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Vol. 10, No. 17 Week of April 24, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Kerr-McGee caves in to Icahn

Big Oklahoma E&P independent to repurchase $4 billion of its stock, avoiding proxy fight with corporate raider at May 10 annual shareholder meeting

Ray Tyson

Petroleum News Houston Correspondent

Independent oil and gas producer Kerr-McGee avoided what could have been a messy showdown in May with corporate raider and major Kerr-McGee shareholder Carl Icahn by giving into Icahn demands aimed at improving the company’s stock price.

Rather than face a proxy fight with Icahn at Kerr-McGee’s annual shareholder meeting on May 10, the company’s board of directors agreed to a number of changes that included repurchasing $4 billion of its own shares at a healthy premium to what the stock traded at when the buyback plan was announced April 14.

For the past two months, Icahn has pressured Kerr-McGee by increasing its stake in the company and threatening to run candidates for board seats at the annual meeting. In addition to repurchasing its shares, Icahn wanted Kerr-McGee to sell its chemical unit and to lock in oil prices on future production.

Kerr-McGee’s board has agreed to sell or spin-off the company’s chemical unit and also said it would sell around $2 billion of short-lived properties, reportedly in shallow waters of the Gulf of Mexico’s continental shelf, the British sector of the North Sea and the U.S. onshore. These properties represent up to 25 percent of Kerr-McGee’s production and 15 percent of the company’s proved reserves on Dec. 31 last year.

One analyst noted that Kerr-McGee’s heavy exposure to high-decline Gulf of Mexico properties has led to minimal production growth and value creation over the last few years.

After Kerr-McGee’s recent announcement, Icahn and hedge fund JANA Partner’s Barry Rosenstein, who have together bought about 7.5 percent of Kerr-McGee, suspended the proxy contest.

“JANA remains supportive of the recent actions undertaken by Kerr-McGee to enhance stockholder value,” Rosenstein said, adding that he expects Kerr-McGee’s annual free cash flow yield to increase to greater than 15 percent, as compared to an average of about 6.7 percent for the company’s peers.

Kerr-McGee will drop lawsuit

Kerr-McGee said it would drop a federal lawsuit that accused Icahn and his associates of violating federal antitrust laws in their efforts to buy more stock and get onto the board.

Icahn stepped into the picture on Feb. 18 when Kerr-McGee announced that it had received letters from Icahn and his Icahn Partners Master Fund, saying that each had filed notice under the Hart-Scott-Rodino Act regarding the intention of each to acquire between $100 million and $500 million of Kerr-McGee stock, for a total of up to $1 billion.

After word spread of Icahn’s involvement, Kerr-McGee stock rose more than 7 percent over a two-day period to $74.20 per share, a 52 week high. After announcing Feb. 23 that it was pursuing strategic alternatives for its chemicals unit, Kerr-McGee stock climbed again to $76.62 per share, nearly an 11 percent increase per share over the Feb. 18 closing.

Kerr-McGee stock took off again following announcement of Kerr-McGee’s new stock repurchase program April 14 and continued rising through at least April 19, closing at $78.40 per share.

The offer to repurchase shares is set to expire on May 18 and stockholders will have an opportunity to tender some or all of their shares at a price not less than $85 per share or more than $92 per share, Kerr-McGee said, adding that it would later determine the amount of shares required based on a total sale price of $4 billion.

If fully subscribed, $4 billion of common stock would represent 27 to 29 percent of the approximately 161.4 million shares outstanding as of March 31, the company noted.

Icahn originally wanted Kerr-McGee to use proceeds from the sales of its chemical unit and oil and gas properties to help buy back $10 billion worth of its stock, $6 billion more than Kerr-McGee ultimately agreed to.

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