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Kerr-McGee Reaches Detente in Proxy Fight with Icahn Group

Kerr-McGee Corp.'s proxy battle with financier Carl Icahn and his associates appeared to come to an end last week, but the settlement announced Thursday came at a steep price. The producer said it will buy back $4 billion worth of stock at an all-time high, and announced a plan to sell off "select" U.S. onshore, Gulf of Mexico and North Sea assets, which represent 20-25% of current production and 10-15% of proved reserves.

The announcement sent Kerr-McGee's shares up more than 6% Thursday, but both Standard & Poor's (S&P) and Moody's Investors Service cut the producer's ratings to below investment grade.

Moody's said that Kerr-McGee's proposed share buyback will represent 27-29% of its outstanding shares and will increase its balance sheet debt outstanding about 2.25 times to more than $7.2 billion.

Its higher leverage "exacerbates its weak fundamental operating performance and portfolio durability as shown by inconsistent organic reserves replacement and correspondingly high finding and development costs over the past three years. The downgrade further reflects the time necessary over the medium term for KMG to transform its portfolio from a higher risk predominantly exploration focus to a lower risk balance of exploitation and exploration," said Moody's.

The detente followed a struggle that began in February, when Icahn Partners Master Fund LP and Jana Partners LLC launched a plan to acquire up to $1 billion of Kerr-McGee stock, or up to about 7.5% of the total shares (see NGI, March 7).

Following the announcement, Icahn's group called for changes, insisting Kerr-McGee sell its chemical unit, sell forward energy reserves to lock in higher commodity prices and use cash to buy back $10 billion in stock rather than finance deepwater exploration. The group also announced intentions to nominate two directors to Kerr-McGee's board.

Kerr-McGee announced it would sell its chemical unit, but as demands increased, the producer filed a lawsuit, alleging the group had breached federal antitrust laws and violated the company's bylaws (see NGI, March 14).

Thursday's action followed settlement talks between both sides. Kerr-McGee said Icahn and Jana would "immediately cease proxy solicitation activities...on successful completion of Kerr-McGee's repurchase program," which the producer expects to complete by the middle of May.

"This settlement enables the company to deliver on its commitment to deliver stockholder value and to advance its strategy as a pure-play exploration and production company," said CEO Luke R. Corbett. "Our conversations with Mr. Icahn and Jana have been productive."

Under the agreement, Kerr-McGee authorized a modified "Dutch Auction" tender offer for up to $4 billion of its common stock, at a price not less than $85/share or more than $92/share. The minimum tender price reflects a 15% premium over the closing stock price on the New York Stock Exchange of $73.97 on April 13. The tender offer is expected to begin on Monday (April 18).

Corbett also said that Kerr-McGee had been "actively engaged in an evaluation of our oil and gas assets to high grade the portfolio to longer-life, less capital intensive properties," and said "the current commodity price environment provides an opportunity to divest of shorter-life properties at attractive values."

Corbett said that "with the proceeds from the separation of the chemical business, divestitures of selected oil and gas assets, and cash flow, which has been underpinned by an expanded hedging program for 2005 through 2007, we expect to be able to reduce debt in the range of approximately $3.5 billion to $4.5 billion during the next two years."

The tender offer replaces the initial $1 billion share repurchase program announced by the company on March 8. Under the initial program, the company repurchased $250 million shares in the open market.

The divestitures are expected to include shorter-life properties located on the Gulf of Mexico shelf, in the North Sea and in undisclosed U.S. onshore areas. With the property sale, Kerr-McGee expects its average reserve life will increase from 9.3 years to 10.3 years. Proved developed reserves are expected to continue to account for 65% of total reserves.

Kerr-McGee's expanded hedging program, which includes a combination of costless collars and fixed-price swaps derivative contracts, now covers 75% of the company's remaining 2005 and 2006 expected eligible production and 50% of its 2007 expected eligible production. Eligible production excludes production from Bohai Bay, China, and gas production from the North Sea.

Kerr-McGee's board of directors also will revise the dividend paid on the company's common stock to a level "consistent with that paid by other pure-play exploration and production companies," it said in a statement. Management has proposed that the annual dividend be reset at 20 cents/share, and the board is expected to revise the dividend to the proposed level for 2Q2005.

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