Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Better Than AdSense

Halliburton Company, Inc. (NYSE:HAL)

Q4 2006 Earnings Call

January 26, 2007 10:00 am ET

Executives

Evelyn Angelle - VP, IR

Dave Lesar - Chairman, President and CEO

Chris Gaut - CFO and EVP

Andy Lane - COO and EVP

Bill Utt - President and CEO, KBR

Cedric Burgher - CFO, KBR

Analysts

Geoff Kieburtz - Citigroup

James Stone - UBS

Jim Wicklund - Banc of America Securities

Scott Gill - Simmons & Company

Dan Pickering - Pickering Energy Partners

Brad Handler - Wachovia

John Rogers - D. A. Davidson

Daniel Henriques - Goldman Sachs

Robin Schumacher - Bear Stearns

Robert Connors - Stifel Nicolaus

Kurt Hallead - RBC

Mike Urban - Deutsche Bank

Pierre Conner - Capital One

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Halliburton and KBR 2006 fourth quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Evelyn Angelle, Vice President, Investor Relations. Ma'am, you may begin.

Evelyn Angelle

Thank you, Matt. Good morning, and welcome to the joint Halliburton-KBR, fourth quarter 2006 Earnings Call. Since we are doing a combined call today, our prepared remarks will be a little longer than usual, but we have allowed plenty of time for questions. Today's call is being webcast, and a replay will be available on both Halliburton and KBR's website for seven days. A podcast download will also be available.

The press releases announcing the fourth quarter results are available on the Halliburton KBR website. Joining me today are Dave Lesar, Halliburton's CEO; Chris Gaut, Halliburton's CFO; Andy Lane, Halliburton's COO; Bill Utt, KBR's President and CEO and Cedric Burgher, KBR's CFO.

In today's call, Dave will provide opening remarks. Chris, will discuss our overall operating performance and financial position, followed by Andy, who will review the ESG regions and our business outlook. Bill and Cedric will address KBR operations and financial matters. We will welcome questions on both companies, after we complete our prepared remarks.

Before turning the call over to Dave, I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton and KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results, and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2005, Halliburton's Form 10-Q for the quarter ended September 30 2006, and recent Halliburton and current reports on Form 8-K. Risks specific to KBR are discussed in the final prospectus for its initial public offering dated November 15, 2006.In addition, please refer to the table in the Halliburton press release that reconciles as reported results to adjusted results for any non-GAAP disclosures.

Certain historical numbers related to KBR referenced in this call differs slightly from numbers set forth in KBR's earnings release issued this morning. These differences generally relate to consolidating and eliminating entries at the Halliburton level and some minor [period] adjustments that KBR reflected in their separate financial statement, during their IPO process. Now I will turn the call over to Dave Lesar, Dave.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Dave Lesar

Thank you, Evelyn, and good morning everyone. I want to focus my comments today on North America, the KBR separation and progress toward the growth goals we set out in our 2006 Analysts' Meeting. But first I would like to begin with a few highlights of our outstanding results in 2006.

With all of the noise that is out there today around gas prices in North America, its very easy to forget what an excellent year we had in accomplishing our goals, especially growing our Eastern hemisphere business. Some of the highlights of the year were our ESG revenue grew year-over-year 28%, each division in ESG had record revenue, operating income and operating income margin in 2006. Our profitability also reached record levels. Our operating income margins were over 26% for ESG and incremental margins were in excess of 38%. Operating income grew over 48% in 2006, driven by a very balanced contribution from all of our product lines.

As I mentioned earlier, our focus on the Eastern Hemisphere of ESG and its growth is reflected in our numbers. Revenue grew to nearly $5 billion, representing a 27% increase over 2005, and operating income in Eastern Hemisphere grew 49% from 2005, resulting in an operating income margins in excess of 20%.

On a sequential basis, our fourth quarter Eastern Hemisphere revenue grew by 13% and operating income grew by 27%. About half of that operating income increase was attributable to the fourth quarter gain on the sale of our lift boat operations.

Our Eastern Hemisphere contributed 41% of total ESG revenues in the fourth quarter. These results reflect the successful execution of our Eastern Hemisphere growth strategy, not just in revenue growth, but market share gains in key countries, also with a strong focus on targeting areas of geographic expansion that result in attractive returns on our assets and resources.

Our performance in Latin America was another bright area for us in 2006, where our margins improved from just over 14% in 2005 to over 19% in 2006.

In addition, our balance sheet has never been stronger. We ended the year with $4.4 billion in cash, up nearly $2 billion at the beginning of the year. That cash sets us up for strong growth in 2007, with a 40% increase in our capital expenditure budget, a 34% increase in our technology budget, and enough cash to pursue strategic acquisition. It will also allow us to continue our aggressive stock repurchase program. We refrained from purchasing shares during major transaction, such as the KBR IPO in the fourth quarter. But once we have completed the separation of KBR, you will see us back in the market aggressively buying our shares. We currently have approximately $1.7 billion left on our share purchase authorization and at year-end, we had a negative debt-to-capital ratio.

Now let me turn to what remains foremost, I believe on many of your minds and that's our outlook on the very important North American market. First, the Canadian market has softened significantly, that had a negative impact on our fourth quarter earnings for Sperry, which has the strong drilling position in Canada, and of course for our pressure pumping operations.

Our fourth quarter revenue in Canada dropped 16% on a sequential basis and our operating income even more. We certainly got hammered in this market in the fourth quarter. If the slowdown and negativity in Canada continues, we will adjust our allocation of capital in that market if necessary.

Turning to the US. We lost several workdays in December, due to the blizzards in the Rockies, where a concentration of our pumping fleet resides. As access to our customers' work sites were delayed. During and after the storms, our customers focused on getting their drilling, the production sites opened up first. That delayed them opening up the sites, which were due to be frac by us. Compounding this was the fact that the weather delays came around the holidays and in some cases our customers just shut frac work down for the balance of the year. For example, in Brighton, Colorado, where we have four frac fleets, and a large number of cementing units, we did essentially no work for the last week of the year. Because of this, the affect of weather and holidays had a much larger impact on our pumping business, than it did on our drilling related businesses.

On a broader scale, even though our pumping units were fully committed during the month. In December, we lost more than 10% of our premium frac workdays in the Rocky Mountains and the Mid-Continent. This is the equivalent of all of our frac fleets in those areas [sitting] idle on workdays, incurring all of the costs but no revenues. Therefore, it was really a weather related, not a demand related impact.

We continue to see strong demand for our services in the US, as we look into 2007. We do see some continued weather related delays in January as ice storms hit the Mid-Continent and parts of Texas and continued snowstorms in the Rockies. The good thing is that this work is not going away. It will only be deferred into later parts of this year. But overall, our customers have given us strong indications that demand for our services will remain high in 2007. Currently, rig counts are rising. Our equipment utilization rates are high, and our backlog remains strong. We continue to watch the market of course very carefully, and are in a position to react quickly to ensure capital resources continue to be deployed in the most optimal manner.

