Three Months Ended March 31, (Millions of dollars, except per-share amounts) 2005 2004 Net Income $354.5 $152.2 Add Loss from Discontinued Operations .5 2.8 Income from Continuing Operations 355.0 155.0 Add Other Items (A) 34.9 4.5 Adjusted After-Tax Income $389.9 $159.5 Diluted Earnings Per Share Net Income $2.20 $1.41 Discontinued Operations --- .03 Continuing Operations $2.20 $1.44 Adjusted After-Tax Income $2.42 $1.48 (A) Items included in "Other Items" are listed in the tables as "Other Information, Net of Income Taxes." Adjusted after-tax income and the related measure per diluted share exclude items that management deems to not be reflective of the company's core operations. These measures are non-GAAP financial measures. Management believes that these measures provide valuable insight into the company's core earnings from operations and enable investors and analysts to better compare core operating results with those of other companies by eliminating items that may be unique to the company. Other companies may define these items differently, and the company cannot assure that adjusted after-tax income and the related measure per diluted share are comparable with similarly titled amounts for other companies.
"In the first quarter, we again met or exceeded our guidance in all aspects of our operations," said Luke R. Corbett, Kerr-McGee chairman and chief executive officer. "We remain on track to achieve average daily production volumes in the range of 352,000 to 367,000 barrels of oil equivalent for the year. Execution of our 2005 drilling program of 900 development and exploratory wells is on schedule with approximately 250 wells drilled to date. This includes the ongoing appraisal of last year's discoveries in Alaska and Bohai Bay, China.
"Last week, we commenced a modified 'Dutch Auction' self tender offer for up to $4 billion of Kerr-McGee's common stock," said Corbett. "The tender will return immediate value to our stockholders as we capitalize on improving market conditions in the chemical industry and high oil and natural gas commodity prices. We are proceeding with the separation of our chemical business through a sale or spinoff. We also have expanded our hedging program to secure attractive returns and are high grading our oil and gas portfolio by divesting of short-life, lower-growth properties. Following the separation of the chemical business, Kerr-McGee will be a pure-play exploration and production company that we believe is well positioned to further enhance stockholder value."
Exploration and Production and Chemical Operating Profit
First-quarter 2005 operating profit was $678.5 million, compared with $334.4 million in the 2004 first quarter. Exploration and production operating profit for the 2005 period was $655.2 million, compared with $329.9 million for the prior-year quarter. The increase is due to higher oil and gas sales prices coupled with higher oil and gas volumes primarily as a result of the Westport acquisition and start of production in China and at Red Hawk. These increased revenues were partially offset by higher lifting costs, depreciation and depletion, and other operating expenses.
Chemical operating profit in the first quarter of 2005 was $23.3 million, an increase of $18.8 million, compared with the same prior-year period. The increase primarily was a result of higher pigment sales prices.
"The continued strengthening of the titanium dioxide pigment market supports our rationale that now is the right time to separate the chemical business to unlock value for our stockholders," added Corbett.
Debt and Tender Offer
During the first quarter of 2005, the company's total debt decreased by $642.9 million, from approximately $3.7 billion at Dec. 31, 2004, to approximately $3.1 billion at March 31, 2005. This decrease primarily resulted from conversion to common stock of the company's $600 million aggregate principal amount of 5.25% convertible debentures. During the quarter, the company repurchased 3.1 million shares of its common stock at a weighted average price of $79.47, for a total expenditure of approximately $250 million. These purchases were funded with available cash.
Subsequent to March 31, 2005, the company commenced an offer to purchase from stockholders up to $4 billion of its outstanding common shares at a price not lower than $85 or higher than $92 per share under a modified "Dutch Auction." If the tender is fully subscribed, approximately $4 billion of common stock will be repurchased, representing 27% to 29% of shares outstanding as of March 31, 2005. The tender offer is expected to be funded with cash on hand and the net proceeds of borrowings. The company obtained commitments for financing, totaling up to $6 billion, which may be used to fund the tender offer, to repay certain existing indebtedness and for general corporate purposes. The tender offer is subject to customary conditions, including obtaining financing pursuant to the terms and conditions contained in the financing commitments.
Following the tender, the company expects to reduce debt by $3.5 billion to $4.5 billion over a two-year period with net proceeds from the separation of its chemical business and divestiture of certain oil and gas properties, along with cash flow from operations which has been underpinned by an expanded hedging program for 2005 through 2007.
Oil and Gas Volumes and Prices
Kerr-McGee's daily oil production averaged 187,700 barrels in the 2005 first quarter, compared with 143,200 barrels in the 2004 period, an increase of 31%. The increase primarily was due to the acquisition of Westport late in the 2004 second quarter and start of production in China in the 2004 third quarter.
The average sales price for oil for the 2005 first quarter, including the effect of the company's hedging program, was $40.98 per barrel, which was 50% higher than in the 2004 first quarter.
Natural gas sales averaged 1.1 billion cubic feet per day for the 2005 first quarter, up 45% from the prior-year period, primarily due to the Westport acquisition and the third-quarter 2004 start of production at Red Hawk in the deepwater gulf.
The average natural gas sales price, including the effects of the company's hedging program, was $6.11 per thousand cubic feet, compared with $5.35 in the 2004 first quarter.
Kerr-McGee expanded its hedging program, which includes a combination of costless collars and fixed-price swaps derivative contracts. The hedging program now covers approximately 75% of the company's remaining 2005 and 2006 expected eligible production and approximately 50% of its 2007 expected eligible production. Eligible production excludes production from Bohai Bay, China, and gas production from the North Sea.
Revenues and Capital Expenditures
First-quarter 2005 revenues of $1.7 billion were up 55% from the prior- year period. Capital expenditures were $398.4 million, compared with $169.8 million for the 2004 first quarter.
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