哈里伯頓 (HAL) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Halliburton Company first quarter 2005 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, Miss Evelyn Angelle. Miss Angelle, please go ahead now.

Thank you.

Good morning, and welcome to Halliburton's first quarter 2005 earnings release and conference call. For those of you I haven't already met an I hope to do so soon, on March 22nd, we announced my appointment as our new Vice President of Investor Relations. Prior to joining Investor Relations, I worked in our Corporate Controller function. I also worked for about 15 years in public accounting prior to joining Halliburton. Paul Koeller is now our Vice President of Global Sales and Delivery in our Digital and Consulting Solutions divisions.

Today's call is being webcast, and a replay will be available on our website for seven days.

Joining me today are Dave Lesar, Chairman, President and Chief Executive Officer; Chris Gaut, Executive Vice President and Chief Financial Officer; and Andy Lane, Executive Vice President and Chief Operating Officer. On today's call, Dave will provide opening remarks, Chris will discuss our overall operating performance and financial results. Next, Andy will cover the business outlook and competitive position of the Energy Services Group and KBR. We will limit each caller to one question and a related follow-up in order to maximize participation in the time allowed. I expect by now, most of you have seen yesterday'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 website, 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-K for the year ended December 31, 2004. And a reconciliation -- in addition, we will be providing some non-GAAP financial measures. A reconciliation of as-reported results to adjusted results is set forth in our earnings release on footnote table 3.

Now we'll turn the call over to Dave Lesar. Dave?

Thanks, Evelyn and good morning, everyone.

As you can see from yesterday's press release, we have good news to report today, both at ESG and KBR. And even though our first quarter is traditionally lower, ESG had all-time record revenue of $2.18 billion; operating income of 513 million, or 403 million excluding our Subsea 7 gain; and all-time record operating margins of 18.5%, excluding the Subsea 7 gain, benefiting from strong oil field activity around the world and price increases that we implemented in 2004. In addition, because we are so confident about the sustainability of the resurgence of pressure pumping activity, and as the market remains very robust with high utilization, we have instituted an additional 11 to 15% price increase effective April 15th in the U.S., and Andy will describe that in a moment. The future clearly looks positive for ESG, as we expect continued improvements in offshore activity, for which Baroid, completion tools, Sperry Drilling Services, and cementing are particularly well-positioned. KBR also delivered operating income of 105 million, which most importantly reflects improved project performance throughout the entire KBR portfolio. Further, the success of our restructuring plan and the resolution of customer issues and definitization of task orders related to our work in Iraq, has contributed to KBR's improved financial performance. We also recently announced KBR being awarded significant gas monetization projects in Indonesia and Nigeria. Andy will also be discussing these developments shortly.

Andy and Chris will also talk about the outlook and sustainability of the KBR results in their remarks. Because we expect earnings in the U.S. to remain strong this year, we were able to reduce some of the valuation allowance we established in the past, related to our estimate of our ability to utilize certain tax credits, resulting in a reduction of our overall effective tax rate to the range of 30 to 32%. We believe that this reduced rate will continue for all of 2005. We're also happy to have concluded our asbestos and silica issues in the first quarter of this year. Our affected subsidiaries have exited bankruptcy, and we have funded the asbestos and silica trust with $2.3 billion in cash and 59.5 million shares of our common stock. We have also already collected over 1 billion of the proceeds related to our asbestos insurance settlements. The asbestos trust shares were treated as outstanding in our earnings per share calculations, effective beginning of this year; and this resulted in a $0.09 or 11% dilution for the first quarter. In March, we also facilitated a very successful secondary offering, allowing the asbestos trust to monetize the entire value of the 59.5 million shares owned by the trust.

With that, I'll turn the call over to Chris.

Thanks, Dave, and good morning.

My comments today will include updates on the Company and segment results. I will summarize the change in revenue and then operating income for each of our six segments, and will then discuss our liquidity and other financial items. Now, throughout the call I will be comparing first quarter 2005 results sequentially to the fourth quarter of 2004.

On a consolidated basis, international revenue was 75% of the total in the first quarter, that's a reduction of 4 percentage points from the fourth quarter of 2004, due to the lower activity in Iraq. Overall, Halliburton revenue was $4.9 billion, that's down 5% sequentially and, again, mainly due to lower activities on our LOGCAP III contract. ESG revenue was up $14 million sequentially, despite the normal seasonal impact usually experienced in the first quarter. KBR revenue was down 9% sequentially due to declining activity in Iraq and the winding down of our lump sum offshore contracts.

