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Kerr-McGee Sells North Sea Assets for $3.5B

In an effort to reduce debt that it incurred to buy back $4 billion in stock earlier this year to fend off a challenge from corporate raider Carl Icahn, Kerr-McGee Corp. sold all of its North Sea assets last week, including 231 million boe of proved reserves, for US$3.5 billion in cash, the assumption of $182 million in abandonment obligations and another $175 million in derivative liabilities.

The company said the action would streamline its operations and reap benefits from the advantageous tax regime in the United Kingdom. Among the changes planned following the sale is an accelerations of drilling activity in the Rocky Mountain region and more exploration in the deepwater Gulf of Mexico.

London-based Centrica bought interests in the four nonoperated fields (Andrew, Brae, Buckland and Skene) and related exploratory acreage for US$566 million, and Copenhagen-based A.P. Moller subsidiary Maersk Olie og Gas AS purchased the remaining assets for US$2.95 billion. The North Sea assets produced a daily average of 77,700 boe during the second quarter of 2005, representing 21% of Kerr-McGee's total production during that period.

"These transactions enhance our strategic plan to high grade our oil and gas portfolio to focus on assets that have the greatest growth opportunities," said Kerr-McGee CEO Luke R. Corbett. "Market valuations and the tax-efficient nature of these transactions led us to the decision to divest of all of our North Sea operations, maximizing the value of these assets to our stockholders." Originally Kerr-McGee was only going to sell some of its North Sea assets.

The divestiture is part of the company's plan to spend less while achieving a higher "per-share production growth rate," Corbett said. The transactions are expected to be completed by early in the fourth quarter. Kerr-McGee expects net after-tax cash proceeds of $3.1 billion.

Icahn, Kerr-McGee's largest shareholder, wanted the company to return $10 billion to shareholders through share repurchases and the still-pending sale of its chemicals unit.

Kerr-McGee is proceeding with separation of its chemical business through a dual track process as a sale or IPO/spin-off. The company's current strategy also includes the divestiture of its Gulf of Mexico shelf properties and selected U.S. onshore properties. Data rooms currently are open to prospective buyers on those assets. The total combined divestitures are expected to represent 25-30% of Kerr-McGee's proved reserves and 30-35 of its projected 2005 average pre-divestment production of 360,000 boe/d. The company expects to complete the chemical separation and the majority of the divestments prior to year end.

"Our remaining oil and gas property portfolio will be weighted toward longer-life, less capital-intensive properties, with a large inventory of repeatable low-risk development projects, while still providing high-potential exploration prospects for future per-share growth," said COO Dave Hager.

Kerr McGee is accelerating development drilling activities by 20% at two large resource plays in the Rockies in the Wattenberg and Greater Natural Buttes areas, where it has identified more than 10,000 projects to unlock more than 400 MMBoe of potential resources. The company plans to complete projects annually that are expected to provide more than 60% of its projected production replacement. Additionally, it expects to drill eight to 12 high-potential new-field wildcats per year, Hager said.

"We also are focusing our exploratory program on high-impact targets in the deepwater Gulf of Mexico and other select proven hydrocarbon basins," he added.

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