We also recognize that the volatility of the price of natural gas impacts our customer's activities, although many of our customers have favorable hedging programs in place. We believe that any weather related impact and the price of natural gas will be short lived, and if this situation occurs, will be self-correcting, as activities would slow temporarily allowing gas inventories to normalize.

In the event that some of our current customers experienced a decline in activity, we believe that our personnel and equipment will remain highly utilized, as we can expand our customer base by redeploying equipment to more active areas.

In looking at some of our most recent contract wins with major customers in the US, we have been awarded an excess of $200 million in incremental work above and over the amount of work that we performed for them in 2006. And pricing continues to improve. We also continue to experience strong demand for our services in the Eastern Hemisphere; and would consider moving equipment to markets outside of the US if necessary.

On pricing, we negotiate pricing throughout the year, either through call-out work or when contracts rollover. Call-out work continues to be favorably impacted by our July 2006 price book increases. Even in the midst of the gas price uncertainty, our recent contract negotiations have resulted in good price increases, and I emphasize "increases". Although, of course they are not as high as we've seen in the previous two years. We will continue to focus on pricing, including negotiating lower discounts, and we believe we can increase pricing in excess of the inflationary costs we expect incur in 2007, because of this we do not expect our US margins to decline in 2007.

Now I would like to take this time to emphasize the performance measures we set out for ourselves last June during the Investor Day. We said we intended to grow revenue over the course of the next three years at a compound rate of at least 20%. Our ESG revenues grew 28% from 2005 to 2006. We said we would double operating income and EPS within three years. In 2006 we increased our operating income by 48% from the prior year and we wanted to post industry leading margins already over 26% in 2006 and high returns on equity.

You can expect a lot of this growth to come from the Eastern Hemisphere, for example, contract wins in the Middle East will likely make this, one of our fastest growing markets. In Russia, we are continuing to broaden our service offerings, as western technology continues to be adopted at a strong rate, such as for our directional drilling suite of tools. And we are currently working on a number of acquisitions, having announced one, earlier this week and more should close in the next few months.

Now let me turn to KBR, for a few minutes. Our recent IPO, of approximately 19% of KBR was very successful. The shares were highly oversubscribed and KBR's stock price performed favorably. We are now working toward the final separation of KBR, which we expect to complete no later than the end of April. And we could do the transaction in one of few ways, we could spin-off the remaining KBR shares to Halliburton shareholders in the form of a dividend, or we could conduct an exchange offer in which Halliburton's shareholders have the opportunities to trade Halliburton shares for KBR shares. This is commonly called a split-off.

We believe a split-off transaction has advantages, given this current stock price relationship. First, it would allow us to effectively repurchase Halliburton shares using KBR shares as a currency. Since the KBR shares are currently trading at a higher earnings multiple than Halliburton shares, this transaction would be accretive to Halliburton's EPS, if the exchange offer were to be fully subscribed. Second, the exchange offer would give Halliburton shareholders the ability to allocate their holdings between Halliburton and KBR on a tax free basis. This could alleviate some of the potential market volatility for KBR shares that might come about in a straight spin-off transaction.

But no decision has been made at this point spin-offs have advantages as well and any decision that we make will require careful study. An assessment of market conditions at the time and getting Board approval. We expect our board to act on this by the end of February. For various legal reasons we do not expect to be commenting on this again, until we are ready to proceed with the separation, which as I said earlier we expect to complete by the end of April.

Now let me turn the call over to Chris for some further details.

Chris Gaut

Thanks Dave and good morning. I will discuss our fourth quarter results compared sequentially to the third quarter. Halliburton Company revenue in the fourth quarter was $6 billion that's up 3% from last quarter. ESG revenue was up $117 million or 3% sequentially. I would highlight that ESG's non-North America operations showed an 11% revenue increase, with each division contributing to that increase. KBR revenue increased $69 million, reflecting an increase in gas monetization work and a slight decrease in Iraq related operations.

ESG operating income increased $53 million to $959 million, which included a $48 million gain on the sale of our non-core self elevating boat operations. Excluding the gain on the lift boat transactions ESG operating margin was 26% in the fourth quarter. Also included in ESG operating income in the fourth quarter was approximately $38 million in business interruption insurance proceeds related to the 2005 hurricanes in the Gulf of Mexico.

KBR reported operating income of $121 million with an operating margin of 4.8%. Income from continuing operations in the fourth quarter includes $5 million in minority interest, related to the 19% of KBR held by outside investors since the IPO in late November. The first quarter of 2007 will include the full impact of KBR's minority interest on Halliburton's income statement by the way.

Now let me highlight ESG's segment results. Production Optimization operating income increased $37 million or 9%. Included in fourth quarter results are the gains from the sales of the lift boats. Production enhancement operating income was negatively impacted by the US weather, stipulations on land usage, as well as the holidays. And there was the significant slowdown in Canada.

However, the Eastern Hemisphere was strong for production enhancement, led by high activity in Asia, the North Sea, and the Southern Persian Gulf area.

Completion Tools operating income increased significantly, reflecting strengths in international demand.

Fluid Systems operating income was relatively flat over the previous quarter. This division benefited from most of the hurricane insurance proceeds during the fourth quarter.

Cementing Services operating income decreased sequentially, particularly from the lower activity in the US land, partially offset by increased activity in Africa.

Baroid's mix of sales, particularly in West Africa, was less favorable in the fourth quarter than in the third quarter. Drilling Information Evaluation operating income for the fourth quarter 2006 was $230 million, that's up 1% from the third quarter, while posting an operating income margin of 26.2%.

Sperry's operating income was negatively impacted by lower activity in Canada and a less favorable mix in Asia Pacific and the North Sea. This was partially offset by Sperry's strong performance in Africa and the Middle East.

The operating income of Security DBS or Drill Bits operation increased sequentially, benefiting from the improved Fixed Cutter and Roller Cone Bit sales in Europe, Africa, and Latin America.

Wireline and Perforating's operating income was up due to improvements in Latin America and in parts of Asia Pacific.

Moving to our Digital and Consulting Solutions segment, operating income improved 24% from the third quarter 2006, due primarily to Landmark's strong yearend software sales activity and growth in consulting services. The fourth quarter is always the strongest for Landmark's type of business. Bill will discuss the results for our two KBR divisions.

So, looking ahead, I would like to provide some guidance on certain 2007 Halliburton financial items, post-KBR separation. The tax rate for Halliburton should be in the 35% range in 2007. Since almost all of the third party debt remains at the Halliburton level, interest expense should be unchanged, exclusive of debt retirements. And minority interest should be in the $5 million range on a quarterly basis, again that's excluding KBR.

We are performing an analysis of the types of costs that we classify as corporate costs post-KBR separation. Without KBR and the consolidated Halliburton results, we expect to change the classification of certain stewardship costs that have historically been allocated among the segments. This will also provide better comparability in our results with our competitors. We will give you an update on that next quarter.

