Kerr-McGee Reports Record Net Income
Kerr-McGee (NYSE: KMG) reports net income for the 2005 second quarter of $370.8 million ($2.60 per diluted common share), compared with $110.6 million ($1.01 per share) for the 2004 second quarter. The company's 2005 second-quarter adjusted after-tax income was $378.4 million ($2.65 per share), compared with $119.9 million ($1.09 per share) for the second quarter of 2004. Adjusted after-tax income is determined by excluding from net income the results from discontinued operations and other items. The $258.5 million increase in the 2005 second-quarter adjusted after-tax income versus the 2004 quarter primarily was due to higher oil and natural gas sales prices, higher oil and gas sales volumes, and higher chemical operating profit. Higher oil and gas sales volumes were due primarily to the acquisition of Westport Resources Corp. on June 25, 2004, and start of production in the Bohai Bay area of China and from the Red Hawk field in the deepwater Gulf of Mexico in the 2004 third quarter. This increase was partially offset by higher oil and gas lifting costs, depreciation and depletion, exploration expense and a provision for income taxes.
Six Months Ended Second Quarter June 30, (Millions of dollars, except per-share amounts) 2005 2004 2005 2004 Net Income $370.8 $110.6 $725.3 $262.8 Add Loss from Discontinued Operations 1.5 3.6 2.0 6.4 Add Other Items (A) 6.1 5.7 46.9 10.2 Adjusted After-Tax Income $378.4 $119.9 $774.2 $279.4 Diluted Earnings Per Share Net Income $2.60 $1.01 $4.78 $2.42 Discontinued Operations .01 .04 .01 .06 Continuing Operations $2.61 $1.05 $4.79 $2.48 Adjusted After-Tax Income $2.65 $1.09 $5.10 $2.57 (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.
"While achieving record net income for the quarter, we have remained focused on transitioning to a pure-play exploration and production company with a balanced portfolio of oil and gas assets," said Luke R. Corbett, Kerr-McGee chairman and chief executive officer. "Strong market conditions in the energy and chemical sectors provide us with this opportunity and we have returned immediate value to our stockholders through the repurchase of approximately 29% of our total outstanding shares as of March 31, 2005. The separation of our chemical business remains on track, and we expect to make a decision regarding a sale or IPO/spinoff during the third quarter. In regards to the divestiture of select lower-growth oil and gas assets, we are pleased with the level of interest from prospective buyers and expect to complete a majority of the sales by year end.
"We are expanding our development program in the Rocky Mountain division to capitalize on these lower-risk, high-return assets," he said. "Growth from these properties will be supplemented by our development activities in the deepwater Gulf of Mexico and Bohai Bay, which are on or ahead of schedule and within budget."
Exploration and Production and Chemical Operating Profit
Second-quarter 2005 operating profit was $719.1 million, compared with $276.9 million in the 2004 second quarter. Exploration and production operating profit for the 2005 second quarter was $685.4 million, compared with $263.0 million for the prior-year quarter. The increase was due to higher oil and gas sales prices coupled with higher oil and gas sales 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 exploration expense, lifting costs, depreciation and depletion, and other operating expenses.
Chemical operating profit in the 2005 second quarter was $33.7 million, an increase of $19.8 million compared with the same prior-year period. The increase primarily was a result of higher pigment sales prices, partially offset by the effect of lower sales volumes.
Share Repurchase and Debt
During the second quarter of 2005, the company repurchased 46,727,763 shares of its common stock at a price of $85 per share for a total cost of approximately $4 billion. To fund the share purchase program the company sold $4.25 billion of term loans, $2 billion of which matures in two years and the balance in six years. In addition, the company entered into a new $1.25 billion five-year revolving line of credit. At June 30, 2005, debt outstanding totaled $7 billion, compared with $3.1 billion at March 31, 2005.
Oil and Gas Volumes and Prices
Kerr-McGee's daily oil production averaged 175,000 barrels in the 2005 second quarter, compared with 140,500 barrels in the 2004 period, an increase of 25%. The increase was primarily due to the Westport acquisition and start of production in China.
The average sales price for oil for the 2005 second quarter, including the effect of the company's hedging program, was $42.90 per barrel, which was 59% higher than in the prior-year quarter.
Natural gas sales averaged 1,118 million cubic feet per day for the 2005 second quarter, up 51% from the prior-year period, primarily due to the Westport acquisition and the start of production at Red Hawk.
The average natural gas sales price, including the effects of the company's hedging program, was $6.42 per thousand cubic feet, compared with $4.70 per thousand cubic feet in the 2004 second quarter.
In the first half of 2005, 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, gas production from the North Sea, and production expected to be disposed of in the asset divesture program.
Revenues and Capital Expenditures
Second-quarter 2005 revenues of $1.8 billion were up 70% from the
prior-year period. Capital expenditures were $485.0 million, compared with
$289.2 million for the 2004 second quarter.
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