Management's Discussion and Analysis

Results of Consolidated Operations

    The company's  1996 net income was $220 million,  or $4.43 per common share,
compared with a net loss in 1995 of $31 million,  or $.60 per common share,  and
1994 net  income of $90  million,  or $1.74 per  common  share.  Net  income was
reduced by a number of unusual items in 1996 and 1995, which totaled $10 million
and $161 million after income taxes, respectively.
    The 1996 unusual items of an operating nature on an after-tax basis were $16
million for noncash  impairments  of long-lived  exploration  and production and
chemical  assets;  $7 million for  restructuring  charges for  relocation of the
exploration and production  operations to Houston,  Texas, and severance expense
associated with the merger of the North American  onshore  properties into Devon
Energy Corporation (Devon);  and $1 million for other charges,  none of which is
individually  significant.  The 1996 nonoperating  unusual items on an after-tax
basis included $44 million for insurance  settlements  related to  environmental
sites; $15 million for gains on sales of  available-for-sale  equity securities;
and $8  million  in  gains  on sale of  marginal  and  nonstrategic  oil and gas
properties.  Partially  offsetting  were after-tax  nonoperating  charges of $28
million for net environmental provisions related to abandoned sites (principally
for the company's  closed facility in West Chicago,  Illinois);  $19 million for
provisions for settled and pending  litigation;  and $6 million for other items,
none of which is individually significant.
    During 1995,  the company  adopted the  provisions of Statement of Financial
Accounting Standards No. (FAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed Of";  began a divestiture  and
restructuring  program  for  its  exploration  and  production  operations;  and
provided for additional  future  remediation  costs related to the West Chicago,
Illinois,  closed  facility.  These noncash,  unusual items totaled $161 million
after income taxes. The company also completed the sale of substantially  all of
its refining and marketing  operations in 1995. The sale of the remaining assets
was completed in 1996 with no material  gain or loss. As a result,  all 1995 and
1994 amounts  related to refining and  marketing  are shown in the  Consolidated
Statement of Income as Discontinued Operations.
    Excluding  unusual items,  1996 income from  continuing  operations was $230
million, compared with $137 million in 1995, or $4.63 per common share and $2.63
per common  share,  respectively.  The increase was primarily due to oil and gas
exploration  and  production  results that more than doubled  those of the prior
year and a 14% increase from coal operations,  partially offset by a 26% decline
in earnings from the chemical unit.  Income from  continuing  operations was $69
million,  or $1.33 per common  share,  in 1994.  The  increase  in 1995  income,
compared with 1994, was  attributable  to higher  earnings from all three of the
company's operating units.
    Excluding  unusual  items,  operating  profit  for 1996  was a  record  $408
million,  compared with $298 million in 1995 and $207 million in 1994.  The 1996
increase  over 1995 is primarily due to  significantly  higher  exploration  and
production  results.  Also  contributing to the increase were higher results for
coal,  partially offset by lower chemical operating profit. In comparing 1995 to
1994, all three operating units experienced increased operating results.
    Consolidated  sales from  continuing  operations were $1.9 billion for 1996,
compared  with $1.8 billion for 1995 and $1.6 billion for 1994.  The increase in
1996  primarily  resulted from higher crude oil and natural gas sales prices and
higher sales of purchased  third-party natural gas, partially offset by declines
in titanium dioxide pigment sales prices and lower crude oil sales volumes.  The
improvement in 1995 over 1994 was from higher titanium dioxide pigment and crude
oil sales prices and higher crude oil, natural gas,  synthetic rutile,  and coal
sales volumes,  partially  offset by lower natural gas and coal sales prices and
lower forest product sales volumes.
    Costs and operating expenses increased $63 million in 1996, primarily due to
increased  purchases of natural gas for resale and higher  feedstock and utility
costs for titanium dioxide pigment.  Costs and operating  expenses increased $85
million in 1995 compared with 1994,  due to higher coal and chemical  production
volumes and increased purchases of crude oil and natural gas for resale.
    General and  administrative  expenses were $187 million,  $140 million,  and
$110 million in 1996,  1995, and 1994,  respectively.  These amounts include net
provisions for  environmental  reclamation  and remediation of inactive sites of
$43 million, $54 million, and $10 million in 1996, 1995, and 1994, respectively,
which represent additional  provisions  established for the removal of low-level
radioactive  materials  from the  company's  inactive  facility in West Chicago,
Illinois,  and the  reclamation of several other inactive  facilities.  The 1996
expense includes  unusual items consisting  primarily of $29 million for settled
and  pending  litigation;   $10  million  for  the  exploration  and  production
restructuring   costs;  and  $9  million  of  other  items,  none  of  which  is
individually  significant.  The 1996 amount also includes the contribution  that
funded Kerr-McGee Foundation Corporation (see Note 13). Excluding  environmental
provisions,  1995  general  and  administrative  expense  was lower  than  1994,
principally  due to the  effects of  corporate  restructuring  and  higher  1994
provisions for bad debts.
    Asset  impairments  totaled $25 million in 1996 and related  principally  to
certain  exploration  and  production  properties  in the Gulf of  Mexico.  This
compares with $227 million in 1995 resulting from the company's  adoption of FAS
121 and the oil and gas divestiture program (see Note 11).
    Exploration  costs for 1996,  1995, and 1994 were $83 million,  $92 million,
and  $85  million,   respectively.  The  company  had  lower  undeveloped  lease
amortization  and lower  geological and geophysical  costs,  partially offset by
higher dry hole expense in 1996,  compared with 1995. The 1995 increase resulted
principally from higher dry hole and geophysical costs in the Gulf of Mexico and
higher other exploration costs in China and domestic areas.
    Interest and debt expense  totaled $52 million in 1996, $61 million in 1995,
and $58 million in 1994.  The decrease in 1996 expense was due to decreased debt
and lower average interest rates.
    Other income for 1996 increased due to several  unusual  items.  The company
settled  environmental  claims with some insurance carriers and recognized gains
on sales of  exploration  and  production  properties  and gains on the sales of
available-for-sale securities (see Note 18).
    