Halliburton operating income was 586 million in the first quarter of 2005, that's up 69% from the fourth quarter of 2004, where we had operating income of 346. ESG first quarter operating margin was 24%, of which 5 percentage points was attributable to the $110 million gain on the sale of Subsea 7, compared to the 17% operating margin in the fourth quarter of 2004, but that included the $14 million gain on the sale of Surface Well Testing. Excluding the gains on the sale of Subsea 7 in the first quarter and Surface Well Testing in the prior year fourth quarter, ESG's operating margin increased from 16% in the fourth quarter of 2004 to 19% in 2005's first quarter. ESG's Fluid Systems and Drilling and Formation Evaluation segments were particularly strong contributors to the improvement this quarter. KBR experienced a dramatic turn around from breakeven operating income in the fourth quarter of 2004 to 105 million of operating income in the first quarter of 2005, that's a 3.8% operating margin. The Subsea 7 gain contributed about $0.14 to our $0.72 earnings per share amount in the first quarter of 2005. Now, setting Subsea 7 aside, our lower tax rate contributed about $0.04 to $0.05 to earnings per share, and I will explain that in a few minutes.

The ESG segment results are follows. Product optimization revenue decreased $12 million or 1% compared to the fourth quarter of 2004, primarily due to a $9 million decrease in revenue from the absence of the Subsea 7 operations. Our U.S. Production Optimization business usually experiences a seasonal drop-off from the fourth quarter to the first quarter, however, the U.S. activity broke the trend this year, resulting in a revenue increase of 11% on only a 2% increase in the U.S. rig count. Overall, Production Enhancement revenue was flat, coming off a very strong fourth quarter and was affected by a first quarter weather-related slow down in Europe. Completion tools revenue was up 2%, benefiting from improving demand in the Gulf of Mexico. Production Optimization operating income increased $83 million over the fourth quarter of 2004. The operating income increase was primarily due to the $110 million first quarter gain on Subsea 7, partially offset by the absence in the first quarter of equity income from Subsea 7 and the $14 million fourth quarter gain on the sale of our Surface Well Testing operations. Excluding these two divested operations, Production Optimization's operating income decreased slightly in the seasonally low first quarter, with the segment delivering a strong operating income margin this quarter of 20%. Robust improvement in the U.S. results offset the absence of Subsea 7 operations and weaker international results during the early part of the first quarter. Production Enhancement margins continued to benefit from improved pricing and the efficient utilization of equipment, particularly in North America. Completion Tools operating income strengthened due to increased Gulf of Mexico and Mexico results.

Moving to Fluid Systems segment, Fluid Systems revenue increased $14 million or 2% over the fourth quarter of 2004, primarily due to a 5% increase in cementing services revenue, due to improvements in Canada and higher U.S. activity. Fluid Systems operating income was up $15 million compared to the fourth quarter of 2004. Cementing services operating income increased 14%, due to higher activity and improved pricing in North America. Baroid operating income increased 18%, primarily due to increased offshore activity and better pricing in the Gulf of Mexico as well as Mexico, partially offset by seasonally low operating income in Holland and Norway, as well as a lower contribution from Venezuela.

The Drilling and Formation Evaluation segment, DFE, first quarter of 2005 segment revenue increased $24 million sequentially or 5%, led primarily by increased activity in the United States, Canada and Latin America. Revenue from Sperry Drilling Services increased 7%, due to a strong winter drilling program in Canada and higher activity in the U.S. land and in Russia. Revenue from drill bits increased 9%. The primarily drivers here were for improved improvement -- improved performance in Canada, the U.S. and Latin America. The fixed cutter product line continues to be robust and Security DBS's Z3 fixed cutter technology was a major contributor in the first quarter. Drilling and Formation Evaluation operating income increased $19 million. Drill bits operating income increased 140% and logging services increased 22%. Sperry Drilling Services had their highest operating income since the fourth quarter of 2002. The combination of improved pricing, better equipment utilization, and a focus on selected markets helped DFE segment advance margins to over 16% for the quarter, up from 13% in the fourth quarter.

The Digital and Consulting Solutions segment had revenue decrease of $12 million from the fourth quarter, primarily due to the usual seasonal decline for Landmark Graphics in the first quarter. However, Landmark Graphics set a new record for first quarter revenue of any year, due to increased software and service sales. Digital and Consulting Solutions segment operating income increased 29 million compared to the fourth quarter. The fourth quarter operating results included the $33 million charge for the fixed price integrated solutions project in Mexico. In the first quarter, we increased this reserve by $8 million to address some additional down hole well problems. While we are now beginning to see some improvement in this project, we believe it is prudent to replenish our contingency reserves. In the first quarter, the additional charge in Mexico was more than offset by the favorable resolution of a Subsea construction contract issue in the amount of $17 million.

