Kerr-McGee takes Westport Resources in $3.4 billion deal

Ray Tyson

Petroleum News Houston correspondent

Oklahoma’s Kerr-McGee has agreed to take Denver’s Westport Resources in a $3.4 billion stock merger that would boost Kerr-McGee’s reserves by 30 percent and production by 34 percent, while expanding Kerr-McGee’s exposure to North American natural gas.

For Westport, the merger would give its shareholders a chance to become part of “a larger, more diversified company” with “exciting upside potential,” Don Wolf, Westport’s chief executive officer, said April 7.

Westport, like Kerr-McGee an exploration and production independent, has properties primarily in the Rocky Mountains, Permian Basin-Midcontinent, Gulf Coast and offshore Gulf of Mexico. Kerr-McGee entered Alaska in 2003 and announced a North Slope discovery there last month. (See cover of Petroleum News’ March 28 edition.)

Kerr-McGee, with current assets of about $10 billion, is an energy and inorganic chemical holding company whose subsidiaries, joint venture partners and other affiliates have operations worldwide, including oil and natural gas onshore U.S. and in the Gulf of Mexico, the United Kingdom and Danish sectors of the North Sea, China, Australia, Benin, Brazil, Gabon, Morocco, Canada and Yemen.

Under the terms of the merger agreement, Westport shareholders would receive 0.71 shares of Kerr-McGee common stock for each common share of Westport. As a result, Kerr-McGee said it expects to issue about 49.4 million new shares to Westport’s shareholders.

Of the $3.4 billion purchase price, about $2.1 billion would be allocated to the 297 million barrels of equivalent of proved reserves, equating to about $7.23 per barrel of equivalent. An additional $900 million is associated with 300 million barrels of probable and possible resources, or $3.10 per barrel of equivalent. The new company expects to convert these probable and possible resources into proved developed reserves at a cost of about $3.75 per barrel.

The transaction is expected to be non-taxable to the shareholders of both companies. Westport shareholders holding more than 42 percent of Westport’s outstanding common stock already have agreed to support the merger, Westport said. The companies expect the deal to close in this year’s third quarter.

Kerr-McGee said its executive management team, including Chief Executive Officer Luke Corbett, would keep their jobs after the transaction closes. However, one of the current board members of Westport would join Kerr-McGee’s board of directors, increasing the size of the company’s board to 10 members.

Proved reserves up by nearly 30 percent

Westport also has reported probable and possible reserves of 1.8 trillion cubic feet of natural gas equivalent, about 50 percent of which are located in and around the Natural Buttes field, in the Uinta basin of northeast Utah. The Greater Natural Buttes area is similar to Kerr-McGee’s tight-gas Wattenberg field.

Kerr-McGee’s total daily production volume is expected to increase more than 34 percent, giving the new company daily production of about 1.2 billion cubic feet of natural gas and 160,000 barrels of oil. About 54 percent of total production would be natural gas.

Kerr-McGee said it has entered into hedges, primarily in the form of costless collars, that when combined with Westport’s existing hedges, cover about 90 percent of Westport’s anticipated proved production through 2006.

As a result of the transaction, Kerr-McGee’s net debt as a percent of total capitalization is expected to decrease from 54 percent to about 42 percent by year-end. In addition, the companies said they expect to realize cost savings of about $40 million annually. The transaction would be accretive to both earnings and cash flow per share beginning in 2005, Kerr-McGee said.

The merger also would give the new Kerr-McGee an exploratory program based on more than 71 million gross undeveloped acres worldwide.