Capital expenditures totaled $272 million during the fourth quarter and $891 million for the full year. We expect our 2007 capital spending to be about $1.3 billion, of which $1.2 billion relates to ESG.

Our technology spent at ESG totaled $262 million during 2006 and we expect that to increase to approximately $350 million in 2007.

As Dave mentioned, our cash and short-term investments exceeds our debt, yielding a negative net debt-to-capital ratio. Andy.

Andy Lane

Thanks Chris. Good morning, everyone. I will address regional results and our outlook. First, I would like to highlight the success of the execution of our Eastern Hemisphere growth strategy. Having achieved revenue growth of 27% year-over-year, our [approach] targets for traditional markets such as the North Sea, and emerging markets for us, such as Southeast Asia and Northern Africa. We are beginning to see the benefits of our recent investment in capital, most notably in Sperry rotary steerable tools and wireline units.

Our continued commitment to investments in infrastructure, capital, and technology are the cornerstones of our Eastern Hemisphere growth strategy.

As you know, many new rigs are being constructed for offshore applications. Our Cementing Group has been working closely with rig manufacturers and contractors, so that Halliburton's Cementing units are installed in the hulls of these rigs. We've had good success recently, which positions Halliburton favorably to perform Cementing services throughout the life of these new rigs. In 2006, Halliburton Cementing units were installed on over 40% of the new offshore rig. And so far, we have already been awarded Cementing installations on 47% of the rigs planned to be delivered in 2007.

Our Europe/Africa/CIS region is the market that shows good growth potential. Despite some constraints in the North Sea, due to rig availability. Our focus on Northern Africa, and particularly Libya, should result in a strong growth in 2007, both in revenue and profitability.

In Russia, our focus now is shifting to diversify our product and service offering. Up until recently, we have been primarily deploying pressure pumping equipment into that market.

In addition to the recent significant Rosneft pressure pumping award, yesterday we announced a large multi-year new contract with TNK-BP, in Russia, which will utilize our Cementing, Baroid, Sperry and Drill Bit products and services. Our customer has particular interest in using our unique technology, such as Sperry's EZ-Pilot and Security DBS', Energy Balanced roller cone Bits. We have also established drilling efficiency records in our Shell-Sakhalin project in Russia. And we recently introduced Pinpoint Stimulation technology for the first time in Russia.

In the fourth quarter, our Europe/Africa/CIS region showed a $113 million or 16% of revenue from last quarter. And as Chris mentioned, we sold our Nigeria and our UK base lift boat operations, in two separate transactions during the fourth quarter.

Going forward, we will have approximately $40 million to $50 million less in revenue annually as a result of these dispositions. The disposition of these non-core operations allows us to focus on developing higher growth businesses. In Africa, our Completion Tools, Cementing and Sperry Drilling Service product line benefit from the higher rig activity and increased demand for our premium service, such as Geo-Pilot, GeoTap and the high end completion tools.

Baroid results in Norway during the fourth quarter reflected the large new multiyear contract; we awarded in June from Statoil. Completion Tools results in Europe reflected -- results in Europe reflected strong sales in the UK, and high demand for our intelligent well completions through WellDynamics.

The Middle East/Asia region is another high growth area for 2007. Already large footprint in Saudi Arabia will continue to expand as work on the Khurais field ramps up. And our work in the UAE is already increasing from the significant contract win we announced, related to pressure pumping and completion tool services.

Our Middle East/Asia region fourth quarter revenue grew $48 million compared to last quarter, led by higher activity in Saudi Arabia, particularly related to the Khurais project. The Khurais project currently has slightly less than half of the rig working that we expect to be running at the peak of the project. We also experienced strong Completion Tool, Wireline and stimulation activity in Asia. Profitability in this region was negatively impacted by mobilization costs, we have experienced related to new contract awards and low utilization of the stimulation vessel in Qatar.

Now turning to the western hemisphere, Dave provided our outlook on the US market. Let me just add a few more thoughts on that topic. One thing we've been very focused on is aligning ourselves with the customers that optimizes both our efficiency and profitability. We have done that very well in the US, by working with customers, who have large pad drilling plans, will allow us to utilize our equipment at a high rate and minimize our mobilization time.

When you compare our US customer base to a recent report outlining estimated 2007 US E&P spending, the top 20, 2007 capital expenditure budgets, includes 17 of the customers in our own top 20 list of customers. Aligning ourselves with large customers, that continued to spend during times of oil and natural gas price volatility, positions us very well for continued revenue growth in this important market. We expect to see more pressure on pricing in US.

Most of our contracts contain cost escalation clauses. We will work with our customers to recover any labor and material cost increase we might experience. We also plan to continue to work down on our customer discounts.

As Dave mentioned, we're executing plans addressed to slowdown in Canada, including moving equipment to higher utilization areas. Our outlook related to heavy oil in Canada was quite positive. We expect the number of Steam Assisted Gravity Drainage wells drilled during 2007 to be twice the number of drills in 2006. We currently have a very strong position in SAGD drilling, which utilizes our Precise Well Placement services, provided by Sperry, Security DBS and Landmark. We expect to participate in the meaningful -- in the growth of the heavy oil market.

Earlier this week, we announced our plans to acquire Ultraline, a leader in cased-hole and production logging services in Canada. This acquisition is consistent with our strategy to expand our portfolio in certain geographic areas. We will be adding Halliburton's open-hole logging into Ultraline, cased-hole capability to expand a total breadth of services in Canada.

Our Latin America results were very strong in the fourth quarter posting a 7% increase in revenue, and a 16% increase in operating income.

Looking ahead to 2007, we will continue to focus on growth and improved profitability from projects in our three major operation hubs, of Mexico, Brazil and Venezuela. As highlighted by the recent award of the Pemex stimulation vessel work.

I would like to highlight two of the emerging technologies we are offering. We continue to see increased success of our Pinpoint Stimulation services, such as CobraMax and SurgiFrac. In fact, our Pinpoint Stimulation revenues increased 57% over 2005.

Baroid has recently introduced the new diesel based drilling fluid called INTEGRADE, it's based on our alkali technology which helps lower overall well construction costs by increasing penetration rates. We realized a 90% increase in the number of INTEGRADE jobs performed in the fourth quarter in deep US well applications.

Now, I will turn the call over to Bill Utt to address KBR. Bill?

Bill Utt

Thanks Andy, and good morning everyone. Well, it has certainly been an exciting year for KBR. I am pleased to lead this organization with such a proud heritage, as we continue our preparation to begin a new chapter in our history as a standalone corporation. I am certainly very pleased with the past of public reception in the market for KBR thus far.

Everyday, I am more impressed with the dedication of KBR employees and the culture we sustain. A commitment and work ethic that drives our ability to deliver our services anytime, anywhere, often under the most extreme circumstances. This work ethic sometimes means that our employees must work in dangerous locations, on behalf of our global customer base. So, let me take this opportunity to reiterate that the safety and security of our KBR employees' is our number one priority.

