Halliburton's boss from hell

Dick Cheney campaigned on a platform of business know-how. But his tenure as

Halliburton CEO left the company mired in bad deals, investigations and lawsuits.

By Robert Bryce

Pages 1 2 3

July 21,
2004 | In early September, during the Republican National Convention, the GOP is
almost certain to name Dick Cheney as its nominee for vice president of the United
States. In the meantime, it's clear that Cheney deserves another nomination: as one of the
worst CEOs in recent American history.

Of course, there are plenty of CEOs that should to be on that list, including Enron's
Kenneth Lay, Tyco's Dennis Kozlowski and Adelphia's John Rigas. While those bosses
certainly are being pilloried, Cheney's disastrous five-year-long tenure at Halliburton
deserves far more scrutiny than the mainstream business press has bothered to provide.

Cheney's job at Halliburton is particularly newsworthy now that John Kerry has chosen
John Edwards as his running mate. The Republicans have already begun hammering
Edwards for his work as a trial lawyer; Democrats have an opportunity to bash Cheney's
performance at Halliburton. Given the wreckage that Cheney left behind, that record
offers a target-rich environment.
Since Cheney's departure, the company's net worth has gone into free-fall, debt has
soared, and it is now facing embarrassing legal entanglements that could hamper its
profitability for years to come. Furthermore, despite being the largest oil-field services
company on earth (last year, its revenues surpassed those of French giant Schlumberger),
Halliburton hasn't been able to make any money. Instead, it's losing money -- lots of
money. In 2002, the company lost $1 billion. In 2003, despite revenues of $16.2 billion, it
lost another $800 million. In the first quarter of this year, losses totaled $65 million. More
bad news is expected when the company reports its second quarter results on Friday.

The latest dose of Cheney-related bad news came on Monday, when Halliburton
announced that the Justice Department has begun a criminal investigation of the company
in connection with the operations of one of its subsidiaries in Iran. Halliburton also said
that it has received a subpoena from a federal grand jury that is seeking documents from
its Iranian dealings. In early 2000, while Cheney was CEO, a Halliburton subsidiary
located in the Cayman Islands opened an office in Tehran. U.S. regulations prohibit
American companies from trading with Iran and Libya because of their links to terrorist
organizations. While at Halliburton, Cheney lobbied against the sanctions, saying that
they were "ineffective."

A Halliburton spokesperson downplayed the investigation and the subpoena, telling the
Wall Street Journal that it is "important to understand, especially in the current political
environment, that this is not a condemnation of the company, but a method of further
studying the facts."

The news of the criminal investigation follows close on the heels of other bad news: In
late June, Halliburton said that it will take an $815 million charge against earnings for the
second quarter. Of that amount, $200 million stems from cost overruns on the Barracuda-
Caratinga offshore project in Brazil, a $2.5 billion undertaking that was announced in
January of 2000 -- seven months before Cheney left Halliburton to become George W.
Bush's running mate. The rest of the charge against earnings -- $615 million -- will cover
the asbestos-related legal claims that stem from Cheney's decision to take over Dresser
Industries in 1998.

Meanwhile, both the Securities and Exchange Commission and French investigators are
investigating Halliburton for its alleged involvement in bribing Nigerian officials over a
giant liquefied natural gas project. Much of the alleged bribery occurred on Cheney's
watch.

Add in a recent $106 million legal judgment against the company for its involvement in a
Kazakh oil deal done during Cheney's stint as CEO, along with the Pentagon's ongoing
investigations into Halliburton's overbilling (investigators have recently found that
Halliburton spent $11 million to house personnel at the five-star Kuwait Hilton), and it
becomes clear that Halliburton may have trouble surviving Dick Cheney.

Indeed, nearly every malady now facing Halliburton follows from deals done during
Cheney's reign. Those deals are ultimately the responsibility of the Halliburton board of
directors -- who, rather than choose an experienced CEO who knew the oil-field services
and construction business, picked a charter member of the Bush family's crony network.

