哈里伯頓 (HAL) 2004 Q4 法說會逐字稿

Good day and welcome to today's Halliburton Company fourth quarter 2004 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. Paul Koeller. Please go ahead, sir.

Thank you, Michelle. Good morning and welcome to Halliburton's fourth quarter 2004 earnings release conference call. Today's call is being Webcast and a replay will be available on our Web site for seven days.

Joining me today are Dave Lesar, Chairman, President, and Chief Executive Officer, Chris Gaut, Executive Vice President and Chief Financial Officer, Andy Lane, Executive Vice President and Chief Operating Officer, and Bert Cornelison, Executive Vice President and General Counsel.

On today's call, Dave will provide opening remarks, Chris will discuss our overall operating performance and financial position, other financial items, and provide an update on our asbestos settlement. Next, Andy will cover the business outlook and compare the position of the Energy Services Group and KBR.

Finally, Dave will provide a few concluding remarks before opening the call for questions. We will limit each caller to one question only in order to maximize participation in the time allowed.

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 can obtain it from our Web site, www.Halliburton.com.

Before turning the call over to Dave, I would 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-KA for the year ended December 31, 2004, and Form 10-Q for the quarter ended September 30, 2004.

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

Thank you, Paul, and good morning, everyone.

Overall I'm pleased with the progress we've made as a Company in the fourth quarter. There certainly are a lot of issues to discuss and I've tried to anticipate the more important ones that are on your minds, and I will address them in the summary in my comments, and then Chris and Andy will go into them in more detail.

First and foremost I'm pleased to say that on December 31, 2004, the asbestos settlement became final and non-appealable, and earlier this week we completed funding the trust and the bankruptcy cases are now officially closed.

In our Energy Services Group we experienced top line growth of 3 percent sequentially, which is a great outcome because we typically have a Q3 to Q4 revenue drop.

We continue to focus on revenue that brings us the right level of returns and not chase revenue for the sake of market share. This supports our view that prices and demand for our services continue to increase. With increased activity as reflected by the current rig count, our utilization is high and pricing improvements have delivered record quarterly revenue.

We achieved a 17.1 percent operating margin for ESG even after recording charges for two integrated solutions projects and intellectual property settlement and gain on surface well testing, which in aggregate decreased the margin by 1.4 percentage points, down to 17.1 percent. Andy and Chris will elaborate on these items.

Also, with regard to the future of KBR, now that asbestos is behind us, I will recommend to our board that KBR be separated from the Company. However, I believe that in order to maximize KBR's value for our shareholders, and to determine the most appropriate form of a transaction for KBR and its components, it may be necessary to establish a track record of solid earnings for several quarters and resolve government investigations and disputes and to work out price, terms, and structure.

I do not intend to provide updates or answer further questions on this topic, but we are working on it and think we can get it done, although there are no guarantees, and it may and will take some time. When we are ready, we'll make an announcement on it.

Regardless of the outcome, our turnaround efforts at KBR will benefit our shareholders.

We are also turning the corner with KBR and have completed our restructuring efforts. The restructuring charges are $10 million higher than we originally anticipated, but we will be more than offset by our increased savings which we expect to now meet or exceed the high end of our previously announced range of 80 to $100 million a year of savings.

In addition, we continue to make progress on the Barracuda Caratinga project. Barracuda had first oil production in December, and Caratinga has sailed out to the field, is on track for oil production in the first quarter of 2005.

In the fourth quarter the first award fee boards were held for our LOGCAP work in Afghanistan and Kuwait, and I'm encouraged by these initial scores which ranged from good to excellent. Andy will further elaborate on the details later.

Let me now turn to the subject of our business in Iran. Several of our competitors are much more active in Iran than we have been, and are currently constructing extensive new facilities on Kish Island. It is inexplicable why these activities have not drawn equal attention, but once again it points out the political nature of the attacks on Halliburton.

In any event, we believe the services we provide in Iran, while perfectly legal under U.S. law, are minuscule in comparison to the scope of our worldwide activity. However, they attract a disproportionate share of attention.

The business environment currently in Iran is not conducive to our overall strategies and objectives. As a result, we have decided to exit Iran and will wind down our operations there while fulfilling our existing contracts and commitments.

If the U.S. sanctions are lifted in the future, or more of our major customers go there, we will return to this market. We will go through the process to move our equipment elsewhere in the Middle East to work on contracts that meet our current business objectives.

The outlook for our business continues to improve, particularly for Energy Services and the LNG businesses. As our customers become more confident about the fundamentals underlying recent oil and gas prices, we anticipate further increases in spending both in the U.S. and internationally.

Now let me turn the call over to Chris, and he can go over some of these items and others in further detail.

Thanks, Dave, and good morning.

I will summarize the Company and segment results, and I will review the change in revenue, then operating income for each of our segments. Starting with the fourth quarter 2004, we began to report six segments, the four segments in ESG, and due to the reorganization of KBR, now two segments in KBR, Energy and Chemicals, and Government and Infrastructure.

I will then discuss our liquidity and other financial items and in closing provide a final update on our asbestos settlement and the effects of funding the settlement on our financial and tax situations.

Throughout this call I will be comparing fourth quarter 2004 results from continuing operations sequentially to the third quarter of 2004. And now moving to our operating results.