Segment Operations

    Operating profit (loss) from each of the company's segments is summarized in
the following table:

(In millions of dollars)                 1996     1995     1994
Exploration and production               $204     $(97)    $ 74
Chemicals                                  85      122       92     
Coal                                       75       43       45
Other                                       7       (4)      (4)
  Total                                  $371     $ 64     $207

Exploration and Production
    Exploration and production's 1996 and 1995 operating profit includes several
unusual items. The 1996 unusual items were $22 million for asset impairments and
a $10 million  charge for the continued  restructuring  of the unit, due to both
the December 1996 merger of the North American onshore properties into Devon and
the announced 1997  relocation of the unit to Houston,  Texas.  The 1995 unusual
items,  totaling  $210  million,  related  to  FAS  121  asset  impairments  and
writedowns  associated with the divestiture program of nonstrategic and marginal
properties and restructuring  charges.  Excluding these unusual items, operating
profit was $236  million and $113  million in 1996 and 1995,  respectively.  The
improvement  resulted  primarily  from increases of 20% and 39% in the company's
average  sales  prices for crude oil and  natural  gas,  respectively,  and a $9
million  decrease in exploration  expense.  The $39 million  improvement in 1995
operating profit excluding unusual items,  compared with 1994, was due to record
crude oil and natural gas sales  volumes and higher crude oil prices,  partially
offset by declines in natural gas sales prices and higher exploration costs.
    Revenues  and  crude oil and  natural  gas  volumes  and  sales  prices  are
summarized in the following table:

                                                   1996     1995     1994
Revenues (millions of dollars)                   $  874   $  690   $  633
Crude oil and condensate produced
  (thousands of barrels per day)                     69       70       67
Average price of crude oil sold (per barrel)     $19.16   $15.99   $14.81
Natural gas deliveries (MMCF per day)               281      291      271
Average price of natural gas
  delivered (per MCF)                             $2.12    $1.52    $1.76

    The company merged its North  American  onshore  exploration  and production
assets into Devon effective December 31, 1996. The merged properties represented
22% of the company's 1996 oil and gas production on a  barrel-equivalent  basis.
The investment in Devon will be accounted for on an equity basis; therefore, the
company's  1997  proprietary  crude oil production and natural gas sales volumes
are expected to be lower than in 1996. 

Chemicals
    Operating profit for chemicals was $85 million in 1996, decreasing from $122
million in 1995 and $92 million in 1994.  Included in 1996 operating  profit are
unusual  charges  totaling $5 million for  impairments  and shutdown costs for a
crosstie treatment facility and the elimination of a product line at a specialty
plant.  Revenues for the three years were $692 million,  $707 million,  and $639
million in 1996, 1995, and 1994, respectively.  The 1996 decline in revenues and
operating  profit from 1995 was primarily due to lower titanium  dioxide pigment
sales prices.  Operating  profit in 1996 was also  adversely  affected by higher
feedstock and utility costs for pigment.
    The  increase  in 1995  revenues,  compared  with  1994,  was due to higher
titanium dioxide pigment sales prices and higher synthetic rutile sales volumes,
partially offset by lower forest products sales volumes.  The increased  pigment
sales price was also the primary reason for the higher 1995 operating profit.

Coal
    Coal operating profit was $75 million, $43 million, and $45 million in 1996,
1995, and 1994,  respectively,  on revenues of $365 million,  $353 million,  and
$294  million,  respectively.  Operating  profit in 1995  includes a $23 million
charge for FAS 121 asset impairments. Average sales prices, which were higher by
$.12 per ton, and slightly improved sales volumes resulted in increased revenues
and operating profit in 1996, compared with 1995.  Operating profit for 1996 was
also positively impacted by lower per-ton production costs at the Galatia Mine.
    Excluding the 1995 FAS 121  impairment  provision of $23 million,  operating
profit would have been $66 million,  or $21 million  higher than 1994.  Revenues
for 1995 were  higher due to higher  sales  volumes,  partially  offset by lower
sales prices. Per-ton production costs were lower in 1995 than in 1994.
<PAGE>
Financial Condition   
    
(Dollars in millions)                   1996     1995     1994
Current ratio                            1.7      1.3      1.1
Working capital                       $  320   $  189   $   52     
Total debt                               663      735      993
Stockholders' equity                  $1,367   $1,416   $1,543
Total debt to total capitalization        33%      34%      39%

