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Kerr-Mcgee
Can it possibly see... stage two?

by Jeff Fischer (TMFJeff@aol.com)

BALTIMORE, MD (Feb. 11, 1999) -- A soaring stock market couldn't stop shares of Kerr-Mcgee (NYSE: KMG), our fifth oil contestant, from striking a new 52-week low today. This new low comes fresh on the heels of 13 years of underperformance. In fact, the stock is now at the same price that it was in 1986. To view this saga in graph form, visit the 13-year chart of Kerr-Mcgee (the blue line in the graph represents the S&P 500).

Your blood is pumping now, isn't it?

Sure it is.

We must give this sleeper a look anyway, because you never know what you might uncover when you look very closely at something that, at first glance, appears unattractive. You could uncover a tiny diamond. Or, after doing some homework, you could find something very, very unattractive. (By the way, when considering the chart above, one needs to remember Kerr's dividend return, which is currently 5.6%.)

As we turn our high-powered Fool-o-scope on Kerr-Mcgee, let's review our list of contestants:

Apache
(NYSE: APA)
Baker Hughes (NYSE: BHI)
BP Amoco (NYSE: BPA)
Exxon Mobil (NYSE: XON, MOB)
Kerr-McGee (NYSE: KMG)
Pennzoil-Quaker State (NYSE: PZL)
Phillips and Ultramar Diamond Shamrock (NYSE: P, UDS)
Sunoco (NYSE: SUN)
Texaco (NYSE:TX)
USX/Marathon and Ashland (NYSE: MRO, ASH)

The first two companies above were axed due to low ROCE, as well as for other reasons. The next two giants were patted on the head with a giant Jester-gloved hand: they move successfully into round two. The fate of Kerr-Mcgee will begin to be determined... now!

Description: Public since 1935, Kerr-McGee explores and produces oil and natural gas in China, the Gulf of Mexico, Indonesia, the North Sea, Thailand, and Yemen. The company also produces chemicals for industrial use, including titanium dioxide (a white pigment used in paint, plastics, paper and Tammy Faye Baker), in which it controls 10% of the world market.

In 1998, Kerr-McGee pitched its coal business into the fire, just as it has been doing with any business that doesn't fit its long-term strategy. For the past 10 years the company has been selling non-core operations, including coal mining, oil refining and marketing, and nuclear fuel manufacturing. Meanwhile, on the other end of the scale Kerr is adding weight.

In the midst of selling operations last year, Kerr also announced its planned acquisition of Oryx Energy (NYSE: ORX), a move that will establish Kerr-McGee as one of the largest nonintegrated upstream oil and gas companies in North America. The new company will possess one billion barrels of total worldwide oil reserves. (Oryx, by the way, also flirted with a new 52-week low today. To view a real tear-jerker, see its 10-year chart. An investor would have performed better by sewing her money into her mattress for 10 years. Literally.)

For the past 12 months, Kerr-Mcgee's revenue was $1.4 billion (down 18%) and net income from continuing operations was $50 million (down 70%). Net margins landed at 3.6%, down from 11% each of the prior two years. Chemicals constitute a majority of the company's sales, with oil and gas in a close second.

After combining Kerr with Oryx, sales should top $2 billion and oil and gas will leap to became the company's largest revenue winner by nearly 2 to 1 -- and that ratio might continue to spread. Last year Kerr-Mcgee formed an exploration alliance with BP Amoco. Kerr plans to increase its oil and gas exploration efforts -- arguably a bold move in today's environment.

Financials: They key elements that we focus on for this overview are: 1) How does the market value the company? 2) How profitable are its chosen operations? 3) How does the company finance its operations? 4) And what does management do with the money that it earns?

When we begin running these numbers, imagine a bubbling black cauldron near your feet under your desk, because that's where we're going to get some of these numbers. We're going to pull them from a concoction of our own making. Why? Given the acquisition of Oryx, we need to estimate some of our figures. They will be very close estimates. And they will be run tomorrow. Tomorrow we'll finish Kerr-Mcgee and Oryx and then we'll wrap up the week with the usual -- a Touchstone Friday summary and housekeeping.

Meanwhile...

Can Kerr-Mcgee make it to round two? The better question is: should the company move to round two, and it's a question that you might already have an answer to, if you're doing this work at home. Kerr-Mcgee's 5.6% dividend yield could prove a bountiful award in the future if the stock can appreciate, too.

To discuss this column, Kerr-Mcgee, and our oily topic in general, visit the Drip Companies message board. We'll see you there. (That is, if you go there.)

Fool on!

[To discuss these columns, please visit the Drip Companies message board on the Web.]

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