Total Company revenue for the fourth quarter was $5.2 billion, that's up 411 million from the third quarter, due in large part to increased activity on KBR's government services contracts, and to a lesser extent, increasing demand for ESG's services which saw increases in all geographic regions.

International revenue was 79 percent of the total in the fourth quarter, an increase of four percentage points, due to higher KBR activity in Iraq, and to higher international revenues at ESG.

Operating income increased 7 million sequentially, due to improved operating performance at KBR and ESG. That was offset by a $33 million loss on two fixed fee integrated solutions products in Southern Mexico, and an $11 million charge for an intellectual property settlement.

KBR had a fourth quarter restructuring charge of $22 million, bringing the total charge for restructuring KBR over the past two quarters to $40 million. Operating results for the fourth quarter also included a $14 million gain on the sale of ESG's surface well testing operations.

Interest expense was about $14 million higher than normal for interest and penalties on tax deficiency assessments in Indonesia and Mexico.

These five items, the charge on the Mexico turnkey project, the IP settlement, the KBR restructuring cost, the gain on surface well testing, and the tax interest and penalties, cost us a net $0.09 in earnings per share during the fourth quarter.

Now I will review our segment operating results, and first I will review the segments within ESG.

ESG revenue totaled $2.2 billion which was up approximately 3 percent from the third quarter. Most of the revenue increase was outside the U.S.

ESG operating income totaled 370 million, a decrease of 44 million compared to the third quarter, due to the smaller gain on the surface well testing sale, and the reserve for loss on the Mexico project.

The ESG segment results are as follows. In the Production Optimization segment revenue increased $26 million or 3 percent over the third quarter. Production enhancement revenue was up $8 million, another record revenue quarter despite the impact of the holiday season.

The revenue increase was primarily due to increased rig activity in Canada, increased utilization of our stimulation vessels in Latin America, and increased activities in North Africa.

Completion tools revenue was up 14 million, despite 7 million in lost revenue resulting from the sale of our surface well testing operations in August, 2004. Revenue increased primarily in Middle East Asia on strong direct sales into Asia and the Southern Gulf, as well as increases in perforating, testing, completion, and underbalanced application work.

Production Optimization's operating income declined 13 million, but this was due to the $26 million difference between the $40 million gain recorded on the sale of surface well testing operations in the third quarter, and the $14 million gain recognized in the fourth quarter.

Fourth quarter operating income was positively impacted by increased revenue and slightly improved stimulation pricing in the U.S., with some offsets due to material and labor cost increases. Additionally, the equity income from our Subsea 7 joint venture was down $3 million as a result of seasonal declines.

As previously announced, we completed the sale of our equity interest in Subsea 7 in January 2005, and we will record a pretax gain on sale of approximately $110 million during the first quarter.

In the Fluids segment, fourth quarter revenue remained essential flat compared to a very strong third quarter with an increase in North America being offset by some declines in our international operations. Fluids segment operating income was down 11 million, compared to the third quarter.

Baroid, our drilling fluids operation, had operating income that decreased 7 million, due to higher operating expenses in Mexico, Brazil, and the Gulf of Mexico.

Cementing operating income decreased $4 million, due to reduced activity in Mexico and Algeria, start-up costs in Russia for a contract in 2005, and lower direct sales of cementing equipment to China, offset by improved pricing and activity in the U.S.

Drilling and Formation Evaluation segment revenue increased $15 million as a result of increased activity in North America, combined with growth in Indonesia, China, and Brazil. Revenue from Directional Drilling and Logging Well Drilling, or LWD services, increased 9 million.

Activity increases in Indonesia, the Caspian, China, Denmark, and Saudi Arabia provided the majority of this increase.

The continued success in Brazil of our new GeoTAP formation testing while-drilling technology was also a significant contributor during the fourth quarter. These increases were partially offset by decreased activity in the North Sea, Mexico, and Russia.

Logging revenue increased 8 million sequentially, primarily due to more equipment sales to China and increased activity in Brazil.

Drilling and Formation Evaluation operating income decreased 3 million sequentially, primarily due to one-time costs for facility closures as well as start-up costs on new contracts. Despite these events, the segment achieved operating margins of approximately 13 percent.

Operating income from Directional Drilling and LWD services decreased 3 million versus the prior quarter, primarily as a result of one-time costs to exit low return locations in Southern Africa, and start-up costs associated with new projects in Argentina, Indonesia, and Denmark. Operating income in Logging services remained flat for the period with no significant variance to the third quarter.

Drill bits operating income was also flat sequentially, with a pension fund adjustment in Belgium, and exit expenses related to closure of certain low return locations being offset in full by improvements in operating costs.

At the Digital and Consulting Solutions segment, which was formerly the Landmark and Other Energy Services segment, revenue increased $22 million, or 14 percent from the third quarter, due to increased revenue from our Landmark Graphics unit.

Landmark Graphics revenue grew 34 percent on a sequential basis, consistent with an historic trend reflecting customers' year-end software budget spend. This higher revenue, primarily on software sales, led to record level of operating income at Landmark Graphics.

Overall, Digital and Consulting Solutions segment operating income decreased by 17 million in Q4 compared to the third quarter. The main reason was the $33 million loss for two integrated solutions project in Southern Mexico.

