SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
February 26, 1999
(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
On February 26, 1999, Oryx Energy Company, a Delaware corporation
("Oryx"), was merged (the "Merger") into Kerr-McGee Corporation ("Kerr-McGee"),
a Delaware corporation with Kerr-McGee being the surviving corporation, pursuant
to an Agreement and Plan of Merger, dated as of October 14, 1998, between
Kerr-McGee and Oryx. As a result of the Merger and a reverse stock split
("Reverse Split") effected by Oryx immediately prior to the Merger, (i) all
shares of common stock, par value $1.00 per share, of Oryx ("Oryx Common Stock")
owned by Kerr-McGee or held by Oryx immediately prior to the Merger were
canceled and retired, and (ii) except as provided in (i), each share of Oryx
Common Stock issued and outstanding immediately prior to the Reverse Split was
converted into the right to receive 0.369 shares of common stock, par value
$1.00 per share, of Kerr-McGee ("Kerr-McGee Common Stock"). The exchange ratio
of 0.369 to 1.0 was determined by negotiations between Kerr-McGee and Oryx. In
the aggregate, Kerr-McGee is issuing approximately 40 million shares of
Kerr-McGee Common Stock. There were no material relationships between Kerr-McGee
and Oryx prior to the consummation of the merger.
Item 7. Financial Statements and Exhibits
Listed below the financial statements, financial information and
exhibits, if any, filed as a part of this report.
(c) Exhibits
Exhibit No. Description
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial data schedules for the twelve months ended December 31, 1998,
1997 and 1996, and at December 31, 1998, 1997, and 1996.
99 Supplemental financial statements for Kerr-McGee Corporation for the
three years ended December 31, 1998
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: July 16, 1999
Exhibit Index
Exhibit No.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial data schedules for the twelve months ended December 31, 1998,
1997 and 1996, and at December 31, 1998, 1997 and 1996.
99 Supplemental financial statements for Kerr-McGee Corporation for the
three years ended December 31, 1998
EXHIBIT 23.1
Consent of Independent Public Accountant
As independent public accountants, we hereby consent to the incorporation of our
report dated February 26, 1999, included in this Form 8-K, 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, 33-66112 and 333-76951.
(ARTHUR ANDERSEN LLP)
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
July 16, 1999
EXHIBIT 23.2
Consent of Independent Accountant
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 33-5473, 33-66112 and 333-76951) and Form S-8
(Nos. 33-24274; 33-50949 and 333-28235) of Kerr-McGee Corporation of our
report dated February 26, 1999 appearing in Kerr-McGee Corporation's Current
Report on Form 8-K and relating to the consolidated financial statements of Oryx
Energy Company, which financial statements are not separately presented therein.
(PRICEWATERHOUSECOOPERS LLP)
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
July 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at December 31, 1998, 1997 and 1996, and the Consolidated
Statement of Income for the years then ended restated to reflect the company's
pooling of interests with Oryx Energy Company and is qualified in its entirety
by reference to such Form 8-K.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 121 192 130
<SECURITIES> 0 0 0
<RECEIVABLES> 394 506 602
<ALLOWANCES> 5 5 5
<INVENTORY> 247 175 221
<CURRENT-ASSETS> 877 926 1054
<PP&E> 10652 10228 10191
<DEPRECIATION> 6499 6309 6498
<TOTAL-ASSETS> 5451 5339 5194
<CURRENT-LIABILITIES> 1050 926 893
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 93 93 93
<OTHER-SE> 1253 1465 1186
<TOTAL-LIABILITY-AND-EQUITY> 5451 5339 5194
<SALES> 2200 2605 2740
<TOTAL-REVENUES> 2200 2605 2740
<CGS> 1053 1003 1053
<TOTAL-COSTS> 2763 2152 2267
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 157 141 145
<INCOME-PRETAX> (520) 535 583
<INCOME-TAX> (175) 184 225
<INCOME-CONTINUING> (345) 351 358
<DISCONTINUED> 277 33 56
<EXTRAORDINARY> 0 (2) 0
<CHANGES> 0 0 0
<NET-INCOME> (68) 382 414
<EPS-BASIC> (.78) 4.40 4.70
<EPS-DILUTED> (.78) 4.38 4.68
</TABLE>
Exhibit 99
Management's Discussion and Analysis
Kerr-McGee/Oryx Merger
On February 26, 1999, the merger between Kerr-McGee and Oryx was
completed. Oryx was a worldwide independent oil and gas exploration and
production company. Its operations have been merged into and reported with
Kerr-McGee's exploration and production segment. All references to the "company"
refer to the merged entity.
Under the merger agreement, each outstanding share of Oryx common stock
was effectively converted into the right to receive 0.369 shares of newly issued
Kerr-McGee common stock. The merger qualified as a tax-free exchange to Oryx's
shareholders and has been accounted for as a pooling of interests. Accordingly,
results of operations, financial position and cash flows for all prior periods
have been restated to reflect the combined company as though it had always been
in existence.
The merger was announced in October 1998. This merger was one of
several transactions during 1998 that are discussed below.
Other 1998 Transactions
In January 1998, Kerr-McGee announced its intent to focus on two core
businesses, the exploration and production of oil and gas and the production and
marketing of titanium dioxide pigment. Several major transactions were part of
this strategic plan.
The company also announced its intent to exit the coal business in
January 1998. The divestiture of the coal operations was completed in July 1998
for approximately $600 million cash and resulted in an after-tax gain of $257
million. 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.
Titanium dioxide pigment annual production capacity was expanded by
approximately 55% with the acquisition of an 80% interest in the Bayer AG
(Bayer) European pigment business. The company has the option to acquire the
remaining 20% after March 31, 2001. The $97 million cash transaction was
effective March 31, 1998.
Oil and gas production and exploratory prospects expanded with the
purchase of the United Kingdom oil and gas assets of Gulf Canada Resources
Limited (Gulf Canada) for $422 million. This transaction was effective March
31, 1998, and increased the company's North Sea reserves by 23% compared with
year-end 1997.
Operating Environment and Outlook
Based on proven reserves at December 31, 1998, Kerr-McGee is one of the
largest independent, non-integrated oil and gas exploration and production
companies based in the United States. In connection with the merger, the
company's management has implemented action plans to achieve synergies that
should result in pre-tax benefits of $100 million annually.
Oil prices in the first five months of 1999 rose from year end 1998
prices, their lowest level since 1985 to peak at more than $19 per barrel on the
New York Mercantile Exchange. Prices were in a low range of less than $10 per
barrel to $14 per barrel for approximately 20 months through March 1999 due
primarily to the Asian and South American economic downturn coupled with an
untimely expansion of OPEC oil supply. Crude oil inventories declined in the
early months of 1999, which indicated world oil consumption was higher than
production. Effective April 1, 1999, OPEC took steps to reduce supplies, and the
market reacted with higher pricing. Management recognizes that supply restraint
by OPEC and a few larger non-OPEC producers remains a risk to commodity pricing
but believes prices should stabilize in the $15 to $18 range.
In early 1999, gas markets in the United States experienced weakened
pricing due to a warm winter and high storage volumes. Management believes the
severe downturn in drilling on the shallow Gulf of Mexico shelf and onshore
United States has already reduced gas deliverability. This lack of investment,
the long startup time required for deepwater projects and increasing demand for
natural gas in environmentally friendly power generation has contributed to
higher prices in mid-1999 and should support them over the longer term.
The company expanded its titanium dioxide pigment capacity by
approximately 55% in 1998. Pigment prices for 1998 increased due to economic
growth, mainly in North America and Europe, rising about 14% in the domestic
market and slightly higher in certain international markets. Management believes
that pigment consumption will remain flat in 1999, which is likely to equate to
a flat pricing structure. To maximize profits, the company is focused on
optimizing manufacturing processes to reduce costs.
Results of Consolidated Operations
Net income (loss) and per-share amounts for each of the three years in
the period ended December 31, 1998, were as follows:
(Millions of dollars,
except per-share amounts) 1998 1997 1996
- -------------------------- --------------------------
Net income (loss) $(68) $382 $414
Income (loss) from continuing operations
excluding special items (24) 343 369
Net income (loss) per share -
Net income (loss) -
Basic (.78) 4.40 4.70
Diluted (.78) 4.38 4.68
Income (loss) from continuing operations
excluding special items -
Basic (.28) 3.95 4.19
Diluted (.28) 3.93 4.17
Net income (loss) was impacted by a number of special items in each of
the years. In 1998, special items related primarily to impairment write-downs
reflecting the current market value of certain of the company's oil and gas
producing fields and certain chemical facilities. Other 1998 special items were
principally nonoperating and reduced net income by $22 million. In 1997, special
items were also principally nonoperating and increased net income by $8 million.
The 1996 special items resulted in a charge to net income of $11 million and
were both operating and nonoperating. These special items affect comparability
between the periods and are shown on an after-tax basis in the following table,
which reconciles income (loss) from continuing operations excluding special
items to net income (loss):
(Millions of dollars) 1998 1997 1996
- --------------------- ---- ---- ----
Income(loss) from continuing
operations excluding
special items $(24) $343 $369
---- ---- ----
Special items, net of
income taxes -
Asset impairment (299) - (16)
Equity affiliate's full-cost
ceiling writedown (27) - -
Net provision for environmental
reclamation and remediation
of inactive sites (26) (13) (28)
Restructuring (25) (1) (7)
Pending/settled litigation - (1) (21)
Settlement of prior years'
income taxes 41 - -
Settlements with
insurance carriers 8 8 44
Effect of United Kingdom tax-
rate change 8 - -
Gains on the sale of
equity securities - 12 15
Gains on the sale of
nonstrategic oil and
gas properties 1 2 7
Other, net (2) 1 (5)
---- ---- ----
Total (321) 8 (11)
---- ---- ----
Income from discontinued operations,
net of income taxes 277 33 56
Extraordinary charge, net of income
taxes - (2) -
---- ---- ----
Net income (loss) $(68) $382 $414
==== ==== ====
The company sold its coal operations in 1998, resulting in an after-tax
gain of $257 million. All amounts related to coal are shown in the Consolidated
Statement of Income as discontinued operations.
In 1997, the company recognized an extraordinary loss of $2 million
(net of $1 million of income taxes) from the write-off of unamortized debt
issuance costs. These costs related to a $500 million credit facility that was
replaced with a five-year, $500 million revolving credit agreement.
Income (loss) from continuing operations excluding special items for
1998 declined $367 million from 1997. This primarily resulted from a $535
million decline in exploration and production operating profit excluding special
items, which was partially offset by a $31 million increase in chemical results.
In 1997, income from continuing operations excluding special items decreased $26
million from the prior year, due primarily to declines of 15% and 7% in
operating profit excluding special items of exploration and production and
chemical, respectively.
Operating profit excluding special items was $177 million, $681 million
and $789 million for 1998, 1997 and 1996, respectively. The merger of certain of
the company's North American onshore properties into Devon Energy Corporation
(Devon) was effective December 31, 1996, and affects the comparability of 1997
and 1996 operating profit. The company's investment in Devon is accounted for
using the equity method, and related results are not included in operating
profit in 1998 and 1997 (see Note 4). In May 1999, Devon announced that it had
signed a definitive agreement to merge with PennzEnergy Company. The merger is
subject to stockholder approval by both companies, various regulatory approvals
and other customary closing conditions. Upon successful completion of the
merger, the company's investment in Devon will no longer be accounted for using
the equity method.
Sales from continuing operations were $2.2 billion in 1998, $2.6
billion in 1997 and $2.7 billion in 1996. Declines in 1998 average sales prices
for oil and natural gas, of 32% and 13%, respectively, and natural gas volume
decreases were partially offset by increased sales volumes and prices for
titanium dioxide pigment. The volume decreases in natural gas sales were
primarily the result of damages to and repair times for pipeline systems,
hurricane downtimes and normal production declines. Volume increases in titanium
dioxide sales relate to the purchase of an 80% interest in Bayer's European
pigment operations and the expansion of the pigment facility in Hamilton,
Mississippi. 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. Oil and gas volumes declined primarily due to the
merger of certain 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.
Costs and operating expenses were $1.1 billion, $1 billion and $1.1
billion for 1998, 1997 and 1996, respectively. The 1998 amount was higher than
the prior year principally due to costs of the new European pigment operations
and higher per-unit costs at the domestic pigment and synthetic rutile
facilities. This was offset by the absence of costs of natural gas purchased for
resale. Costs and operating expenses for 1997 were lower than the prior year,
primarily due to the absence of certain 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.
Following are general and administrative expenses for 1998, 1997 and
1996:
(Millions of dollars) 1998 1997 1996
- --------------------- ---- ---- ----
General and administrative expenses
excluding special items $204 $194 $186
---- ---- ----
Special items -
Net provision for environmental
reclamation and remediation
of inactive sites 41 20 43
Restructuring 36 2 10
Pending/settled litigation - 2 29
Other, net (3) 3 9
---- ---- ----
Total 74 27 91
---- ---- ----
General and administrative expenses $278 $221 $277
==== ==== ====
The increase in 1998 vs. 1997 general and administrative expenses
primarily resulted from additional costs related to the company's European
pigment operations, which were acquired in March 31, 1998. 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 charges are for a 1998 voluntary severance
program for the former domestic operations, the work process review and
organizational restructuring of several groups, the 1996-1997 relocation of part
of the exploration and production unit to Houston, Texas, and severance
associated with the divestiture program and the Devon merger.
Asset impairments totaled $446 million in 1998 and $25 million in 1996
(see Note 10). Of the 1998 amount, $389 million was for writedowns associated
with certain oil and gas fields located in the North Sea, China and United
States. Asset impairment of $57 million was also recognized for certain chemical
facilities in Idaho and Alabama. The impairments were recorded because these
assets were no longer expected to recover their net book values through future
cash flows. The 1996 asset impairment related principally to certain oil and gas
exploration and production properties in the Gulf of Mexico.
Exploration costs for 1998, 1997 and 1996 were $215 million, $139
million and $122 million, respectively. The 1998 increase was the result of
higher dry hole costs in the Gulf of Mexico, Kazakhstan, Thailand and onshore
United States, higher undeveloped leasehold amortization in the Gulf of Mexico,
higher geophysical expenses related to the Gulf of Mexico and higher district
expense in China, the North Sea and Gulf of Mexico, partially offset by lower
dry hole costs in China. Increased Gulf of Mexico leasehold amortization,
geophysical expenses and lease rentals were the primary reason for the 1997
increase over the prior year. In addition, dry hole expenses were higher in
China and Algeria, which were partially offset by lower dry hole costs in the
North Sea.
Taxes, other than income taxes, were $53 million in 1998, $103 million
in 1997 and $111 million in 1996. The 1998 decline was due to lower severance
taxes, a direct result of lower oil and gas prices. The decline in 1997 from
1996 was primarily due to the absence of certain merged onshore North American
properties, which resulted in a decrease in proprietary oil and gas production
volumes.
