Oklahoma City-based Kerr-McGee Oil &
Gas has been among the busiest independent
oil companies in the mergers and acquisitions market.
The result: The firm has grown to be a major player
in several key producing regions around the world.
Jeffrey W. Lund, vice president of exploration and
production for Kerr-McGee in Houston, pointed out that no industry
or company, regardless of size, has been excluded from today's merger
and acquisition frenzy -- and some of the largest of these transactions
have occurred in the energy industry.
"The more visible mega-mergers (BP-Amoco-Arco, ExxonMobil)
have created a new class of super majors, but they also, perhaps,
triggered opportunities for additional transactions within the energy
sector as the mega majors manage their portfolios to increase profitability,
adopt new business models and control costs," Lund said.
Kerr-McGee has strictly adhered to several key principles
for merger and acquisition transactions.
"In order to achieve value growth through these deals,"
Lund said, "there are a few attributes that we must get right:"
-
There must be a strategic purpose for the merger or acquisition.
"Once this framework is set," he added, "you must
be committed to adhering to those basic principles."
-
There must be up side opportunity that enhances the value of the
acquired or merged assets.
-
There must be the ability to create financial and operating synergies
-- and absolute dedication to achieving those synergies in a timely
manner in order to make the surviving entity stronger than the separate
pieces.
-
There must be creativity and flexibility.
"In today's economy you must be capable and willing
to think outside the box to structure a truly value enhancing transaction,"
he said.
-
There must be timing that is beneficial from both an operational,
functional and business cycle standpoint.
"Many people believe that in the energy sector it
helps a lot if you have the ability to achieve a merger when oil
is $10 and natural gas is $2," Lund said, "but this is not the only
environment in which successful transactions can occur. We believe
that any transaction that is entered into with the expectation that
price increases will validate the transaction will be doomed to
failure."
-
There must be a willing buyer and seller.
"Of course, there have been transactions consummated
in a hostile environment," Lund said. "However, I believe that the
maximum value is created for all participants when both parties
are working toward a common goal."
'Some Serious Upside'
Kerr-McGee's recent merger and acquisition transactions
have been consummated at various stages within the commodity price
cycle.
"We certainly liked the timing of our deal with Oryx
-- it was serious frosting on the cake," Lund said, "but the transaction
was value creating for us even without the subsequent dramatic price
rise.
"Our strategy is to profitably grow our worldwide
exploration and production and build on our core E&P areas in
the United States, the North Sea and selected deep-water basins."
This strategy has helped Kerr-McGee's transformation
from a relatively small domestic integrated energy company with
assets of $3.7 billion to total assets of more than $10 billion
-- that includes divesting of refining, marketing and coal business
as well as mergers and several strategic acquisitions.
Among the company's more important moves came in
1996, when Kerr-McGee merged with Devon Energy.
"A strategic decision was made to change the ownership
structure of our North American onshore assets, which at that time
represented a relatively small amount of reserves that were scattered
throughout North America," Lund said. "The Devon transaction was
a win/win divestiture, which adjusted both companies' portfolios
to align with their specific strategies."
The company "employed a creative financial swap of
properties for equity that was an innovative financial deal structure
subsequently replicated by other companies," Lund said.
Another important Kerr-McGee deal came in 1998, when
Gulf Canada's North Sea properties came on the market -- assets
that meshed with Kerr-McGee's strategy to grow its core North Sea
E&P operations.
Also, both firms had a common interest in the Gryphon
property.
"We came to recognize that there was also an opportunity
to develop an under-appreciated prospect 10 miles north of our Gryphon
property," Lund recalled. "Our own mapping of the area revealed
potential for as much as 100 million barrels of oil."
Less than two weeks after mobilizing the technical
team, Kerr-McGee had a definitive purchase and sales agreement with
Gulf Canada that helped them avoid a protracted public auction.
"And in February of last year we announced the Leadon
discovery, exactly the prospect that we mapped at the time of the
Gulf acquisition," he added.
Through some very creative lease work, Kerr-McGee
now controls 100 percent of Leadon -- a 100+ million barrel discovery
on a 100 percent Kerr-McGee leasehold.
"That," Lund said, "is some serious upside and synergy
realized."
A Strategic Move
Also in 1998 Kerr-McGee announced its merger with
Oryx Energy, the largest transaction in the company's history. The
two firms had strong property overlays, giving the merged company
critical mass in the deep-water Gulf of Mexico and the North Sea.
"The merger was a major strategic combination that
had most all of our key ingredients for success -- core focus, synergy,
friendly transaction and opportunity for upside," Lund said. "We
were truly operating as one corporation within days of receiving
stockholder approval of the merger."
Strategically, the assets fit together ideally. The
combination created one of the largest leasehold positions in the
deep-water Gulf of Mexico and allowed Kerr-McGee to assemble an
experienced team and generate the financial strength to capitalize
on the potential.
"The final result," Lund said, "is an entity that
is much stronger than either of its parts."
Kerr-McGee, like so many independents, also has benefited
from other mega-mergers. In January 2000, for example, the firm
took advantage of the Repsol/YPF merger and Repsol's need to divest
itself of certain non-core assets to reduce its overall debt by
acquiring Repsol's North Sea assets.
That move added about 28,000 barrels of oil to the
firm's daily production and 100 million barrels of oil equivalent
of reserves to the UK unit -- solidifying Kerr-McGee's position
as the largest U.S. independent oil producer in the North Sea.
These strategic assets were situated between and
adjacent to the Gryphon development and the Leadon discovery, giving
the company four additional fields in the immediate area and solidifying
core operations in a cost-effective way.
Most recently, Kerr-McGee announced earlier this year
its acquisition of HS Resources, valued at approximately $1.7 billion.
"This strategic acquisition ... fits our strategy
to profitably grow our oil and gas operations while providing balance
to our portfolio from virtually every aspect," Lund said. "It also
provides significant upside opportunity to further add to our reserves."
The assets of HS Resources are primarily concentrated
within Colorado's Wattenberg Field in the D-J Basin along the Front
Range of the Rockies. The acquisition, Lund said, will:
- Create a new core U.S. operating area with long-lived reserves
and significant growth opportunities.
- Add 1.3 trillion cubic feet of gas equivalent to Kerr-McGee's
U.S. reserves at $1.10 per thousand cubic feet of gas equivalent.
- Increase the firm's gas component by nearly 80 percent.
"Mergers and acquisitions are key business activities,"
Lund said. "They complement the drill bit in achieving strategic
objectives."