Halliburton's board members have been candid in discussing the reasons for hiring
Cheney -- and his business acumen is never mentioned. Cheney, whose degrees are in
political science, had virtually no business experience when he became CEO of
Halliburton in 1995. Thomas H. Cruikshank, the former chairman of Halliburton, told
one reporter that Cheney got the job because "he would be able to open doors around the
world and to have access practically anywhere ... There was a lot that he could bring in
the way of customer relationships."

But there's little evidence to show that those relationships did Halliburton any good.
Instead, Cheney's ability to forge relationships got Halliburton into the worst acquisition
in its history. In January of 1998, Cheney went quail hunting with Bill Bradford, the
chairman of Dresser Industries, another big oil-field services company. During their
shooting expedition on a ranch in South Texas, Cheney proposed a merger with Dresser.
After a series of meetings, Bradford agreed.

But Cheney didn't grasp the scope of Dresser's legal liabilities. Dresser owned a
subsidiary that was facing a mountain of legal bills stemming from its old asbestos
business. That asbestos problem began catching up to Halliburton almost immediately.
The year of the merger, Halliburton had about 70,000 outstanding claims on asbestos. By
2002, it was facing more than 300,000 lawsuits. In late 2001 alone, the company was hit
by jury verdicts totaling $122 million. The company's stock price fell like a rock -- going
from a high of more than $60 in the days after Cheney was named as Bush's running mate
to as low as $9. Credit rating agencies downgraded Halliburton's debt, and there was
open talk of bankruptcy.

Since then, Halliburton has been able to strike a deal with its insurers to cover much of
the asbestos-related costs. But Halliburton is likely to suffer from its asbestos hangover
for several years to come, as it works to pay down increased debt it took on to resolve the
matter.

"The Dresser deal will go down as one of the worst deals in the modern energy business,"
says a Houston-based energy analyst who has been following Halliburton for several
years. The analyst asked that his name not be used -- which is not surprising given
Halliburton's size and the staunch Republican leanings of most energy business
personnel. Asked if Cheney was a good CEO for Halliburton, the analyst replied, "The
answer is clearly no. He knows how to make decisions. But he wasn't an energy guy. You
can't find anything good that comes out of his tenure."

Another Cheney-era deal, the Brazilian offshore oil project known as Barracuda-
Caratinga, is also draining the company's cash. During Cheney's time at the helm,
Halliburton agreed to a fixed-price contract with the Brazilian oil company, Petrobras, to
build the infrastructure needed for the two offshore oil fields -- Barracuda and Caratinga,
which are located in about 3,000 feet of water. But the project has spun out of control. In
a June 29 research note, Merrill Lynch analyst Mark S. Urness wrote that the cost
overruns and charges taken by Halliburton on the project have already totaled $675
million, and the company may still have to cough up another $272 million to resolve the
mess.

Despite the problems, Urness still rates Halliburton a "buy," saying that the company has
a "solid fundamental outlook" that is based on its "leading oil services franchise, as we
anticipate increased worldwide upstream capital spending by producers through 2004-
05."

Halliburton recently lost a $106 million legal judgment to a pair of Houston oil
companies that had claimed the services giant violated confidentiality agreements in an
oil deal in western Kazakhstan, near the Caspian Sea. Again, Cheney was involved.

Last month, the Financial Times reported that Cheney and his second in command, David
Lesar (who succeeded Cheney as Halliburton's CEO), were both aware of negotiations
between Halliburton and the Houston companies -- Anglo-Dutch Petroleum International
and an affiliate -- for the rights to develop a rich oil field in Kazakhstan. In 1997, Anglo-
Dutch went to Halliburton and the two began negotiating. Anglo-Dutch later sued
Halliburton because Halliburton kept confidential information about the oil field and then
tried to buy out Anglo-Dutch's interest in the project. Last October, a jury sided with
Anglo-Dutch. Halliburton and a British company, Ramco Energy, were ordered to pay
Anglo-Dutch. Halliburton was ordered to pay the majority of the judgment.