Interest and debt expense totaled $157 million in 1998, $141 million in
1997 and $145 million in 1996. Borrowings increased in 1998 due to the
acquisitions of European chemical operations and North Sea oil and gas assets
partially offset by the proceeds from the sale of the coal assets. Decreased
debt was the principal reason for the lower 1997 expense, compared with the
prior year.
Other income was as follows for each of the years in the three-year
period ended December 31, 1998:
(Millions of dollars) 1998 1997 1996
- --------------------- ---- ---- ----
Other income excluding special items $36 $43 $ 9
--- --- ----
Special items -
Interest income from settlement of
prior years' income taxes 19 - -
Settlements with insurance carriers 12 12 67
Equity affiliate's full-cost
ceiling writedown (27) - -
Gains on the sale of nonstrategic
oil and gas properties 2 2 11
Gains on sales of equity securities - 18 23
Other, net 1 7 -
--- --- ----
Total 7 39 101
--- --- ----
Other income $43 $82 $110
=== === ====
Lower equity earnings from unconsolidated affiliates were the primary
reason for the decline in 1998 other income excluding special items, compared
with the prior year. Equity earnings from the Devon investment were impacted by
lower oil and gas prices and decreased $14 million for 1998, compared with 1997.
In 1997, equity earnings from Devon of $23 million contributed to higher other
income, as compared with 1996. In addition, the company recorded $2 million in
foreign currency exchange losses in 1997, compared with a $15 million loss in
the prior year.
Segment Operations
Operating profit (loss) from each of the company's segments is
summarized in the following table:
(Millions of dollars) 1998 1997 1996
- --------------------- ---- ---- ----
Operating profit excluding
special items -
Exploration and production $ 62 $597 $699
Chemicals 115 84 90
----- ---- ----
Total 177 681 789
Special items (482) (5) (37)
----- ---- ----
Operating profit (loss) $(305) $676 $752
===== ==== ====
Exploration and Production
Exploration and production sales, operating profit (loss) and
production and sales statistics are shown in the following table:
(Millions of dollars,
except per-unit amounts) 1998 1997 1996
- ------------------------- ------ ------ ------
Sales $1,267 $1,845 $2,048
====== ====== ======
Operating profit excluding
special items $ 62 $ 597 $ 699
Special items (423) (2) (32)
------ ------ ------
Operating profit (loss) $ (361) $ 595 $ 667
====== ====== ======
Net proprietary crude oil and
condensate produced
(thousands of barrels per day) 172 172 177
Average price of crude oil sold
(per barrel) $12.52 $18.32 $19.18
Proprietary natural gas sold
(MMCF per day) 584 685 781
Average price of natural gas sold
(per MCF) $ 2.12 $ 2.43 $ 2.10
Asset impairment for certain oil and gas fields in the North Sea, China
and United States totaled $389 million in 1998 and is reflected in special
items. Also, in 1998 a $34 million restructuring reserve is shown as a special
item. This amount was provided primarily for a voluntary severance program for
former Oryx domestic operations. Special items in 1997 consisted primarily of
additional costs for the segment's restructuring and relocation to Houston,
Texas. The 1996 special items were $22 million for asset impairment and $10
million for restructuring, due to the December 1996 merger of certain North
American onshore properties into Devon and the announcement of the relocation of
certain exploration and production personnel to Houston, Texas.
Chemicals
Chemical sales and operating profit are shown in the following table:
(Millions of dollars) 1998 1997 1996
- --------------------- ---- ---- ----
Sales $933 $760 $692
==== ==== ====
Operating profit excluding
special items $115 $ 84 $ 90
Special items (59) (3) (5)
---- ---- ----
Operating profit $ 56 $ 81 $ 85
==== ==== ====
Asset impairment totaled $57 million for noncore chemical assets in
Alabama and Idaho in 1998 and is included in special items. In addition, $2
million of severance charges were recorded as special items in 1998. Special
items in 1997 were primarily for the write-off of obsolete equipment. The 1996
amount was for impairment and shutdown costs for a crosstie-treating facility
and the elimination of a product line at a specialty plant.
Titanium dioxide pigment prices increased throughout 1998. This
improvement in pricing, along with the company's acquisition of 80% of the
104,000 net metric-ton-per-year European pigment operations from Bayer and a
full year's production from the 27,000 metric-ton-per-year expansion of the
company's Hamilton, Mississippi, plant were the primary reasons for the $173
million increase in chemical sales. These sales increases were partially offset
by higher per-unit costs for pigment, synthetic rutile and certain electrolytic
products, resulting in a $31 million increase in operating profit excluding
special items. 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 1997, average prices
received over the year were less than those received in 1996. 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.
Financial Condition
(Millions of dollars) 1998 1997 1996
- --------------------- ----- ----- -----
Current ratio 0.8 1.0 1.2
Total debt $2,250 $1,766 $1,849
Total debt less cash 2,129 1,574 1,719
Stockholders' equity $1,346 $1,558 $1,279
Net debt to total capitalization 61% 50% 57%
Floating-rate debt to total debt 33 15 31
Cash Flow
Net cash provided by operating activities was $385 million in 1998,
compared with $1.1 billion in 1997 and $1.2 billion in 1996.
The decrease in 1998 resulted primarily from the net loss and increased
working capital and other changes that used cash from operating activities. Net
cash provided by operating activities was reduced by taxes paid related to the
sale of the discontinued coal operations of $115 million.
The decrease in 1997 net cash provided by operating activities,
compared with 1996, resulted primarily from lower net income, lower noncash
charges, higher cash environmental expenditures and lower deferred income taxes.
Cash flow provided by operating activities in 1997 was also adversely affected
by the company's merger of certain of its North American onshore oil and gas
properties into Devon, since undistributed earnings from equity affiliates
represent a noncash item.
In 1998, proceeds of approximately $600 million were received from the
sale of the company's discontinued coal operations, $150 million from the sale
of the ammonium perchlorate operations and marginal exploration and production
properties and $20 million from other investing activities. These sources of
cash from investing activities and net proceeds from debt issuances of $481
million were used for capital expenditures of $981 million, acquisitions of the
Gulf Canada North Sea assets and the European titanium dioxide pigment
facilities totaling $518 million and dry hole costs of $92 million.
In both 1997 and 1996, 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, $17 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 $57 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.
The company's Board of Directors authorized a stock purchase program in
1998. A total of 580,000 shares ($25 million) was purchased before the program
was cancelled because of the company's merger. The 1995 stock purchase program
was completed in August 1997 with expenditures of $60 million in 1997, $195
million in 1996 and $45 million in 1995. A total of 4,829,000 shares was
purchased through this 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.
Liquidity
At year-end 1998, total debt outstanding was $2.3 billion. The
percentage of net debt to total capitalization was 61% at December 31, 1998, 50%
at December 31, 1997, and 57% at year-end 1996. The higher percentage at
year-end 1998 resulted from the increase in borrowings due to the acquisitions
of the Gulf Canada United Kingdom assets and the European pigment operations,
and capital expenditures that totaled more than the cash proceeds from the sales
of the coal operations. The improvement in the 1997 percentage was the direct
result of repayment of debt, which more than offset the effect of the stock
purchase program on total capitalization.
In connection with the merger, ratings agencies reviewed the company's
debt ratings. The new ratings are "BBB+," "Baa1" and "BBB" for senior unsecured
debt. See Note 8 for a discussion of the company's debt at year-end 1998.
The company has the borrowing capacity to meet its needs and provide
for its commercial paper program and general liquidity. In April 1999, the
company increased its shelf registration with the Securities and Exchange
Commission to offer up to $1 billion of debt securities, preferred stock, common
stock or warrants.
The company and/or its subsidiaries also have several revolving credit
agreements. At year-end 1998, $598 million was outstanding under revolving
credit facilities, which bear interest at varying rates. At December 31, 1998,
the company had unused lines of credit and revolving credit agreements totaling
$708 million. Of this amount, $345 million and $90 million could be used to
support the commercial paper borrowings of Kerr-McGee Credit LLC and Kerr-McGee
Oil (U.K.) PLC respectively, both wholly owned subsidiaries.
On February 26, 1999, the date of the merger, the company signed two
new revolving credit facilities replacing $75 million of a Kerr-McGee Oil (U.K.)
PLC revolving credit facility and Oryx's $500 million, five-year revolving
credit facility entered into October 20, 1997. The two new agreements consist of
a three-year, $500 million facility and a 364-day, $250 million facility.
Initially, one-third of the borrowings under each of the agreements can be made
in British pound sterling, euros or other local European currencies. Interest
for each of the revolving credit facilities is payable at varying rates.
During 1998, the company and/or its subsidiaries entered into two other
revolving credit agreements. One of the company's wholly owned U.K.
subsidiaries, Kerr-McGee Resources Limited, entered into a $76 million revolving
credit agreement, of which $71 million was outstanding at year-end. This
agreement permits borrowings through May 15, 2003. Another facility entered into
during 1998 allows for the European operations to borrow up to 500 million
Belgian francs (approximately $14 million). This facility is renewable annually.
At December 31, 1998, an amount equal to $8 million was outstanding under this
arrangement. Interest is payable at varying rates for both of these facilities.
At December 31, 1998, the company classified $400 million of its
short-term obligations as long-term debt. Final settlement of these obligations,
consisting of revolving credit borrowings and commercial paper, is not expected
to occur in 1999. The company has the intent and the ability, as evidenced by
committed credit arrangements, to refinance this debt on a long-term basis. The
company's practice has been to continually refinance its commercial paper, while
maintaining levels believed to be appropriate.
The company finances capital expenditures through internally generated
funds and various borrowings. Cash capital expenditures were $981 million in
1998, $836 million in 1997 and $875 million in 1996, a total of $2.7 billion.
During this same three-year period, $3.1 billion of net cash was provided by
operating activities (exclusive of working capital and other changes), which
exceeded cash capital expenditures and dividends paid during the periods by
approximately $124 million.
Management anticipates that 1999 cash capital requirements, currently
estimated at $545 million, and the capital expenditures programs for the next
several years can continue to be provided through internally generated funds and
selective 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 for additional discussions of the
company's financial instruments and hedging activities.
Foreign Currency Exchange
The U.S. dollar is the functional currency for the company's
international operations, except for its European chemical operations. It is the
company's intent to hedge a portion of its monetary assets and liabilities
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 pound sterling. These contracts
generally have durations of less than three years. The company also enters into
forward contracts to hedge the sale of various foreign currencies, principally
generated from accounts receivable for 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 hedged transaction when it is settled in cash.
Following are the notional amounts at the contract exchange rates,
weighted-average contractual exchange rates and estimated fair value by contract
maturity for open contracts at year-end 1998 and 1997 to purchase (sell) foreign
currencies. All amounts are U.S. dollar equivalents.
<TABLE>
<CAPTION>
(Millions of dollars, Notional Weighted-Average Estimated
except average contract rate) Amount Contract Rate Fair Value
<S> <C> <C> <C>
Open contracts at
December 31, 1998 -
Maturing in 1999 -
Australian dollar $56 .7117 $48
German mark (1) 1.6745 (1)
British pound sterling 41 1.6355 42
Maturing in 2000 -
Australian dollar 21 .6145 21
Open contracts at
December 31, 1997 -
Maturing in 1998 -
Australian dollar 63 .7507 55
British pound sterling 49 1.6147 50
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. The company has participated in various interest
rate hedging arrangements to help manage the floating-rate portion of part of
its debt. At December 31, 1998, all interest rate hedging contracts had expired.
At December 31, 1997, the company was a party to interest rate hedging
agreements having notional amounts of $500 million, of which $250 million
represented interest rate caps (caps) and $250 million represented interest rate
swaps (swaps). The company's exposure to changes in LIBOR was reduced due to the
offsetting terms of the caps and swaps (see Note 16).
The table below presents principal amounts and related weighted-average
interest rates by maturity date for the company's long-term debt obligations
outstanding at year-end 1998. All borrowings are in U.S. dollars.
<TABLE>
<CAPTION>
There- Fair Value
(Millions of dollars) 1999 2000 2001 2002 2003 after Total 12/31/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate debt -
Principal amount $235 $26 $175 $ 35 $116 $910 $1,497 $1,648
Weighted-average
Interest rate 9.56% 8.43% 9.81% 8.86% 8.04% 7.49% 8.17%
Variable-rate debt -
Principal amount - $65 $129 $452 $71 - $717 $717
Weighted-average
Interest rate - 5.43% 6.33% 5.94% 5.58% - 5.92%
</TABLE>
At December 31, 1997, long-term debt included fixed-rate debt of $1,509
million (fair value - $1,681 million) with a weighted-average interest rate of
8.18% and $232 million variable-rate debt, which approximated fair value, with a
weighted-average interest rate of 6.39%.
Commodity Prices
The company periodically uses 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. Since the contracts
qualify as hedges and correlated to price movements of crude oil and natural
gas, any gain or loss from these contracts is deferred and recognized as part of
the hedged transaction.
At December 31, 1998, the company had open crude oil collar contracts
to hedge approximately 4% of its estimated 1999 worldwide crude oil sales
volumes at an average floor price of $15.85 per barrel and an average ceiling
price of $17.35 per barrel. Approximately 21% of its estimated 1999 worldwide
natural gas sales volumes were hedged using collar arrangements at an average
floor price of $2.29 per MMBtu and an average ceiling price of $2.47 per MMBtu.
The aggregate carrying value of these contracts at December 31, 1998, was $7
million, and the aggregate fair value, based on quotes from brokers, was
approximately $22 million.
Environmental Matters
The company's operations are subject to various environmental laws and
regulations. Under these laws, the company is or may be required 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, 1998, the company had received notices that it has been
named a potentially responsible party (PRP) with respect to 17 existing EPA
Superfund sites that require remediation and may share liability at certain of
these sites. 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. The company is uncertain as
to its involvement in many of the sites 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.
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 1998, $91 million was added
to the reserve for active and inactive sites. At December 31, 1998, the
company's reserve for these sites totaled $240 million. In addition, at year-end
1998, the company had a reserve of $219 million for the future costs of the
abandonment and removal of offshore well and production facilities at the end of
their productive lives. In the Consolidated Balance Sheet, $376 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, 1998, are as follows:
(Millions of dollars) 1998 1997 1996 Total
---- ---- ---- -----
Charges to environmental
reserves $109 $ 96 $59 $264
Capital expenditures 24 17 15 56
Recurring expenses 13 20 19 52
---- ---- --- ----
Total $146 $133 $93 $372
==== ==== === ====
The company has not recorded in the financial statements potential
reimbursements from governmental agencies or other third parties (see Notes 9
and 13). The following table reflects the company's portion of the known
estimated costs 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 1998.
