Kerr-McGee, Oryx Join Consolidation Ranks
The stock merger of Kerr-McGee and Oryx Energy creates the No. 4
U.S. independent producer with market capitalization of $4 billion
and is symptomatic of an industry pushed headlong into
consolidation by sharply depressed oil and gas prices.
The deal announced last week creates a company with about one
billion equivalent barrels of proved reserves in an environment
where mergers and widespread layoffs and spending cuts have become
the norm. Both companies have been tightening their belts lately,
especially Oryx. In short, the deal marries cash-strapped Oryx's
exploration portfolio with Kerr-McGee's healthier balance sheet.
"I think both companies get helped out by the deal," said Norman
Rosenberg, an oil analyst with Standard & Poor's Equity Group.
"What the deal offers [Kerr-McGee] is some very good deep-water
acreage, complementary production in the North Sea and the Gulf of
Mexico." He noted Oryx had been troubled by a "very high" debt to
capitalization ratio, stemming in part from a recent expensive dry
hole in Kazakhstan. On the positive side is Oryx's Baldpate
production in the Gulf (50-50 with operator Amerada Hess), which
will be the combined company's largest single producer on a BOE
basis, Rosenberg said.
The merged company will be called Kerr-McGee Corp. and will have
headquarters in Oklahoma City and a worldwide workforce of about
4,400 employees. It will rank in size behind fellow independents
Union Pacific Resources, Burlington Resources, and Unocal. The deal
brings together different cultures, said Rosenberg, noting Oryx's
aggressive exploration outlook and Kerr-McGee's more conservative
approach. "Oryx has always seemed to compete with companies that
are larger than Oryx in the deep-water. They're definitely a more
aggressive type of company."
Each Oryx shareholder will receive 0.369 newly issued shares of
Kerr-McGee common stock for each Oryx common share, resulting in an
equity split of about 55% Kerr-McGee and 45% Oryx. Oryx will issue
about 39 million of its shares for the 106 million outstanding Oryx
shares. The transaction is intended to be accounted for as a
pooling of interests and to be tax-free to Oryx's shareholders.
Each company's board has approved the deal. The combined company's
enterprise value will be about $6 billion,
$100M in Savings Projected
The companies said they expect synergies and cost savings to
exceed $100 million annually with most of the savings realized by
year-end 1999. The transaction is expected to be accretive to
earnings and cash flow in 1999 and thereafter, excluding one-time
transaction costs. The $100 million in savings is expected to break
down into about $43 million in reduced operating costs, $43 million
in reduced corporate overhead, and $14 million in lower exploration
and interest expenses, said Kerr-McGee spokeswoman Marge Ferroli.
She said cuts to overhead would include job cuts as well as
reductions in office space and other items.
Oryx stock traded as high as 30 11/16 in the last 52 weeks. The
share price has trended down since May but jumped 29% to close at
14 13/16 Thursday on news of the deal. Kerr-McGee's stock dropped 4
3/16 - nearly 9% - Thursday to close at 42 _. The stock's 52-week
range is 38 to 73 3/16. "Oryx seemed to be for sale for quite some
time. The only issue was what price were they going to get for
their company," said Rosenberg. "They need the financial stability
that Kerr-McGee can provide." He said the price to Kerr-McGee is
reasonable, particularly following the Thursday drop in its share
price. There is no collar on the share price
Kerr-McGee CEO Luke R. Corbett will be CEO of the merged
company, and Robert L. Keiser, Oryx CEO, will be chairman. In
addition to Keiser, four outside Oryx directors will join the
Kerr-McGee Board, increasing its size to 14. During a conference
call Thursday, Corbett touted the merger's synergies in the UK
North Sea and particularly the Gulf of Mexico.
"First and foremost, we both believe the companies have
complementary asset bases and certainly complementary skill sets.
On a combined basis, we will have an enviable portfolio of
high-impact exploration and development projects. Benefits will
also be generated from the increased size of this combined company.
Our company's financial strength will provide the flexibility to
withstand price volatility and to capitalize upon market growth
opportunities. Obviously because of the overlap of our operations
we will also achieve significant economies of scale, generating
substantial cost savings."
