(FORTUNE Magazine) – From behind the obsidian mirrors of his wraparound sunglasses, Ray Rodon surveys the vast desert landscape of southern Iraq's Rumailah oilfield. Nearby, a burning well--torched by retreating Iraqi troops--emits waves of searing heat as American soldiers hunt for booby traps amid the field's rusting pipes and valves. In his helmet and flak jacket, Rodon looks a lot like them. But he's actually a civilian who works for Halliburton, the oilfield services and construction company. Just four days into the war against Saddam Hussein, Rodon has come to Rumailah to assess Iraq's battered oil infrastructure.

A project manager with Halliburton's engineering and construction division, Kellogg Brown & Root (KBR), Rodon has spent months preparing for the daunting task of repairing Iraq's oil industry. Working first at headquarters in Houston and then out of a hotel room in Kuwait City, he has studied the intricacies of the Iraqi national oil company, even reviewing the firm's organizational charts so that Halliburton and the Army can ascertain which Iraqis are reliable technocrats and which are Saddam loyalists.

Rodon represents the vanguard of what is expected to be a growing army of Halliburton employees in Iraq, where the U.S. is preparing to embark on the grandest exercise in nation building since its occupation of Japan after World War II. At the center of that undertaking will be U.S. companies, with Halliburton probably chief among them. Indeed, Texans wearing KBR baseball caps are arriving by the planeload at Kuwait's airport. Some will support the military directly--KBR employees already handle the meal service, laundry, and garbage pickup for several military camps in Kuwait and will do the same as U.S. units establish bases in Iraq. But after the war most hope to be involved in the multibillion-dollar task of rebuilding Iraq: its roads, electrical grid, water supply, ports, airports, and, most important, oil facilities.

The liberation of Iraq couldn't come at a better time for Halliburton, whose business has been dogged by a host of troubles--from a slowdown in domestic oil production to nightmare asbestos litigation. Last year revenues declined 6%, to $12.6 billion, and the company reported a net loss of $984 million. But CEO Dave Lesar, who took over when his predecessor Dick Cheney went to Washington, is starting to put Halliburton's problems behind it. He has cut costs, sold unproductive assets, curtailed money-losing overseas operations, and devised a bold plan to settle asbestos-related lawsuits. With natural-gas production poised to rebound and government contracts--including work in Iraq--on the rise, Halliburton's moment has arrived.

Military contracts may be glamorous, but Halliburton makes most of its money in the arcane world of oilfield services. It provides customers everything they need to get oil and natural gas out of the ground, from drill bits to software to underwater pipe. The company's roots are here--it was founded by Erle Halliburton in Oklahoma in 1919 as the New Method Oil Well Cementing Co.--and its energy service group still accounts for about 60% of revenues and 85% of profits.

You'd think that booming oil and natural-gas prices would be a bonanza for Halliburton and other oil services firms, but you'd be wrong. Spending in the industry is closely tied to the number of drilling rigs in operation, and there are actually fewer up and running today. The reason: "Customers don't believe these [oil] prices are sustainable, so there is no capital spending to open new rigs," says Lesar. Many of Halliburton's customers are also waiting to see how the war turns out before stepping up production.

There are signs, however, that natural-gas producers in North America are starting to respond to surging demand with increased drilling. By the end of February there were 71 more U.S. gas rigs in operation than last year, a 10% jump. Each new rig that comes online rings Halliburton's cash register back in Houston.

The other part of Halliburton's business is engineering and construction, both civilian and military. KBR designs and builds stuff all around the world--big stuff, such as offshore drilling platforms, chemical factories, refineries, and power plants. It also undertakes major civil engineering projects, such as creating roads and water systems. And it provides the government with logistical support. To do that, you need global reach. Halliburton has it. "We operate in 120 countries, with 83,000 people worldwide," says Lesar. "There are very few places the customer can go that we don't already have a footprint." But lately KBR's performance has been hamstrung by cost overruns on several large international projects. They are soup-to-nuts construction jobs, called EPIC projects. The acronym stands for engineering, procurement, installation, and construction, but EPIC is also an apt description of their scope, scale, billion-dollar pricetags--and, unfortunately for Halliburton, the losses they produced.

In the past the company had agreed to take on EPIC assignments for a lump-sum payment, a policy that proved disastrous in some overseas locations, where costs ran out of control and profits evaporated. For instance, last year Halliburton lost $119 million on a joint venture to develop 55 deepwater oil wells off the coast of Brazil. It lost another $33 million on an offshore oil platform project in the Philippines. As a result of those and other missteps, KBR's operating profit margins were only 2.1% last year, short of the company's publicly stated goal of 3%.

Lesar, who worked as an accountant at Arthur Andersen before joining Halliburton in 1993, has put a stop to that money-losing practice. He declared that Halliburton would no longer accept lump-sum payments for international EPIC projects (although it is obligated to complete the ones it has begun). While some worried that Halliburton would lose market share as a result of Lesar's decision, it seems to have started a trend. Several rivals, including McDermott and Stolt Offshore, have announced similar changes in their business practices.