<TABLE>
<CAPTION>
Total Known Total Total Number
Estimated Expenditures of Identifiable
Cost Through 1998 PRPs
---- ------------ ----
Location of Site State of Investigation/Remediation Millions of dollars
- ---------------- ---------------------------------- -------------------
<S> <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. $ 15 $ 7 3
West Chicago, Ill., Began cleanup of a portion of one
two sites outside site in 1995, and cleanup of the
the facility second site began in 1997 (see
Note 9). 58 50 1
Chicago, Ill., and Various stages of investigation/ 44 32 359
13 sites individually remediation ---- ---- ----
not material 117 89 363
---- ---- ----
Non-EPA Superfund sites
under consent order,
license or agreement
West Chicago, Ill., Reached agreement with the City
facility of West Chicago. Decommissioning
is in progress under State of
Illinois supervision while awaiting
state license amendment (see Note 9).
Began shipments to a permanent
disposal facility in 1994. 385 225
Cleveland/Cushing, Began cleanup in 1996. 63 47
---- ----
Okla.
448 272
---- ----
Non-EPA Superfund sites
individually not material 224 188
---- ----
Total for all sites $789 $549
==== ====
</TABLE>
Management believes adequate reserves have been provided for
environmental and all other known contingencies. However, it is possible that
additional reserves could be required in the future due to the previously noted
uncertainties.
Year 2000 Readiness
In 1996, the company established a formal Year 2000 Program (Program)
to assess and correct Year 2000 problems. The Program is organized into two
major areas: Business Systems and Facilities Integrity. Business Systems include
replacement and upgrade of computer hardware and software, including major
business applications such as purchasing, inventory, engineering, financial,
human resources, etc. Facilities Integrity encompasses telecommunications, plant
process controls, instrumentation and embedded chip systems as well as an
assessment of third-party Year 2000 readiness. The Program is generally divided
into the following phases:
- - Identification, evaluation and prioritization of systems that need to
be modified or replaced.
- - Remediation work to modify existing systems or install new systems.
- - Testing and validation of the systems and applications.
- - Contingency planning.
An integral part of the Program is communication with third parties to
assess the extent and status of their Year 2000 efforts. Formal communications
have been initiated with critical suppliers to determine whether their
operations and/or the products and services provided to the company will be Year
2000 ready. In addition, the company has contacted key customers and partners
requesting information regarding their Year 2000 readiness. The company
continues to evaluate responses and make additional inquiries as needed.
The company is also developing contingency plans to address potential
failure of critical systems and/or critical suppliers. These plans may include
items such as activating manual systems, placing operations on standby and other
procedures to accommodate significant disruptions that could be caused by system
failures. When appropriate, alternative providers are being identified in the
event that certain critical suppliers are unable to provide an acceptable level
of service to the company. Contingency plans that address business critical
areas are expected to be completed by the end of the 1999 third quarter.
As of December 31, 1998, approximately 95% of the work on Business
Systems for the merged company had been completed. Many of the Business Systems
projects were undertaken to improve business functionality and not solely to
address Year 2000 issues. These activities are anticipated to be completed by
the end of the 1999 third quarter.
Approximately 70% of the planned work on Facilities Integrity has also
been completed, including additional activities resulting from the merger.
Critical activities are expected to be completed by the end of the third quarter
of 1999. However, some ongoing work in areas of contingency planning, third
party communications, auditing and year-end communication response planning is
expected to continue through the end of 1999.
Program expenditures total approximately $45 million from inception
through December 31, 1998, which included $19 million spent during 1998. The
total cost to achieve Year 2000 readiness is estimated to be $52 million for the
entire Program, which is not material to the company's consolidated results of
operations, financial position or cash flows. Program expenditures are provided
through internally generated funds and selective borrowings.
The failure to correct a critical system that is adversely affected by
Year 2000 could result in disruption of some aspects of the company's normal
business activities or operations. Such failures could have a material adverse
effect on the company's results of operations and cash flows in a particular
quarter or annual period. Management believes that the Program is comprehensive
and reduces Year 2000 risks associated with internal systems to a manageable
level. Regardless of management's efforts to assess and verify internal
readiness, there can be no assurance that all outside entities with which the
company does business will be Year 2000 compliant. Failure by a third party to
remediate Year 2000 issues in a timely manner could have a material adverse
effect on the company's results of operations and cash flows in a particular
quarter or annual period. Failure of a critical operating or safety system, or
the failure of a key third-party supplier, partner or customer, are believed to
be the most reasonably likely worst-case scenarios that could impact the
company.
New Accounting Standards
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
effect of the SOP is to be recognized prospectively and is effective for 1999
financial statements.
SOP No. 98-5, "Reporting on the Costs of Start-Up Activities" was
issued in April 1998. It requires that costs related to start-up activities,
including organization costs, be expensed as incurred. The SOP was adopted in
the first quarter of 1999, and the company recognized approximately $6 million
($4 million after income taxes) as the cumulative effect of the change in
accounting principle. These costs were carried as deferred charges at year-end
1998.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative and Hedging Activities." The statement
requires recording all derivative instruments as assets or liabilities, measured
at fair value. The standard is effective for fiscal years beginning after June
15, 1999. An exposure draft was issued in May 1999 to defer the effective date
to fiscal years beginning after June 15, 2000. The company is currently
evaluating the impact the standard will have on income from continuing
operations; however, management believes it will not be material due to the
limited amount of hedging activity in which the company currently engages.
Cautionary Statement Concerning Forward-Looking Statements
The company has made certain forward-looking statements in this report,
which are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of the company's management. Forward-looking statements
are not guarantees of performance. Among the factors that could cause actual
results to differ materially are crude oil and natural gas prices; chemicals
prices and competitive conditions affecting supply and demand for the company's
chemical products; potential failure to achieve expected production from
existing and future oil and gas development projects; potential disruption or
interruption of the company's production or manufacturing facilities due to
accidents or political events; the potential liability for remedial actions
under existing or future environmental regulations; and potential liability
resulting from pending or future litigation. In addition, such statements could
be affected by general domestic and international economic and political
conditions.
Certain information in the Year 2000 Readiness section is
forward-looking. The Year 2000 Program and the dates on which the company
believes it will be completed are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no assurance that there will not be a delay
in, or increased costs associated with, the implementation of the Year 2000
Program.
Forward-looking statements include information concerning possible or
assumed future results and may be preceded by, followed by, or otherwise include
the words "believes," "expects," "anticipates," "intends," "plans," "estimates"
or similar expressions. For those statements, the company claims the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
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 regularly 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, 1998 and 1997, and the related consolidated statements of income,
comprehensive income and stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 did not
audit the financial statements of Oryx Energy Company, which was merged into the
company during 1999 in a transaction accounted for as a pooling of interests,
as discussed in Note 1. Such statements are included in the consolidated
financial statements of Kerr-McGee Corporation and reflect total assets and
total revenues of 36 percent and 37 percent in 1998, respectively, total assets
and total revenues of 39 percent and 47 percent in 1997, respectively,
and total revenues of 43 percent in 1996, of the related consolidated
totals, after restatement to reflect certain adjustments as set forth in
Note 24. The financial statements of Oryx Energy Company prior to those
adjustments were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to the amounts included for Oryx Energy
Company, is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
Oklahoma City, Oklahoma,
February 26, 1999
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors, Oryx Energy Company:
In our opinion, the consolidated balance sheets of Oryx Energy Company
and its Subsidiaries and the related consolidated statements of income, cash
flows and changes in shareholders' equity (not presented separately herein)
present fairly, in all material respects, the consolidated financial position
of Oryx Energy Company and its Subsidiaries as of December 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 26, 1999
<TABLE>
Consolidated Statement of Income
<CAPTION>
(Millions of dollars,
except per-share amounts) 1998 1997 1996
- -------------------------- ------ ------ ------
<S> <C> <C> <C>
Sales $2,200 $2,605 $2,740
------ ------ ------
Costs and Expenses
Costs and operating expenses 1,053 1,003 1,053
General and administrative expenses 278 221 277
Depreciation and depletion 561 545 534
Asset impairment 446 - 25
Exploration, including dry holes and
amortization of undeveloped leases 215 139 122
Taxes, other than income taxes 53 103 111
Interest and debt expense 157 141 145
------ ------ ------
Total Costs and Expenses 2,763 2,152 2,267
------ ------ ------
(563) 453 473
Other Income 43 82 110
------ ------ ------
Income (Loss) from Continuing Operations
before Income Taxes and Extraordinary Charge (520) 535 583
Provision (Benefit) for Income Taxes (175) 184 225
------ ------ ------
Income (Loss) from Continuing Operations
Before Extraordinary Charge (345) 351 358
Income from Discontinued Operations,
net of taxes of $156 in 1998,
$12 in 1997 and $18 in 1996 277 33 56
------ ------ ------
Income (Loss) before Extraordinary Charge (68) 384 414
Extraordinary Charge, net of taxes of $1 - (2) -
------ ------ ------
Net Income (Loss) $ (68) $ 382 $ 414
====== ====== ======
Net Income (Loss) per Common Share
Basic -
Continuing operations $(3.98) $ 4.04 $ 4.07
Discontinued operations 3.20 .38 .63
Extraordinary charge - (.02) -
------ ------ ------
Net income (loss) $ (.78) $ 4.40 $ 4.70
====== ====== ======
Diluted -
Continuing operations $(3.98) $ 4.02 $ 4.05
Discontinued operations 3.20 .38 .63
Extraordinary charge - (.02) -
------ ------ ------
Net income (loss) $ (.78) $ 4.38 $ 4.68
====== ====== ======
The accompanying notes are an integral part of this statement.
</TABLE>
<TABLE>
Consolidated Statement of Comprehensive Income and Stockholders' Equity
<CAPTION>
Accumulated
Capital in Other Deferred Total
Comprehensive Common Excess of Retained Comprehensive Treasury Compensation Stockholders'
(Millions of dollars) Income Stock Par Value Earnings Income (Loss) Stock and Other Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $92 $1,217 $103 $ 2 $(111) $(179) $1,124
Net income $414 - - 414 - - - 414
Unrealized gain on
securities, net of
$5 income tax 9 - - - 9 - - 9
Realized gains on
securities, net of
$8 income tax (15) - - - (15) - - (15)
Appreciation of securities
donated, net of $5
income tax (8) - - - (8) - - (8)
Shares issued - 1 24 - - - - 25
Shares acquired - - - - - (195) - (195)
Dividends declared
($1.64 per share) - - - (81) - - - (81)
Other - - - - - - 6 6
---- ----------------------------------------------------------------------------------
Total $400
====
Balance December 31, 1996 93 1,241 436 (12) (306) (173) 1,279
Net income $382 - - 382 - - - 382
Unrealized gain on
securities, net of
$1 income tax 2 - - - 2 - - 2
Realized gains on
securities, net of
$6 income tax (12) - - - (12) - - (12)
Appreciation of securities
donated, net of $1
income tax (2) - - - (2) - - (2)
Minimum pension liability
adjustment (5) - - - (5) - - (5)
Shares issued - - 33 - - - - 33
Shares acquired - - - - - (57) - (57)
Dividends declared
($1.80 per share) - - - (86) - - - (86)
Other - - - (1) - - 25 24
---- ----------------------------------------------------------------------------------
Total $365
====
Balance December 31, 1997 93 1,274 731 (29) (363) (148) 1,558
Net loss $(68) - - (68) - - - (68)
Foreign currency
translation adjustment (5) - - - (5) - - (5)
Minimum pension liability
adjustment (2) - - - (2) - - (2)
Shares issued - - 8 - - - - 8
Shares acquired - - - - - (25) - (25)
Dividends declared
($1.80 per share) - - - (86) - - - (86)
Effect of equity affiliate's
merger - - - (51) - - - (51)
Other - - - 1 - - 16 17
----- ----------------------------------------------------------------------------------
Total $(75)
=====
Balance December 31, 1998 $93 $1,282 $527 $(36) $(388) $(132) $1,346
=================================================================================
The accompanying notes are an integral part of this statement.
</TABLE>
<TABLE>
Consolidated Balance Sheet
<CAPTION>
(Millions of dollars) 1998 1997
- --------------------- ------ ------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 121 $ 192
Accounts receivable, net of allowance for doubtful
accounts of $5 in both 1998 and 1997 389 501
Inventories 247 175
Deposits, prepaid expenses and other 120 58
------ ------
Total Current Assets 877 926
Investments
Equity affiliates 170 277
Other assets 87 63
Property, Plant and Equipment - Net 4,153 3,919
Deferred Charges 164 154
------ ------
Total Assets $5,451 $5,339
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 385 $ 368
Short-term borrowings 36 25
Long-term debt due within one year 236 5
Taxes on income 48 109
Taxes, other than income taxes 11 31
Accrued liabilities 334 388
------ ------
Total Current Liabilities 1,050 926
------ ------
Long-Term Debt 1,978 1,736
------ ------
Deferred Credits and Reserves
Income taxes 329 329
Other 748 790
------ ------
Total Deferred Credits and Reserves 1,077 1,119
------ ------
Stockholders' Equity
Common stock, par value $1.00 - 300,000,000 shares
authorized, 93,378,069 shares issued in 1998 and
93,228,091 shares issued in 1997 93 93
Capital in excess of par value 1,282 1,274
Preferred stock purchase rights 1 1
Retained earnings 527 731
Accumulated other comprehensive loss (36) (29)
Common stock in treasury, at cost - 7,010,790
shares in 1998 and 6,434,465 shares in 1997 (388) (363)
Deferred compensation (133) (149)
------ ------
Total Stockholders' Equity 1,346 1,558
------ ------
Total Liabilities and Stockholders' Equity $5,451 $5,339
====== ======
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>
<TABLE>
Consolidated Statement of Cash Flows
<CAPTION>
(Millions of dollars) 1998 1997 1996
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Cash Flow from Operating Activities
Net income (loss) $ (68) $ 382 $ 414
Adjustments to reconcile to net cash
provided by operating activities -
Deferred income taxes (98) 31 98
Depreciation, depletion and amortization 615 593 579
Dry hole cost 100 53 55
Asset impairment 446 - 25
Provision for environmental reclamation
and remediation of inactive sites 41 20 43
Gain on sale of coal operations,
net of income taxes (257) - -
Gain on sale of exploration and production
properties (20) (3) (19)
Realized gain on available-for-sale
securities - (18) (23)
Retirements and (gain) loss on sale of
other assets 13 (4) (3)
Noncash items affecting net income 13 23 39
Changes in current assets and liabilities
and other, net of effects of operations
acquired and sold -
(Increase) decrease in accounts
receivable 164 139 (29)
(Increase) decrease in inventories (54) 40 5
(Increase) decrease in deposits
and prepaids (92) 17 52
Decrease in accounts payable
and accrued liabilities (103) (53) (7)
Increase (decrease) in taxes payable (165) 66 23
Other (150) (189) (83)
----- ------ ------
Net cash provided by operating
activities 385 1,097 1,169
----- ------ ------
Cash Flow from Investing Activities
Capital expenditures (981) (836) (875)
Cash dry hole cost (92) (52) (34)
Acquisitions (518) - -
Proceeds from sale of discontinued
operations 599 - 13
Proceeds from sale of chemical and
exploration and production properties 150 17 57
Proceeds from sale of available-for-sale
securities - 21 29
Proceeds from sale of other assets 11 17 11
Proceeds from sale of long-term investments 12 13 17
Purchase of long-term investments (3) (12) (15)
----- ------ ------
Net cash used in investing
activities (822) (832) (797)
----- ------ ------
Cash Flow from Financing Activities
Issuance of long-term debt 563 390 245
Issuance of common stock 6 28 16
Increase (decrease) in short-term
borrowings 11 (12) (57)
Repayment of long-term debt (93) (464) (275)
Dividends paid (86) (85) (83)
Treasury stock purchased (25) (60) (195)
----- ------ ------
Net cash provided by (used in)
financing activities 376 (203) (349)
----- ------ ------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents (10) - -
----- ------ ------
Net Increase in Cash and Cash Equivalents (71) 62 23
Cash and Cash Equivalents at Beginning of Year 192 130 107
----- ------ ------
Cash and Cash Equivalents at End of Year $ 121 $ 192 $ 130
===== ====== ======
The accompanying notes are an integral part of this statement.
