Kerr-McGee to sell or spin-off chemical unit; board rejects Icahn proposal

The board of directors of oil and gas producer Kerr-McGee has approved a management request to sell or spin-off its chemical unit and to repurchase $1 billion of company stock.

“We do not believe that the value of our chemical business is adequately reflected in our market evaluation,” Luke Corbett, Kerr-McGee’s CEO, said March 8.

The repurchase program primarily will be financed through the use of free cash flow generated from operations after planned capital expenditures, which is projected to be about $850 million in 2005. However, the board unanimously rejected a proposal by former corporate raider Carl Icahn that Kerr-McGee sell 250 million barrels of oil equivalent reserves using a formula known as a volumetric production payment, or VPP. “This would not leave the company with sufficient capital to develop the more than 425 million barrels of oil equivalent reserves currently booked as proved but undeveloped,” Corbett said. “As a result, we believe the value of our remaining proved reserves would be greatly reduced.”

Icahn and his Icahn Partners Master Fund have notified Kerr-McGee that each intends to acquire between $100 million and $500 million of Kerr-McGee stock, for a total of up to $1 billion. The Icahn group is seeking to fill two seats on the Kerr-McGee board. Additionally, Kerr-McGee said Icahn’s proposal would not allow for the timely exploitation of its large inventory of identified probable and possible resources and exploration of the company’s high-potential prospect inventory. Moreover, since none of the proceeds from Icahn’s proposal would be applied to debt reduction, “it would have very serious negative implications” to the company’s capital structure and likely cause Kerr-McGee’s credit rating to drop to junk status, Corbett said.

“Mr. Icahn’s proposal is tantamount to mortgaging the company’s future simply to provide Mr. Icahn and his partners with some quick cash,” he said.

—Ray Tyson