ROBERT M. WOHLEBER - KERR-MCGEE CORP - (KMG)
CEO Interview - published 09/20/00

DOCUMENT # KAP240

ROBERT M. WOHLEBER is a Senior Vice President and the Chief Financial Officer for Kerr-McGee Corp. Mr. Wohleber holds a Bachelor’s degree from the University of Notre Dame and a Master’s degree from the University of Pittsburgh, both in Business Administration. He began his career in corporate finance in 1974 with Mellon Bank in Pittsburgh as an Assistant Investment Officer. He worked for Copperweld Corp. from 1978 to 1986, when he joined Freeport-McMoRan Companies. Since then, he has held positions of increasing responsibility, including Senior Vice President and Chief Financial Officer of Freeport-McMoRan Inc. and Senior Vice President of Finance for Freeport-McMoRan Copper & Gold Inc. In 1998, he was named Executive Vice President, Chief Financial Officer and Director of McMoRan Exploration Co. and president and chief operating officer of Freeport-McMoRan Sulphur. Mr. Wohleber joined Kerr-McGee in December 1999 in his current position.

Sector: Oil & Gas Drilling & Exploration

TWST: Would you provide our readers with an overview of Kerr-McGee Corporation?

Mr. Wohleber: Kerr-McGee began operations more than 70 years ago and today has approximately $7.2 billion of assets focused on oil and gas exploration and production and the production and marketing of titanium dioxide pigment. In 1997, the company embarked on a significant transformation, announcing that its long-term strategy would focus on two core businesses — oil and gas exploration and production and titanium dioxide pigment. After completing divestitures of non-core businesses, a merger with Oryx Energy, and several major acquisitions, Kerr-McGee has become one of the largest US independent exploration and production companies, with approximately 80% of the company’s assets associated with oil and gas. The other core business of the company is in the inorganic chemical industry, unlike other oil and gas companies that produce petrochemicals. Kerr-McGee is the third-largest producer and marketer of titanium dioxide pigment in the world. This inorganic chemical is an opacifier used in coatings, plastics and many quality of life products. It is a niche business that provides steady earnings and cash flow and complements our oil and gas business.

TWST: Where does Kerr-McGee do most of its oil and gas exploration?

Mr. Wohleber: Our activities span six continents but are primarily focused in the United Kingdom sector of the North Sea and the Gulf of Mexico, as well as onshore in the US and selected international regions that offer proven high-potential exploration plays. The North Sea and United States operations represent approximately 80% of the company’s reserves, which total more than one billion barrels of oil equivalent and have a reserve life of more than nine years. These two areas produce about 90% of the revenue for our oil and gas business. We also have production in Ecuador, Kazakhstan, Indonesia and China. We recently announced three discoveries in the deep water gulf, a discovery in the North Sea and two discoveries in Bohai Bay, China. We will continue to focus on opportunities in our core areas, as we expand our international portfolio and explore deep water plays worldwide, including Gabon, Brazil, Australia and the Scotia Shelf.

TWST: Do you sell titanium dioxide pigment (TiO2) to paint and plastic manufacturers?

Mr. Wohleber: Yes, we sell TiO2 to customers around the world in more than 80 countries. We are a global producer, with operations in the United States, Germany, Belgium, the Netherlands and Australia, allowing us to serve the world’s three major market segments — North America, Europe and Southeast Asia. This is a very unique business, one in which we have a distinct technological advantage because we are one of only four companies that own proprietary chloride technology for producing titanium dioxide pigment. In addition, we have the capability to produce pigment using sulfate technology. About 70% of our pigment is produced using the chloride technology and 30% using the sulfate process. In addition to our technological advantage, we are recognized as one of the low-cost producers of this product.

TWST: What do you see as the most significant trends or developments within your sector over the next couple of years?

Mr. Wohleber: Discovering new oil and gas reserves is going to be critical to the success of oil and gas companies, since there will be a continued demand for energy. There’s a shortage, obviously, of these commodities in the current environment. Exploration and production companies need to be financially strong to be able to support the capital required to find and develop reserves and produce the products. Kerr-McGee has an attractive acreage position and a proven record of finding and developing fields at reasonable costs. Kerr-McGee has maintained and developed its lease-hold position in high-potential trends worldwide. We have one of the largest inventories among the independent companies — more than 52 million gross undeveloped and developed acres worldwide — including the largest deepwater acreage position in the Gulf of Mexico. In fact, globally, we have a five-year inventory of drillable prospects that provides Kerr-McGee the opportunity to drill from 25 to 30 exploratory wells per year. We believe that this level of activity provides Kerr-McGee the exposure to potential discoveries that will replace our production and grow our reserve base. We believe this large inventory, with approximately 50% in deep water, is relatively unique among our peers. Deep water is a hallmark and an area of great success for Kerr-McGee. We have had three significant discoveries in the last 12 months in the deepwater areas. Our strategy is to be in a position where we can continually high-grade our prospects in high-quality exploration prospects, along meaningful trends.