</TABLE>
Notes to Financial Statements
1. The Company and Significant Accounting Policies
Kerr-McGee is an energy and chemical company with worldwide operations.
It explores for, develops, produces and markets crude oil and natural gas and
its chemical operations primarily produces and markets titanium dioxide pigment.
The exploration and production unit produces and explores for oil and gas in the
United States, United Kingdom sector of the North Sea, Indonesia, China,
Kazakhstan and Ecuador. Exploration efforts are also extended to Australia,
Algeria, Brazil, Gabon, Thailand and Yemen. The chemical unit has operations in
the United States, Australia, Germany and Belgium. The company also has an
equity interest in Devon Energy Corporation, a publicly traded oil and gas
exploration and production company (see Note 4).
On February 26, 1999, the merger between Kerr-McGee and Oryx was
completed. Oryx was a worldwide independent oil and gas exploration and
production company. Under the merger agreement, each outstanding share of Oryx
common stock was effectively converted into the right to receive 0.369 shares of
newly issued Kerr-McGee common stock. The merger qualified as a tax-free
exchange to Oryx's shareholders and has been accounted for as a pooling of
interests. In the aggregate, Kerr-McGee is issuing approximately 39 million
shares of Kerr-McGee common stock bringing the total shares outstanding to
approximately 86 million. Kerr-McGee's consolidated financial statements have
been restated for periods prior to the merger to include the operations of Oryx,
adjusted to conform to Kerr-McGee's accounting policies and presentation. See
Note 24 for additional details regarding the financial information of the
previously separate companies.
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 and changes in ownership
interest, changes in equity for undistributed earnings are included in the
Consolidated Statement of Income. All material intercompany transactions have
been eliminated.
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
The U.S. dollar is considered the functional currency for each of the
company's international operations, except for its European chemical operations.
Foreign currency transaction gains or losses are recognized in the period
incurred. The net foreign currency transaction losses in 1998 and 1997 were
immaterial. The company recorded net foreign currency transaction losses of $15
million in 1996.
The local currencies are the functional currencies for the European
chemical operations. Translation adjustments resulting from translating the
functional currency financial statements into U.S. dollar equivalents are
reported separately in accumulated other comprehensive income (loss) in the
Consolidated Statement of Comprehensive Income and Stockholders' Equity.
Net Income (Loss) per Common Share
Basic net income (loss) 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 net income per share
is computed by dividing net income by the weighted-average number of common
shares and common stock equivalents outstanding for the period.
The weighted-average number of shares used to compute basic net income
(loss) per share was 86,688,026 in 1998, 86,756,138 in 1997 and 88,053,257 in
1996. After adding the dilutive effect of the conversion of options to the
weighted-average number of shares outstanding, the shares used to compute
diluted net income per share were 87,113,906 in 1997 and 88,505,456 in 1996.
There was no dilution for 1998 since the company incurred a loss from continuing
operations.
Not included in the calculation of the denominator for diluted net
income per share were 494,063 and 530,667 employee stock options outstanding at
year-end 1997 and 1996, respectively. The inclusion of these options would have
been antidilutive since they were not "in the money" at the end of the
respective years.
The company has reserved 1,886,121 shares of common stock for issuance
to the owners of its 7-1/2% Convertible Subordinated Debentures due 2014
(Debentures). The Debentures are convertible into the company's common stock at
any time prior to maturity at $106.03 per share of common stock. The conversion
of the Debentures was not considered for purposes of calculating income loss
per share, as the impact would have been antidilutive to net income (loss) per
share for the periods presented.
Cash Equivalents
The company considers all investments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents totaling $58
million in 1998 and $133 million in 1997 were comprised of time deposits,
certificates of deposit and U.S.
government securities.
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 the associated indirect manufacturing expenses. 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 the unit-of-production or the
straight-line method. Capitalized exploratory drilling and development costs are
amortized using the unit-of-production method based on total estimated proved
developed oil and gas reserves. Amortization of producing leasehold, platform
costs and acquisition costs of proved properties is based on the
unit-of-production method using total estimated proved reserves. 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 1998, 1997 and 1996 was $28 million, $24 million and $26 million,
respectively.
Impairment of Long-Lived Assets
Proved oil and gas properties are reviewed for impairment on a
field-by-field basis when facts and circumstances indicate that their carrying
amounts 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.
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.
Revenue Recognition
Except for natural gas sales, revenue is recognized when title passes
to the customer. Natural gas revenues and gas-balancing arrangements with
partners in natural gas wells are recognized when the gas is produced using the
entitlements method of accounting and are based on the company's net working
interests. At December 31, 1998 and 1997, both the quantity and dollar amount of
gas balancing arrangements were immaterial.
Lease Commitments
The company utilizes various leased properties in its operations,
principally for office space. Lease rental expense was $37 million in 1998, $39
million in 1997 and $33 million in 1996.
The aggregate minimum annual rentals under noncancelable leases in
effect on December 31, 1998, totaled $162 million, of which $21 million is due
in 1999, $19 million in 2000, $64 million in the period 2001 through 2003 and
$58 million thereafter.
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 costs at current prices of 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.
Employee Stock Option Plan
The company accounts for its employee stock option plan 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 is offset by gains or losses on the hedged receivable, capital
item or operating cost.
In 1996, 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, and no contracts were entered into in 1998. Open contracts at year-end
1996 matured throughout 1997. Net gains and losses on these contracts in both
1997 and 1996 were immaterial.
From time to time the company enters into arrangements to hedge the
impact of price fluctuations on anticipated crude oil and natural gas sales.
Gains or losses on hedging activities are recognized in oil and gas revenues in
the period in which the hedged production is sold (see Note 16).
The company periodically enters into interest rate hedging agreements
to alter the floating rate portion of its underlying debt portfolio. Advance
proceeds received under the agreements are included in deferred credits and are
amortized as offsets to interest and debt expense over the relevant periods. The
differentials paid or received during the terms of such agreements are accrued
as interest rates change and are recorded as adjustments to interest and debt
expense (see Note 16).
2. Cash Flow Information
Net cash provided by operating activities reflects cash payments for
income taxes and interest as follows:
(Millions of dollars) 1998 1997 1996
--------------------- ---- ---- ----
Income taxes paid $151 $89 $78
Interest paid 180 163 171
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 $43 million, $19 million and $4 million at year-end
1998, 1997 and 1996, respectively; transactions during 1997 associated with the
assignments of interest of certain North Sea oil and gas properties;
transactions during 1996 associated with the acquisition of additional interests
in the North Sea; 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 certain of 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.
3. Inventories
Major categories of inventories at year-end 1998 and 1997 are:
(Millions of dollars) 1998 1997
--------------------- ---- ----
Chemicals and other products $185 $119
Materials and supplies 53 48
Crude oil 9 8
---- ----
Total $247 $175
==== ====
4. Investments - Equity Affiliates
At December 31, 1998 and 1997, investments in equity affiliates are as
follows:
(Millions of dollars) 1998 1997
--------------------- ---- ----
Devon Energy Corporation $108 $217
Javelina Company 30 32
National Titanium Dioxide Company Limited 18 12
Other 14 16
---- ----
Total $170 $277
==== ====
The company holds 9,954,000 shares of Devon common stock, a publicly
traded oil and gas exploration and production company, representing an ownership
interest in Devon of approximately 21% and 31% at December 31, 1998 and 1997,
respectively. The initial 31% investment in Devon was recorded at the carrying
value of the North American onshore properties merged into Devon at December 31,
1996. The change in ownership interest resulted from Devon's merger with a third
party, which was accounted for as a pooling of interests. In 1998, the carrying
amount of the investment in Devon stock was adjusted for the issuance of
additional common stock that resulted from the merger, and retained earnings
were charged $51 million for the decrease in the company's share of Devon's net
assets resulting from the merger. Devon also recorded a full cost writedown in
1998. The company's proportionate share of the writedown was $27 million. The
market value of the company's investment in Devon was $305 million at December
31, 1998, 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.
Due to immateriality, investments shown as Other in the preceding table have
been excluded from the information below.
(Millions of dollars) 1998 1997 1996
--------------------- ---- ---- ----
Results of operations -
Net sales(1) $593 $570 $207
Net income (loss) (41) 105 22
Financial position -
Current assets 222 198
Property, plant and
equipment - net 1,334 990
Total assets 1,582 1,215
Current liabilities 170 123
Total liabilities 844 470
Stockholders' equity 738 745
(1)Includes net sales to the company of $2 million, $26 million and $44
million for 1998, 1997 and 1996, respectively.
5. Investments - Other Assets
Investments in other assets consist of the following at December 31,
1998 and 1997:
(Millions of dollars) 1998 1997
--------------------- ---- ----
Net deferred tax asset $17 $22
U.S. government obligations 17 19
Patents 6 6
Long-term notes receivable, net of $9
allowance for doubtful notes in both
1998 and 1997 41 5
Equity securities - 2
Other 6 9
--- ---
Total $87 $63
=== ===
6. Property, Plant and Equipment
Fixed assets and related reserves by business segment at December 31,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Reserves for
Depreciation and
Gross Property Depletion Net Property
(Millions of dollars) 1998 1997 1998 1997 1998 1997(1)
- --------------------- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Exploration and production $ 9,359 $ 8,514 $5,837 $5,382 $3,522 $3,132
Chemicals 1,162 1,020 588 506 574 514
Other 130 147 73 90 57 57
Discontinued operations - 547 - 331 - 216
------- ------- ------ ------ ------ ------
Total $10,651 $10,228 $6,498 $6,309 $4,153 $3,919
======= ======= ====== ====== ====== ======
(1)Includes chemical assets held for sale of $11 million.
</TABLE>
7. Deferred Charges
Deferred charges are as follows at year-end 1998 and 1997:
(Millions of dollars) 1998 1997
--------------------- ---- ----
Pension plan prepayments $101 $ 96
Nonqualified pension plan deposits 10 7
Intangible assets 8 12
Unamortized debt issue costs 8 10
Preoperating and startup costs 6 8
Amounts pending recovery from third parties 8 -
Other 23 21
---- ----
Total $164 $154
==== ====
8. Debt
Lines of Credit and Short-Term Borrowings
At year-end 1998, the company had available unused bank lines of credit
and revolving credit facilities of $708 million. Of this amount, $345 million
and $90 million can be used to support commercial paper borrowing arrangements
of Kerr-McGee Credit LLC 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 1998, 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 1998 consisted of commercial paper
totaling $28 million (6.37% average effective interest rate) and notes payable
totaling $8 million (3.63% average interest rate). Outstanding at year-end 1997
was a note payable for $25 million (5.98% 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 1998 and 1997, debt
totaling $400 million and $77 million, respectively, was classified as long-term
consistent with this policy.
On October 17, 1997, the company replaced a $500 million credit
facility with a five-year $500 million credit facility. As a result, the company
recognized an extraordinary loss of $2 million (net of $1 million of income
taxes) from the write-off of unamortized debt issuance costs.
Long-term debt consisted of the following at year-end 1998 and 1997:
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997
- --------------------- ---- ----
<S> <C> <C>
Debentures -
7-1/2% Convertible subordinated debentures,
$10 due annually May 15, 1999
through 2013 and $50 due May 15, 2014 $ 200 $ 200
7.125% Debentures due October 15, 2027
(7.01% effective rate) 150 150
7% Debentures due November 1, 2011,
net of unamortized debt discount of
$105 in 1998 and $108 in 1997
(14.25% effective rate) 145 142
8-1/2% Sinking fund debentures due
June 1, 2006 11 22
Notes payable -
10% Notes, $100 due June 15, 1999, and
$150 due April 1, 2001 250 250
6.625% Notes due October 15, 2007
(6.54% effective rate) 150 150
8.375% Notes due July 15, 2004 150 150
8.125% Notes due October 15, 2005 150 150
8% Notes due October 15, 2003 100 100
9.50% Notes due November 1, 1999 100 100
Variable interest rate revolving credit
agreements with banks (5.84% average rate
at December 31, 1998), $65 due March 6, 2000;
$10 due December 4, 2001; $135 due April 28, 2002;
$317 due October 17, 2002 and $71 due May 15, 2003 598 193
Medium-Term Notes (8.95% average effective
interest rate at December 31, 1998),
$15 due January 4, 1999; $11 due
January 2, 2002 and $2 due February 1, 2002 28 28
Commercial paper (6.37% average effective
interest rate at December 31, 1998) 119 40
Guaranteed Debt of Employee Stock Ownership
Plan 9.61% Notes due in installments
through January 2, 2005 49 51
Other 14 15
------ ------
2,214 1,741
Long-term debt due within one year (236) (5)
------ ------
Total $1,978 $1,736
====== ======
</TABLE>
Maturities of long-term debt due after December 31, 1998, are $236
million in 1999, $91 million in 2000, $304 million in 2001, $487 million in
2002, $187 million in 2003 and $909 million thereafter.
Certain of the company's long-term debt agreements contain restrictive
covenants, including a minimum tangible net worth requirement and a maximum
total indebtedness to cash flow ratio. At December 31, 1998, the company was in
compliance with its debt covenants.
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. Contingencies
West Chicago
In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation,
closed the facility at West Chicago, Illinois, that processed thorium ores.
Kerr-McGee Chemical Corporation now operates as Kerr-McGee Chemical LLC
(Chemical). Operations resulted in some low-level radioactive contamination at
the site and, in 1979, Chemical 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, Chemical, the City of West Chicago (the
City) and the State reached agreement on the initial phase of the
decommissioning plan for the closed West Chicago facility, and Chemical began
shipping material from the site to a licensed permanent disposal facility.
In February 1997, Chemical executed an agreement with the City as to
the terms and conditions for completing the final phase of decommissioning work.
The State indicated approval of this agreement and has issued license amendments
authorizing much of the work. Chemical expects the majority of the work to be
completed within five years.
