哈里伯頓 (HAL) 2004 Q1 法說會逐字稿

Good day everyone and welcome to today's Halliburton Company first quarter 2004 results conference call. Today's call is being recorded. At this time for openings 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.

Good morning and welcome to Halliburton's first quarter 2004 earnings release conference call. Today's call is being Webcast 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 the Energy Services Group, Randy Harl, Chief Executive Officer of KBR, and our Burt Cornelison, Executive Vice President and General Counsel.

On today's call Dave will provide some opening remarks, Chris will discuss our overall operating performance, financial position and update you on the progress of our asbestos settlement as well as 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, and finally Dave will wrap it up with 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 we've allowed.

I expect by now most of you have seen this morning's press release with our first quarter results. If you don't have a copy of our press release you can obtain it from our Web site, www.Halliburton.com.

Before turning the call over to Dave 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 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 10-K-A for the year ended December 31, 2003.

With that I'll now turn the call over to Dave Lesar. Dave.

Thank you, Cedric, and good morning everyone.

We obviously had a lot of moving parts in our company in the first quarter so I thought what I would do is basically make a general comment and then hit the highlights before we turn it over to Chris, Randy, and John for more detail.

Overall I'm pleased with the operating performance that we had during the quarter. As John and Randy will tell you, the outlook for our business is improving, particularly in our important Energy Services and LNG businesses.

While the first quarter customer spending continued to be modest due to economic and political uncertainties I believe that this is changing. Commodity prices have been sustained at higher levels, demand continues to remain strong, and the global economy has been growing. As our customers now have much stronger balance sheets, I believe that this bodes very well for increased capital spending and a long-term recovery in our business.

Several highlights for the quarter which the guys will go over in more detail, include making very good progress on our asbestos settlement, confirmation hearings will take place in just a couple of weeks, and the Bankruptcy Court has been timely addressing the various components of KBR's reorganization plan.

For example, the judge recently rejected the insurer's claims for standing in the bankruptcy. We have a settlement agreement in place with our largest insurer and hope to announce additional insurance settlements in the near future.

Chris and Randy will also give you an update on our work in Iraq. We believe our level of work in Iraq has peaked in the first quarter and our working capital investment will decline over the balance of the year. We believe that the award fee process could start by the end of the year.

In the meantime, we have established an excellent presence in a long-term world-class hydrocarbon basin, and this is a market that we should be in for a long time.

While the Energy Services Group operating income was down sequentially, you'll see that most of the decline can be attributed to seasonality and Landmark, which we talked about in the fourth quarter, and the Subsea 7 businesses.

This decline in these two businesses also impacted the sequential results for Latin America and Europe/Africa, as this is where the majority of that impact was reflected. These businesses should improve over the next couple of quarters.

Also as John will tell you the supply and demand balance in the U.S. is at a point where we believe that price increases are justified. And we are moving to increase our U.S. price book in most product and services, such as cementing, stimulation, bits, fluids, completions, and logging.

Lastly, the charge on the Barracuda project, while it was disappointing, gives us a comprehensive agreement in principal with Petrobras that if completed would resolve all disputed items and significantly reduce the remaining risk for us on the project.

So those are the items that we'll go into more detail on. Let me turn the call over to Chris.

Thanks, Dave, and good morning.

My comments today will include updates on the company and segment results and l will summarize the change in revenue, then operating income, for each of our five segments. I will review the Barracuda-Caratinga project and the previously announced first quarter charge, liquidity and other financial items and I will provide an asbestos update.

Now moving to operating results and throughout this call I will be comparing first quarter 2004 results from continuing operations sequentially to the fourth quarter of 2003.

Total company revenues for the quarter were $5.5 billion, consistent with last quarter on continued strong onshore drilling activity in North America and government services work in Iraq.

International revenues were 76% of the total in the first quarter 2004, and that's compared to 79% in the fourth quarter. That's continuing at a high level due to the Iraq work.

Operating income decreased $128 million sequentially primarily due to the $97 million pretax charge related to the Barracuda project.

For the first quarter income from continuing operations was $76 million or 17 cents per diluted share compared to $146 million or 34 cents per diluted share for the fourth quarter. The decrease is primarily due to the Barracuda charge which after taxes was $62 million, or 14 cents per diluted share.

Now let's look at our segment operating results. First we'll talk about the Energy Services Group, or ESG.

ESG revenue totaled $1.8 billion, which was up about 1% from the fourth quarter. ESG operating income totaled $214 million. That's a decrease of $27 million compared to the fourth quarter, partly due to a normal seasonal decline for Landmark Graphics in the first quarter and wider losses due to the seasonal weakness and [inaudible] impairments from our 50% ownership in Subsea 7.

Results for the ESG segments are as follows. And we'll begin with the Drilling and Formation Evaluation segment which showed great improvement over the fourth quarter.

DFE revenue increased $27 million with increases in all geographic areas except Latin America. Logging revenue increased $17 million sequentially due primarily to product sales into China.

Revenue from directional drilling and logging well drilling, or LWD, those services increased $4 million due to new contract awards in Norway and increased activity in Canada and Kuwait. These increases were partially offset by weak deep water activity in the Gulf of Mexico.

Drill bit revenue increased by $4 million due to increased activity in North America and Eurasia and new contract awards in Mexico and Norway offset by declines in China.

Drilling and Formation Evaluation operating income increased $26 million with incremental margins of 96% on improvement across the segment. Geographically all regions improved in operating income except for Latin America just as they did for revenue.

Operating income from directional drilling and LWD services more than doubled from the prior quarter. The improved performance was due to increased activity in Norway and Kuwait and the benefit from previously announced cost reduction measures which included a net reduction in the workforce of over 200 employees and redeployment of resources and assets to areas with higher utilization.

