SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 8, 1998
(Date of Report - Date of earliest event reported)
KERR-MCGEE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-3939 73-0311467
(State of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
Kerr-McGee Center
Oklahoma City, Oklahoma 73125
(Address of principal executive offices) (Zip Code)
(405) 270-1313
(Registrant's telephone number)
Item 5. Other Events
The company committed to formal plans for the sale of its coal
operations in the second quarter of 1998 and began reporting coal operations as
discontinued operations. The company hereby incorporates by reference in
Attachment A the restated financial information and statements at December 31,
1997, 1996 and 1995 and for the years then ended.
ATTACHMENT A
Management's Discussion and Analysis
Results of Consolidated Operations
Net income (loss) and per-share amounts for each of the three years in the
period ended December 31, 1997, were as follows:
(Millions of dollars, except per-share amounts) 1997 1996 1995
----------------------------------------------- ---- ---- ----
Net income (loss) $194 $220 $(31)
Income from continuing operations
excluding special items 151 174 88
Earnings (loss) per share -
Net income (loss) -
Basic 4.06 4.45 (.60)
Diluted 4.04 4.43 (.60)
Income from continuing operations
excluding special items -
Basic 3.17 3.52 1.70
Diluted 3.15 3.50 1.70
Net income (loss) was affected by a number of special items in each of the
years. In 1997, special items were principally nonoperating that increased net
income by $10 million. The 1996 special items resulted in a charge to net income
of $10 million and were both operating and nonoperating. In 1995, special items
related primarily to the company's adoption of Statement of Financial Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The following table reconciles income
from continuing operations excluding special items to net income:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
<S> <C> <C> <C>
Net income from continuing operations excluding
special items $151 $174 $ 88
---- ---- -----
Special items, net of income taxes -
Gains on the sale of equity securities 12 15 --
Settlements with insurance carriers 8 44 --
Gains on the sale of nonstrategic oil and
gas properties 4 8 --
Net provision for environmental reclamation
and remediation of inactive sites (13) (28) (16)
Pending/settled litigation (1) (21) --
Asset impairment -- (16) (125)
Restructuring (1) (7) (4)
Other, net 1 (5) (1)
----- ----- -----
Total 10 (10) (146)
----- ----- -----
Income from discontinued operations,
net of income taxes 33 56 27
----- ------ -----
Net income (loss) $194 $220 $(31)
==== ==== ====
</TABLE>
The merger of the company's North American onshore properties into Devon
Energy Corporation (Devon) was effective December 31, 1996. This merger affects
the comparability of the periods presented since the company's approximate 31%
investment in Devon is accounted for by the equity method (see Note 4). In 1995,
the company completed the sale of substantially all of its refining and
marketing operations and completed the sale of the remaining assets in 1996. The
sales of the coal operations were completed in 1998. Therefore, all amounts
related to refining and marketing and coal are shown in the Consolidated
Statement of Income as discontinued operations.
Income from continuing operations excluding special items for 1997 declined
$23 million from the prior year, due to declines in operating profit for both
business units. Excluding special items, exploration and production operating
profit for 1997 was 25% lower than the prior year, while chemical results were
lower by 7%. The $86 million increase in 1996 income from continuing operations
excluding special items, compared with 1995, was primarily due to oil and gas
exploration and production results that more than doubled the prior year's
results, partially offset by a 26% decline in earnings from the chemical unit.
Operating profit excluding special items was $262 million, $326 million and $235
million for 1997, 1996 and 1995, respectively.
Following is a discussion of the major changes in various items shown in
the Consolidated Statement of Income.
Consolidated sales from continuing operations were $1.4 billion, compared
with $1.6 billion for 1996 and $1.4 billion for 1995. Sales for 1997 were less
than the prior year due to lower crude oil prices and volumes, lower natural gas
volumes and lower average prices for titanium dioxide pigment. Primary
contributors to the decline in oil and gas volumes were the merger of the North
American onshore properties into Devon, divestitures of nonstrategic properties
and significantly lower sales of natural gas purchased from third parties.
Partially offsetting these declines were higher prices for natural gas and
increased pigment volumes. The increase in 1996 sales over 1995 resulted
primarily from higher crude oil and natural gas prices and higher sales of
purchased third-party natural gas, partially offset by declines in titanium
dioxide pigment sales prices and lower crude oil volumes.
Costs and operating expenses were $739 million, $804 million and $745
million for 1997, 1996 and 1995, respectively. The 1997 amount was lower than
the prior year, primarily due to the absence of North American onshore and
divested oil and gas properties and significantly lower volumes of natural gas
purchased for resale, partially offset by higher production costs for pigment.
Costs and operating expenses for 1996 were higher than 1995, primarily due to
increased purchases of natural gas for resale and higher feedstock and utility
costs for titanium dioxide pigment.
Following are general and administrative expenses for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
<S> <C> <C> <C>
General and administrative expenses
excluding special items $109 $106 $113
---- ---- ----
Special items -
Net provision for environmental reclamation
and remediation of inactive sites 20 43 27
Pending/settled litigation 2 29 --
Restructuring 2 10 7
Other, net 3 9 --
---- ----- ----
Total 27 91 34
---- ----- ----
General and administrative expenses $136 $197 $147
==== ==== ====
</TABLE>
Net provisions for environmental reclamation and remediation of inactive
sites primarily represent additional provisions established for the removal of
low-level radioactive materials from the company's inactive facility and offsite
areas in West Chicago, Illinois. Restructuring represents charges for the
relocation of the exploration and production unit to Houston, Texas, and
severance associated with the divestiture program and the Devon merger.
Asset impairments totaled $25 million in 1996 and related principally to
certain exploration and production properties in the Gulf of Mexico. This
compares with $204 million for continuing operations in 1995, which resulted
from the company's adoption of FAS 121 and the writedowns associated with the
oil and gas divestiture program (see Note 11).
Exploration costs for 1997, 1996 and 1995 were $65 million, $74 million and
$80 million, respectively. Lower dry hole costs in the North Sea, offset in part
by higher costs in China, were the primary reason for the reduced 1997 costs.
Also contributing to the reduction was lower undeveloped lease amortization,
partially offset by higher geophysical cost. In 1996, the company had lower Gulf
of Mexico undeveloped lease amortization and lower geological and geophysical
costs, partially offset by higher dry hole expense, compared with 1995.
Interest and debt expense totaled $47 million in 1997, $52 million in 1996
and $60 million in 1995. Decreased debt was the principal reason for the lower
1997 expense, compared with the prior year. The decrease in 1996 expense was due
to both lower debt and lower average borrowing costs.
Other income was as follows for each of the years in the three-year period
ended December 31, 1997:
(Millions of dollars) 1997 1996 1995
--------------------- ----- ----- -----
Other income excluding special items $ 47 $ 29 $ 27
Special items -
Gains on sales of equity securities 18 23 --
Settlements with insurance carriers 12 67 --
Gains on the sale of nonstrategic
oil and gas properties 6 13 --
Other, net 7 -- 2
----- ----- -----
Total 43 103 2
----- ----- -----
Other income $ 90 $132 $ 29
===== ==== =====
Equity income from Devon was the primary reason for the increase in other
income excluding special items for 1997 compared with the prior year. Also
contributing were lower foreign currency transaction losses and higher interest
income.
Transactions Subsequent to Year-End 1997
The company continuously reviews each business unit in an effort to find
innovative ways to maximize shareholder value through existing operations and/or
new opportunities worldwide. In a strategy approved by the Board of Directors,
the company's future efforts will be concentrated on oil and gas exploration and
production and titanium dioxide pigments, the principal chemical business.
The company announced its intent to exit the coal business in January 1998.
The sales were completed in mid-1998 for $600 million cash, resulting in an
after-tax gain of $257 million. Therefore, coal operations are presented as
discontinued operations in all periods. The gain on the sale and the cash
proceeds will be reflected in the 1998 Consolidated Statement of Income and
Consolidated Statement of Cash Flows.
Over the three-year period ended December 31, 1997, coal contributed
operating profit excluding special items and net cash flow (after-tax cash flow
less cash capital expenditures) of $185 million and $150 million, respectively.
The absence of the coal operations will contribute to a higher effective tax
rate due to the absence of statutory allowances for coal depletion.
The company also disposed of its ammonium perchlorate operation in the
first half of 1998 in a $39 million cash sale. The gain on the sale was
immaterial. In January 1998, the company signed a letter of intent to negotiate
the sale of substantially all of the remaining electrolytic and specialty -
chemical businesses. The discussions were terminated mid-1998.
Pigment production capacity was significantly expanded in 1998 with the
acquisition of an initial 80% interest in Bayer AG's European pigment
operations. The company has the option to acquire the remaining 20% interest
over a two-year period beginning in 2001. The $97 million cash transaction was
effective March 31, 1998.
The company acquired additional interest in the United Kingdom sector of
the North Sea with the acquisition of the North Sea assets of Gulf Canada
Resources Limited (Gulf Canada) for Cdn $590 million (U.S. $419 million) and
assumed debt. The transaction was effective March 31, 1998. The additional
production from these properties will increase the company's North Sea
production and reserves in excess of 80% and 75%, respectively, of the company's
North Sea average production rates and proved reserves at year-end 1997.
In the 1998 fourth quarter, the company and Oryx Energy Company (Oryx)
announced a strategic merger, which will create the fourth largest U.S.
independent oil and gas exploration and production company. Oryx shareholders
will receive 0.369 shares of newly issued Kerr-McGee common stock for each share
of Oryx common stock. Approximately 39 million shares of Kerr-McGee common stock
will be issued to the Oryx stockholders in total, bringing total shares
outstanding to approximately 86 million. The transaction will be accounted for
as a pooling of interest and be tax-free to Oryx stockholders. The existing Oryx
debt (approximately $1.3 billion) will become the company's obligation. The Oryx
7-1/2% convertible debentures due 2014 will become convertible into shares of
Kerr-McGee common stock at a conversion rate adjusted to reflect the exchange
ratio. The combined companies will have total capitalization of approximately $6
billion and a Board of Directors numbering 14. Nine of the of the directors will
be from the company's current board and five from the Oryx board. The merger is
expected to be consummated in early 1999, pending shareholder and certain
regulatory approvals.
Each of these transactions are independent steps in an ongoing strategic
plan. Management anticipates that each of these transactions will have positive
long-term impacts on operating profit, cash flow and liquidity that will enhance
shareholder value.
Segment Operations
Operating profit from each of the company's segments is summarized in the
following table:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- -----
Operating profit excluding special items -
Exploration and production $178 $236 $113
Chemicals 84 90 122
---- ---- ----
Total 262 326 235
Special items (6) (37) (210)
---- ---- ----
Operating profit $256 $289 $ 25
==== ==== ====
Exploration and Production
The company merged its North American onshore exploration and production
assets into Devon effective December 31, 1996, and accounts for the investment
on the equity basis. Therefore, income from Devon is not included in 1997
operating profit, and the company's proportionate interest in Devon's volumes is
not included in the 1997 production and sales shown in the following table.
<TABLE>
<CAPTION>
(Millions of dollars, except per-unit amounts) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales $628 $874 $690
Operating profit excluding special items $178 $236 $113
Special items (3) (32) (210)
Operating profit (loss) $175 $204 $(97)
Proprietary crude oil and condensate produced
(thousands of barrels per day) 57 69 70
Average price of crude oil sold (per barrel) $18.51 $19.16 $15.99
Proprietary natural gas sold (MMCF per day) 184 281 291
Average price of natural gas sold (per MCF) $2.56 $2.12 $1.52
</TABLE>
Special items in 1997 consisted primarily of additional costs for the
unit's restructuring and relocation to Houston. The 1996 special items were $22
million for asset impairments and $10 million for restructuring, due to the
December 1996 merger of the North American onshore properties into Devon and the
announcement of the relocation to Houston. The 1995 special items related to FAS
121 asset impairments and writedowns associated with the program to divest
nonstrategic and marginal properties and restructuring charges.
Equity accounting for the merged properties and lower average sales prices
for crude oil, partially offset by increased sales prices for natural gas and
lower exploration expenses, were the primary reasons for lower 1997 operating
profit excluding special items. Improvement in 1996 operating profit excluding
special items, compared with 1995, resulted primarily from increases of 20% and
39% in the company's average sales prices for crude oil and natural gas,
respectively, and a decrease in exploration expenses.
Chemicals
Chemical operating profit and sales were as follows. Special items in 1997
were primarily for the writeoff of obsolete equipment and in 1996 for
impairments and shutdown costs for a crosstie-treating facility and the
elimination of a product line at a specialty plant.
(Millions of dollars) 1997 1996 1995
--------------------- ----- ----- -----
Sales $ 760 $ 692 $707
Operating profit excluding special items $ 84 $ 90 $122
Special items (3) (5) --
----- ----- -----
Operating profit $ 81 $ 85 $122
===== ===== ====
The increase in 1997 sales, compared with 1996, was due to increased
titanium dioxide pigment and ammonium perchlorate sales volumes. Partially
offsetting these increases were lower average pigment prices. Although prices
strengthened considerably in the last half of the year, average prices received
in 1997 were less than those received in the prior year. The higher 1997 pigment
volumes resulted from the completion of the expansion at the Hamilton,
Mississippi, plant and a full year's production from the 1996 expansion in
Western Australia. The decrease in 1996 sales from 1995 resulted from lower
pigment sales prices. Operating profit in both 1997 and 1996 was also adversely
affected by higher per-unit production costs for pigment than in the respective
prior years.
Financial Condition
(Millions of dollars) 1997 1996 1995
--------------------- ------ ------ ------
Current ratio 1.3 1.7 1.3
Working capital $ 166 $ 320 $ 189
Total debt 579 663 735
Total debt less cash 396 542 648
Stockholders' equity $1,440 $1,367 $1,416
Total debt to total capitalization 29% 33% 34%
Floating-rate debt to total debt 11 66 64
Cash Flow
Net cash provided by operating activities was $569 million in 1997,
compared with $645 million in 1996 and $369 million in 1995.
The decrease in 1997 resulted primarily from lower net income, lower
noncash charges, higher cash environmental expenditures and lower deferred
income taxes, partially offset by working capital and other changes that
increased net cash provided by operating activities. Cash flow provided by
operating activities in 1997 was also adversely affected by the company's merger
of its North American onshore oil and gas properties into Devon, as
undistributed earnings from equity affiliates represent a noncash item.
The increase in 1996 net cash provided by operating activities, compared
with 1995, was primarily attributable to the company's record net income and
temporary changes in working capital and other, which decreased 1995 net cash
provided by operating activities by $211 million. Although a net loss of $31
million was incurred in 1995, the special charges, totaling $260 million before
income taxes, were all noncash and did not adversely affect net cash provided by
operations.
In each of the years 1997, 1996 and 1995, cash provided by operating
activities was supplemented by other sources of cash that were used primarily to
reduce debt and purchase the company's common stock (see Note 14). In 1997, cash
available increased $21 million from the sale of equity securities, $18 million
from the sale of nonstrategic and marginal exploration and production
properties, $17 million from the sale of other assets and $21 million related to
insurance settlements. During 1996, the company received cash proceeds of $48
million from the divestiture of nonstrategic, marginal and other exploration and
production properties; $43 million related to insurance settlements; $29 million
from the sale of equity securities; $13 million from the sale of the remaining
refining and marketing assets; and $11 million from the sale of other assets,
including the company's West Virginia coal mining operation. Proceeds from the
sale of substantially all of the company's refining and marketing operations
increased cash available by $419 million in 1995.
