Kerr-McGee Corp. Embarks on Bold Restructuring Plan

Strategic Insights -

In a bold move, Kerr-McGee Corp. has decided to restructure its upstream operations by selling a significant chunk of upstream assets. The company will use the proceeds from these asset sales to buy back stock, scale back debt, and increase its dividend. Analysts welcomed the aggressive plan, with Dean Witter Inc. analyst Eugene Nowak stating that the $300 million allocated for stock repurchase was more than he expected. Kerr-McGee plans to focus on its core businesses, including oil and natural gas exploration and production, coal, and chemicals.

Key Takeaways:

  • Kerr-McGee Corp. will use $400 million in proceeds from asset sales to buy back stock, reduce debt, and increase its dividend.
  • Up to $300 million will be used to buy back common stock, representing 10% of the company's outstanding shares.
  • $100 million will be used to scale back debt, reducing the company's long-term debt of $661 million as of June 30.
  • Kerr-McGee will raise its quarterly dividend by 8% to 41 cents/share, payable January 2 to stockholders of record as of December 6.
  • The company plans to restructure its upstream business by selling off non-strategic oil and gas assets, which account for about 10% of the company's reserve base, 10% of current production volumes, and roughly 5% of total annual cash flow.
  • Kerr-McGee will write down some oil and gas properties to comply with Financial Accounting Standard No. 121.
  • The divestiture program and asset write-down will result in an after-tax charge of $100 million to $125 million in the third quarter.
  • The company will focus its worldwide exploration program on key areas that are economically viable in a flat-price environment.
  • Kerr-McGee will expand output of titanium dioxide pigment to meet rising customer demand.

Statistics:

  • $400 million: proceeds from asset sales to be used for stock buyback, debt reduction, and dividend increase.
  • $300 million: allocated for stock repurchase, representing 10% of the 50 million or so outstanding Kerr-McGee shares.
  • $661 million: long-term debt as of June 30.
  • 8%: increase in quarterly dividend to 41 cents/share.
  • 10%: reduction of non-strategic oil and gas assets of the company's reserve base.
  • 10%: reduction of non-strategic oil and gas assets of the company's current production volumes.
  • 5%: reduction of non-strategic oil and gas assets of the company's total annual cash flow.
  • $100 million to $125 million: after-tax charge resulting from divestiture program and asset write-down in the third quarter.

Sources:

  • "Kerr-McGee to Restructure Operations, Buy Back Stock," Bloomberg News.
  • "Kerr-McGee to Use Asset Sale Proceeds to Buy Back Stock, Pay Debt," Dow Jones Business News.
  • "Kerr-McGee Plans to Restructure Upstream Operations, Expand Chemicals Output," Reuters.
  • Financial Accounting Standard No. 121.
  • Dean Witter Inc.