Kerr-McGee, Oryx join U.S. merger frenzy

Kerr-McGee/Oryx Combination Profile [116,135 bytes]

Consolidation continues apace in the U.S. oil and gas industry with the planned merger of Kerr-McGee Corp. and Oryx Energy Co. in an exchange of stock transaction valued at $1.86 billion.

The merger, involving Kerr-McGee's acquisition of Oryx and its assumption of $1.3 billion in Oryx debt, will create what the two firms describe as the fourth largest independent exploration and production company in the U.S. The combined companies will have proved reserves totaling more than 1 billion boe worldwide.

Kerr-McGee, based in Oklahoma City, has followed a strategy of fine-tuning its focus for a number of years, devolving from one of the U. S. industry's smaller integrated "majors" into a largely E&P company. In recent years, the company has sold its interests in refining/marketing, natural gas processing plants, contract drilling, coal, pot- ash/phosphate mines, uranium, and soda ash. Apart from its global upstream oil and gas operations, the company's remaining fo- cus is on its titanium dioxide pigment operations.

Oryx, headquartered in Dallas, started life as the biggest U.S. independent oil and gas producer when Sun Co. spun off its upstream subsidiary Nov. 1, 1988. With subsequent industry consolidation, Oryx in recent years has struggled under a heavy debt load while it throttled back on what had been an ambitious exploration program outside the U.S.

The merger

The merger calls for each Oryx stockholder to receive 0.369 newly issued Kerr-McGee common share for each Oryx common share, resulting in an equity split of about 55% Kerr-McGee and 45% Oryx.

Kerr-McGee plans to issue about 39 million shares of new common stock, bringing total outstanding shares to about 86 million.

Analysts pegged the value that Oryx shareholders would get in the deal at about $17.32/share, or a premium of about 50% over Oryx's closing stock price on Oct. 15, the day the merger was announced. The transaction would be accounted for as a pooling of interests and would be tax-free to Oryx shareholders.

The companies estimated the resulting entity would have a combined-asset enterprise value of about $6 billion. The new company, retaining the Kerr-McGee Corp. name and headquarters, would have a global work force of about 4,400 employees. It was uncertain at presstime whether any jobs would be cut as a result of the merger, which is expected to be completed by first quarter 1999.

When the merger is complete, Kerr-McGee Chairman and CEO Luke R. Corbett will become CEO of the combined company, and Oryx Chairman and CEO Robert L. Keiser will become chairman. The two executives will co-chair the transition effort to integrate operations.

Benefits

The two companies expect the merger will produce cost savings from reduced overhead and interest expense, lower operating costs, and trim- med exploration expenses totaling more than $100 million/ year, most of which will begin to be realized by yearend 1999.

The transaction is expected to be accretive to earnings and cash flow in 1999 and thereafter, excluding one-time costs linked to the merger.

"This strategic merger creates value for both Kerr-McGee and Oryx shareholders," Corbett said. "The companies have complementary skill sets and assets, particularly in the Gulf of Mexico and the North Sea. Kerr-McGee brings a strong balance sheet, exploration and exploitation opportunities, and development expertise, particularly in the deepwater area of the gulf."

Kerr-McGee's sizeable leasehold in the Gulf of Mexico hearkens to 1947, when the company drilled the world's first well out of sight of land. Oryx also has one of the industry's biggest portfolios in the gulf.

"The combination of these two companies is an ideal business and cultural fit," Keiser said. "The financial strength provided by this merger will allow us to pursue opportunities worldwide, take advantage of our complementary capabilities, and further enhance shareholder value."

Corbett added, "Kerr-McGee appreciates the Oryx exploration team and their successful track record. Part of our optimism about the future of the combined company stems from the fact the talented exploration team from Oryx will have a major role in improving production replacement rates and finding and development costs of the new company."

Kerr-McGee has worldwide net production of 78,000 b/d of oil and 277 MMcfd of gas. Its upstream oil and gas operations are in the Gulf of Mexico, onshore North America, U.K. North Sea, China, Indonesia, Thailand, and Yemen.

Oryx has global net production of 108,000 b/d of oil and 397 MMcfd of gas. It has operations in the Gulf of Mexico, U.S. onshore, U.K. North Sea, Ecuador, Australia, Algeria, and Kazakhstan.

Debt ratings affected

While investment analysts generally viewed the merger as a good fit and beneficial to both companies, the two major credit rating services offered a mixed view.

Moody's Investors Service placed Kerr-McGee's A3 senior unsecured ratings under review for possible downgrade and Oryx's Ba1 senior unsecured ratings under review for possible upgrade. Moody's confirmed the commercial paper ratings of Kerr-McGee and two affiliates.

"The review of Kerr-McGee's ratings for possible downgrade principally reflects the substantial increase in leverage that will result from the merger," Moody's said. "Kerr-McGee's debt will increase, on a pro forma basis, by $1.3 billion to $2.2 billion."

Moody's noted that the merger will also more than double Kerr-McGee's reserve base and "will combine Oryx Energy's stronger record in finding and developing new reserves at competitive costs with Kerr-McGee's stronger balance sheet."

The New York rating service also pointed out that the combined companies' oil production will represent more than 60% of post-merger production of about 300,000 boed, "resulting in significant oil price sensitivity for earnings and cash flow."

However, Moody's said that the stability of Kerr-McGee's cash flow will continue to benefit from its earlier non-energy diversification: "The company is the world's fifth largest producer of titanium dioxide pigments, representing the bulk of the company's nearly $1 billion in annual revenues from chemicals."

Duff & Phelps Credit Rating Co., Chicago, took a similar tack in assessing the two companies' credit ratings. It placed Kerr-McGee's A senior unsecured notes on rating watch (down) and reaffirmed the company's D-1- commercial paper rating. Duff & Phelps at the same time placed the BBB- senior unsecured notes and BB+ convertible subordinated debentures of Oryx on rating watch (up). It also noted the nearly 50% increase in Kerr-McGee's debt leverage.