BBC News Online business reporter
Winning Iraq deals has proved a mixed blessing
Halliburton's move to overhaul its Kellogg, Brown and Root subsidiary follows months of embarrassment.
The US oil services and construction giant appeared to have struck lucky when KBR won contracts worth $13bn (£7.2bn) to rebuild Iraq, becoming the Pentagon's biggest contractor there.
But the celebrations turned sour as KBR's Iraq contracts brought a constant stream of unwelcome publicity, Pentagon audits and Congressional hearings.
Now Halliburton plans to streamline KBR, but may spin it off into a separate company, or even sell it if the revamp fails to halt the drag on its parent's share price.
To indicate its readiness to try some blue sky thinking, Halliburton invited Wall Street analysts to Houston for a briefing titled "Looking Beyond".
They seem to have liked what they heard: the meeting "surpassed expectations", UBS analyst James Stone wrote in a briefing note for investors.
"Many of the public problems that have plagued Halliburton...have stemmed from the company's ownership of KBR, from asbestos, to huge cost over-runs on fixed price contracts, to bad publicity surrounding the government operations work in Iraq," he wrote.
Halliburton's chief executive David Lesar was in a combative mood as his firm revealed it was rethinking KBR's future.
According to the New York Times, Mr Lesar said Halliburton had become the target of a "vicious campaign" linked to November's US presidential election. The firm insists it has attracted scrutiny from critics of President Bush hunting for a war-for-oil scandal and corporate sleaze.
Glare of publicity
Certainly, the fact that Vice-President Dick Cheney ran Halliburton for five years from 1995 to 2000 has put KBR's Iraq contracts under the political spotlight.
And it has not had a happy time there.
Halliburton could have more work
Pentagon auditors found it had overcharged the US military for supplying fuel, meals and accommodation in Iraq and Kuwait, though a decision to claw back 15% on KBR's bills was suspended.
The Pentagon has since given KBR's purchasing systems a clean bill of health.
But it has said it may break up KBR's umbrella battlefield services logistics contract and re-tender it to several contractors. Arguably, Iraq has proved a poisoned chalice for KBR.
Ironically, the biggest financial leakages in KBR's accounts appear to have been capped, but the firm remains embarrassed by scandals in Iraq and Nigeria.
KBR's main financial woes involve asbestos and silica liabilities inherited from a firm it bought, and costly delays on a huge offshore oil platform construction project in Brazil.
On the up
KBR is putting together the final details of an asbestos claims settlement worth $4.2bn (£3.2bn). In July, a US district court judge put KBR into bankruptcy protection as part of the settlement.
Analysts say Halliburton's share price has already absorbed the pain, so no more damage is expected.
In Brazil, the aptly-named Barracuda-Caratinga project has swallowed funds as problems in a Brazilian shipyard delayed completion. Halliburton booked $700m in charges on its accounts since 2002.
But Barracuda-Caratinga is now going swimmingly: "I can see the end of this project and it's not far away," the Wall Street Journal quoted KBR chief executive Andrew Lane as saying.
KBR has had a bumpy ride recently
KBR has said it is now moving away from fixed-price projects.
Record-breaking world oil prices mean prospects are bright for Halliburton's oil field services business, which had profit margins of 14.2% in the three months to June 2004, up 1% on year-earlier.
Halliburton consists of two major divisions, KBR, which provides logistics and construction services, and the Energy Services Group, which concentrates on support services for oil explorers.
KBR accounts for only between 10% and 15% of Halliburton's operating income but has "become a focal point for (Halliburton) investors" and a "key source of the valuation discount that has plagued the stock", according to the UBS analyst.
He favours a partial stock market flotation of KBR as a way for its parent to cut debt and return to financial health.
Overall, Halliburton lost $820m in 2003, on sales of $16.2bn. Sales were up and losses were down on the previous year, when it lost $998m on narrower revenue of $12.5bn.
UBS is forecasting narrower losses in 2004 of $394m and a big jump in revenues to $20.3bn.