(FORTUNE Magazine) – Over the past few months Halliburton has been called a war profiteer, a beneficiary of crony capitalism, and a no-good Beltway Bandit. Its contracts are being eyeballed by congressional Democrats who claim that Halliburton is cleaning up on its work in Iraq, and the possibility that the company overcharged Washington for gasoline has only reinforced suspicions that any company once run by Dick Cheney must have something to hide. And with Halliburton almost certain to win a slice of the $5 billion in fresh Iraq contracts to be awarded by the Pentagon shortly, the political heat is only going to intensify.

It has all the makings of a delicious election-year scandal--Howard Dean has already weighed in--but there's just one problem: Halliburton doesn't stand to make very much money on its Iraq contracts. In fact, despite the allegations of cost overruns and overpriced fuel (you try moving trucks full of flammable liquid hundreds of miles through a war zone), Wall Street analysts like Morgan Stanley's Ole Slorer estimate that KBR--the division of Halliburton that's handling the work in Iraq--lost $63 million worldwide in 2003. "It's an insignificant part of the business," says Slorer. "While the contracts might be worth billions, that doesn't mean Halliburton is earning billions. The margins are very, very skinny."

Indeed, in the third quarter of 2003, Iraq-related work generated $900 million in revenues but only about $21 million in after-tax profits for KBR. That adds up to a not very scandalous profit margin of 2.3%. On the other hand, in 2004 the Houston-based company's energy services business should earn over $1 billion on revenues of $7.6 billion. That equals a 13% profit margin, and that's why Halliburton's stock tracks the energy sector, not the government services or defense groups. Winning all that government work may have generated headlines, but if anything, says Slorer, the ensuing controversy has depressed Halliburton's shares.

So why is Halliburton in this business at all? Plenty of people are asking that question. On Wall Street there's increasing speculation that Halliburton will spin off KBR later this year. "If KBR were managed as a standalone entity, it could achieve better growth," says Slorer. "It's too small a division to get the kind of management focus or capital it needs."

Halliburton CEO David Lesar is also evaluating how KBR fits into his long-term plan for the company. Although Lesar has his hands full dealing with criticism over the Iraq contracts and a pending plan to settle asbestos-liability claims, he plans to focus on the fate of KBR, as well as Halliburton's overall growth prospects, later this year. Once the asbestos deal is concluded, says Lesar, "I'll take a look at the total business portfolio, and we'll let Wall Street help us make that decision." Lesar admits the PR wars are tiring, adding, "There are days when I get out of bed and I know there are going to be stories out there." But a decision about KBR "can't be made in the heat of battle; it's something I need to reflect on."

Meanwhile, Wall Street is betting on a spinoff, especially if there's more controversy over those new contracts. "Halliburton has already completely separated oil services operations from KBR," says analyst Robin Shoemaker of Bear Stearns. "Within a year after the asbestos settlement is completed, I would expect to see two companies emerge."

--Nelson D. Schwartz