Total debt declined to $579 million at year-end 1997 from $735 million at
year-end 1995. In 1995, the company's Board of Directors authorized a stock
purchase program of up to $300 million. The program was completed in August
1997. Expenditures were $60 million in 1997, $195 million in 1996 and $45
million in 1995, with a total of 4.8 million shares purchased through the
program.
On January 14, 1997, the company's Board of Directors approved an increase
in the quarterly dividend payable April 1, 1997, to $.45 per share from $.41 per
share. In 1995, the Board increased the quarterly dividend payable January 2,
1996, to $.41 per share from $.38 per share.
Liquidity
The company's strong balance sheet reflects a solid working capital
position and low debt to capitalization. The company's debt has been rated "A"
or "A-" by various rating agencies, resulting in low debt costs. At December 31,
1997, the company's net working capital position was $166 million, a decline
from the 1996 year-end position. The merger of the company's North American
onshore exploration and production properties contributed to the lower working
capital position since certain components of working capital were converted into
the Devon equity investment. The 1996 net working capital position of $320
million was an increase of $131 million from the prior year. This increase was
the result of the other cash inflows discussed previously, which were used
primarily to repay short-term borrowings and fund the company's stock purchase
program.
The percentage of total debt to total capitalization was 29% at December
31, 1997, 33% at December 31, 1996, and 34% at year-end 1995. This improvement
is the direct result of the company's repayment of debt, which more than offset
the effect of the stock purchase program on total capitalization.
In October 1997, the company replaced the majority of its then outstanding
floating-rate debt with $300 million of fixed-rate securities. The company
issued $150 million of 7.125% (effective rate 7.01%) debentures due October 15,
2027, and $150 million of 6.625% (effective rate 6.54%) notes due October 15,
2007.
Additionally, the company and/or its subsidiaries have several revolving
credit agreements. At year-end 1997, $37 million was outstanding under one of
the agreements with interest payable at varying rates. At December 31, 1997, the
company had unused lines of credit and revolving credit facilities of $714
million. Of this amount, $340 million and $265 million can be used to support
the commercial paper borrowings of Kerr-McGee Credit Corporation and Kerr-McGee
Oil (U.K.) PLC, respectively, both wholly owned subsidiaries.
Two revolving credit agreements were amended in 1997. The $105 million
revolving credit agreement between the company's wholly owned subsidiary
Kerr-McGee China Petroleum Ltd. and several banks was extended to March 6, 2000.
The $37 million outstanding at year-end 1997 was under this agreement. The
revolving credit agreement among the company, its wholly owned subsidiary
Kerr-McGee Oil (U.K.) PLC and several banks was amended from $230 million to
$225 million and separated into two loan facilities. Under one arrangement, $150
million may be borrowed through April 28, 2000. Under the other, $75 million is
available through April 28, 1998, with the provision that one-year extensions
may be requested. Interest is payable at varying rates for all of the revolving
credit agreements.
The company finances capital expenditures through internally generated
funds and various borrowings. Cash capital expenditures were $341 million in
1997, $392 million in 1996 and $484 million in 1995, a total of $1.2 billion.
During this same period, $1.7 billion of net cash was provided by operating
activities (exclusive of working capital and other changes), which was
approximately $200 million in excess of cash capital expenditures and dividends
paid during the period.
Management anticipates that 1998 cash capital requirements, currently
estimated at $520 million (including $60 million for the coal business), and the
capital expenditures programs for the next several years can continue to be
provided through internally generated funds and selective short-term and/or
long-term borrowings.
Market Risks
The company is exposed to a variety of market risks, including the effects
of movements in foreign currency exchange rates, interest rates and certain
commodity prices. The company addresses its risks through a controlled program
of risk management that includes the use of derivative financial instruments.
The company does not hold or issue derivative financial instruments for trading
purposes. See Notes 1 and 16 to the Consolidated Financial Statements for
additional discussion of the company's financial instruments and hedging
activities.
Foreign Currency Exchange
The U.S. dollar is the functional currency for all of the company's
operations. It is the company's intent to hedge a portion of its monetary
assets, liabilities and commitments denominated in foreign currencies.
Periodically, the company purchases foreign currency forward contracts to
provide funds for operating and capital expenditure requirements that will be
denominated in foreign currencies, primarily Australian dollars and British
pounds sterling. These contracts generally have durations of less than three
years. The company also enters into forward contracts to sell various foreign
currencies as hedges, principally for accounts receivable generated from
titanium dioxide pigment sales denominated in foreign currencies. These
contracts are principally for European currencies and generally have durations
of less than a year. Since these contracts qualify as hedges and correlate to
currency movements, any gains or losses resulting from exchange rate changes are
deferred and recognized as adjustments of the transaction when the hedged item
occurs.
At year-end 1997, the company's derivative financial instruments were
comprised only of foreign currency forward contracts. Following are the notional
amounts at the contract exchange rates, weighted-average contractual exchange
rates and estimated fair value by contract maturity for open foreign currency
contracts at year-end 1997. All amounts are U.S. dollar equivalents.
<TABLE>
<CAPTION>
Dec. 31, 1997
Notional Weighted-Average Estimated Fair
(Millions of dollars, except average contract rate) Amount Contract Rate Value
<S> <C> <C> <C>
Forward contracts to purchase (sell) currencies -
Maturing in 1998 -
Australian dollar $63 .7507 $55
British pound sterling 12 1.5897 12
German mark (3) 1.7721 (3)
British pound sterling (1) .6137 (1)
Belgian franc (1) 36.0382 (1)
Maturing in 1999 -
Australian dollar 39 .7377 35
</TABLE>
Interest Rates
The company's exposure to changes in interest rates relates primarily to
long-term debt obligations. At year-end 1997, the company's long-term debt was
comprised of 93% fixed-rate instruments, which minimize earnings volatility
related to interest expense. The company does not currently participate in
interest rate-related derivative financial instruments.
The table below presents principal amounts and related weighted-average
interest rates by maturity date for the company's long-term debt obligations.
All borrowings are in U.S. dollars.
<TABLE>
<CAPTION>
There- Fair Value
(Millions of dollars) 1998 1999 2000 2001 2002 after Total 12/31/97
- --------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate debt -
Principal amount $2 $8 $10 $12 $10 $475 $517 $632
Weighted-average interest rate 9.49% 9.00% 9.61% 9.61% 9.61% 7.05% 7.25%
Variable-rate debt -
Principal amount -- -- $37 -- -- -- $37 $37
Weighted-average interest rate -- -- 6.04% -- -- -- 6.04%
</TABLE>
Commodity Prices
Although no such contracts were entered into during 1997, the company has
periodically used commodity futures and option contracts to hedge a portion of
its crude oil and natural gas sales and natural gas purchased for operations in
order to minimize the price risks associated with the production and marketing
of crude oil and natural gas. These contracts generally had maturities of one
year or less. Since the contracts qualified as hedges and correlated to price
movements of crude oil and natural gas, any gain or loss from these contracts
was explicitly deferred and recognized as part of the hedged transaction.
In 1997, approximately 70% of the company's coal sales resulted from
contracts with durations of at least three years. At year-end 1997, the average
contract price was in excess of spot prices.
Other
As a global energy and inorganic chemical company, Kerr-McGee is subject to
the volatility of crude oil, natural gas and titanium dioxide pigment prices and
risks associated with operations outside the United States. The company has
announced its intention to concentrate on two primary businesses - oil and
natural gas exploration and production and the production and marketing of
titanium dioxide pigments.
Oil and gas prices in 1998 are below those received in 1997. Company
management continuously monitors the underlying global pricing fundamentals of
these commodities and factors those conditions into its projections and economic
forecasts. In addition, more than 15% of the company's year-end 1997 proprietary
oil production was from Southeast Asia, which is in the midst of an economic
crisis. The company is taking steps to provide reasonable assurance that its
level of risk remains manageable, such as requiring letters of credit from
buyers when management deems appropriate.
Pigment prices have increased from 1997 levels, and the industry continues
to consolidate. Management anticipates that the consolidation trends will
continue in the near future and that the company's status as one of only four
companies that own the preferred chloride technology, along with its low cost
position, will benefit operating profit, cash flow and liquidity.
Environmental Matters
The company's operations are subject to various environmental laws and
regulations. Under these laws, the company is subject to possible obligations to
remove or mitigate the effects on the environment of the disposal or release of
certain chemical, petroleum or low-level radioactive substances at various
sites, including sites that have been designated Superfund sites by the U.S.
Environmental Protection Agency (EPA) pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as
amended. At December 31, 1997, the company had received notices that it has been
named a potentially responsible party (PRP) with respect to the remediation of
16 existing EPA Superfund sites and may share liability at certain of these
sites. In 1996, the company signed a Consent Decree with respect to a site at
Slidell, Louisiana. In addition, the company and/or its subsidiaries have
executed consent orders, operate under a license or have reached agreements to
perform or have performed remediation or remedial investigations and feasibility
studies on sites not included as EPA Superfund sites.
The company does not consider the number of sites for which it has been
named a PRP to be a relevant measure of liability. Because of continually
changing environmental laws and regulations, the nature of the company's
businesses, the large number of other PRPs, the present state of the law, which
imposes joint and several liability on all PRPs under CERCLA, and pending legal
proceedings, the company is uncertain as to its involvement in many of the
sites. Therefore, the company is unable to reliably estimate the potential
liability and the timing of future expenditures that may arise from many of
these environmental sites. Reserves have been established for the remediation
and reclamation of active and inactive sites where it is probable that future
costs will be incurred and the liability is estimable. In 1997, $41 million was
added to the reserve for active and inactive sites. At December 31, 1997, the
company's reserve for these sites totaled $243 million. In addition, at year-end
1997, the company had reserves of $68 million for the future costs for the
abandonment and removal of offshore well and production facilities at the end of
their productive lives and $23 million for the decommissioning and reclamation
of coal mining locations. In the Consolidated Balance Sheet, $251 million of the
total reserve is classified as a deferred credit, and the remaining $83 million
is included in current liabilities.
Expenditures for the environmental protection and cleanup of existing sites
for each of the last three years and for the three-year period ended December
31, 1997, are as follows:
(Millions of dollars) 1997 1996 1995 Total
--------------------- ---- ---- ---- -----
Charges to environmental reserves $ 94 $56 $ 61 $211
Recurring expenses 20 19 23 62
Capital expenditures 17 15 20 52
---- ---- ---- -----
Total $131 $90 $104 $325
==== ==== ==== =====
The company has not recorded in the financial statements potential
reimbursements from governmental agencies or other third parties (see Notes 10
and 13). The following table reflects the company's portion of the known
estimated cost of investigation and/or remediation that is probable and
estimable. The table includes all EPA Superfund sites where the company has been
notified it is a PRP under CERCLA and other sites for which the company believes
it had some ongoing financial involvement in investigation and/or remediation at
year-end 1997.
<TABLE>
<CAPTION>
Total Known Total
Estimated Expenditures Total Number
Cost Through 1997 of Identifiable
Location of Site State of Investigation/Remediation (Millions of dollars) PRPs
<S> <C> <C> <C> <C> <C>
EPA Superfund sites
Milwaukee, Wis. Executed consent decree to remediate
the site of a former wood-treating
facility. Awaiting approval of proposed
remedy; installed and operating a free-
product recovery system $ 19 $ 7 3
West Chicago, Ill., Began cleanup of a portion of one site
two sites outside in 1995, and cleanup of the second site
the facility began in 1997 (see Note 10). 43 29 1
Slidell, La., Chicago, Ill., Various stages of investigation/remediation 30 26 492
and 11 sites individually ------ ----- -----
not material 92 62 496
------ ----- -----
Non-EPA Superfund sites
under consent order, license
or agreement
West Chicago, Ill., Reached agreement with the City of West
facility Chicago. Decommissioning is in progress
under State of Illinois supervision while
awaiting state license amendment (see
Note 10). Began shipments to a
permanent disposal facility in 1994. 348 185
Cleveland/Cushing, Okla. Began cleanup in 1996 48 36
Cimarron, Okla. Remediation is complete and monitoring
continues. 36 34
------ -----
432 255
------ -----
Non-EPA Superfund sites
individually not material 154 118
------ -----
Total for all sites $678 $435
==== ====
</TABLE>
Although management believes adequate reserves have been provided for
environmental and all other known contingencies, it is possible, due to the
previously noted uncertainties, that additional reserves could be required in
the future.
Other
The use by many existing computer systems of a two-digit year date format
rather than four digits - the Year 2000 issue - impacts the company's business
systems and facilities. In 1996, a formal program was initiated and a number of
project teams were formed and charged with the responsibility of identifying
areas of potential concern and ensuring that timely corrective actions are
taken. At year-end 1997, the implementation of new or modification of existing
business systems was approximately two-thirds complete, and the review of plant
and facility process controls was under way. Management anticipates modification
or replacement of systems will be essentially complete by year-end 1998. The
company is also working with key suppliers, vendors and customers to ensure Year
2000 compliance. The ultimate outcome of the Year 2000 project cannot be
guaranteed; however, the company believes that the program under way will
provide a smooth transition into the year 2000 and reduces risk to a manageable
level. The cost of addressing the Year 2000 issue is not material to the
consolidated results of operations or financial condition of the company.
During 1997 and early 1998, the Financial Accounting Standards Board issued
several pronouncements related to financial statement disclosure that will
affect the company's 1998 financial statement presentation. There will be no
effect on net income as a result of these pronouncements. Following is a
discussion of the new standards.
FAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components as a part
of the basic financial statements. At the beginning of 1998, the company had no
significant items to be reported as other comprehensive income. However, prior
years' information will be presented. The disclosures will be required for the
1998 year-end financial statements, and abbreviated information will be required
for the first quarter.
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for determining segments and reporting
information about a company's business segments in annual financial statements.
Also required is selected information about operating segments in interim
financial reports issued to shareholders. The company does not foresee any
material change to the operating segments currently reported in Note 24,
"Reporting by Business Segments." However, the financial information presented
will differ. Quarterly information will be presented in the first 1998 quarter,
and prior periods will be restated.
FAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement, effective
for year-end 1998 financial statements, revises disclosures about pensions and
other postretirement benefit plans. It does not change the measurement or
recognition of costs associated with those plans.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Amounts capitalized
or expensed by the company for internal-use software projects are not expected
to differ materially as a result of the SOP, since the prescribed accounting
treatment is fairly consistent with the company's current accounting policy. The
SOP, the effect of which is to be recognized prospectively, is effective for
1999 financial statements.
Responsibility for Financial Reporting
The company's management is responsible for the integrity and objectivity
of the financial data contained in the financial statements. These financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate under the circumstances and, where necessary, reflect
informed judgments and estimates of the effects of certain events and
transactions based on currently available information at the date the financial
statements were prepared.
The company's management depends on the company's system of internal
accounting controls to assure itself of the reliability of the financial
statements. The internal control system is designed to provide reasonable
assurance, at appropriate cost, that assets are safeguarded and transactions are
executed in accordance with management's authorizations and are recorded
properly to permit the preparation of financial statements in accordance with
generally accepted accounting principles. Periodic reviews are made of internal
controls by the company's staff of internal auditors, and corrective action is
taken if needed.
