Kerr Mcgee Corporation Business Information, Profile, and History

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History of Kerr Mc Gee Corporation

From its beginning as a small drilling company during the Great Depression, Kerr-McGee Corporation has grown to become one of the country's more successful medium-sized energy and chemical companies. Kerr-McGee's operations focus on three areas: oil and natural gas production, production and marketing of inorganic industrial chemicals, and coal mining and marketing.

Company Origins in Oil Drilling Contracting

The Great Depression was just around the corner when Anderson & Kerr Drilling Company was founded near Oklahoma City, Oklahoma, in July 1929. The company's assets amounted to three boilers and two steam rigs, and the company was one of many small oil-related firms vying for drilling contracts in a city that was booming. The local newspaper, the Daily Oklahoman, in October 1929, mentioned the October stock market crash briefly under the headline, "Business Men are Unnecessarily Troubled by Crash of Stocks." This town wasn't feeling the depression--there was oil here and plenty of it.

While James L. Anderson handled the equipment end, Robert S. Kerr sought drilling contracts, operating from a hotel room and going home only on weekends. Anderson was said to have "a nose for oil" and the ability to drill more economically than others, and Kerr was a talented capital raiser. Financing the young company was a constant challenge. It faced rising debt, strong competition, and the need to keep busy, when Kerr, still relatively unknown, met with Frank Phillips, founder of Phillips Petroleum Company. Kerr wanted to drill some of Phillips's leases in the area, and he eventually won a contract. As Kerr's longtime associate, Rex Hawks, told John Samuel Ezell, in Innovations in Energy: The Story of Kerr-McGee, "As Kerr was about to leave, he turned and said, "By the way, Mr. Phillips, there's one little item I was about to forget.' When asked what that was Kerr replied that he would have to borrow $20,000 to sink the well. Phillips then "cussed a little while and exclaimed, 'You spend all this time wanting the job and haven't the money to drill it with.' Kerr 'hemmed and hawed,' but in the end Phillips called [his office] ... and said, 'Let this damn man have $20,000 to drill this lease with.'" Kerr's bold drive and inexhaustible belief in his company kept the company moving forward through times when the speculative nature of the business and the tough competition would have folded a less determined company.

In 1932 the company opened an office for its staff of 11 in Oklahoma City and was incorporated as A&K Petroleum Company. In 1935 its first public offering of 120,000 shares of common stock was made available at $5.00 per share. In 1936 when the company was negotiating a second stock offering, Anderson decided that the company was growing to a size he no longer felt comfortable managing, and he opted to sell his interest in the A&K.

The year 1937 was a critical time. The economy was in recession, oil prices were decreasing, and there was no money to finance drilling. The company's directors recognized a need for leadership at the executive level to move the company's exploration and production into the black. They were willing to bank a large part of their holdings on two men from Phillips Petroleum, offering them salaries that dwarfed their own by comparison. Robert Lynn became executive vice-president of the company which, in these formative years, restructured and renamed its operations several times. He played a prominent role in the company, then called Kerlyn Oil Company, for five years. Dean A. McGee, the second man from Phillips, was to direct the company on a new course almost immediately. His presence was felt until his death in 1989.

McGee, who had been Phillips's chief geologist, relied heavily on credit, faith, and hard labor. Within a year the company made its first major oil discovery--the Magnolia field in Columbia County, Arkansas. The revenues from the Magnolia discovery fueled further expansion.

Demand for oil was rising dramatically as a result of wartime needs, however the company struggled under debt, taxes, government restrictions, a shortage of capital and manpower, as well as continuing low prices for its products. Kerr and his workers continued making deals, leveraging assets, and using their talents to keep operating. Kerlyn was chronically short of capital in its early years and often had to stop drilling until money could be raised to continue. Much of its capital came from small contributions of $1,000 to $3,000. In 1943 a deal was struck in which Phillips Petroleum put up 75 percent of the cost for half a share in any Kerlyn venture in which it participated. That year, the company's exploratory drilling, or wildcatting, led to discovery of oil to the northwest of Oklahoma City, setting off the west Edmonton boom. The U.S. Bureau of Mines categorized this find as the year's "greatest addition of new oil."

In 1942, confident that the company was in capable hands and certain that his primary role was to be played out in public office, Bob Kerr made a long-desired move into politics. That year he was elected governor of Oklahoma, and throughout successive political roles, including U.S. senator, Kerr remained an active member of the company's board until his death in 1963.

When Kerr made his move into politics Robert Lynn decided to leave the company. From the time he joined the firm, McGee had acted as a key figure in the company. He was the logical choice to move into Lynn's leadership role, and in 1946 the company changed its name to Kerr-McGee Oil Industries, Inc. McGee became executive vice-president in 1942 and was made president of Kerr-McGee in 1957.

