Kerr-McGee Reaps Motherlode

Updated from 8:46 a.m. EDT

Two years of maneuvering to enhance value at Kerr-McGee(KMG Quote) found the bull's-eye Friday when the company agreed to be acquired by Anadarko(APC Quote) at a 40% premium to its market value.

Anadarko will pay $70.50 a share in cash, or about $16 billion, for its Oklahoma-based rival. Kerr-McGee's stock, which closed Thursday at $50.30, surged on the news, recently rising $18.21, or 36.2%, to $68.51. As of Thursday's close, Kerr-McGee's market capitalization was about $11.4 billion, while Anadarko's was $22.2 billion.

Anadarko also announced an agreement Friday to acquire Western Gas Resources(WGR Quote) for $61 a share cash, or $4.7 billion. Western Gas closed at $40.91 Thursday and was up $18.63, or 45.5%, to $59.54 on Friday.

Shares of Anadarko fell $2.69, or 5.5%, to $45.70.

All told, including assumed debt, the acquisitions will cost $23.3 billion. To pay for it, Anadarko got a $24 billion acquisition facility from UBS, Credit Suisse and Citigroup that it will pay down using proceeds from asset sales, free cash flow and the sale of new stock over the next 18 to 24 months

The Anadarko-Kerr deal unites two of the biggest independent oil and gas producers in the U.S. Oklahoma City-based Kerr-McGee has big exploration and production operations in the U.S., particularly in the Rocky Mountains; the Gulf of Mexico; and offshore China. It claimed proven reserves of 362 million barrels of crude and equivalents at the end of 2005.

Anadarko expects ultimately to recover 3.8 billion barrels of equivalent from Kerr-McGee and Western Gas at a price of less than $12 per barrel. By contrast, crude futures are currently trading north of $70 a barrel.

"Opportunities to gain access to such large, high-margin resource opportunities at such economic full-cycle costs are rare, and we are excited about the value we expect to create for Anadarko shareholders," Anadarko said.

"The core assets being acquired strongly complement Anadarko's existing properties, providing the scale and focus needed to deliver more robust, predictable and efficient growth," Anadarko said. "Kerr-McGee's outstanding deepwater holdings and skill sets will elevate Anadarko into the top echelon of deepwater operators.

"Similarly, Kerr-McGee's long-lived natural gas resource plays in Colorado and Utah, along with Western Gas Resources' in Wyoming, will combine with Anadarko's assets to make us one of the largest producers in several of the most prolific basins in the Rockies," Anadarko said.

On a continuing operations basis, Kerr-McGee earned about $946 million on revenue of $3.24 billion in the year ended Dec. 31, 2005, up from $415 million on sales of $2.85 billion a year earlier. Analysts surveyed by Thomson First Call expect the company to earn $4.50 a share this year, giving the $70.50-a-share takeout price a price-to-earnings ratio of roughly 15.7.

Based on Thursday's close, Kerr-McGee's stock is up 15% on the year and more than 80% since the start of 2005. Much of the two-year gain followed a campaign of shareholder activism by Carl Icahn, who convinced the driller to sell its chemicals business in April 2005 and spend $4 billion on share buybacks.

Woodlands, Texas-based Anadarko derives most of its production from the U.S. and claimed proven reserves of 1.1 billion barrels of crude and equivalents and 7.9 trillion cubic feet of natural gas at the end of 2005. The company is expected to earn $2.55 billion, or $5.58 a share, on sales of $7.86 billion this year, according to Thomson First Call.