After the judgment was finalized, Scott Van Dyke, president and chief executive of
Anglo-Dutch, told the Financial Times, "I think Halliburton thought I was just a little guy
that they could walk all over."

Perhaps the most serious legal problems now facing Halliburton -- and Cheney -- involve
the alleged bribery in Nigeria. Halliburton got into the Nigerian construction project in
1999. French authorities are investigating a $180 million slush fund that may have been
used to bribe Nigerian officials. Cheney is one of several former Halliburton officials
who may face indictment by French courts thanks to his role in the $4 billion project,
which was built by Halliburton and Technip, one of France's largest engineering firms.

On June 18, Halliburton announced that it was "severing all ties" to Jack Stanley, the
former president of Halliburton's construction and services subsidiary, Kellogg, Brown &
Root. Halliburton took action against Stanley and another Halliburton official because it
said they had received "improper personal benefits." Stanley allegedly received some $5
million in payments from the Nigerian project.

Halliburton has launched its own investigation into the Nigerian mess. The probe is being
handled by the Houston law firm of Baker Botts, which has close ties to the Bush
administration. The lawyer investigating the matter is James Doty, who represented
George W. Bush when he was purchasing the Texas Rangers baseball team in the late
1980s. The Securities and Exchange Commission has launched its own investigation into
the Nigerian bribery scandal, and it appears that Baker Botts is representing Halliburton
in that inquiry as well. A spokesperson for the law firm referred questions to
Halliburton's spokeswoman, Wendy Hall. Hall did not respond to e-mails.

If the SEC finds that Halliburton did bribe Nigerian officials, the company and its
officials could be charged under the Foreign Corrupt Practices Act. If it is convicted
under FCPA, Halliburton will be barred from bidding on federal contracts. That would
mean the company would lose all future contracts with the Pentagon -- an area that is
now one of its primary businesses.

Cheney had served as secretary of defense in the first Bush administration, and during his
time as Halliburton's CEO, he pushed the company to increase its contracting deals with
the Pentagon. He hired a number of former high-ranking military officials, who then
began aggressively pursuing deals with the U.S. Army and other branches of the military.
In Iraq, Halliburton was awarded logistics and oil-field repair contracts worth some $8
billion.

But it's not clear that all of that work has been good for the company's bottom line. In
fact, the opposite may be true. According to the company, in 2003 its Iraq-related work
resulted in $3.6 billion in revenues. But those contracts accounted for just $85 million in
operating profits.

Those profits may turn out to be very expensive. It appears that Halliburton has
overcharged the Pentagon for everything from fuel and food to overnight stays for its
personnel at the Kuwait Hilton. The Pentagon has launched wide-ranging audits of the
company's activities. The Department of Justice has launched its own inquiry into
Halliburton, and the company could face fraud charges. In March, the company
announced that the government audits of its contracts could "materially and adversely
affect our liquidity" -- that is, the ability of the company to meet its ongoing cash
obligations.

A CEO of an energy research firm, who also asked not to be named, said that
Halliburton's lack of profits, given today's high oil prices, is stunning. "How can they not
be making money in a business that is minting money?" he asked. He also questioned
Cheney's push to get into the military contracting business. "The entitlements and all the
attention on Halliburton's connections with the Pentagon and the Iraq contracts hasn't
resulted in them getting anywhere. It's not repeat business. It's arguable whether they
should even be in the business at all."

Given all of Cheney's blunders, it's no surprise that Halliburton's balance sheet is a
disaster zone. Since the end of 2000, shareholder equity (the company's net worth) has
fallen from almost $4 billion to less than $2.5 billion. Long-term debt during that time
period has increased nearly fourfold, going from $1 billion to more than $3.9 billion.
Between the end of 2000 and the first quarter of 2004, Halliburton's total liabilities went
from $6.1 billion to $13.9 billion.
In short, Cheney's mistakes have cost Halliburton billions of dollars. But Cheney himself
did just fine. During his 58-month stint at Halliburton, Cheney was paid a total of $45
million. He continues to receive deferred compensation from the company. This year's
payout to Cheney is likely to exceed $100,000.