Now I will review KBR's financial results. Consolidated KBR revenues for the full year 2006 totaled $9.6 billion compared to $10.1 billion during 2005. Most of the decrease relates to lower activity in Iraq. During the same period operating income decreased by $214 million, resulting in a 2.6% operating margin in 2006. Our 2006 results included a significant charge on Escravos project and impairment charges on our Australian railroad interest. I will provide an update on both of these matters in a moment. Our 2005 results included an $85 million gain on the sale of our interest in the toll road.

Now let me turn to our two segments. Energy and Chemicals posted $686 million in fourth quarter revenue, a 14% increase over the third quarter. Operating income increased 31% to $59 million during the fourth quarter. Revenues and operating income improved as a result of the higher gas monetization activity. Our focus on technology continues to differentiate us from our peers. We recently sold another technology license for our proprietary propylene technology, SUPERFLEX. This will be the second propylene unit in the world of its kind and the first one in the Asia-Pacific region. We are also contracted for two proprietary ammonia technology projects, one ROSE unit and two offshore engineering projects in the fourth quarter. This brings our ROSE licensing sales to a record eight units in 2006 and we expect demand for these proprietary heavy oil refining capabilities to increase in 2007.

Now, let me update you on a few key projects ongoing in the E&C division. The Escravos gas to liquid project in Nigeria was approximately 45% complete as of December 31. This project still has a long way to go, as we've only just begun construction activities. Since June, we have continued to experience cost increases, which have for the most part been offset by client approved change orders and reductions in our allowances and contingencies.

During the fourth quarter we reported $9 million charge related to KBR's forecast of engineering hours required to complete the project, of which a portion of these engineering hours will be non-billable due to our agreement with our partner to cap the total engineering cost we each bill to the joint venture.

Looking ahead, we believe there is a risk of further cost increases, due to uncertainties in the construction phase of this project. So, we expect we would ultimately recover most of any such cost increases from our client. However, should significant cost increases occur, there could be timing differences between the recognition of these increased costs in KBR's projections, and the recognition of offsetting revenues related to recoveries from our clients via approved change orders.

Any estimated cost increase, we are unable to recover from our clients are charged against contingencies and allowances during the period, would be recorded as a charge to income. On a more positive note, as of December 31, our levels of contingencies and allowances on the Escravos project compared to our uncommitted cost to complete the project remain at the same ratio, as we established at June 30.

Additionally, we have completed the first check estimate on the Yemen project, which was approximately 39% complete, as of yearend. No significant changes to project cost estimates were identified.

Now, all of KBR's major fixed price projects have completed this important project review milestone. Finally, the Amenas Gas project in Algeria, has achieved commercial operation as we successfully completed our project performance tests.

Shifting to our other division, the Government and Infrastructure division, fourth quarter revenues of $1.8 billion were essentially flat to the third quarter, with a slight decline in our Iraq related work. Operating income for the division grew $8 million to $61 million in the fourth quarter. The third quarter included a $32 million impairment charge on the Australian railroad investment. The fourth quarter included a $12 million charge on an embassy construction project in Macedonia, in which we experienced an escalation and labor and material costs. This decrease was offset by favorable partial settlement on the container-related issue and higher income from the DML shipyard, largely related to the completion of a project.

Let me provide an update on our LOGCAP-4. During the fourth quarter, we reached a favorable partial settlement on the outstanding container issue. We expect the balance of the container issue to be resolved during the first half of 2007. The recent troop search in Iraq has caused us to increase our hiring. We expect our revenues to be modestly impacted by the increase in troop count during 2007.

Our customer, the US Army, has recently indicated they expect to announce the award of the LOGCAP-4 contract by the end of the first quarter and begin re-competing past quarters in the June and July timeframe.

As you recall, the current expectation is that the LOGCAP-4 contract will be divided among three contractors. You may have seen some press on KBR and our DML investment in the UK. We have received inquiries related to purchasing KBR's interest in DML. We plan to evaluate these inquiries, but currently have made no decisions regarding our interest in DML.

In the meantime, DML showed strong results throughout 2006. We have provided the UK Ministry of Defence, the financial information they have requested with respect to KBR as a standalone entity.

Additionally, Halliburton continues to guarantee KBR's performance under the DML agreement.

An agreement on the [AST] railroad investment was recently reached with the project lenders. There is now a bank settlement agreement in place, which restructures the joint ventures' debt and delays the principal payments for the next few years. No additional impairment charges were taken during the fourth quarter related to this venture.

Finally, let me update you on our management restructuring efforts. I began this effort in the third quarter, and together with my leadership team I have continued to define the organizational structure and activities between the corporate staff and the business units. These corporate changes have been designed to enhance risk awareness and transparency, as well as improve KBR's financial performance, all critical to continue the momentum reflected in our recent results.

We have recorded a charge of $5 million in the fourth quarter related to this restructuring and to cover the charges for reductions enforced, which were necessary in some areas, as we optimize our structure around the KBR workload and processes. I expect that we may be announcing further charges in 2007, as we continue to review KBR and its cost structure to deliver our services to our costumers.

Let me close by providing you our outlook on some of the E&C markets in which we participate. Worldwide resource constraints, escalating material and equipment prices, and ongoing supply chain pricing pressures are causing delays, and in some cases, cancellations of major gas monetization and upstream prospects.

Delays in the awarding of these projects may negatively impact our first half of 2007, as we are expecting some of these projects to be awarded during 2006 and in early 2007. We continue to believe, however, we will win our share of these projects, as they are ultimately awarded.

Additionally, other awards in the Energy and Chemicals division, like the recent fourth quarter wins I discussed a moment ago and the additional work related to the troop search in Iraq, should mitigate the impact of the expected delays in gas monetization and upstream projects awards.

Now let's turn to Cedric for more details on KBR.

Cedric Burgher

Thanks Bill. I would like to begin with the discussion of backlog. Our recent contracts have been more heavily weighted toward reimbursable work, instead of pure lump sum turnkey. This has been official in terms of reducing risk in our backlog, but it also has the effect of driving overall backlog numbers lower.

For example, some cost reimbursable contracts, particularly in our Energy and Chemical segment, call for KBR to provide procurement management services on behalf of the customer rather than the actual procurement of materials.

In the case of procurement management, KBR does not include the cost of the material in either backlog or revenue. The Energy and Chemical division's backlog as of December 31 was $5.7 billion, as compared to $6 billion at the end of September. The Government and Infrastructures division's backlog as of December 31 was $7.8 billion, compared to $9 billion at the end of the third quarter.

Backlog for the fourth quarter was reduced primarily due to the significant work-off on our LOGCAP-3 contract. The size of projects that we add -- that we expect to add to our backlog should continue to decline, as we expect to see our customers agreeing to absorb certain cost items within these projects as opposed to paying KBR to take these risks including our expected cost-for-market volatilities and contingencies.