The fixed price contracts, awarded in the second quarter of 2004, involve drilling 33 turnkey wells for Pemex. The $33 million charge reflects the estimated total project loss through estimated completion of the projects in the second quarter 2006.

That resulted from higher mobilization and start-up expenses, increased costs to complete the projects, and longer drilling times than originally anticipated.

Segment results also included an $11 million charge for an intellectual property settlement. This settlement was necessary to complete the sale of Subsea 7, which was completed in January of 2005.

At KBR, our Engineering and Construction group KBR, and here we're comparing fourth quarter 2004 sequentially to the third quarter 2004, you will note that in an effort to bring greater transparency to KBR's results, we are now reporting two segments for KBR rather than one. We have included a supporting table in our press release that provides historical quarterly numbers for these two segments.

KBR revenue totaled $3 billion. That's up 349 million, or 13 percent from the previous quarter, primarily due to the increase in volume of the government services LOGCAP III project in the Middle East, as well as a 7 percent increase in the Energy and Chemicals segment.

Energy and Chemicals revenue for fourth quarter was 736 million, an increase of $47 million compared to the third quarter of 2004. Revenue increased primarily due to progress on gas projects in Algeria and Egypt, a crude oil facility in Canada, the Belanak project in Indonesia, and operation and maintenance projects in the United States and the U.K.

Offsetting the increases were lower activities on an olefins project in the U.S., and the Barracuda Caratinga project in Brazil.

Energy and Chemicals reported an operating loss of 9 million in the fourth quarter, compared to a loss of 44 million in the third quarter. The third quarter results were negatively impact by a 59 million loss on a gas project in Algeria, and the Belanak project in Indonesia.

Fourth quarter results were negatively impacted by charges for additional estimated costs through completion of the Belanak project of 14 million, and settlement of a completed mining project in the United States of a claim for $7 million loss. The third quarter and fourth quarter 2004 results both included a $14 million restructuring charge for the Energy and Chemicals segment.

Our LNG project in Egypt successfully reached a major completion milestone in December, yielding improved operating income in the fourth quarter.

Government and Infrastructure revenue increased $302 million, compared to the third quarter. Revenue on government projects in the Middle East was up $240 million, primarily due to increased activity on the LOGCAP III project.

In addition, revenue increased at the DML shipyard in the U.K. Government and Infrastructure operating income increased $15 million over the previous quarter, primarily from Iraq and the DML shipyard.

In the fourth quarter we recorded a loss on a fixed price construction project in Afghanistan for the U.S. government of $8 million. The fourth quarter 2004 results also included an $8 million restructuring charge for Government and Infrastructure, as compared to a $4 million charge in the third quarter.

Halliburton's Iraq-related work contributed approximately $1.7 billion in revenue in the fourth quarter 2004, and $13 million of operating income, or a 0.8 percent operating profit margin. Higher activities on LOGCAP III were responsible for the $200 million revenue increase and the $9 million operating income increase over the third quarter.

Andy will talk about our initial award fee results. In order to change our assumption and accrue a higher award fee and more income from Iraq, we would need the task orders to be definitized as well as see more award fee decisions.

Now, turning from our segment operating results to other financial items.

General corporate expenses were $21 million in the fourth quarter, compared to 22 million in the third quarter. We expect corporate expenses in 2005 to be in the range of 21 to 25 million per quarter.

Interest expense was 69 million in the fourth quarter, compared to 51 million in the third quarter. As I mentioned, the increase was due primarily to fourth quarter interest and penalty charges levied on tax assessments in Indonesia, and to a lesser extent in Mexico, and this is in respect to prior year activity going back to the 1990's.

Our effective tax rate on continuing operations for the quarter was 37 percent. We expect our tax rate in 2005 to be in the 37 to 39 percent range.

Capital expenditures totaled 153 million for the fourth quarter, that's up 15 million sequentially. The full-year 2004 capital spending was on plan at $575 million. For 2005 we expect Cap Ex to be about $650 million.

Depreciation expense was 122 million for the fourth quarter, compared to 118 million in the previous quarter.

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

We ended the fourth quarter with $2.8 billion in cash and equivalents, that's down from 3 billion at September 30. The reduction was due primarily to the increase in Iraq working capital and to funding on the Barracuda Caratinga project.

This month, approximately 2.3 billion of our cash was used to fund the asbestos and silica trusts, and we have received over 1 billion from our insurance settlements leaving us in a very solid position today with over $1.5 billion in cash post-asbestos.

Our working capital position on our government services work in the Middle East was approximately 700 million at December 31, 2004. That's up from approximately 500 million at September 30.

This reflects the increased activity and increased revenue in the Middle East associated with the increased troop count prior to the Iraqi elections. We do not expect a further increase in our working capital investment beyond this 12/31 balance.

Under KBR's agreement to sell specified U.S. government accounts receivable approximately 263 million was outstanding at December 31st, about the same level as it was in the third quarter. These receivables now have been collected and the balance retired and we are now currently selling further, we are not currently selling further government receivables, although the facility continues to be available.

As of December 31st the balance outstanding under our ESG accounts receivable securitization facility was about $250 million.

Our liquidity position at the end of the fourth quarter was strong, and now that we've funded the asbestos and silica trusts and begun to receive insurance proceeds, we believe our financial position will allow us to reduce our debt load.

