'Uncontrollable Outside Events' Expected To Lower Kerr-McGee 3Q

Even though overall operations are performing well, with oil and gas production on track to be up 5% over 2000 and development projects on schedule, producer Kerr-McGee Corp. said Friday that uncontrollable outside events -- mostly within its chemicals division -- will push down projected third quarter earnings, which will be released in one month.

Richard Buterbaugh, vice president of investor relations for the Oklahoma City-based producer, said the company's chemical unit, ranked second in the United States, has been hit hardest by a global economic slowdown, which had begun before the terrorist attacks Sept. 11, but which are accelerating a sharp decline in sales. He said the attacks on the United States have led to more uncertainty and a further slowing of U.S. and world economies.

"The outlook for our chemicals business continues to deteriorate," he said. "The world events of last week have put more pressure on U.S. and world economies...we are already seeing evidence of this." He said the company's titanium dioxide sales volumes had been especially hard hit, with "September volumes further reduced from already unseasonably low levels." Third quarter prices for the chemical, used as a pigment in paint, are expected to be about 4% below second quarter levels. Its titanium dioxide plants are operating at about 75% of their capacity, and a further reduction is "likely" in the fourth quarter.

Buterbaugh warned analysts in a conference call that the third quarter results will miss expectations because the September rebound it had forecast never materialized. With third quarter results not expected to be released until Oct. 24, he said the company expects to take a one-time after-tax charge of $80-$85 million against its third quarter earnings because of crude oil pipeline problems and environmental costs.

As it waits for the chemicals business to rebound, Buterbaugh said the company has accelerated required maintenance at "various" facilities, but added that the maintenance work, mostly focused on German operations, have cost $5 million -- costs that were not anticipated until a later date. "The combined costs could reduce operating margins by 50% from second quarter levels," he said of its European operations.

Kerr-McGee closed on its acquisition of HS Resources on Aug. 1, which included the assumption of $450 million of HS Resources' debt, he said (see NGI, May 21). A final payment of $650 million was made to HS Resources' shareholders at the end of August, and overall, Kerr-McGee's debt increased by $1.3 billion. Before the end of the month, the company plans to secure $1.2 billion in long-term financing for the HS Resources deal, he said.

When the stock market reopened following the moratorium, Kerr-McGee took a pounding, as a leading loser among the oil and gas stocks, falling 5.5% on the first day. It fell on subsequent days, but declines were more in line with the rest of the producers.

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