Now let's turn to our two KBR segments. Government and Infrastructure revenue for the first quarter 2005 was $2.1 billion, compared to $2.3 billion in the fourth quarter. The decrease is primarily due to lower activity in Iraq under our LOGCAP contract. Operating income was 53 million in the first quarter, versus only 9 million in the fourth quarter. The fourth quarter included an $8 million restructuring charge. First quarter results were positively impacted by 22 million of operating income related to Iraq activities recognized above our historical award fee accrual rate. Of this $22 million of operating income, 10 million resulted from the defect settlements and 12 million resulted from award fees related to definitized task orders. Andy will provide details on the defect settlement and an update on our definitization efforts in a few minutes. Although most of our Government and Infrastructure projects performed well during the quarter, the first quarter did include an $11 million charge related to a highway project in the U.K. Iraq-related work contributed $1.5 billion of revenue and $38 million in operating income in the first quarter for a 2.6% margin.

Energy and chemicals revenue for the first quarter of 2005 was $663 million, compared to 736 million in the fourth quarter. The decrease was due to the winding down of our lump sum offshore epic operations and the completion, or near completion of certain large LNG and oil and gas projects. Andy will be discussing recently-awarded LNG and gas to liquids work that will begin impacting our results later this year. Partially offsetting this -- the decrease was additional work on an olefins project in the U.S. E&C operating income was 52 million in the first quarter compared to a loss of 9 million in the fourth quarter. The fourth quarter included a $14 million restructuring charge, a loss in the Belanak project in Indonesia, and an unfavorable settlement on a completed mining project in the U.S. totaling $21 million. The first quarter of 2005 was positively impacted by stronger results and consistent execution on many of our projects, including an LNG project in Nigeria and other offshore management and project services projects. Looking forward, we think KBR can generate margins in the 2 to 3% range for the remainder of 2005 with upside if we get further positive award fee decisions on our government work.

Our general corporate expenses were 32 million in the first quarter, compared to 21 million in the fourth quarter of 2004. The increase in the first quarter was due to an adjustment to our self insurance reserve, higher professional expenses on specific projects this quarter and our corporate image advertising campaign. We expect corporate expenses for the remainder of 2005 to be in the range of 25 to $29 million quarterly. Interest expense was 52 million in the first quarter, compared to 69 million in the fourth quarter of 2004. The decrease was due primarily to the fourth quarter 2004 interest and penalty charges related to tax assessments in Indonesia and Mexico. Our effective tax rate on continuing operations for this quarter was 31%. The tax rate was reduced by about 5 percentage points by a reduction in our valuation allowance. This reduction occurred because of an increase in our projection of full-year 2005 U.S. taxable income, which increases our estimate of tax benefits, such as foreign tax credits, that we will be able to realize. For the remainder of 2005, we expect our continuing operations effective tax rate to be in this 30 to 32% range. This rate, though, is highly sensitive to our estimated level of U.S. taxable income in future periods.

Let me take a few minutes to update you on our liquidity. Cash and marketable securities were 1.8 billion at March 31. That's a decrease of 1 billion since year-end, due primarily to the asbestos settlement and that's net of insurance collections and the Subsea 7 sale proceeds. Our working capital position on our government services work in the Middle East was approximately $600 million at March 31, down from $700 million at December 31, 2004. Last month, we entered into a $1.2 billion five-year revolving credit agreement, which replaces our 700 million three-year facility as well as our 500 million 364-day facility. The new facility was more -- has more favorable pricing as well as terms and conditions. At March 31, no cash had been drawn under the new revolver, and we had available borrowing capacity of approximately $1 billion, taking into account outstanding letters of credit.

Due to our strong liquidity position, we have given notice that on April 26th, we will redeem our $500 million senior notes, which are otherwise due in January of 2007. This is our initial step in our goal to reduce our debt to capitalization ratio to mid-30s within two years.

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

Thanks, Chris, and good morning.

As you can see, we had a very strong quarter. Sometime back, Dave used the term 'perfect storm' to describe the many issues confronting our Company, such as asbestos, Barracuda-Caratinga and the constant negative press we've received. To weather this period in our corporate history, we had to fundamentally improve our core businesses. We adopted approach that focused on cost control, capital discipline and job execution. I believe that these efforts are clearly reflected in our results this quarter. Operating income results in both the ESG and KBR demonstrate this focus on our business. I'm very proud of the management teams at both ESG and KBR.

In ESG, our main growth drivers continue to be our pressure-pumping businesses, production enhancement, and cementing and services. We expect to see continued increased activity in North America and to continue to service more complex well applications, which generally result in higher margins for us. As you know, the U.S. pressure pumping market remains very strong. In May 2004, we implemented an 8% price increase; and in October 2004, we implemented an 11% increase. And as Dave mentioned, effective April 15 of this year, we introduced additional price increases ranging from 11 to 15%. Some of this price increase will be used to offset labor and supply cost pressures that we're currently experiencing. In the first quarter, we estimate that our production enhancement and cementing results in the U.S. reflect half of the October 2004 increase and most of the May 2004 increase. We expect to derive the balance of the benefit of the 2004 price increase in the near future, as our long-term contracts begin to incorporate the new rates.

