The stock merger of Kerr-McGee and Oryx Energy creates the No. 4U.S. independent producer with market capitalization of $4 billionand is symptomatic of an industry pushed headlong intoconsolidation by sharply depressed oil and gas prices.

The deal announced last week creates a company with about onebillion equivalent barrels of proved reserves in an environmentwhere mergers and widespread layoffs and spending cuts have becomethe norm. Both companies have been tightening their belts lately,especially Oryx. In short, the deal marries cash-strapped Oryx’sexploration portfolio with Kerr-McGee’s healthier balance sheet.

“I think both companies get helped out by the deal,” said NormanRosenberg, an oil analyst with Standard &amp Poor’s Equity Group.”What the deal offers [Kerr-McGee] is some very good deep-wateracreage, complementary production in the North Sea and the Gulf ofMexico.” He noted Oryx had been troubled by a “very high” debt tocapitalization ratio, stemming in part from a recent expensive dryhole in Kazakhstan. On the positive side is Oryx’s Baldpateproduction in the Gulf (50-50 with operator Amerada Hess), whichwill be the combined company’s largest single producer on a BOEbasis, Rosenberg said.

The merged company will be called Kerr-McGee Corp. and will haveheadquarters in Oklahoma City and a worldwide workforce of about4,400 employees. It will rank in size behind fellow independentsUnion Pacific Resources, Burlington Resources, and Unocal. The dealbrings together different cultures, said Rosenberg, noting Oryx’saggressive exploration outlook and Kerr-McGee’s more conservativeapproach. “Oryx has always seemed to compete with companies thatare larger than Oryx in the deep-water. They’re definitely a moreaggressive type of company.”

Each Oryx shareholder will receive 0.369 newly issued shares ofKerr-McGee common stock for each Oryx common share, resulting in anequity split of about 55% Kerr-McGee and 45% Oryx. Oryx will issueabout 39 million of its shares for the 106 million outstanding Oryxshares. The transaction is intended to be accounted for as apooling of interests and to be tax-free to Oryx’s shareholders.Each company’s board has approved the deal. The combined company’senterprise value will be about $6 billion,

$100M in Savings Projected

The companies said they expect synergies and cost savings toexceed $100 million annually with most of the savings realized byyear-end 1999. The transaction is expected to be accretive toearnings and cash flow in 1999 and thereafter, excluding one-timetransaction costs. The $100 million in savings is expected to breakdown into about $43 million in reduced operating costs, $43 millionin reduced corporate overhead, and $14 million in lower explorationand interest expenses, said Kerr-McGee spokeswoman Marge Ferroli.She said cuts to overhead would include job cuts as well asreductions in office space and other items.

Oryx stock traded as high as 30 11/16 in the last 52 weeks. Theshare price has trended down since May but jumped 29% to close at14 13/16 Thursday on news of the deal. Kerr-McGee’s stock dropped 43/16 – nearly 9% – Thursday to close at 42 _. The stock’s 52-weekrange is 38 to 73 3/16. “Oryx seemed to be for sale for quite sometime. The only issue was what price were they going to get fortheir company,” said Rosenberg. “They need the financial stabilitythat Kerr-McGee can provide.” He said the price to Kerr-McGee isreasonable, particularly following the Thursday drop in its shareprice. There is no collar on the share price

Kerr-McGee CEO Luke R. Corbett will be CEO of the mergedcompany, and Robert L. Keiser, Oryx CEO, will be chairman. Inaddition to Keiser, four outside Oryx directors will join theKerr-McGee Board, increasing its size to 14. During a conferencecall Thursday, Corbett touted the merger’s synergies in the UKNorth Sea and particularly the Gulf of Mexico.