The Board of Directors reviews and monitors financial statements through
its audit committee, which is composed solely of directors who are not officers
or employees of the company. The audit committee meets with the independent
public accountants, internal auditors and management to review internal
accounting controls, auditing and financial reporting matters.
The independent public accountants are engaged to provide an objective and
independent review of the company's financial statements and to express an
opinion thereon. Their audits are conducted in accordance with generally
accepted auditing standards, and their report is included below.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Kerr-McGee Corporation:
We have audited the accompanying consolidated balance sheet of Kerr-McGee
Corporation (a Delaware corporation) and subsidiary companies as of December 31,
1997 and 1996, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kerr-McGee Corporation and
subsidiary companies as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Oklahoma City, Oklahoma,
November 6, 1998
ARTHUR ANDERSEN LLP
<TABLE>
Consolidated Statement of Income
<CAPTION>
(Millions of dollars, except per-share amounts) 1997 1996 1995
- ----------------------------------------------- ------- -------- -------
<S> <C> <C> <C>
Sales $1,388 $1,566 $1,401
------ ------ ------
Costs and Expenses
Costs and operating expenses 739 804 745
General and administrative expenses 136 197 147
Depreciation and depletion 239 267 275
Asset impairment -- 25 204
Exploration, including dry holes and amortization of
undeveloped leases 65 74 80
Taxes, other than income taxes 20 30 29
Interest and debt expense 47 52 60
------- -------- -------
Total Costs and Expenses 1,246 1,449 1,540
------- -------- -------
142 117 (139)
Other Income 90 132 29
------- -------- -------
Income (Loss) from Continuing Operations before Income Taxes 232 249 (110)
Provision (Benefit) for Income Taxes 71 85 (52)
------- -------- -------
Income (Loss) from Continuing Operations 161 164 (58)
Income from Discontinued Operations, net of taxes of $12 in 1997,
$18 in 1996 and $3 in 1995 33 56 27
------- -------- -------
Net Income (Loss) $ 194 $ 220 $ (31)
======= ======== =======
Earnings (Loss) per Common Share
Basic -
Continuing operations $ 3.38 $ 3.32 $(1.12)
Discontinued operations .68 1.13 .52
------- -------- -------
Total $ 4.06 $ 4.45 $ (.60)
======= ======== =======
Diluted -
Continuing operations $ 3.36 $ 3.30 $(1.12)
Discontinued operations .68 1.13 .52
------- -------- -------
Total $ 4.04 $ 4.43 $ (.60)
======= ======== =======
</TABLE>
<TABLE>
Consolidated Statement of Retained Earnings
<CAPTION>
(Millions of dollars, except per-share amounts) 1997 1996 1995
- ----------------------------------------------- ------- -------- -------
<S> <C> <C> <C>
Balance at Beginning of Year $1,348 $1,209 $1,320
Net income (loss) 194 220 (31)
Dividends declared (per common share - $1.80 in 1997,
$1.64 in 1996 and $1.55 in 1995) (86) (81) (80)
------- -------- -------
Balance at End of Year $1,456 $1,348 $1,209
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
Consolidated Balance Sheet
<CAPTION>
(Millions of dollars) 1997 1996
- --------------------- -------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 183 $ 121
Accounts receivable, net of allowance for doubtful
accounts of $5 in both 1997 and 1996 274 375
Inventories 172 218
Deposits and prepaid expenses 60 91
-------- -------
Total Current Assets 689 805
Investments
Equity affiliates 273 244
Other assets 60 74
Property, Plant and Equipment - Net 1,998 1,948
Deferred Charges 76 53
-------- -------
Total Assets $3,096 $3,124
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 247 $ 262
Short-term borrowings 25 37
Long-term debt due within one year 2 --
Taxes on income 36 5
Taxes, other than income taxes 17 26
Accrued liabilities 196 155
-------- -------
Total Current Liabilities 523 485
-------- -------
Long-Term Debt 552 626
-------- -------
Deferred Credits and Reserves
Income taxes 159 131
Other 422 515
-------- -------
Total Deferred Credits and Reserves 581 646
-------- -------
Stockholders' Equity
Common stock, par value $1.00 - 150,000,000 shares authorized,
54,120,747 shares issued in 1997 and 53,862,347 shares issued in 1996 54 54
Capital in excess of par value 346 334
Preferred stock purchase rights 1 1
Retained earnings 1,456 1,348
Unrealized gain on available-for-sale securities -- 12
Common stock in treasury, at cost - 6,434,465 shares in 1997 and
5,568,815 shares in 1996 (363) (306)
Deferred compensation (54) (76)
-------- -------
Total Stockholders' Equity 1,440 1,367
-------- -------
Total Liabilities and Stockholders' Equity $3,096 $3,124
====== ======
</TABLE>
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this balance sheet.
<TABLE>
Consolidated Statement of Cash Flows
<CAPTION>
(Millions of dollars) 1997 1996 1995
---- ---- ----
<S> <C> <C>
Cash Flow from Operating Activities
Net income (loss) $194 $220 $(31)
Adjustments to reconcile to net cash provided by operating activities -
Deferred income taxes 36 68 (51)
Depreciation, depletion and amortization 271 307 334
Asset impairment -- 25 227
Provision for environmental reclamation and remediation of inactive sites 20 43 54
Realized gain on available-for-sale securities (18) (23) --
Gain on sale of refining and marketing operations, net of income taxes -- -- (2)
Gain on sale of exploration and production properties (6) (21) --
Retirements and gain on sale of other assets (4) (3) (1)
Noncash items affecting net income 1 18 50
Changes in current assets and liabilities and other, net of effects of
discontinued refining and marketing operations sold -
Decrease in accounts receivable 132 48 75
(Increase) decrease in inventories 40 1 (1)
(Increase) decrease in deposits and prepaids 13 59 (50)
Decrease in accounts payable and accrued liabilities (16) (37) (121)
Increase (decrease) in taxes payable 31 (22) (56)
Other (125) (38) (58)
---- ---- -----
Net cash provided by operating activities 569 645 369
---- ---- -----
Cash Flow from Investing Activities
Capital expenditures (341) (392) (484)
Proceeds from sale of available-for-sale securities 21 29 --
Proceeds from sale of refining and marketing operations -- 13 419
Proceeds from sale of exploration and production properties 18 48 --
Proceeds from sale of other assets 17 11 17
Proceeds from sale of long-term investments 13 17 61
Purchase of long-term investments (14) (6) (8)
---- ---- -----
Net cash provided by (used in) investing activities (286) (280) 5
---- ---- -----
Cash Flow from Financing Activities
Decrease in short-term borrowings (12) (57) (218)
Repayment of long-term debt (375) (36) (35)
Issuance of long-term debt 299 24 --
Issuance of common stock 12 16 9
Dividends paid (85) (83) (79)
Purchase of treasury stock (60) (195) (45)
---- ---- -----
Net cash used in financing activities (221) (331) (368)
---- ---- ----
Net Increase in Cash and Cash Equivalents 62 34 6
Cash and Cash Equivalents at Beginning of Year 121 87 81
---- ---- -----
Cash and Cash Equivalents at End of Year $183 $121 $ 87
==== ==== =====
</TABLE>
The accompanying notes are an integral part of this statement.
Notes to Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of all
subsidiary companies that are more than 50% owned and the proportionate share of
joint ventures in which the company has an undivided interest. Investments in
affiliated companies that are 20% to 50% owned are carried as Investments -
Equity affiliates in the Consolidated Balance Sheet at cost adjusted for equity
in undistributed earnings. Except for dividends, changes in equity in
undistributed earnings are included in the Consolidated Statement of Income. All
material intercompany transactions have been eliminated.
In connection with the restructuring of the exploration and production
operations, certain operating and exploration expenses for 1996 and 1995 have
been reclassified to general and administrative expense in order to conform with
the current year's presentation. This reclassification had no effect on
exploration and production operating profit or consolidated net income (loss)
for either period. Certain information in Note 24, "Reporting by Business
Segments," and in the supplemental oil and gas information shown in Notes 25
through 29 has also been adjusted to reflect this reclassification.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates as additional information
becomes known.
Foreign Currencies
As the U.S. dollar has been adopted as the functional currency for each of
the company's international operations, foreign currency transaction gains or
losses are recognized in the period incurred. The company recorded net foreign
currency transaction losses of $9 million in 1996. The net foreign currency
transaction losses in 1997 and 1995 were immaterial.
Earnings (Loss) per Common Share
Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the weighted-average number of common shares outstanding
for the period and common stock equivalents.
The weighted-average number of shares used to compute basic earnings per
share was 47,807,916 in 1997, 49,419,993 in 1996 and 51,669,285 in 1995. After
adding the dilutive effect of the conversion of options to the weighted-average
number of shares outstanding, the shares used to compute diluted earnings per
share were 48,000,082 in 1997 and 49,657,890 in 1996. For 1995, there was no
dilution since the company incurred a loss from continuing operations.
Not included in the calculation of the denominator for diluted earnings per
share were 157,000 and 153,000 employee stock options outstanding at year-end
1997 and 1996, respectively. The inclusion of these options would have been
anti-dilutive since they were not "in the money" at the end of the respective
years. See Note 18, "Employee Stock Option Plans," for a discussion of
transactions that occurred after year-end 1997.
Cash Equivalents
The company considers all investments purchased with a maturity of
three months or less to be cash equivalents. Cash includes time deposits,
certificates of deposit and U.S. government securities, all of which totaled
$132 million in 1997 and $89 million in 1996.
Inventories
The costs of the company's product inventories are determined by the
first-in, first-out (FIFO) method. Inventory carrying values include material
costs, labor and indirect manufacturing expenses associated therewith. Materials
and supplies are valued at average cost.
Property, Plant and Equipment
Oil and Gas - Exploration expenses, including geological and geophysical
costs, rentals and exploratory dry holes, are charged against income as
incurred. Costs of successful wells and related production equipment and
developmental dry holes are capitalized and amortized by field using the
unit-of-production method as the oil and gas are produced.
Undeveloped acreage costs are capitalized and amortized at rates that
provide full amortization on abandonment of unproductive leases. Costs of
abandoned leases are charged to the accumulated amortization accounts, and costs
of productive leases are transferred to the developed property accounts.
Other - Property, plant and equipment is stated at cost less reserves for
depreciation, depletion and amortization. Maintenance and repairs are expensed
as incurred, except that costs of replacements or renewals that improve or
extend the lives of existing properties are capitalized. Costs of nonproducing
mineral acreage surrendered or otherwise disposed of are charged to expense at
the time of disposition.
Depreciation and Depletion - Property, plant and equipment is depreciated
or depleted over its estimated life by application of the unit-of-production or
the straight-line method. In arriving at rates under the unit-of-production
method, the quantities of recoverable oil, gas and other minerals are
established based on estimates made by the company's geologists and engineers.
Retirements and Sales - The costs and related depreciation, depletion and
amortization reserves are removed from the respective accounts upon retirement
or sale of property, plant and equipment. The resulting gain or loss is included
in other income.
Interest Capitalized - The company capitalizes interest costs on major
projects that require a considerable length of time to complete. Interest
capitalized in 1997, 1996 and 1995 was $8 million, $9 million and $11 million,
respectively.
Impairment of Long-Lived Assets
The company adopted the provisions of Statement of Financial Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," during the 1995 third quarter.
Proved oil and gas properties are reviewed for impairment on a
field-by-field basis when facts and circumstances indicate that their carrying
amount may not be recoverable. In performing this review, future cash flows are
estimated by applying estimated future oil and gas prices to estimated future
production, less estimated future expenditures to develop and produce the
reserves. If the sum of these estimated future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the property, an
impairment loss is recognized for the excess of the carrying amount over the
estimated fair value of the property. Prior to the third quarter of 1995, proved
properties were evaluated on an area-of-interest basis and impaired when
capitalized costs exceeded estimated future revenues, computed by applying
current oil and gas prices to estimated future production, less estimated future
expenditures to develop and produce the reserves.
Other assets are reviewed for impairment by asset group for which the
lowest level of independent cash flows can be identified and impaired in the
same manner as proved oil and gas properties. Prior to the third quarter of
1995, individual properties were written down when impairments were deemed to
have occurred.
Income Taxes
Deferred income taxes are provided to reflect the future tax consequences
of differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
Site Dismantlement, Reclamation and Remediation Costs
The company provides for the estimated cost at current prices of final
reclamation and land restoration at coal mining locations and the dismantlement
and removal of oil and gas production and related facilities. Such costs are
accumulated over the estimated lives of the facilities by the use of the
unit-of-production method. As sites of environmental concern are identified, the
company assesses the existing conditions, claims and assertions, generally
related to former operations, and records an estimated undiscounted liability
when environmental assessments and/or remedial efforts are probable and the
associated costs can be reasonably estimated.
Gas-Balancing Arrangements
Gas-balancing arrangements with partners in natural gas wells are accounted
for by the entitlements method. At December 31, 1997 and 1996, both the quantity
and dollar amount of such arrangements recorded in the Consolidated Balance
Sheet were immaterial.
Lease Commitments
The company utilizes various leased properties in its operations,
principally for office space. Net lease rental expense was $14 million in 1997,
$13 million in 1996 and $12 million in 1995.
The aggregate minimum annual rentals under noncancelable leases in effect
on December 31, 1997, totaled $59 million, of which $11 million is due in 1998,
$9 million in 1999, $17 million in the period 2000 through 2002 and $22 million
thereafter.
Employee Stock Option Plans
The company accounts for its employee stock option plans using the
intrinsic value method in accordance with Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees."
Futures, Forward and Option Contracts
The company hedges a portion of its monetary assets, liabilities and
commitments denominated in foreign currencies. Periodically, the company
purchases foreign currency forward contracts to provide funds for operating and
capital expenditure requirements that will be denominated in foreign currencies
and sells foreign currency forward contracts to convert receivables that will be
paid in foreign currencies to U.S. dollars. Since these contracts qualify as
hedges and correlate to currency movements, any gain or loss resulting from
market changes will be offset by gains or losses on the hedged receivable,
capital item or operating cost.
In 1996 and 1995, the company also entered into foreign currency forward
contracts to sell various foreign currencies in anticipation of titanium dioxide
pigment sales denominated in foreign currencies. These contracts were
marked-to-market with the resulting gain or loss reflected in income in the
period in which the change occurred. There were no open contracts at year-end
1997. Open contracts at year-end 1996 matured between January and December 1997.
Net gains and losses on these contracts in 1997, 1996 and 1995 were immaterial.
Although no such contracts were entered into during 1997, the company has
periodically used commodities futures and option contracts to hedge a portion of
its crude oil and natural gas sales and natural gas purchased for operations in
order to minimize the price risks associated with the production and marketing
of crude oil and natural gas. These contracts generally have had maturities of
one year or less. Since the contracts qualified as hedges and correlated to
price movements of crude oil and natural gas, any gain or loss from these
contracts was explicitly deferred and recognized as part of the hedged
transaction. Prior to the sale of the refining and marketing operations, the
company also hedged a portion of its refined-product sales and crude oil
purchased for the refineries.
Management of price risks must consider market conditions and availability.
As these factors change, the company adjusts its hedging strategy and modifies
its futures, forward and option contract positions.