Expansion into Downstream Operations in 1945

Exploration activities continued to increase as Kerr-McGee expanded its drilling operations to the Gulf of Mexico. Seeking to capitalize on the increased need for refined oil products, the company also moved into "downstream" operations with the purchase of its first refinery in 1945. Downstream activities generally include transportation, refining, storage, marketing, distribution, and slop disposal--in short, all activities that follow the upstream activities of exploration and production.

In the postwar 1940s the energy needs of the United States were rising dramatically. The country was using as much oil in one year as did the entire world in 1938. Kerr-McGee responded to this trend with many firsts in oil exploration and production, including in 1947, the completion of the world's first commercial oil well that was out of sight and safety of land, 11 miles off Louisiana's shore. This marked the beginning of the nation's offshore drilling industry. The company added natural gas processing with the purchase of three plants in Oklahoma in 1951, and a fourth in Pampa, Texas, in 1952.

Diversification in the 1950s-60s

As the cold war escalated, the government's need for uranium to fuel the atomic bomb program also grew. Kerr-McGee was the first oil company to enter the uranium industry when it acquired mining properties on a Navaho reservation in Arizona in 1952. Mills were needed to process the materials, and Kerr-McGee soon moved into this area, completing its first mill in the fall of 1954. Soon thereafter the company began construction of the country's largest uranium-processing mill, which was brought onstream in 1958.

In 1955 the company moved into major retailing with its purchase of the Deep Rock Oil Corporation. Building upon an established base of service stations in the midwestern states, Kerr-McGee formed a subsidiary, Deep Rock Oil Company, to continue this aspect of expansion. During this period, Kerr-McGee also expanded its refining capabilities, with the purchase of Cato Oil and Grease Company, and Triangle Refineries, a major wholesaler of petroleum products. Transworld Drilling Company Ltd. was formed to handle Kerr-McGee's domestic and overseas contract drilling in 1958.

The company remained strong in a very competitive industry by making use of innovative methods in its oil production. In 1961 the company was making use of drilling devices that eventually were used to complete the largest vertical shaft successfully drilled by rotary methods in North America at the time. In 1962 the company commissioned the world's largest submersible offshore drilling unit, and in 1963 it built a new research center in Oklahoma City.

In its drive to become a total energy company, Kerr-McGee continued to push into other energy-related areas, entering the forestry business in 1963 with its purchase of two suppliers of railroad cross-ties, and acquiring several fertilizer-marketing companies in the early 1960s, which in 1965 were consolidated into Kerr-McGee Chemical Corporation.

In 1965 Kerr-McGee Oil Industries, Inc. became Kerr-McGee Corporation, a name that better represented the company's diversified holdings. Growth and expansion continued. Although Kerr-McGee had begun doing business in industrial chemicals, its 1967 merger with American Potash and Chemical Corporation marked the company's major entry into the market. This gave the company control of 13,000 acres of a dry lake bed in Searles Valley, California, from which it began extracting brine to produce soda ash, boron products, sodium sulfate, and potash. Two industrial chemical plants were also included in the acquisition, making Kerr-McGee a major processor of a number of industrial chemicals, including the company's most profitable chemical product, titanium dioxide, a white pigment used mainly in the manufacture of paint and plastics.

In 1970 Kerr-McGee was a major player in six of the eight parts of the nuclear fuel cycle, including exploration, mining, milling, conversion of uranium oxide into uranium hexafluoride at a new Sequoya facility in eastern Oklahoma, pelletizing of these materials, and fabrication of fuel elements at its Cimarron Facility in Oklahoma.

At this time the oil industry was undergoing major change. The Organization of Petroleum Exporting Countries's oil embargo in 1973 sent the price of gasoline and energy soaring, and the U.S. public was forced to begin conserving. It was a time of opportunity for energy companies; revenues were increasing and the government was bending over backwards to encourage exploration and production by deregulating and offering hefty tax credits. Despite these favorable conditions, however, Kerr-McGee's performance slipped in a number of areas, as the company lost its lead in offshore drilling and suffered from a lack of managerial direction. Chairman since 1963 and CEO since 1967, Dean McGee instigated an organizational restructuring that, among other changes, established two new subsidiaries, Kerr-McGee Coal Corporation led by Frank McPherson, and Kerr-McGee Nuclear Corporation led by R.T. Zitting. The restructuring was meant to give the company the strength needed to compete in the increasingly complex, turbulent world market.

