and the Form-8K filed on January 23rd, 2004. With that, I will now turn the call over to Chris Gaut. Chris.

Thanks, Cedric and good morning. My comments today will include updates on our company and segment results. Our liquidity and other financial items and asbestos update, including the discussion of the insurance settlements with Equitos that we announced last evening. So moving to our operating results I will now be comparing our fourth quarter 2003 results from continuing operations sequentially to the third quarter 2003 for the duration of my comments.

Total company revenues for the quarter were up 1.3 billion or 32% sequentially due to government services work in Iraq. International revenues were 79% of the total in the fourth quarter, that's up from 74% in the third quarter, again primarily due to government services work in Iraq. Our operating income increased $99 million sequentially primarily due to the 77 million charge related to the Angelo Dutch litigation that we took in the third quarter and the improved performance at KBR. For the fourth quarter, income from continuing operations was 146 million, or 34 cents per diluted share compared to 92 million or 21 cents per diluted share for the third quarter.

Third quarter results include the 11-cent per share charge for the Angelo Dutch litigation. Now I will review our segment operating results and first we'll begin with the Energy Services Group, ESG revenue totaled $1.8 billion, which is essentially flat for the third quarter. ESG operating income totaled $241 million. That is an increase of 71 million compared to the third quarter. The sequential change is impacted by the Angelo Dutch litigation costs in the third quarter and a $16 million swing in the Sub C7 joint venture from a profit in Q3 to a loss of Q4.

The results for the ESG segments are as follows; drilling information evaluation revenues declined 16 million with decreases in most geographic areas. Revenue from directional drilling and logging -- services decreased 6 million with declining recounts in the Gulf of Mexico and the U.K partially offset by increases in Canada, Norway and Russia. For drill beds, revenues decreased by $5 million due to decreased activity in the Gulf of Mexico and the Middle East and logging revenues and logging revenues decreased $6 million comparatively because of larger direct sales into Vietnam in the third quarter.

Drilling information evaluation operating income decreased 28 million because of softness in offshore drilling services. In addition the fourth quarter included $8 million for plant consolidation and severance charges. Operating income from directional drilling and LWD services declined 18 million because of lower margins in the Gulf of Mexico and U.K sector of the North Sea and severance expenses incurred to align the business with activity levels in these areas.

For drill bits, operating income was down 7 million towards the previously announced consolidation of our drill bit manufacturing facilities in the Woodland, Texas and severance expense at a European manufacturing facility to adjust for the reduced rate count in that region. The logging operating income was down $3 million in Q4, logging continued to perform well with attractive margins for the third consecutive quarter. Fluid segment revenue was up 21 million compared to the third quarter with improved activity across the segment. Cementing revenue was up $11 million primarily due to increased activity in Nigeria, deep water work in Egypt and increased work in Western Europe primarily in the U.K and Denmark and Germany, (inaudible) revenue increased $8 million on activity from new contract awards in Mexico, the U.K. and Norway.

Fluid segment operating income was up 18 million with improvements in cementing Baroid and in venture - cementing operating income increased 13% primarily from those as I mentioned in the revenue section increased activity in Nigeria, deep water work in Egypt and change to a higher margin product service mix in the Gulf of Mexico. At Baroid, operating income increased $9 million, led by increased activity in Trinidad and Venezuela and increased sales of our biodegradable drilling fluid accolade in The Gulf of Mexico.

Our Inventure JV results were up $3 million on improved sales of expandable pipe. The production optimization segment revenue declined 16 million or 2%, that decline includes a $16 million decrease in the equity income of our sub C joint venture due to reduced utilization and deferral of project start dates. Production enhancement revenue was up $6 million due to increased activity in Iraq, Algeria and Nigeria, which was partially offset by lower revenue in the United States, the North Sea and Saudi Arabia.

Completion products revenue declined by 5 million primarily due to lower sales in the Gulf of Mexico and the Middle East. Production optimization of operating income decreased $6 million or 5% including the $16 million decline in Sub C7. Production enhancement operating income improved 7% due to increased activity in a sort of new contract in Algeria, more offshore work in Nigeria and pricing improvement in the US.

Completion products operating income 30% in the fourth quarter with improvements occurring in Nigeria, Brazil and the U.K. Landmark and other Energy Services revenues increased $5 million primarily due to improved Landmark Graphics fourth quarter seasonal sales in Venezuela, Western Europe and Asia. Landmark and other energy service's operating income was up 87 million due to the Angelo Dutch charge in the third quarter as well as improved fourth quarter software sales. For the year, 2003, Landmark Graphics recorded its highest annual level of operating income up 18% over 2002 and the highest operating income margins since Landmark joined Halliburton.

Now let's move to our engineering construction segment KBR and we are comparing the fourth quarter of 2003 sequentially to the third quarter of 2003. Revenues for KBR increased 1.3 billion or 56% sequentially to approximately 3.7 billion in the fourth quarter of 2003. The improvement was primarily due to increased government services activity in the Middle East and to a lesser extent oil and gas projects in Algeria, progress in Barracuda and operations in maintenance projects. This was partially offset by lower revenue on projects in Nigeria and Malaysia and a hydrocarbon project in Qatar. We added 3.7 billion to KBR backlog in the fourth quarter, which represents approximately 100% of revenue for the quarter. Net of work off, KBR backlog at the end of December was $9.7 billion.