2. Cash Flow Information
Net cash provided by operating activities reflects cash payments for
interest and income taxes as follows:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Interest paid $47 $60 $68
Income taxes paid 15 17 75
Noncash transactions not reflected in the Consolidated Statement of Cash
Flows include capital expenditures for which payment will be made in the
subsequent year totaling $19 million, $4 million and $24 million at year-end
1997, 1996 and 1995, respectively; transactions during 1997 associated with the
assignments of interest of certain North Sea oil and gas properties; the
revaluation of certain investments to fair value and transactions affecting
deferred compensation associated with the Employee Stock Ownership Plan in each
of the three years. See Notes 16 and 20.
Effective December 31, 1996, the company merged its North American onshore
exploration and production operations into Devon Energy Corporation (Devon) in
exchange for 9,954,000 shares of Devon common stock (see Note 4). This
transaction was not reflected in the Consolidated Statement of Cash Flows due to
its noncash nature.
The effect of foreign currency exchange rate fluctuations on cash and cash
equivalents was immaterial.
3. Inventories
Major categories of inventories at year-end 1997 and 1996 are:
(Millions of dollars) 1997 1996
--------------------- ---- ----
Chemicals and other products $119 $163
Materials and supplies 48 49
Crude oil 5 6
---- ----
Total $172 $218
==== ====
4. Investments - Equity Affiliates
At December 31, 1997 and 1996, investments in equity affiliates are as
follows:
(Millions of dollars) 1997 1996
--------------------- ---- ----
Devon Energy Corporation $217 $193
Javelina Company 32 27
National Titanium Dioxide Company Limited 12 12
Other 12 12
---- ----
Total $273 $244
==== ====
Effective December 31, 1996, the company merged its North American onshore
exploration and production operations into Devon, a publicly traded oil and gas
exploration and production company. The company received 9,954,000 shares of
Devon common stock representing an ownership interest in Devon of approximately
31%. This initial investment in Devon was recorded at the value of the assets
given up in accordance with APB No. 29, "Accounting for Nonmonetary
Transactions." The market value of the company's investment in Devon was $383
million at December 31, 1997, based on the closing price of Devon's common stock
as reported in The Wall Street Journal.
Javelina Company and National Titanium Dioxide Company Limited represent
the company's investment of 40% and 25%, respectively, in non-exploration and
production joint ventures or partnerships.
Following are financial summaries of the company's equity affiliates.
Financial information related to investments that are shown as Other in the
preceding table has been excluded.
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Results of operations -
Net sales(1) $570 $207 $250
Total costs and expenses 413 183 171
Net income 105 22 66
Financial position -
Current assets 198 153
Property, plant and equipment - net 990 962
Total assets 1,215 1,135
Current liabilities 123 130
Total liabilities 470 484
Stockholders' equity 745 651
(1)Includes net sales to the company of $26 million, $44 million and $47
million for 1997, 1996 and 1995, respectively.
5. Investments - Other Assets
Investments in other assets consist of the following at December 31, 1997
and 1996:
(Millions of dollars) 1997 1996
--------------------- ---- ----
Net deferred tax asset $22 $23
U.S. government obligations 19 --
Patents 6 5
Long-term notes receivable, net of $9 allowance for
doubtful notes in both 1997 and 1996 5 17
Equity securities 2 24
Other 6 5
---- ----
Total $60 $74
=== ===
6. Property, Plant and Equipment
Fixed assets and related reserves by business segment at December 31, 1997
and 1996, are as follows:
<TABLE>
<CAPTION>
Reserves for
Depreciation and
Gross Property Depletion Net Property(1)
(Millions of dollars) 1997 1996 1997 1996 1997 1996
--------------------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Exploration and production $2,888 $3,192 $1,677 $2,005 $1,211 $1,187
Chemicals 1,020 946 506 459 514 487
Other 147 153 90 98 57 55
Discontinued coal operations 547 546 331 327 216 219
------- ------- -------- ------- ------- -------
Total $4,602 $4,837 $2,604 $2,889 $1,998 $1,948
====== ====== ====== ====== ====== ======
</TABLE>
(1)Includes net assets held for sale of $126 million for chemicals at
December 31, 1997, and $9 million for exploration and production at
December 31, 1996. The coal segment was disposed of in 1998. (See Notes
11 and 21).
7. Deferred Charges
Deferred charges are as follows at year-end 1997 and 1996:
(Millions of dollars) 1997 1996
--------------------- ---- ----
Pension plan prepayment $42 $33
Preoperating and startup costs 8 4
Intangible assets 6 3
Other 20 13
---- ----
Total $76 $53
==== ====
8. Debt
Lines of Credit and Short-Term Borrowings
At year-end 1997, the company had available unused bank lines of credit and
revolving credit facilities of $714 million. Of this amount, $340 million and
$265 million can be used to support commercial paper borrowing arrangements of
Kerr-McGee Credit Corporation and Kerr-McGee Oil (U.K.) PLC, respectively.
The company has arrangements to maintain compensating balances with certain
banks that provide credit. At year-end 1997, the aggregate amount of such
compensating balances was immaterial, and the company was not legally restricted
from withdrawing all or a portion of such balances at any time during the year.
Short-term borrowings at year-end 1997 consisted of a note payable of $25
million (5.98% interest rate). Outstanding at year-end 1996 were notes payable
totaling $15 million (5.97% average interest rate) and commercial paper totaling
$22 million (5.84% average interest rate).
Long-Term Debt
The company's policy is to classify certain borrowings under revolving
credit facilities and commercial paper as long-term debt since the company has
the ability under certain revolving credit agreements and the intent to maintain
these obligations for longer than one year. At year-end 1997 and 1996, debt
totaling $37 million and $400 million, respectively, was classified as long-term
consistent with this policy.
Long-term debt consisted of the following at year-end 1997 and 1996:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996
--------------------- ---- ----
<S> <C> <C>
Debentures -
7.125% Debentures due October 15, 2027
(7.01% effective rate) $150 $ --
7% Debentures due November 1, 2011,
net of unamortized debt discount of
$108 million in 1997 and $111 million in
1996 (14.25% effective rate) 142 139
8-1/2% Sinking fund debentures due June 1, 2006 22 34
Commercial paper -- 266
Guaranteed Debt of Employee Stock Ownership Plan -
9.61% Series B notes due in installments
through January 2, 2005 51 51
Notes payable -
6.625% Notes due October 15, 2007
(6.54% effective rate) 150 --
Variable interest rate revolving credit agreements
with banks due March 6, 2000 (6.04% average
rate at December 31, 1997) 37 114
Other 2 22
554 626
---- ----
Long-term debt due within one year (2) --
---- ----
Total $552 $626
==== ====
</TABLE>
Maturities of long-term debt due after December 31, 1997, are $2 million in
1998, $8 million in 1999, $47 million in 2000, $12 million in 2001, $10 million
in 2002 and $475 million thereafter.
At year-end 1997, the company guaranteed no debt or other liabilities of
its unconsolidated equity affiliates. However, at year-end 1996, the company
guaranteed its ratable portion of the debt of unconsolidated equity affiliates
totaling $7 million. These borrowings, which are not included in the preceding
table, were paid in full by the unconsolidated equity affiliates during 1997,
and the company was released as the guarantor.
Additional information regarding the major changes in debt during the
periods and unused commitments for financing is included in the Financial
Condition discussion in Management's Discussion and Analysis.
9. Other Financial Information
Condensed financial information relating to the company's previously
unconsolidated, wholly owned finance subsidiary is summarized below:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Results of operations -
Interest income 17 $ 25 $25
Net income 4 6 5
Financial position -
Assets $116 $367
Liabilities (3) (258)
----- ----
Stockholder's equity $113 $109
==== ====
10. Contingencies
West Chicago
In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation (KMCC),
closed the facility located in West Chicago, Illinois, that processed thorium
ores. Operations resulted in some low-level radioactive contamination at the
site, and in 1979, KMCC filed a plan with the Nuclear Regulatory Commission
(NRC) to decommission the facility. The NRC transferred jurisdiction of this
site to the State of Illinois (the State) in 1990. The following discusses the
current status of various matters associated with the West Chicago site.
Closed Facility - In 1994, KMCC, the City of West Chicago (the City) and
the State reached agreement on Phase I of the decommissioning plan for the
closed West Chicago facility, and KMCC began shipping material from the site to
a licensed permanent disposal facility.
In February 1997, KMCC executed an agreement with the City as to the terms
and conditions for completing the final phase of decommissioning work, the bulk
of which is expected to be completed about four to six years after receiving the
necessary license amendment. The State has indicated approval of this agreement,
and KMCC expects the State to issue a license amendment that will enable KMCC to
complete the final phase of decommissioning work.
In 1992, the State enacted legislation imposing an annual storage fee equal
to $2 per cubic foot of byproduct material located at the closed facility. The
storage fee cannot exceed $26 million per year, and any storage fee payments
must be reimbursed to KMCC as decommissioning costs are incurred. KMCC has been
fully reimbursed for all storage fees paid pursuant to this legislation. In June
1997, the legislation was amended to provide that future storage fee obligations
are to be offset against decommissioning costs incurred but not yet reimbursed.
Offsite Areas - The U.S. Environmental Protection Agency (EPA) has listed
four areas in the vicinity of the West Chicago facility on the National Priority
List that the EPA promulgates under authority of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 and has designated KMCC as a
potentially responsible party in these four areas. The EPA issued unilateral
administrative orders for two of these areas (referred to as the residential
area and Reed-Keppler Park), which require KMCC to conduct removal actions to
excavate contaminated soils and ship the soils elsewhere for disposal. Without
waiving any of its rights or defenses, KMCC has begun the cleanup of these two
sites.
Judicial Proceedings - In December 1996, a lawsuit was filed against the
company and its subsidiary, KMCC, in Illinois state court on behalf of a
purported class of present and former West Chicago residents. The lawsuit seeks
damages for alleged diminution in property values and the establishment of a
medical monitoring fund to benefit those allegedly exposed to thorium wastes
originating from the former facility. The case was removed to federal court and
is being vigorously defended.
Government Reimbursement - Pursuant to Title X of the Energy Policy Act of
1992 (Title X), the U.S. Department of Energy is obligated to reimburse KMCC for
certain decommissioning and cleanup costs in recognition of the fact that much
of the facility's production was dedicated to United States government
contracts. Title X was amended in 1996 to increase the amount authorized to $65
million plus inflation adjustments. As of December 31, 1997, KMCC has been
reimbursed approximately $40 million under Title X.
Other Matters
The plants and facilities of the company and its subsidiaries are subject
to various environmental laws and regulations. The company or its subsidiaries
have been notified that they may be responsible in varying degrees for a portion
of the costs to clean up certain waste disposal sites and former plant sites. As
of December 31, 1997, the company's estimate for the cost to investigate and/or
remediate all presently identified sites of former or current operations, based
on currently known facts and circumstances, totaled $243 million, which includes
$163 million for the former West Chicago facility and $14 million for the
residential area and Reed-Keppler Park. Reserves have been established based on
these estimates. Actual costs will be reduced by the amounts recoverable under
Title X and other government programs. Expenditures from inception through
December 31, 1997, totaled $435 million for currently known sites.
In addition to the environmental issues previously discussed, the company
or its subsidiaries are also a party to a number of other legal proceedings
pending in various courts or agencies in which the company or a subsidiary
appears as plaintiff or defendant. The ultimate costs to decommission presently
known sites are difficult to estimate because of the numerous contingencies,
which include continually changing laws and regulations, the nature of the
company's businesses and pending legal proceedings. Actual costs could differ
from those currently estimated as information becomes available for sites that
are not now included in the reserve, if contamination is not as expected, or
field conditions or other variables differ significantly from those that are now
assumed. Therefore, it is not possible to reliably estimate the amount or timing
of all future expenditures relating to environmental and other contingencies.
The company provides for costs related to contingencies when a loss is probable
and the amount or range of amounts is reasonably estimable. Management believes,
after consultation with general counsel, that adequate reserves have been
provided for all known contingencies. However, the ultimate cost will depend on
the outcomes of the previously-noted uncertainties. Therefore, it is possible
that additional reserves could be required in the future.
11. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Assets to Be Held and Used
In 1996 and 1995, certain oil and gas fields in the United States and
Canada and certain coal and other assets were deemed to be impaired because the
assets were not expected to recover their entire carrying value through future
cash flows. The impairment loss is included in the Consolidated Statement of
Income as Asset impairment and was determined as the difference between the
carrying value and the estimated fair value. The fair value for these impaired
assets was generally determined based on the estimated present value of future
cash flows. No impairments were recognized during 1997. The impairment loss by
segment for 1996 and 1995 was as follows. Not included is $23 million for coal
in 1995, which is included in discontinued operations.
(Millions of dollars) 1996 1995
--------------------- ---- ----
Exploration and production $22 $ 99
Other -- 1
---- ----
Total $22 $100
=== ====
Assets to Be Disposed Of
During 1997 the company's exploration and production operating unit
completed the program to divest a number of crude oil and natural gas producing
properties considered to be nonstrategic. The majority of these properties were
located onshore in the United States; however, certain of these properties were
located in the Gulf of Mexico, Canada and the North Sea. Net gains recognized on
the sales of properties included in the divestiture program totaled $6 million
in 1997 and $13 million in 1996. The divestiture program properties did not
constitute a material portion of the company's year-end 1996 oil and gas
reserves or oil and gas production or cash flows from operations for 1997 or
1996. At year-end 1995, these properties comprised approximately 10% of the
company's oil and gas reserves, 10% of oil and gas production volumes and 5% of
the company's 1995 cash flows from operations.
As a result of the divestiture program, these nonstrategic oil and gas
properties were reduced in 1995 to their estimated fair value less the cost to
sell if the carrying value of the property exceeded such fair value net of the
estimated cost of selling the property. The carrying value of the divestiture
program properties was $172 million prior to the recognition of the impairment
loss on the properties for which a loss was indicated. The impairment loss
totaled $104 million and has been included in the Consolidated Statement of
Income as Asset impairment. There were no subsequent revisions to the estimated
fair values of these properties.
Certain chemical facilities were closed during 1996. A $3 million
impairment loss was recognized in 1996, which reduced the carrying value of the
assets to nil.
Also held for sale at December 31, 1995, were the net long-term assets
totaling $5 million of a wholly owned coal mining operation in West Virginia.
This sale was completed in February 1996. The gain on the sale was immaterial.
Following are the sales and pretax income (loss) for assets to be disposed
of at December 31, 1997, 1996 and 1995, as included in the Consolidated
Statement of Income in each of the last three years. Any impairment loss is
included in the pretax amounts.
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- -----
Sales -
Chemicals $166 $160 $ 158
Exploration and production -- 42 64
---- ---- -----
Total $166 $202 $ 222
==== ==== =====
Income (Loss) -
Chemicals $22 $ 17 $ 23
Exploration and production -- 9 (108)
--- --- -----
Total $22 $26 $ (85)
=== === =====
The company withdrew from the ammonium perchlorate business in 1998 (see
Management's Discussion and Analysis). The carrying value of these assets was
approximately $9 million at year-end 1997, which did not exceed fair value. The
gain on the sale was immaterial. In January 1998, the company signed a letter of
intent to dispose of the remaining electrolytic and specialty - chemical
operations. Discussions were terminated in mid-1998, and the operations are no
longer considered to be held for sale. The company also exited the coal business
in 1998 (see Management's Discussion and Analysis and Note 21, "Discontinued
Operations").