We have seen strong improvements in North America pressure pumping revenue per rig in recent months. Wells are increasing in complexity; and as a result, the cost of constructing and services these wells is going up. We benefit from this since deep and deviated wells, which are becoming more prevalent, require more services and use more of our high-value added fracturing and acidizing services. We also do quite a bit of remedial refrac work on existing wells, especially on gas wells in North America. Currently this remedial, or refrac, work represents a good portion of our stimulation work in North America. And we expect this work to continue to be a driver of revenue growth for us. So while the drill and recal continues to be a useful barometer for us, certain portions of our services are less tied to the drilling recal than in the past.

Internationally, was saw a modest decrease in activity in product optimization. This is primarily as a result of slow January for our stimulation vessel in the North Sea and weather-related delays North Sea, continental Europe and Russia. However, March activity was stronger and prospects for our stimulation vessel have improved significantly. The Middle East-Asia region also underperformed in the first quarter due to weather problems in Russia, and our decision to be very selective in accepting work in Russia. We are actively addressing these issues and expect improved results in the second quarter. We also expect to see improved performance from product lines that are leveraged to long-term contracts internationally as a result of the price increases and project wins in 2004 and early 2005.

Now let me discuss utilization and capacity within pressure pumping, since I know that is a topic on everyone's mind. We're running near full capacity in North America because we are generally fully booked on jobs 60 days out. However, there are many things we are doing to effectively increase that capacity. Some of these include increasing the efficiency of our crews and coordinating frac campaigns with our customers. We are also adding some equipment to meet the increased demand of our customers within our disciplined capital budget. We are currently benefiting from the breadth of our portfolio, leveraging the strength of the U.S. land market and the improvement of the offshore market, especially the Gulf of Mexico. We had an outstanding first quarter in the United States and Canada, and the first quarter results show an excellent, balanced financial performance in all four ESG divisions. We are seeing many of our key customers moving back out to the deep water, a highly technical sector, in which Baroid fluid services, completion tools, Sperry Drilling Services, production enhancement with our vessel fleet, and cementing services are all very well-positioned. This is evidenced by our first quarter improvements in our completion and sand control businesses.

In addition, we expect improvement in the North Sea market throughout the year. The other international areas that have strong growth potential for us are Saudi Arabia, Angola, and Mexico. Last year we initiated a strategic directive to evaluate underperforming countries and regions, and execute either fix-it or exit plans. We have already seen improvements in our operating results related to this overall effort and expect to realize further improvements in the future.

Now I'll switch to KBR. We have great news to report. Back in the fall of 2004, we walked you through our plan to turn KBR around. This included rationalizing our cost structure, attacking major issues such as Barracuda-Caratinga project and our Iraq billing issues. And implementing a more disciplined approach to the way we pursue, select and execute projects. The first quarter results reflect significant progress made on all of these fronts. As mentioned before, we expect to yield between 80 and 100 million in annual savings from the restructuring of KBR, and we expect to realize the full benefit of these efforts as the year progresses. The KBR results clearly show that we have delivered on our commitments to turn KBR's fundamental business around.

In our Government and Infrastructure segment, we had several achievements in the quarter, including the resolution of major outstanding issues with the Army and significant progress on the definitization of task orders, as well as three more encouraging award fee scores at our LOGCAP project. We announced earlier this month that we successfully resolved two issues with the Army Field Support Command, a division of the Army Material Command that oversees our LOGCAP contract. First, we reached an agreement in the billing dispute over dining facilities in Iraq and Kuwait. Under the terms of the agreement, the Army agreed to $1.2 billion in defac payments and it will retain 55 million of the 200 million in payments that had been withheld to date. We expect the 55 million to be borne by our subcontractors. Second, by working closely with the Army, we were able to complete the definitization process on our LOGCAP task orders, valued at more than $10.5 billion. This makes us current with regard to definitization of historical LOGCAP task orders and eliminates the potential 15% withholding issue under the LOGCAP contract. We are now up to date on our LOGCAP definitization for our current task orders, and we are making progress to definitize task orders prior to starting future work.

We were notified in March that following an award fee evaluation board that was held in Kuwait and January, we received strong award fee scores for our performance on three LOGCAP task orders. These include excellent ratings for our work under the theater transportation mission in Iraq and a very good rating for our work in Jabuti These scores continue to demonstrate that our customer recognized the outstanding support that we have been providing the troops. We are expecting to hear more from the award fee boards in the next two months, and we'll update you when we have more information.