In addition subsequent to year-end, KBR was awarded two new contracts, CENTCOM value up to $1.5 billion and Rio continuation, with a contract value of up to 1.2 billion both of which were not included in the year-end backlog. KBR operating income was $82 million in the fourth quarter which was a $33 million improvement over the prior period, due to increased work in Iraq, and $18 million benefit from lower than anticipated insurance costs, and third quarter project losses in Europe and the Middle East. We have had generally positive developments on the Barracuda projects since our conference call.

In November 2003, definitive agreements were entered into with the Barracuda project owner pursuant to which the project owner has agreed to pay $69 million of KBR's claims which were included in the 182 million of probable un approved claims as of September 30 2003. The remaining probable claims will be subject to arbitration proceedings. Also under the agreements, the project owner, granted an extension of time to the original completion dates in other milestone dates. As a result, the exposure on liquidated damages has been reduced by $169 million, from 265 million to 96 million. The project is now 83% complete and there is 235 million in backlog at December 31, 2003.

In the fourth quarter, the project accrued an additional 10 million of expense for cost contingencies. Now, we'd like to update you on the VAT tax issue on the Barracuda project. On December 16 of last year, the state of Rio de Janeiro issued a decree which is subject to pass for the good challenge, that recognizes its PETROVOS is entitled to a credit for the value-added taxes paid on the project. The decree also provides that the value-added tax s that may be due on the project, by which have not yet been paid, may be paid in January 2004 without penalty or interest.

In response to the decree, KBR and PETRAVOS has entered an agreement where by PETROVOS has agreed to one, directly pay the value added taxes on imports on the projects, including a payment in January of approximately $150 million for imports on the project to date and two, reimburse KBR for value added taxes paid, a local purchases that's approximately $100 million of which become due in 2004.

The bell neck project in Indonesia continuos to make good progress finishing the quarter at 89% complete with $151 million in backlog. Our liquefied natural gas project continuos to realize good job performance and financial contributions. The Sea gas LNG project in Egypt is expected to be completed in late 2004, which will be the first 5 million ton per year LNG plant ever built. This project and several others that are currently under way at KBR's technical and performance leadership in designing and building the world's most efficient in the successful LNG facilities and, Randy will be talking about this more in a few minutes.

KBR's work for the U.S. and UK governments in Middle East continues to be strong. Iraq related work for Halliburton as a whole contributed approximately 44 million in operating income for the fourth quarter and 2.2 billion of revenue that's a 2% margin before corporate costs and taxes. This represents about 15% of Halliburton's fourth quarter consolidated operating income. The Iraq relate the work for KBR and ESG contributed just under 6 cents in after tax EPS.

Now turning from Segment operating results to other financial items, general corporate expenses were 20 million in the fourth quarter compared to 15 in the third quarter. In 2004, we expect general corporate expenses to be between 20 and 25 million per quarter, due to Sarbanes-Oxley compliance costs and the increased spending on media relations and professional fees to defend Halliburton's reputation. Interest expense was 54 million in the fourth quarter compared to 33 million in the prior quarter, the increase due to the issuance of the 1.05 billion of senior notes in the quarter.

We expect interest expense to be approximately 57 million in the first quarter of 2004. Our effective tax rate on continuing operations for the quarter was 35%, however we anticipate their effective tax rate on continuing operations in 2004 will return to approximately 38%.

Capital expenditures totaled 145 million for the fourth quarter, that's up 3 million sequentially. Our full year capital spending was down 33% year-over-year to $515 million, approximately 450 million in ESG and the remainder in KBR. Capital expenditures for 2004 are expected to continue at this reduced level. Depreciation expense was 134 million for the quarter, and 518 million for the year. Depreciation exceeded capital spending in 2003. We expect little change in DD and A for 2004. Minority interests totaled $22 million that's up 16 million sequentially on stronger earnings from our majority owned international joint ventures

Now we'll take a minute to update you on our debt and liquidity. Total debt on December 31 2003 was $3.4 billion that's up from 2.4 billion at September 30 due to the issuance of the 1.05 billion in senior notes during the quarter that included 750 million of seven year notes and a fixed rate of 5.5% and 300 billion of two year floating rate notes. Earlier this week, we closed on the issuance of 500 million of three-year senior notes at a floating rate of LIBOR plus at 0.75%. These notes are redeemable at our option in whole or in part after one year. We ended the quarter with 1.8 billion in cash, that's up from 1.2 billion at September 30. The 600 million increase is primarily attributable to the 1 billion provided by financing activities, 210 million provided from operating activities, and those sources were offset by our uses of funds, 310 million were an asbestos settlement payment, 140 million used in capital expenditures, and 140 million increase in Iraq working capital requirements, where we currently have a working capital investment of more than $800 million.