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 Chemical as decommissioning costs are incurred. Chemical
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 (CERCLA) and has
designated Chemical 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 areas and Reed-Keppler Park), which require Chemical to
conduct removal actions to excavate contaminated soils and ship the soils
elsewhere for disposal. Without waiving any of its rights or defenses, Chemical
has begun the cleanup of these two sites.
Judicial Proceedings - In December 1996, a lawsuit was filed against
the company and Chemical 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 United States Department of Energy is obligated to
reimburse Chemical 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 1998 to increase the amount
authorized to $140 million plus inflation adjustments. Through April 30, 1999,
Chemical has been reimbursed approximately $69 million under Title X.
Other Matters
The company's current and former operations involve management of
regulated materials and are subject to various environmental laws and
regulations. These laws and regulations will obligate the company to clean up
various sites at which petroleum, chemicals, low-level radioactive substances or
other regulated materials have been disposed of or released. Some of these sites
have been designated Superfund sites by the EPA pursuant to CERCLA. The company
is also a party to legal proceedings involving environmental matters pending in
various courts and agencies. As of December 31, 1998, 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 $240 million, which includes $168 million for the former West Chicago
facility, the residential areas and Reed-Keppler Park. Reserves have been
established based on this estimate. Expenditures are reduced by the amounts
recovered under government programs. Expenditures from inception through
December 31, 1998, totaled $549 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.
It is not possible for the company to reliably estimate the amount and
timing of all future expenditures related to environmental matters because of:
- - the difficulty of estimating cleanup costs;
- - the uncertainty in quantifying liability under environmental laws
that impose joint and several liability on all potentially
responsible parties; and
- - the continually changing nature of environmental laws and regulations.
The company provides for costs related to contingencies when a loss is
probable and the amount is reasonably estimable. Although management believes,
after consultation with general counsel, that adequate reserves have been
provided for all known contingencies, the ultimate cost will depend on the
resolution of the above-noted uncertainties. Therefore, it is possible that
additional reserves could be required in the future.
10. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Assets to Be Held and Used
At year-end 1998, certain oil and gas fields located in the North Sea,
China and the United States and two domestic chemical plants were deemed to be
impaired because the assets were no longer expected to recover their net book
values through future cash flows. Expectations of future cash flows were lower
than those previously forecasted primarily as a result of continued weakness in
crude oil, natural gas and certain chemical product prices. Downward reserve
revisions were also deemed necessary for certain fields.
The oil and gas impairment test was based on estimates of future cash
flows for each field. Crude oil price estimates were $13.00 to $14.50 per barrel
for 1999, increasing $.50 to $1.00 per barrel each year. Natural gas price
estimates were $2.10 to $2.25 per MMBtu for 1999, increasing $.05 to $.10 per
MMBtu each year. These prices, consistent with forecasts by investment bankers
and industry consultants, were applied to production profiles developed by the
company's engineers using proved reserves at December 31, 1998. Probable
reserves and future development costs were taken into consideration when
justified by actual drilling and planned additional drilling.
The chemical impairment test was based on current prices for a variety
of different products, including vanadium compounds and fertilizers manufactured
at the Soda Springs, Idaho, plant and synthetic rutile manufactured at the
Mobile, Alabama, plant. These prices were escalated based on current market
perceptions.
The impairment loss was determined based on the difference between the
carrying value of the assets and the present value of future cash flows
discounted at 10%, or market value when appropriate. The resulting impairment
loss represents 10% and 9% of the carrying value of exploration and production
and chemical assets, respectively, before the impairment.
In addition, certain oil and gas fields in the Gulf of Mexico were
impaired in 1996. There was no impairment loss recognized in 1997.
Following is the impairment loss for assets held and used by segment
for each of the years ended December 31, 1998 and 1996:
(Millions of dollars) 1998 1996
--------------------- ---- ----
Exploration and production $389 $22
Chemicals 57 -
---- ---
Total $446 $22
==== ===
Assets to Be Disposed Of
The company withdrew from the ammonium perchlorate business in 1998.
The carrying value of these assets was approximately $9 million. The gain on the
sale was immaterial.
During 1997, the company's exploration and production operating unit
completed a program to divest a number of crude oil and natural gas producing
properties considered to be nonstrategic. Most of these properties were located
onshore in the United States; however, some 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 oil and gas production or cash flows from operations
for 1997 or 1996 or year-end 1996 oil and gas reserves.
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.
Following are the sales and pretax income included in the Consolidated
Statement of Income in each of the last three years for assets sold during the
three-year period ended December 31, 1998. Any impairment loss is included in
the pretax income amounts.
The company had no material assets held for disposal at year-end 1998.
(Millions of dollars) 1998 1997 1996
--------------------- ---- ---- ----
Sales -
Exploration and production $ - $ - $42
Chemicals 11 30 29
--- --- ---
Total $11 $30 $71
=== === ===
Income (Loss) -
Exploration and production $ - $ - $ 9
Chemicals - 3 (5)
--- --- ---
Total $ - $ 3 $ 4
=== === ===
11. 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 and extraordinary charge is composed of the
following:
(Millions of dollars) 1998 1997 1996
--------------------- ---- ---- ----
Domestic $(345) $252 $270
International (175) 283 313
----- ---- ----
Total $(520) $535 $583
===== ==== ====
The corporate tax rate in the United Kingdom decreased to 30% from 31%
effective April 1, 1999, and decreased to 31% from 33% effective April 1, 1997.
The deferred income tax liability balance was adjusted to reflect the revised
rates, which decreased the international deferred provision for income taxes by
$10 million in 1998 and $13 million in 1997. The 1998, 1997 and 1996 provision
(benefit) for income taxes is summarized below:
(Millions of dollars) 1998 1997 1996
--------------------- ----- ---- ----
U.S. Federal -
Current $(159) $ 2 $ 34
Deferred 20 84 69
----- ---- ----
(139) 86 103
----- ---- ----
International -
Current 18 146 105
Deferred (55) (52) 11
----- ---- ----
(37) 94 116
----- ---- ----
State 1 4 6
----- ---- ----
Total $(175) $184 $225
===== ==== ====
At December 31, 1998, the company had foreign operating loss
carryforwards totaling $110 million - $9 million that expire in 2001, $19
million that expire in 2003 and $82 million that have no expiration date.
Realization of these operating loss carryforwards is dependent on generating
sufficient taxable income.
The net deferred tax asset, classified as Investments - Other assets in
the Consolidated Balance Sheet, represents the net deferred taxes in certain
foreign jurisdictions. 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. Deferred tax liabilities and assets at December 31, 1998 and 1997, are
composed of the following:
(Millions of dollars) 1998 1997
- --------------------- ---- ----
Net deferred tax liabilities -
Accelerated depreciation $593 $660
Exploration and development 69 59
Undistributed earnings of
foreign subsidiaries 28 28
Postretirement benefits (86) (82)
Foreign operating loss carryforward (28) (4)
Dismantlement, reclamation,
remediation and other reserves (79) (130)
AMT credit carryfoward (60) (71)
Other (108) (131)
---- ----
329 329
---- ----
Net deferred tax assets -
Accelerated depreciation 5 13
Foreign operating loss carryforward (14) (29)
Other (8) (6)
---- ----
(17) (22)
---- ----
Total $312 $307
==== ====
In the following table, the U.S. Federal income tax rate is reconciled
to the company's effective tax rates for income (loss) from continuing
operations as reflected in the Consolidated Statement of Income.
1998 1997 1996
---- ---- ----
U.S. statutory rate (35.0)% 35.0% 35.0%
Increases (decreases)resulting from -
Taxation of foreign operations 9.6 3.9 3.0
Adjustment of prior years'
accruals (.4) (.8) .4
Refunds of prior years'
income tax (5.6) - -
Contribution of appreciated
equity securities - - (.8)
Adjustment of deferred tax balances
due to tax rate changes (2.0) (2.4) -
Other - net (.2) (1.3) 1.0
----- ---- ----
Total (33.6)% 34.4% 38.6%
===== ==== ====
The Internal Revenue Service has examined the Kerr-McGee Corporation
and subsidiaries' pre-merger Federal income tax returns for all years through
1994, and the years have been closed through 1992. The Oryx income tax returns
have been examined through 1995, and the years have been closed through 1978.
The company believes that it has made adequate provision for income taxes that
may become payable with respect to open tax years.
12. Accrued Liabilities
Accrued liabilities at year-end 1998 and 1997 are as follows:
(Millions of dollars) 1998 1997
--------------------- ---- ----
Current environmental reserves $ 83 $ 83
Interest payable 71 72
Drilling and operating costs 67 94
Employee-related costs and benefits 59 64
Restructuring reserve(1) 20 12
Other 34 63
--- ----
Total $334 $388
==== ====
(1)See Note 19.
13. Deferred Credits and Reserves - Other
Other deferred credits and reserves consist of the following at
year-end 1998 and 1997:
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997
--------------------- ---- ----
<S> <C> <C>
Reserves for site dismantlement,
reclamation and remediation $376 $397
Postretirement benefit obligations 269 281
Minority interest in subsidiary companies 39 21
Other 64 91
---- ----
Total $748 $790
==== ====
</TABLE>
The company provided for environmental reclamation and remediation of
former plant sites, net of reimbursements received, during each of the years
1998, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997 1996
--------------------- ---- ---- ----
<S> <C> <C> <C>
Provision, net of reimbursements $47 $18 $45
Reimbursements received 14 12 10
</TABLE>
The reimbursements, which pertain to the former facility in West
Chicago, Illinois, were received pursuant to the Energy Policy Act of 1992 (see
Note 9).
14. Common Stock
Changes in common stock issued and treasury stock held for 1998, 1997
and 1996 are as follows:
(Thousands of shares) Common Stock Treasury Stock
Balance December 31, 1995 92,058 2,445
Exercise of stock options and
stock appreciation rights 543 -
Issuance of shares for
achievement awards - (3)
Stock purchase program - 3,127
------ -----
Balance December 31, 1996 92,601 5,569
Exercise of stock options and
stock appreciation rights 627 -
Issuance of shares for
achievement awards - (2)
Stock purchase program - 867
------ -----
Balance December 31, 1997 93,228 6,434
Exercise of stock options and
stock appreciation rights 150 -
Issuance of shares for
achievement awards - (3)
Stock purchase program - 580
------ -----
Balance December 31, 1998 93,378 7,011
====== =====
The company has 40 million shares of preferred stock without par value
authorized, and none is issued.
There are 1,107,692 shares of the company's common stock registered in
the name of a wholly owned subsidiary of the company. These shares are not
included in the number of shares shown in the preceding table and in the
Consolidated Balance Sheet. These shares are not entitled to be voted.
In mid-1998, the Board of Directors authorized management to purchase
up to $300 million of company common stock over the next three years. A total of
580,000 shares was acquired at a cost of $25 million before this stock purchase
program was cancelled because of the merger with Oryx. The 1995 stock purchase
program was completed in 1997 with a total of 4,829,000 shares of the company's
stock acquired in open-market transactions at a cost of $300 million.
The company has had a stockholders-rights plan since 1986. The current
rights plan is dated July 6, 1996, and replaced the previous plan prior to its
expiration. Rights were distributed under the original plan 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 occurs,
each right would entitle the holder (other than a holder owning more than 15% of
the outstanding stock) 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, 1998:
(Millions of dollars) 1998 1997 1996
--------------------- ---- ---- ----
Interest $38 $14 $ 11
Settlements with insurance
carriers 12 12 67
Gain on sale of assets 7 6 22
Income (loss) from
unconsolidated affiliates (12) 32 14
Gain on sale of available-for-
sale securities - 18 23
Other (2) - (27)
--- --- ----
Total $43 $82 $110
=== === ====
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, as Current Assets
or as Investments - Other assets, depending upon their maturity. At December 31,
1998 and 1997, the fair value of available-for-sale securities totaled $30
million and $27 million, respectively, which approximated cost at the end of the
periods. The company held no securities classified as held to maturity or
trading at December 31, 1998 and 1997.
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.
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,
1998 and 1997, the carrying amount and estimated fair value of such financial
instruments for which fair value can be determined are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
(Millions of dollars) Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $121 $121 $192 $192
Long-term notes receivable 9 9 5 5
Contracts to sell foreign
currencies - 2 - 8
Contracts to purchase foreign
currencies - 111 - 139
Interest rate hedging contracts - - 5 11
Oil and gas price hedging
contracts 7 22 2 9
Short-term borrowings 36 36 25 25
Total long-term debt 2,214 2,365 1,741 1,913
</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 chemical's accounts receivable generated from titanium dioxide pigment sales
denominated in foreign currencies, the operating costs and capital expenditures
of international chemical operations, and the operating costs and capital
expenditures of U.K. oil and gas operations. The purpose of these foreign
currency hedging activities is to protect the company from the risk that the
functional currency 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 and $3 million in 1996. The net foreign currency hedging loss
recognized in 1998 was immaterial.
Net unrealized losses on foreign currency contracts totaled $7 million
at year-end 1998 and $13 million at year-end 1997. Net unrealized gains totaled
$4 million at year-end 1996. The company's foreign currency contract positions
at year-end 1998 and 1997 were as follows:
December 31, 1998 -
- Contracts maturing January 1999 through December 2000 to purchase $113
million Australian for $77 million and 25 million British pound sterling for
$40 million
- Contracts maturing January through March 1999 to sell various foreign
currencies (principally European) for $2 million
December 31, 1997 -
- Contracts maturing January 1998 through December 1999 to purchase $137
million Australian for $102 million and 31 million British pound sterling for
$49 million
- Contracts maturing January through April 1998 to sell various foreign
currencies (principally European) for $8 million
The company also participated in various interest rate hedging
arrangements to help manage the floating rate portion of part of its debt. At
December 31, 1998, all interest rate hedging contracts had expired. At December
31, 1997, the company was a party to interest rate hedging agreements having
notional amounts of $500 million, of which $250 million represented interest
rate caps (caps) maturing on September 15, 1998. The remaining $250 million at
December 31, 1997, represented interest rate swaps (swaps) expiring on September
15, 1998, that had been under option at December 31, 1994, and were subsequently
exercised on August 15, 1995. The terms of the caps exposed the company to
interest rate risk when LIBOR exceeded 5 percent per year. Under the terms of
the caps, the company received advance proceeds of $19 million from the
counterparties and paid the excess by which LIBOR exceeded 5 percent on the
notional amounts. Under the terms of the swaps, the company received advance
proceeds of $14 million from the counterparties and paid an annual rate of 9.75
percent while receiving LIBOR. The offsetting terms of the caps and swaps
reduced the company's exposure to changes in LIBOR. At December 31, 1998 and
1997, the aggregate carrying values of the gains deferred from the company's
interest rate futures agreements were nil and $5 million, respectively. The
estimated fair market value, based on market quotes, was $11 million at December
31, 1997.
The company has periodically used oil or natural gas futures or option
contracts to reduce the effect of the price volatility of crude oil and natural
gas. The futures contracts permitted settlement by delivery of commodities.