Drill bits operating income was up $7 million far more than the revenue increase as we do not have the very high expenses experienced in the fourth quarter from plant consolidation and the fourth quarter severance expenses.

For the fourth consecutive quarter logging returned commendable mar grins and their operating income increased 6% sequentially.

Let's turn to the fluid segment.

First quarter results were hurt here by lower margins at Baroid. Fluid segment revenue was up $4 million compared to the fourth quarter. Strong onshore U.S. activity was offset by significant declines in the weak Gulf of Mexico.

Cementing revenue was up $5 million primarily due to Canada's increased seasonal drilling activity and new contracts in Norway partially offset by lower revenue in the Gulf of Mexico, the U.K., and Russia.

Baroid revenue decreased $4 million on reduced activity in the Gulf of Mexico, Mexico, Algeria and Nigeria partially offset by increased onshore activity in North America. Fluid segment operating income was down $13 million primarily due to lower results at Baroid.

Cementing operating income decreased $2 million primarily from reduced activity in the Gulf of Mexico and higher expenses in Nigeria offset by increased activity in Canada and Norway.

At Baroid operating income decreased $10 million due to reduced activity in the Gulf of Mexico, reduced margins in Mexico, higher expenses in Nigeria and Algeria and restructuring and severance expenses for the Gulf of Mexico.

The Production Optimization segment declined $5 million as revenue in Latin America and the Middle East offset improvements in North America and Europe/Africa revenue. The decline also includes a $6 million increase in equity losses from our Subsea 7 joint venture due to costs related to early termination of leased vessels, a lower vessel activity related to the seasonal declines in the North Sea.

Production enhancement revenue, and production enhancements our stimulation business, was up $2 million with strong growth in North America, an increased land rig activity in Russia offset by lower international equipment sales and services in Iraq and China. Completion products and tools and testing revenue was up $2 million on improved sales in the U.K. and Indonesia partially offset by lower project activity in Nigeria.

Following the restructuring of our joint ventures with Shell which closed late in the first quarter, we consolidated WellDynamics at the end of the quarter and we are now managing that business within our Production Optimization segment. For comparability we have shifted WellDynamics' historical results out of Landmark and Other to the Production Optimization segment.

Production Optimization operating income decreased $33 million from a very strong level in the fourth quarter due to the $6 million increase of equity losses at Subsea 7, higher bonus accruals compared to the fourth quarter and less favorable sales mix between services, product, and equipment sales. Reduced utilization of workover vessels in Nigeria also negatively impacted results.

In Landmark and Other Energy Services, the net segment revenues decreased $9 million and operating income decreased $7 million primarily due to the usual seasonal decline for Landmark Graphics in the first quarter partially offset by a $13 million favorable adjustment resulting from settlement of the Anglo-Dutch litigation and improved integrated solution results driven by strong oil and gas pricing.

Now a geographical summary of ESG.

In North America sequential operating income increased $18 million on strong onshore drilling activity and the $13 million Anglo-Dutch settlement adjustment partially offset by a decline in the Gulf of Mexico. Latin America operating income fell $18 million due to activity declines in Mexico, Brazil and Venezuela, partially offset by improvement in Argentina.

Europe/Africa operating income decreased $17 million primarily due to reduced activity and higher costs in Algeria and Nigeria. Middle East Asia operating income fell $10 million due to lower equipment sales into China offset by increased equipment sales into Russia.

Now let's move to our engineering construction segment, KBR. And again we'll be comparing first quarter 2004 sequentially to the fourth quarter of 2003.

KBR revenue totaled $3.7 billion approximately the same as the previous quarter. Revenue increased on government services work in the Middle East and other parts of the world and to a lesser extent on hydrocarbon projects in Canada and Nigeria as well as upstream operations and maintenance projects.

This was partially offset by lower revenue earned on onshore projects in Algeria, the United States and Belgium and offshore projects in Mexico and Brazil.

We added $2.4 billion to the KBR backlog in the first quarter which represents about 65% of revenue for quarter. Net of workoff, KBR backlog at the end of March was $8.4 billion, down $1.3 billion from December 31, 2003, primarily due to the workoff and transition of the fuel delivery work in Iraq to the Defense Energy Support Center.

KBR's operating loss was $15 million which was a $97 million decrease from the fourth quarter due to the $97 million loss on the Barracuda project in the first quarter. The additional charges taken in the quarter follow a thorough review of the Barracuda-Caratinga project which indicated higher cost to complete the project, schedule extensions and other factors.

As of March 31st the project is 86% complete and we have about $315 million yet to spend.

As we announced last week KBR has signed an agreement in principal with Petrobras which if consummated, would significantly reduce remaining risks associated with the Barracuda-Caratinga project. It would provide resolution to our claims that would otherwise go to arbitration and reduce the potential for significant late delivery penalties.

The new agreement is subject to final agreement and approval by the project lenders and the Bankruptcy Court. The agreement if completed would amend all existing agreements and release both parties from all existing claims.

By reducing KBR's scope of work to be performed after the two vessels sail away and extending milestone deadlines, the potential for late delivery penalties is greatly reduced. If we're not able to reach final agreement with Petrobras or obtain the necessary approvals, we will pursue arbitration of our claim. Although this would be a long process, we believe we have a strong case.

In the absence of an agreement with Petrobras we would also evaluate whether the increased costs accrued in the first quarter 2004 would increase our claim.

Our other remaining major offshore EPIC project, the Belenik project in Indonesia continues to make progress and was 93% complete at the end of the first quarter with about $100 million in backlog.

Our liquefied natural gas projects continue to realize good job performance and financial contributions. The Seagas LNG project in Egypt is expected to be completed later this year which will be the first 5 million ton per year LNG plant ever built. And Randy will talk more about that in a minute.

