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Kerr-McGee CEO Says Changes to Reveal 'True Value'

There was no mention of financier Carl Icahn's recent demands on Kerr-McGee Corp. during the company's 1Q2005 conference call with analysts last week, but his group's calls to shake things up to increase shareholder value was evident.

CEO Luke Corbett, who presided over the meeting with Dave Hager, vice president of exploration and production (E&P), said that these were "obviously exciting times" for the Oklahoma City-based producer, which include the sale or spin off of its chemicals unit, a tender offer to buyback more stock and a move to divest of between 10-15% of its oil and gas reserves, or about 20-25% of production.

The sales and tender offer, said Corbett, are designed to make the company more "transparent," which he said will reveal the "true value" of Kerr-McGee through its share price.

All of the restructuring -- the chemicals unit sale, the tender offer and the divestitures -- ostensibly began last February, when Icahn and Jana Partners LLC announced their intention to acquire up to $1 billion of the company's stock (see NGI, March 7). Within days, Kerr-McGee announced it would sell or spin off the chemicals unit, but that only began a public dispute that ended in April with major concessions by Kerr-McGee (see NGI, April 18).

Corbett said "events have been moving smoothly," with "considerable interest" from buyers in the sale of the chemicals unit, which the company expects to sell or spin off by year's end. The CEO also noted that Kerr-McGee "continues to believe that the oil and gas assets are not fully reflected in the stock price," and "so we are taking steps to improve our E&P profile."

Among other things, the producer is divesting assets that have "shorter life" in the Gulf of Mexico, onshore and in the North Sea -- "those with little working interests and nonoperating assets," Corbett explained.

In answer to questions about the divestitures, Hager called all of the planned asset sales "short-live opportunities," and with their sales, "overall, we'll see a 10% plus improvement in our reserves production ratio." With a lower decline rate, capital and maintenance spending needs will be decreased, Hager said. And sales of the high-decline properties will lead to a "reasonable" 3-to-5% growth rate for the remaining assets.

"We see this as a way to get greater predictability...which is one of the drivers," said Hager.

The production company more than doubled its earnings compared to results a year ago, with net income at $354.5 million ($2.20/share), compared with $152.2 million ($1.41) in 1Q2004. Revenue was up 55% at $1.72 billion from $1.11 billion a year earlier.

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