12. Income Taxes
The taxation of a company that has operations in several countries involves
many complex variables, such as differing tax structures from country to country
and the effect on U.S. taxation of international earnings. These complexities do
not permit meaningful comparisons between the domestic and international
components of income before income taxes and the provision for income taxes, and
disclosures of these components do not provide reliable indicators of
relationships in future periods. Income (loss) from continuing operations before
income taxes is composed of the following:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- -----
Domestic $132 $142 $(166)
International 100 107 56
---- ---- -----
Total $232 $249 $(110)
==== ==== =====
Effective April 1, 1997, the corporate tax rate in the United Kingdom
decreased from 33% to 31%. Effective January 1, 1995, the income tax rate in
Australia increased from 33% to 36%. The deferred income tax liability and asset
balances were adjusted to reflect these revised rates, which decreased the 1997
and 1995 international deferred provision for income taxes by $8 and $2 million,
respectively. The 1997, 1996 and 1995 provision (benefit) for income taxes on
income from continuing operations is summarized below:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
U.S. Federal -
Current $ 5 $ 19 $(11)
Deferred 34 25 (64)
---- ---- ----
39 44 (75)
---- ---- ----
International -
Current 32 5 9
Deferred (1) 32 9
---- ---- ----
31 37 18
---- ---- ----
State 1 4 5
---- ---- ----
Total $ 71 $85 $(52)
==== === ====
At December 31, 1997, the net deferred tax asset includes the benefit for
$80 million in net operating loss carryforwards that have no expiration dates.
At December 31, 1997, the company had additional foreign net operating loss
carryforwards totaling $12 million that expire in 2001. These loss carryforwards
offset a portion of the foreign net deferred tax liability. Realization of net
operating loss carryforwards is dependent on generating sufficient taxable
income. Although realization is not assured, the company believes it is more
likely than not that all of the net deferred tax asset will be realized.
The net deferred tax asset, which is classified as Investments - Other
assets in the Consolidated Balance Sheet, represents the net deferred taxes in
certain foreign jurisdictions. Deferred tax liabilities and assets at December
31, 1997 and 1996, are composed of the following:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996
--------------------- ---- ----
<S> <C> <C>
Net deferred tax liability -
Accelerated depreciation $240 $259
Exploration and development 72 65
Undistributed earnings of foreign subsidiaries 28 23
Postretirement benefits (47) (46)
Dismantlement, reclamation, remediation and other reserves (69) (113)
Foreign operating loss carryforward (4) (10)
Other (61) (47)
---- ----
159 131
---- ----
Net deferred tax asset -
Accelerated depreciation 13 16
Foreign operating loss carryforward (29) (36)
Other (6) (3)
---- ----
(22) (23)
---- ----
Total $137 $108
==== ====
</TABLE>
In the following table, the U.S. Federal income tax rate is reconciled to
the company's effective tax rates for income from continuing operations as
reflected in the Consolidated Statement of Income.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% (35.0)%
Increases (decreases) resulting from -
Taxation of foreign operations 2.5 1.1 (1.3)
State income taxes 1.2 1.1 (1.3)
Adjustment of prior years' accruals (1.9) .3 (1.3)
Federal income tax credits -- (.3) (2.5)
Dividends paid on Employee Stock Ownership Plan (.7) (.6) (1.3)
Foreign equity income -- -- (1.6)
Contribution of appreciated equity securities (.4) (1.8) --
Adjustment of deferred tax balances due to
tax rate changes (3.4) -- (1.9)
Other - net (1.6) (.5) (1.0)
----- ---- -----
Total 30.7% 34.3% (47.2)%
==== ==== =====
</TABLE>
The Internal Revenue Service has examined the company's Federal income tax
returns for all years through 1994, and the years have been closed through 1992.
The company believes that it has made adequate provision for income taxes that
may become payable with respect to open tax years.
13. Other Deferred Credits and Reserves
Other deferred credits and reserves consist of the following at
year-end 1997 and 1996:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996
--------------------- ---- -----
<S> <C> <C>
Reserves for site dismantlement, reclamation and remediation $251 $345
Postretirement benefit obligations 120 117
Other 51 53
----- -----
Total $422 $515
==== ====
</TABLE>
The company provided for environmental reclamation and remediation of
former plant sites, net of reimbursements received, during each of the years
1997, 1996 and 1995 as follows:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Provision, net of reimbursements $18 $43 $54
Reimbursements received 12 10 11
The reimbursements, which pertain to the former facility in West
Chicago, Illinois, were received pursuant to the Energy Policy Act of 1992 (see
Note 10). An additional $49 million was provided in 1995 for refining and
marketing-related sites and included in the discontinued operations (see Note
21).
14. Stockholders' Equity
Changes in common stock, capital in excess of par value and treasury stock
for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Common Stock Capital in Treasury Stock
(Millions of dollars and Shares Par Excess of
thousands of shares) Issued Value Par Value Shares Cost
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 53,304 $53 $309 1,610 $ 63
Exercise of stock options and
stock appreciation rights 210 1 9 -- --
Stock purchase program -- -- -- 835 48
Balance December 31, 1995 53,514 54 318 2,445 $111
Exercise of stock options and
stock appreciation rights 348 -- 16 -- --
Issuance of shares for
achievement awards -- -- -- (3) --
Stock purchase program -- -- -- 3,127 195
------ --- ---- ----- ----
Balance December 31, 1996 53,862 54 334 5,569 306
Exercise of stock options and
stock appreciation rights 259 -- 12 -- --
Issuance of shares for
achievement awards -- -- -- (2) --
Stock purchase program -- -- -- 867 57
------ --- ---- ----- ----
Balance December 31, 1997 54,121 $54 $346 6,434 $363
====== === ==== ===== ====
</TABLE>
The company has 40 million shares of preferred stock without par value
authorized, and none is issued.
During 1995, the Board of Directors authorized management to purchase up to
$300 million of the common stock of the company. The program was completed in
August 1997 with a total of 4,829,000 shares acquired at a cost of $300 million.
In 1996, the company's Board of Directors replaced the existing
stockholder-rights plan, which expired in July 1996, with a new rights plan
dated July 9, 1996. Such rights were distributed as a dividend at the rate of
one right for each share of the company's common stock. Generally, the rights
become exercisable the earlier of 10 days after a public announcement that a
person or group has acquired, or a tender offer has been made for, 15% or more
of the company's then-outstanding stock. If either of these events occur, each
right would entitle the holder (other than the 15% holder) to buy the number of
shares of the company's common stock having a market value two times the
exercise price. The exercise price is $215. Generally, the rights may be
redeemed at $.01 per right until a person or group has acquired 15% or more of
the company's stock. The rights expire in July 2006.
15. Other Income
Other income is as follows during each of the years in the three-year
period ended December 31, 1997:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Income from unconsolidated affiliates $32 $14 $12
Gain on sale of available-for-sale securities 18 23 --
Settlements with insurance carriers 12 67 --
Interest 12 9 15
Gain on sale of assets 10 24 2
Other 6 (5) --
---- ---- ----
Total $90 $132 $29
=== ==== ===
16. Financial Instruments and Hedging Activities
Investments in Certain Debt and Equity Securities
The company has certain investments that are considered to be available for
sale. These financial instruments are carried in the Consolidated Balance Sheet
at fair value, which is based on quoted market prices. The company held no
securities classified as held to maturity or trading at December 31, 1997 and
1996. At December 31, 1997 and 1996, available-for-sale securities for which
fair value can be estimated were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- -------------------------------------
Fair Gross Unrealized Fair Gross Unrealized
(Millions of dollars) Value Cost Holding Gains Value Cost Holding Gains
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government obligations -
Maturing within one year $ 8 $ 8 $-- $26 $26 $--
Maturing between one year
and four years 19 19 -- -- -- --
Equity securities -- -- -- 22 3 19
--- --- --- --- --- ---
Total $27 $27 $-- $48 $29 $19
=== === === === === ===
</TABLE>
U.S. government obligations are carried in the Consolidated Balance Sheet
as Current Assets or as Investments - Other assets, depending upon their
maturity. Equity securities are carried as Investments - Other assets.
During 1997 and 1996, the company sold available-for-sale equity
securities. Proceeds from the sales totaled $21 million in 1997 and $29 million
in 1996. The average cost of the securities was used in the determination of the
realized gains, which totaled $18 million in 1997 and $23 million in 1996 before
income taxes. Also during 1997 and 1996, the company donated a portion of its
available-for-sale equity securities to Kerr-McGee Foundation Corporation, a
tax-exempt entity whose purpose is to contribute to not-for-profit
organizations. The fair value of these donated shares totaled $3 million in 1997
and $16 million in 1996, which included appreciation of $3 million and $13
million before income taxes, respectively.
The change in unrealized holding gains, net of income taxes, as shown in the
separate component of stockholders' equity during the three-year period ended
December 31, 1997, is as follows:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Beginning balance $12 $26 $12
Net unrealized holding gains 2 9 14
Net realized gains (12) (15) --
Net appreciation of donated securities (2) (8) --
---- ---- ----
Ending balance $-- $12 $26
==== ==== ====
Financial Instruments for Other than Trading Purposes
In addition to the investments previously discussed, the company holds or
issues financial instruments for other than trading purposes. At December 31,
1997 and 1996, the carrying amount and estimated fair value of such financial
instruments for which fair value can be determined are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Carrying Fair Carrying Fair
(Millions of dollars) Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $183 $183 $121 $121
Long-term notes receivable 5 5 17 17
Contracts to sell foreign currencies -- 8 13 33
Contracts to purchase foreign currencies -- 102 -- 29
Short-term borrowings 25 25 37 37
Total long-term debt 554 669 626 737
</TABLE>
The carrying amount of cash and cash equivalents approximates fair value of
those instruments due to their short maturity. The fair value of notes
receivable is based on discounted cash flows or the fair value of the note's
collateral. The fair value of the company's short-term and long-term debt is
based on the quoted market prices for the same or similar debt issues or on the
current rates offered to the company for debt with the same remaining maturity.
The fair value of foreign currency forward contracts represents the aggregate
replacement cost based on financial institutions' quotes.
Hedging Activities
Most of the company's foreign currency contracts are hedges principally for
chemicals' accounts receivable generated from titanium dioxide pigment sales
denominated in foreign currencies ($65 million hedged in 1997 and $68 million in
1996) and the operating costs and capital expenditures of international chemical
operations ($50 million hedged in 1997 and $28 million in 1996). The purpose of
these foreign currency hedging activities is to protect the company from the
risk that the eventual U.S. dollar amounts from sales to foreign customers and
purchases from foreign suppliers could be adversely affected by changes in
foreign currency exchange rates. The company recognized net foreign currency
hedging gains of $4 million in 1997, $3 million in 1996 and $8 million in 1995.
At December 31, 1997, the company had foreign currency contracts maturing
between January 1998 and December 1999 to purchase $137 million Australian and 8
million British pounds sterling for $102 million and $12 million, respectively.
Additionally, at December 31, 1997, the company had contracts to sell for $8
million various foreign currencies, principally European, which mature between
January and April 1998. At December 31, 1996, the company had foreign currency
contracts that matured between January and December 1997 to purchase $36 million
Australian for $25 million. Additionally, at December 31, 1996, the company had
contracts to sell for $34 million various foreign currencies, principally
European, which matured between January and December 1997. This included
contracts totaling $14 million for anticipated pigment sales that were
marked-to-market. Net unrealized losses on foreign currency contracts totaled
$13 million at year-end 1997. Net unrealized gains on foreign currency contracts
totaled $4 million at year-end 1996 and $3 million at year-end 1995.
Although no oil or natural gas futures or option contracts were entered
into during 1997, the company has periodically used these types of contracts to
reduce the effect of the price volatility of crude oil, natural gas and, prior
to the sale of the refining and marketing operations, refined products. The
futures contracts permitted settlement by delivery of commodities.
During 1996, the company sold forward 10 million barrels of crude oil and
37 billion cubic feet of natural gas representing approximately 40% and 36% of
its worldwide crude oil and natural gas production, respectively. Net hedging
losses on crude oil and natural gas recognized in 1996 totaled $37 million. The
effect of the losses was to reduce the company's 1996 average gross margin for
crude oil and natural gas by $1.04 per barrel and $.11 per MCF, respectively. At
year-end 1996, there were no open crude oil or natural gas contracts.
During 1995, the company sold forward 13 million barrels of crude oil and
19 billion cubic feet of natural gas representing approximately 49% and 18% of
its worldwide crude oil and natural gas production, respectively, and 35% of the
refined-product sales of the discontinued refining and marketing operations.
Hedging gains and losses recognized for 1995 were immaterial. At year-end 1995,
open crude oil and natural gas contracts had an aggregate value of $151 million,
and the unrecognized loss on these contracts totaled $14 million.
Contract amounts do not quantify risk or represent assets or liabilities of
the company but are used in the calculation of cash settlements under the
contracts. These financial instruments limit the company's market risks, are
with major financial institutions, expose the company to credit risks and may at
times be concentrated with certain institutions or groups of institutions.
However, the credit worthiness of these institutions is subject to continuing
review, and full performance is anticipated. Additional information regarding
market risk is included in the quantitative and qualitative disclosure in
Management's Discussion and Analysis.
Year-end hedge positions and activities during a particular year are not
necessarily indicative of future activities and results.
17. Taxes, Other than Income Taxes
Taxes, other than income taxes, during the years ended December 31, 1997,
1996 and 1995, are composed of the following:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
Payroll $11 $11 $11
Property 4 8 8
Production/severance 3 9 8
Other 2 2 2
---- ---- ----
Total $20 $30 $29
==== ==== ====
18. Employee Stock Option Plans
The 1987 Long Term Incentive Program (1987 Program) authorized the issuance
of shares of the company's common stock through December 31, 2002, in the form
of stock options, restricted stock or long-term performance awards. The options
may be accompanied by stock appreciation rights. The 1987 Program was amended in
May 1995 to restore the number of shares available to be granted to 1,000,000,
bringing the total number of shares authorized to be granted through the program
to 2,740,000.
The company's employee stock options are fixed-price options granted at the
fair market value of the underlying common stock on the date of the grant.
Generally, one-third of each grant vests and becomes exercisable over a
three-year period immediately following the grant date and expires 10 years
after the grant date.
The 1984 Employee Stock Option Plan authorized the granting of options over
a 10-year period for up to 1,000,000 shares of common stock and accompanying
stock appreciation rights. The 1984 plan was terminated on May 3, 1988. After
that date, no further options could be granted under this plan, although options
and any accompanying stock appreciation rights outstanding at that time could be
exercised prior to their respective expiration dates.