KBR's work for the U.S. and U.K. governments in Iraq continued at high activity levels though revenue and operating income decreased modestly from the fourth quarter. Iraq-related work for Halliburton as a whole contributed approximately $32 million in operating income for the first quarter on $2.1 billion of revenue. That's a 1.5% margin before corporate cost and taxes.

Now turning from segment operating results to other financial items.

Our general corporate expenses were $24 million in the first quarter compared to $20 million in the fourth quarter. This increase was due mainly to higher communication and legal expenses.

We expect general corporate expenses to be between 20 and $24 million per quarter due to Sarbanes-Oxley compliance costs and if necessary increased spending on media relations and professional fees to defend Halliburton's reputation at least through the election.

Interest expense was $56 million in the first quarter and that's compared to $54 million in the prior quarter. We expect interest expense to be approximately $57 million in the second quarter of 2004.

Our effective tax rate from continuing operations for the quarter for the first quarter was 37%. We currently anticipate our effective tax rate on continuing operations through the rest of 2004 will continue in the high 30s.

Capital expenditures totaled $130 million for the first quarter, that's down $15 million sequentially. The decrease is due to our focus on capital discipline. Depreciation expense was $132 million for first quarter compared to $134 million in the prior quarter.

Now I'd like to take a minute to update you on debt and liquidity.

Total debt at March 31st was approximately $4 billion, that's up from approximately $3.5 billion at December 31, 2003, and that's due to the issuance in January 2004 of $500 million of three-year senior notes at a floating rate of LIBOR plus 3/4%. These notes are redeemable at our option in whole or in part after one year.

We ended the first quarter with $1.9 billion in cash, that's up from $1.8 billion at December 31st. We continue to have $700 million in availability under our revolving credit facility and over $200 million in availability under ESG's receivable facility. We intend to arrange a similar facility for KBR to help finance their working capital needs.

Our working capital position on our government services work in Iraq was approximately $1.25 billion at March 31, 2004, and that's up from approximately $880 million at December 31, 2003. We do expect a general decline in our working capital requirements during the second half of the year, primarily due to the transfer of the civilian fuel delivery work to the Defense Energy Support Center and the completion of the RIO-1 project and the leveling off of the LOGCAP III project after the initial ramp-up in 2003.

Our outlook is for overall improvement for the second quarter in our financial results, however the decline in activity under the RIO contract in Iraq will lead to lower revenue and profit contribution at KBR.

With respect to our proposed asbestos settlement, and as we previously announced DII Industries, KBR, and other affected subsidiaries filed Chapter 11 proceedings on December 16, 2003 in Bankruptcy Court. Various insurers have asserted a broad right of standing in connection with the bankruptcy cases and filed a motion to dismiss the reorganization cases and various other objections But on February 11, 2004 the Bankruptcy Court issued a ruling quoting the insurers lacked standing to bring motions seeking to dismiss the prepackaged reorganization cases.

The Bankruptcy Court has scheduled a firm date for the hearing on confirmation of the proposed plan of reorganization and approval of solicitation procedures and that firm date for the confirmation hearing is set for the period May 10 through 12, 2004. We would expect the judge's ruling within a few weeks of those dates.

Assuming the Bankruptcy Court confirms the plan the court's ruling then would be presented to the District Court for affirmation. Our expectation is that this process could be completed sometime in the late summer of 2004, unless there are delays due to appeals. Once appeals, if any, are exhausted we would fund the trust.

In the first quarter of 2004 we recorded an after-tax charge of $141 million to discontinued operations for the increase in the market value of the 59.5 million shares of Halliburton stock to be contributed to the asbestos trust as part of this asbestos liability settlement as well as related legal and court expenses. So it's mainly due to the fact that our stock price went up over $3 a share during that period from December 31st to March 31st.

Although we do not have additional insurance settlements to announce at this time, discussions are taking place with a number of the insurance carriers who have not yet settled with us.

With regard to our $2 billion receivable for insurance note that we have moved $500 million from long-term to current accounts receivable due to the Iquitos settlement that we previously announced.

Now regarding our analyst meeting for this year, we announced last quarter that due to the potential conflict with the May hearing dates we rescheduled our previously announced analyst and investor conference. We are now targeting our analyst and investor day for September 23rd of this year, and we will make a formal announcement when the timing of this event is finalized.

Now I'd like to turn the call over to John Gibson for his remarks on the Energy Services Group, environment, and outlook. John.

Thanks, Chris.

As indicated by Chris and in our press release the business overall performed to expectations in the first quarter of 2004. Each of our four divisions had areas of strong performance. But before discussing each of the divisions we need to try to explain the drop in sequential operating income.

The largest single impacts to sequential operating income are attributable to seasonal items, both Subsea 7 and Landmark as Dave mentioned are seasonal businesses that uniquely impact Halliburton. Their combined sequential operating income impact approached $25 million in Q1.

Like most software businesses, Landmark generates its highest revenue and operating income in the fourth quarter. Subsea 7 typically experiences weather-related slowdowns in the North Sea in the first quarter as well. I'll provide more detail ob other impacts to operating income as we discussion the divisions.

In our Drilling and Formation Evaluation segment we have implemented the previously announced cost reduction initiatives including a net reduction of more than 200 employees at Sperry-Sun and the redeployment of resources and assets to areas of higher utilization. Although deep water Gulf of Mexico and the U.K. sector of the North Sea remains soft, the cost reduction measures coupled with new contract awards in Norway and direct sales into Russia resulted in operating income more than doubling on a sequential basis and recovering to near double digits.

For Security DBS we're well positioned to leverage benefits from our newly constructed facilities in The Woodlands, Texas. We're also excited about our energy roller comb bits which is a proprietary technology to Halliburton.

Our logging and perforating business continues to have strong performance particularly in the markets that we've chosen to work in in the international arena. Our Fluid segments revenue was flat overall with continued good performance in cementing being offset by under performance in Baroid.