Now I would like to summarize our final steps with respect to our asbestos settlement.

As previously announced earlier this week, we have completed the funding of our asbestos and silica trust by issuing 59.5 million shares of common stock for the benefit of future asbestos claimants, as well as having completed the cash funding for current claimants in the amount of $2.775 billion in total. The 59.5 million shares will be reflected in our EPS computation beginning in January 2005.

Our diluted share count at the current stock price is about 505 million shares.

In the fourth quarter 2004, we recorded an after-tax charge of $386 million to discontinued operations, primarily for the increase in market value of the 59.5 million shares of Halliburton stock that were contributed to the asbestos trust as part of the settlement.

During the time DII and KBR were in bankruptcy, we had to mark to market the value of the 59.5 million shares, the stock component of our asbestos settlement. When we exited bankruptcy on December 31, 2004, we were able to fix the value of the stock portion of the settlement for accounting purposes.

The stock has now been issued and we will not have these types of charges in future periods. Further, because the stock issuance became a certainty as of year-end, we were finally able to reflect the value of the stock in equity rather than as a liability as of December 31st.

Let me explain the tax consequences of the settlement.

With the increased value of the settlement due to our higher stock price, our net operating loss or tax loss carry forward has increased to $3.9 billion, most of it at the Halliburton Company level.

Keep in mind that the 3.9 billion is a pretax number. The NOL could potentially offset $1.4 billion in future U.S. tax payments, a cash benefit, but we have applied a $1.1 billion valuation allowance against this amount in accordance with GAAP.

Our tax rate on our income statement will not change as a result of having the NOL. As I said, our effective tax rate will remain in the high 30s in 2005. However, if there were a significant change in our profitability profile, then we would adjust the valuation allowance which would change our tax rate in that period.

We intend to hold our 2005 first quarter earnings conference call on Friday, April 22, 2005, at 9:00 a.m. central time.

Now I would like to turn the call over to Andy for his remarks on the market and the outlook for our operations. Andy?

Thanks, Chris. Good morning.

As Chris indicated we posted a solid fourth quarter which I believe reflects the continued strength of the market and internal improvements we've made both at ESG and KBR.

In ESG we increased annual revenues by over a billion dollars, generating more than half of this increase outside the U.S. 60 percent of ESG's 2004 revenues were generated outside the U.S. We had record annual revenues in Canada, Europe-Africa, and Middle East Asia Pacific regions.

In 2004 we set annual revenue and operating income records for ESG as well as three of its four segments. We also set record annual operating income in Europe-Africa, and Middle East Asia Pacific regions.

The 15.9 percent margin for the entire year was also a record for the Energy Services Group. We are very pleased with the Energy Services Group's outstanding performance in 2004.

For the fourth quarter, ESG also set revenue records in the Drilling and Formation Evaluation and Production Optimization segments. ESG set a fourth quarter margin record with a 17.1 percent margin.

KBR's Government and Infrastructure segment also set an annual revenue record. At KBR we've completed our restructuring and plan to deliver the savings we indicated in our fall investor conference.

So now let's cover some of the highlights of the quarter. I'll first address ESG and then KBR.

This is the second consecutive quarter that ESG has generated record revenue. We saw improved top line growth in all of our regions.

ESG's revenue performance was primarily driven by increased rig activity and also improved pricing. It was also a great quarter in terms of operating income, in spite of the losses we incurred on our projects in Southern Mexico.

On an annual basis, we improved operating margins by four percentage points from 2003 to 2004, reflecting this improved activity and pricing as well as lower overhead costs. We plan to continue to focus on cost management in 2005.

ESG improved its working capital by lowering days sales outstanding by 14 percent, and we increased inventory turns by 13 percent. We will continue to focus on working capital and capital discipline as we move into 2005.

Let me now provide our general outlook of the market.

Current market conditions are generally viewed as excellent, with strong commodity prices, high rig counts in many parts of the world, and increasing exploration and production budgets. Further, there are clear signs that the momentum experienced in 2004 will continue into 2005 and 2006.

We are very well positioned in sectors that are experiencing particularly strong activity, such as the U.S. onshore gas where we have a leading market share position in pressure pumping.

We are also well positioned in the offshore segments that could experience a good rebound over the next several quarters, particularly deep water Gulf of Mexico.

Given the tightness of service company capacity, customers are increasingly seeking to secure oil field services with longer term contracts. In the last quarter, we won a series of major contracts onshore in the U.S. gas sector, and internationally in Russia, Algeria, and the Middle East.

Our success in winning longer term contracts is a result of a process designed to target, compete for, and win strategic long-term projects. It has yielded a 64% win rate on projects we targeted in 2004, representing approximately $1.7 billion in future revenue.

I'm extremely pleased with this strengthening of our longer term positions in these key markets, particularly internationally. Not only for the profitable growth it offers, but because of the balance it brings to our portfolio.

Technology is at the core of our business and our future. In addition to the many awards we announced earlier in the year, we were very pleased with our major success in the last quarter at the European Innovation Awards for DepthStar. It's a new deep water subsurface safety valve in our Production Optimization segment.

We have established a core innovation organizational structure within all our segments and geographies, and this will improve development and introduction of new technologies.

