By OGJ editors
HOUSTON, Apr. 7 -- Oklahoma City-based independent Kerr-McGee Corp. Wednesday reported it will acquire Westport Resources Corp. of Denver in a merger deal 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 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.
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 to 10 the size of Kerr-McGee's board.
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 are in the US.
Following completion of the deal, the new company will have production of about 1.2 bcf 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% of total daily volumes 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.
S&P reaction
Following the announced deal Wednesday, Standard & Poor's Rating Servcies placed Kerr-McGee's long-term 'BBB' corporate rating on CreditWatch with negative implications, 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 CreditWatch with positive implications.
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.