We have 700 million in availability under our revolving credit facility that expires in the fourth quarter of 2006 and believe we have sufficient financing arranged to address the proposed asbestos and silica settlement. As we previously announced DII industry LLC (inaudible) and our other affected subsidiary filed Chapter 11 proceedings on September 16th 2003 and bankruptcy court in Pittsburgh Pennsylvania. The cases have been assigned to honorable Judith Fitzgerald. The effective subsidiaries will continued to be Wholly owned by Halliburton Company and will continue the normal operations.

The businesses of Halliburton company, Halliburton's energy services group and (inaudible) government services are not included in the Chapter 11 filing, prior to the proceeding with the chapter 11 filing, the effect of subsidiaries solicited exception ces from known present Asbestos and Silica claimants to propose plan of re-organization, valid votes were received from substantially all known claimants.

Of the votes validly passed, over 97% of voting asbestos claimants and over 99% of voting silica claimants voted to accept the proposed plan of reorganization meeting the voting requirements of Chapter 11 of the U.S. Bankruptcy Code for approval of the proposed plan. The proposed plan of re-organization was filed as part of Chapter 11 proceedings.

As a result of the Chapter 11 proceedings, we adjust the asbestos and silica liability to reflect the full amount of the proposed settlement which together with related expenses resulted in a before and after tax charge of $1.1 billion to discontinued operations in the fourth quarter 2003. The tax effect of this charge was minimal, as the valuation allowance was establish for the net operation allowance, created by the charge.

A significant increase in future domestic profitability would result in as realizing more of the interval, based on an updated independent evaluation of our insurance coverage, and taking into account our estimate that some claims will be settled at a discount, we will maintain our receivable for insurance for passive silica related liabilities of the current $2 billion level.

As you probably saw our last nights press release, we have a reached a comprehensive agreement with Equitos to settle our insurance claims against the certain under riders have voids of London, reinsured by Equitos for $575 million, the settlement will resolve all of our asbestos related claims against Lloyd's. Our claim against the London market company insurers is not affected by the settlement. We will be paid a total of 575 million in two installments of 500 million and 75 million 18 months later. The first payment will be made on the later January 5, 2005 or at the same date as DII and the other effected subsidiaries will be obligated to pay asbestos claimants as part of the proposed asbestos settlement. The deal is contingent on our receiving final confirmation of our bankruptcy plan and no U.S. federal asbestos reform legislation is passed in the current Congress.

We will also reclassify a portion of our asbestos and silica related liabilities from long-term to short-term resulting in an increase of short-term liabilities by 2.5 billion since we believe, we will be required to fund the remaining cash portion of the settlement in less than one year. One final settlement, once final settlement is achieved, we will recognize that a portion of the asbestos liability will be funded with 59.5 million Halliburton shares. And that will reduce our liabilities and increase equity by the value of the shares.

In connection with reaching an agreement with representatives of asbestos and silica claimants to limit the cash required to settle pending claims to $2.775 billion, DII Industries paid 311 million of the 2.775 billion cash amount prior to the Chapter 11 filing. Halliburton also guaranteed the payment of an additional 160 million of the remaining 2.5 billion cash amount, which must be paid on the earlier to occur of June 17, 2004, and the date on which an order confirming the proposed plan of reorganization becomes final and non-appeal able.

Various insurers of the data's have assorted a broad right of standing in connection with the bankruptcy cases and have filed a motion to dismiss the reorganization cases and various other objections. The bankruptcy court heard Arguments in mid January on the insurers' standing and has indicated that will issue a ruling' at the scheduled February 11 hearing.

The bankruptcy court has scheduled a firm date for the hearing on confirmation of proposed plan of reorganization and approval solicitation procedures for May 10 through 12 2004. If the bankruptcy court confirms the plan, the court ruling then would be presented to the district court for affirmation. Our expectation in this process could be completed sometime in the early summer of 2004. After that, it would be a period for appeals to the third Circuit Court of appeals. Once appeals if any, are exhausted we would fund the trust. Because of the potential conflict with the May court hearings, we are planning to re schedule our plans and analyst date to a later date. Now I'd like to turn the call over to John for his remarks on the Energy Services Group environment and outlook. John.

Thanks, Chris. Health safety and environment service quality performance are part of the Halliburton culture and to support that culture, we start all of our meetings in ESG with an HSC and service quality moment. Consistent with this theme, here is a message that combines the two, I remember at our last earnings release concluding my remarks to you with a comment on safety and acknowledgment of the many people at Halliburton who live in a safety first approach day in and day out. The remaining part of 2003, our customers gave us their own views on our performance and they are overwhelmingly positive.

In some cases they have asked for our direct support. As a result, we're not engaged by one of our major South American operators in the design and implementation of their new safety management system as a service offering and they have an opportunity with another customer as well that we're pursuing.

I'd now like to provide a commentary on our performance in 2003, what we've learned and changes we're implementing to better position ourselves for enhanced performance in 2004. Overall I believe our results in 2003 demonstrated that we are making good progress towards our long-term objectives. High commodity prices resulted in an improved activity levels with average global recounts up 19%. Nonetheless reduced investment rates by our customers, meant that overall activity growth perhaps failed to meet the broader expectations of the market.