Now, let's review other financial items. General and administrative expenses included in operating income, increased by $23 million to $108 million in 2006. The majority of which is attributable to the implementation of a new ERP system, and costs associated with being a standalone company. We expect our general and administrative costs to average around $30 million per quarter during 2007.

Our net interest income in the fourth quarter was $14 million, as compared to $1 million a net interest expense in the third quarter. The improvement resulted from KBR paying-off debt in the fourth quarter with the proceeds from the IPO. In addition, the higher cash balance positively impacted interest income.

In the fourth quarter, our effective tax rate was 49%, this relatively high rate was driven by our return-to-accrual adjustments and the inability to credit foreign taxes, as a member of the Halliburton, US consolidated group. We estimate KBR's effective tax rate in 2007 will be approximately 38%, as we will begin utilizing foreign tax credits in the US.

With respect to earnings guidance, like Halliburton, we believe it is best practice not to provide specific guidance.

Now, I would like to discuss our liquidity and balance sheet. Our balance sheet remained strong, with cash and cash equivalents of $1.5 billion at the end of December. With our net IPO proceeds of $508 million and cash generated during the year, we repaid our $774 million note due to Halliburton during 2006, and ended 2006 with total debt of $20 million.

Debt should remain negligible throughout 2007. Our overall working capital at the end of the quarter was $915 million, which includes working capital related to our government services work in the Middle East of $248 million. We continue to make good progress in reducing our working capital in the Middle East, which decreased by $84 million compared to our prior quarter. For the full year 2006, our Middle East working capital reduced by $247 million to $248 million balanced at the end of the year.

Capital expenditures totaled $7 million during the fourth quarter 2006, and $57 million during the full year. Depreciation was $15 million during the fourth quarter and $47 million for the full year. For 2007, we expect our capital expenditures to total approximately $95 million and depreciation to be approximately $57 million.

In the fourth quarter, KBR adopted the FAS-158 new pension accounting rules. As a result of the adoption at December 31, total assets decreased by $208 million, total liabilities increased by $45 million, minority interest decreased by $98 million, and shareholder's equity decreased by $155 million.

Now, I will turn the call back over to Dave Lesar for his final remarks. Dave?

Dave Lesar

Thank you, Cedric. It has been a lot of information we've drawn out today, but let me just summarize, where I see we are. First of all, after over two years of very concentrated efforts, we're now only a couple of months away from the complete separation of Halliburton and KBR. We still believe that the complete separation will unlock additional shareholder value. At Halliburton, we look forward to focusing all of our energy on implementing our growth strategy as a peer oilfield services company. We continue to grow our already strong position in the Eastern Hemisphere, and we will maximize our position in the US, through up and down markets. But overall, we still see a very strong global demand for our products and services through the end of the decade.

We will now open it up for questions. Please limit your comments to one question and one follow-up.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Geoff Kieburtz of Citigroup. Your question please.

Geoff Kieburtz - Citigroup

Good morning. I wondered, if you could talk a little bit about the capital spending plans for 2007 and for [PSG] and where you see that being concentrated?

Chris Gaut

Sure, Geoff. This is Chris. Well, the $1.2 billion of capital spending that we see in 2007, which is a significant increase over 2006. That increase is going to almost -- will very largely go to our Eastern Hemisphere operations, and the biggest recipient of the increase will be in our Drilling Information Evaluation sector. That will be complemented by a good increase in our fluid space, where we have a good number wins on cementing units or new offshore rigs and refurbished offshore rigs and as we build out our bulk plans for our [Bahrain] operations. Andy, you want to add anything to that.

Andy Lane

Yes, Geoff. Chris said it, both were very Eastern focused for growth, while some infrastructure for the project wins, but also just pure service equipment and expansions in Eastern Hemisphere and a lot more balance than we have had in the past weighted towards the Drilling, Sperry's business, the Bits business and also the wireline business and specially Sperry Downhole Tool systems and wireline trucks we mentioned, have a big investment going there and we are going to continue that.

Geoff Kieburtz - Citigroup

As my follow-up, if we take out the benefit of the business interruption? Fluids had a pretty steep margin erosion in the fourth quarter. Is that any cause for concern?

Chris Gaut

Well, Geoff, some of it is mix of jobs that we had in the Eastern Hemisphere. Cementing of course, was impacted a very heavily by what we talked about, the weather and the holiday impact both in the US and impacted significantly in Canada. So we know where the issues are both in Cementing and in the Baroid mix of businesses and we still think it's doing very well and the outlook is still very strong for both of those business. Most of our Eastern Hemisphere wins have a component of Cementing and Baroid in those and we are investing a lot in the mobilization costs, to get ready for those contracts, but we feel very good about those contracts going forward.

Geoff Kieburtz - Citigroup

So you are expecting just a rebound in the immediate future?

Chris Gaut

Yes, we are still mobilized, Geoff. As you know, with the Eastern Hemisphere project wins that go over multiple years and take us one or two quarters to get fully mobilized on the costs. So we definitely expect them to rebound in 2007.

Geoff Kieburtz - Citigroup

Thank you.

Operator

Our next question is from James Stone of UBS, your question please.

James Stone - UBS

Good morning, Dave I appreciate your comments on spilt off or spin-off. Can I just ask you a clarification? If you do a split-off and it is not fully subscribed, do you still have the ability to distribute the remaining shares on a tax-free basis?

Dave Lesar

Yes, the mechanics of the split-off is that it is, if it is less than fully subscribed but more than the minimum then the remainder number of KBR shares would be distributed through a pro-rata dividend and the whole thing would be tax-free. Those are the mechanics.

James Stone - UBS

Okay. And Andy just as a follow-up, you said pricing in the US will remain under pressure, but Dave said pricing -- price gains would exceed inflation growth. Can you guys just reconcile those two statements?

Dave Lesar

Yeah Jamie this is Dave. You know, obviously the last couple of years we have had double-digit price increases, Jim. So, those double-digit ability is what has come under pressure, but I think for those that are concerned that pricing has fallen off the cliff in North America, we just don't see that happening. And so yes we are getting price increases, they are not as good as they have been in the last couple of years, but they are price increases. And what is under pressure of course, is we are asking for more than we are getting, and we are getting more pushback than what 0we would have got in the last couple of years, but that doesn't mean that we are not being successful in getting increases.

James Stone - UBS

That's very helpful thanks.

Operator

Your next question is from Jim Wicklund of Banc of America. Your question please.

Jim Wicklund - Banc of America Securities

Hey guys. As a follow-up, we have talked in the past about how your payback on adding new frac spreads in the US is 12 months in all. Have you guys looked to see what normalized returns on that business will or should be?

Chris Gaut

Sure Jim. When we look at investment in pressure pumping spread, we certainly assume its going to last a very long time and so we do look at that over a full cycle and do try to normalize the returns. And we certainly see that the returns that we would be getting would exceed our hurdles of a 15% after-tax return un-leveraged. It certainly -- the results -- the economics we run on new investments currently are helped by the fact that we have such a strong market right in this environment, but on a full cycle basis even if one normalize the numbers. Its, we think it's quite attractive.