During 1998, the company entered into hedging arrangements for 7
million barrels of crude oil and 61 billion cubic feet of natural gas
representing approximately 11% and 29% of its worldwide crude oil and natural
gas sales volumes, respectively. Net hedging gains recognized in 1998 totaled
$45 million. The effect of the gains was to increase the company's 1998 average
gross margin for crude oil and natural gas by $.55 per barrel and $.05 per MCF,
respectively. At year-end 1998, open crude oil and natural gas contracts had an
aggregate value of $7 million, and the unrecognized gain on the contracts
totaled $15 million.
During 1997, the company entered into hedging arrangements for 12
million barrels of crude oil and 75 billion cubic feet of natural gas
representing approximately 18% and 30% of its worldwide crude oil and natural
gas sales volumes, respectively. Net hedging losses recognized in 1997 totaled
$27 million. The effect of the losses was to reduce the company's 1997 average
gross margin for crude oil and natural gas by $.10 per barrel and $.08 per MCF,
respectively. At year-end 1997, open crude oil and natural gas contracts had an
aggregate value of $2 million, and the unrecognized loss on these contracts
totaled $7 million.
During 1996, the company entered into hedging arrangements for 19
million barrels of crude oil and 107 billion cubic feet of natural gas
representing approximately 30% and 37% of its worldwide crude oil and natural
gas sales volumes, respectively. Net hedging losses recognized in 1996 totaled
$117 million. The effect of the losses was to reduce the company's 1996 average
gross margin for crude oil and natural gas by $.77 per barrel and $.23 per MCF,
respectively. At year-end 1996, open crude oil and natural gas contracts had an
aggregate value of $10 million, and the unrecognized loss on these contracts
totaled $13 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 at times may 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 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, as shown in the Consolidated Statement of
Income for the years ended December 31, 1998, 1997 and 1996, are composed of the
following:
(Millions of dollars) 1998 1997 1996
-------------------- ---- ---- ----
Payroll $12 $ 11 $ 11
Property 14 15 17
Production/severance 26 74 81
Other 1 3 2
--- ---- ----
Total $53 $103 $111
=== ==== ====
18. Employee Stock Option Plans
The 1998 Long Term Incentive Plan (1998 Plan) authorizes the issuance
of shares of the company's common stock any time prior to December 31, 2007, in
the form of stock options, restricted stock or long-term performance awards. The
options may be accompanied by stock appreciation rights. A total of 2,300,000
shares of the company's common stock is authorized to be issued under the 1998
Plan.
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.
The 1987 Long Term Incentive Program (1987 Program) authorized the
issuance of shares of the company's stock over a 15-year period in the form of
stock options, restricted stock or long-term performance awards. The 1987
Program was terminated when the stockholders approved the 1998 Plan. No options
could be granted under the 1987 Program after that time, although options and
any accompanying stock appreciation rights outstanding may be exercised prior to
their respective expiration dates.
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.
In connection with the merger with Oryx (see Note 1), outstanding stock
options under the stock option plans maintained by Oryx were assumed by the
company. Stock option transactions summarized below include amounts for the 1998
Plan, the BSOP, the 1987 Program and the Oryx plans using the merger exchange
rate of 0.369 for each Oryx share under option.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Price per Price per Price per
Options Option Options Option Options Option
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 2,050,671 $56.84 2,241,136 $54.06 2,338,919 $53.14
Options granted 1,105,043 61.97 481,213 68.04 474,691 54.25
Options exercised (127,576) 44.34 (580,605) 50.49 (410,170) 45.57
Options surrendered upon
exercise of stock
appreciation rights (4,000) 38.06 (5,000) 32.38 (58,634) 40.80
Options forfeited (24,928) 60.26 (6,703) 57.46 (6,469) 53.00
Options expired (215,728) 65.65 (79,370) 93.43 (97,201) 76.94
--------- --------- ---------
Outstanding, end of year 2,783,482 58.77 2,050,671 56.84 2,241,136 54.06
========= ========= =========
Exercisable, end of year 1,497,753 55.38 1,249,055 53.96 1,354,961 56.31
========= ========= =========
</TABLE>
The following table summarizes information about stock options issued
under the plans described above that are outstanding and exercisable at December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Contractual Price Price
Options per Option Life (years) per Option Options per Option
------- ---------- ------------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
193,956 $32.01 - $39.56 5.9 $ 35.11 164,333 $35.67
494,653 40.81 - 49.25 4.7 45.92 494,653 45.92
934,257 50.56 - 59.66 8.1 57.43 310,907 54.13
880,735 61.00 - 69.61 8.1 65.99 338,625 64.73
221,402 70.46 - 73.50 6.7 72.60 130,756 72.06
58,479 97.56 - 119.58 1.7 106.16 58,479 106.16
--------- ---------
2,783,482 32.01 - 119.58 7.1 58.77 1,497,753 55.38
========= =========
</TABLE>
Statement of Financial Accounting Standards(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 plans 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 1998, 1997 and 1996.
Had compensation expense been determined in accordance with FAS No.
123, the resulting compensation expense would have affected net income and
per-share amounts as shown in the following table. These amounts may not be
representative of future compensation expense 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.
(Millions of dollars,
except per share amounts) 1998 1997 1996
------------------------- ---- ---- ----
Net Income (Loss) -
As reported $ (68) $ 382 $ 414
Pro forma (76) 376 411
Net Income (Loss) per Share -
Basic -
As reported (.78) 4.40 4.70
Pro forma (.88) 4.34 4.67
Diluted -
As reported (.78) 4.38 4.68
Pro forma (.88) 4.32 4.64
The fair value of each option granted in 1998, 1997 and 1996 was
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions.
<TABLE>
<CAPTION>
Assumptions
----------------------------------------------------------------------------------- Weighted Average
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (years) Volatility Options Granted
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 5.0% - 5.4% 0% - 3.0% 5.8 - 10 17.3% - 30.3% $9.78 - $11.20
1997 6.3 - 7.0 0 - 3.1 5.8 - 10 17.5 - 30.8 11.65 - 14.37
1996 6.0 - 6.1 0 - 3.1 5.8 - 9 17.9 - 30.7 7.17 - 13.17
</TABLE>
19. Restructuring Charges
Oryx initiated a voluntary severance program in 1998, prior to the
agreement to merge with Kerr-McGee, for its domestic operations. The company
also completed a work process review during 1998 which resulted in the
elimination of nonessential work processes, organizational restructuring and
employee reductions in both the operating and staff units. The programs resulted
in the notification of approximately 260 employees that their positions would be
eliminated.
The restructuring of the Exploration and Production operating unit
began in 1995 with the unit's reorganization of its administrative and operating
functions and continued throughout 1996 and 1997 with the unit's merger of
certain of its North American onshore properties into Devon and the relocation
of part of the unit to Houston, Texas. This program was essentially completed at
year-end 1997 except for costs associated with an office lease obligation and
resulted in approximately 550 employees terminating their employment.
During the three-year period ended December 31, 1998, the company
accrued a total of $52 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 $20 million reserve at
December 31, 1998, primarily represents remaining severance costs and $7 million
for costs associated with an office lease obligation that has no economic
benefit to the company. The amounts are expected to be paid and charged to the
reserve during 1999. The accruals, expenditures and reserve balances are set
forth below:
(Millions of dollars) 1998 1997
--------------------- ---- ----
Beginning balance $ 12 $ 23
Accruals 40 2
Retirement benefits to
be paid from plan assets (23) -
Payments (9) (13)
---- ----
Ending balance $ 20 $ 12
==== ====
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 approximately 3 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.
The company stock acquired by the ESOP trust is held in a loan suspense
account. Deferred compensation, representing the unallocated ESOP shares, is
reflected as a reduction of stockholders' equity. 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 expense is recognized and stock is then
allocated to participants' accounts at market value as the participants'
contributions are made to the SIP. 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.
The Oryx Capital Accumulation Plan (CAP) is a combined stock bonus and
leveraged ESOP available to substantially all U.S. employees of the former Oryx
operations. On August 1, 1989, Oryx privately placed $110 million of notes
pursuant to the provisions of the CAP. Oryx loaned the proceeds to the CAP,
which used the funds to purchase Oryx common stock and were placed in a trust.
Stock is released by the trust as the loan principal and interest are paid.
Stock is allocated to participants on a quarterly basis as the loan is repaid.
The number of shares allocated to each participant is determined by the
proportion each participant's contributions bear to the total contributions of
all participants. Deferred compensation, representing the unallocated CAP
shares, is reflected as a reduction of stockholders' equity. Prior to 1995 and
resuming in 1997, the CAP made scheduled loan payments using Oryx contributions
to the CAP. In 1995 and 1996, repayments were deferred pending a ruling
requested from the Internal Revenue Service. The company plans to merge the CAP
into the ESOP and SIP.
Shares of stock allocated to the ESOP and CAP participants' accounts
and in the loan suspense are as follows:
(Thousands of shares) 1998 1997
--------------------- ----- -----
Participants' accounts 1,736 1,832
Loan suspense account 1,610 1,848
The shares allocated to ESOP and CAP participants at December 31, 1998,
included approximately 52,000 shares released in January 1999, and at December
31, 1997, included approximately 15,000 shares released in January 1998.
All ESOP and CAP shares are considered outstanding for net income
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
and CAP-related expense of $17 million, $13 million and $15 million in 1998,
1997 and 1996, respectively. These amounts include interest expense incurred on
the third-party ESOP debt of $5 million in both 1998 and 1997 and $6 million in
1996. The company contributed $16 million, $12 million and $9 million to the
ESOP and CAP in 1998, 1997 and 1996, 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 1998, 1997 and 1996.
21. Employee Benefit Plans
The company has both noncontributory defined-benefit retirement plans
and company-sponsored contributory postretirement plans for health care and life
insurance. Most employees are covered under the company's retirement plans, and
substantially all U.S. employees may become eligible for the postretirement
benefits if they reach retirement age while working for the company.
Following are the changes in the benefit obligations during the past two years:
<TABLE>
<CAPTION>
Postretirement Health
Retirement Plans and Life Plans
(Millions of dollars) 1998 1997 1998 1997
- --------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation, beginning
of year $ 976 $906 $209 $197
Service cost 16 15 3 2
Interest cost 66 64 13 15
Plan amendments 38 - 1 -
Net actuarial loss 15 71 8 10
Acquisitions 6 - - -
Dispositions, curtailments,
settlements 5 (12) (2) -
Benefits paid (95) (68) (15) (15)
------ ---- ---- ----
Benefit obligation, end of year $1,027 $976 $217 $209
====== ==== ==== ====
</TABLE>
The benefit amount that can be covered by the retirement plans that
qualify under the Employee Retirement Income Security Act of 1974 (ERISA) is
limited by both 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 benefit obligation
for the unfunded retirement plans was $109 million and $107 million at December
13, 1998 and 1997, respectively. 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 $10 million at year-end 1998 and $7
million at year-end 1997. The postretirement plans are also unfunded.
Following are the changes in the fair value of plan assets during the
past two years and the reconciliation of the plans' funded status to the amounts
recognized in the financial statements at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Postretirement Health
Retirement Plans and Life Plans
(Millions of dollars) 1998 1997 1998 1997
- --------------------- ------ ------ ----- ------
<S> <C> <C> <C> <C>
Fair value of plan assets,
beginning of year $1,138 $ 995 $ - $ -
Actual return on plan assets 351 203 - -
Employer contribution 10 20 - -
Benefits paid (95) (68) - -
Settlements - (12) - -
------ ------ ----- -----
Fair value of plan assets,
end of year 1,404 1,138 - -
Benefit obligation (1,027) (976) (217) (209)
------ ------ ----- -----
Funded status of plan -
over (under) 377 162 (217) (209)
Amounts not recognized in
the Consolidated Balance
Sheet -
Transition asset (13) (20) - -
Prior service costs 33 17 - -
Net actuarial loss (gain) (366) (123) 18 3
------ ------ ----- -----
Prepaid expense (accrued liability) $ 31 $ 36 $(199) $(206)
====== ====== ===== =====
</TABLE>
Following is the classification of the amounts recognized in the
Consolidated Balance Sheet at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Postretirement Health
Retirement Plans and Life Plans
(Millions of dollars) 1998 1997 1998 1997
- --------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid benefits expense $102 $ 96 $ - $ -
Accrued benefit liability (109) (102) (199) (206)
Additional minimum liability -
Intangible asset 7 13 - -
Accumulated other comprehensive
income 31 29 - -
---- ---- ----- -----
Total $ 31 $ 36 $(199) $(206)
==== ==== ===== =====
</TABLE>
Total costs recognized for employee retirement and postretirement
benefit plans for each of the years ended December 31, 1998, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
Postretirement Health
Retirement Plans and Life Plans
(Millions of dollars) 1998 1997 1996 1998 1997 1996
- --------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net periodic cost -
Service cost $ 16 $ 15 $15 $ 3 $ 2 $ 3
Interest cost 66 64 63 13 15 15
Expected return on
plan assets (94) (84) (80) - - -
Net amortization -
Transition asset (8) (8) (7) - - -
Prior service cost 3 2 2 - - -
Net actuarial loss (gain) 1 1 2 (1) - -
---- ---- --- --- --- ---
(16) (10) (5) 15 17 18
Dispositions, curtailments,
settlements 26 6 4 (1) - -
---- ---- --- --- --- ---
Total $ 10 $ (4) $(1) $14 $17 $18
==== ==== === === === ===
</TABLE>
The following assumptions were used in estimating the actuarial present
value of the plans' benefit obligations and net periodic expense:
1998 1997 1996
---- ---- ----
Discount rate 6.75% 6.5% - 7.0% 7.3% - 7.5%
Expected return on plan
assets 9.0% - 9.5% 9.0% - 9.5% 9.0% - 9.5%
Rate of compensation
increases 4.0% - 5.0% 4.0% - 5.0% 4.0% - 5.0%
The health care cost trend rates used to determine the year-end 1998
postretirement benefit obligation was 5.7% to 7.5% in 1999, gradually declining
to 4.5% to 5% in the year 2008 and thereafter. A 1% increase in the assumed
health care cost trend rate for each future year would increase the
postretirement benefit obligation at December 31, 1998, by $17 million and
increase the aggregate of the service and interest cost components of net
periodic postretirement expense for 1998 by $1 million. A 1% decrease in the
trend rate for each future year would reduce the benefit obligation at year-end
1998 by $16 million. It was not practical to calculate the effect of the percent
decrease on net periodic expense in the health care cost trend rate.
22. Reporting by Business Segments
The company is managed in two industry segments: oil and gas
exploration and production and manufacturing and marketing of titanium dioxide
pigment. The exploration and production unit produces and explores for oil and
gas in the United States, United Kingdom sector of the North Sea, Indonesia,
China, Kazakhstan and Ecuador. Exploration efforts are also extended to
Australia, Algeria, Brazil, Gabon, Thailand and Yemen. The chemicals group
manufactures and markets primarily titanium dioxide pigment, as well as
electrolytic chemicals and forest products. The chemicals segment has operations
in the United States, Australia, Germany and Belgium.