We achieved major growth in many of our markets. We saw strong performance in Canada, in the Middle East, and Latin America. Mexico's performance was particularly strong and our earnings more than doubled. The signing of contracts for the national (inaudible) sellers with the governments of Nigeria and Indonesia reinforced the many successes we had with national oil companies and their governments over the last few years, as something we wish to build on in 2004. Together with the data centers in Pakistan, the U.K., Brazil, Norway, Australia, Canada and Houston as well as the recent selection of Landmark as the Kazakhstan National data banks, we believe Halliburton is emerging as the clear leader for data center technology. All of this was made by the acquisition of Petra (ph) bank in 2001. Also we signed a $10 million agreement with Sonatrach to provide real time operation for center capabilities together with extensive training of its personnel in new technology.

Several of our business segments showed solid performance gains during the year. However, some geographies and product lines require further improvement. We've already developed plans to improve the performance with these units. The Gulf of Mexico was an overall disappointment to us. Attributable to about 5% year-on-year decline on the offshore rig count and specifically a reduction in deep water activity with a number of our key clients, a fact that may be unique to Halliburton. As a result, we have started the process of reducing our cost structure in the gulf and are refocusing our efforts towards the more successful of our new products.

Equally importantly, we have redeployed a number of people and assets to higher growth international markets, including as far afield as Latin America and Asia. For the fourth quarter, there was significant time in transit and therefore no revenue for much of this equipment, which we don't expect to reoccur going forward. Our drilling and formation evaluation division so excellent performance in logging, the Sperry-Sun performance was adversely affected in the second half of the year by the downturn of activity in The Gulf of Mexico and the U.K. sector of the North Sea.

As a result, we executed in Q3 and Q4 , our plan to take some $50 million of annual costs out of Sperry. We expect to see a solid recovery of margins during 2004. At Baroid, we set challenging targets for 2003 and largely achieved them. We improved margins year-over-year by over 200 basis points. But are we planned to be? The answer is no. We have recently made leadership changes in Baroid and will further line costs with market fundamentals in 2004 to improve market performance.

We've also taken a hard look at our various joint ventures and recently announced the restructuring of two big ventures with Shell. Well dynamics and in venture consistent with the different stages of maturity of these two technologies, to create a win-win opportunities for each company. For In venture we elect to dilute our interest to Shell, since we believe this capital intensive join venture has more synergies within customer priorities and steel and pipe manufacturers.

In return, we've received significantly enhanced marketing and distribution rights for sand screens and liner hangers, which is central to our businesses and offer opportunities for profitable growth. In a similar strategic vein, we believe the majority state securing well dynamics is better aligned with the core realtime knowledge thrust of our Landmark and production optimization divisions. We also achieved significant growth in our new products and services in 2003. Overall revenues associated with new technologies were some 30% higher than those of 2002 across a wide range of customers and geographies. We are particularly proud of our achievement in rotary steerables where we increased our revenues by 80% with an increase in our tool fleet of only 25%, a true sign of efficient growth. These significant areas of new growth are backed up by a new set of products we'll be launching during 2004 in both our core and our growth markets.

Of course, we can't deliver these without outstanding people; so let me tell you about a record-breaking deep-water well test we conducted with Stat oil in the Norwegian Sea. The test was performed from a dynamically positioned drill ship at a water depth of more than 1200 meters. The testing operation lasted more than 400 hours and despite very rough weather and heavy seas Halliburton delivered. The stat oil project manager said that despite being planned on a very tight schedule, we are impressed by how the operation was prepared and performed. He went on to say that the realtime communications was a very important success factor in the complex operation that was performed without incidents or an environmental spill.

I really like this story because it shows that when you bring great people, great technology and a great plan together you can accomplish what's never been done before. To me that's the meaning of our motto done right. As we look forward we see modest growth in global markets during 2004 and as we discussed previously we have a sharp focus on our operational efficiency and working hard to maintain our leadership in capital discipline without compromising our ability to serve new growth markets in the future.

Our capital discipline resulted in a 13 plus percent return on a capital employed for 2003 exceeding our cost of capital. We intend to maintain a dynamic approach to both capital allocation and operational efficiency that is in line with the evolving markets and our capabilities. With the actions already in place, and the significant pipeline of technologies and opportunities available to us, we believe Halliburton is positioned with a robust business platform with ample room for innovative growth in new markets and to profitably capture a significant portion of the huge capital investment that is going to made in energy in the next five to ten years. And with that I'd like to turn it over to Randy Harl to discussion KBR.

Thanks, John. Chris has given you a detailed review of our financial performance so I want to briefly touch on KBR's operational highlights and the outlook for our business. I'm pleased to report that KBR has had a very successful fourth quarter in all of our business lines, with government business setting the pace with record setting bookings. We had revenue of over 2 billion from government work in the Middle East, and we see significant opportunities continuing in the coming year. Our restore Iraqi oil or Rio project reached December's production goal of 2 billion barrels of oil per day in October two months ahead of schedule.

As Chris said earlier, you may have seen the U.S. Army Corps of Engineers January 13 announcement of our CENTCON project award which is a project that is worth up to $1.5 billion US and Halliburton on January 16 announced that we were awarded a competitively bid 1.2 billion Rio continuation contract. Combined with the existing support contracts, total value exceeds an unprecedented $9 billion U.S. In addition to the Middle East, opportunities are also strong in the United States, the U.K. and Australia as governments continue to look to the private sector to perform work traditionally done in-house. Now I'd like to provide a few comments about how we comply with government regulations. Even though we maintain our own rigorous systems of internal controls external audits and other reviews of contractor work for the government are standard and even welcome practice. It is not unusual for questions to be raised or clarifications be requested.