Cash Flow
    Net cash provided by operating activities was $645 million in 1996, compared
with $369  million in 1995 and $356  million in 1994.  The  increase  in 1996 is
primarily  attributable to the company's record net income and temporary changes
in working  capital and other,  which  decreased  net cash provided by operating
activities  by $211  million  in 1995.  Although a net loss of $31  million  was
incurred in 1995, the unusual charges,  which totaled $260 million before income
taxes,  were all  noncash  and did not  adversely  affect net cash  provided  by
operations.  Net cash provided by operating  activities in 1995 was  essentially
the same as in 1994.
    In both 1996 and 1995, the company had several other sources of cash,  which
were used  primarily  to reduce debt and purchase the  company's  common  stock.
During  1996,  the  company  received  cash  proceeds  of $48  million  from the
divestiture of  nonstrategic,  marginal,  and other  exploration  and production
properties; $29 million from the sale of equity securities; $13 million from the
sale of the remaining  refining and marketing  assets;  and $11 million from the
sale of  other  assets,  including  the  company's  West  Virginia  coal  mining
operation. Proceeds from the sale of substantially all of the company's refining
and marketing operations resulted in cash flow of $419 million in 1995.
    Total debt  declined from $993 million at December 31, 1994, to $663 million
at December  31, 1996.  In  September  1995,  the  company's  Board of Directors
authorized  management to purchase company stock of up to $300 million.  Through
December 31, 1996, approximately 4 million shares had been acquired at a cost of
$243 million - $195 million in 1996 and $48 million in 1995. The company expects
to complete the stock purchase program by mid-1997.
    On January 14, 1997, the company's  Board of Directors  approved an increase
in the quarterly dividend payable April 1, 1997, from $.41 per share to $.45 per
share.  In 1995, the Board increased the quarterly  dividend  payable January 2,
1996, from $.38 per share to $.41 per share.
    The company  merged its North American  onshore oil and gas properties  into
Devon effective  December 31, 1996. In exchange for the properties,  the company
received 9,954,000 shares of Devon stock, approximately 31% of the common shares
outstanding. In future years, the company will report its proportionate share of
Devon's  earnings as other  income and will report  dividends  from Devon in the
Consolidated Statement of Cash Flows. Liquidity
    At December 31, 1996,  the company's net working  capital  position was $320
million,  an increase of $131 million from December 31, 1995.  The 1996 increase
was the  result  of the cash  inflows  discussed  previously,  which  were  used
primarily to repay  short-term  borrowings  and also resulted in the higher cash
balance at year-end  1996.  The 1995  increase of $137 million over 1994 was the
result  of  repayments  of  short-term  debt from the  sales  proceeds  from the
discontinued  refining and marketing  operations.  The current ratio at December
31, 1996,  was 1.7 to 1, compared with 1.3 to 1 at year-end 1995 and 1.1 to 1 at
year-end 1994.
    The percentage of total debt to total capitalization was 33% at December 31,
1996,  compared  with 34% at December 31, 1995,  and 39% at year-end  1994.  The
ratio's decline is the direct result of the company's repayment of debt, despite
the  partially  offsetting  effect  of  the  stock  purchase  program  on  total
capitalization.
    The  company has several  revolving  credit  agreements.  One  provides  for
combined borrowings by the company and Kerr-McGee Credit  Corporation,  a wholly
owned  subsidiary,  of up to $325 million through December 4, 2001, of which $50
million was outstanding at year-end 1996.  Another agreement entered into by the
company and Kerr-McGee Oil (U.K.) PLC, a wholly owned subsidiary, is a revolving
credit  agreement with several banks providing for combined  borrowings of up to
$230  million  through  December  21,  1999,  none of which was  outstanding  at
year-end  1996.  Both of these  agreements  require that the  principal  amounts
outstanding be paid in full on the  respective  termination  dates.  Interest is
payable at varying rates.
    In February 1995, the company's  wholly owned  subsidiary,  Kerr-McGee China
Petroleum  Ltd.,  entered into a revolving  credit  agreement with several banks
providing  for  borrowings of up to $105 million  through  February 24, 1998, of
which $64  million was  outstanding  at  year-end  1996.  Interest is payable at
varying rates.
    The company's wholly owned subsidiary, Kerr-McGee Canada Ltd., had revolving
credit agreements with three banks at December 31, 1996. As amended in September
and  October  1996,  two of the  agreements  provided  for $20  million  each in
committed lines of credit; the third agreement made $15 million available, for a
total of $55  million.  The  company is  guarantor  for each of the  agreements.
Interest  is payable  at varying  rates.  At  year-end  1996,  $10  million  was
outstanding  under the $20 million  agreement,  which has a September  25, 1997,
termination  date,  and  $5  million  was  outstanding  under  the  $20  million
agreement, which has an October 16, 1997, termination date. In January 1997, the
$15  million  facility  was  canceled  by the  company  and the bank.  It is the
company's  intent to repay the amounts  outstanding at December 31, 1996, and to
request  cancellation  of the two remaining  credit  facilities,  as they are no
longer  needed  due to the  company's  merger of its  Canadian  exploration  and
production properties into Devon.
    On June 3, 1996, the company and the Kerr-McGee  Corporation  Employee Stock
Ownership  Plan (ESOP)  entered into an  agreement  under which  Kerr-McGee,  as
sponsor of the ESOP,  loaned the ESOP $25  million.  The note bears  interest at
6.85% and is payable to Kerr-McGee in installments, which began January 2, 1997.
The note will be paid in full on  January  2,  2005,  which  coincides  with the
expected  allocation of shares held by the ESOP to  participants.  The ESOP used
the  proceeds  of the loan from the  company  to  prepay a portion  of the 9.47%
Series A notes,  which were  guaranteed  by the  company  and  reflected  in the
company's  balance sheet as long-term  debt.  The remaining  Series A notes were
paid as scheduled on July 1, 1996.  The amount loaned to the ESOP by the company
represents  sponsor  financing  and  therefore  does not appear in the company's
Consolidated  Balance  Sheet.  The 9.61%  Series B notes,  totaling $51 million,
remain outstanding and are also scheduled to be paid in full on January 2, 2005.
The first payment of $2 million is due in 1998.
    At  year-end  1996,  the company had  available  unused  lines of credit and
revolving credit  facilities of $657 million.  Of this amount,  $305 million and
$270  million  can be  used  to  support  the  commercial  paper  borrowings  of
Kerr-McGee Credit Corporation and Kerr-McGee Oil (U.K.) PLC, respectively.
    The  company  has  financed  its  capital  expenditures  through  internally
generated funds and various borrowings during the three years ended December 31,
1996. Cash capital expenditures were $392 million in 1996, $484 million in 1995,
and $410 million in 1994, a total of $1.3 billion. During this same period, $1.7
billion of net cash was provided by operating  activities,  exclusive of working
capital changes,  which was approximately $200 million in excess of cash capital
expenditures and dividends paid during the same period.
    Management  anticipates  that  1997  cash  capital  requirements,  currently
estimated  to  be  $445  million   excluding   acquisitions,   and  the  capital
expenditures  programs  for the  next  several  years  can be  provided  through
internally generated funds and selective short-term and/or long-term borrowings.
    The  U.S.  dollar  is the  functional  currency  for  all  of the  company's
operations.  It is the  company's  intent  to hedge a  portion  of its  monetary
assets,   liabilities,   and  commitments  denominated  in  foreign  currencies;
therefore,  from time to time, the company  purchases  foreign  currency forward
contracts  to  provide  funds for known or  anticipated  operating  and  capital
requirements  that will be denominated  in foreign  currencies and to sell funds
received  from  collections  of  accounts  receivable   denominated  in  foreign
currencies.  Additionally,  the company  periodically uses commodity futures and
options to minimize the price risks  associated with producing and selling crude
oil and natural gas (see Note 13). Environmental Matters
    The  company's  operations  are  subject to various  environmental  laws and
regulations. Under these laws, the company is subject to possible obligations to
remove or mitigate the effects on the  environment of the disposal or release of
certain  chemical,  petroleum,  or low-level  radioactive  substances at various
sites,  including sites that have been designated  Superfund sites by the United
States  Environmental  Protection  Agency  (EPA)  pursuant to the  Comprehensive
Environmental  Response,  Compensation,  and Liability Act of 1980 (CERCLA),  as
amended. At December 31, 1996, the company had received notices that it has been
named a potentially  responsible  party (PRP) with respect to the remediation of
16 existing  EPA  Superfund  sites and may share  liability  at certain of these
sites.  In 1996,  the company  signed a Consent Decree with respect to a site at
Slidell,  Louisiana,  which has not yet been finalized. In addition, the company
and/or its subsidiaries  have executed consent orders,  operate under a license,
or have reached agreements to perform or have performed  remediation or remedial
investigations  and  feasibility  studies on sites not included as EPA Superfund
sites.
    The  company  does not  consider  the  number of sites for which it has been
named a PRP to be a  relevant  measure  of  liability.  Because  of  continually
changing  environmental  laws  and  regulations,  the  nature  of the  company's
businesses,  the large number of other PRPs, the present state of the law which,
under CERCLA, imposes joint and several liability on all PRPs, and pending legal
proceedings,  the  company is  uncertain  as to its  involvement  in many of the
sites.  Therefore,  the company is unable to  reliably  estimate  the  potential
liability  and the  timing of future  expenditures  that may arise  from many of
these  environmental  sites.  Reserves have been established for the remediation
and  reclamation  of active and inactive  sites where it is probable that future
costs will be incurred and the liability is estimable.  In 1996, $55 million was
added to the reserve for active and inactive  sites.  At December 31, 1996,  the
company's  reserve for these sites totaled $296 million.  At year-end  1996, the
company  also  had  reserves  of $90  million  for  the  future  costs  for  the
abandonment and removal of offshore well and production facilities at the end of
their productive lives and $20 million for the  decommissioning  and reclamation
of coal mining locations. In the Consolidated Balance Sheet, $345 million of the
total reserves is classified as deferred credits,  and the remaining $61 million
is included in current liabilities.
    Expenditures for the environmental  protection and cleanup of existing sites
for each of the last three years and for the  three-year  period ended  December
31, 1996, are as follows:

(In millions of dollars)               1996    1995    1994   Total
Capital expenditures                    $15    $ 20    $ 17    $ 52
Recurring expenses                       19      23      28      70
Charges to environmental reserves        56      61      60     177
  Total                                 $90    $104    $105    $299
<PAGE>
    The  company  has  not  recorded  in  the  financial   statements  potential
reimbursements from governmental  agencies or other third parties (see Note 10).
The following  table reflects the known estimated cost of  investigation  and/or
remediation that is probable and estimable. The table includes all EPA Superfund
sites  where the company  has been  notified it is a PRP under  CERCLA and other
sites where the company  believes it has some ongoing  financial  involvement in
investigation and/or remediation at year-end 1996.

<TABLE>
<CAPTION>

                                                                                       Total Known          Total
                                                                                         Estimated   Expenditures      Total Number
                                                                                              Cost   Through 1996   of Identifiable
Location of Site                Stage of Investigation/Remediation                        (In millions of dollars)             PRPs
<S>                             <C>                                                          <C>              <C>              <C>

EPA Superfund sites
  Milwaukee, Wis.               Executed consent decree to remediate the site of a
                                former wood-treating facility.  Conducting pre-design
                                studies; installed and operating a free-product
                                recovery system.                                             $ 19             $ 5                3
 
  West Chicago, Ill.,
    outside the facility        Began cleanup of a portion of the site in 1995.
                                Cleanup of an additional area expected to begin
                                in 1997 (see Note 10).                                         33              17                1

  Slidell, La., Chicago, Ill.,
    and 11 sites individually
    not material                Various stages of investigation/remediation.                   30              12              492
                                                                                               82              34              496

Non-EPA Superfund sites under
consent order, license, or
agreement
  West Chicago, Ill., facility  Agreement executed. Awaiting a license to
                                complete decommissioning of a former facility.
                                Shipments to a permanent disposal facility
                                continue (see Note 10).                                      319             148

  Cleveland/Cushing, Okla.      Began cleanup at Cleveland/Cushing in 1996.                   48              26

  Cimarron, Okla.               Remediation essentially complete at Cimarron.                 32              31
                                                                                             399             205

Non-EPA Superfund sites
individually not material                                                                    156             102
    Total for all sites                                                                     $637            $341

</TABLE>

    Although  management  believes  adequate  reserves  have been  provided  for
environmental  and all other known  contingencies,  it is  possible,  due to the
previously noted  uncertainties,  that additional  reserves could be required in
the future that could have a material  effect on the results of  operations in a
particular quarter or annual period.  However,  the ultimate resolution of these
commitments and contingencies, to the extent not previously provided for, should
not have a material  adverse  effect on the company's  financial  position.

Accounting Matters

    In March 1997, the Financial  Accounting Standards Board issued FAS No. 128,
"Earnings per Share," which replaces primary earnings per share (EPS) with basic
EPS. Basic EPS includes no dilution and is computed by dividing income available
to  common  stockholders  by  the  weighted-average   number  of  common  shares
outstanding for the period. The statement is effective for 1998, and the company
believes the effect on its EPS will be immaterial.
    In October  1996,  the American  Institute of Certified  Public  Accountants
issued   Statement   of   Position   (SOP)  96-1,   "Environmental   Remediation
Liabilities." Effective for 1997, the SOP uses the current guidance in financial
accounting  standards  as its  framework  in  determining  when to  recognize an
environmental  liability.  Based on certain criteria in the remediation process,
it requires  that a company  accrue the best  estimate of costs to be  incurred,
including the accrual of costs of  compensation  and benefits for employees that
are expected to devote time directly to  remediation  efforts.  It also requires
accrual of  postremediation  monitoring  costs that are  expected to be incurred
after  remediation is complete.  The company  believes that the SOP will have no
effect on net income or earnings per share.
<PAGE>
Responsibility for Financial Reporting

    The company's management is responsible for the integrity and objectivity of
the  financial  data  contained in the  financial  statements.  These  financial
statements have been prepared in conformity with generally  accepted  accounting
principles  appropriate  under the circumstances  and, where necessary,  reflect
informed   judgments  and  estimates  of  the  effects  of  certain  events  and
transactions based on currently available  information at the date the financial
statements were prepared.
    The  company's  management  depends  on the  company's  system  of  internal
accounting  controls  to  assure  itself  of the  reliability  of the  financial
statements.  The  internal  control  system is  designed  to provide  reasonable
assurance, at appropriate cost, that assets are safeguarded and transactions are
executed  in  accordance  with  management's  authorizations  and  are  recorded
properly to permit the  preparation of financial  statements in accordance  with
generally accepted accounting principles.  Periodic reviews are made of internal
controls by the company's staff of internal  auditors,  and corrective action is
taken if needed.
    The Board of Directors reviews and monitors financial statements through its
audit  committee,  which is composed solely of directors who are not officers or
employees of the company.  The audit committee meets with the independent public
accountants,  internal  auditors,  and management to review internal  accounting
controls, auditing, and financial reporting matters.
    The independent  public  accountants are engaged to provide an objective and
independent  review of the  company's  financial  statements  and to  express an
opinion  thereon.  Their  audits are  conducted  in  accordance  with  generally
accepted auditing standards, and their report is included below.
    
