ICAHN PARTNERS LP
ICAHN PARTNERS MASTER FUND LP
HIGH RIVER LIMITED PARTNERSHIP
JANA PARTNERS LLC
March 10, 2005
VIA FEDERAL EXPRESS AND FACSIMILE
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Mr. Luke R. Corbett
Chairman and Chief Executive Officer
Kerr-McGee Corporation
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma 73102
Dear Mr. Corbett:
We are writing in response to the March 8th announcement by Kerr-McGee
Corporation ("KMG") regarding the board's decision to approve the sale of KMG's
chemicals business and the repurchase of $1 billion of shares. We are encouraged
that KMG agrees with our position with respect to the sale of its chemicals
business. However, the board did not address the substance of our proposal -
taking advantage of the significant arbitrage opportunity we outlined. We have
spoken with several of KMG's largest shareholders, and we found that each
believes that:
o KMG should not miss the opportunity to LOCK IN HIGH OIL PRICES;
o KMG should STOP WASTING MONEY ON HIGH-RISK EXPLORATION; and
o KMG should RETURN MORE MONEY TO SHAREHOLDERS IMMEDIATELY.
We continue to believe that if KMG were to consummate the VPP transaction
described in our March 3rd letter, it would unlock significant shareholder
value. Furthermore, contrary to KMG's mischaracterization of our proposal, we
are not seeking "quick cash." As such, given current market conditions, if KMG
were to consummate the VPP transaction we proposed and commence a tender offer
(as opposed to an uncertain and open-ended buy back such as that approved by the
board) to repurchase its shares at $90 per share, WE WOULD COMMIT NOT TO SELL
OUR SHARES IN SUCH AN OFFER.
KMG has expressed concern that returning capital to its shareholders would
limit its ability to conduct exploratory drilling activities. That is exactly
our point - we believe KMG can spend its money much more judiciously than to
continue spending money on high-risk exploration. Extrapolating from your public
filings, we see that KMG's 3-year historic average exploration costs through the
drill bit (including revisions) are approximately $40 per boe (excluding
Westport and other acquisitions). At its current share price (and assuming a
value for the chemicals business within management's estimated range), KMG now
has the opportunity to repurchase its own shares and thereby repurchase its own
reserves at between $11 and $12 per boe.
We believe that KMG has destroyed shareholder value through its
exploratory activities over the last three years. We do not seem to be alone in
our opinion. In addition to the several large KMG shareholders with whom we have
spoken, Goldman Sachs, in a research report released on March 7th, stated as
follows:
"Our concern with Kerr-McGee's current E&P business model is
that its strategy of trying to offset the steep declines inherent in
its mature, short-lived core E&P asset base does not appear to be a
good fit with a high-risk deepwater exploration strategy. If allowed
to continue, WE SEE A HIGH LIKELIHOOD THAT KERR-MCGEE COULD SQUANDER
THE BENEFITS OF HIGH OIL PRICES. . . . We believe that the most
attractive solution would be for Kerr-McGee to "produce out" its E&P
reserves. Given our view that Kerr-McGee's E&P business is capable
of generating substantial cash flow, THE KEY TO UNLOCKING THE VALUE
WOULD BE TO SPEND MINIMAL AMOUNTS OF CAPEX, ESSENTIALLY DEPLETE OUT
ITS RESERVES OVER TIME, AND RETURN REMAINING CASH FLOWS BACK TO THE
SHAREHOLDERS. We believe Kerr-McGee could choose to take advantage
of currently high commodity forward prices to lock in value for its
reserves. "1 (emphasis added)
KMG's board should be focused on maximizing value for its shareholders,
the constituency to whom the board owes its fiduciary duties. We are dismayed
that KMG has chosen to make dismissive public statements instead of taking
seriously our proposal for enhancing shareholder value. To resort to meaningless
rhetoric is wasteful, just as, unfortunately for shareholders, we believe much
of KMG's exploratory drilling activity has been. Although we believe that a
proxy fight would be a debilitating exercise for all involved, if KMG continues
to ignore what we believe is the obvious way to unlock shareholder value, we
will press forward to seek to elect the undersigned to the board at the upcoming
annual meeting of shareholders. Further, if oil prices were to decline and KMG
were to miss the significant and unique arbitrage opportunity that currently
exists, management and the board will be responsible for having destroyed
shareholder value.
Very truly yours,
CARL C. ICAHN
BARRY ROSENSTEIN
SECURITY HOLDERS ARE ADVISED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS
RELATED TO SOLICITATION OF PROXIES BY MESSRS. CARL ICAHN AND BARRY ROSENSTEIN
AND THEIR RESPECTIVE AFFILIATES FROM THE STOCKHOLDERS OF KERR-MCGEE CORPORATION
FOR USE AT ITS ANNUAL MEETING WHEN AND IF THEY BECOME AVAILABLE, BECAUSE THEY
WILL CONTAIN IMPORTANT INFORMATION, INCLUDING INFORMATION RELATING TO THE
PARTICIPANTS IN ANY SUCH PROXY SOLICITATION. WHEN AND IF COMPLETED, THE PROXY
STATEMENT AND SUCH OTHER DOCUMENTS WILL BE AVAILABLE AT NO CHARGE AT THE
SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV, AND A
DEFINITIVE PROXY STATEMENT AND A FORM OF PROXY WILL BE MAILED TO STOCKHOLDERS OF
KERR-MCGEE CORPORATION.
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1 We have not received, nor have we sought, permission from Goldman Sachs to
publish excerpts from this research report.