"Westport's extensive inventory of low-risk U.S. exploitation opportunities complements Kerr-McGee's high-impact deepwater exploration program providing us a more predictable performance profile," said Luke R. Corbett, Kerr-McGee chairman and chief executive officer. "Westport's substantial property base in the Rockies expands our platform for applying our proven tight-gas and supply-chain expertise. These new properties have a probable and possible resource potential of 1.8 trillion cubic feet of natural gas equivalent (TCFe), and more than 2,500 low-risk drilling locations have already been identified. When combined with our existing U.S. onshore property position, these properties will provide a stable foundation of high-margin production and low-risk growth opportunities. Additionally, the incremental free cash flow generated from these properties will give Kerr-McGee added financial flexibility to accelerate our high-potential deepwater program."
"This transaction provides important benefits to our shareholders," said Don Wolf, Westport chairman and chief executive officer. "It provides significant value while retaining the opportunity to participate in the exciting upside potential of Kerr-McGee. Our shareholders will benefit from becoming part of a larger, more diversified company with tremendous growth opportunities balanced with a substantial development portfolio and a strong balance sheet."
The addition of Westport's reserves will increase Kerr-McGee's proved reserves by nearly 30%, mainly from North American natural gas. As of December 31, 2003, Westport had 1.8 TCFe of proved reserves which were 76% natural gas and primarily located in the Rocky Mountain and Texas Gulf Coast areas. Third-party reserve consultants determined 87% of the proved reserves. Westport has an additional 1.8 TCFe of identified probable and possible resources. Approximately 50% of these resources are located in and around the Natural Buttes field, in the Uinta basin in northeast Utah. The Greater Natural Buttes area is similar to Kerr-McGee's Wattenberg field and will allow Kerr-McGee to apply its proven expertise in tight-gas and supply-chain management to maximize the efficient recovery of these resources.
Of the $3.4 billion purchase price, approximately $2.1 billion is expected to be allocated to the 297 million barrels of equivalent (BOE) of proved reserves equating to approximately $7.23 per BOE. An additional $.9 billion is associated with 300 million BOE of probable and possible resources, or $3.10 per BOE. The company expects to convert these probable and possible resources into proved developed reserves at a cost of approximately $3.75 per BOE.
The combined entity will have a substantial base of low-risk exploitation opportunities located onshore in the U.S. Potential reserve additions from these lower risk properties will supplement Kerr-McGee's high-potential deepwater exploration program. In addition, the broader base of assets is expected to provide a more predictable stream of production volumes.
Kerr-McGee's total daily production volume is expected to increase more than 34% following completion of the transaction. Approximately 54% of total daily volumes will be natural gas. Kerr-McGee has entered into hedges, primarily in the form of costless collars, that when combined with Westport's existing hedges, cover approximately 90% 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 approximately 22% from 54% to approximately 42% by year-end. This reduced leverage, coupled with expected increased free cash flow, will enhance Kerr-McGee's financial flexibility. In addition, the companies expect to realize cost savings of approximately $40 million annually. The transaction will be accretive to both earnings and cash flow per share beginning in 2005.
Under the terms of the merger agreement, Westport shareholders will receive 0.71 shares of Kerr-McGee common stock for each common share of Westport. As a result, Kerr-McGee expects to issue approximately 49.4 million new shares to Westport's shareholders. The transaction is expected to be non-taxable to the shareholders of both companies. In addition, prior to consummation of the transaction, Westport will redeem all of its 6 1/2% Convertible Preferred Stock at an anticipated redemption price of $25.65 per share.
The transaction is contingent upon the approval by the shareholders of both companies as well as other customary closing conditions. Shareholders of Westport holding more than 42% of Westport's outstanding common stock have entered into voting agreements pursuant to which such stockholders have agreed to vote in favor of the merger. Kerr-McGee's executive management team will continue in their current roles after the close of the transaction. Upon completion of the transaction, one of the current board members of Westport will join the Kerr-McGee board of directors, increasing the size of Kerr-McGee's board to ten members. The transaction is expected to be completed during the third quarter of this year.
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