Jim Wicklund - Banc of America Securities

Okay. And my follow up if I could, my E&P analyst this morning lowered his -- he has definitely lowered his gas price forecast in the US. Nobody knows what gas prices are going to be, because nobody knows the weather. But just generally, I assume you guys are looking for the US rig count to increase this year. I guess is that true and are you all looking at a gas price to drive that level of activity.

Chris Gaut

Well, I think there are two things that are going on. One of the important things is a change in the mix of rigs in the US land market, where we have a large number of new, more efficient rigs coming on, which will be drilling more wells. I think we are agnostic on the rig count itself, clearly with these new rigs coming on, we could be drilling more wells. What we are seeing from our customer base is significant activity. Dave referenced the number of new contracts that -- new commitments that we are winning. So, we see a very active frac market in front of us, fully utilizing, as we see that the market today, fully utilizing our available equipments and --

Jim Wicklund - Banc of America Securities

So they should matter?

Chris Gaut

Yeah.

Jim Wicklund - Banc of America Securities

Okay, very helpful. Thanks guys.

Operator

Your next question is from Scott Gill of Simmons & Company. Your question please.

Scott Gill - Simmons & Company

Yes, good morning gentlemen. Andy, did I hear you say that you would consider moving equipment out of Canada into the US, and if that's true, what type of equipments are you considering moving here?

Andy Lane

Yes Scott, it is what we are considering. We know we are going to have a good first quarter compared to the fourth quarter we feel. As historically, the first quarter is a strong quarter in Canada. So we aren't considering anything to move in the short-term. But, of course, the second quarter with the spring breakup we have every year, and then the outlook after the winter and gas prices outlook for the second half for Canada. We are certainly going to take all that in account. And it would be primarily pumping equipment, first -- to look at moving it either to better utilization, higher price markets here in the US or Eastern Hemisphere.

Scott Gill - Simmons & Company

Any thought to -- I guess the question could come up, if you did move the equipment from Canada into the US, would that exacerbate the pricing pressure, so kind of what's the process with respect to pricing in the US, and how that might impact where you ultimately move that equipment?

Andy Lane

Yes Scott, we don't see the type and amount of equipment we are talking about. We don't see it having a negative impact on the pricing in the US. It's not that type of scaled movement. And we wouldn't that, we would -- we feel very good about our pricing, as they went through in the US and the demand for our service in the US. If we were to be over utilized there, we would move to Eastern Hemisphere. So, first, we are going to maximize the market and activity level in the US, but we're positioned along with our new capital builds that Chris talked about. We're always looking at growth opportunities for the Eastern Hemisphere.

Scott Gill - Simmons & Company

Okay. Thanks and one last one, if I can squeeze it in here, Chris. What was the percent of revenue from Canada during the fourth quarter?

Chris Gaut

Sorry Scott. We don't breakout our North America segments by practice. So unfortunately I can't do that in this case.

Scott Gill - Simmons & Company

Okay, thank you.

Operator

Next question is from Dan Pickering of Pickering Energy Partners, your question.

Dan Pickering - Pickering Energy Partners

Hey guys. I was hoping that you could -- as we look at the revenue decline in North America, just want to make sure I understand kind of our math would say that it looks like about half of the sequential decline came from Canada, the rest came from US, and I was just wondering if there was any -- one, is that close to accurate, and two, do we isolate the US piece of the business, primarily the pressure pumping?

Chris Gaut

Yeah, I mean the first one is similar to the question that Scott just asked and so I can't give you more granularity on the breakdown between US and Canada just because that's not our practice or the precedent that we want to set. Now, yes, certainly our biggest business in North America is our production enhancement business. So, it is definitely fair to say that just because of the size and scale of that business, it has felt -- it had the biggest impact of the activity reduction in Canada and in our very large market position we have in the Rockies in the US.

Dan Pickering - Pickering Energy Partners

Thank you. Unrelated question for Bill and Cedric, please. Bill, you mentioned that there may be some delays in some of these larger projects that you are looking at for KBR. I think around the road show timing, you had mentioned something like a bidding environment out there, it was about $20 billion or so projects that you were looking at that might come to fruition. Has that number changed much in the last few months?

Bill Utt

Not materially. We still see generally the same list of prospects out there and the delays we are seeing are really driven by our customers' desire to absorb the information and that is communicated to us in our pricing related to the supply chain pricing pressures that we see, but the overall outlook in terms of the number of project is still where we thought it was back at the road show.

Dan Pickering - Pickering Energy Partners

Okay. So, they are not going away. They are just slipping a bit.

Bill Utt

I would characterize that as being correct, yes.

Dan Pickering - Pickering Energy Partners

Thank you.

Operator

Your next question is from Brad Handler of Wachovia. Your question please.

Brad Handler - Wachovia

Thanks. Good morning everybody. Could I ask you first on the Halliburton side please, just another sort of financial detail question. If we look at the Middle East/Asia margin, it is down by a couple hundred basis points. You guys have spoken to the drivers there, but can you perhaps split up how much of that do you think was due to infrastructure kind of ramping, versus how much was due to product mix?

Chris Gaut

Yeah, I think that the ramping up for new contracts was certainly a part of that. In the Middle East, we have a number of things underway. It was also some mix effect that we had in our fluids business that had an impact as well.

Andy Lane

Yeah, Brad the main ramp up is of course is Al Khurais project, our UAE project that we talked about with Cementing, and we've had several wins in Total -- for [Total] in Indonesia, that are ramping up in the Asia area.

Brad Handler - Wachovia

I don't know, if it's just too -- if I am getting too granular. Just given that three quarters of that mix is a quarter or something?

Chris Gaut

That would be hard to --

Brad Handler - Wachovia

Hard to break?

Chris Gaut

Yeah.

Brad Handler - Wachovia

Fair enough, okay. If I could ask unrelated follow-up on the KBR side, please, you have historical information by segments within both divisions. Can you give us that information on the call here now?

Cedric Burgher

We don't have the material ready for the call; we will have it in our filing and so we will provide it at that time.

Brad Handler - Wachovia

Okay, fair enough.

Bill Utt

In the 10-K.

Cedric Burgher

Correct.

Brad Handler - Wachovia

Good enough. Thank you very much.

Operator

Our next question is from Geoff Kieburtz of Citigroup. Your question please.

Geoff Kieburtz - Citigroup

Oh gosh, I got cycled around rather quickly, didn't I? What I wanted to ask was in terms of your technology spend, could you talk a little bit about what the mix concentration is there?

Andy Lane

Yes, Geoff, well, it's up roughly 50% on development and 20% on research, you see from a broad standpoint, the rest balance being more operational engineering. So, that's the mix and then it's equally split between our divisions and that has been very consistent for several years, so we have ramped up both -- in Sperry, in Landmark and in both cementing and fracturing.

