The $4 billion stock merger of Kerr-McGee and Oryx Energyannounced yesterday will create the fourth largest independentproducer in the United States with about one billion equivalentbarrels of proved reserves. The move comes in an environment offoundering commodity prices and widespread industry layoffs andfollows the announcement of aggressive cost-cutting moves by Oryx.

The merged company will be called Kerr-McGee Corp. and will haveheadquarters in Oklahoma City and a worldwide workforce of about4,400 employees. Each Oryx shareholder will receive 0.369 newlyissued shares of Kerr-McGee common stock for each Oryx commonshare, resulting in an equity split of about 55% Kerr-McGee and 45%Oryx. The transaction is intended to be accounted for as a poolingof interests and to be tax-free to Oryx’s shareholders. Eachcompany’s board has approved the deal. The combined company’senterprise value will be about $6 billion,

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.

While the deal values Oryx shares at about $17.32 each, thestock has traded as high as 30 11/16 in the last 52 weeks. Theshare price has trended down since May and Thursday was tradingaround 14 before closing at 14 13/16. One analyst said Oryxshareholders wouldn’t be too happy with the Oryx valuation in themerger. Kerr-McGee’s stock dropped 4 3/16 – nearly 9% – Thursday toclose at 42 3/4. The stock’s 52-week range is 38 to 73 3/16.

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.”

Kerr-McGee has a strong balance sheet, exploration andexploitation opportunities and development expertise, and Oryxbrings a significant inventory of exploration prospects andtechnical expertise, particularly in the deep-water Gulf, Corbettsaid.

Kerr-McGee’s North American onshore 1997 proved reserves were 67million BOE. Gulf of Mexico reserves were 91 million BOE. Totalproved reserves were 367 million BOE. Oryx domestic onshore provedreserves were 256 million BOE; 168 million BOE in the Gulf ofMexico. Oryx total proved reserves were 640 million BOE in 1997.Post-merger production will be about 60% oil, making earnings andcash flow significantly sensitive to low oil prices, noted Moody’sInvestors Service. However, cash-flow stability will benefit fromKerr-McGee’s titanium dioxide pigments business, the world’s fifthlargest.

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 & Poor’s reacted similarly. Moody’scited Kerr-McGee’s increased leverage as the reason for thepossible downgrade. “Kerr-McGee’s debt will increase, on apro-forma basis, by $1.3 billion to $2.2 billion. On the plus side,however, “The transaction will also more than double the company’sreserve base to about 1 billion barrels of oil equivalent, creatingthe fourth largest U.S. independent oil and gas producer, and willcombine Oryx 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. The initiatives included thesale of about $35 million of U.S. onshore properties in order tokeep debt at about $1.2 billion.

In June, Oryx struck an alliance with Cinergy Corp. ofCincinnati, OH, for the marketing of its U.S. gas production for upto 10 years (See weekly NGI June 22, 1998). That contract willremain in place post merger, a Kerr-McGee spokeswoman said. Lastmonth, Oryx began production at its Baldpate platform in the Gulfof Mexico flex trend. In August the company said it has had fivesuccesses out of 12 exploration wells drilled this year. Two of thesuccesses were discoveries in the Gulf, and three were in Ecuador.Oryx also was drilling two wildcat wells in the deep Gulf atMississippi Canyon 536/580 and Garden Banks 217.

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.

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