Fitch has downgraded the ratings on some of Kerr-McGee Corp’s debt, citing a weaker-than-expected 2002 production forecast, a lack of hedged production and a poor titanium dioxide market.

In light of the recent reductions in forecasted 2002 production, Fitch does not believe that Kerr-McGee’s credit profile currently supports a ‘BBB+’ rating. The ratings agency said it was “less confident in Kerr-McGee’s ability to meaningfully reduce debt in the intermediate term through free cash flow,” which it believes will be lower than originally anticipated due to its reduced production growth profile.

Fitch downgraded Kerr-McGee senior unsecured debt to ‘BBB’ from ‘BBB+’, its DECS (debt exchangeable for common stock of Devon Corp.) to ‘BBB’ from ‘BBB+’ and its convertible subordinated notes to ‘BBB-‘ from ‘BBB’. The ‘F2’ rating for Kerr-McGee’s commercial paper has been affirmed and the Rating Outlook is Stable.

In its ratings review, Fitch noted the decommissioning of Kerr-McGee’s Hutton Field, and delays in the Skene, Nansen, and Boomvang fields. During the third quarter of 2001, the Hutton Field was decommissioned due to the amount of corrosion present in the pipeline. That was followed by delays in the commencement of the Nansen and Boomvang fields in the deepwater Gulf of Mexico due to hurricanes in the Gulf this past fall. Most recently, production from Skene in the North Sea was delayed six to nine months due to technical issues with the tow out and subsea bundle. Finally, 10%-15% of oil production is at risk due to possible divestitures in the next 12 months. In total, Kerr-McGee now expects daily production in 2002 to reach 350,000 barrels of oil equivalent.

“Another item of concern is the fact that Kerr-McGee does not hedge a significant amount of production, which could potentially weaken revenue and EBITDA further in 2002,” Fitch said. Also, Kerr-McGee’s chemical operations are having a weaker year than previously expected. The economic slowdown in recent quarters has had a negative impact on titanium dioxide revenues, cost structures and margins. Fitch does not expect its chemical operations to improve materially in 2002. The company is the world’s third-largest producer and marketer of titanium dioxide.

Kerr-McGee’s recent performance was solid due to historically strong commodity prices, Fitch said. But weaker chemical operations partially offset the results. Over the last 12 months, EBITDAX was $2.1 billion, interest coverage was 11.6 times (x) and debt/EBITDA was 2.0x. Kerr-McGee’s realized price of oil in 2001 should be close to $23 per barrel and natural gas prices will likely be near $3.75 per Mcf, both of which are well above the historical average. The ratings agency said it expects Kerr-McGee to divest a modest amount of assets in the near to intermediate term and use the proceeds of such sales to reduce debt.

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