What is unusual, however, is for these questions to be made public, especially before the contractor has an opportunity to respond. Last week KBR confirmed that we had voluntarily disclosed a potential $6 million over billing that may have involved improper payments to one or more former KBR employees. The important message here is that our internal company auditors in Iraq uncovered this issue and we immediately disclosed this to our customer. While the investigation is underway, we have refunded to the government the full amount. And if we verify that an over billing has occurred, we will seek recovery from the subcontractor involved.

In the Balkans where we have worked for many years, a similar situation arose in 2000, which we are still dealing with today. Issues like this do occur. And investigations can take a while. But when we find irregularities, we report them and we correct them. The fact that we respond and take action so quickly is one of the reasons our customers have confidence in us. In spite of the many misleading and inaccurate reports you may hear or read, we are proud of the work we are doing and appreciative of the continued confidence of our customers. The reshaping of our offshore business away from lump sum EPIC contracts to cost reimbursement services have been marked by some impressive new work.

During the next week we expect to sign a major reimbursable EPCM or engineering procurement and construction management contract for West African oil field development. This will be a major award under our new EPCM strategy. We have also been awarded a contract for BP's ACG 3 work developing oil fields in the Caspian Sea off the coast of Azerbaijan. This contract validates our new strategy and puts us in a strong position to expand our business in this rapidly growing Caspian market. We are also pursuing program management opportunities in deep-water locations around the world. These efforts implemented under our new strategy are allowing us to utilize our global resources to continue to be a leader in the offshore business.

Chris has already given you an update on the existing lump sum projects that we are working on. I would like to add that we are having extensive discussions with (inaudible) regarding the Barracuda and (inaudible) in an effort to resolve most if not all open end issues. In the event of a settlement, we will significantly reduce our risk exposure. As soon as we know something, we'll let you know. Out sourcing of operations and maintenance work has been increasing worldwide and we expect this trend to continue. An increasing number of independents are acquiring mature oil field assets from majors and are looking to out source operations and maintenance capabilities.

KBR is investing in technologies to optimize asset performance in both upstream and downstream oil and gas market. In the last six months, we have secured several hundred million dollars of operations and maintenance upstream backlog and we see this trend growing rapidly especially in the North Sea, The Gulf of Mexico, Africa, and Asia-Pacific. LNG is another significant growth area that we're actively pursuing in several markets and it is shaping the future of our onshore business. There is a strong drive to (inaudible) gas reserves in the Middle East, West Africa, Asia Pacific, Eurasia and Latin America. At the same time the demand for gas is increasing in the United States, Japan, China and India.

LNG is one of the most effective ways to meet that demand. In the U.S. alone LNG is expected to supply 10 to 20% of the natural gas demand by the year 2020. We are expecting the market for LNG receiving and re gasification terminals to take off in the United States. We are currently negotiating ongoing project management services for an LNG terminal in Italy where we recently completed design work. We have also won the award for a significant pre feed scope for a single train LNG facility in bon TANG Indonesia. On the (inaudible) side we anticipate new words in Africa South America and Asia-Pacific as customers look for wise to modernize newer remotely located gas field for to make use of the associated gas produced from established oil fields.

LNG development has created opportunities for us in other businesses as well. In December, we were awarded project area, which is an infrastructure engineering study for proposed LNG receiving terminal in New Zealand. We're also seeing significant business opportunities in the United Kingdom. The market for major public infrastructure projects there has been dominated for almost a decade by privately financed projects, which now account for about 10% of the countries infrastructure capital spending.

We have then involved with a significant number of these projects and we expect to build on that business using our experience with pulling together complex financing arrangements and managing partnerships. Through our condor joint venture we're taking advantage of a growing demand for infrastructure development in northern Africa especially Algeria, where we have recently finalized five new infrastructure contracts.

Our biggest infrastructure success for the quarter was the completion of the Alice Springs to Darwin railway in Australia. This railway cost Australian $1.4 billion in runs 1,430 kilometers across the heart of the continent. This is one. Largest and most complexed infrastructure projects ever undertaken in Australia and we face serious challenges of distance, climate and terrain. As the managing partner, of the join venture team KBR overcame these challenges to successfully complete the work five months ahead of schedule allowing the railway to start operations early and earning us a substantial performance bonus. KBR will also be involved in the operations and maintenance of the railway.

Taking a successful infrastructure project and then following it with operations and maintenance services is just one example of how KBR is leveraging a strength of its diverse business. Another example is LNB project pursued jointly by our infrastructure and government businesses. In a join venture called as (inaudible) defense. We were selected by the U.K. ministry of defense as the provisional preferred bidder for this project. This is a U.S. $7.3 billion, 35-year contract to upgrade and provide services for the British Army's garrisons. This project will radically improve the living and working environment of 1000's of military personnel and demonstrates KBR's continued success as an established provider of both infrastructure and government support services.