The PCO Oil South contract has been challenging in part due to violent attacks by insurgents on infrastructure in the southern part of Iraq. Because the volume of work performed on PCO is lower than we had projected initially and due to the unattractive risk/reward profile, we are evaluating the scope and all of our options on this contract.

Switching to the E&C, the big story within Energy and Chemicals is the progress we made with our gas monetization strategy. We have added very important products to our backlog since year-end. During the first quarter, KBR and its partners won a contract from BP valued at $1.8 billion for the engineering, procurement and construction of the grassroots Tangguh LNG facility. This project is the largest current capital development in Indonesia and will include the construction of a two-trained LNG processing plant and the support facilities. When completed, the project will be the flagship of BP's LNG strategy, as well as a large contributor to Indonesia's economic growth. As part of our low-cost localization strategy, we announced the opening of an engineering center in Jakarta, which will play an important role in this project.

Earlier this month, we were awarded the $1.7 billion EPC contract for our gas to liquids facility in Escravos, Nigeria. Our customers are Chevron-Texaco and Nigeria National Petroleum Company. This grassroots facility is the first of its kind in west Africa and will provide significant environmental benefits by converting currently-flared natural gas to produce clean GTL fuels. This is the first GTL EPC job that we have won, and it opens the door for future work in this area. The flaring of gas is an environmental issue that is growing in importance, and one that is likely to lead to additional GTL facilities. Since this work was awarded in April, it is not included in our March 31, 2005 backlog. Most LNG industry participants believe that we are in the early stages of a major buildup in the industry, with annual LNG export capacity expected to double in the next five years. As a leader in this industry and as evidenced by our recent wins, we are very well-positioned to benefit from this projected growth trend.

We've also achieved important reimbursable contract wins in our upstream oil and gas group. KBR was awarded two offshore projects by Chevron-Texaco, an engineering services contract, and a front end engineering design, or FEED, contract, both located offshore west Africa. In Western Australia, we were awarded the FEED contract for a gas production platform by Woodside Energy. Additionally, we were awarded two major onshore projects by Exxon-Mobil. The FEED studies for the Papua New Guinea gas pipeline project and the EPC contract for SO's [ph] onshore oil production facility in Chad. Within E&C, we also saw improved performance on existing projects, such as trains 4, 5 and 6 in Nigeria.

Our improved project execution performance reflects a number of things. First, we believe we are getting better at executing projects. We've made management changes, and we've placed our top people on our most important projects. Second, we have put stringent price controls in place, and we will only take on work that will generate acceptable margins. We're focused on profit and not revenue. Finally, we are targeting projects that we have a proven capability, such as LNG facilities and can offer a differentiated service.

I'll now turn it back to Dave for closing comments. Dave?

Thanks, Andy.

In closing, I just want to make a few comments about our outlook on the markets that we serve. Halliburton works today in virtually every country that produces oil and gas, and our ESG and KBR employees communicate daily with the majors, the independents, and national oil companies. This provides us with an effective information network that we try to leverage to gain a good perspective of our markets. The fundamental drivers of our business appear to be quite good. Oil prices will continue to fluctuate, but we expect to continue to see strong demand trend in our products and services over the next several quarters.

I also know that many of you are interested in our plans for KBR. As we announced in January, we believe it is necessary for KBR to deliver solid operating performance for a number of quarters, to build KBR's backlog, and reduce uncertainty around the various disputes and investigations under way, in order for us to maximize KBR's value for our shareholders. We certainly have made progress in these areas during the first quarter, and we continue to evaluate options related to KBR, but I don't have any further information in that area to report at this time.

Finally, let me add that we're very busy, and our people are working harder than ever, and I want to thank all the men and women of both KBR and ESG for their work, dedication, and want to congratulate them on a great quarter.

With that, we'll open it up and take what questions you have, and go from there. Evelyn, you can manage the process.

Okay, Bruce. Do you want to get us started?

[OPERATOR INSTRUCTIONS]. James Stone, UBS.

Good morning, guys. And it was a nice quarter. I -- I just have a couple of questions. I think you did a pretty good job of explaining some of the differences in the quarter, but perhaps if we look out a little bit, can you just talk about what the prospects are for improvements in the international margins? The U.S.-North American business is doing -- seems to be doing fabulously, you're raising prices there. When will we start seeing sort of a catch up on the international side from a -- from a profitability perspective? And then my second -- or follow up question just has to do with the sustainability of KBR's profits if we sort of back out the settlement gains?