We are working through a series of actions to turn Baroid around. We've taken some $20 million of annualized costs out of Baroid including a net reduction of approximately 150 employees and are implementing a focused plan to improve efficiency in our operations throughout the delivery chain.

Specifically Baroid has restructured the Gulf of Mexico operations to be profitable at a lower activity level. We focused our sales efforts to improve our win rate on major projects and the win rate on major new contracts was 52% in the first quarter.

We've appointed a director of supply chain management to source new low-cost materials and reduce overall material costs and help on logistics. We expect to see benefits in the second half of the year from this.

The Baroid executive management has also established more accountability to profitability with our field management so that we can drive quicker and better decisions. We expect to see marked improvement in Baroid in the second quarter and throughout the remainder of the year.

In Production Optimization segment, production enhancement activities are robust and growing and we anticipate a continuation of this trend. As mentioned, divisional results were negatively impacted by our Subsea 7 joint venture due to seasonality.

Production Optimization was also negatively impacted by cost incurred to expand our under balanced business in a new geographic market and a significant drop in profitability in Nigeria related to dry dock expense and the timing of some of the deep water activities of offshore Nigeria.

Finally, in the Landmark division, Landmark Graphics Q1 revenues declined sequentially as historically been the case, however Landmark Graphics had a record revenue in first quarter. Also, it secured a long-term contract in Mexico which is the largest single contract in the history of Landmark Graphics. We continue to see growth in the remainder of the Landmark division as well.

We believe that increasingly national oil companies will demand integrated service solutions. We've been pursuing these solutions since the 1990s so we're very well positioned to capitalize on this growing segment of the industry.

We have a dedicated group within Halliburton to ask for the identification of major integrated opportunities. We currently see in excess of $2 billion in projects that will be tendered in 2004. We expect to announce significant wins in the second quarter related to integrated service solutions.

Now to finish commenting on divisions I'd like to make some general comments.

We're enjoying a very robust onshore U.S. marketplace and assuming commodity prices are stable for the remainder of 2004 this trend looks sustainable we believe that demand will increase throughout 2004 for our U.S. onshore services. That results from a 24% rig count increase year-over-year in the U.S. predominantly in the gas area and that's really caused an increase in demand.

As a result of increasing demand and the rising raw material costs, we're implementing a U.S. price book increase of 8% effective May 1st in our pressure pumping businesses. We think the increase is both prudent and something our customers will feel is reasonable and justified.

We also intend to increase pricing across the broader spectrum of our products and services where we believe market conditions are appropriate. Single-digit price book increases should be possible in the U.S. for most of our products and services. We think these increases are prudent and something that we'll be able to explain to customers.

Chris has already gone over the regional results, so I'd like to talk about two of the industry needs for which we have solutions that we see as very positive going forward.

It's clear that the delivery of improved drilling performance will require collaborative efforts in both execution and up-front planning starting at the reservoir and Landmark has designed a new product to address the required collaboration. It's called the Engineer's Desktop. This new product suite has been in development for about two years and the new platform provides the digital infrastructure for key reservoir work flows including drilling, well design, real-time operations, field surveillance and reservoir economics.

We believe that the integration of Landmark's industry-leading geology and geophysical software suite with these engineering tools are going to be a big benefit to our customers in the industry.

The second area of importance is under balanced drilling. Under balanced drilling offers sustainable benefits for the oil and gas industry including more rapid penetration rates, lower environmental impact on the surface through the reduced need for fluids and greatly reduced potential for damage to the reservoir.

In addition it is the ability to identify additional reserves in many fields that makes under balanced drilling so valuable to our customers.

While the benefits of under balanced drilling are significant, technical challenges also exist. The planning and execution has to be very precise to maintain optimum well safety and that's where Halliburton truly differentiates itself.

The highlight in the quarter was that we secured a two-year extension of a contract with BP to provide under balanced drilling services in the United Arab Emirates. To deliver the under balanced results that BP requires, we're using proprietary products and processes. Real-time connections through our Scan 3 and insight data acquisition and management systems and our unique four-phase separation system.

The result is comprehensive, reservoir-focused approach for both supports services for under balanced application.

And as we are proving with the BP project we have met and exceeded the technical challenges. In addition during the last five years, we've exceeded 5 million work hours without a lost time incident. That's a record of sustained health, safety, and environmental achievement and service quality that we're quite proud of.

So in conclusion we're truly focused on improving our relative performance in this market and we're going to address areas to improve and position ourselves for growth.

With that I'd like to turn it over for Randy to talk about KBR. Randy.

Thanks, John.

Chris has given you a detailed review of our financial performance, but before I touch on KBR's operational highlights and the outlook for our business I wanted to say a few words about our seven employees who were missing in Iraq.

I'm sure you have all been following the news stories about these employees who were transportation personnel for our LOGCAP III project. We are saddened that four bodies have now been positively identified as KBR employees, and the remaining three are still missing.

I have placed a call to each of these families and have spoken to most of them to express condolences and sympathy on behalf of our entire company. We are doing everything we can to assist these families and to help our other employees to cope with this tragedy.

Since the start of our involvement in the region, our company and its subcontractors have lost a total of 34 personnel which confirms that our work is difficult and in a very dangerous environment. We are appreciative of the thousands of messages of encouragement sent to our Middle East employees who remain committed to continue serving the troops and assisting the Iraqi people in rebuilding their country's oil infrastructure.

Moving forward with the operational highlights and outlook for our business I'm pleased to report that apart from the Barracuda-Caratinga charge, overall KBR's businesses exceeded expectations for the quarter. The Barracuda-Caratinga settlement resolves all current disputes between us and Petrobras, properly distributes our future work activity and lays forward the most expeditious path to first oil and ultimate production.

Our relationship with Petrobras is good at this point and I am pleased with our in-principal agreement and progress we are making to finish and bring closure to this project.

