KBR sees U.S. military contract margins up

HOUSTON (Reuters) - KBR Inc (KBR.N) expects profit margins on the next round of U.S. military logistics contracts to rise as they are split between different companies, the engineering and services company's chief executive said on Tuesday.

KBR is competing with Fluor Corp (FLR.N) and DynCorp International (DCP.N) for the next Logistics Civil Augmentation Program, or LOGCAP IV, and expects to find out whether it has won one of two contracts for Afghanistan in July.

But Chief Executive William Utt said the previous LOGCAP contract, which includes food, mail, laundry and trucking among other services, was the lowest-margin business KBR had.

"If you start taking the scale away, generally people's margins are going to go up, particularly as we approach more traditional government contracting margins," Utt told the Reuters Global Energy Summit in Houston.

Utt said KBR, spun off from oilfield services company Halliburton Co (HAL.N) two years ago, was confident about winning one of the Afghanistan contracts because of its experience there.

But he also acknowledged the decision could be influenced by a political reaction prompted by the company's ties to the previous U.S. administration of George W. Bush and his vice president, Dick Cheney -- a former Halliburton chairman and CEO.

"In some respects, we find ourselves at a crossroads of anti-big business, anti-war, anti-Bush-Cheney that people associate with KBR," Utt said. "While we can't change who was the former chairman of our former parent who was a former VP of the United States, we can at least bring back the debate to facts."

Addressing one regular criticism, apart from the many legal challenges KBR faces over its operations in Iraq, Utt said bidding for the previous LOGCAP contract had been competitive.

Turning to the Houston-based company's large energy component, Utt said rising oil prices and better economic signs had improved the outlook for engineering and construction work on offshore energy, natural gas production and refineries.

"Fewer people every day are thinking crisis, and we're seeing recovery now," he said. "It's still a tough environment but we are seeing some initial loosening up of the hydrocarbon markets."

Utt noted that even if there was no oil demand growth globally in the next decade and a half, the world would need 40 million barrels per day of new production by 2025, with existing sources running dry.

"As a player in the hydrocarbon market, the depletion makes a treadmill in that you've got to keep reinvesting to find new resources," he said, and that drilling in more remote places played to KBR's strengths. "We go where civilization hasn't been yet."

During the commodity boom that ended last year, KBR booked fewer fixed-price contracts, instead laying off the risk of price fluctuations on clients, but charging less as a result.

Utt pointed to negotiations for a contract with Sonatrach in 2007, when KBR offered Algeria's state energy company the option of just paying KBR a lump sum to do the engineering work for its Skikda liquefied natural gas project while shouldering the risk of higher metal costs itself.

"They said, 'Well, why do I want to pay you $700 million to underwrite that risk?'" Utt said. "We had a very robust discussion and maybe the first time we had shared with out customers what our risk premium was."

In an interview in April, Utt said KBR's backlog was now only about a fifth fixed-price, though he expected that to rise with commodity prices more stable.

Utt also said on Tuesday the time was right for a series of new LNG production projects after three years of few investment decisions.

(Reporting by Braden Reddall; Editing by Phil Berlowitz, Richard Chang)