Kerr-McGee's oil exploration and production operations grew substantially through the mid-1970s. In 1974 the company increased its refining capabilities significantly with the acquisition of the Southwestern Refining Company, Inc., in Corpus Christi, Texas. In 1976 the company expanded its production activities into the Arabian Gulf and the North Sea, and participated in the discovery of the Beatrice oil field, off Scotland's shore.

Coal operations began proving lucrative when the first commercial deliveries of steam coal--coal used to produce steam--were made from surface mining operations in Wyoming in 1978. In the same year, soda ash production began at the company's Argus, California, facility, significantly increasing the company's industrial chemical output.

The Silkwood Case and Other Controversies in the 1970s

The concerns of environmentalists began to loom large in the 1970s, and litigation took up more of the company's time and money. Although there had been previous charges made against Kerr-McGee involving worker safety and environmental contamination, the highly publicized case of Karen Silkwood, which began in 1974, highlighted the hazardous nature of nuclear energy and raised important questions regarding corporate accountability. The Oil, Chemical and Atomic Workers Union alleged that Kerr-McGee's Cimarron River plutonium plant near Oklahoma City, was manufacturing faulty fuel rods, falsifying product inspection records, and, in certain cases, risking the safety of its employees.

Silkwood, a 28 year-old lab technician at Cimarron and one of the union's most active members, was involved in substantiating the charges before the Atomic Energy Commission. Silkwood had suffered radiation exposure in a series of unexplained incidents and had then been killed in an automobile crash while on her way to meet with an Atomic Energy Commission official and a New York Times reporter. Although never confirmed, her untimely death led to speculation of foul play and prompted a federal investigation into safety and security at the plant. Following additional problems with worker contamination and a National Public Radio report alleging the misplacement of a significant quantity of plutonium, the company finally shut down the Cimarron plant. In 1986 Karen Silkwood's family settled an $11.5 million plutonium-contamination lawsuit against Kerr-McGee for $1.38 million with Kerr-McGee admitting no liability in the case.

Creating further negative publicity for the embattled company, Kerr-McGee's nuclear-fuel processing plant in Gore, Oklahoma, was cited by the Nuclear Regulatory Commission for 15 health and safety infractions between 1978 and 1986. In 1986 an overfilled cylinder of uranium hexafluoride exploded, releasing a toxic cloud of radioactive hydrofluoric acid. One employee died, and 110 people were hospitalized. This fueled public outcry and set in motion a number of legal proceedings. The controversy surrounding the incident was further exacerbated when the Nuclear Regulatory Commission accused Kerr-McGee of giving a false statement during the commission's investigation.

Kerr-McGee's uranium mining, milling, and processing operations accounted for 2 percent of its revenues, while costing $72 million in losses between 1982 and 1986. Aside from the environmental problems, demand had fallen off significantly. Kerr-McGee's leadership was still confident that the slump in demand would reverse itself and that its substantial uranium reserves would pay off in the 1990s.

Aside from the problems associated with uranium production, the company's oil operations were not expanding satisfactorily. Kerr-McGee's failure to pay scientists competitive salaries through the tumultuous, highly competitive 1970s proved especially harmful to the company's bread-and-butter oil exploration and production. A market-research firm estimated that between 1980 and 1984 Kerr-McGee's oil reserves fell 21 percent and gas reserves fell 10 percent. In 1986 an estimate by Morgan Stanley & Company put Kerr-McGee's average cost for finding a barrel of oil at $13.03; the average cost for 12 competitors was $7.35 per barrel.

After years of expanding to fulfill its goal of becoming "the total energy company," Kerr-McGee was involved in a wide variety of resource enterprises, including uranium and plutonium mining, milling, and processing; chemicals and coal; contract drilling; refining; gasoline retailing; and timber. Many analysts felt that Kerr-McGee suffered from too much diversification. Earnings dropped from $211 million in 1981 to $118 million in 1983. In 1983 Dean McGee stepped aside as chairman and Frank A. McPherson was named his successor.

Era of Restructuring: 1983-97

Soon after taking over, McPherson embarked on a long-term slimming down of Kerr-McGee's operations. When the fertilizer market began to suffer in the 1980s, McPherson sold off the company's potash operations to Vertac Chemical in 1985 and divested its phosphate mines in the following year. In 1988 McPherson finally decided to sell the company's troublesome uranium interests, which were divested by the end of 1989. In late 1990 and early 1991, Kerr-McGee severed its remaining tie with the company's roots by selling off its contract drilling operations as well as divesting its soda products operations; together, the contract drilling and soda products sales brought in $340 million after taxes.