There were no individually significant customers in 1998, 1997 or 1996.
Sales to subsidiary companies are eliminated as described in Note 1.
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997 1996
- -------------------- ------ ------ ------
<S> <C> <C> <C>
Sales -
Exploration and production $1,267 $1,845 $2,048
Chemicals 933 760 692
------ ------ ------
Total $2,200 $2,605 $2,740
====== ====== ======
Operating profit (loss)(1) -
Exploration and production $ (361) $ 595 $ 667
Chemicals 56 81 85
------ ------ ------
Total $ (305) $ 676 $ 752
====== ====== ======
Net operating profit (loss)(1) -
Exploration and production $ (266) $ 375 $ 410
Chemicals 35 52 53
------ ------ ------
Total (231) 427 463
Net interest expense(1) (77) (84) (89)
Net nonoperating income (expense)(1) (37) 8 (16)
Income from discontinued operations,
net of taxes 277 33 56
Extraordinary charge, net of taxes - (2) -
------ ------ ------
Net income (loss) $ (68) $ 382 $ 414
====== ====== ======
Sales -
U.S. operations $1,311 $1,635 $1,733
------ ------ ------
International operations -
North Sea - exploration
and production 472 644 706
Other - exploration and
production 67 105 112
Australia - chemicals 178 185 151
Europe - chemicals 163 - -
Other - chemicals 9 36 38
------ ------ ------
889 970 1,007
------ ------ ------
Total $2,200 $2,605 $2,740
====== ====== ======
Operating profit (loss)(1) -
U.S. operations $ (116) $ 400 $ 427
------ ------ ------
International operations -
North Sea - exploration
and production (146) 85 103
Other - exploration and
production (85) 178 213
Europe - chemicals 23 - -
Australia - chemicals 19 13 9
------ ------ ------
(189) 276 325
------ ------ ------
Total $ (305) $ 676 $ 752
====== ====== ======
(1)Includes special items. Refer to Management's Discussion and Analysis.
Depreciation, depletion and
amortization -
Exploration and production $ 527 $ 508 $ 490
Chemicals 68 55 55
Other 6 5 4
Discontinued operations 14 25 30
------ ------ ------
Total $ 615 $ 593 $ 579
====== ====== ======
Cash capital expenditures -
Exploration and production $ 871 $ 708 $ 722
Chemicals 92 91 118
Other 8 10 6
Discontinued operations 10 27 29
------ ------ ------
Total 981 836 875
------ ------ ------
Exploration expenses -
Exploration and production -
Dry hole costs 100 53 55
Amortization of undeveloped
leases 40 23 15
Other 74 61 50
------ ------ -----
Total 214 137 120
Minerals and other 1 2 2
------ ------ -----
Total exploration expenses 215 139 122
Less - Amortization of oil and
gas and minerals leases and
other noncash expenses (42) (23) (19)
------ ------ -----
173 116 103
------ ------ -----
Total cash capital
expenditures and cash
exploration expenses $1,154 $ 952 $ 978
====== ====== =====
Identifiable assets -
Exploration and production $4,083 $3,924 $3,737
Chemicals 1,098 875 886
------ ------ ------
Total 5,181 4,799 4,623
Corporate and other assets 270 270 295
Discontinued operations - 270 276
------ ------ ------
Total $5,451 $5,339 $5,194
====== ====== ======
Identifiable assets -
U.S. operations $2,734 $3,094 $2,725
------ ------ ------
International operations -
North Sea - exploration and
production 1,749 1,282 1,285
Other - exploration and
production 212 164 320
Australia - chemicals 245 243 268
Europe - chemicals 223 - -
Other - chemicals 18 16 25
------ ------ ------
2,447 1,705 1,898
------ ------ ------
Total $5,181 $4,799 $4,623
====== ====== ======
Net property, plant and equipment -
U.S. operations $2,095 $2,382 $2,205
International operations -
North Sea - exploration
and production 1,617 1,101 1,106
Other - exploration and
production 213 303 247
Australia - chemicals 129 133 135
Europe - chemicals 99 - -
------ ------ ------
Total $4,153 $3,919 $3,693
====== ====== ======
Net assets -
U.S. operations $ (89) $ 485 $ 335
------ ------ ------
International operations -
North Sea - exploration and
production 931 801 477
Other - exploration and
production 140 108 231
Australia - chemicals 204 152 211
Europe - chemicals 142 - -
Other - chemicals 18 12 25
------ ------ ------
1,435 1,073 944
------ ------ ------
Total $1,346 $1,558 $1,279
====== ====== ======
</TABLE>
23. Discontinued Operations
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
approximately $600 million. 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 of $50 million;
property, plant and equipment of $216 million; other assets of $4 million;
current liabilities of $40 million and long-term liabilities of $73 million.
Summarized financial information for discontinued operations for the three years
ended December 31, 1998, is as follows:
(Millions of dollars,
except per-share amounts) 1998 1997 1996
- -------------------------- ---- ---- ----
Sales $ 174 $323 $365
===== ==== ====
Income from discontinued operations -
Gain on disposal, net of income
taxes of $149 $ 257 $ - $ -
Income from operations, net of
income taxes of $7 in 1998,
$12 in 1997 and $18 in 1996 20 33 56
----- ---- ----
Total $ 277 $ 33 $ 56
===== ==== ====
Net income per share -
Basic -
Gain on sale $2.97 $ - $ -
Income from operations .23 .38 .63
----- ---- ----
Total $3.20 $.38 $.63
===== ==== ====
Diluted -
Gain on sale $2.97 $ - $ -
Income from operations .23 .38 .63
----- ---- ----
Total $3.20 $.38 $.63
===== ==== ====
24. Merger with Oryx Energy Company
On February 26, 1999, the merger between Kerr-McGee and Oryx was
completed. The following table provides a reconciliation of sales reported by
Kerr-McGee to the combined amounts presented in the Consolidated Statement of
Income:
<TABLE>
(Millions of dollars)
- ---------------------
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales
Pre-Merger
Kerr-McGee $1,396 $1,388 $1,566
Oryx 820 1,197 1,147
Merger reclassifications (16) 20 27
------ ------ ------
Total $2,200 $2,605 $2,740
====== ====== ======
Merger reclassifications primarily represent the reclassification of Oryx's
other income to Kerr-McGee's presentation.
</TABLE>
The following table provides a reconciliation of net income reported by
Kerr-McGee to the combined amounts presented for the three years ended December
31, 1998, 1997 and 1996:
<TABLE>
(Millions of dollars)
- ---------------------
<CAPTION>
Income (Loss)
From Continuing Discontinued Extraordinary
Operations Operations Charge Net
(net of taxes) (net of taxes) (net of taxes) Income (Loss)
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
1998
Pre-Merger
Kerr-McGee $(227) $277 $ - $ 50
Oryx (95) - - (95)
Merger adjustments (23) - - (23)
----- ---- --- ----
Total $(345) $277 $ - $(68)
===== ==== === ====
1997
Pre-Merger
Kerr-McGee $ 161 $ 33 $ - $194
Oryx 172 - (2) 170
Merger adjustments 18 - - 18
----- ---- --- ----
Total $ 351 $ 33 $(2) $382
===== ==== === ====
1996
Pre-Merger
Kerr-McGee $ 164 $ 56 $ - $220
Oryx 163 - - 163
Merger adjustments 31 - - 31
----- ---- --- ----
Total $ 358 $ 56 $ - $414
===== ==== === ====
</TABLE>
Merger adjustments reflect conforming accounting policy changes
primarily related to the following:
a. Financial Accounting Standards (FAS) No. 106, "Accounting for
Postretirement Benefits Other Than Pensions," allowed for recognition
of the postretirement transition obligation either immediately in net
income as a change in accounting principle in the period of adoption
or on a delayed basis as a component of net periodic postretirement
benefit cost. Kerr-McGee adopted FAS 106 in 1992 and elected immediate
recognition of its transition obligation. Oryx adopted the statement
at the beginning of 1993 and elected to delay recognition of its
transition obligation, amortizing the amount on a straight-line basis
over 20 years. The adjustment to immediately recognize Oryx's
transition obligation increased pre-tax income by $9 million, $3
million and $4 million for the years ended 1998, 1997 and 1996,
respectively.
b. Kerr-McGee and Oryx use different methods to recognize Petroleum
Revenue Tax (PRT) for U.K. operations. Kerr-McGee estimates the total
PRT to be payable over the life of a field and charges this amount to
income tax expense on a unit-of-production basis. Oryx used the
flow-through method, which recognizes PRT as a production tax in total
costs and expenses as amounts become currently payable. The adjustment
to provide for PRT using the life-of-field method decreased net income
$12 million in 1998 and increased net income $31 million in 1997 and
$36 million in 1996.
Oryx reduced the amount of its estimated dismantlement and removal
costs by the amount of PRT expected to be recovered when the field is
abandoned. (Under the life-of-field method, this amount is included in
the estimate of total PRT payable over the field life). To provide for
dismantlement costs similar to Kerr-McGee, operating expense was
increased $14 million, $15 million and $9 million for the years ended
1998, 1997, and 1996, respectively.
c. Kerr-McGee and Oryx use different methods to provide for nonproducing
leasehold cost impairment. Kerr-McGee capitalizes undeveloped acreage
costs and amortizes the costs at rates that provide full amortization
upon abandonment/expiration of unproductive leases. Oryx capitalized
undeveloped acreage costs but recognized abandonment of unproductive
leaseholds when the lease expired or when circumstances indicated. To
provide for nonproducing leasehold costs similar to Kerr-McGee,
exploration expense was increased $11 million in 1998, $7 million in
1997 and $3 million in 1996.
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, 1998, consist of the following:
<TABLE>
<CAPTION>
Proportional
Interest
Results of in Equity
Production Other Depreciation Income Tax Operations Affiliate's
Gross (Lifting) Related Exploration and Depletion Asset Expenses Producing Results of
(Millions of dollars) Revenues Costs Costs(1) Expenses Expenses Impairment (Benefits) Activities Operations(2)
- --------------------- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 -
Domestic $ 721 $184 $126 $141 $285 $114 $(36) $(93) $(11)
North Sea 450 195 7 21 170 160 (20) (83) -
Other international 67 12 9 52 31 115 (45) (107) 7
------ ---- ---- ---- ---- ---- ---- ----- ----
Total crude oil and
natural gas
activities 1,238 391 142 214 486 389 (101) (283) (4)
Other(3) 29 5 1 - - - 6 17 -
------ ---- ---- ---- ---- ---- ---- ----- ----
Total $1,267 $396 $143 $214 $486 $389 $(95) $(266) $ (4)
====== ==== ==== ==== ==== ==== ==== ===== ====
1997 -
Domestic $1,045 $211 $101 $82 $316 $ - $120 $ 215 $ 25
North Sea 615 207 11 19 140 - 94 144 -
Other international 101 29 12 36 29 - (6) 1 3
------ ---- ---- ---- ---- ---- ---- ----- ----
Total crude oil and
natural gas
activities 1,761 447 124 137 485 - 208 360 28
Other(3) 84 55 2 - - - 12 15 -
------ ---- ---- ---- ---- ---- ---- ----- ----
Total $1,845 $502 $126 $137 $485 $ - $220 $ 375 $ 28
====== ==== ==== ==== ==== ==== ==== ===== ====
1996 -
Domestic $1,081 $248 $105 $63 $305 $ 22 $123 $ 215 $ -
North Sea 651 187 12 40 136 - 116 160 -
Other international 107 40 12 17 33 - 3 2 -
------ ---- ---- ---- ---- ---- ---- ----- ----
Total crude oil and
natural gas
activities 1,839 475 129 120 474 22 242 377 -
Other(3) 209 159 1 - 1 - 15 33 -
------ ---- ---- ---- ---- ---- ---- ----- ----
Total $2,048 $634 $130 $120 $475 $ 22 $257 $ 410 $ -
====== ==== ==== ==== ==== ==== ==== ===== ====
(1)Includes restructuring charges of $34 million, $2 million and $10
million in 1998, 1997 and 1996, respectively (see Note 19).
(2)The equity affiliate follows the "full cost" method of accounting
for oil and gas exploration and production activities.
(3)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.
</TABLE>
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).
1998 1997 1996
------ ------ ------
Average sales price -
Crude oil (per barrel) -
Domestic $12.73 $18.34 $19.45
North Sea 12.93 18.93 19.60
Other international 9.90 15.36 15.85
Average 12.52 18.32 19.18
Natural gas (per MCF) -
Domestic 2.09 2.43 2.11
North Sea 2.46 2.44 2.50
Other international - - 1.14
Average 2.12 2.43 2.10
Production costs -
(Per barrel of oil equivalent)
Domestic 3.23 3.25 3.51
North Sea 5.62 6.25 5.48
Other international 1.78 4.33 5.21
Average 3.97 4.27 4.22
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 1998
and 1997 are set forth in the table below. Not included in the amounts shown are
$221 million that represent the company's proportional interest in an equity
affiliate's net capitalized costs at December 31, 1998 and 1997, (see Note 4).
The equity affiliate follows the "full cost" method of accounting for oil and
gas exploration and production activities.
(Millions of dollars) 1998 1997
- --------------------- ------ ------
Capitalized costs -
Proved properties $8,701 $8,152
Unproved properties 583 299
Other 75 63
------ ------
Total 9,359 8,514
------ ------
Reserves for depreciation,
depletion and amortization -
Proved properties 5,734 5,309
Unproved properties 69 42
Other 34 31
------ ------
Total 5,837 5,382
------ ------
Net capitalized costs $3,522 $3,132
====== ======
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 pre-tax 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>
Proportional
Standardized Interest in
Future Measure of 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 Measure
- --------------------- ------------ -------------- ------------ ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 -
Domestic $ 4,780 $2,108 $ 718 $1,954 $ 713 $1,241 $102
North Sea 3,121 2,474 82 565 160 405 -
Other international 1,499 977 181 341 264 77 90
------- ------ ------ ------ ------ ------ ----
Total $ 9,400 $5,559 $ 981 $2,860 $1,137 $1,723 $192
======= ====== ====== ====== ====== ====== ====
1997 -
Domestic $ 8,006 $2,936 $1,584 $3,486 $1,310 $2,176 $205
North Sea 4,026 2,678 282 1,066 356 710 -
Other international 2,291 1,471 236 584 283 301 19
------- ------ ------ ------ ------ ------ ----
Total $14,323 $7,085 $2,102 $5,136 $1,949 $3,187 $224
======= ====== ====== ====== ====== ====== ====
1996 -
Domestic $11,697 $3,058 $2,878 $5,761 $2,150 $3,611 $336
North Sea 5,833 3,088 913 1,832 534 1,298 -
Other international 2,255 1,089 370 796 387 409 28
------- ------ ------ ------ ------ ------ ----
Total $19,785 $7,235 $4,161 $8,389 $3,071 $5,318(1) $364
======= ====== ====== ====== ====== ====== ====
(1)Includes $(8) million for properties held for sale.