Oklahoma City, OK-based Kerr-McGee has a strong balance sheet,
exploration and exploitation opportunities and development
expertise, and Oryx brings a significant inventory of exploration
prospects and technical expertise, particularly in the deep-water
Gulf, Corbett said.
Kerr-McGee's North American onshore 1997 proved reserves were 67
million BOE. Gulf of Mexico reserves were 91 million BOE. Total
worldwide proved reserves were 367 million BOE, including reserves
recently acquired from Gulf Canada and the equity share of the
reserves of Devon Energy Corp. Kerr-McGee worldwide net gas
production is 277 MMcf/d. Operations are in China, Indonesia,
Thailand, and Yemen besides the United States and the UK North Sea.
The domestic onshore proved reserves of Dallas-based Oryx were
256 million BOE; 168 million BOE in the Gulf of Mexico. Oryx
worldwide total proved reserves were 640 million BOE in 1997. Oryx
worldwide net gas production is 397 MMcf/d. The company is the
second largest independent holder of deep-water Gulf blocks and has
operations focused in Ecuador, Australia, Algeria, and Kazakhstan
besides the United States and the UK North sea.
Deal Viewed Positively for Oryx
Post-merger production will be about 60% oil, making earnings
and cash flow significantly sensitive to low oil prices, noted
Moody's Investors Service. However, cash-flow stability will
benefit from Kerr-McGee's titanium dioxide pigments business, the
world's fifth largest.
While both companies are active in the Gulf and UK North Sea,
Merrill Lynch analyst Allie Lee, who attended the companies'
presentation Thursday, told NGI she didn't see much overlap of
operations. She noted the companies are in separate areas of the
North Sea and that their deep-water Gulf leases aren't right next
to each other. "I think people may be taking that as sort of a
Moody's placed some ratings of Kerr-McGee under review for
possible downgrade and placed some ratings of Oryx under review for
possible upgrade. Standard & Poor's reacted similarly. A J.P.
Morgan analyst upgraded Kerr-McGee to "buy" from "market performer"
and called the deal a "good move" for the company. Moody's cited
Kerr-McGee's increased leverage as the reason for the possible
downgrade. "Kerr-McGee's debt will increase, on a pro-forma basis,
by $1.3 billion to $2.2 billion. On the plus side, however, "The
transaction will also more than double the company's reserve base
to about 1 billion barrels of oil equivalent, creating the fourth
largest U.S. independent oil and gas producer, and will combine
Oryx Energy's stronger record in finding and developing new
reserves at competitive costs with Kerr-McGee's stronger balance
Oryx had a disappointing second quarter with net income of $16
million, down from $23 million in the second quarter of 1997.
Revenues in the second quarter were $213 million, down from $274
million. In July when it released second quarter results, Oryx also
outlined cost-cutting strategies, including the sale of about $35
million of U.S. onshore properties in order to keep debt at about
$1.2 billion. Oryx also said it would cut capital spending by 17%
and production by 7%.
Similar to Other Recent Deals
The combined company's executive line-up also will include: Tom
J. McDaniel, vice chairman and a member of the board of directors;
John C. Linehan, executive vice president and chief financial
officer; and Russell G. Horner, senior vice president, general
counsel and secretary. Jerry W. Box, president and chief operating
officer of Oryx, has elected to retire, and Edward W. Moneypenny,
chief financial officer of Oryx, has chosen to seek other
The transaction is subject to shareholder approvals, expiration
of the Hart-Scott-Rodino waiting period and other customary closing
conditions and regulatory approvals. Completion of the transaction
is anticipated in the first quarter of 1999.
Similar deals of late include Atlantic Richfield's acquisition
of Union Texas Petroleum (See NGI May 11, 1998), Marathon Oil's
buyout of Tarragon Oil & Gas (NGI June 8, 1998), and Devon
Energy's acquisition of Northstar Energy (NGI July 6, 1998), not to
mention the BP-Amoco mega-merger (See Daily GPI, Aug. 12, 1998).
Not surprisingly, Rosenberg predicted more transactions like the
Kerr-McGee-Oryx deal. He noted: Companies need to grow reserves;
independents have enjoyed strong exploration results over the last
couple of years; and share prices are depressed, making companies
less able to fend off takeovers. "Those ingredients tell me we
ought to have more of these deals coming."
Joe Fisher, Houston