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Kerr-McGee, Oryx Join Consolidation Ranks

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 &amp 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 negative."

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 &amp 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 sheet."

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 employment opportunities.

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 &amp 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

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