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26 Feb 1999
MOODY'S DOWNGRADES KERR-MCGEE TO Baa1 FROM A3 (SR. UNSECURED); RATING OUTLOOK IS NEGATIVE
Moody's Investors Service downgraded the senior unsecured ratings of Kerr-McGee Corporation to Baa1 from A3, and upgraded the senior unsecured ratings of Oryx Energy Company to Baa1 from Ba1. The commercial paper ratings of two Kerr-McGee supported affiliates were confirmed at Prime-2. These actions follow today's approval by the shareholders of both companies of a combination in which Oryx will be merged into Kerr-McGee in an all common stock merger. Including debt to be assumed by Kerr-McGee, the transaction will total about $2.5 billion. The surviving entity will continue to be named Kerr-McGee Corporation, with ownership held approximately 55% by previous holders of Kerr-McGee and 45% by shareholders of Oryx.
The downgrade of Kerr-McGee's ratings primarily reflects the substantial increase in leverage due the assumption of the debt obligations of Oryx, with resulting financial and operating debt coverage measures which are more comparable to industry companies in the Baa rating category. The merger increases Kerr-McGee's debt by about $1.3 billion to about $2.25 billion. Using current prices for oil and natural gas, Moody's estimates that the company will have a debt to cash flow ratio of about 3X in 1999, which is relatively weak compared to peers in the Baa1 rating category. Post-merger earnings and cash flow will be highly sensitive to oil prices, with oil comprising over 60% of the company's 300,000 barrels of oil equivalent daily production. Kerr-McGee also faces challenges in improving its above average costs of production and its below average record for replacing reserves at competitive costs. The company's average lifting cost of $4 per boe reflects the higher costs typical for North Sea production, and the generally higher costs for producing oil compared to natural gas.
The rating outlook is negative, based on Moody's concern that earnings and cash flow will remain under pressure until oil prices begin to recover, which could delay Kerr-McGee's plans to gradually reduce its post-merger debt level. The outlook also reflects uncertainty that the company can fully achieve the improvements expected in its cost structure and the efficiency of its capital spending.
Moody's ratings also recognize continuing strengths of Kerr-McGee, and the benefits which derive from the merger. The acquisition of Oryx more than doubles the company's reserve base to about 1 billion barrels of oil equivalent, creating the fourth largest U.S. independent oil and gas producer. Kerr-McGee will retain key operating staff from Oryx, which had a favorable record for finding and developing new reserves at low costs. About 85% of the company's reserves will be located in the politically stable U.S. and U.K., with a strong presence in emerging deepwater plays in the Gulf of Mexico. The company believes that it can achieve synergies and cost savings in excess of $100 million annually as a result of the merger. Kerr-McGee also has a strong production profile compared to many independent E&P companies, with expected production growth of about 6% in 1999 (compared to combined production of both companies in 1998) and 2000. The stability of Kerr-McGee's cash flows will also continue to benefit from significant non-energy diversification. The company is the world's fifth largest producer of titanium dioxide pigments, a business which represents the bulk of its nearly $1 billion in total chemicals revenues.
Ratings Downgraded: Kerr-McGee Corporation senior unsecured notes and debentures to Baa1 from A3; shelf registration for senior unsecured securities to (P)Baa1 from (P)A3.
Ratings Confirmed: Kerr-McGee Oil (U.K.) plc Prime-2 commercial paper, guaranteed by Kerr-McGee Corporation, and Kerr-McGee Credit LLC Prime-2 commercial paper, supported by Kerr-McGee's obligation to make payments to enable Kerr-McGee Credit LLC to meet a fixed charge coverage test.
Ratings Upgraded: Oryx Energy Company senior unsecured notes and medium term notes to Baa1 from Ba1; issuer rating to Baa1 from Ba1; convertible subordinated debentures to Baa2 from Ba3.
Kerr-McGee Corporation is a global energy and chemicals producer, with assets of $5.4 billion at year-end 1998, pro-forma for the merger with Oryx. 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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