Report of Independent Public Accountants

To the Stockholders and Board of Directors
of Kerr-McGee Corporation:

    We have audited the  accompanying  consolidated  balance sheet of Kerr-McGee
Corporation (a Delaware corporation) and subsidiary companies as of December 31,
1996 and 1995,  and the  related  consolidated  statements  of income,  retained
earnings,  and cash  flows  for each of the  three  years  in the  period  ended
December 31, 1996.  These  financial  statements are the  responsibility  of the
company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.
    We conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
    In our opinion,  the financial  statements referred to above present fairly,
in all material respects,  the financial position of Kerr-McGee  Corporation and
subsidiary  companies as of December 31, 1996 and 1995, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
    As explained in Note 11 to the  financial  statements,  the company  adopted
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in
1995.
    
    
Oklahoma City, Oklahoma,
   February 17, 1997                (ARTHUR ANDERSEN LLP)
                                     ARTHUR ANDERSEN LLP
<PAGE>
                                              
<TABLE>
Consolidated Statement of Income

<CAPTION>
(In millions of dollars, except per-share amounts)                              1996        1995        1994
<S>                                                                           <C>         <C>         <C>   
Sales                                                                         $1,931      $1,754      $1,566
Costs and Expenses
   Costs and operating expenses                                                1,030         967         882
   General and administrative expenses                                           187         140         110
   Depreciation and depletion                                                    297         304         295
   Asset impairment                                                               25         227          --
   Exploration, including dry holes and amortization of undeveloped leases        83          92          85
   Taxes, other than income taxes                                                 66          61          64
   Interest and debt expense                                                      52          61          58
     Total Costs and Expenses                                                  1,740       1,852       1,494
                                                                                 191         (98)         72
Other Income                                                                     132          29          27
Income (Loss) from Continuing Operations before Income Taxes                     323         (69)         99
Provision (Benefit) for Income Taxes                                             103         (45)         30
Income (Loss) from Continuing Operations                                         220         (24)         69
Income (Loss) from Discontinued Operations, Net of Provision (Benefit)
for Income Taxes of $(4) in 1995 and $13 in 1994                                  --          (7)         21
Net Income (Loss)                                                              $ 220       $ (31)     $   90

Net Income (Loss) per Common Share
   Continuing Operations                                                       $4.43       $(.47)     $ 1.33
   Discontinued Operations                                                        --        (.13)        .41
     Total                                                                     $4.43       $(.60)     $ 1.74
</TABLE>
   
<TABLE>
Consolidated Statement of Retained Earnings

<CAPTION>
(In millions of dollars, except per-share amounts)                              1996        1995        1994
<S>                                                                           <C>         <C>         <C>   
Balance at Beginning of Year                                                  $1,209      $1,320      $1,309
   Net income (loss)                                                             220         (31)         90
   Dividends declared (per common share: $1.64 in 1996,
     $1.55 in 1995, and $1.52 in 1994)                                           (81)        (80)        (79)
Balance at End of Year                                                        $1,348      $1,209      $1,320

The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


<TABLE>
Consolidated Balance Sheet


<CAPTION>
(In millions of dollars)                                                        1996        1995
<S>                                                                           <C>         <C> 
ASSETS
Current Assets
   Cash                                                                       $  121      $   87
   Accounts receivable, net of allowance for doubtful
     accounts of $5 in 1996 and 1995                                             375         334
   Inventories                                                                   218         221
   Deposits and prepaid expenses                                                  91         122
        Total Current Assets                                                     805         764
Investments
   Equity affiliates                                                             244          38
   Other assets                                                                   74         122
Property, Plant, and Equipment - Net                                           1,948       2,210
Deferred Charges                                                                  53          79
     Total Assets                                                             $3,124    $  3,213

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Short-term borrowings                                                      $   37    $     94
   Accounts payable                                                              262         297
   Long-term debt due within one year                                             --           9
   Taxes on income                                                                 5          --
   Taxes, other than income taxes                                                 26          18
   Accrued liabilities                                                           155         157
        Total Current Liabilities                                                485         575

Long-Term Debt                                                                   626         632
Deferred Credits and Reserves
   Income taxes                                                                  131          92
   Other                                                                         515         498
        Total Deferred Credits and Reserves                                      646         590
Stockholders' Equity
   Common stock, par value $1.00 - 150,000,000 shares authorized,
     53,862,347 shares issued in 1996, and 53,513,888 shares issued in 1995       54          54
   Capital in excess of par value                                                334         318
   Preferred stock purchase rights                                                 1           1
   Retained earnings                                                           1,348       1,209
   Unrealized gain on available-for-sale securities                               12          26
   Common stock in treasury, at cost - 5,568,815 shares in 1996 and
     2,444,690 shares in 1995                                                   (306)       (111)
   Deferred compensation                                                         (76)        (81)
        Total Stockholders' Equity                                             1,367       1,416
          Total Liabilities and Stockholders' Equity                          $3,124    $  3,213


The  "successful  efforts"  method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this balance sheet.
</TABLE>