TWST: Would you consider your lease-hold position in the Gulf of Mexico to be one of your major competitive advantages?

Mr. Wohleber: Absolutely. We have over 500 blocks in the Gulf of Mexico, with more than 300 of these in deep water. Deep water, as I said, is a target area for us — these are areas in water depths greater than 1,000 feet, with reserve potential of 100 million to 200 million barrels. We will also drill in the ultra-deep water, from 5,000 to 10,000 feet, where the reserve potential is 150 million to 500 million barrels. Given our large inventory position and our plans to drill eight to 10 exploratory wells in the deepwater gulf a year, we believe Kerr-McGee has a significant advantage versus our peers.

TWST: Will deep water areas and ultra-deep water areas be a focus of your exploration program in the future?

Mr. Wohleber: Yes. Kerr-McGee’s goal is to grow our annual production capacity by 3% to 4% per year and add to our reserve base in order to maintain that production, and we believe deep water plays worldwide hold great potential for our company. In deep water exploration and development, we feel Kerr-McGee has a technological advantage. Kerr-McGee was the first company to drill a commercial well out of sight of land in the Gulf of Mexico in 1947. We have continued to maintain a technological edge. Kerr-McGee was the first to install a purpose-built floating production, storage and offloading facility in the North Sea. We installed the first articulated compliant tower in the deep waters of the gulf. We were also the first company to use the spar technology in the Gulf of Mexico at our Neptune field. We are in the process of developing two additional production facilities that will use similar spar technology at our deep water Nansen and Boomvang fields in the gulf. This technology allows us to save significant development cost, which enables us to bring on these reserves and production at a lower cost and quicker.

TWST: Are spar technology and FPSO relatively recent developments for Kerr-McGee?

Mr. Wohleber: Not only recent for Kerr-McGee, but as I said, we were the first to use these technologies, so they are recent technologies for the industry. The Neptune spar started production in 1997. Our North Sea FPSO at the Gryphon field began production in 1993. These technologies and others that we have experience with will not only be valuable to us in our two main core areas, the Gulf of Mexico and North Sea, but also as we focus on global deepwater opportunities. As I said earlier, our deep water inventory includes acreage around the world. In Brazil and Gabon, we have lease-hold positions on trend with some significant discoveries, and, with our deep water experience, we understand these play concepts. The geology is similar to geology that we find in the deep water areas of the gulf. Kerr-McGee will continue to maintain and grow its portfolio of high-quality prospects along high-potential trends, that can add meaningful value and offers the potential to build our reserve base. Over the past year, we have announced six discoveries with reserves ranging from 70 million to 250 million barrels each. Kerr-McGee’s interests in these discoveries range from 30% to 100%. With reserves of one billion barrels of oil equivalent, discoveries such as these, that are 10% to 15% of our reserve base are the type of discoveries we want to target.

TWST: Would you say that there are any major risks involved with oil and gas exploration in foreign countries?

Mr. Wohleber: You mentioned the word risks; clearly drilling for oil and gas is not a perfect science. Even with the best technology and experienced staff, there are risks associated with our business. However, we believe, with Kerr-McGee’s 70 years of experience in oil and gas exploration and production, our first-class employees and technological advantages — combined with our strong balance sheet and financial position — we will continue to be successful for years to come. Given our successes over the past year, we are on the right track to a profitable future. Regarding the risks of doing business around the world, we have developed excellent relationships in the countries where we are doing business, such as China, and do not see a high-risk situation where we operate. In Brazil, we have developed a good relationship with Petrobras, which is the state-owned oil company. We have worked with them in the Gulf of Mexico, and they in turn have given us the chance to look at opportunities in Brazil. Although there are risks in the oil and gas industry, we believe they are manageable and ones that Kerr-McGee can turn into opportunities.

TWST: Is it essential to develop a good working relationship with the governments and the government-owned oil companies in those countries?

Mr. Wohleber: Yes, absolutely. I think when you go into any foreign country, you’ve got to understand the people and develop good relationships. I think once you do that, you really should not have any problems. Kerr-McGee has been able to develop a good working relationship with the governments in which we operate.

TWST: What are Kerr-McGee’s policies regarding environmental responsibility?

Mr. Wohleber: Environmental stewardship is one of Kerr-McGee’s top priorities. We are involved in natural resources — oil, gas and inorganic chemicals — and Kerr-McGee has a long history of protecting the environment. The company’s goal is to set the standard in our industries for environmental and safety programs. We have been recognized globally for our environmental and safety accomplishments. We will continue to maintain the highest environmental and safety standards at all of our operations worldwide.

TWST: What are the opportunities for improvement for Kerr-McGee?