This concludes my portion of the discussion, except to say in summary that all of KBR's businesses put in strong and successful performances in the fourth quarter, which has given us a lot of momentum and confidence, as we move into 2004. Now I'll turn the call over to Dave who will make some closing comments. Dave.

Thank you, Randy. As you've heard in the fourth quarter, both ESG and KBR showed improved financial results. And as I told you at the end of last quarter, we did not see an improvement coming in the Gulf of Mexico and the North Sea, and that became a reality in the fourth quarter. However, offsetting this was the improvement in some very key international markets and, of course, at KBR.

Looking back at the year, of course, in December, we took a significant step forward in resolve our asbestos and silica liability. The companies that we put into bankruptcy are proceeding as Chris has indicated. And earlier this month, the court has approved a number of the provisions in our plan and set the confirmation hearings from May. In the face of harsh and hostile environment, KBR has performed very well in Iraq, as most of you know, and as we indicated, KBR has won the larger of the two oil field contracts for the work in the southern Iraqi fields. I believe that validates our statements that we are the best company for this job. And we will continue to deliver what is required in Iraq and all across the globe to win contracts based on what we know, not who we know.

I am extremely proud of our over 100,000 employees and the great work they do in the difficult and harsh environments we work in. I'm especially proud of our employees in Iraq who are risking their lives every day while serving the troops. We've done this, remember, for more than 60 years in both democratic and Republican administrations and we will continue to support the troops in spite of the inaccurate and unfair accusations from our critics. We do not expect this coverage to stop until after the election. We will continue to have daily scrutiny and sniping at every aspect of our company from our critics. This is unprecedented for a U.S. corporation. This isn't a complaint, it's just a fact. But we will continue to stay the course and continue to serve our customers.

Before I open it up for questions, I would like to say that we are very optimistic about 2004 as we look to put asbestos and silica and its liabilities behind us and review our focus on the great things that John and Randy indicated ESG and KBR are doing. As they told you, we expect ESG and KBR to continue to improve their financial performance in 2004.

I have been quite encouraged by recent customer feedback, which I have received on some of my trips. For example, a recent discussions with our customers in the Iraqi mountains in mid continent indicate that demand for products and services in this region may absorb the equipment that's there and allow us to start getting price increases. For example, we have just had a customer roll over a large contract in the Iraqi mountains at a 6% price increase instead of rebidding it. I returned last week from a trip to Asia. And there is great opportunity for us to participate in the many gas-related projects being developed in that part of the world.

As John indicated, the Gulf of Mexico remains a soft spot. And any improvement there will have a positive impact on our business. As I believe we are now sized for that market as it exists today. I also believe we'll see accelerated spending during the year as customers adjust their budgets upward with the long-term price of oil and gas being where they are today. With that, we'll open it up for some questions and see what's on your mind.

Thank you. [OPERATOR INSTRUCTIONS]. And we'll take our first question from Ken Sill with Credit Suisse First Boston.

Yeah. Good morning, gentlemen. I appreciate the positive outlook comments. I'm wondering a little bit of figuring out what happened in Q4 particularly if you look at the drilling and formation valuation business. You know, revenues were a little bit light profitability was down a little bit. Is that the business that got hit the hardest by moving equipment and down time? And if so, is there any way to kind of quantify or we might expect to see coming back as you move to Q1?

Drilling formation valuation group was hit the hardest by the changes in the Gulf of Mexico. And we have transferred equipment particularly out of the DFE group into other marketplaces. And a lot of the $50 million annual costs that I mentioned out of DFE was related to the Gulf of Mexico so I think we'll see it recover pretty quickly as we move into 2004. We really focused on improving our asset allocation to that market and moving it to where we saw upside and we were con strained by the number of assets that we had. So I think the Gulf of Mexico should recover pretty quickly.

The other area was the U.K., north particularly the U.K. side of the North Sea and we also had to look at redistributing assets there and reducing costs and we're doing both of those. So it's just those two soft markets with regard to our market share and our competitiveness we're doing well. As you can see our rotary steerable have grown dramatically in the last year and our technology is being accepted quite well and we're quite positive about DFE as we go forward.

We'll take our next question from Jim Wicklund with Banc of America Securities.

Hi. Good morning guys. On the asbestos settlement, the 575 million from Equitos. About what did that constitute of the total potential liability that Equitos faced?

Hi, Jim. Chris. Yeah, the 575 million that we've agreed with Equitos represents approximately 60 cents on the dollar of the coverage that we have with them.

And we'll take our next question from Scott Gill with Simmons & Company.

Hi. Good morning. It's actually Justin Tugman. Chris and Bret, I wanted to inquire about a decision that was rendered last Friday regarding AC & S and Travelers Insurance where the bankruptcy court judge gave a victory to Travelers in their effort to deny AC & S bankruptcy for asbestos. Can you comment on how this case would impact your legal battles with the insurance companies?

Sure. This is Brett. First of all, I do not believe that decision was a victory for Travelers. In point of fact, if you look at the decision, the court specifically noted that to the extent the plan limits the right of Travelers to object that limitation is consistent with 524 G. I think Travelers lost a number of insurance related issues in that decision. What troubled the judge were two fundamental issues in the plan, neither of which was applicable to us.

