Oklahoma City-based Kerr-McGee Corp. Apr. 7 reported it will acquire Westport Resources Corp. of Denver in a merger valued at about $3.4 billion, which will consist of about $2.4 billion in equity and Westport's debt of $981 million at yearend 2003. The newly formed company will retain the Kerr-McGee name and will be based in Oklahoma City.
Kerr-McGee agreed to offer 0.71 share of common stock for each Westport common share, resulting in an issuance of about 49.4 million new shares to Westport's shareholders. Also, Westport will redeem all of its 6.5% convertible preferred stock at an anticipated redemption price of $25.65/share.
In other recent upstream news:
- Precision Drilling Corp. agreed to buy all of GlobalSantaFe's worldwide land drilling assets in a $316.5 million cash deal.
- Qatar Petroleum Co. (QP) and Japan Drilling Co. Ltd. (JDC) agreed to establish the first national drilling company in Qatar, named Gulf Drilling International (GDI).
In recent downstream news:
- AltaGas Services Inc., Calgary, agreed to buy BP Canada Energy Resources Co.'s 48.66% interest in the Edmonton ethane extraction plant (EEEP) at Edmonton for $46 million (Can.).
- Subsidiaries of Flint Hills Resources LLC, Wichita, have agreed to acquire the assets of BP PLC's global performance chemicals business unit. Terms of the agreement were not disclosed. Flint Hills is a unit of Koch Industries Inc.
Kerr-McGee-Westport
The deal, which is yet to be approved by shareholders of both companies, is expected to close during the third quarter. Following close of the transaction, Kerr-McGee's executive management team will continue in their current roles, while one member of the current Westport board will join the Kerr-McGee board, increasing its size to 10.
Kerr-McGee said that of the purchase price, about $2.1 billion will be allocated to the 297 million boe of proved reserves, equating to about $7.23/boe. An additional $900 million is associated with 300 million boe of probable and possible resources, or $3.10/boe. Kerr-McGee said it expects to convert these probable and possible resources into proved developed reserves at a cost of about $3.75/boe.
Combined assets
Once combined, the new Kerr-McGee will hold 1.3 billion boe of proved reserves, of which 57% will be natural gas. About 76% of these reserves is in the US.
Following completion of the deal, the new company will have production of about 1.2 bcfd of natural gas and 160,000 b/d of oil. It will hold interest in more than 71 million gross undeveloped acres worldwide. Kerr-McGee's total daily production volume is expected to increase more than 34%, of which 54% will be natural gas.
"The addition of Westport's reserves will increase Kerr-McGee's proved reserves by nearly 30%, mainly from North American natural gas," Kerr-McGee said.
At yearend 2003, Westport had 1.8 tcfe of proved reserves, mainly in the Rocky Mountain and Texas Gulf Coast areas. Third-party reserves consultants determined 87% of the proved reserves, and Westport has an additional 1.8 tcfe of identified probable and possible resources, the company said. About half of these resources are in and around Natural Buttes field in the Uinta basin in Northeast Utah.
"The Greater Natural Buttes area is similar to Kerr-McGee's Wattenberg field and will allow Kerr-McGee to apply its proven expertise in tight-gas and supply-chain management to maximize the efficient recovery of these resources," Kerr-McGee said.
Kerr-McGee said it also would maintain its titanium dioxide production capacity of about 668,000 tonnes/year.
By yearend, Kerr-McGee said it expects its net debt, as a percent of total capitalization, to decrease to 42% from its current 54%. Additionally, the companies expect to realize $40 million/year in cost savings as a result of the deal.
Analyst reaction
Following the announced deal, Standard & Poor's Rating Services placed Kerr-McGee's long-term 'BBB' corporate rating on negative credit watch, and lowered its short-term debt rating from 'A-2' to 'A-3.'
At the same time, S&P placed its 'BB' corporate credit rating on Westport on positive credit watch.
S&P said that as of yearend 2003, Kerr-McGee had $3.6 billion of debt outstanding. "Although the acquisition will improve Kerr McGee's debt metrics and modestly benefit some of the company's operating measures, [we] intend to review Kerr McGee on a pro forma basis regarding the Westport acquisition to determine whether the acquisition sufficiently deleverages Kerr-McGee and augments its current operational weaknesses to warrant an affirmation of the current rating," S&P said.
"Specifically, we are concerned about Kerr-McGee's very high finding and development costs—a problem shared by Westport, the still-high component of undeveloped reserves, the large amount of future spending associated with developing these reserves, the company's significant debt leverage, and whether it will be able to achieve debt reduction from internally generated cash—something it has not demonstrated on a consistent basis," said S&P credit analyst John Thieroff.
Precision Drilling
Precision Drilling's acquisition, which is expected to be completed during the second quarter, includes 31 land rigs in the Middle East, North Africa, and South America and a fleet of specialized rig transport equipment that supports land rig operations in Kuwait and the Kuwaiti-Saudi Arabia Partitioned Neutral Zone.
GlobalSantaFe said that its land rig business has become "an increasingly smaller part" of its overall operations over the years and that the transaction will permit the Houston-based company to focus its efforts on growing its offshore market.
In a research note, Lehman Bros. Inc. analyst Angeline M. Sedita broke down the rig's locations: "[GlobalSantaFe's] land rig fleet is entirely international, comprised of 12 rigs in Kuwait, 8 rigs in Venezuela, 7 rigs in Saudi Arabia and Oman, and 4 rigs in Egypt."
Sedita added that currently, 17 of the rigs are working at rates from $5,000/day to $20,000/day. She added that GlobalSantaFe would likely use proceeds from the sale to "fund the completion of several newbuild offshore rigs currently under construction."
GDI formation
QP will own 60% of the shares in newly formed GDI, while JDC will hold 40%. A capital investment of $258 million is expected during the joint venture's first 3 years.
GDI will commence business in the second quarter with one jack up rig bought from JDC. The joint venture plans to invest in both new and used rigs. In addition, GDI is expected to pursue business opportunities outside Qatar.
Qatar government officials said GDI constitutes an important stage in the country's oil and gas development.
AltaGas-BP
BP's Edmonton plant has a licensed inlet capacity of 390 MMcfd of natural gas and gross natural gas liquids production of 15,000 b/d of specification ethane and 6,000 b/d of propane-plus product. EEEP straddles the ATCO Pipelines Ltd. system, which transports natural gas into Edmonton and the Ft. Saskatchewan area.
The acquisition is expected to close in the second quarter.
Flint Hills-BP
Assets in Flint Hills' acquisition include a chemical production facility in Joliet, Ill., the production from a Geel, Belgium, plant that BP will continue to operate, and associated research and marketing capabilities. The transaction is expected to close in the second quarter.