In 2004, our new product and service revenue reached 39 percent of our total revenue. This is our highest level ever. In 2005 we will continue to invest in technology at the same level as 2004.

In terms of segment performance, Digital and Consulting solutions experienced mixed results. Landmark Graphics had a record quarter in terms of both revenue and operating income and this was driven by very strong software sales. We've also seen the increasing adoption of our real-time drilling and visualization technologies.

As Chris mentioned, fourth quarter results included a $33 million project loss for the drilling, evaluation, and completion of 33 wells in Southern Mexico for Pemex. The loss is primarily the result of operational startup and subsurface problems on the initial wells, third party and other cost increases, increased drilling times, and a work stoppage due to community blockage of the roads.

The charge reflects the estimated total project loss through completion of the hole drilling program in mid 2006. We are committed to completing the project per the current cost projections and we have a very focused team working on it.

As I did on Barracuda Caratinga project, I'm committed to personally staying on top of our progress and ensure we stay on track. These Pemex projects are our only turnkey drilling projects.

As a result of this projects, I've made the decision to be very selective about pursuing lump-sum drilling projects. And in the future, Chris and I will personally review and sign off any lump-sum projects of this nature.

As has been experienced by ourselves and others, these types of projects are inherently very risky without sufficient upside to offset this risk. We have elected not to bid on two much larger turnkey projects in Mexico, one in Burgess, and one offshore.

Moving on, I am pleased with the progress of our Drilling and Formation Evaluation segment and we remain committed to further improvements.

Whereas in the fourth quarter of 2003, our drill bit business lost money and Sperry was generating single-digit margins, this year drill bits are profitable and logging and Sperry are generating double-digit operating margins. This is due to more efficiently run operations through changes in the segment's cost structure completed this year and the improving market.

Margins in our logging business continue to be strong reflecting our successful strategy to select profitable areas for operation. Going forward we intend to continue to use this strategy and only compete in areas where we know we can operate profitably.

Sperry's performance has also improved over the course of the year as some of its major tools such as GeoPilot and GeoTAP continue to gain market acceptance. In 2005, we are expecting growth and margin improvement in Sperry.

While the security margins did improve 4 percent in 2004 compared to 2003, they would have been 2 percent higher were it not for patent litigation costs. We still expect even further improvement and I'm confident that our bit business will improve in 2005.

In Fluids, I continue to be encouraged by about the improvement in Baroid, which achieved a second consecutive quarter of double-digit margins. Baroid had a record revenue quarter and we secured over $115 million in contract wins in West Africa alone. With this momentum we expect further margin improvement in 2005.

I also want to take this opportunity to recognize the continued success of our leading cementing business.

Cementing again provided outstanding performance this quarter and is a star performer in the business portfolio of the ESG. This product line continues to lead ESG in capital efficiency through its emphasis on improved asset utilization, cost management, and supply chain improvements.

We expect the North American market to continue to offer opportunities for further pricing improvement and overall margin performance in cementing in 2005.

Our Production Optimization business continues to benefit from its leading position in the strong U.S. gas market.

We've implemented two pricing increases over the course of 2004, and have seen good support from our customers reflecting their view of our strong service and technology positioning. This is has resulted in back-to-back record revenue quarters for production enhancement.

We continue to convert customers to the new price book that was effective only October 15th, and the fourth quarter results only partially reflect the impact of this price increase.

Due to our leading position and a demand for stimulation service, bookings for frac jobs are still scheduled 45 to 60 days out. We continue to find creative ways to work with our customers to maximize our equipment utilization in off-peak periods to meet their needs.

Recently we have won two major contracts with independents in our prime stimulation market, the Rocky Mountains, in excess of $100 million per year. These projects were awarded at good pricing and were the results of our ability to deliver superior service quality.

These achievements demonstrate our leadership in the North America market and that we are winning our work on performance and reliability versus price. We have strong position with the independents who are currently the most active customer base.

In 2005 we will maintain a disciplined approach to our capacity expansion in the U.S. and Canada as our focus will be on pricing improvement. With the rig availability a constraint, we are modestly adding conventional pumping equipment and some rig lift stimulation capacity.

In completion tools, where we have the strongest position in offshore markets, we expect improvements in 2005 particularly in the deep water Gulf of Mexico and in the North Sea.

The quarter also provided evidence that our efforts to restructure some of our major joint ventures have been successful. Last year we took a majority position in WellDynamics to improve financial performance in the business.

In the fourth quarter WellDynamics generated record revenue and operating income. The strong fourth quarter performance was largely driven by significant increases in demand for intelligent completions in the Middle East, North America, and Norway, and as a result of successful introduction of several new products which now give our customers the widest range of SmartWell intelligent completion solutions available in the market.

In summary, I'm very pleased with the underlying performance of the ESG and the clear momentum we have going into 2005. We have very strong relationships with a customer base that is clearly more optimistic about the future than they were at the same time last year.

Through our continued major contract wins, our focus on pricing improvements, and on providing differentiated value through technology, we expect to capitalize on the strong market fundamentals we see going into 2005.

Now I'll discuss KBR's results.

KBR set a record of its own in 2004 with annual revenues of $12.5 billion, 90 percent of which were generated outside the U.S. As I have previously stated, our restructuring efforts at KBR would yield between 80 million to 100 million in annual savings at KBR.