Now I want to elaborate on the settlement's impact to us during the quarter and on a carry-forward basis.

The $97 million charge relates to both the settlement with Petrobras and contingency items and allowances for work not yet completed on the project. The revised cost estimate includes an almost 70% increase to contingencies and other allowances we've put in place for offshore installation and commissioning.

As a result we believe we have anticipated potential shortfalls and addressed associated risks. Also part of the settlement was an agreement to transfer certain portions of the commissioning and operations to Petrobras who is best equipped to leverage its local resource and other area projects and more effectively transition into an operations mode.

Meanwhile, we will retain our focus on our core competency overseeing all engineering and construction activities to reduce the risk of future schedule delays and budget increases. With this agreement in place, both Petrobras and KBR feel confident we have a realistic road map to see us through the final stages of the project, now 86% complete.

Now on to the key operational highlights of our business.

In the Middle East, KBR continues to work closely with U.S. coalition forces to reassess local security requirements and put additional and appropriate measures in place to protect our employees. Meanwhile, we will stay the course and fulfill contractual obligations with our customers.

These include providing logistical support to coalition forces and humanitarian and reconstruction aid to the Iraqi people as well as helping to restore the country's vital oil infrastructure. In fact, I'm proud that under the new competitively bid $1.2 billion restore Iraqi oil continuation contract, or RIO-2, awarded us January 16 by the U.S. Army Corps of Engineers, we continue to meet our monthly production goals ahead of schedule and we're able for the first time since the war began to boost the country's oil production higher than pre-war levels.

The unique capability KBR offers is our ability to draw from the hydrocarbon side of our business the specialty engineering skills and technical knowledge required to undertake a challenging project such as this one.

With respect to the fuel transportation mission under RIO-1 we made our final fuel deliveries March 31 and have completely transferred that work to the Defense Energy Support Center, or DESC. Revenue associated with the fuel deliveries was approximately $600 million for the quarter and includes all fuel invoiced through March.

Because of the large amount of working capital required to support fuel transport, the contract completion will have a positive impact on our liquidity in the second quarter of 2004.

Regarding our LOGCAP III contract, our internal procurement team has completed an analysis of all 64 dining facilities and administration centers, or DFAC's, in our Iraqi and Kuwait areas of operation. We believe the analysis validates our position and concludes that KBR's actions were consistent with our prime contract with the Army Materiel Command, or AMC.

We are in the process of billing U.S. government for the $141 million in invoices for food services we voluntarily withheld and are paying subcontractor invoices and resolving the previously billed $36 million for related services.

It is possible the Defense Contract Audit Agency, or DCAA, may recommend that payments be withheld on one or more of the defects until its own audits are complete. In the event this occurs, we believe we have a strong contractual position and will ultimately be reimbursed.

Secondly, I would like to offer a quick update on our efforts to resolve a separate potential payment withhold by our client on our LOGCAP III invoices.

As we reported earlier this quarter, the AMC sent us a letter indicating its intent to withhold 15% from all our LOGCAP III invoices paid after March 31, 2004, until our task orders under the contract are definitized. Since the AMC allowed us a 30-day extension to the withholding period and we are continuing to work with them to obtain a further extension.

We do not believe the potential 15% withhold will have a significant or sustained impact on our liquidity as the withholding is temporary and ends once the definitization process is complete. And I'm happy to report that KBR is on schedule with the definitization process and our customer is pleased with our progress.

I'm sure that most of you have seen this morning's Wall Street Journal article. I've also read it.

In my view is that it is a rehash of the same old issues which we have addressed many times and feel confident will be resolved. However, I don't want the issue raised on our supply of ice to go unanswered.

What wasn't said is that we were tasked by the military to provide between 4 and 11 pounds of ice per person depending on the season. If you take the average, that's 800 tons per day at peak of the operation. So it seems to me that two 440-ton per day ice plants are not unreasonable.

Outside the Middle East KBR continues to be recognized for its expertise in implementing key strategic operations for governments, and municipalities worldwide. For example, in January the U.K. Ministry of Defence awarded us a seven-year contract called CONLOG to provide logistics and infrastructure support to the worldwide operations and exercises of its Permanent Joint Forces Headquarters.

As prime contractor, we will work alongside the British armed forces to identify and assess suppliers for a range of support services and ensure they are deployed rapidly and reliably wherever they are needed in the world. Winning this competitively bid contract against strong international competition only solidifies our position as one of the U.K.'s top defense contractors.

I expect our government sector work to remain strong across all regions with Iraq outpacing other market especially in the near-term. Because of our existing level of presence and performance in Iraq, I believe KBR is ideally positioned to be awarded future work in the area.

Improved area security, and the establishment of a stable government, however, are both necessary to realize these projects.

Our private sector business also performed well during the first quarter of 2004 as KBR continues to play an integral role in gas to liquids, or GTL, and liquefied natural gas, or LNG, projects worldwide.

I'm pleased to announce KBR is part of a team outlining the requirements for Shell's first next-generation GTL plant. As part of the team, KBR signed a letter of agreement with Shell Global Solutions to provide Front End Engineering and Design, or FEED work for its $5 billion onshore gas to liquids facility in Qatar.

The project term is 14 months during which time we expect the majority of the design work hours to be executed at our Greenford office near London.

Additionally during the first quarter KBR along with its partner successfully completed the 8th LNG train from Malaysia's Bintulu LNG facility. Both trains seven and eight, known collectively as the TIGA Expansion Project, are currently producing LNG.

We continue to expect significant growth in the GTL and LNG market as demand for clean fuels and affordable natural gas expands worldwide. In fact, KBR is actively pursuing nine LNG liquifactions projects, five LNG receiving terminal projects and three gas to liquids projects.

