A Hedge Fund Liquidation Story

Buy Pitch
Halliburton Spinoff: KBR

November 3rd

James Cullen
Portfolio Manager
Boston College Investment Club
 The BCIC Portfolio
• Still Over-Diversified
– In Sum, Need to Reduce Number of Holdings
– New Buys Must Be Large Part of Portfolio
• But Fear is Widespread
– Club Has Cash, Bargains Exist
– Selectively Add Holdings

Proposal: Buy 600 shares = $8,700 (3.8%)

 KBR Overview
• A Spinoff of Halliburton
• Diverse Construction, Engineering, and
Services Company
– Government and Infrastructure
– Upstream/Downstream Energy
– Services (Construction and Industrial)
– Technology (Value-Added Refining)
– Venture (Financing and Investing in Projects)
 KBR by the Numbers
• $10.6 Billion in Revenue (ttm)
– P/S of 0.24x; 0.13x Including Cash
• $300 Million in Net Income (ttm)
– P/E of 8.2x; 4.5x Including Cash
• $310 Million in “Owner Earnings” (ttm)

• Backlog of $15.25 Billion

 Revenues by Segment

• 78% of G&I Revenues (50% of Total) From US

Government Ops – Middle East
 Operating Earnings by Segment

• Smaller Reliance on G&I/US Government Middle

East Ops for Earnings (24% of Operating Income)
 Reasons to Buy
• Strong, Cash-Rich Balance Sheet
– Industry Consolidation, BE&K Purchase
• Massive Projects Financed by Oil
Companies and Governments
– Customer Base Still Has Liquidity
• Large Backlog & Legacy Projects

• Favorable Risk/Reward
 From the Conference Call, Part I
• Withdrawal from Iraq?
– Short-term Increase in Work
– Longer-term, Decrease in Revenues Would Lag
Troop Declines

• Energy Price Declines a Problem?

– Helps on Input Costs as Well
– Projects Still Economical
– Balance Sheet Financers/National Oil Companies
 From the Conference Call, Part II
• Project Cancellations?
– “We have not yet seen any indication that major projects in the
international energy sectors are being cancelled or delayed…”
• Bill Utt, President and CEO, KBR

• LogCAP III and IV

– Afghanistan Work Remains Steady
– Targeting 40% of IV Contract
– KBR Historically Successful in Securing Work
• New Projects More Profitable
 Risks to the KBR Long Thesis
• Extreme Drop in Global CapEx
– Upstream Energy or Downstream Refining
– Attempting Project Diversification
• Wasting Cash on Balance Sheet
• Very Competitive Bidding on Projects

• World Peace
…and other things we don’t know we don’t know
 KBR Valuation: The Downside
• Stock Around $14.50/Share
– Back Out $6.65/Share in Cash  About $8

• Net Tangible Assets

– $9.50/Share  -35% Downside
• Net Cash Position
– $6.65/Share  -55% Downside
 KBR Valuation: The Upside
• Earnings Estimates
– Full Year 2008: $1.71  4.7x Earnings
– Next Year 2009: $1.91  4.2x Earnings
– 10x Earnings + Cash = $25/Share (+70%)
– 15x Earnings + Cash = $34/Share (+135%)

• Book Value Basis

– With ROE (Net of Cash) KBR Generates,
About 2.5x Book Value = $36/Share (+150%)
 Conclusion: Buy KBR
• Excellent Balance Sheet
• Global Scale, Top Player in Field
• Desirable Customer Base
– Resilient on Project Spending

• Very Inexpensive
– Political Risk Seems Oversold
• Buy From Distressed Sellers