This has been a very difficult process. We now expect to meet or exceed the upper end of that range in 2005.

As Chris mentioned, we have incurred an additional 22 million restructuring charge in the quarter, bringing the total to 40 million for the third and fourth quarter of 2004.

The restructuring is only one aspect of KBR's turnaround. Since my direct involvement with KBR in July of 2004, I have also focused on bringing resolution to a number of significant issues that have been a drag on KBR's profitability.

We were successful in accelerating the sail-away of Barracuda and Caratinga, [with] settling billing disputes in excess of $150 million, and addressing many of the current projects to allow us a clean slate in 2005.

As you know, the Barracuda and Caratinga project has had a significant negative impact on our Energy and Chemicals division for the past three years. This is why I'm very pleased with the recent progress that we have made in bringing this project closer to completion.

We finalized an agreement with Petrogras which provides for release of all claims of all parties, the settlement of change orders and revision of major milestones. As we reported before, the Barracuda vessel set sail in October produced first oil in December.

The Caratinga vessel also left port in December to conduct sea trails. The Caratinga FPSO is currently moored in the field and we are in the process of pulling in the first well risers and we are on target to produce first oil this quarter.

I was particularly disappointed in the $15 million Belanak charge in the fourth quarter. I do not expect any further losses on this project, and this was the last project of our major offshore EPIC projects.

The major story within our Energy and Chemicals division is the progress we have made with our gas monetization strategy.

KBR and its joint venture partners were issued a Letter of Authorization by a customer to perform a pre-FEED work for the Gorgon LNG project in Western Australia. This project will include two 5-million ton per annum LNG processing trains.

We are in the final stages of contract negotiations on several major multi-billion dollar gas monetization projects in Asia and Africa, and we expect to add these to backlog in the near future.

We've also achieved significant milestones on the SEGAS LNG liquification facility. This is the largest single LNG train of its type in the world and the first LNG plant located in Egypt.

We believe the project achieved the scheduled record by the reaching important ready for start-up milestone within four and a half years from start of the project. On December 30th, SEGAS produced first LNG and KBR, along with its joint venture partners, have delivered exceptional performance at every stage of this project.

While these LNG projects involved fixed-price contracts, they clearly fall within our stated strategy to pursue risk-based contracts only when we have a clear and differentiated position. Our technology, successful track record, and positive working history with our joint venture partners are key differentiators in this particular case.

As you might expect, Iraq remains the center of our attention with our Government and Infrastructure segment. With the recent wave of attacks, the number of KBR employees and subcontractors killed in action has now increased to 60.

Despite these tragic losses, our nearly 47,000 employees and subcontractors in theater continue to provide excellent support and service to our customer under these grueling conditions, and we thank them and we're very proud of their efforts.

Going forward we expect activity in Iraq to decline, but not as much as we had previously anticipated. The Defense Contract Management Agency, or DCMA, has granted continued approval of our estimating system with certain enhancements that we are currently implementing.

If you recall, many of the government's claims of overpayments were blamed on an inadequate price estimating system. The DCMA's approval is a positive vote of confidence for us.

We continue to make progress with our LOGCAP, RIO, and PCO customers on definitizing our cost proposals. Of the 139 task orders involved, and the $10.9 billion in revenue we've generated since inception, we have definitized 41 task orders totaling $1.2 billion, and we're currently negotiating an additional 14 task orders totaling $3.5 billion.

In the fourth quarter, the first award fee boards were held for our LOGCAP work in Afghanistan and Kuwait. Our average score of 90 on both boards reflects a very good rating, and is only one point below what is classified as excellent. We are very encouraged by these initial scores.

As we work with our customer and complete the definitization process, this award fee score will apply to the whole definitized amount of these task orders. The award board score of 90 corresponds to 80 percent of the total award fee being recognized.

Let me close by highlighting what I believe are the major themes for 2005.

For ESG, the market has improved significantly in 2004 and continues to look strong in 2005. Within this robust market we will continue to be focused on improved margins through pricing improvements and cost control. We will drive for improved return on capital through improved earnings and capital discipline during this up cycle.

At KBR, we have made the tough decisions and we have positioned the Company for future profitability. We remain committed to generating margins in the 1 to 3 percent range in 2005, and I would be disappointed if we didn't achieve the high end of that range.

Now I'd turn the call back over to Chris who will make some closing comments.

2004 was a very challenging year for the Company with all the press and headline stories dealing with asbestos, Iraq, and politics, yet we overcame these numerous obstacles and the Company thrived.

Our employees stayed focus on our customers and core businesses allowing executive management to resolve the distractions. Through our investment in technology and innovation we will remain a market leader in our industry.

Looking ahead, the outlook for the oil service industry is strong due to increased spending levels and the tightening of capacity. Infrastructure spending and the increased demand for non-conventional sources of natural gas should benefit KBR.

Our hearts continue to grieve for the ones we have lost and our empathy goes out to their families and loved ones. We continue to serve the U.S. military in Iraq with the largest civilian force ever assembled and we are extremely proud of the tenacity, courage, and sacrifice of our employees in Iraq and the efforts of Halliburton employees around the world.

With that we'll open up to questions and look forward to addressing any questions that you have.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. In the interest of time, please limit yourself to one question only. Our first question today will come from Geoff Kieburtz with Smith Barney.

