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Moody's, S&P to Review Kerr-McGee Following Icahn Announcements

The two major credit ratings agencies Friday placed the debt ratings of Kerr-McGee Corp., under review for possible downgrade following the announcement that financier Carl Icahn has filed to purchase up to $1 billion of the company's stock, is jockeying for a seat on the board of directors and wants the company to make some major strategic changes.

Moody's put its "Baa3 Senior Unsecured" rating on Kerr-McGee debt under review for possible downgrade to junk bond status. Standard & Poor's (S&P) placed its "BBB" corporate credit rating on the producer on "CreditWatch" with negative implications.

"Moody's believes that aspects of Kerr-McGee's fundamental credit profile are improving," said the analysts. "However, the presence of Mr. Icahn as a significant shareholder introduces material event risk that could lead to a ratings downgrade."

S&P said its listing was based on "the company's weak operating performance and metrics in 2004, uncertainty with respect to the strategic direction of the company, and increasing business and financial risk associated with external pressures that may cause management to pursue actions that are not supportive of credit quality." In addition, S&P said "the company's focus on deepwater exploration and development has led to a somewhat uneven operating track record and relatively high cost structure."

In a Securities and Exchange Commission filing on March 2, Icahn proposed a resolution for the company's annual meeting, scheduled for May 10, that would nominate Icahn and investor Barry Rosenstein of Jana Partners LLC to be elected to the company's board of directors. In addition, Icahn proposed that Kerr-McGee sell its chemicals business, execute a volumetric production payment (VPP) for 250 MMboe and use the proceeds from both of these transactions to purchase shares of the company's stock.

"Execution of the VPP proposed by Mr. Icahn would reduce Kerr-McGee's total proved reserves by over 20% and would reduce its proved developed (PD) reserves by about one-third," said Moody's analysts. "An asset sale of this magnitude with no corresponding reduction in debt would lead to leverage close to $10/PD boe, or more than double the company's current leverage. A VPP, particularly one as large as Mr. Icahn proposed, would be unambiguously negative and would most likely lead to a downgrade to 'Ba1' or below."

In conducting its review during this evolving situation, Moody's plans to focus on (1) Kerr-McGee's response to the VPP proposal, (2) the potential sale of the chemicals business, including the impact on its environmental liabilities, (3) the use of proceeds from either of these including a stock buyback proposal, (4) any other proposals resulting from Icahn's stock ownership, (5) Kerr-McGee's leverage, and (6) expected 2005 operating performance relative to its exploration and production peers.

S&P said its CreditWatch would be resolved "in the near term."

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