First of all, he mentions a number of times that what troubled him, was that the plan pays similar claims in totally disparate manners by giving preferential treatment to claimants who were secured by insurance proceeds. We don't do that. We treat all claimants exactly the same. And an example the judge used was that you could have a non-malignant plural disease paid in full because it was secured by insurance where as a mesophelioma (ph) claimant could potentially gain nothing at all because it was in one of the categories that was contention of conflict against travelers.

Again we don't have that situation at all. We have one set of TDPs. Every body is going to be paid consistently the same. We only have one class of claimants. And we aren't using or don't have any contingencies for insurance because we're funding it and we're proceeding separately against the insurers as evidenced by the settlement. And secondly, he was troubled by the fact you don't have an ongoing business. You have a shell. You have a shell that didn't really negotiate but the plan was dictated by the plaintiffs' lawyers. I can tell you, because I did it.

We negotiated for more than a year extensively with over 125 separate plaintiffs' law firms. At sometimes extremely contentiously. And in addition to that we had a very active, very well respected plaintiffs' as a futures rep and Eric Green was a law professor in Boston who also negotiated extensively for the futures try. I think all of those facts produce a fundamental situation that is completely different from AC & S.

We'll take our next question from Terry Darling with Goldman Sachs.

Thanks, John. You had mentioned 13% return on capital for the year for the Energy Services Group. I'm wondering if you can share the details in the numerator and denominator. And then Randy we're struggling out here to try to get a hand on it coming of some of the revenue recognition and revenue is up, more than a billion dollar sequentially. Can you tell us where you see that number is headed as we move through '04 and will we see the normal seasonal downturn?

Terry on the return on capital, that's an internal performance measure that we use for the two separate groups. Our real focus on keeping that metric is it gives us good capital discipline. It helps us understand where to set the capital budget for the year and it makes us focus on ensuring that we look at the markets and the capacity required on them. I'd say that our capital budget for '04 represents the fact we don't see a need for additional capacity in the marketplace and we're going to maintain a real strong focus on capital so that we outperform our cost of capital in '04.

We'll take our next question from Brad Handler with Blaylock & Partners.

I don't think we got the second part of Terry's question and KBR.

Mr. Darling, if you want to re-signal "* 1".

The question asked on revenue recognition for our contracts in Iraq, we recognize the base portion of the contracts currently as the work is performed. And that is 1% on LOGCAP (ph) and 2% on the Rio contract that we're performing now. In addition, we have the opportunity to award to earn award fees performance bonuses. But it is some time before those are finally determined.

We recognize in revenue a portion of those award fees as the work is performed, but what nets out to not a large portion of those fees. Historically KBR has earned a very high proportion of the award fees so we have good support for the fact that we expect the award fees to be earned, but given all the attention this contract is getting, we think it's prudent that we recognize just on a net basis a relatively small portion of the award fees currently and wait for those to be earned. And once they are earned, they will flow through our income statement at that time. But we wouldn't expect the first award fees to begin to be recognized until late, late this year.

Sorry, Terry.

And we'll go next to Brad Handler with Blaylock & Partners.

Thanks. Could you please share with backlog at about 12.5 billion, how much is expected to be earned in '04? And as a follow-up question sort of related could you comment on the EPCM contract little bit more. Were you up against EPIC contracts? Or are others in the industry following your lead or others also offering more of a cost reimbursable and that's the way you see the industry moving?

And the 9.7 billion backlog at KBR December 31 plus the additional contracts, some of that backlog is for contracts over multi-years. Some of it is for current 2004 work. What you have seen as we provided backlog and backlog as compared to revenue in recent quarters, we've been able to replace 100% of the backlog that we worked off. At this point, it looks as if approximately 3/4 of our 9.7 billion in backlog will be performed in 2004. But we do expect our recent record has been we've been able to replace that. And then on EPCM contracts. Randy.

On EPCM, the transition implementing our strategy, you know, is something that will rebalance the risk and reward ratio in our portfolio. We have been very successful at pursuing this strategy, but in the industry in general, there are still a lot of people willing to take on EPIC contracts. I think the results from my perspective are probably not going to be very good or very different than what we've experienced. But, you know, I think the course that we're pursuing is going to be of great benefit to us.

We'll take our next question from Mark Earnest with Merrill Lynch.

Yes. Good morning I wanted to ask on Landmark and other energy services, obviously a very good year last year, very high operating margins. Is that sustainable and also what were the primary contributors to the improvement?

Yeah Landmark Graphics good margins in that business. And to the extent that we don't have impairments of our (inaudible) properties as we had in the prior year the Landmark margins good graphics kind of show through. John.

I think we're going to see an excellent year for Landmark Graphics over year. We have good new products coming out. The scheduling for the products is quite good. We release about three new products a quarter. In Landmark each of those have really strong market alignment and are actually designed by our customers in coordination with them. We've got good growth in the data bank areas and we have a couple of NOCs that I believe you will see announcements on in the near term that are going to standardize on the Landmark system as well. So, it's quite good for Landmark. One dilemma with Landmark is the seasonality of Landmark. Q4 is much like the Christmas season for retailers, Landmark enjoys a great Christmas season and coming into Q1 it's usually softer. So I'd look for some seasonality of the Landmark numbers in Q1.