Okay, Jamie, thanks. And I'll -- let me -- I'll start and Chris can add some comment to it. I'll focus -- we see improvement throughout 2005 on the international side. The first quarter was our expected weakest quarter outside the U.S. As you know, we did very strong in the quarter; and outside the U.S., the weakness on the Production Optimization side, we mentioned the Skandi Fjord in North Sea. It basically didn't work all of January and part of February. Norway was very slow across the board for us. Russia was extremely slow and we actually generated a loss in Russia that offset a lot of our other good results, and Australia was slow, and we had a -- a start-up of a frac boat in Brazil. So, all of these factors together are what offset the tremendous results on the Production Optimization inside the U.S. But we see all that strengthening as the year goes on. We're addressing each one of those issues and -- in particular, the Russia performance. We see the first quarter as being the bottom of our performance this year, and we'll do much better. We had a good year last year. On the -- do you want to add to that?

On the North Sea, we clearly see that coming along over the course of the year. It looks like a good year there for us and for others. And then Saudi -- Saudi Arabia, no doubt about the fact that that will be a very active market and we're well-positioned there, and that-ll be kind of a yanker for the Middle East and expected a good year there over the course of 2005.

Okay, Chris, thanks. And on the second part, Jamie, on KBR's results, they may be a surprise to some of you, they're not to me. We said last year we'd turn KBR around, and we did, and we have a very strong management team in place there. And when -- as Chris said, we are updating our guidance on the earnings for the year for KBR at 2 to 3%, operating income for the year and we feel very good about that. We have some issues still to resolve. As you know, we are very pleased with the settlement on the defac issue. We still have fuel and we still have containers, and we still have laundry issues that are disputes. We're going to -- we're working on all three of those areas, and we expect to resolve those and work those through in the next two quarters. We also expect some additional award fee board scores that'll have a big impact on whether it's a good or a great year for KBR.

I would just add that as we pointed out, we had about $22 million of award fee decisions that were above kind of our normalized level of accrual. And we have further award fee decisions pending. We expect those decisions to be made over the course of this year; and to the extent that we get more there, then it will take us above our guidance there on KBR of a 2 to 3% margin. And that -- that $22 million was really the reason for the outperformance above the 3% margin here in the -- in the first quarter.

Ken Sill, Credit Suisse First Boston.

Yes, good morning. I wanted to follow up on that. First, I was very pleasantly surprised by the margins in the Energy and Chemical segment, very nice margins there relative to what you've seen. Is that kind of 7 to 8% margin on that segment of the business sustainable? Or should we expect that to -- to moderate as we move over to the next few quarters?

Ken, I would say the way we should think about the Energy and Chemicals business at KBR is that if it -- it's doing well when it earns margins at 5% or better and doesn't have specific project issues. And we're disappointed when it earns margins at less than 5%. We did, obviously, well in the first quarter; and I think that gives you an idea of what kind of our expectations are there with these more gas monetization projects coming over the course of the year.

Okay. And as a follow-up on the award fees out there, could you summarize kind of like you did last quarter, how much potential award fee is left in terms of LOGCAP I and -- LOGCAP and RIO I, how much is left to definitize?

Got that. Andy, did you want to add on the --?

Ken, I just wanted to add one comment, the improved results definitely reflect exactly what Chris said. It also reflects some of the cost savings we put in place last year, so you're starting to see that. The other thing I want to give you an update on is the Barracuda and Caratinga project that's been a big drain on the E&C division. That project is progressing very well. We're 97% complete now, and Barracuda is producing 145,000 barrels a day, and Caratinga is on production and producing 95,000 barrels a day. So, Petrobras last two weeks has set record production levels of 1.75 million barrels a day, and they credit both of these fields coming on production. So, we're -- we've made really strong progress there, and we don't expect any negatives from that project for 2005. And we still have final lender reliability tests to complete this year, and we feel very good about that, and that's been a big factor on that division in the past.

And then, Ken, on your question about the award fee potential beyond what we've accrued. On the work that we've completed, there is about $120 million of award fee potential that has not been accrued and has not been decided upon. About half of that is related to the LOGCAP contract, and the other half is related to RIO and the PCO contract. We have more guidance than data points on the LOGCAP side. So far, we are realizing about 2/3 of that potential on the LOGCAP side. And -- so that's a data point that we have, although there's quite a bit that hasn't been decided yet on LOGCAP. On the RIO and PCO side, we don't have as good of data points. The publicity around those has been more adverse, and so I guess we're more cautious on those at this point in time. But I think that gives you an idea of what the potential is, Ken, and, of course, we add to that each quarter as we do more work.

James Wicklund, Banc of America.

Good morning, guys, good quarter. Your price increase for the U.S. -- how much -- what is inflation? What's your increased cost? You mentioned increased cost and increased personnel. Can you kind of net out where you've gone with the last two price increases, and where you expect to go with this so we understand the net impact?

