Credit analyst says Kerr-McGee struggles to maintain growth

By Ronda Fears

Nashville, Feb. 4 - Kerr Mc-Gee Corp. is struggling to keep pace in the areas of oil and gas reserves growth and balance sheet strengthening, said Standard & Poor's Corp. credit analyst John Thieroff in a report Tuesday.

"In recent months, many of the large independent oil and gas companies announced expectations for lower 2003 production relative to 2002 as a result of either operational difficulties (Amerada Hess Corp., Marathon Oil Co.), asset sales (Devon Energy Corp., Burlington Resources Inc.), or both (Kerr-McGee Corp.)," Thieroff said.

"These production shrinkages come at a time when most oil and gas companies face a dearth of prospects and drilling activity has slowed considerably from robust levels of early 2001.

"The likelihood of greater clarity regarding Iraq and resolution of labor issues in Venezuela raise the specter of considerably lower oil prices in the second half of 2003.

"If prices fall to $19 to $21 per barrel on a sustained basis, the effect of such a drop in combination with production declines could seriously affect credit quality for a number of the independents."

On Jan. 13, S&P revised its outlook on Kerr- McGee (BBB/A-2) to stable from positive. The large Oklahoma City-based independent exploration and production company has about $4 billion in debt.

The outlook revision reflects S&P expectations that Kerr-McGee's deleveraging to a credit profile commensurate with a higher rating is not likely to be achieved in the near term.

"Although the company achieved meaningful debt reduction in 2002 with asset sales, the recent $335 million write-down of the company's Leadon field in the U.K. North Sea highlights the challenges Kerr-McGee faces in deleveraging through organic growth," Thieroff said.

Rating stability for Kerr-McGee reflects S&P expectation that the company has addressed its primary areas of operational concern and that production targets for the intermediate term will be met or exceeded, however. S&P also expects deleveraging to remain a priority and that aggressive growth objectives will not impede progress there.

The ratings of Kerr-McGee reflect an above-average business position in the volatile exploration and production segment of the oil and gas industry, partially offset by a moderately aggressive financial profile.

Relative to other independent producers, Kerr-McGee has a large, diverse set of properties with significant growth opportunities, but also risk associated with that, the credit analyst noted.

"The company has focused considerable efforts on deepwater exploration and development in recent years, which has added some risk to its business profile," Thieroff said.

"Kerr- McGee also faces significant financial risk resulting from heavy capital spending requirements and significant debt leverage."

Largely as a result of reserve writedowns, Kerr McGee's leverage has spiked to the upper-50% area despite debt reduction of about $700 million in 2002, he noted.

S&P expects significant oil and gas volumes hedged at prices above market levels should allow Kerr-McGee to modestly improve financial measures but debt reduction from cash from operations is not likely to be material near term unless commodity prices materially increase.

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