Like, Revenue driven.

Revenue what - is what he was getting at the year and the end of the year.

He has done it. They have done a tremendous job in terms of efficiency, operational efficiency in order to improve the margins as well.

Well go next to the Curt Hartley with RBC Capital.

Hi, guys. I thought to do what presume is doing formation or evaluation a little but further on the operating margins in the quarter were 4%, second, third quarter were both North of 10%. When you talked, John, about improving, you know cost savings and getting the margins back up quickly, are we talking about getting back to that double-digit level by the first quarter of '04? Are we talking about something that will gradually progress as the year goes on? Some color on that will be very helpful. Thank you.

Well Curt, as we mentioned in the fourth quarter we mentioned that we had severance costs and consolidation cost of our plant on the drill bits within DFE. We had some costs that we don't expect to recur, you know, throughout 2004. So that will help. John.

I think those are the two main points. And it occurred both in Q3 and Q4. We were taking a look how to align to the marketplace, looking at our cost basis. And we do -- we've already executed a plan to remove 50 million in annualized costs from DFE that's going to be very positive for us in terms of margins in 2004. It was specific markets, too. It wasn't a general problem. The Gulf of Mexico just slowed down with the deep-water problem. And we incurred those severance costs in '03. The consolidations also occurred in '03 and we think that's going to be very beneficial as we brought all of our bit manufacturing together in the woodlands and that will be positive for us as well.

And we'll go next to Pierre Conner with Hibernia South Coast Capital.

Good morning, everybody. First, Chris and Randy, a question to help understand again the revenue stream on government support. Can you tell me how the run rate in Middle East support currently is - how does it compares to the quarterly run rate on the fourth quarter? And the follow-up is related to that. Is there anything that changes relative to the margins there? Was there anything in that deployment costs, et cetera, in the fourth quarter that doesn't reoccur?

Hi, Pierre. Our fourth quarter run rate we think is sustainable as we see it three 2004 roughly speaking, maybe up a bit with the second phase of Rio coming in. But not a large change. The margin on -- and you were asking about the margin on that market in Iraq?

Yes.

The margin there I think is roughly the same as we expect in 2004. It is down a bit from the third quarter. Because, as the volume increases, the margin comes down a bit, as we have recovered our overhead and therefore the overhead recovery rate comes down as the volume goes up. But the margin that we realized in the fourth quarter I think is a good indicator of the ballpark of margin that we would expect in 2004 in this work. As we indicated before, when we do realize award fees that would be in addition. That would positively impact our margins.

And we'll go next to Jamie Stone with UBS.

I have 2 questions on the balance sheet. The first is can you talk about what timing is in terms of working off with growing receivable that you have with the government and receivables overall? And then the second is the insurance provision on the balance sheet of 2.1 billion, when you say that you don't expect that to change, is that now factoring in this settlement with EQUITOS? Or does the settlement with EQUITOS affect the provision on the balance sheet?

OK, Jamie, sure. On receivables, we have the built up the run rate and are now in a stable level as we just answered in the prior question. So we don't expect a significant change in our overall net working capital position associated with Iraq going forward. As I mentioned our net worth of capital investment in Iraq related is about, is more than $800 million, which represents about 30 days sale. And as long as we're running at that rate, working capital is going to stay at about that level. Eventually, as the troops are redeployed home, and as we complete our contracts, the working capital investment will come down as our billings go down as receivables come down.

On the insurance receivable, as we tried to explain in the prepared remarks, the EQUITOS settlement is included in our expectation that the insurance receivable will remain at $2 billion. We have assumed that we would settle with EQUITOS and some others. Settle some portion of our claims. But if it were the case that we were to settle with all insurance carriers on the same terms as EQUITOS which is not our expectation at this point, then that would -- you know, that would result in a different number, a lower number on our balance sheet. But that is not our expectation as we said earlier. Our receivable is based on the expectation that we settle with EQUITOS and some others, but not all and on that basis, $2 billion is the insurance receivable that will remain on the balance sheet.

OK. We have time for one more question.

We'll take our final question from Steven Gengaro with Jeffries & Company.

Thank you and good morning gentleman. Just a follow up on the asbestos front, I think originally you had said you're entitled to the first $2.3 billion of insurance recoverables. Does the 575 count towards that? Or does the original close to a billion count towards that? You said about 60 cents on the dollar.

I'm not sure I understand the question. But yeah, we keep the first 2.3 billion to the extent the insurance collections end up being 2.3 billion, which is not our expectation at this point, but if that were the case, then the excess would go to the futures trust. Bert.

That's correct. We have an insurance asset of right around $3 billion. And so to the extent we monetarise that and collect more than 2.3, the agreement with the futures rep requires that to go in the futures trust.

That 2.3 billion does not change as a result of the settlement with Equitos. That 2.3 billion dividing point is what we keep and what goes to the futures trust remains regardless of what settlements we make. OK, that concludes our call. I want to thank you for joining us and a replay will be available on our Web site.