Jim, let me -- I'll start, and then Chris might add some comment to it. Inflation is in the 3 to 4% range, and we do our annual adjustment of our own personnel costs April 1, so we have that. And we also have pressures from our suppliers' material costs, largely in the profin [ph] and of course, you know on the fuel, we -- we transport a tremendous amount of materials to locations so the fuel cost increase also hits us. But we believe, like I believe we covered, we believe we've received most of the 8% from the May 2004 increase.

Okay.

And roughly half, 4 to 5%, of the October 11% price increase. So, of that 19% on the last two price increases, we believe we're in the 11 to 12% and we're working hard to get the remainder of the October price increase through. And we see that will impact this next quarter. And then we're working hard now to -- with our new price increase for 2005 to push that through in the second half of 2005.

Okay. My follow-up is you guys know your business real well, you're the number one -- the leader in pressure pumping. Is was mentioned by one of your competitors that capacity additions in the second half of the year might moderate price increases. Your comments don't seem to agree with that. Can you talk to us about capacity additions that you're doing and that you see in the U.S.?

Jim, capacity additions in the production and enhancement sector in 2005 are in line with the additions we had in 2004, just -- I guess our increase year-over-year is really in line with an inflation rate. We are making some additions there; but really they're going to be more in the nature, ultimately, of replacements of older equipment to continue to have one of the newest fleets -- and most competitive fleets that's out there. And we don't subscribe to the view that there's overcapacity in the market. To the contrary, demand is outstripping supply and as you're seeing, pushing prices consistently higher.

Jim, I'll just add we -- and I agree 100% with what Chris just added. We're still booked way out and we see a really strong market for us. I've been in the business a long time, and this is one of the most robust markets we've ever had. Here at -- look this point in the year, so we do feel very strong. We do not agree that the pricing will come down the second half. We're not going after markets share. We're very focused on profitability, and so we see it as a very strong year all throughout 2005.

Terry Darling, Goldman Sachs.

Thanks and congratulations also, particularly to KBR. Wanted to follow up on the Middle East-Asia revenues and margins, which looked flat on a year-over-year basis and try to understand that better. Chris, I think you indicated that you expected Saudi dip [ph] it to be picking up as the year progresses. Where are the areas of weakness in that -- in that segment?

Terry, I'll start and Chris will add some. We will -- in the Middle East-Asia, it also includes our Eur-Asia area so we rolled Russia into that. Russia was the big downside. Saudi was strong, the Middle East was strong, and mainly in Russia it was a weather-related issue in the first two months of the quarter. We do not have any significant direct sales in the quarter, and we have some -- that's a market that we largely serve with direct sales. Our work with BP TNK was slow in the quarter. Our Caspian -- Kazakhstan work was slow, and then we have not returned to work for Yuganesta [ph] Gas. We're confirming payment schedules there. So, all of those factors together made it a very bad quarter for us in Russia. We're working on all of those issues hard so we see that improving. And outside of that, the Middle East was strong, most of Asia was strong. We had some softness in Australia was the other impact on the quarter for us.

And the other one was direct sales to China were down versus a year ago. Concentrating more on providing services. So, on a comparative period versus the fourth quarter, if that's what you're looking at, Terry, yes. We have lower direct sales to China, Russia was off, as Andy mentioned, and Australia off and that really explains the difference. We don't see anything really continuing among those three, though.

Okay. And follow-up would be, Chris, if we were to have an outlook for North America in 2006 that was similar or better than 2005, would we see the tax rate come up at all, or is that a level of benefits to offset your income that suggests that the lower tax rate is likely to continue under that scenario?

What we're saying here, Terry, is that this lower tax rate is -- for 2005, we will take a look later in the year at future periods; but for your modeling purposes, at this point, I would say that we're going to get back to more of a normalized tax rate, as per our earlier guidance, in the future. Now, if -- our tax rate, as I mentioned, is going to be highly sensitive to the level of domestic earnings; and we could have a similar event next year, as well. If the U.S. continues to strengthen, we could have a similar event as we have here in 2005. But our guidance at this point is for a higher tax rate in future years.

Jim Crandall, Lehman Brothers.

Do your positive results that you reported for the E&C business affect at all the timing of the potential sale of KBR? The valuation you expect to achieve? And then how you would expect to sell it?

Well, Jim, as we said, one of the -- we feel that the valuation of KBR would become more clear as we're able to demonstrate the financial capability of KBR, and we feel that this is a first step down that road. So, yes, we feel that these -- the -- the performance of KBR is now becoming evident; and definitely, that will have an impact on valuation. We're not setting out a timeline for KBR separation. We want to make the value more clear through earnings performance. We want to build the backlog at KBR, which is happening, and we want to make progress on some of the issues around KBR to improve the understanding there. But we don't want to attach a timeline to that, Jim.