Transactions during the past three years under these plans are summarized
below:
<TABLE>
<CAPTION>
1987 Incentive Program 1984 Stock Option Plan
---------------------- ----------------------
Weighted-Average Weighted-Average
Exercise Price Exercise Price
Options per Option Options per Option
<S> <C> <C> <C> <C>
Balance outstanding December 31, 1994 1,178,403 $45.11 33,000 $27.58
Options granted 409,000 49.31 -- --
Options exercised (206,821) 43.81 (3,000) 27.06
Options surrendered upon exercise
of stock appreciation rights (6,850) 39.80 (20,000) 27.91
Options forfeited (49,369) 45.87 -- --
--------- --------
Balance outstanding December 31, 1995 1,324,363 46.61 10,000 27.06
Options granted 310,800 63.56 -- --
Options exercised (333,594) 46.40 -- --
Options surrendered upon exercise
of stock appreciation rights (48,634) 43.63 (10,000) 27.06
Options forfeited (6,469) 53.00 -- --
--------- --------
Balance outstanding December 31, 1996 1,246,466 50.98 -- --
Options granted 325,200 68.90 -- --
Options exercised (256,986) 45.93 -- --
Options surrendered upon exercise
of stock appreciation rights (5,000) 32.38 -- --
Options forfeited (6,703) 57.46 -- --
Options expired (400) 54.06 -- --
--------- --------
Balance outstanding December 31, 1997 1,302,577 56.48 -- --
========= ========
Options exercisable -
December 31, 1995 626,759 44.87 10,000 27.06
December 31, 1996 623,461 46.44 -- --
December 31, 1997 750,894 50.87 -- --
</TABLE>
Following is the range of exercise prices and weighted-average remaining
life of all stock options outstanding at December 31, 1997, and the
weighted-average price within each price range of those options outstanding and
those options exercisable at year-end 1997.
<TABLE>
<CAPTION>
Options Outstanding at December 31, 1997 Options Exercisable at December 31, 1997
--------------------------------------------------------------------------- ----------------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Remaining Exercise Price Exercise Price
Options per Option Contractual Life per Option Options per Option
<S> <C> <C> <C> <C> <C> <C>
38,900 $32.38-$39.57 2.7 $38.00 38,900 $38.00
418,518 40.81- 49.25 5.6 45.49 385,183 45.56
230,657 50.56- 54.50 6.9 53.14 170,169 52.77
457,502 61.00- 64.88 8.7 63.96 138,642 63.96
157,000 73.50- 73.50 9.0 73.50 18,000 73.50
--------- -------
1,302,577 32.38- 73.50 7.2 56.48 750,894 50.87
========= =======
</TABLE>
FAS No. 123, "Accounting for Stock-Based Compensation," prescribes a
fair-value method of accounting for employee stock options under which
compensation expense is measured based on the estimated fair value of stock
options at the grant date and recognized over the period that the options vest.
The company, however, chooses to account for its stock option plan under the
optional intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees," whereby no compensation expense is recognized for fixed-price stock
options. Compensation cost for stock appreciation rights, which is recognized
under both accounting methods, was immaterial for 1997, 1996 and 1995.
Had compensation expense been determined in accordance with FAS No. 123,
the estimated weighted-average, grant-date fair value would have been $14.37,
$13.17 and $14.54 per option for those options granted in 1997, 1996 and 1995,
respectively, and the resulting compensation expense would have affected net
income (loss) and per share amounts as shown in the following table. These
amounts may not be representative of compensation expense that might be expected
to result in future years using the fair-value method of accounting for employee
stock options, as the number of options granted in a particular year may not be
indicative of the number of options granted in future years, and the fair-value
method of accounting has not been applied to options granted prior to January 1,
1995.
<TABLE>
<CAPTION>
(Millions of dollars, except per share amounts) 1997 1996 1995
----------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) -
As reported $194 $220 $(31)
Pro forma 191 218 (32)
Earnings (Loss) per Share -
Basic -
As reported $4.06 $4.45 $(.60)
Pro forma 4.00 4.42 (.62)
Diluted -
As reported 4.04 4.43 (.60)
Pro forma 3.99 4.40 (.62)
</TABLE>
The fair value of each option granted in 1997, 1996 and 1995 was estimated
as of the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions.
1997 1996 1995
---- ---- ----
Expected life (years) 5.8 5.8 10.0
Risk-free interest rate 6.3% 6.1% 7.1%
Expected dividend yield 3.1 3.1 3.1
Expected volatility 17.5 17.9 19.4
The number of the company's common shares issued upon exercise of options
after year-end 1997 was not material.
In January 1998, the Board of Directors approved a broad-based stock option
plan (BSOP) that provides for the granting of options to purchase the company's
common stock to all full-time employees, except officers. A total of 1,500,000
shares of common stock is authorized to be issued under the BSOP, and
approximately 465,000 options were granted in January 1998.
The Board of Directors, subject to stockholder ratification, also approved
the 1998 Long Term Incentive Plan (the 1998 Plan) to be effective January 1,
1998. This plan provides for the granting of options, restricted stock and other
awards to key employees. Stock appreciation rights may be associated with the
options. A total of 2,300,000 shares of the company's common stock is authorized
to be issued under the 1998 Plan, and in January 1998, 185,000 options were
granted.
The 1987 Program terminated upon stockholder ratification of the 1998 Plan.
No further options can be granted under the 1987 Program after its termination,
although options and any accompanying stock appreciation rights outstanding at
that time may be exercised prior to their respective expiration dates.
Options under either the BSOP or the 1998 Plan are granted at prices equal
to the fair market value of the underlying common stock at the time of grant.
Also in January 1998, the Board of Directors approved provisions to amend
and restate the Executive Deferred Compensation Plan (EDCP). The amendment of
the EDCP adds the company's common stock as an investment alternative, allows
stock option gains to be deferred pretax and implements certain administrative
changes. A total of 500,000 shares of common stock is authorized to be issued
through the EDCP and periodically transferred from the company's treasury stock
or purchased in open-market transactions.
Earnings per share for 1997 would have been lower had these plans been in
existence and had shares been transferred to the EDCP prior to year-end 1997 or
if any options granted under the BSOP or the 1998 Plan had been "in the money"
at year-end. The impact on basic and diluted earnings per share would have been
dependent on the number of shares transferred to the EDCP, while diluted
earnings per share would have been further impacted by the number of incremental
shares included in the denominator of the diluted earnings-per-share
computation.
19. Restructuring Charges
Restructuring of the exploration and production operating unit continued
during 1997 with the relocation of the unit to Houston, Texas. This, in
conjunction with the unit's merger of its North American onshore properties into
Devon (see Note 4) and the 1995 reorganization, resulted in approximately 300
employees terminating their employment, most of whom were terminated by year-end
1997.
During the three-year period ended December 31, 1997, the company accrued a
total of $19 million for the cost of special termination benefits for retiring
employees to be paid from retirement plan assets, future compensation,
relocation, lease cancellation and outplacement. The $2 million reserve at
December 31, 1997, primarily represents remaining severance costs, which are
expected to be paid and charged to the reserve during 1998. The accruals,
expenditures and reserve balances are set forth below:
(Millions of dollars) 1997 1996
--------------------- ---- ----
Beginning balance $10 $ 5
Accruals 2 10
Retirement benefits to be paid from plan assets -- (2)
Payments (10) (3)
---- ----
Ending balance $ 2 $10
==== ===
20. Employee Stock Ownership Plan
In 1989, the company's Board of Directors approved a leveraged Employee
Stock Ownership Plan (ESOP) into which is paid the company's matching
contribution for the employees' contributions to the Kerr-McGee Corporation
Savings Investment Plan (SIP). Most of the company's employees are eligible to
participate in both the ESOP and the SIP. Although the ESOP and the SIP are
separate plans, matching contributions to the ESOP are contingent upon
participants' contributions to the SIP.
In 1989, the ESOP trust borrowed $125 million from a group of lending
institutions and used the proceeds to purchase 2.7 million shares of the
company's treasury stock. The company used the $125 million in proceeds from the
sale of the stock to acquire shares of its common stock in open-market and
privately negotiated transactions. In 1996, a portion of the third-party
borrowings was replaced with a note payable to the company (sponsor financing).
The third-party borrowings are guaranteed by the company and are reflected in
the Consolidated Balance Sheet as Long-Term Debt, while the sponsor financing
does not appear in the company's balance sheet. Deferred compensation,
representing the unallocated ESOP shares discussed in the following paragraph,
is reflected as a reduction of stockholders' equity.
The company stock acquired by the ESOP trust is held in a loan suspense
account. The company's matching contribution and dividends on the shares held by
the ESOP trust are used to repay the loan, and stock is released from the loan
suspense account as the principal and interest are paid. The stock is then
allocated to participants' accounts at market value as the participants'
contributions are made to the SIP. Deferred compensation reflected in the
company's Consolidated Balance Sheet is reduced as shares are allocated to
participants' accounts. Long-term debt is reduced as payments are made on the
third-party financing. Dividends paid on the common stock held in participants'
accounts are also used to repay the loans, and stock with a market value equal
to the amount of dividends is allocated to participants' accounts.
At December 31, 1997 and 1996, the ESOP trust held shares of stock
allocated to participants' accounts and in the loan suspense account as follows:
(Thousands of shares) 1997 1996
--------------------- ----------------------
Participants' accounts 1,343 1,251
Loan suspense account 1,110 1,290
The shares allocated to participants at December 31, 1997, included
approximately 15,000 shares released in January 1998. The shares allocated to
participants at December 31, 1996, included approximately 14,000 shares released
in January 1997.
All ESOP shares are considered outstanding for earnings-per-share
calculations. Dividends on ESOP shares are charged to retained earnings.
Compensation expense is recognized using the cost method and is reduced for
dividends paid on the unallocated ESOP shares. The company recognized
ESOP-related expense of $10 million, $12 million and $14 million in 1997, 1996
and 1995, respectively. These amounts include interest expense incurred on the
third-party ESOP debt of $5 million, $6 million and $8 million in 1997, 1996 and
1995, respectively. The company contributed $1 million, $9 million and $15
million to the ESOP in 1997, 1996 and 1995, respectively. The cash contributions
are net of $4 million for the dividends paid on the company stock held by the
ESOP trust in each of the years 1997, 1996 and 1995.
21. Discontinued Operations
During 1995, the company disposed of substantially all of its refining and
marketing operations, which had been conducted by wholly owned subsidiaries,
Kerr-McGee Refining Corporation and Cato Oil and Grease Co. The 1995 gain on the
sale was $2 million, net of $1 million for income taxes. All of the crude oil
and refined-product inventories of the discontinued refining and marketing
operations were valued using the last-in, first-out (LIFO) method until sold
during 1995. LIFO reserves of $12 million were reversed at the time of the sale
of these inventories. The sales of the remaining refining and marketing assets
were completed during 1996, and the resulting gains and losses were immaterial.
The company exited from the coal business in 1998 with the sales of its
mining operations at Galatia, Illinois, and Kerr-McGee Coal Corporation, which
held Jacobs Ranch Mine in Wyoming. The cash sales resulted in proceeds of $600
million and a gain of $257 million, net of $149 for income taxes. These amounts
will be reflected in the Consolidated Statement of Income and the Consolidated
Statement of Cash Flows for the year ended December 31, 1998. Coal assets and
liabilities at December 31, 1997, are included as part of the appropriate line
items in the Consolidated Balance Sheet. Included at December 31, 1997, are
current assets $50 million; long-term assets $221 million; current liabilities
$40 million; and long-term liabilities $73 million.
The operating results of both the discontinued coal and refining and
marketing operations are reported separately in the Consolidated Statement of
Income. Revenues applicable to all discontinued operations were as follows:
(Millions of dollars) 1997 1996 1995
--------------------- ---- ----- ------
Coal $323 $365 $ 353
Refining and marketing -- -- 1,127
----- ----- ------
$323 $365 $1,480
==== ==== ======
22. Postretirement Benefits
The company sponsors contributory plans to provide certain health care and
life insurance benefits for retired employees. Substantially all the company's
employees may become eligible for these benefits if they reach retirement age
while working for the company; however, benefits available and costs to
individual employees vary depending on the employee's date of retirement and
date of employment with the company.
At December 31, 1997 and 1996, the actuarial and recorded liabilities for
postretirement benefits, none of which has been funded, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
(Millions of dollars) Health Life Health Life
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligations -
Retirees $(77) $(19) $(69) $(18)
Fully eligible active participants (9) (2) (11) (1)
Other active participants (21) (3) (18) (4)
----- ---- ---- ----
Total (107) (24) (98) (23)
Unrecognized net (gain) loss 6 (3) -- (4)
----- ---- ---- ----
Accrued postretirement expense $(101) $(27) $(98) $(27)
===== ==== ==== ====
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, the components of net
periodic expense for postretirement benefits were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
(Millions of dollars) Health Life Health Life Health Life
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits earned during the period $1 $1 $1 $1 $1 $1
Interest cost on accumulated postretirement
benefit obligations 8 1 8 1 8 1
-- -- -- -- -- --
Net postretirement expense $9 $2 $9 $2 $9 $2
== == == == == ==
</TABLE>
The following assumptions were used in estimating the actuarial present
value of the accumulated postretirement benefit obligations and net periodic
postretirement benefit expense:
1997 1996 1995
---- ---- ----
Future compensation increases 5.0% 5.0% 5.00%
Discount rate 7.0 7.5 7.25
The health care cost trend rate used to determine the year-end 1997
accumulated postretirement benefit obligation was 8% in 1998, gradually
declining to 5% in the year 2009 and thereafter.
A 1% increase in the assumed health care cost trend rate for each future
year would increase the accumulated postretirement benefit obligation by $13
million at December 31, 1997. In addition, the aggregate of the service and
interest cost components of net periodic postretirement expense for 1997 would
increase by $1 million.
23. Retirement Plans
Most of the company's employees are covered under noncontributory
retirement plans of the company and certain of its subsidiaries. The benefits of
these plans are based primarily on years of service and employees' remuneration
near retirement. The company's policy is to fund the minimum amounts as
permitted by the Employee Retirement Income Security Act of 1974 (ERISA).
The funded status of plans with assets in excess of accumulated benefits at
December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
(Millons of dollars) 1997 1996
-------------------- ---- ----
<S> <C> <C>
Plan assets at fair value $639 $538
---- ----
Actuarial present value of accumulated benefit obligations -
Vested (354) (322)
Nonvested (16) (13)
---- -----
Total (370) (335)
---- ----
Plan assets in excess of accumulated benefit obligations $269 $203
==== ====
Plan assets at fair value $639 $538
---- ----
Projected benefit obligations -
Actuarial present value of accumulated benefit obligations (370) (335)
Projected salary increases (54) (46)
---- -----
Total (424) (381)
---- ----
Plan assets in excess of projected benefit obligations 215 157
Unrecognized net asset at January 1, 1987 (13) (17)
Unrecognized prior service costs 11 12
Unrecognized net gain (171) (119)
---- ----
Pension prepayment at end of year $ 42 $ 33
==== =====
</TABLE>
The net periodic pension credit, excluding charges of $2 million in 1996
and $1 million in 1995 related to the restructuring program (see Note 19), for
each of the past three years is summarized as follows:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- -----
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 10 $ 9 $ 8
Interest cost on projected benefit obligations 28 27 27
Return on plan assets (126) (70) (115)
Net amortization and deferral 79 27 71
----- ---- -----
Net pension credit $ (9) $ (7) $ (9)
===== ==== =====
</TABLE>
The amount of benefits that can be covered by the funded plans is limited
by ERISA and the Internal Revenue Code. Therefore, the company has unfunded
supplemental plans designed to maintain benefits for all employees at the plan
formula level and to provide senior executives with benefits equal to a
specified percentage of their final average compensation. The projected benefit
obligation for these unfunded plans totaled $14 million and $19 million at
December 31, 1997 and 1996, respectively. To reflect the amount by which the
accumulated benefit obligation exceeded the accrued pension expense for these
plans, an additional liability is recorded in the Consolidated Balance Sheet at
both December 31, 1997 and 1996. Offsetting is an intangible asset (see Note 7).