Our technical expertise and performance make us confident that we will continue to be recognized as the leader in designing and building the world's most efficient and successful LNG and GTL facilities. These projects are predominantly located in countries where KBR has successfully completed LNG project for the past 30 years. In fact, we are hopeful that during the next several days we will sign a letter of intent for an additional LNG train at one of the sites where KBR is currently working.

As you are well aware, we announced in late 2002 we would no longer pursue undifferentiated offshore lump-sum Engineering Procurement Installation and Commissioning, or EPIC projects. Today our strategic focus is on securing projects with controlled and equitable risk reward profiles.

Consist with this strategy, I'm proud to report we signed the first reimbursable EMCP, or Engineering Procurement and Construction Management contract with BP for a floating production storage and offloading vessel this quarter. The work will take place on BP's Greater Plutonio fields located in Block 18 offshore Angola and is expected to be completed in 2007.

This concludes my portion of the discussion except to say, in summary, that apart from the Barracuda-Caratinga charge, KBR's business has put in a strong and successful performance in the first quarter. Our outlook remains positive, and we believe the world economic recovery should continue to have a beneficial impact on all our engineering and construction businesses.

Now I'll turn the call over to Dave who will make some closing comments. Dave.

Thank you, Randy.

Just in summary, as you've heard today, I think we've made good progress in the quarter and as I said we have lots of moving parts in the company right now. But certainly we made good progress towards resolving asbestos in the next couple of quarters, working capital has peaked in Iraq.

As John has indicated U.S. pricing should start to improve in our Energy Services business, and we're seeing customer capital spending begin to trend up. And we are completing our offshore EPIC lump-sum projects. Our outlook for Energy Services Group and LNG is improving, and this bodes well for the rest of the year and into next year.

Just as a final note. There's really nothing more difficult for me than to see the tragic loss of life of our employees that has occurred over the past year. Our hearts grieve for these employees that we have lost and our empathy goes out to their families and loved ones.

As Randy told you we are committed to honoring our contracts and I am extremely proud of the tenacity, the courage and sacrifice of our employees in Iraq and around the world. In the face of harsh and hostile environment I think KBR has performed well.

And as I said before, I am disappointed that ill-founded allegations from politicians and the media have increased security risks for our employees in these tough locations. The facts are we are uniquely qualified to provide military logistical support. We've been doing it for 60 years, and it's because of our ability and our experience.

So with that, let's open it up for questions, and we'll let Cedric moderate us.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question and one follow-up to allow everyone an opportunity to ask a question. Once again, that is star one to ask a question. We'll go first, James Stone at UBS.

Good morning, guys. Thanks for the very detailed run-through. Let me just come back and talk about the ESG side. In the Production Optimization segment margins were down, it seemed like margins and even the growth in profitability in the enhancement side was a little bit less than expected. I understand the issues at Subsea 7, but could you perhaps talk about how you see that business going out over the next couple of quarters and perhaps what the competitive landscape looks like particularly onshore in the U.S.?

James to address Production Optimization first you'd have to take a look as production enhancement is a component of that. You seem to be focusing on the stimulation component, not the overall.

The majority of the improvements that we need are need to improve the Subsea 7 joint venture, that's where the majority of the loss came in the quarter. Also, we had some trouble with the completion products area in Nigeria as well, with the deep water being delayed. But if I take a look at the production enhancement business itself, we gained market share in the quarter and we saw a strengthening in our pricing.

We also keep up with sort of scheduling as well, and if I look at the schedule boards we're out four to six weeks in the U.S. where we have a backlog of business and we're working really hard to increase that backlog, and looking at that backlog is what's giving us the confidence to go in and to elevate those prices as we go forward. We've been studying a price increase for several months, and we felt like it was an opportune time to do it.

The backlog supports that, PE is very strong and we have tremendous robust market here in the U.S. and I think you're going to see it continue to improve throughout the year.

As my related follow-up can you give us more color then on how you see Subsea 7 shaping up over the next couple of quarters? We're obviously heading into a more seasonally favorable period and then maybe what's the ultimate disposition of Subsea 7 look like?

The joint venture should be accretive for us as we go into Q2. That's what our plan is. We're excited to see them come out of the doldrums associated with the seasonality of it in Q1.

We're very focused on the leadership there looking at the cost, making sure how we do the vessel work is improved and that we get the expenses down and that we go out and really fight in the marketplace for the right market share for to us improve that business. We have some of our best people that are on the board of the joint venture and I see a tremendous amount of focus on it, and as well as our partner, and so I believe DS&D and ourselves are very focused on improvement in that joint venture.

And there were some vessel impairments in both the fourth quarter and the first quarter, more in the first quarter at Subsea 7 and you also may have seen that Subsea 7 had some pretty good contract awards that they recently earned in Brazil, West Africa, and the North Sea.

Next move to Dan Pickering with Pickering Energy Partners.

Good morning, guys. Iraq, just curious here, $600 million in fuel contracts that were turned back over to the government. In terms of profitability would we assume that that's generating higher than average profitability for the Iraq business that we saw in Q1 given which contract it was within?

Yes, Dan that work was under the RIO contract, which is the more profitable of the three contracts that we have in Iraq, so that was part of the reason I was saying that we expect our profitability as well as our revenue to be lower in the second quarter. And, you know, an important point, too, keeping in mind the full Iraq picture, is that a lot of our earnings here are deferred until the award fees are made, and we're hopeful that by later this year we'll begin to see those award fees decisions made, particularly on RIO-1 now that that work is coming to a conclusion.

That was the area of my follow-up, which was, have you changed any of your accrual processes from fourth quarter to first? You talked to us about how you were accruing your potential awards and then given the award timing et cetera, is it possible that Iraq could actually make more money for Halliburton in 2005 than it does in 2004?

