Kerr-McGee looks to shed chemical unit
Tue Mar 8, 2005 08:13 PM ET

SAN FRANCISCO, March 8 (Reuters) - Kerr-McGee Corp. plans to shed its chemicals unit, possibly through a spinoff or sale, because it believes the market has undervalued the business, the oil and gas company said on Tuesday.

The plan follows last month's announcement that the Oklahoma City company had hired an investment firm to explore a possible separation of the unit.

On Tuesday, the company's board approved a share buyback program initially set at $1 billion and rejected a proposal by billionaire financier Carl Ichan to sell part of Kerr-McGee's future oil and gas production.

The size of the share buyback could increase as Kerr-McGee makes progress in separating the chemicals division, the world's third-largest producer of titanium dioxide, a white pigment used in paint, coatings, plastics and paper, the company said.

The initial repurchase program primarily will be financed through the use of free cash flow generated from operations after planned capital expenditures, projected at about $850 million this year.

The company said that to ensure projected cash flow, it has hedged 45 percent of expected oil production and 50 percent of its expected U.S. natural gas output for 2005 and expects to add to these positions.

Kerr-McGee also expects to fund the remaining repurchase program with a portion of its existing bank credit facility and may issue new securities, which may take the form of debt or perpetual preferred stock, it said.

In February Icahn and one of his funds filed papers under antitrust laws to acquire up to $1 billion in the company's stock.

Kerr-McGee's board turned down Icahn's proposal for a "volumetric production payment," or VPP, for 250 million barrels of oil equivalent, calling it "irresponsible and not in the best interests of all of its stockholders, creditors and the company."

Icahn has proposed in a letter to Kerr-McGee that it should sell forward contracts on future oil and gas production and use the proceeds to buy back stock.

Kerr-McGee Chairman and Chief Executive Officer Luke Corbett said the VPP proposal "would extract the revenue from approximately 32 percent of our proved developed producing reserves, while leaving the company with 100 percent of the costs," damage its capital structure, and "likely cause our credit rating to drop to junk status."

He said the company will make its case "directly with our stockholders."

Source: Reuters

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