Although not considered plan assets, a grantor trust was established from which
payments for certain of these supplemental plans are made. The trust had a
balance of $7 million and $12 million at December 31, 1997 and 1996,
respectively. Excluding $6 million in 1997 related to the settlement of a
significant portion of the liabilities of the unfunded supplemental plans, net
periodic pension expense for these plans was $3 million for 1997 and $4 million
for each of the years 1996 and 1995.
The following assumptions were used in estimating the actuarial present
value of the projected benefit obligation and net periodic pension costs:
1997 1996 1995
---- ---- ----
Future compensation increases 5.0% 5.0% 5.00%
Discount rate 7.0 7.5 7.25
Long-term rate of return on plan assets 9.0 9.0 9.00
24. Reporting by Business Segments
The company is an international energy and chemical company. The principal
areas of oil and gas exploration and production are the Gulf of Mexico, the
United Kingdom sector of the North Sea, China, Southeast Asia, Yemen and, prior
to December 31, 1996, onshore in North America. The company has domestic
chemical operations and interests in chemical operations in Western Australia
and Saudi Arabia.
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
--------------------- ---------------------------------------
<S> <C> <C> <C>
Sales -
Exploration and production(1) $ 628 $ 874 $ 690
Chemicals 760 692 707
All other -- -- 4
------ ------ ------
Total $1,388 $1,566 $1,401
====== ====== ======
Operating profit (loss)(2) -
Exploration and production $ 175 $ 204 $ (97)
Chemicals 81 85 122
------ ------ ------
Total $ 256 $ 289 $ 25
====== ====== ======
Net operating profit (loss)(2) -
Exploration and production $ 107 $ 136 $ (56)
Chemicals 52 53 81
------ ------ ------
Total 159 189 25
Net interest expense (24) (29) (29)
Net nonoperating income (expense)(2) 26 4 (55)
Income from discontinued operations,
net of income tax 33 56 27
------ ------ ------
Net income (loss) $ 194 $ 220 $ (31)
====== ====== ======
Sales -
U.S. operations(3) $ 889 $1,026 $ 884
------ ------ ------
International operations(4) -
North Sea - exploration and production 215 289 272
China - exploration and production 56 25 --
Australia - chemicals 185 151 158
Other 43 75 87
------ ------ ------
499 540 517
------ ------ ------
Total $1,388 $1,566 $1,401
====== ====== ======
Operating profit (loss)(2) -
U.S. operations $ 159 $ 174 $ (44)
------ ------ ------
International operations -
North Sea - exploration and production 80 93 108
China - exploration and production 4 2 (5)
Australia - chemicals 13 9 24
Other -- 11 (58)
------ ------ ------
97 115 69
------ ------ ------
Total $ 256 $ 289 $ 25
====== ====== ======
</TABLE>
(1)Includes primarily crude oil sales to the discontinued refining and
marketing operations of $112 million in 1995.
(2)Includes special items. Refer to Management's Discussion and Analysis.
(3)Includes U.S. crude oil sales to the discontinued refining and marketing
operations of $105 million in 1995.
(4)Includes international crude oil sales to the discontinued refining and
marketing operations of $7 million in 1995.
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
<S> <C> <C> <C>
Depreciation, depletion and amortization -
Exploration and production $ 186 $ 218 $ 231
Chemicals 55 55 52
All other 5 4 6
Discontinued operations 25 30 45
------ ------ ------
Total $ 271 $ 307 $ 334
====== ====== ======
Cash capital expenditures -
Exploration and production $213 $239 $371
Chemicals 91 118 69
All other 10 6 2
Discontinued operations 27 29 42
------ ------ ------
Total 341 392 484
------ ------ ------
Exploration expenses -
Petroleum exploration and production -
Dry hole costs 25 37 34
Amortization of undeveloped leases 8 10 14
Other 30 25 31
------ ------ ------
Total 63 72 79
Minerals and other 2 2 1
------ ------ ------
Total exploration expenses 65 74 80
Less - Amortization of oil and gas and minerals
leases and other noncash expenses (8) (14) (19)
------ ------ ------
57 60 61
------ ------ ------
Total cash capital expenditures and
cash exploration expenses $ 398 $ 452 $ 545
====== ====== ======
Identifiable assets -
Exploration and production $1,681 $1,667 $1,748
Chemicals 875 886 802
------ ------ ------
Total 2,556 2,553 2,550
Corporate and other assets 270 295 297
Discontinued operations 270 276 366
------ ------ ------
Total $3,096 $3,124 $3,213
====== ====== ======
Identifiable assets -
U.S. operations $1,362 $1,390 $1,317
------ ------ ------
International operations -
North Sea - exploration and production 699 651 669
China - exploration and production 183 180 149
Australia - chemicals 243 268 260
Other 69 64 155
------ ------ ------
1,194 1,163 1,233
------ ------ ------
Total $2,556 $2,553 $2,550
====== ====== ======
Net assets -
U.S. operations $ 617 $ 582 $ 623
------ ------ ------
International operations -
North Sea - exploration and production 475 413 409
China - exploration and production 134 109 106
Australia - chemicals 152 211 199
Other 62 52 79
------ ------ ------
823 785 793
------ ------ ------
Total $1,440 $1,367 $1,416
====== ====== ======
</TABLE>
25. Results of Operations from Crude Oil and Natural Gas Activities
The results of operations from crude oil and natural gas activities for the
three years ended December 31, 1997, consist of the following:
<TABLE>
<CAPTION>
Interest
Results of in Equity
Production Other Depreciation Asset Income Tax Operations Affiliate's
Gross (Lifting) Related Exploration and Depletion Impair- Expenses Producing Results of
(Millions of dollars) Revenues(1) Costs Costs(2) Expenses(2) Expenses ment (Benefits) Activities Operations(3)
- --------------------- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 -
Domestic $309 $ 50 $25 $25 $105 $-- $ 39 $ 65 $25
North Sea 190 49 7 13 53 -- 27 41 --
China 56 11 6 16 19 -- -- 4 --
Other international 3 1 6 9 1 -- (4) (10) 3
---- ---- --- --- ---- --- ---- ---- ---
Total crude oil and
natural gas activities 558 111 44 63 178 -- 62 100 28
Other(4) 70 55 2 -- -- -- 6 7 --
---- ---- --- --- ---- --- ---- ---- ---
Total $628 $166 $46 $63 $178 $-- $ 68 $107 $28
==== ==== === === ==== === ==== ==== ===
1996 -
Domestic $397 $ 83 $31 $26 $127 $22 $35 $ 73 $ --
North Sea 240 57 8 36 57 -- 30 52 --
China 25 8 5 2 8 -- 1 1 --
Other international 32 10 6 8 15 -- (2) (5) --
---- ---- --- --- ---- --- ---- ---- ---
Total crude oil and
natural gas activities 694 158 50 72 207 22 64 121 --
Other(4) 180 159 1 -- 1 -- 4 15 --
---- ---- --- --- ---- --- ---- ---- ---
Total $874 $317 $51 $72 $208 $22 $ 68 $136 $--
==== ==== === === ==== === ==== ==== ===
1995 -
Domestic $294 $92 $17 $57 $128 $144 $(58) $(86) $--
North Sea 242 57 8 15 66 -- 32 64 --
Other international 40 11 12 7 20 53 (20) (43) --
----- ----- ---- ---- ----- ----- ---- ---- ---
Total crude oil and
natural gas activities 576 160 37 79 214 197 (46) (65) --
Other(4) 114 88 3 -- 3 6 5 9 --
----- ----- ---- ---- ----- ----- ---- ---- ---
Total $690 $248 $40 $79 $217 $203 $(41) $(56) --
==== ==== === === ==== ==== ==== ==== ===
</TABLE>
(1)Gross revenues for 1995 include sales to affiliated entities totaling
$112 million. Of this amount, $97 million and $7 million were applicable
to Domestic and North Sea gross revenues, respectively, and $8 million
was from other activities.
(2)Includes restructuring charges of $2 million, $10 million and $7
million in 1997, 1996 and 1995, respectively. These charges are
classified as Other Related Costs, with the exception of $1 million
classified as Exploration Expenses in 1995 (see Note 19).
(3)The equity affiliate follows the "full cost" method of accounting for
oil and gas exploration and production activities.
(4)Includes gas marketing, gas processing plants, pipelines and other
items that do not fit the definition of crude oil and natural gas
activities but have been included above to reconcile to the segment
presentations.
The table below presents the company's average per-unit sales price of
proprietary crude oil and natural gas and production costs per barrel of oil
equivalent for each of the past three years. Natural gas production has been
converted to a barrel of oil equivalent based on approximate relative heating
value (6 MCF equals 1 barrel).
1997 1996 1995
------ ------ ------
Average sales price -
Crude oil (per barrel)
Domestic $18.53 $19.36 $15.69
North Sea 18.77 19.08 16.31
China 17.71 19.53 --
Other international 18.59 17.69 15.21
Average 18.51 19.16 15.99
Natural gas (per MCF)
Domestic 2.57 2.16 1.56
North Sea 2.52 2.64 2.66
Other international -- 1.14 .85
Average 2.56 2.12 1.52
Production costs -
(Per barrel of oil equivalent)
Domestic 2.75 3.32 3.78
North Sea 4.70 4.33 3.91
China 3.50 5.92 --
Other international 4.55 3.41 2.39
Average 3.48 3.72 3.68
26. Capitalized Costs of Crude Oil and Natural Gas Activities
Capitalized costs of crude oil and natural gas activities and the related
reserves for depreciation, depletion and amortization at the end of 1997 and
1996 are set forth in the table below. Not included in the amounts shown are
$221 million and $209 million that represent the company's proportional interest
in an equity affiliate's net capitalized costs at December 31, 1997 and 1996,
respectively (see Note 4). The equity affiliate follows the "full cost" method
of accounting for oil and gas exploration and production activities.
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996
--------------------- ------- -------
<S> <C> <C>
Capitalized costs -
Proved properties $2,709 $3,054
Unproved properties 134 104
Other 45 34
------- -------
2,888 3,192
------- -------
Reserves for depreciation, depletion and amortization -
Proved properties 1,623 1,953
Unproved properties 30 29
Other 24 23
------- -------
1,677 2,005
------- -------
Net capitalized costs $1,211 $1,187
====== ======
</TABLE>
27. Standardized Measure of and Reconciliation of Changes in Discounted
Future Net Cash Flows (Unaudited)
The standardized measure of future net cash flows presented in the
following table was computed using year-end prices and costs and a 10% discount
factor. The future income tax expense was computed by applying the appropriate
year-end statutory rates, with consideration of future tax rates already
legislated, to the future pretax net cash flows less the tax basis of the
properties involved. However, the company cautions that actual future net cash
flows may vary considerably from these estimates. Although the company's
estimates of total reserves, development costs and production rates were based
upon the best information available, the development and production of the oil
and gas reserves may not occur in the periods assumed. Actual prices realized
and costs incurred may vary significantly from those used. Therefore, such
estimated future net cash flow computations should not be considered to
represent the company's estimate of the expected revenues or the current value
of existing proved reserves.
<TABLE>
<CAPTION>
Standardized Proportional
Future Measure of Interest in Equity
Development 10% Discounted Affiliate's
Future and Production Future Future Net Annual Future Net Standardized
(Millions of dollars) Cash Inflows Costs Income Taxes Cash Flows Discount Cash Flows(1) Measure
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 -
Domestic $1,407 $ 403 $ 290 $ 714 $242 $ 472 $205
North Sea 1,807 813 266 728 266 462 --
China 401 171 42 188 45 143 --
Other international 304 153 55 96 42 54 19
------ ------ ------ ------ ---- ------ ----
Total $3,919 $1,540 $ 653 $1,726 $595 $1,131 $224
====== ====== ====== ====== ==== ====== ====
1996 -
Domestic $2,217 $ 435 $ 552 $1,230 $411 $ 819 $336
North Sea 2,610 841 638 1,131 382 749 --
China 658 248 95 315 91 224 --
Other international 246 147 38 61 26 35 28
------ ------ ------ ------ ---- ------ ----
Total $5,731 $1,671 $1,323 $2,737 $910 $1,827 $364
====== ====== ====== ====== ==== ====== ====
1995 -
Domestic $2,320 $ 910 $ 350 $1,060 $339 $ 721 $ --
North Sea 1,494 418 328 748 254 494 --
China 551 179 96 276 81 195 --
Other international 297 94 62 141 54 87 --
------ ------ ------ ------ ---- ------ ------
Total $4,662 $1,601 $ 836 $2,225 $728 $1,497 $ --
====== ====== ====== ====== ==== ====== ======
</TABLE>
(1)Includes $(8) million in 1996 and $51 million in 1995 from properties
held for sale (see Note 11).
The changes in the standardized measure of future net cash flows are
presented below for each of the past three years:
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
- --------------------- ------ ------ ------
<S> <C> <C> <C>
Net change in sales, transfer prices and production costs $(1,121) $ 847 $ 451
Changes in estimated future development costs (64) 45 (165)
Sales and transfers less production costs (446) (516) (402)
Purchases of reserves in place -- 1 62
Changes due to extensions, discoveries, etc. 108 474 58
Changes due to revisions in quantity estimates 37 116 17
Changes due to sales of reserves in place (8) (139) (86)
Changes due to reserves merged into equity affiliate -- (511) --
Current period development costs 152 155 243
Accretion of discount 261 199 167
Changes in income taxes 384 (289) (124)
Timing and other 1 (52) (19)
------ ------ ------
Net change (696) 330 202
Total at beginning of year 1,827 1,497 1,295
------ ------ ------
Total at end of year $ 1,131 $1,827 $1,497
====== ===== ======
</TABLE>
28. Crude Oil, Condensate and Natural Gas Net Reserves (Unaudited)
The estimates of proved reserves have been prepared by the company's
geologists and engineers. Such estimates include reserves on certain properties
that are partially undeveloped and reserves that may be obtained in the future
by improved recovery operations now in operation or for which successful testing
has been demonstrated. The company has no proved reserves attributable to
long-term supply agreements with governments or consolidated subsidiaries in
which there are significant minority interests. At December 31, 1996, the
company merged its North American onshore properties into an equity affiliate
(see Note 4).
The following table summarizes the changes in the estimated quantities of
the company's crude oil and condensate and natural gas reserves for the three
years ended December 31, 1997.
