W&T Offshore Inc., Houston, (NYSE: WTI) plans to acquire substantially all of Oklahoma City-based Kerr-McGee Corp.'s (NYSE: KMG) Gulf of Mexico conventional shelf properties for $1.3 billion in cash. The transaction is expected to close in the second quarter. The properties are on the Gulf Shelf in federal and state waters. W&T estimates it will gain proved reserves of approximately 362 billion cu. ft. of gas equivalent (74% gas; 72% proved developed). Probable and possible reserves are estimated to total 650 billion equivalent. Before hurricanes Katrina and Rita, production was some 230 million cu. ft. equivalent per day. Currently, production is approximately 150 million equivalent per day. The package includes interests in approximately 100 fields on 249 offshore blocks, including 83 undeveloped blocks, across the western, central and eastern Gulf of Mexico, primarily in water depths of less than 1,000 feet. W&T plans to operate 36 of the producing fields, owning 66% of net production and 60% of net reserves. Upon closing, W&T is expected to be one of the top three gross acreage-holders in the Gulf, with approximately 2.3 million gross acres. "As we told the market when we went public last year, one of our objectives was to put the company in a position to do larger transactions, and today we have demonstrated that we can do a large transaction," says Tracy W. Krohn, W&T chairman and chief executive. "We are very excited...The spread of properties across the Gulf of Mexico and upside potential fit in nicely with our core expertise. Our team has identified more than 95 exploration prospects related to these properties and our review is still in the early stages of evaluation." W&T expects to finance this transaction with bank debt and cash on hand. John White, an E&P analyst with Natexis Bleichroeder, says, "W&T has announced the largest transaction in its history...To put the transaction into perspective, the day prior to the announcement...W&T's market capitalization was $2.1 billion." His new 2006 earnings-per-share estimate for W&T is now $3.81, up from $3.53, and his 2006 forecast for cash flow per share is now $9.48 from $7.62. Kerr-McGee expects after-tax cash proceeds of approximately $925 million, which it plans to use for general corporate purposes, including buying back stock and reducing debt. "The sale of the shelf assets is the final step in our announced strategy to divest of lower-growth, shorter-lived properties and focus on higher-impact opportunities," says Dave Hager, Kerr-McGee chief operating officer. "Our remaining oil and natural gas portfolio is weighted toward longer-life, less capital-intensive properties where we have a growing inventory of low-risk development projects. Upon closing, Kerr-McGee's portfolio will include interests in gas plays in the Rockies, deepwater Gulf infrastructure, and high-potential exploratory prospects, he adds. John P. Herrlin, an E&P analyst with Merrill Lynch, reports the deal represents a price of $3.70 per thousand cu. ft. of proven reserves and $34,941 per flowing bbl. based on pre-hurricane production, or $53,576 per flowing bbl. based on post-hurricane production. "Although the deal may not be perceived as favorable as yesterday's Cal Dive/Remington transaction for GOM shelf properties-$5.05 per thousand cu. ft. equivalent proven and $103,700 per flowing bbl.-we believe the sale represents a decent price, especially in the context of the lower reserves-to-production ratios typically for shelf properties and the 2005 average transaction multiples of $2.59 per proven reserve," Herrlin says. "Moreover, after-tax proceeds of $925 million will go a long way toward funding [Kerr-McGee's] recently announced $1-billion-share buyback."

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