“First and foremost, we both believe the companies havecomplementary asset bases and certainly complementary skill sets.On a combined basis, we will have an enviable portfolio ofhigh-impact exploration and development projects. Benefits willalso be generated from the increased size of this combined company.Our company’s financial strength will provide the flexibility towithstand price volatility and to capitalize upon market growthopportunities. Obviously because of the overlap of our operationswe will also achieve significant economies of scale, generatingsubstantial cost savings.”

Oklahoma City, OK-based Kerr-McGee has a strong balance sheet,exploration and exploitation opportunities and developmentexpertise, and Oryx brings a significant inventory of explorationprospects and technical expertise, particularly in the deep-waterGulf, Corbett said.

Kerr-McGee’s North American onshore 1997 proved reserves were 67million BOE. Gulf of Mexico reserves were 91 million BOE. Totalworldwide proved reserves were 367 million BOE, including reservesrecently acquired from Gulf Canada and the equity share of thereserves of Devon Energy Corp. Kerr-McGee worldwide net gasproduction 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 were256 million BOE; 168 million BOE in the Gulf of Mexico. Oryxworldwide total proved reserves were 640 million BOE in 1997. Oryxworldwide net gas production is 397 MMcf/d. The company is thesecond largest independent holder of deep-water Gulf blocks and hasoperations focused in Ecuador, Australia, Algeria, and Kazakhstanbesides the United States and the UK North sea.

Deal Viewed Positively for Oryx

Post-merger production will be about 60% oil, making earningsand cash flow significantly sensitive to low oil prices, notedMoody’s Investors Service. However, cash-flow stability willbenefit from Kerr-McGee’s titanium dioxide pigments business, theworld’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 ofoperations. She noted the companies are in separate areas of theNorth Sea and that their deep-water Gulf leases aren’t right nextto each other. “I think people may be taking that as sort of anegative.”

Moody’s placed some ratings of Kerr-McGee under review forpossible downgrade and placed some ratings of Oryx under review forpossible 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 citedKerr-McGee’s increased leverage as the reason for the possibledowngrade. “Kerr-McGee’s debt will increase, on a pro-forma basis,by $1.3 billion to $2.2 billion. On the plus side, however, “Thetransaction will also more than double the company’s reserve baseto about 1 billion barrels of oil equivalent, creating the fourthlargest U.S. independent oil and gas producer, and will combineOryx Energy’s stronger record in finding and developing newreserves at competitive costs with Kerr-McGee’s stronger balancesheet.”

Oryx had a disappointing second quarter with net income of $16million, down from $23 million in the second quarter of 1997.Revenues in the second quarter were $213 million, down from $274million. In July when it released second quarter results, Oryx alsooutlined cost-cutting strategies, including the sale of about $35million 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: TomJ. McDaniel, vice chairman and a member of the board of directors;John C. Linehan, executive vice president and chief financialofficer; and Russell G. Horner, senior vice president, generalcounsel and secretary. Jerry W. Box, president and chief operatingofficer of Oryx, has elected to retire, and Edward W. Moneypenny,chief financial officer of Oryx, has chosen to seek otheremployment opportunities.

The transaction is subject to shareholder approvals, expirationof the Hart-Scott-Rodino waiting period and other customary closingconditions and regulatory approvals. Completion of the transactionis anticipated in the first quarter of 1999.

Similar deals of late include Atlantic Richfield’s acquisitionof Union Texas Petroleum (See NGI May 11, 1998), Marathon Oil’sbuyout of Tarragon Oil &amp Gas (NGI June 8, 1998), and DevonEnergy’s acquisition of Northstar Energy (NGI July 6, 1998), not tomention the BP-Amoco mega-merger (See Daily GPI, Aug. 12, 1998).Not surprisingly, Rosenberg predicted more transactions like theKerr-McGee-Oryx deal. He noted: Companies need to grow reserves;independents have enjoyed strong exploration results over the lastcouple of years; and share prices are depressed, making companiesless able to fend off takeovers. “Those ingredients tell me weought to have more of these deals coming.”

Joe Fisher, Houston

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