That is possible. We do take a reserve against each of our contracts there. And there is judgment applied to that based on what questions and issues need to be addressed as well as how far we are along with the award fee process.

But once those awards have changed, once those awards are made, then we will realize the full amount, and that could well be more than we've accrued to date. So, yes, the profitability could be greater.

One note, there has been a change in the accounting rules as it relates to contracts performed over time, and particularly ones involving award fees. So on the RIO-2 contract we will be probably accruing less of the award fee until it is awarded since that contract was signed after the change in the EITF standard. So that, again, would tend to delay some of the award recognition.

We'll go next to Jim Crandall at Lehman Brothers.

Good morning. Question on a couple of different businesses. First of all, I thought that your results in Drilling and Formation Evaluation were quite strong, both on the revenue and earnings side. Could you talk about competitive conditions in this market and how you're performing with your new tools in both logging well drilling and rotary steerables?

Actually we're very proud of the performance in DFE. We put a lot of work in last year and we're seeing the results of it this year. Combination of getting our costs in line, which I think we've done an excellent job at, and then growing the market through our new product and new technologies, particularly our rotary steer. We have excellent tools in the marketplace there, we have low maintenance costs on those tools so that we're able to actually keep them out there and keep then working for longer hours than many of the other tools in the marketplace.

As a result we're getting good returns on those and we're seeing an increase in the directional drilling around the globe and we hope that that trend will continue because we have the right fleet of equipment and the right personnel and processes to take advantage of improvement in that marketplace.

Okay. John, my follow-up, you announced an 8% price increase in domestic pumping services. When was your last price increase in the U.S., list price increase in the U.S. pumping service market and how much was it?

The last pumping price increase was August of 2003. In fact, we were the last company to have a price increase, and back then, so we worked through that and so I think this price increase actually has a lot more legs under it.

As we look forward the demand for the pumping services here in the U.S. is stronger now than in August of 2003 so I'm more confident of us being able to realize some of the gains here than I was even back in '03.

Next we'll move to Jim Wicklund with Banc of America Securities.

Good morning, guys. Y'all talk about the implementation, one of the costs was the implementation of exit strategies for logging operations in several under performing countries. You guys have always been focused on market share so now you're leaving different markets. Are you leaving a vacuum behind and what's the strategy behind this?

Well, Jim, we are leaving certain markets. You have to have enough critical mass there in order to be able to provide equipment and crews. You need enough economy of scale and scope for profitability, and so we've consolidated our equipment in markets where we have good relationships, that we have good integrate solutions selling so that we're able to provide the logging services with other products and services and we found that that's been very successful for us, the consolidation of equipment and the concentration that we need.

We obviously don't have enough equipment and crews in place to be the industry leader in this area so we have to focus and put ourselves in markets where we're very competitive and can be number one or two but in a smaller niche area, and I think that they've executed that extremely well over the last year.

I wasted my follow-up by not asking it the first time. What countries are you leaving?

Well, we've certainly reduced activity in India, and I probably shouldn't go through all the countries we're pulling out of for competitive reasons, Jim.

Oh, they know, they know.

Well, I'll say this Jim. We're pulling out of markets where the margins are low and the ability to get paid is difficult, and so if you time the balance sheet issues along with the market situation, we're making decisions on that basis.

Talking strictly wire line logging here.

Just, just logging.

Okay, guys. Thanks.

Next we'll move to Terry Darling at Goldman Sachs.

Thanks. I wanted to lead with my follow-up which would be a follow-up to Jamie's question on the production enhancement business. Chris, I think you indicated that revenues, not Production Optimization, just the enhancement piece, was up $2 million sequentially. Can you give what you say operating income delta was sequentially?

Jimmy, it was down a few million dollars, and we did, as I mentioned, have more compensation bonus accruals in the first quarter than we had in the fourth quarter so that explained most of it. The rest would be just a mix, a slight change in the mix of the services there. But not a huge change in our margins.

We feel that that business continues quite strong, and as John indicated we're obviously positive about the opportunity for pricing movement there in North America.

My primary question is, then, on engineering and construction margins, and what we should be thinking about going forward excluding Iraq. If we do a little back of the envelope here and we pull out the $97 million charge and we pull out the $32 million for Iraq, from the numerator, and we pull out $2.1 billion in the denominator for the revenues related to Iraq, and make a guess at what the Barracuda revenues might have been, it kind of back of the envelope looks like your margins there are in the 3.5% range.

A, is that math make sense? And number two, given the LNG projects to be concluded here in the back part of the year should we expect to see some continued improvement in that underlying base margin?

We're not going to give specific guidance there, Terry, on what we think the margins are going to be in the E&C side. It's been a difficult area for us to be consistent with.

But we think that the contribution from government is going to be down in the second quarter. Wouldn't argue with your math calculation there a whole lot but we can't be specific on the percentage guidance. We have said in the past that we're aiming for a 3% overall margin within E&C. And, Randy, anything you want to add?

I think that pretty much sums it up, Chris.

Did we get all of that, Terry?

Okay. Thanks, yeah.

Next we'll go to Ken Sill with CS First Boston.

Yeah, I'm going to start with a follow-up, like everybody else, do it backwards. You said there are some asset write offs in Subsea 7. How much was that in Q1 and Q4 on a pre and post tax basis for the vessel impairments?

Yes, it was a variety of things. They had some vessels that they had on lease that turned back and there was one that they owned they took an impairment charge on. I believe that the amount was about $9 million.

Total.

And that's for 100% of Subsea 7, not just our 50%.

Okay and that's --

The rest would have been operating result.

So half of that would be what's in the $14 million loss this quarter?

That's correct.

Then on the Fluids business it sounds like you're taking some steps to fix that. It's obviously been, I guess, at least in my model, a little bit of a disappointment for awhile here. What has been driving, you know, what have the issues been at Baroid, and is it an issue with products or is it just customer mix in the Gulf of Mexico? What is it going to take to fix that and how do you guys think that's going to progress over the next two to three quarters?