Mr. Wohleber: I think the transition we have gone through has put us in a good position to compete in our two core businesses, oil and gas exploration and production and the production and marketing of titanium dioxide pigment. We have been able to increase our size and scope in both industries. We are one of the largest independent oil and gas companies and with about 70% of our reserves in oil and 30% in gas, we have meaningful positions in both commodities. During our transition, we decided to retain our chemical business because of our technological, low-cost and quality advantages. We have moved from a company that was number eight or nine in this industry to the third largest in the world, with a 16% global market share. We believe our company has accomplished a great deal over the past three years. We have the wind behind our sails now and are moving forward very nicely. Having said that, I believe all companies should consistently review their operations to ensure they are maximizing the value for their shareholders. Kerr-McGee is no exception. In February 1999, we completed a merger with Oryx Energy that was accounted for on a pooling-of-interests basis. Through this transaction, we believe we created substantial value for our shareholders. However, with any transaction of this nature, there will be some assets that do not offer the desired growth potential for the company. Under the pooling regulations, we are not permitted to do any significant sale of assets for a two-year period. That two-year period will expire in February of next year, and we will review the assets in our portfolio. We will have greater flexibility to divest of assets that do not complement our strategy of focusing on two core businesses.

TWST: Do you see further mergers and acquisitions in addition to the acquisition of Oryx in the next couple of years?

Mr. Wohleber: We are a company that certainly considers acquisitions and opportunities that meet our matrix. We will look at opportunities to acquire assets that support our core businesses, provide good return on capital, and are accretive to our earnings. The Oryx transaction was accretive, and it has turned out to be an excellent transaction for the company. The stock of our company has gone up over 100% since the acquisition. The increase in oil and gas prices has certainly played a role in that, but the fact is that we were in a position to take advantage of the merger opportunity during a downtime in the market. In January, we completed the $550 million acquisition of Repsol’s North Sea assets, adding nearly 100 million barrels of oil in our core North Sea area. We paid less than $4.25 per barrel of oil equivalent on a proved and probable basis. Again, this was a good quality acquisition — it was low-cost, accretive to the company, and provided positive return on capital. Over the past two years, we have completed two significant acquisitions in our chemical business. In 1998, we acquired 80% of Bayer’s titanium dioxide plants in Germany and Belgium. This year, we acquired two facilities from Kemira, one in Savannah, Georgia, and the other in the Netherlands, which have increased the size and opportunities of our chemical business. We will do selective acquisitions again, if they fit our matrix and make sense. We don’t want to just increase the size of our company for growth’s sake. We feel, as I said, that in both of these businesses we have reached our critical mass, the ability to compete, to leverage, and to have the adequate capital and cash flow to do what we want to do in our oil and gas and chemical businesses. So acquisitions play a role here, but they don’t drive Kerr-McGee.

TWST: Do you have any thoughts or comments on your stock price?

Mr. Wohleber: We feel that our stock price has recovered nicely from the weak points when oil prices were down to $12 a barrel. We are pleased with the price increase since our acquisition of Oryx, but we are still behind our peer group. We trade at the low end of the price multiples for both cash flow and earnings compared to other E&P stocks. We have a dividend yield of 3%, which meets all of the tests of a classic value stock. I think it is an excellent time for shareholders to come into our company because of our transformation, proven track record over the last year, especially on the oil and gas side, and our ability to bring on acquisitions that add significant value. Kerr-McGee’s stock price, we believe, is undervalued. We recognize that a lot of funds are flowing into other growth stocks, technology stocks, telecommunications, etc. We will continue communicating with investors to let them know what Kerr-McGee is doing and the positive results of our transformation. Our prospects and opportunities are very bright, and we are optimistic about the future of our company. We believe that there is unrecognized value in our stock and we are working hard to get our story out.

TWST: Is there anything that I may have missed or overlooked that you would want to discuss or highlight before we conclude the interview?

Mr. Wohleber: I would just say in summary that we believe Kerr-McGee is well-positioned to take advantage of opportunities in both of our core businesses. We are generating significant cash flow at today’s prices. Our net-operating cash flow could be about $1.6 billion this year if you simply annualize our first six months’ results. We will have capital expenditures and dividends of about $1 billion this year, so we expect to generate $500 million to $700 million of free cash flow. We are using this to pay down our debt — debt that we used to fund acquisitions in the past two years. Our balance sheet is getting stronger every day, our cash flow is strong, and we are very excited about the prospects we have on the drilling side. We do not believe that many of our peer companies can say they have had six discoveries over the last 12 months. We are trying to beat that drum and let people know that Kerr-McGee has really got a lot going for it. We have a cost, quality or technological advantage in each of our core businesses. We have demonstrated our ability to add to them both internally and through selected acquisitions, and we are well-positioned to grow these businesses in the future.

TWST: Thank you. (JF)

ROBERT M. WOHLEBER
 Senior Vice President & CFO
 Kerr-McGee Corporation
 Kerr-McGee Center
 123 Robert S. Kerr Ave.
 Oklahoma City, OK  73125
 (405) 270-1313
 (405) 270-3609 - FAX
 www.kerr-mcgee.com

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