Geoff Kieburtz - Citigroup

Okay. And on the CapEx, is there any segment of your CapEx that you think would be reduced in 2007 versus 2006?

Andy Lane

Yeah, our US production enhancement spending is down in 2007 compared to 2006 as we've said before. Both -- and that's not news, we’ve said that before and that remains our plans, yeah.

Geoff Kieburtz - Citigroup

Any other segment?

Chris Gaut

No.

Dave Lesar

I don't think so Geoff.

Geoff Kieburtz - Citigroup

Okay, thank you.

Operator

Next question is from John Rogers of D. A. Davidson. Your question please.

John Rogers - D. A. Davidson

Hi, good morning. Bill, I am curious on the margins for the energy and chemicals business. They were substantially higher than they have been for some time, you noted one close out charge there, were there any other unusual gains in the quarter or was it just timing of projects?

Bill Utt

The one we point out would be the -- would be in GNI where we had a contract closed at DML, which gave us a base in the completion of a submarine project that gave us a bump in the fourth quarter, and also the partial settlement on containers, which was also contributing to the strong margins we had in the fourth quarter, beyond --

John Rogers - D. A. Davidson

And some of the containers Bill, you mean related to Iraq one of the --?

Bill Utt

Right

John Rogers - D. A. Davidson

One of the issues that has been raised by the auditors that is now in the process are being resolved?

Bill Utt

That's correct, this was part of the DCA audits that we periodically go through and we are successfully working through the container issue as I mentioned we will have the full issue we believe resolved during the first half of '07, and we continue to make good progress on all fronts with the DCA and those discussions. We had a couple of FEED projects that finished up at the end of the year, which you had a little bit impact but not to the degree we saw with the DML results and the partial settlement on containers.

John Rogers - D. A. Davidson

Okay, then the FEED projects -- but on the energy and chemical side I was referring to just because.

Bill Utt

Well, on the energy and chemical side we had some restructurings within the Bonny Island project Trains 4 and 5 and then the 26 project. While they did have a positive impact on operating impact did get backed out in minority interest, so that the net effect here on the bottom line at KBR was zero.

John Rogers - D. A. Davidson

Okay. And then on the charges that you mentioned potentially restructuring in 2007 on the management side? Can you give us a sense of magnitude there?

Bill Utt

Not right now, we take a fairly thorough and thoughtful view with discreet aspects of our business and as we talked about on the road show. One of the activities we undertook from the -- in the third quarter and then in the fourth quarter was review the human resource service and delivery side for KBR. And yeah, we took a couple of months and we thoughtfully looked at what we were doing and we were able to reduce our annual spend on HR cost from $30 million a year to 20. We certainly didn’t have any targets going into that exercise with respect to the savings we could achieve. But we are able to, you know very positively realign the cost and support activities of HR within KBR. We expect, as we move to other discrete sectors in '07 that we could see continued reductions in our overheads within the company.

John Rogers - D. A. Davidson

Thank you.

Operator

The next question is from Daniel Henriques of Goldman Sachs. Your question please.

Daniel Henriques - Goldman Sachs

Hi good morning. My question is to go back on the Eastern Hemisphere margins, how should we think about it in terms of timing you mentioned some startup costs and mobilization cost. Is that like a gradual improvement over the course of the years that at some point there is a step up, how should we think about that?

Dave Lesar

Yeah Daniel, I wouldn't think of a big step up, because it's a very large business Northern Hemisphere and we are talking about isolated projects that we want. But they are the big projects, the Statoil win for Cementing and Baroid, the Middle East wins and the Asia wins, we talked about previously. So, there won't be a big step over gradual improvement as those projects get mobilized and ramped up to full profitability.

Andy Lane

And the mix effect which is also important, just had some volatility from period-to-period.

Daniel Henriques - Goldman Sachs

And on the Khurais project, how much of Khurais is already in your numbers?

Andy Lane

Well, all of the projects that's occurred, but it's a as we said to let than half the full activity. So as you know when we announce that we expected, in excess of 20 rigs working at full -- at full activity levels and so we are less than half of that right now at the end of the year. And its just part of the process that Saudi Aramco is going through to ramp up that project. But they are going fully forward with it. And so we are active on in an 8 to 10 rig range.

Daniel Henriques - Goldman Sachs

Okay and Chris this is for you in terms of capital structure you obviously still have a very un-levered balance sheet. What do you think is an ideal capital structure and how do you think you get there?

Chris Gaut

Well, an ideal capital structure would not be net -- zero net debt that is true. Now, we do have a fair amount of debt on the balance sheet excluding the cash were 27%, 28% debt to total capital, which we would think be approaching of an optimal capital structure. So, really the issue is we have a lot of cash that we have been generating in the business. So, what do we do with that and we have identified that we want to grow internally through expanding our capital expenditures and we've been adding capital to our operations about as quickly as we think our operations can absorb it. We will spend the cash on acquisitions and we expect that to be at least $1 billion a year and we're off on that program and then most of the remainder we see going towards returning to the shareholders principally through a share repurchase program that started at a billion and then was augmented with another 2 billion. So, that’s how we see we can move towards more of an optimal capital structure but when we think about our priorities, our priorities are first making sure we invest the cash wisely and getting the best return rather than just doing something in order to get to that optimal capital structure as quickly as possible.

Daniel Henriques - Goldman Sachs

It just looks that even if spend $1 billion budget I think you establish for annually for acquisitions plus your CapEx it's still has -- you still have a lot left over. Should we think about buyback as gradual thing overtime or do you think that there's a space for doing something like faster to move to from more efficient capital structure?

Dave Lesar

That's part of our value evaluation relative to acquisition opportunities. That would be a factor but I think having the cash balance we have gives the company the flexibility to look at a number of different things and also be well positioned whatever the future course of oil and gas prices is.

Daniel Henriques - Goldman Sachs

Thank you.

Operator

The next question is from Robin Schumacher of Bear Stearns, your question please.

Robin Schumacher - Bear Stearns

Yes, thank you. I wondered if have a sense as you do for your US customers about their plans for '07, if you have any similar feedback from your Canadian customers especially what may transpire their after this spring breakup if you expect that market to rebound or if it will remain weak, or do you know?

Chris Gaut

Robin, we know what they, the once that are released publicly and we know through our contacts with them. They are pretty much in the same position -- many and we are. Looking at the market they are going to have an active first quarter plan not as big a rig count as it was in the first quarter of 2006 but very more active than in the fourth quarter of last year and then of course the breakup and they are going to evaluate the pricing at that point. We see a good market in Canada. We just don’t know how strong it will be. And we’re going to follow their announcements very closely.

Robin Schumacher - Bear Stearns

Okay. Just one clarification on this split-off potential. You've indicated here in your press release, you spent 1.3 billion so far on share repurchases out of the 3 billion authorization, now was the split-off, if you reduce shares that way, does anyway that count against this repurchase authorization, or is that totally separate?