The Fluids business is one we've put a lot of focus on. If you can imagine that for everybody the Gulf of Mexico became incredibly weak during '03 carrying over into '04. And so we have tremendous dependence upon the Gulf of Mexico so first I'd say that you have to give us quite a lot of credit.

I'm excited about what we've accomplished in the U.S. We've shifted from the Gulf of Mexico to the Rockies and the mid-continent in order to be able to have a good year in the U.S. If you take a look at the numbers it took tremendous effort to shift activity from the Gulf of Mexico where we had tremendous market leadership to the onshore and accomplish what we did.

So in the Fluids area we've had to go back into the Gulf of Mexico where we were very strong and reduce costs, change our focus there, and we've done that. We also have had to improve our performance internationally, so for Baroid to really have an outstanding future it's going to have to improve its international focus.

On the cementing side that is one of our strong, strong businesses around the world, certainly in the United States. And so anytime we look at the Fluids numbers we see that cementing is often making up some of the shortfalls on the Fluid side and we've got a 52% win on major projects with Baroid at this time and as we go forward we're really looking at that metric and we think we can improve our win rate on major projects for the Fluids division.

How do you think that's going to run through the margins over the next couple of quarters? Is it going to have some pretty immediate impact in Q2?

I believe it is going to have immediate impact. We've taken costs out, we are improving our wins on major projects and as we go forward I think you'll see fairly good impact on Baroid even in Q2.

We'll go next to Scott Gill with Simmons & Company.

Yes, good morning. My first question is for you, Randy, with regard to what your contracts in Iraq. Can you tell us where current oil production is in Iraq and what the goal is for the end of 2004?

It's about 2.5 million barrels a day and that will grow some through the end of the year, but not significantly.

Okay. And my follow-up is for you, John. Just based on the type and amount of work that you have at Landmark Graphics, what is your outlook for exploration activity through the balance of '04, and are you seeing any specific regions of strength or surprises in that outlook?

Let me address exploration in general. I've just been reviewing the acquisition numbers and exploration cost numbers for the industry and if you take a look at the most recent acquisitions that have been made, reserves by our customers purchasing other companies, we're seeing prices per barrel of oil equivalent in the ground that are now exceeding 11.5, up to as high as to the mid 13's, so this is the first month that in my opinion, we've seen crossover cost of acquiring reserves through purchase, merger acquisition, be greater than the cost of exploration.

If that trend were to hold I'd say that's going to bode very well for some improvement in the exploration market overall. That's good news for Landmark which is the leading supplier of solutions for exploration, the ability to handle data, store it, manage it, analyze it, and the consulting services associated with it. So on the exploration solutions that could be a very good sign for us.

But are you seeing that now in your business?

Actually, right now the biggest thing, if we took a look at the Mexico contract, it still is equipping scientists, particularly at national oil companies, with the tools that they need to do both exploration and production, so it's more of a complete market approach than it is really focused just on exploration.

Okay. That's helpful. Thank you.

And we'll go next to Jack Kieburtz with Smith Barney.

Good morning. Randy, I have a question for you about Iraq that I'll try to frame carefully so that you can answer it. But, you know, as mentioned a couple of times, you feel like your Iraq business has peaked, I understand that in the short-term because of the fuel contract, but as we think about your work in Iraq, what are the variables that are going to make the biggest impact on, you know, the revenue run rate? I recall in the Balkans contract your revenue tracked quite closely with the troop levels but you have a different sort of mix here with the RIO contract. Can you help to us focus on those variables that are going to allow us to make a better estimate of how revenue is going to trend there?

I think you hit it in saying that it is troop strength and, of course, the duration of their stay are the main ones. And on the RIO side, the contracts for RIO-2 is transitioning to the CPA, and so the variable there will be how quickly CPA can implement the work that's going to be done under that contract. So I think those are the two main things.

So wildcat proportional with troop strength with probably a little bit of lag as troops come down before our revenue comes down and, you know, RIO, harder to judge but based more on what the CPA decides the level of activity is going to be.

How quickly they move.

Right now.

And how do you think about the impact of the transition to some form of Iraqi government?

Well, I think the work has been identified there to hold the production levels that we have today, as well as to increase certainly needs to be done, and, you know, as security becomes better in the area, I think those projects can be implemented and fully expect that work to get done and even increase.

Okay. So we could see an uptick here after a near-term decline?

Yes, I would expect that.

Okay. Thank you.

One or two more questions here.

All right, and we'll take our next question from Mike Ervin at Deutsche Bank.

Thanks. Good morning. Wanted to come back to Baroid in terms of your focus on winning new contracts and on that win rate. What are you trying to do there to kind of differentiate yourselves? Is it a technology issue? Is it a price issue just more of a focus?

Well, there's two or three focuses there. One is our technology is quite good and seen as industry leading so it's a matter of making sure that our marketing effort and the communication of our capability is done efficiently so that customers understand how well differentiated we are.

Rates of penetration for us are quite high compared to other product lines. Our reduction in loss of Fluids is good so all the technological areas are not really our weakness. We probably didn't focus as much on our sales effort internationally as we should have, and though the acquisition Dresser's been several years ago, they're giving the full integration of Baroid into the Halliburton family has been probably a little slower than we desired and we're just now beginning to get I think the leverage from bringing Baroid into the Halliburton family and taking advantage of the infrastructure and our abilities around the globe.

Okay. We've got time for one more question here.

And that question will come from Robert McKenzie with Friedman, Billings and Ramsey. Mr. McKenzie your line is open, please go ahead.

Okay. I guess that will wrap it up for today. Thank you for joining us on today's call. A replay will be available on our Web site.

And that does conclude today's conference. Thank you for your participation.