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06 May 2003
MOODY'S DOWNGRADES KERR-MCGEE CORP.'S LONG-TERM DEBT (Sr. Unsec. To Baa3) AND COMMERCIAL PAPER (to PRIME-3); RATING OUTLOOK IS STABLE
Approximately $3.9 billion of debt securities affected.
New York, May 06, 2003 -- Moody's Investors Service downgraded the senior unsecured debt ratings
of Kerr-McGee Corp. (KMG) to Baa3 from Baa2 and the company's
commercial paper ratings to Prime-3 from Prime-2.
The ratings outlook is stable. These actions conclude Moody's
review of Kerr-McGee's ratings that was initiated on January
The downgrade primarily reflects: (i) high leverage relative to
the company's proved and proved developed reserve base, (ii)
a significant increase in the company's already high total full
cycle costs, placing KMG amongst the highest in the peer group,
(iii) a reduction in the company's proved developed reserve life
(iv) increased F&D costs as a result of a 2002 drilling program that
yielded reserve additions of only 42 million barrels at an approximate
cost of $26.00 per BOE, and (v) a substantial reduction
in the size of total proved reserve base, from 1.5 billion
BOE in 2001 to approximately 1.0 billion BOE at year-end
2002, driven largely by asset sales and negative revisions at the
Leadon field in the U.K. North Sea. Moody's
believes the cumulative impact of several of these factors has been to
reduce the proportion of cash generating assets relative to those that
consume cash, providing a weaker base from which to fund the company's
higher risk deepwater exploration and development programs.
The stable ratings outlook reflects: (i) KMG's projected cashflow
surplus in 2003, driven largely by asset sales, which is expected
to result in debt reduction and a subsequent improvement in the company's
adjusted debt/proved developed BOE, (ii) the expectation that operating
costs will improve during 2003, (iii) KMG's expectation that
the current drilling program will produce significantly improved results
compared to 2002, resulting in lower F&D costs and the timely
migration of proved undeveloped reserves to proved developed producing
reserves, (iv) a near-term production profile that is essentially
flat in 2003 (excluding divestitures) and up in 2004 driven by production
from Gunnison and Red Hawk, (v) the expectation that KMG's
proved developed reserve life will improve in 2003, (vi) no material
change in the company's contingent liabilities, and (vii)
KMG's chemicals business will continue to generate positive free
cash flow with an improving near to medium term trend.
Ratings downgraded include: Kerr-McGee Corporation's senior
unsecured notes, medium-term notes, and debentures,
from Baa2 to Baa3; its convertible subordinated debentures from Baa3
to Ba1; its bank debt from Baa2 to Baa3; its shelf registration
for senior unsecured securities from (P)Baa2 to (P)Baa3; its subordinated
shelf from (P)Baa3 to (P)Ba1, and its preferred stock shelf from
(P)Ba1 to (P)Ba2. Kerr-McGee Credit LLC's commercial paper
rating from Prime-2 to Prime-3 and the commercial paper
ratings of Kerr-McGee (GB) PLC, Kerr-McGee Chemical
GmbH, Kerr-McGee International Aps, and Kerr-McGee
Pigments (Holland) B.V., which are all guaranteed
by Kerr-McGee Corporation from Prime-2 to Prime-3.
At December 31, 2002 KMG's adjusted debt relative to proved
developed reserves was approximately $7.00/BOE (before any
allocation to the chemicals business), which is amongst the highest
in the investment grade E&P peer group. Moody's had expected
KMG to modestly decrease leverage relative to proved developed reserves
over the course of 2002 following the company's 2001 acquisition
of HS Resources and the start-up of it's two deepwater Gulf
of Mexico projects, Nansen and Boomvang. KMG did use most
of the $754 million in pre-tax assets sale proceeds received
during 2002 to reduce total debt, however the sale of proved and
proved developed reserves resulted in an increase in leverage relative
to KMG's proved developed reserve base.
In addition, disappointing results from the development program
at the Leadon field and other properties in the U.K. North
Sea and the Gulf of Mexico resulted in significant negative revisions
of 104 million BOE in 2002. Moody's notes KMG's drilling
program, which was scaled back earlier in 2002 due to weaker commodity
prices, also yielded very weak results given the capital invested.
For 2002, KMG had drillbit F&D costs of $26.02/BOE
as the company spent approximately $1.0 billion on exploration
and development and only added proved reserves of 42 million BOE.
Considering the relatively low drilling costs of 2002 and the lack of
any material reduction in KMG's percentage of PUD reserves,
these costs are very high.
The rating further considers KMG's increased total full cycle costs,
which again are amongst the highest in the investment grade E&P peer
group. Each component of full-cycle costs was up in 2002
compared to 2001, including 3-year average F&D costs
(driven by the poor drilling results shown in 2002). In the near
term, KMG expects material improvements in its cost structure as
the company realizes the benefits of selling higher cost production and
bringing on lower cost production. Moody's notes success
in lowering the cost structure, as well as the leverage, are
key elements in the stability of the rating.
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.
Corporate Finance Group
Moody's Investors Service
John C. Cassidy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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