Could you just comment on the sequential decline in the margins at, in the Fluids and the Drilling and Formation Evaluation segments? That kind of surprised me. It looked like it might also be related to the sort of flatness in the North American performance in ESG for the quarter.

Yes, I'll take that one. In DFE we were down 3 million, and as Chris covered this was mostly costs associated where we continue to work and look at our underperforming operations outside the U.S. and [to improve] on an ongoing effort to improve our overall operation and the closing costs of some of those locations primarily in Africa were the biggest costs there, and we also had some mobe costs for areas where we had new wins in Argentina, Indonesia, and Europe, so that was the big part. And we also had some closures doing the same approach in Sperry and in security and we had closures in [TRANSAD] in Gabone.

We took a one-time hit for our pension in Belgium, and then we continue to absorb the legal expenses with our IP case in security and we have not recognized the gain from that award yet.

In Fluids, we were down 11 million, primarily from Baroid, and this was a result of lower performance in Mexico, some associated with the integrated project, and also cost increases in Brazil and the Gulf of Mexico. And we also had a lower result from the result from our Algeria joint venture.

And then in cementing, you know, cementing had a record Q4 performance, but in comparison to Q3 we also had a direct sale to China in the third quarter that did not reflect in the fourth quarter.

And our next question we'll hear from Jim Crandall with Lehman Brothers.

Dave or Andy, can you comment on the Mexican turnkey loss and whether you, the reasons for that and whether that might result in a re-evaluation of your position, of your strategic view towards that business?

Jim, yes, I'll take that one. As we've said before, this model of lump sum bidding and bundling your service together and including pass-through drilling rig costs and third-party costs and absorbing that risk profile from the drilling contractors is one we've been very skeptical on.

The market is huge in Mexico. We picked a project we thought we could be successful on, and it was in the core of our discrete product business in Southern Mexico. We have not been successful on bidding on other projects for many years there. We felt like we had a good handle on this project, and as you know the bids are open bid in that area.

On the [ERAT] bid, the main bid on this project we beat our competitor by $8 million, and unfortunately we've had many problems on the project, and this is inherent to these projects. We had to mobilize seven rigs. They're all Parker rigs from other countries in South America to bring them to this project.

We had unanticipated delays in those mobe, in getting the rigs working in Mexico. We had community unrest that we did not foresee in this project where road blockades occurred on both projects until settlement with Pemex occurred, and then we could continue working. That impacted that project.

That was a broader issue, a Pemex issue.

A Pemex issue, not a Halliburton issue, right. Yeah, it, community unrest and blockage shut down all of Pemex rigs, not just this project. Thanks, Chris.

We've had operational issues on the first couple of wells so we took a hard look at the whole project and what we plan to do and what we felt we could deliver on the drilling efficiency for the remainder of the wells. We've completed four wells and we are currently about to complete three more. So the project is for 33 wells and very soon we'll have seven wells of the total completed and we've taken the charge now that we think will cover all the costs associated with finishing the rest of the 33 wells and that will be through mid-2006.

So to answer your question, yes, we remain very skeptical about the turn-key lump sum of contracting model, and that's why Chris and I will personally take ownership of any future one, and we'll be very skeptical about anyone in the future that is presented to us.

And next we'll move on to James Stone with UBS.

Andy, can you just address the issue with pricing for stimulation services in North America as you look out into 2005 as well as your outlook for not only Halliburton's capacity but the market capacity?

You know, you have to look at Production Optimization. Without that gain, the difference in the gain that Chris talked about in his comment from that segment with the gain from surface well tests, there was a delta of 26 million more taken in the third quarter than the fourth quarter, so if you equalize that out, we actually had a better fourth quarter than the third quarter, primarily driven by our pump and service business in that segment.

And we saw in both our frac business and our cementing business the uptick from the October 15th price increase only hit in December, but we did see an up cycle in pricing index that we track very closely, so we only really got the benefit from that price increase for a partial part of December. So we see more benefit coming in 2005.

And we also took additional, we've continued to take additional costs out, but we also absorb cost increases from our materials that we have to get passed through in these pricing increases. So quick comments on the pricing side.

On the capacity side, the market continues to be really rig-constrained, and as I said, we're booked out almost two months on most of all of our frac equipment, and we're going to put a modest investment in future capacity because of the rig constraints.

It doesn't make a lot of sense to throw a lot of capital at the pumping business right now, but we're going to take care of strategic opportunities to add capacity in markets, some in the U.S. and some outside the U.S., and we're going to invest in rigless fracturing equipment, stimulation equipment, that will not be under the rig constraint.

And James Wicklund with Banc of America Securities will have our next question.

Guys, to carry Jamie's question a little bit further, you had mentioned that you're going to have some modest increase in capital spending acceleration. You actually outspent your DD&A by about15, 16 percent last year, and this year you're going to outspend your depreciation by about 30 percent. So Andy, can you tell us modest strategic increases in U.S. pressure pumping capacity and some increases in rigless stimulation capacity outside the U.S., 30 percent outspending your DD&A sounds more like the moderated words you're using. Can you tell us where that money is going to be spent? Obviously not on pressure pumping. And can you kind of pin us down on what the rigless stimulation, what that is and where it is?