<PAGE>

<TABLE>
Consolidated Statement of Cash Flows

<CAPTION>
(In millions of dollars)                                                        1996        1995        1994
<S>                                                                             <C>        <C>         <C>
Cash Flow from Operating Activities
   Net income (loss)                                                            $220       $ (31)      $  90
   Adjustments to reconcile to net cash provided by operating activities -
     Depreciation, depletion, and amortization                                   307         334         340
     Asset impairment                                                             25         227          --
     Deferred income taxes                                                        68         (51)          2
     Provision for environmental reclamation and remediation of inactive sites    43          54          10
     Gain on sale of exploration and production properties                       (21)         --          --
     Realized gain on available-for-sale securities                              (23)         --          --
     Gain on sale of refining and marketing operations, net of income taxes       --          (2)         --
     Noncash items affecting net income                                           18          50          57
     Retirements and gain on sale of assets                                       (3)         (1)         (4)
     Changes in current assets and liabilities and other, net of effects
        of discontinued operations sold -
          (Increase) decrease in accounts receivable                              48          75         (42)
          (Increase) decrease in inventories                                       1          (1)        (52)
          (Increase) decrease in deposits and prepaids                            59         (50)         (1)
          Increase (decrease) in accounts payable and accrued liabilities        (37)        (121)        46
          Decrease in taxes payable                                              (22)        (56)        (23)
          Other                                                                  (38)        (58)        (67)
            Net cash provided by operating activities                            645         369         356
Cash Flow from Investing Activities
   Capital expenditures                                                         (392)       (484)       (410)
   Proceeds from sale of exploration and production properties                    48          --          --
   Proceeds from sale of refining and marketing operations                        13         419          --
   Proceeds from sale of other assets                                             11          17          27
   Proceeds from sale of available-for-sale securities                            29          --          --
   Proceeds from sale of long-term investments                                    17          61          30
   Purchase of long-term investments                                              (6)         (8)        (76)
            Net cash provided by (used in) investing activities                 (280)          5        (429)
Cash Flow from Financing Activities
   Increase (decrease) in short-term borrowings                                  (57)       (218)        149
   Purchase of treasury stock                                                   (195)        (45)         --
   Dividends paid                                                                (83)        (79)        (78)
   Repayment of long-term debt                                                   (36)        (35)        (11)
   Issuance of long-term debt                                                     24          --          --
   Issuance of common stock                                                       16           9           1
            Net cash provided by (used in) financing activities                 (331)       (368)         61

Net Increase (Decrease) in Cash and Cash Equivalents                              34           6         (12)
Cash and Cash Equivalents at Beginning of Year                                    87          81          93
Cash and Cash Equivalents at End of Year                                        $121         $87       $  81

The  accompanying  notes are an integral part of this  statement.
</TABLE>



<PAGE>

Notes to Financial Statements

1.  Significant Accounting Policies

Principles of Consolidation
    The consolidated financial statements include the accounts of all subsidiary
companies  that are more  than 50% owned  and the  proportionate  share of joint
ventures  in  which  Kerr-McGee  has  an  undivided  interest.   Investments  in
affiliated  companies  that are 20% to 50% owned are  carried as  Investments  -
Equity affiliates in the Consolidated  Balance Sheet at cost adjusted for equity
in  undistributed  earnings.   Except  for  dividends,   changes  in  equity  in
undistributed earnings are included in the Consolidated Statement of Income. All
material  intercompany  transactions  have  been  eliminated.  The  consolidated
financial statements and certain prior-year financial  information  contained in
the  related   notes  have  been   restated  to  conform  to  the   current-year
presentation.

Foreign Currencies
     As the U.S. dollar has been adopted as the functional  currency for each of
the company's  international  operations,  foreign currency transaction gains or
losses are recognized in the period  incurred.  The company recorded net foreign
currency  transaction  losses of $9  million  in 1996.  Total  foreign  currency
transaction gains and losses in 1995 and 1994 were immaterial.

Net Income (Loss) per Common Share
     After adding the dilutive  effect of the conversion of stock options to the
weighted  average number of shares  outstanding,  the shares used to compute net
income per common share were  49,657,890  in 1996 and  51,739,880  in 1994.  The
weighted  average  number of shares used to compute the 1995 net loss per common
share was 51,669,285.

Cash Equivalents
     The company  considers all  investments  purchased with a maturity of three
months or less to be cash equivalents. Cash includes time deposits, certificates
of deposit, and U.S. government  securities all totaling $89 million in 1996 and
$48 million in 1995.

Inventories
    The  costs  of the  company's  product  inventories  are  determined  by the
first-in,  first-out  (FIFO) method.  The crude oil and refined  products of the
discontinued  refining and marketing  operations  were valued using the last-in,
first-out  (LIFO)  method  until  the sale of  these  inventories  during  1995.
Inventory   carrying  values  include   material  costs,   labor,  and  indirect
manufacturing  expenses associated therewith.  Materials and supplies are valued
at average cost.

Property, Plant, and Equipment
    Oil and Gas - Exploration  expenses,  including  geological and  geophysical
costs,  rentals,  and  exploratory  dry holes,  are  charged  against  income as
incurred.  Costs of  successful  wells  and  related  production  equipment  and
developmental  dry  holes  are  capitalized  and  amortized  by field  using the
unit-of-production method as the oil and gas are produced.
    Undeveloped  acreage  costs are  capitalized  and  amortized  at rates  that
provide full  amortization  on  abandonment  of  unproductive  leases.  Costs of
abandoned leases are charged to the accumulated amortization accounts, and costs
of productive leases are transferred to the developed property accounts.
    Other - Property,  plant,  and equipment is stated at cost less reserves for
depreciation, depletion, and amortization.  Maintenance and repairs are expensed
as  incurred,  except that costs of  replacements  or renewals  that  improve or
extend the lives of existing  properties are capitalized.  Costs of nonproducing
mineral acreage  surrendered or otherwise  disposed of are charged to expense at
the time of disposition.
    Depreciation,  Depletion, and Amortization - Property,  plant, and equipment
is depreciated, depleted, or amortized over its estimated life by application of
the  unit-of-production  or the straight-line method. In arriving at rates under
the unit-of-production method, the quantities of recoverable oil, gas, and other
minerals are established based on estimates made by the company's geologists and
engineers.
    Retirements and Sales - The costs and related depreciation,  depletion,  and
amortization  reserves are removed from the respective  accounts upon retirement
or sale  of  property,  plant,  and  equipment.  The  resulting  gain or loss is
included in other income.
     Interest  Capitalized  - The company  capitalizes  interest  costs on major
projects  that  require  a  considerable  length of time to  complete.  Interest
capitalized  in 1996,  1995,  and  1994 was $9  million,  $11  million,  and $10
million, respectively.

Impairment of Long-Lived Assets
    The company adopted the provisions of the Statement of Financial  Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," during the 1995 third quarter.
    Proved  oil  and  gas   properties   are  reviewed  for   impairment   on  a
field-by-field  basis when facts and circumstances  indicate that their carrying
amount may not be recoverable.  In performing this review, future cash flows are
estimated by applying  estimated  future oil and gas prices to estimated  future
production,  less  estimated  future  expenditures  to develop  and  produce the
reserves.  If the sum of these  estimated  future cash flows  (undiscounted  and
without interest  charges) is less than the carrying amount of the property,  an
impairment  loss is  recognized  for the excess of the carrying  amount over the
estimated fair value of the property. Prior to the third quarter of 1995, proved
properties  were  evaluated  on an  area-of-interest  basis  and  impaired  when
capitalized  costs  exceeded  estimated  future  revenues,  computed by applying
current oil and gas prices to estimated future production, less estimated future
expenditures to develop and produce the reserves.
     Chemical, coal, and other assets are reviewed for impairment by asset group
for which the  lowest  level of  independent  cash flows can be  identified  and
impaired in the same manner as proved oil and gas properties. Prior to the third
quarter of 1995,  individual  properties were written down when impairments were
deemed to have occurred.

