The Cheney Curse

The veep hasn’t helped Halliburton. He has hurt it.

Last week, Halliburton, the oil-services and construction company formerly run by Vice President Dick Cheney, surprisingly warned that its earnings for the current quarter would be 15 percent lower than estimates. You’d think that Halliburton would be thriving. After all, oil prices are high, and the company has received giant—if controversial—contracts to oversee the reconstruction of Iraq. The no-bid prewar contract it received to work on Saddam’s oil fields has, according to the Wall Street Journal,gushed $1.3 billion of revenues thus far. The company also won a competitive bid for a $1.4 billion contract to support military personnel.

Here is a strange fact about the well-connected company: Dick Cheney hasn’t helped it. In January 2001, if you bought stock thinking that Cheney’s ascension would be a boon to Halliburton, you made a bad bet. Since January 2001, Halliburton has underperformed both the Oil Services Index and the S&P 500—although it has outperformed both indexes over the past year.

It turns out that as much as Halliburton has benefited from having Cheney in government, it suffers from having had him in the executive suite before then. As CEO, Cheney was less an operations manager than a deal-maker, a boldface name who opened doors, especially abroad, and sealed huge contracts. But several of the deals he struck proved to be ill-advised and questionable and, ultimately, damaging to the company and its shareholders.

Halliburton attributes its earnings shortfall to problems in joint ventures and high legal fees—both of which can be laid at Cheney’s feet. Cheney midwifed the Barracuda-Caratinga Project, which is gnawing a hole in the company’s balance sheet. Under the $2.5 billion deal, announced in January 2000 when Cheney was CEO, Halliburton was supposed to develop two offshore oil fields in Brazil by December 2003 and April 2004, respectively. But the project has turned into a fiasco, with huge cost overruns and bad schedule misses. As of June 30, 2003, the project was 75 percent complete—and more than a year behind schedule. By that date, Kellogg, Brown and Root, the responsible subsidiary, had already recorded a pretax loss of $345 million on the project, with the possibility of greater losses to come. The miserable experience has caused the current management team to cease making fixed-price bids on giant projects.

Halliburton is piling up legal fees from Cheney-era mistakes. One of Cheney’s largest deals was the $7.7 billion acquisition of Dresser Industries in 1998. At the time, only companies that had been directly involved in asbestos production and use were being held liable. But as the volume of asbestos-related claims rose, lawyers began to pursue companies that were tangentially connected to asbestos—yet still legally liable. Dresser had once owned a unit, Harbison-Walker, that used asbestos. When Harbison-Walker declared bankruptcy in 2002, Halliburton began to face massive claims. Last year, the company said it would put $4 billion in cash and stock into a trust to help settle such claims. As part of an effort to settle the claims once and for all, Halliburton is trying to engineer a bankruptcy filing for a major subsidiary.

Halliburton is also fending off class-action lawsuits and a Securities and Exchange investigation related to its accounting practices. In May 2002, questions were raised about how Halliburton accounted for unapproved claims and change orders on long-term construction projects. A year later, Halliburton settled about 20 shareholder class-action lawsuits for approximately $6 million. But there could be more costs associated with the Cheney-era accounting issues. Judicial Watch, the conservative gadfly organization whose suit against Halliburton was dismissed in September, is considering an appeal. And the SEC investigation is continuing.

On the positive side of the balance sheet, crony capitalism has certainly helped Halliburton in Iraq. Without Cheney, after all, the Iraq war and the massive Halliburton contracts that followed would have been far less likely. But it’s easy to overstate the importance of such work to Halliburton. In its second-quarter conference call, the company reported that Iraq-related activity accounted for only about 9 percent of revenue. And this type of business is unsustainable—unless the United States invades a country that needs new infrastructure every year. (Is that the plan, Mr. Vice President?)

American citizens must hope they avoid the fate of Halliburton shareholders: at first glad to have the experienced Cheney at the top, then excited about his ambitious plans, and, finally, dismayed to be left holding the bag when Cheney moves on to another job.