Okay. My follow-up question is, Andy, what kind of -- what are you seeing in the field in LWD from Schlumberger's new technology introductions, in particular, do you see the impact yet on your formation pressure testing area, which they've just gotten into?

We haven't seen a big impact yet in that area but as you can see, on the DFE division, we had an outstanding quarter and specifically just Sperry an excellent quarter, too. So, we're still encouraged by -- we're not exactly where we want to be with Sperry, I think we have some improvement we continue to work on. Tim Probert, his group's doing an excellent job there. And we're -- in the rotary steerable area ourselves, we're just rolling out our own 4.75 rotary steerable tool, and we're very confident that that's going to provide us a good upside to where first trials and first runs are in Norway and Saudi Arabia and -- and also some runs in Alaska and Canada. So, we feel very good that we're getting that size and adding that capacity to our portfolio.

Dan Pickering, Pickering Energy Partners.

Good morning, gentlemen. I just want to try and put the pressure pumping price increase in context. If we look at '04 North American revenues, about 3.6 billion or so. Can you help us with how much of that would be pressure pumping-related?

You're asking for the -- for the industry?

Chris, no. I guess I'm just looking at Halliburton's North American pressure pumping exposure. I'm trying to put it in context of the total revenues of the Company.

Yes.

You've got -- you reported about 3.6 billion in North American revenue in '04.

Yes.

And just trying to figure out is pressure pumping a majority of that business so I can understand the incrementals around the pricing, is where I'm going.

Well, yes, production enhancement and -- and cementing are two of our largest PS -- PSLs within our divisions; but, Dan, we're -- we also have quite large businesses with the Baroid and with completions and with Sperry, which aren't far behind. But really, we need to -- in terms of quantifying things, we need to stay at the segment and division level.

Okay. Well, let me -- let me attack the -- the issue a different way then. As we look at first quarter results, sticking with the oil field, do we see -- as we look into Q2 and Q3, do we see any of your geographies or segments that should see lower or slower revenue or profitability? Sounds like the answer is no, but I guess I want to hear you guys address that question.

Dan, I agree with you. The answer is no.

Okay. And so then taking that through, I guess looking at a tax rate that's sustainable, do we look at first quarter numbers and say that this is sort of the baseline of profitability and earnings for the Company as we move through the rest of 2005?

We talked about the guidance on the -- on the tax rate for the year at 30 to 32%. We tried to point out to you kind of what the special items are on both the ESG and the KBR side. But, we're -- and we've given you some guidance on margin on the KBR side, but we're not giving guidance on ESG's results for the period, if that's what you're asking, Dan. You know, that's what you guys do, I guess. Could we get one more, Evelyn.

Yes, we have time for one more question.

Scott Gill, Simmons & Company.

Yes. Good morning. Andy, can we -- let's talk a little bit about the gas-to-liquids facility award for KBR in Nigeria. Can you talk a little bit about the contract terms? And if this is one of those fixed price-type contracts, what assurances are in place so that we don't see cost overruns and charges like we've had for some of these other fixed price-type contracts?

Yes, Scott, I'm glad to talk about that. An excellent report on LNG put out recently. The gas-to-liquids project is an EPC fixed-price contract. We do these very well. You got to separate these onshore midstream projects from the offshore projects. There's a huge difference. In the lump sum offshore projects do not have the up front fee, engineering, detail, design and planning and scheduling occur and there's a much higher risk profile with those that in the past we've been involved in. And that's why we exited that space. On this type of project, very disciplined, FEED pre-FEED announced in the schedule and the cost -- cost escalation is understood very well. We are the major player in Nigeria, so we understand doing business and building these projects in Nigeria very well. So, this, to us, is an extension of our expertise in LNG, and we're utilizing the Fasolo [ph] technology, along with Chevron-Texaco technology on this project, so we feel very good about that. So, we do not view this as any more risky than our LNG projects that we've done very well on.

Okay, and my second question, on the ESG side, I know things in Iraq are still volatile, but any signs as to when ESG-type work might begin in that part of the world?

Yes, it's very difficult and it's going to be a while, I'm afraid, because it still is not an environment where we feel we can go in there and -- with a drilling rig -- 24-hour type environment, lit up at night and the type of traditional services we provide on the ESG side, it's just not an environment either legally or risk-wise that we can start doing work. We hope that that comes and develops in the coming quarters, but we don't see it in the near future.

Thank you for joining us today. This concludes our call.

Thank you.

You're welcome, thank you, sir. And ladies and gentlemen, this does conclude today's Halliburton Company first quarter 2005 results conference call. We do appreciate your participation, and you may disconnect at this time.