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16 Aug 2001
CORRECTION: MOODY'S DOWNGRADES KERR-MCGEE TO Baa2 FROM Baa1 (SR. UNSECURED); RATING OUTLOOK IS STABLE (CORRECTION TO TEXT. HS RESOURCES' PRIOR SR. SUBORDINATED RATING SHOULD READ Ba3 NOT B2.)
Moody’s Investors Service downgraded the senior unsecured ratings of Kerr-McGee Corporation (KMG) to Baa2 from Baa1and upgraded the senior subordinated ratings of HS Resources, Inc. (HSR) to Baa3 from Ba3. These actions follow KMG's announced completion of the acquisition of HSR coupled with the unconditional guarantee of HSR's public debt. The $1.7 billion transaction, including assumed debt of approximately $450 million, will be funded with $833 million of cash and $383 million of new common equity. The rating outlook is stable.
The downgrade of Kerr-McGee’s ratings primarily reflects the substantial increase in leverage due the predominantly debt funded acquisition of HSR. After considering the incremental debt related to this transaction, Moody's estimates KMG's adjusted debt/BOE (proved developed) to be well above $5.00. Allocating a portion of the debt to the company's titanium dioxide business still results in financial leverage that is inconsistent with the Baa1 rating. Furthermore, KMG has a significant amount of future development capital to spend in order to convert its proved undeveloped reserves to proved developed. As a result, Moody's believes total debt will likely increase further by year end 2001, and material debt reduction isn't likely in the near term absent very strong commodity prices and asset sales.
Equally important in Moody's decision to downgrade KMG's senior unsecured ratings is management's track record of aggressively financing acquisitions. In the recent past, the company's leverage has consistently been at levels Moody's deemed high for the Baa1 rating category or beyond it. Given the company's relatively high full-cycle cost structure, short reserve life (proved developed), and high risk, high reward deepwater growth strategy, Moody's believes the Baa2 rating better reflects the inherent risks while providing the company greater flexibility to carry out its strategy going forward.
The ratings also recognize the continuing strengths of KMG, and the benefits which should be derived from the merger. The acquisition will increase the company's proved reserves by approximately 20%, to 1.3 billion BOE, making KMG the fourth largest U.S. independent oil and gas producer. The reserve base will also be more balanced, with the percentage of reserves located in the U.S. increasing to 51% (from 41%) and the oil/natural gas mix changing to 57%/43% (from 64%/36%). HSR's reserves are also longer lived and generally have lower operating costs, which should result in a modest improvement in KMG's overall reserve life and cost structure. In addition, the acquisition is expected to provide KMG with a significant inventory of lower risk drilling prospects. The stability of Kerr-McGee’s cash flows will also continue to benefit from significant non-energy diversification. The company is the world’s third largest producer of titanium dioxide pigments, a business which typically generates $150 million to $250 million of free cashflow (after capital expenditures) annually.
The stable rating outlook is based on Moody's expectation that KMG will successfully bring its two deepwater GOM projects (Nansen and Boomvang) on line in the fourth quarter of 2001/first quarter of 2002 and continue to realize production gains while improving its full-cycle cost structure. Moody's also expects modest decreases in financial leverage in the near term. More conservative fiscal policies could also result in Moody's having a more positive outlook for KMG's ratings going forward.
Ratings downgraded include Kerr-McGee Corporation's senior unsecured notes, medium-term notes, and debentures, from Baa1 to Baa2; its convertible subordinated debentures from Baa2 to Baa3; its bank debt from Baa1 to Baa2; its subordinated shelf from (P)Baa2 to (P)Baa3, and its shelf registration for senior unsecured securities from (P)Baa1 to (P)Baa2. Kerr-McGee Oil (U.K.) plc's Prime-2 rating for commercial paper, guaranteed by Kerr-McGee Corporation, and Kerr-McGee Credit LLC's Prime-2 rating for commercial paper, also guaranteed by Kerr-McGee Corporation, remain unchanged.
Kerr-McGee Corporation is a global energy and chemicals producer. Its principal businesses are oil and gas exploration and production, and the production of titanium dioxide pigment, which is principally used in coatings and plastics. The company's headquarters are in Oklahoma City, OK.
No Related Data.
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