Chris Gaut

No, Robin, it would be -- the additional authorization would be additive to the shares that we would bring in if we proceeded with the split-off. So I think what you do is take the estimate of what we would bring in by the split-off plus the billion seven and then we would look at on going back to the board for more, if we continue to see ourselves undervalued and the cash flow is strong as we anticipate.

Dave Lesar

Robin, we would reiterate that decision on the form of the separation has not been made.

Robin Schumacher - Bear Stearns

Right. Okay, thank you.

Operator

Your next question is from Kurt Hallead of RBC. Your question please.

Kurt Hallead - RBC

Hi, good morning. The question related to the -- can you give us the revenue number that was associated with the asset sale that were made in the quarter, so if you had impact of $48 million on operating income, can you just give us some idea that revenue and operating income for that business that was sold?

Dave Lesar

Yes, Kurt, as we -- I think we've covered it in a minute ago, there was 40 million to 50 million annually.

Kurt Hallead - RBC

That's a revenue number, right?

Dave Lesar

That's a revenue number for the two best close, one of the two best in process, two transactions, one of that was in UK and the rest was in Nigeria.

Kurt Hallead - RBC

What was the operating income associated with them?

Dave Lesar

Well, we do not want to get too granular here relative to people who bought those businesses and so forth and so we don't allocate out all the cost to those businesses. So no one give you a gross margin business, gross margin estimate in new business. But I think with that range of revenue, Kurt, you can make some best estimates, I wouldn't say that that business is materially different in its margin potential and others.

Kurt Hallead - RBC

Okay. Alright, thank you.

Operator

Your next question is from Pierre Conner of Capital One. Your question please.

Pierre Conner - Capital One

I would say you have covered all my questions. Thanks guys.

Operator

Thank you. Our next question comes from Barry Bannister of Stifel Nicolaus. Your question please.

Robert Connors - Stifel Nicolaus

Good morning. This is actually Robert Connors of Stifel Nicolaus. Barry had to run and jump on the Caterpillar Call. But my question was for Bill Utt and regarding KBR. And can you provide more color on how a shift away from fixed price contracting may have affected the E&C segment only bookings growth in the quarter, and also going forward?

Bill Utt

The comments that Cedric and I made regarding the E&C bookings, go back on a backlog basis to what risks that we are taking and how that, you know, what goes through our books and what doesn't. We have seen an evolution from a model that existed at KBR regarding full lump-sum turnkey contracts, to an increased level of granularity regarding the various risks of performing home office services, construction, and procurement materials. And we see with our customers were developing a much richer and more robust discussion about how we are pricing our products and services, particularly given the escalations that we've seen in the last several months towards our supply chain. And so we are finding that with these volatilities that are now exist in our supply chain that our customers are increasingly looking to take those on their side of the ledger and not have KBR provided contingency or a volatility risk premium in our service offering. Now that would have the effect of moving us down to where we are in some cases looking only at home office services that we would underwrite on a fixed price basis for the same project that two years ago we might have taken under a full lump sum turnkey. And as we look at that, you will see as we move forward that the contributions to backlog from these projects may only be 25% or 30% of what they were because of the greater degree of pass through of these procured items et cetera colluded to in his call.

Robert Connors - Stifel Nicolaus

Okay. Thank you. And on in another note, is there any sort of change in your backlog burn rate going forward at a year ago from various Halliburton and KBR filings, which say the burn rate going forward like G&I was about 76% and in E&C was about 51%, are you guys still within range?

Chris Gaut

I don’t have it by percent, but I can tell you I don’t think it works that neatly in terms of year-over-year rate that really is project driven. The biggest issue for the quarter end for the year was the decrease in or the work-off in our LOGCAP-3 contract and that was $1.1 billion net reduction for the quarter. Also in the unfunded category, that also was a $1.1 billion decrease, all in the GNI area from $3.1 billion to $2 billion.

Robert Connors - Stifel Nicolaus

But that has a shorter time horizon?

Dave Lesar

It does. You have to remember on the road show, we've talked about the transition task order that we received from the government, as they were competing LOGCAP, for they took our performance of task order 139 out through at the end of August of 2007. And we clearly have been working that backlog off and the funding of that project continues, but we haven't seen subsequent awards related to task order 139, because we have gotten it at the time as we discussed an extraordinarily longer commitment of work under task order 139, it's during the third quarter.

Andy Lane

The history there has been that with the government on the LOGCAP contract as we get shorter term backlog.

Robert Connors - Stifel Nicolaus

Somewhat just in time.

Andy Lane

Yeah, so that's goes to support the numbers you have there, right.

Bill Utt

On the E&C side, the reduction on a quarter basis was just under 10% and that represents work off in really of our major gas monetization projects. There is seven or eight to talk about. Only significant increase we put out in the press release was related to the [Sakhalin] project, which we booked in the fourth quarter, as offset to that reduction.

Evelyn Angelle

Now, let's take one more question.

Operator

Thank you. Our final question comes from Mike Urban of Deutsche Bank. Your question please.

Mike Urban - Deutsche Bank

Thanks, good morning. One or two follow-up on the acquisition side, it just a little bit earlier. But you've made one here recently and looks like there is some others teed up. Any particular product line, region, technology that you're looking to fill out? In other words, any themes out there? Or is it more opportunistic?

Andy Lane

Obviously, we're not going to give you the list, the target.

Mike Urban - Deutsche Bank

Sure.

Andy Lane

But, mainly the things that we are looking at are associated with our drilling information evaluation business or other downhole tools, technology and equipment. We're focused on expanding our products and technology, and we're also as we’ve said, from a much broader perspective looking to grow our non-North America business. So, those would be some of the priorities that are built into the deals that we're working on.

Dave Lesar

Yeah Mike. And Ultraline fits well, as you may or may not know we do not have a presence today in our wireline business in Canada. So, we offered a broadening of that portfolio in Canada, business where we know very well, and it’s a good addition everything else we have in Canada. So, also as we said and Chris covered, we're looking for geographic addition where there is a market share position we like, we are in a presence that we don’t have at the level we want. And those are good acquisitions [that end to us] and we know the business, they integrate well. And so, we're definitely looking at those in several markets.

Mike Urban - Deutsche Bank

And it seems like that the deal flow has picked up here a little bit as that function of being further down the road on KBR or have valuations become more attractive, there's a little bit of a turmoil in the market?

Andy Lane

I think evaluations are an important point in discussions between buyers and sellers getting together.

Mike Urban - Deutsche Bank

Okay. That's all from me. Thanks.

Evelyn Angelle

Alright, great. I want to thank everyone for participating and their insightful comments and questions. Both KBR and ESG management will be available the rest of the day for those of you who didn't get all your questions answered. So, feel free to call us. That concludes our call. Thank you, all.

Operator

Ladies and gentlemen, Thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Halliburton Company Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts