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W&T Buys Kerr-McGee Shelf Properties for $1.34B

Kerr-McGee Corp. last week agreed to sell the rest of its interests on the Outer Continental Shelf of the Gulf of Mexico to W&T Offshore Inc. for $1.34 billion in cash. The transaction is the largest in W&T's history, and it makes the Houston-based explorer one of the top acreage holders in the Gulf with 2.3 million gross acres.

W&T estimated there were 363 Bcfe of net proved reserves in the Kerr-McGee assets as of Oct. 1, 2005, and of that, 74% are natural gas. Pre-Hurricanes Katrina and Rita, the properties were producing 230 MMcfe/d; currently, they are producing 150 MMcfe/d. The assets represented about 10% of Kerr-McGee's daily production.

"As we told the market when we went public last year, one of our objectives was to put the company in a position to do larger transactions, and today we have demonstrated that we can do a large transaction," said W&T CEO Tracy W. Krohn. "The spread of properties across the Gulf of Mexico and upside potential fit in nicely with our core expertise," he added. "Our team has identified more than 95 exploration prospects related to these properties and our review is still in the early stages of evaluation."

The properties include interests in about 100 fields on 249 offshore blocks (including 83 undeveloped blocks) spreading across the Western, Central and Eastern Gulf, primarily in water depths of less than 1,000 feet. W&T plans to operate 36 of the producing fields with working interests, which represents 66% of the net production and 60% of the net reserves. In addition to purchasing the Gulf assets, W&T will assume responsibility for abandonment liabilities, which Kerr-McGee had recorded at about $135 million at year-end 2005.

"The sale of the Shelf assets is the final step in our announced strategy to divest of lower-growth, shorter-lived properties and focus on higher-impact opportunities," said Kerr-McGee Chief Operating Officer Dave Hager. "Our remaining oil and natural gas portfolio is weighted toward longer-life, less capital-intensive properties where we have a growing inventory of low-risk development projects."

Kerr-McGee began revamping the company last year by spinning off its chemicals business and paring down assets to concentrate on domestic onshore exploration and production (see NGI, Nov. 28, 2005; April 18, 2005). Hager said when the W&T transaction is completed, Kerr-McGee's property portfolio "will be well positioned to deliver consistent, repeatable per-share growth from our assets, which include two large natural gas resource plays in the Rockies, attractive infrastructure in the deepwater Gulf and a growing inventory of high-potential exploratory prospects."

The transaction, with an effective date of Oct. 1, 2005, is expected to close by the end of 2Q2006. Kerr-McGee expects the net after-tax cash proceeds of $925 million, subject to certain adjustments, to be added to its existing excess cash position, from which funds will be used for general corporate purposes, including partially funding the recently announced stock repurchase program and reducing debt as it matures.

W&T expects to finance the transaction with bank debt and cash on hand, and it has received a financing commitment from The Toronto Dominion Bank for up to a $1.3 billion senior secured credit facility.

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