HAL (OP/A): KBR files for IPO; reiterate HAL as our top pick - Goldman Sachs - April 16, 2006
On Friday, KBR filed an S-1 related to its IPO. Even though this was widely expected, we think that the announcement is a positive for HAL shares because there was uncertainty in terms of timing and because it confirms the company's commitment to focus on the Oilfield Services business. In fact, the filing states that HAL advised KBR that it intends to dispose of its remaining KBR stake following the IPO, even though the timing and format of this second step is still unclear. We reiterate HAL as our Top Pick and we expect the IPO of KBR to act as a catalyst to bridge the valuation gap between HAL and SLB/BHI as it will highlight the attractiveness of HAL's core Oilfield business. HAL currently trades at an ?07 EV/DACF of 12.1x, versus 13.6x for SLB and BHI. Our fair value for HAL of $97 implies 26% upside. Because of SEC rules, we cannot comment in any detail on the IPO or KBR matters but only on the implications for HAL.
The S-1 did not change our view on HAL or KBR, but it contains some interesting additional information about this process. In the paragraphs below we summarize some of the key incremental highlights from the S-1.
FILING DETAILS: Proceeds from both the IPO and the sale of the Production Services group will be used primarily to pay KBR's intercompany loan from HAL, which amounted to $774 million as of 12/31/05.
KEY HIGHLIGHTS FROM THE S-1:
* #1 - HAL INTENDS TO DISPOSE OF ITS REMAINING KBR STAKE AFTER IPO: HAL advised KBR that it intends to dispose of its remaining KBR stake following the IPO, even though the timing and format of this second step is still unclear. We consider this a positive for HAL shares as it further demonstrates management commitment to focus on their core Oilfield Services business. After the 180-day lock-up period following the IPO, HAL could select several different alternatives including a spin-off to HAL's shareholders, additional public offerings, etc. In our view, taxes will play a very important role in the format of this second step as HAL will likely try to keep the tax-free status of the IPO unchanged.
* #2 - HAL TO INDEMNIFY KBR FOR POTENTIAL GOVERNMENTAL FINES RELATED TO FCPA MATTERS (Foreign Corrupt Practices Act): As previously disclosed, the US government is conducting a formal investigation into payments made in connection with the construction and subsequent expansion by TSKJ (Technip, Snamprogetti, JGC and KBR - 25% each) of a multi billion dollar natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. The S-1 filing states that HAL agreed to indemnify KBR for fines/penalties assessed against KBR by a governmental authority or a settlement relating to FCPA matters. However, HAL's indemnity will NOT apply to any other claims related to FCPA matters (e.g. third party claims, indirect damages, etc).
* #3 - UPDATE ON BARRACUDA-CARATINGA: No changes on Barracuda-Caratinga since HAL's 10-K. The project was 98% complete as of 12/31/05. The key area of dispute at this point is related to problems in the replacement of subsea bolts performed by KBR. Petrobras is seeking $220 million for the cost of monitoring and replacing the defective bolts plus interests and legal fees. KBR believes the cost of replacing the bolts is Petrobras' responsibility since it designed the bolts. KBR also disagrees with the amount of the charge and estimates the cost of replacement of the bolts at $140 million.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA. |