Meanwhile, KBR has been enjoying the spoils of war--make that wars. Based on its performance providing U.S. troops in the Balkans with housing, food, water, mail, laundry, and heavy equipment (a job for which Halliburton has been paid $3 billion so far), the company won an unprecedented ten-year deal in December 2001 to supply similar logistical support to U.S. military operations around the world.

The Pentagon's Logistics Civil Augmentation Program pays Halliburton through what's called a cost-plus arrangement, meaning that KBR is guaranteed to recover its expenses, plus receive a set profit, provided the contract terms are met. To date, KBR has received $830 million from the program. The company is also helping to run Incirlik Air Base and other U.S. military facilities in Turkey (where an initial contract, set to expire in September, was worth $118 million) and received $65 million to support bases in Afghanistan and Uzbekistan. What's more, it earned $33 million building cells for suspected al Qaeda members at Guantanamo Bay, Cuba. Overall, Halliburton's backlog of government revenue expanded 40% in the last three months of 2002 alone.

The surge in government jobs has led to accusations that Halliburton is the beneficiary of political favoritism. After all, until August 2000, Dick Cheney was the company's CEO. He netted $30 million cashing in his Halliburton stock and options before assuming office, and the company still pays him up to $1 million a year in deferred compensation. Lesar, not surprisingly, dismisses the criticism. "Contrary to what most people think, the fact that my predecessor is the Vice President has absolutely nothing to do with my ability to get work from the government," he says. Halliburton points out that it would be a violation of federal regulations for Cheney to have any role in the procurement process, and notes that the company has a long history as a government contractor, dating back to its role building ships for the Navy in World War II.

What's clear is that, as CEO, Cheney brought Halliburton a lot of headaches. The crowning achievement of his tenure was the company's $7.7 billion acquisition of rival Dresser Industries in 1998. The deal wound up saddling Halliburton with massive asbestos liability from a Dresser subsidiary that had once used the carcinogen to make bricks and pipe coatings. With the merger, Halliburton unwittingly assumed Dresser's liability. When Halliburton revealed in December 2001 that it had lost several asbestos trials, its stock price plummeted 43% in a single day. Investors wondered whether the company would survive. "That day will not go down as one of my best," Lesar quips.

He can afford to joke about it now because Halliburton believes that it has found an innovative way to put the asbestos litigation behind it. Last December, a year after its stock took that death-defying dive, Halliburton reached an unusual settlement with plaintiffs lawyers. The agreement calls for a "contained bankruptcy" of KBR that would keep the bulk of Halliburton out of bankruptcy. KBR will be restructured--parts of it may be sold--and the proceeds will go into a trust that will pay off the 320,000 pending asbestos claims. Although the settlement is expected to cost Halliburton up to $4 billion, the company's stock has bounced back to $22 a share, roughly where it was before it crashed.

The other major legacy of Cheney's tenure is an SEC investigation into accounting irregularities. The agency wants to know whether the company improperly booked revenues from customers that were disputing construction cost overruns. Halliburton used to record revenue only when payment was received, but in 1998 it switched accounting methods. It didn't disclose the change until a year later. The company says the change wasn't reported earlier because it wasn't material, representing just $89 million in revenue during a year in which Halliburton brought in $17 billion. But $55 million of the disputed amount dropped directly to the bottom line, representing 7% of the company's after-tax profits. Halliburton says that the accounting method it uses is standard and that the change was approved by its auditor at the time, Arthur Andersen, and by its new auditor, KPMG, as well.

Assuming the asbestos settlement holds up and the SEC clears the company of wrongdoing, Halliburton will get a major lift from rebuilding Iraq. It's unclear how much of that job--estimated at $100 billion--will go to Halliburton, but the company will certainly get a chunk of it. So far the U.S. has put out to bid about $1.5 billion worth of contracts for reconstruction efforts in Iraq, and President Bush has asked Congress for $2.5 billion for humanitarian assistance and rebuilding this year, plus $1.3 billion for oilfield repair. Halliburton already has received a contract for an undisclosed sum to fight well fires as well as to evaluate and repair oilfields. That's what Rodon was doing in Rumailah. As of presstime, Halliburton was reportedly out of the running for a $600 million reconstruction contract, but it may still be brought on as a subcontractor. And there will be other contracts up for grabs.

Halliburton's work in Iraq will represent a kind of homecoming. One of KBR's predecessor companies did engineering work on the Rumailah fields in the 1960s. KBR also helped to build Iraq's massive Mina al-Bakr oil terminal in the Persian Gulf and to repair it after the Iran-Iraq war. (That terminal was seized by Navy SEALs in a daring nighttime raid at the start of Operation Iraqi Freedom.)

Once the shooting stops and the rebuilding is done, Halliburton will still have a role in a post-Saddam Iraq. To tap more of its vast oil reserves, Iraq is likely to turn to the multinational oil companies that are Halliburton's main customers. As a result, Halliburton will be making money there long after the U.S. Army departs.

FEEDBACK jkahn@fortunemail.com