By the end of 1991 Kerr-McGee was focused exclusively on oil and natural gas, chemicals, and coal, but McPherson was not finished cutting. The company's petroleum refining and marketing unit was losing money, leading to the mid-1992 decision to explore the sale, merger, or restructuring of this troubled operation. After failing in an effort to sell the unit as a package--which included four refineries, several terminals, a 1,300-mile pipeline, and 51 service stations in Oklahoma, Kansas, and Texas--Kerr-McGee succeeded in divesting them piecemeal in 1995. Of the approximately $400 million brought in through the sales, about $300 million was used to buy back company stock, with the remainder going to pay down debt, which had dropped to $632 million in 1995 compared to $886 million in 1991.

Meanwhile, Kerr-McGee was working to beef up its remaining core businesses. In 1991 production started at titanium dioxide plants in Western Australia and Saudi Arabia, helping to establish the company as a global producer and marketer of pigment. In the area of oil and gas exploration, three major North Sea fields came onstream in 1993, with one of them setting a record for fast-track development through the use of the first permanently moored floating production, storage, and offloading facility in the North Sea. Kerr-McGee was also achieving success through exploration ventures in Indonesia (onshore), the Gulf of Mexico (the deepwater Pompano project), the South China Sea (through a partnership with Amoco Corp.), and China's Bohai Bay. Overall, the company's proven crude-oil reserves in 1996 stood at 170 million barrels, 45 percent more than in 1989.

At the same time that the company was drilling around the globe, however, Kerr-McGee was pulling back from its North American onshore oil and natural gas exploration and production operations, in what the company called "part of the effort to further focus our operations." After divesting some of its North American onshore fields in late 1995 and 1996, Kerr-McGee merged what remained into Devon Energy Corporation in exchange for a 31 percent stake in Devon.

As a result of the McPherson-led cuts, Kerr-McGee was a much smaller company ($1.93 billion in 1996 sales, compared to $3.68 billion in 1990 and $3.15 billion in 1985) but also a much more profitable one (net income was a record $220 million in 1996, compared to $150 million in 1990 and $137 million in 1985). The restructuring behind it--and with the nightmarish memories of its ill-fated venture into the nuclear industry finally beginning to recede--the company could now focus on growing its three core businesses. It did so, however, under new leadership. McPherson retired in early 1997, and Luke R. Corbett, who had been named president and chief operating officer in 1995, became the company's fourth chairman and CEO.

Into the New Millennium

In the late 1990s Kerr-McGee continued its recovery from its dip into nuclear power production by refocusing its aims on its core businesses and rationalizing its approach to its side interests. In 1998 the company began acquiring titanium dioxide plants in Europe from Bayer, a major producer of the compound. The following year a merger with Oryx Energy Company increased Kerr-McGee's exploratory prospects and reserves. In 2000 Kerr-McGee purchased plants in Savannah, Georgia and Botlek in the Netherlands from the Kemira Corporation. Although the deal made Kerr-McGee the third-largest producer of the compound in the world, with 16 percent of total market share, it was not without its drawbacks. The Savannah plant, for instance, had a record of environmental violations. Later that year, Kerr-McGee sold its interest in some TiO₂-producing plants in Saudi Arabia in an effort to focus its business on assets in Europe and the United States.

Natural gas was another area in which Kerr-McGee expanded its interests, concentrating on sites in Europe and the Americas. In the spring of 2002 the company and its partner in the operation, Ocean Energy, announced that they had uncovered large natural gas deposits at a deep-water well in the Gulf of Mexico. At the same time Kerr-McGee expanded its interests in natural-gas drilling in the North Sea, off the coast of the British Isles. According to a report in Offshore, the company had committed almost half of its annual budget for exploration and production to develop sites in the area. Kerr-McGee also took advantage of an opportunity to divest itself of some natural-gas interests in Indonesia. But that year the company ventured into new areas in petroleum exploration, including sites in northeastern China.

Principal Subsidiaries: Kerr-McGee Chemical Corporation; Kerr-McGee China Petroleum Ltd. (Bahamas); Kerr-McGee Coal Corporation; Kerr-McGee Credit Corporation; Kerr-McGee Oil (U.K.) PLC; Westport Resources.

Chronology

• Key Dates:
• 1929: The Anderson & Kerr Drilling Company is founded.
• 1945: Seeking to diversify, the company buys a refinery in Oklahoma.
• 1946: The company changes its name to Kerr-McGee.
• 1956: The company goes public on the New York stock exchange.
• 1967: Company enters the industrial chemical industry, buying a pigment plant in Mississippi.
• 1983: Frank A. McPherson is elected CEO and chairman.
• 1990: The company begins streamlining its activities, divesting its offshore drilling contracts.
• 1999: Kerr McGee merges with Oryx Energy.
• 2004: Company celebrates its 75th anniversary.