<TABLE>
<CAPTION>
Crude Oil and Condensate Natural Gas
(Millions of barrels) (Billions of cubic feet)
North Interna- North Interna-
Domestic Sea China tional Total Domestic Sea tional Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves -
Balance December 31, 1994 77 75 26 13 191 568 199 82 849
Revisions of previous estimates 2 1 4 1 8 (6) -- 3 (3)
Purchases of reserves in place 1 -- -- -- 1 45 -- -- 45
Sales of reserves in place (5) -- -- -- (5) (31) -- (1) (32)
Extensions, discoveries and
other additions 1 -- -- -- 1 25 -- 1 26
Production (10) (14) -- (2) (26) (82) (8) (16) (106)
--- --- -- -- --- ---- --- --- ----
Balance December 31, 1995(1) 66 62 30 12 170 519 191 69 779
Revisions of previous estimates 12 (1) -- (1) 10 (1) (10) (1) (12)
Purchases of reserves in place -- -- -- -- -- 1 -- -- 1
Sales of reserves in place (10) -- -- (1) (11) (28) -- (18) (46)
Reserves merged into
equity affiliate (16) -- -- (9) (25) (122) -- (41) (163)
Extensions, discoveries and
other additions 3 39 -- 7 49 27 2 39 68
Production (11) (11) (2) (1) (25) (84) (11) (9) (104)
--- --- -- -- --- ---- --- --- ----
Balance December 31, 1996(1) 44 89 28 7 168 312 172 39 523
Revisions of previous estimates 5 1 -- 1 7 (1) 29 3 31
Sales of reserves in place -- (1) -- -- (1) (27) -- -- (27)
Extensions, discoveries and
other additions 7 -- -- 4 11 37 -- 4 41
Production (9) (8) (3) (1) (21) (56) (12) -- (68)
--- --- -- -- --- ---- --- --- ----
Balance December 31, 1997 47 81 25 11 164 265 189 46 500
=== === == == === ==== === === ====
Proportional interest in
equity affiliate's reserves
December 31, 1996 22 -- -- 3 25 172 -- 13 185
December 31, 1997 22 -- -- 3 25 175 -- 15 190
Proved developed reserves -
December 31, 1995(1) 45 50 -- 12 107 329 156 65 550
December 31, 1996(1) 26 45 20 -- 91 183 161 -- 344
December 31, 1997 28 33 25 11 97 166 147 -- 313
Proportional interest in
equity affiliate's reserves
December 31, 1996 20 -- -- 3 23 164 -- 13 177
December 31, 1997 20 -- -- 2 22 142 -- 14 156
</TABLE>
(1)Includes 1 million barrels of oil and 3 billion cubic feet of natural
gas held for sale at December 31, 1996, and 12 million barrels of oil
and 57 billion cubic feet of natural gas held for sale at December 31,
1995 (see Note 11).
The following presents the company's barrel of oil equivalent proved
developed and undeveloped reserves based on approximate relative heating value
(6 MCF equals 1 barrel).
<TABLE>
<CAPTION>
North Other
(Millions of equivalent barrels) Domestic Sea China International Total
<S> <C> <C> <C> <C> <C>
December 31, 1995(1) 152 94 30 24 300
December 31, 1996(1) 96 118 28 14 256
December 31, 1997 91 112 25 19 247
Proportional interest in
equity affiliate's reserves
December 31, 1996 51 -- -- 5 56
December 31, 1997 52 -- -- 5 57
</TABLE>
(1)Includes 2 million barrels of oil equivalent and 21 million barrels of
oil equivalent held for sale at December 31, 1996 and 1995, respectively
(see Note 11).
29. Costs Incurred in Crude Oil and Natural Gas Activities
Total expenditures, both capitalized and expensed, for crude oil and
natural gas property acquisition, exploration and development activities for the
three years ended December 31, 1997, are reflected in the following table:
<TABLE>
<CAPTION>
Property
Acquisition Exploration Development
(Millions of dollars) Costs(1) Costs(2) Costs(3)
<S> <C> <C> <C>
1997 -
Proprietary costs -
Domestic $ 29 $ 31 $ 45
North Sea -- 15 86
China -- 26 8
Other international 2 13 13
---- ----- -----
Total $ 31 $ 85 $ 152
==== ===== =====
Proportional interest in equity affiliate's costs -
Domestic $ 6 $ 6 $ 25
Other international -- -- 2
---- ---- -----
Total $ 6 $ 6 $ 27
==== ==== =====
1996 -
Proprietary costs -
Domestic $ 6 $ 53 $ 99
North Sea -- 49 21
China 1 6 25
Other international -- 9 10
---- ----- -----
Total $ 7 $117 $155
==== ==== ====
1995 -
Proprietary costs -
Domestic $84 $ 58 $128
North Sea 7 28 23
China 1 2 82
Other international 1 11 10
---- ----- -----
Total $93 $ 99 $243
=== ===== ====
</TABLE>
(1)Includes $29 million applicable to purchases of reserves in place in
1995.
(2)Exploration costs include delay rentals, exploratory dry holes, dry
hole and bottom hole contributions, geological and geophysical costs,
costs of carrying and retaining properties, etc., and capital
expenditures, such as costs of drilling and equipping successful
exploratory wells, etc.
(3)Development costs include costs incurred to obtain access to proved
reserves (surveying, clearing ground, building roads, etc.), to drill
and equip development wells and to acquire, construct and install
production facilities and improved recovery systems. Development costs
also include costs of developmental dry holes.
30. Supplementary Mineral Ore Reserve and Price Data (Unaudited)
The following table presents selected statistics related to the company's
mineral operations. Mineral reserves presented in the following table represent
those estimated quantities of proved and probable ore that, under presently
anticipated conditions, may be profitably recovered and processed for the
extraction of their mineral content. Future production of these resources is
dependent on many factors, including market conditions and governmental
regulations.
<TABLE>
<CAPTION>
(Thousands of tons) 1997 1996 1995 1994 1993
- ------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Proved and probable (demonstrated)
reserves, December 31 -
Coal(1) 506,000 810,400 833,700 864,200 887,900
Heavy minerals 6,500(2) 5,500 5,700 6,000 8,000
Production -
Coal 32,100 31,300 31,100 25,600 23,300
Heavy minerals 234 149 238 268 263
Average market price (per ton) -
Coal $8.93 $10.48 $10.12 $10.73 $13.78
Heavy minerals 127.20 142.60 104.40 85.43 69.47
</TABLE>
(1)The company withdrew from the coal business in 1998. See Management's
Discussion and Analysis and Note 11.
(2)Represents 177 million tons of sand containing 3.7% heavy minerals in
Western Australia. The percentages of valuable heavy minerals within the
heavy-mineral concentrate are 4.5% rutile, 61.3% ilmenite, 3.3%
leucoxene and 11.1% zircon.
31. Quarterly Financial Information (Unaudited)
A summary of quarterly consolidated results for 1997 and 1996 is presented
below. Refer to Management's Discussion and Analysis for information about 1997
and 1996 special items.
<TABLE>
<CAPTION>
Diluted Earnings per
Income (Loss) Net Common Share
Operating From Continuing Income Continuing Net
Sales Profit Operations (Loss) Operations Income
<S> <C> <C> <C> <C> <C> <C>
1997 Quarter Ended -
March 31 $ 384 $ 83 $ 58 $ 70 $1.21 $1.45
June 30 335 54 37 42 .76 .87
September 30 324 57 31 37 .65 .77
December 31 345 62 35 45 .74 .95
------ ---- ---- ---- ----- -----
Total $1,388 $256 $161 $194 $3.36 $4.04
====== ==== ==== ==== ===== =====
1996 Quarter Ended -
March 31 $ 365 $ 65 $ 35 $ 48 $ .69 $ .94
June 30 379 62 37 51 .73 1.01
September 30 389 67 46 62 .94 1.27
December 31 433 95 46 59 .94 1.21
------ ---- ---- ---- ------ -----
Total $1,566 $289 $164 $220 $3.30 $4.43
====== ==== ==== ==== ====== =====
</TABLE>
The company's common stock is listed for trading on the New York Stock
Exchange and was held by approximately 11,300 stockholders of record at year-end
1997. The ranges of sales prices and dividends declared during the last two
years are as follows:
Market Prices
---------------------------------------
Dividends
1997 1996 per Share
------------------ ------------------ --------------
High Low High Low 1997 1996
-------------------------------------------------------
Quarter Ended -
March 31 75 61 7/8 65 3/4 59 3/8 $.45 $.41
June 30 67 1/4 55 1/2 67 3/8 56 5/8 .45 .41
September 30 69 15/16 59 13/16 63 3/8 55 3/4 .45 .41
December 31 71 1/2 60 1/8 74 1/8 60 5/8 .45 .41
<TABLE>
Five-Year Financial Summary
<CAPTION>
(Millions of dollars, except per-share amounts) 1997 1996 1995 1994 1993
- ---------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Net Income (Loss)
Sales $1,388 $1,566 $1,401 $1,272 $1,118
------ ------ ------ ------ ------
Operating costs and expenses 1,199 1,397 1,480 1,187 1,020
Interest and debt expense 47 52 60 59 46
------ ------ ------ ------ ------
Total costs and expenses 1,246 1,449 1,540 1,246 1,066
------ ------ ------ ------ ------
142 117 (139) 26 52
Other income 90 132 29 27 17
Provision (benefit) for income taxes 71 85 (52) 18 33
------ ------ ------ ------ ------
Income (loss) from continuing operations
before extraordinary charge and cumulative
effect of accounting changes 161 164 (58) 35 36
Income from discontinued operations 33 56 27 55 41
------ ------ ------ ------ ------
Net income (loss) $ 194 $ 220 $ (31) $ 90 $ 77
====== ====== ====== ====== ======
Common Stock Information, per Share
Diluted earnings (loss) per common share -
Continuing operations $3.36 $3.30 $(1.12) $.67 $.74
Discontinued operations .68 1.13 .52 1.07 .83
Total $4.04 $4.43 $(.60) $1.74 $1.57
Dividends declared 1.80 1.64 1.55 1.52 1.52
Stockholders' equity 30.09 28.10 27.52 29.82 29.24
Market high for the year 75.00 74.13 64.00 51.00 56.00
Market low for the year 55.50 55.75 44.00 40.00 41.75
Market price at year-end $63.31 $72.00 $63.50 $46.25 $45.25
Shares outstanding at year-end (thousands) 47,686 48,294 51,069 51,694 51,655
Balance Sheet Information
Working capital $166 $320 $189 $52 $102
Property, plant and equipment - net 1,998 1,948 2,210 2,489 2,446
Total assets 3,096 3,124 3,213 3,696 3,506
Long-term debt 552 626 632 673 590
Total debt 579 663 735 993 859
Stockholders' equity 1,440 1,367 1,416 1,543 1,512
Cash Flow Information
Net cash provided by operating activities 569 645 369 356 427
Cash capital expenditures 341 392 484 410 449
Dividends paid 85 83 79 78 73
Purchase of treasury stock $60 $195 $45 $-- $--
Ratios and Percentage
Current ratio 1.3 1.7 1.3 1.1 1.1
Average price/earnings ratio 16.2 14.7 NM 26.1 31.1
Total debt to total capitalization 29% 33% 34% 39% 36%
Employees
Total wages and benefits $285 $289 $314 $319 $319
Number of employees at year-end 3,746 3,851 3,976 5,524 5,812
</TABLE>
<TABLE>
Six-Year Operating Summary
<CAPTION>
1997 1996 1995 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exploration and Production
Net proprietary production of
crude oil and condensate -
(thousands of barrels per day)
Domestic 24.2 30.6 28.9 25.5 27.8 25.5
North Sea 23.4 30.9 36.7 34.3 16.7 16.0
China 8.8 3.7 -- -- -- --
Other international .5 3.4 4.8 7.5 8.7 9.0
------ ------ ------ ------ ------ ------
Total 56.9 68.6 70.4 67.3 53.2 50.5
Average price of crude oil sold
(per barrel) -
Domestic $18.53 $19.36 $15.69 $14.64 $15.76 $18.17
North Sea 18.77 19.08 16.31 15.15 15.90 18.71
China 17.71 19.53 -- -- -- --
Other international 18.59 17.69 15.21 13.79 14.80 16.83
Average $18.51 $19.16 $15.99 $14.81 $15.64 $18.11
Proprietary natural gas sales
(MMCF per day) 184 281 291 271 286 296
Average price of natural gas
sold (per MCF) $2.56 $2.12 $1.52 $1.76 $1.92 $1.56
Net exploratory wells drilled -
Productive 2.65 4.91 3.71 9.61 2.22 2.59
Dry 4.42 3.52 9.16 8.47 10.09 5.53
------ ------ ------ ------ ------ ------
Total 7.07 8.43 12.87 18.08 12.31 8.12
Net development wells drilled -
Productive 9.78 21.33 40.86 22.27 43.90 27.26
Dry -- 1.04 2.95 4.63 2.33 3.05
------ ------ ------ ------ ------ ------
Total 9.78 22.37 43.81 26.90 46.23 30.31
Undeveloped net acreage (thousands) -
Domestic 319 265 472 499 523 620
North Sea 391 428 358 363 243 184
China 2,184 925 341 282 -- --
Other international 10,124 927 1,424 1,463 2,087 401
------ ------ ------ ------ ------ ------
Total 13,018 2,545 2,595 2,607 2,853 1,205
Developed net acreage (thousands) -
Domestic 155 209 537 542 539 549
North Sea 24 33 22 21 21 18
China 19 19 19 19 19 --
Other international 104 104 159 165 180 187
------ ------ ------ ------ ------ ------
Total 302 365 737 747 759 754
Estimated proved reserves
(millions of equivalent barrels) 247 256 300 332 317 302
Chemicals
Industrial and specialty chemical
sales (thousands of tons) 488 446 445 381 331 314
</TABLE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
23.0 Consent of Independent Public Accountant
27.0 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KERR-MCGEE CORPORATION
By: (Deborah A. Kitchens)
---------------------
Deborah A. Kitchens
Vice President and Controller
Dated: November 13, 1998
-----------------
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23.0 Consent of Independent Public Accountant
27.0 Financial Data Schedule
EXHIBIT 23
Consent of Independent Public Accountant
As independent public accountants, we hereby consent to the incorporation
of our report dated November 6, 1998, into the company's previously filed
Registration Statements on Form S-8 File Nos. 33-24274, 33-50949 and 333-28235,
and the company's previously filed Registration Statements on Form S-3 File Nos.
33-5473 and 33-66112.
(ARTHUR ANDERSEN LLP)
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
November 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Consolidated
Balance Sheet at December 31, 1997, 1996, and 1995, and the Consolidated
Statement of Income for the years then ended and is qualified in its entirety by
reference to such Form 8-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 183 121 87
<SECURITIES> 0 0 0
<RECEIVABLES> 279 380 339
<ALLOWANCES> 5 5 5
<INVENTORY> 172 218 221
<CURRENT-ASSETS> 689 805 764
<PP&E> 4602 4837 5767
<DEPRECIATION> 2604 2889 3557
<TOTAL-ASSETS> 3096 3124 3213
<CURRENT-LIABILITIES> 523 485 575
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 54 54 54
<OTHER-SE> 1386 1313 1362
<TOTAL-LIABILITY-AND-EQUITY> 3096 3124 3213
<SALES> 1388 1566 1401
<TOTAL-REVENUES> 1388 1566 1401
<CGS> 739 804 745
<TOTAL-COSTS> 1246 1449 1540
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 47 52 60
<INCOME-PRETAX> 232 249 (110)
<INCOME-TAX> 71 85 (52)
<INCOME-CONTINUING> 161 164 (58)
<DISCONTINUED> 33 56 27
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 194 220 (31)
<EPS-PRIMARY> 4.06 4.45 (.60)
<EPS-DILUTED> 4.04 4.43 (.60)
</TABLE>
