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Exec Says Kerr-McGee's Sales Set Stage for Deepwater, Overseas Growth

As it readies itself to become a pure-play exploration and production (E&P) company, Kerr-McGee Corp. has begun due diligence to possibly sell its chemicals unit, while at the same time it is preparing an initial public offering that should be ready by mid-June, according to Dave Hager, senior vice president of E&P.

Hager told participants at the UBS Global Oil & Gas Conference in Austin, TX that besides selling off the chemicals unit, the company also will prepare data rooms to ready the sale of 10-15% of its oil and gas reserves, or about 20-25% of production (see NGI, May 2).

"We're excited about our divestiture program," said Hager, which will "reduce our capital expenditures and dial back the risk profile." Kerr-McGee, long a major player in the Gulf of Mexico (GOM) deepwater, plans to become even more active there, while at the same time increasing some U.S. onshore production and pursuing new international opportunities.

"After all of the transactions, we will be a pure play E&P with very strong free cash flow, longer reserve life and identified production growth," he said. About 50% of Kerr-McGee's reserves are in the U.S. onshore, where there are a large number of low risk, repeatable plays. They are expected to continue to "provide a strong backbone to our cash flow generation."

The biggest property sales will be in the GOM shallow waters, where the company has had a presence since 1947. While E&P remains active on the shelf through this year, "we're particularly more active in deepwater." The shelf properties are "rapidly maturing, difficult to grow, and they require a lot of capital, so it's appropriate to pursue monetization of the Gulf of Mexico shelf assets," Hager said.

Future success is focused on the GOM deepwater, where production currently is 85,000 boe/d. The Constitution field, which began development early last year, is operated 100% by Kerr-McGee. "It is on time, on budget, and the facility construction is going extremely well," said Hager. "We're very confident...of first production by mid-2006." Constitution, located in the Green Canyon area in 5,000 feet of water, is estimated to have proven and probable reserves of about 110 MMboe (see NGI, Jan. 19, 2004).

Once the "deleveling activities" are completed, Hager said, Kerr-McGee still will look for new properties to buy, "focused on transactions to add to existing core areas. We'll be focused on transactions that have an impact on our per-share basis."

Also Wednesday, in an interim 2Q2005 report, the company reaffirmed its 2005 production targets of 346,500-374,300 boe/d. It expects oil production of between 164,000-176,000 bbl/d, while natural gas output is expected to range between 1.095-1.190 Bcf/d. Gas marketing revenues are expected to be $140-150 million.

Also last week financier Carl Icahn and his investor coalition dropped their push to gain two seats on Kerr-McGee's board of directors, according to a regulatory filing with the Securities and Exchange Commission.

Icahn's group now controls about 5.95% of the Oklahoma City-based producers shares, and has been an advocate of major changes within the company. However, the filing indicated that the Icahn coalition would abandon a bid for board membership after Kerr-McGee completed a successful tender offer for 46.73 million shares at $85/share. The tender offer to repurchase the shares was about 16% higher than the current share price.

"Kerr-McGee is in a delicate position right now," said Motley Fool in a research note. "With Icahn breathing down its neck, management may be tempted to reach a little further than necessary to 'prove' its loyalty to shareholder value. That said, the company has a strong history, and with solid new prospects in places like Alaska, Brazil, China's Bohai Bay, and the Rockies...management may in fact be cleaning the company up to position it for better growth as a pure exploration and production operator."

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