Yeah, Jim, the total capital spending outlook that we gave for 2005 of 650 is for the total company, including KBR. KBR spending will be up next year both for the DML shipyard, but also for software spend as they move forward with their implementation of SAP. So KBR is going to see about a $30 million increase in Cap Ex next year. So that's part of it.

And Jim, to answer the other part of the question, we have looked at the portfolio of our spend and pumping services will make up the majority of the spend. Some of that is for replacement of older equipment, and some of that is for the additional capacity I mentioned. And rigless activity as the coiled tubing, pinpoint stimulation-type products, service lines that are primarily in Iraqis and the mid-continent area when we selectively stimulate.

We're also going to add capacity in Russia, we're going to add capacity one in the Middle East, Qatar and Argentina, so we are selectively, very selectively adding pumping service capacity where it's warranted outside the U.S. market.

We will add some capacity in Canada. We've had an outstanding year in Canada this past year and we see a very good market in Canada for the next two years.

And Jim, I would add that our spending even in 2005 at that level, is down 25 percent or so from the levels of 2001, 2002. So capital discipline does continue to be a very important theme for us.

And next we'll hear from Robin Shoemaker with Bear Stearns.

Yes. I'll ask the question regarding these performance bonuses and could you give us an indication of when the award decisions would be made? The size of the award or performance bonuses I believe is several times the fees that you've incurred so far, but I think you have also accrued for some portion of the award fees already. So just in the sense of what might be the first quarter where these performance fees would hit the P&L, and the order of magnitude given that these go back well over a year now?

Robin, let me take the first part and talk about the award fees we have received, and then Chris will cover what we've booked and what our outlook is.

You know, award fees go on this scale, the government scale, 70 or below is considered average performance, 71 to 80 is good, 81 to 90 very good, and then 91 to 100 is excellent, so this is the scale that we're rated on.

For the LOGCAP work in Kuwait they looked at eight task orders. These were the original eight tasks that we did in Kuwait early on in the war, and the lowest score we received out of the review of those eight was 86. The highest score was 99, and that was for our retrograde work that we did in Kuwait that I've been at personally.

They were doing a fantastic job there and we've saved hundreds of millions of dollars through our retrograde operations in support of the military there. And so that covered task orders in the 800 million total dollar value. Not all of those were definitized yet.

Switching to Afghanistan, they reviewed six task orders there. Our lowest score was 88, and our highest score was 95. And these covered various sites in Afghanistan including Kabul, waterworks, and training compounds, and the total for that task orders that were reviewed was 360 million, and again not all that has been definitized yet. So now Chris will cover the other part of your question.

Yes, as Andy mentioned the award fees that we have received are in Kuwait and Afghanistan. We're still awaiting award fee decisions on the bulk of the work which would be in Iraq under LOGCAP and on the RIO contract, and certainly those were some of the more challenging parts of the work that we've had with issues around them and so it's going to be important to see how those award fees come through before we make any decisions on our accrual levels.

In general, though, on the accounting, the amount that we will ultimately accrue is the definitized costs. That is, the agreed cost should have spent for the project, times the award fee percentage. And so we need to have finalization on both the definitization and the fee.

In order to get to our accrual level, which has been 50 percent of the award fees, we need about a, we need a score of 82.5 on average. Of course, that depends a lot. That's an average score, and every task order is different size so the weighting makes a big difference. So until we have both the definitization and the award fee decisions, and we have some of these bigger task orders decided, that will be what we would be looking for in order to change our rate of accrual.

And next we'll hear from Pierre Connor with Hibernia Southcoast Capital.

Actually, my question's already been answered. Thank you guys.

Got time for one more I think.

Next we'll move on to Terry Darling with Goldman Sachs.

Thanks. Wondering if y'all can comment on the first quarter outlook for the ESG business excluding Landmark which presumably will be improved with the absence of any issues in Mexico as well as ENC. Typically you're down sequentially in the first quarter but you've obviously got some pricing momentum, and then in ENC there were a number of project adjustments. Can you give us the outlook for those two segments directionally, please?

Yes, Terry, directionally for sure, I'll start with KBR. I'm optimistic about the first quarter in KBR. As we said at the investor conference and I've said previous to that, you know, we weren't going to turn around the issues in KBR and the projects there in one quarter and we spent a lot of hard effort on the third and fourth quarter to turn that business around and we expect good results and I personally expect very good results out of KBR in the first quarter and for the whole year.

On the ESG side, you know, you know the seasonally first quarter usually is always our lowest quarter. We have a lot of momentum in activity going into first quarter so we're optimistic about that.

You already mentioned, of course, we do have the seasonal fall-off from Landmark where they get a majority of their software sales in the fourth quarter so you've already factored that in, but on the other three core segments of the business we're optimistic that the market condition is going to be strong and we're going to continue to work very hard to push the pricing increase that we saw signs in December into the first quarter.

We are seeing some increase in our costs and that we expect to continue through 2005 but in the single digits in terms of inflation rate. And I think we talked about some of the non-operating costs and try to give you some guidance there.

Okay. Well, thank you. Paul, do you want to wrap it up?

Thank you all. Ladies and gentlemen this conference call will be available for replay starting today, Friday January 28th at noon Eastern time and it will be available through Friday February 4th. You may access this replay through our Web site. Thank you for your participation. You may now disconnect.

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