Income Taxes
     Deferred  income taxes are provided to reflect the future tax  consequences
of  differences  between  the tax  bases of  assets  and  liabilities  and their
reported amounts in the financial statements.

Site Dismantlement, Reclamation, and Remediation Costs
    The  company  provides  for the  estimated  cost at current  prices of final
reclamation and land restoration at coal mining locations and the  dismantlement
and removal of oil and gas  production  and related  facilities.  Such costs are
being  accumulated  over the estimated lives of the facilities by the use of the
unit-of-production method. As sites of environmental concern are identified, the
company  assesses the existing  conditions,  claims,  and assertions,  generally
related  to  former  operations,   and  records  an  estimated   liability  when
environmental   assessments   and/or  remedial  efforts  are  probable  and  the
associated costs can be reasonably estimated.

Gas-Balancing Arrangements
     Gas-balancing arrangements with partners in natural gas wells are accounted
for by the entitlements method. At December 31, 1996 and 1995, both the quantity
and dollar  amount of such  arrangements  recorded in the  Consolidated  Balance
Sheet were immaterial.

Lease Commitments
    The  company   utilizes   various  leased   properties  in  its  operations,
principally for office space.  Net lease rental expense was $14 million for 1996
and $12 million for each of the years 1995 and 1994.
    The aggregate minimum annual rentals under noncancelable leases in effect on
December 31, 1996,  totaled $31 million,  of which $9 million is due in 1997, $8
million in 1998, $6 million in 1999, $5 million in 2000, and $3 million in 2001.
 
Employee Stock Option Plans
    The company accounts for its employee stock option plans using the intrinsic
value method in accordance  with Accounting  Principles  Board Opinion (APB) No.
25,  "Accounting for Stock Issued to Employees."  

Futures, Forward, and Option Contracts
    To minimize the price risks  associated with the production and marketing of
crude oil and natural gas, the company periodically uses commodities futures and
option  contracts  to hedge a portion  of its crude oil and  natural  gas sales.
These  contracts  generally  mature  in one year or less.  Since  the  contracts
qualify as hedges and correlate to price movements of crude oil and natural gas,
any gain or loss from these  contracts is explicitly  deferred and recognized as
part of the hedged transaction.  Prior to the sale of the refining and marketing
operations,  the company also hedged a portion of its refined-product  sales and
crude oil purchased for the refineries.
    The  company  hedges a portion  of its  monetary  assets,  liabilities,  and
commitments  denominated  in  foreign  currencies.   Periodically,  the  company
purchases  foreign currency forward contracts to provide funds for operating and
capital expenditure  requirements that will be denominated in foreign currencies
and sells foreign currency forward contracts to convert receivables that will be
paid in foreign  currencies to U.S.  dollars.  Since these contracts  qualify as
hedges and  correlate to currency  movements,  any gain or loss  resulting  from
market  changes  will be offset by gains or  losses  on the  hedged  receivable,
capital item, or operating cost.
    In 1996 and 1995,  the company also entered  into foreign  currency  forward
contracts to sell various foreign currencies in anticipation of titanium dioxide
pigment  sales   denominated  in  foreign   currencies.   These   contracts  are
marked-to-market  with the  resulting  gain or loss  reflected  in income in the
period in which the change  occurs.  Open  contracts  at year-end  1996 and 1995
mature  within the  subsequent  12-month  period.  Net gains and losses on these
contracts in 1996 and 1995 were immaterial.
     Management of price risks must consider market conditions and availability.
As these factors change,  the company adjusts its hedging  strategy and modifies
its futures, forward, and option contract positions.

Use of Estimates
    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the  reported  amounts of assets and  liabilities,  the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates as additional
information becomes known.

2.  Cash Flow Information

    Net cash  provided  by  operating  activities  reflects  cash  payments  for
interest and income taxes as follows:

(In millions of dollars)         1996     1995     1994
Interest paid                     $60      $68      $76
Income taxes paid                  17       75       42

    Effective  December 31, 1996, the company merged its North American  onshore
exploration and production  operations into Devon Energy Corporation  (Devon) in
exchange  for  9,954,000  shares  of Devon  common  stock  (see  Note  4).  This
transaction is not reflected in the Consolidated  Statement of Cash Flows due to
its noncash nature. Other noncash transactions not reflected in the Consolidated
Statement of Cash Flows include capital  expenditures  for which payment will be
made in the subsequent year totaling $4 million, $24 million, and $20 million at
year-end  1996,  1995,  and  1994,  respectively;  the  revaluation  of  certain
investments  to  fair  value;   transactions   affecting  deferred  compensation
associated  with  the  Employee  Stock   Ownership  Plan  (ESOP);   and  certain
transactions affecting the debt related to the ESOP. See Notes 13 and 19.
    The effect of foreign currency  exchange rate  fluctuations on cash and cash
equivalents was immaterial.

3.  Inventories

    Major categories of inventories at year-end 1996 and 1995 are:

(In millions of dollars)                1996            1995
Chemicals and other products            $163            $157
Materials and supplies                    49              49
Crude oil                                  6              15
  Total                                 $218            $221

4.  Investments - Equity Affiliates

    At December  31, 1996 and 1995,  investments  in equity  affiliates  are as
follows:

(In millions of dollars)                     1996         1995

Devon Energy Corporation                     $193          $--
Javelina Company                               27           21
National Titanium Dioxide Company Limited      12           12
Other                                          12            5
  Total                                      $244          $38

    Effective  December 31, 1996, the company merged its North American  onshore
exploration and production  operations into Devon, a publicly traded oil and gas
exploration and production  company.  The company  received  9,954,000 shares of
Devon common stock  representing an ownership interest in Devon of approximately
31%. The  investment in Devon is recorded at the value of the assets given up in
accordance  with APB No. 29,  "Accounting  for  Nonmonetary  Transactions."  The
market value of the company's  investment in Devon was $346 million based on the
closing price of Devon's common stock as reported in The Wall Street Journal for
December 31, 1996.
    Javelina Company and National Titanium Dioxide Company Limited represent the
company's  investment  of 40% and  25%,  respectively,  in  non-exploration  and
production joint ventures or partnerships.
     Following  are  financial  summaries of the  company's  equity  affiliates.
Financial  information  related  to  investments  that are shown as Other in the
preceding table have been excluded.