</TABLE>
The changes in the standardized measure of future net cash flows are
presented below for each of the past three years:
(Millions of dollars) 1998 1997 1996
- --------------------- ------- ------- ------
Net change in sales, transfer
prices and production costs $(2,156) $(3,704) $2,806
Changes in estimated future
development costs (377) (283) (19)
Sales and transfers less
production costs (847) (1,314) (1,364)
Purchases of reserves in place 159 26 209
Changes due to extensions,
discoveries, etc. 173 478 978
Changes due to revisions in
quantity estimates 43 81 207
Changes due to sales of reserves
in place (107) (9) (148)
Changes due to reserves merged into
equity affiliate - - (511)
Current period development costs 687 556 482
Accretion of discount 437 759 482
Changes in income taxes 693 1,242 (1,136)
Timing and other (169) 37 (222)
------- ------- ------
Net change (1,464) (2,131) 1,764
Total at beginning of year 3,187 5,318 3,554
------- ------- ------
Total at end of year $ 1,723 $ 3,187 $5,318
======= ======= ======
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 in accordance with the Securities and Exchange
Commission definitions. 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 certain of 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, 1998.
<TABLE>
<CAPTION>
Crude Oil and Condensate
(Millions of barrels)
---------------------------------------------------------------
North Other
Domestic Sea International Total
-------- ----- ------------- -----
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves -
Balance December 31, 1995(1) 272 163 79 514
Revisions of previous estimates 22 5 (3) 24
Purchases of reserves in place 3 29 - 32
Sales of reserves in place (13) - (1) (14)
Reserves merged into
equity affiliate (16) - (9) (25)
Extensions, discoveries and
other additions 10 46 41 97
Production (27) (32) (6) (65)
--- --- --- ---
Balance December 31, 1996(1) 251 211 101 563
Revisions of previous estimates 12 11 1 24
Purchases of reserves in place 5 - - 5
Sales of reserves in place - (1) - (1)
Extensions, discoveries and
other additions 28 1 9 38
Production (26) (30) (7) (63)
--- --- --- ---
Balance December 31, 1997 270 192 104 566
Revisions of previous estimates 6 6 (15) (3)
Purchases of reserves in place - 45 - 45
Sales of reserves in place (13) - - (13)
Extensions, discoveries and
other additions 14 9 21 44
Production (24) (32) (7) (63)
--- --- --- ---
Balance December 31, 1998 253 220 103 576
=== === === ===
Proportional interest in
equity affiliate's reserves(2)
December 31, 1996 22 - 3 25
December 31, 1997 22 - 3 25
December 31, 1998 11 - 9 20
Proved developed reserves -
December 31, 1996(1) 158 141 39 338
December 31, 1997 166 115 55 336
December 31, 1998 148 141 38 327
Proportional interest in
equity affiliate's reserves(2)
December 31, 1996 20 - 3 23
December 31, 1997 20 - 2 22
December 31, 1998 10 - 8 18
</TABLE>
<TABLE>
<CAPTION>
Natural Gas
(Billions of cubic feet)
---------------------------------------------------
Other
North Interna-
Domestic Sea tional Total
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves -
Balance December 31, 1995(1) 1,817 216 69 2,102
Revisions of previous estimates (24) (9) (1) (34)
Purchases of reserves in place 9 2 - 11
Sales of reserves in place (60) - (18) (78)
Reserves merged into
equity affiliate (122) - (41) (163)
Extensions, discoveries and
other additions 129 3 39 171
Production (263) (15) (9) (287)
----- ---- --- ------
Balance December 31, 1996(1) 1,486 197 39 1,722
Revisions of previous estimates 1 22 3 26
Purchases of reserves in place 19 - - 19
Sales of reserves in place (30) - - (30)
Extensions, discoveries and
other additions 229 - 214 443
Production (235) (16) - (251)
----- ---- --- -----
Balance December 31, 1997 1,470 203 256 1,929
Revisions of previous estimates (3) 7 13 17
Purchases of reserves in place 4 46 - 50
Sales of reserves in place (89) - - (89)
Extensions, discoveries and
other additions 131 3 103 237
Production (197) (17) - (214)
----- ---- --- -----
Balance December 31, 1998 1,316 242 372 1,930
===== ==== === =====
Proportional interest in
equity affiliate's reserves(2)
December 31, 1996 172 - 13 185
December 31, 1997 175 - 15 190
December 31, 1998 122 - 124 246
Proved developed reserves -
December 31, 1996(1) 999 182 - 1,181
December 31, 1997 923 161 - 1,084
December 31, 1998 817 163 - 980
Proportional interest in
equity affiliate's reserves(2)
December 31, 1996 164 - 13 177
December 31, 1997 142 - 14 156
December 31, 1998 96 - 120 216
(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 10).
(2)During 1998, the equity affiliate merged with a third party, which
reduced the company's ownership interest in the affiliate. The
company's proportionate interest reflects its ownership interest at
the respective year-end (see Note 4).
</TABLE>
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 International Total
- -------------------------------- -------- --- ------------- -----
<S> <C> <C> <C> <C>
December 31, 1996(1) 499 244 107 850
December 31, 1997 515 226 147 888
December 31, 1998 472 261 165 898
Proportional interest in
equity affiliate's reserves(2)
December 31, 1996 51 - 5 56
December 31, 1997 52 - 5 57
December 31, 1998 31 - 30 61
(1)Includes 2 million barrels of oil equivalent held for sale at
December 31, 1996 (see Note 10).
(2)During 1998, the equity affiliate merged with a third party, which
reduced the company's ownership interest in the affiliate. The
company's proportionate interest reflects its ownership interest at
the respective year-end (see Note 4).
</TABLE>
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, 1998, 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>
1998-
Proprietary costs -
Domestic $117 $136 $347
North Sea 423 38 311
Other international 5 75 29
---- ---- ----
Total $545 $249 $687
==== ==== ====
Proportional interest in
equity affiliate's costs -(4)
Domestic $ 11 $ 7 $ 16
Other international 30 10 15
---- ---- ----
Total $ 41 $ 17 $ 31
==== ==== ====
1997 -
Proprietary costs -
Domestic $ 70 $110 $360
North Sea 2 18 146
Other international 2 61 50
---- ---- ----
Total $ 74 $189 $556
==== ==== ====
Proportional interest in
equity affiliate's costs -(4)
Domestic $ 6 $ 6 $ 25
Other international - - 2
---- ---- ----
Total $ 6 $ 6 $ 27
==== ==== ====
1996 -
Proprietary costs -
Domestic $ 36 $ 90 $360
North Sea 94 54 72
Other international 1 29 50
---- ---- ----
Total $131 $173 $482
==== ==== ====
(1)Includes $280 million, $11 million and $100 million applicable to
purchases of reserves in place in 1998, 1997 and 1996, respectively.
(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 and capital
expenditures, such as costs of drilling and equipping successful
exploratory wells.
(3)Development costs include costs incurred to obtain access to proved
reserves (surveying, clearing ground, building roads), 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.
(4)During 1998, the equity affiliate merged with a third party, which
reduced the company's ownership interest in the affiliate. The
company's proportionate interest reflects its ownership interest at
the respective year-end (see Note 4).
</TABLE>
30. Quarterly Financial Information (Unaudited)
A summary of quarterly consolidated results for 1998 and 1997 is
presented below. In periods in which there was a loss from continuing
operations, the conversion of stock options was not assumed since the loss
per-share amount would have been lower. Therefore, the quarterly per-share
amounts may not add to the annual amounts. Refer to Management's Discussion and
Analysis for information about special items.
<TABLE>
<CAPTION>
Diluted Income (Loss)
per Common Share
-------------------------
Operating Income (Loss)Net
(Millions of dollars, Profit From Continuing Income Continuing Net
except per-share amounts) Sales (Loss) Operations (Loss) Operations Income
- -------------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 Quarter Ended -
March 31 $ 507 $ 55 $ 16 $ 24 $ .18 $ .27
June 30 601 73 32 83 .36 .95
September 30 556 11 (68) 150 (.77) 1.73
December 31 536 (444) (325) (325) (3.75) (3.74)
------ ----- ----- ---- ------ -----
Total $2,200 $(305) $(345) $(68) $(3.98) $(.78)
====== ===== ===== ==== ====== =====
1997 Quarter Ended -
March 31 $ 727 $ 224 $ 128 $140 $1.46 $1.59
June 30 613 136 64 70 .75 .81
September 30 618 157 78 83 .89 .95
December 31 647 159 81 89 .92 1.03
------ ----- ----- ---- ----- ------
Total $2,605 $ 676 $ 351 $382 $4.02 $4.38
====== ===== ===== ==== ===== =====
</TABLE>
The company's common stock is listed for trading on the New York Stock
Exchange and was held by approximately 35,000 stockholders of record at year-end
1998. The ranges of market prices and dividends declared during the last two
years for Kerr-McGee Corporation common stock prior to the merger with Oryx are
as follows:
<TABLE>
<CAPTION>
Market Prices Dividends
1998 1997 per Share
--------------------------------- --------------------------- ---------
High Low High Low 1998 1997
-------------- --------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended -
March 31 73 3/16 55 7/8 75 61 7/8 $.45 $.45
June 30 70 1/4 56 5/8 67 1/4 55 1/2 .45 .45
September 30 60 1/2 38 69 15/16 59 13/16 .45 .45
December 31 47 9/16 36 3/16 71 1/2 60 1/8 .45 .45
</TABLE>
<TABLE>
Five-Year Financial Summary
<CAPTION>
(Millions of dollars, except per-share amounts) 1998 1997 1996 1995 1994
- ---------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Net Income (Loss)
Sales $2,200 $2,605 $2,740 $2,419 $ 2,359
----------------------------------------------------
Costs and operating expenses 2,606 2,011 2,122 2,305 2,185
Interest and debt expense 157 141 145 193 211
----------------------------------------------------
Total costs and expenses 2,763 2,152 2,267 2,498 2,396
----------------------------------------------------
(563) 453 473 (79) (37)
Other income 43 82 110 147 15
Provision (benefit) for income taxes (175) 184 225 (42) 9
----------------------------------------------------
Income (loss) from continuing operations (345) 351 358 110 (31)
Income from discontinued operations 277 33 56 27 55
Extraordinary charge, net of taxes - (2) - (23) (12)
Cumulative effect on prior years of
change in accounting principle - - - - (948)
----------------------------------------------------
Net income (loss) $ (68) $ 382 $ 414 $ 114 $ (936)
====================================================
Common Stock Information, per Share
Diluted net income (loss) -
Continuing operations $(3.98) $ 4.02 $ 4.05 $ 1.23 $ (.36)
Discontinued operations 3.20 .38 .63 .30 .63
Extraordinary charge - (.02) - (.26) (.14)
Cumulative effect of change in
accounting principle - - - - (10.82)
-----------------------------------------------------
Net income (loss) $(.78) $ 4.38 $ 4.68 $ 1.27 $(10.69)
====================================================
Dividends declared (1) $ 1.80 $ 1.80 $ 1.64 $ 1.55 $ 1.52
Stockholders' equity 15.58 17.88 14.59 12.47 12.33
Market high for the year (1) 73.19 75.00 74.13 64.00 51.00
Market low for the year (1) 36.19 55.50 55.75 44.00 40.00
Market price at year-end (1) $38.25 $63.31 $72.00 $63.50 $ 46.25
Shares outstanding at year-end (thousands) 86,367 86,794 87,032 89,613 90,143
Balance Sheet Information
Working capital $ (173) $ - $ 161 $ (106) $ (254)
Property, plant and equipment - net 4,153 3,919 3,693 3,807 4,497
Total assets 5,451 5,339 5,194 5,006 5,918
Long-term debt 1,978 1,736 1,809 1,683 2,219
Total debt 2,250 1,766 1,849 1,938 2,704
Net debt (total debt less cash) 2,129 1,574 1,719 1,831 2,612
Stockholders' equity 1,346 1,558 1,279 1,124 1,112
Cash Flow Information
Net cash provided by operating activities 385 1,097 1,169 728 678
Cash capital expenditures 981 836 875 745 611
Dividends paid 86 85 83 79 79
Treasury stock purchased (1) $ 25 $ 60 $ 195 $ 45 $ -
Ratios and Percentage
Current ratio .8 1.0 1.2 .9 .8
Average price/earnings ratio NM 14.9 13.9 42.5 NM
Net debt to total capitalization 61% 50% 57% 62% 70%
Employees
Total wages and benefits $ 359 $ 367 $ 367 $ 402 $ 422
Number of employees at year-end 4,400 4,792 4,827 5,176 6,724
(1) Represents Kerr-McGee Corporation amounts prior to merger with Oryx.
</TABLE>
<TABLE>
<CAPTION>
Five-Year Operating Summary
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Exploration and Production
Net proprietary production of crude
oil and condensate -
(thousands of barrels per day)
Domestic 66.2 70.6 73.8 74.8 73.4
North Sea 87.4 83.3 86.5 91.9 88.7
Other international 18.4 18.1 16.8 17.4 26.4
----------------------------------------------------
Total 172.0 172.0 177.1 184.1 188.5
====================================================
Average price of crude oil sold (per barrel) -
Domestic $12.73 $18.34 $19.45 $15.73 $14.25
North Sea 12.93 18.93 19.60 16.56 15.33
Other international 9.90 15.36 15.85 14.70 14.58
Average $12.52 $18.32 $19.18 $16.05 $14.80
Proprietary natural gas sales
(MMCF per day) 584 685 781 809 872
Average price of natural gas
sold (per MCF) $ 2.12 $ 2.43 $ 2.10 $ 1.63 $ 1.82
Net exploratory wells drilled -
Productive 4.40 7.65 6.91 4.71 11.61
Dry 14.42 7.42 5.52 11.16 13.47
----------------------------------------------------
Total 18.82 15.07 12.43 15.87 25.08
====================================================
Net development wells drilled -
Productive 62.30 95.78 143.33 135.86 69.27
Dry 9.00 7.00 13.04 11.95 9.63
----------------------------------------------------
Total 71.30 102.78 156.37 147.81 78.90
====================================================
Undeveloped net acreage (thousands) -
Domestic 1,487 1,353 1,099 1,280 1,415
North Sea 908 523 560 570 629
Other international 14,716 14,630 4,556 4,031 7,494
----------------------------------------------------
Total 17,111 16,506 6,215 5,881 9,538
====================================================
Developed net acreage (thousands) -
Domestic 810 830 871 1,190 1,270
North Sea 115 70 79 58 68
Other international 612 201 198 207 1,015
----------------------------------------------------
Total 1,537 1,101 1,148 1,455 2,353
====================================================
Estimated proved reserves (1)
(millions of equivalent barrels) 898 888 850 864 1,059
Chemicals
Industrial and specialty chemical sales
(thousands of metric tons) 481 443 405 404 346
(1) Does not include proportionate interest in equity affiliate's reserves.
</TABLE>