(In millions of dollars)                     1996    1995    1994
Results of operations -
  Net sales(1)                             $  207    $250    $198
  Total costs and expenses                    183     171     178
  Net income                                   22      66       6
Financial position -
  Current assets                              153      99      84
  Property, plant, and equipment - net        962     286     298
  Total assets                              1,135     400     403
  Current liabilities                         130      82      88
  Total liabilities                           484     232     301
  Stockholders' equity                        651     168     102

(1)  Includes  net sales to the company of $44  million,  $47  million,  and $36
million for 1996, 1995, and 1994, respectively.


5.  Investments - Other Assets
    
    Investments  in other assets  consist of the following at December 31, 1996
and 1995:

(In millions of dollars)                                  1996            1995
Equity securities                                          $24            $ 55
Net deferred tax asset                                      23              21
Long-term notes receivable, net of $8 allowance 
  for doubtful notes                                        17              21
U.S. government obligations                                 --              17
Other                                                       10               8
  Total                                                    $74            $122


6.  Property, Plant, and Equipment

<TABLE>
    Fixed assets and related  reserves by business  segment at December 31, 1996
and 1995, are as follows:
<CAPTION>
                                                                     Reserves for
                                                                Depreciation, Depletion,
                                            Gross Property         and Amortization           Net Property(1)
(In millions of dollars)                     1996    1995            1996    1995             1996    1995
<S>                                        <C>     <C>             <C>     <C>              <C>     <C>             
Exploration and production                 $3,192  $4,162          $2,005  $2,686           $1,187  $1,476                      
Chemicals                                     946     835             459     411              487     424            
Coal                                          546     554             327     317              219     237 
Other                                         153     127              98      81               55      46
Discontinued operations                        --      89              --      62               --      27
  Total                                    $4,837  $5,767          $2,889  $3,557           $1,948 $ 2,210

(1)  Includes  net  assets  held  for sale of $9  million  for  exploration  and
production at December 31, 1996; and $52 million for exploration and production,
$7 million for coal, and $27 million for the discontinued refining and marketing
operations at December 31, 1995.
</TABLE>

7.  Deferred Charges

    Deferred charges are as follows at year-end 1996 and 1995:
(In millions of dollars)                                    1996            1995
Pension plan prepayment                                      $33             $28
Preoperating and startup costs                                 4               4
Intangible assets                                              3               4
Cost of injected gas                                          --              29
Other                                                         13              14
  Total                                                      $53            $ 79

    The cost of injected gas was  associated  with miscible  gas-flood  projects
located  onshore in North America.  These  properties were merged into an equity
affiliate effective December 31, 1996 (see Note 4).
     
8.  Debt

Lines of Credit and Short-Term Borrowings
    At year-end 1996, the company had available  unused bank lines of credit and
revolving credit  facilities of $657 million.  Of this amount,  $305 million and
$270 million can be used to support  commercial paper borrowing  arrangements of
Kerr-McGee Credit Corporation and Kerr-McGee Oil (U.K.) PLC, respectively.
    The company has arrangements to maintain  compensating balances with certain
banks that  provide  credit.  At year-end  1996,  the  aggregate  amount of such
compensating balances was immaterial, and the company was not legally restricted
from withdrawing all or a portion of such balances at any time during the year.
    Short-term  borrowings at year-end 1996 consisted of notes payable totaling
$15 million  (5.97% average  interest  rate) and  commercial  paper totaling $22
million (5.84% average  interest rate).  Outstanding at year-end 1995 were notes
payable totaling $94 million (6.1% average interest rate).

Long-Term Debt
    The  company's  policy is to  classify  borrowings  under  revolving  credit
facilities  and  commercial  paper of up to $400 million as long-term debt since
the company has the ability under certain  revolving  credit  agreements and the
intent to maintain these obligations for longer than one year.
    Long-term debt consists of the following at year-end 1996 and 1995:
<TABLE>

<CAPTION>
(In millions of dollars)                                                              1996       1995
<S>                                                                                   <C>        <C>   
Debentures -
  7% Debentures due November 1, 2011, net of unamortized debt discount of $111 in
    1996 and $113 in 1995 (14.25% effective rate)                                     $139       $137
  8-1/2% Sinking fund debentures due June 1, 2006                                       34         45
Commercial paper (5.84% at December 31, 1996)                                          266        310
Guaranteed debt of Employee Stock Ownership Plan -
  9.47% Series A notes due in installments through January 2, 2000                      --         30
  9.61% Series B notes due in installments through January 2, 2005                      51         51
Notes payable -
  Variable  interest rate revolving credit  agreements with banks (5.84% average
    rate at December  31,  1996),  $64 due February 24, 1998 and $50 due December 4,
      2001                                                                             114         66
  Other                                                                                 22          2
                                                                                       626        641
Long-term debt due within one year                                                      --         (9)
      Total                                                                           $626       $632
</TABLE>

    Maturities of long-term debt due after December 31, 1996, are $65 million in
1998, $43 million in 1999,  $10 million in 2000,  $314 million in 2001, and $194
million thereafter.
    In addition to the debt shown in the preceding table, the company guaranteed
its ratable portion of the debt of unconsolidated  equity affiliates totaling $7
million  at  year-end  1996  and  $12  million  at  year-end  1995.  No  loss is
anticipated by reason of this guarantee.
    Additional  information  regarding  the major  changes  in debt  during  the
periods and unused  commitments  for  financing  is  included  in the  Financial
Condition discussion in Management's Discussion and Analysis.

9.  Other Deferred Credits and Reserves

    Other  deferred  credits and reserves  consist of the following at year-end
1996 and 1995:


(In millions of dollars)                     1996    1995
Reserves for site dismantlement,
  reclamation, and remediation               $345    $333
Postretirement benefit obligations            117     112
Other                                          53      53
      Total                                  $515    $498

    The company provided for environmental reclamation and remediation of former
plant  sites,  net of  reimbursements  received,  during each of the years 1996,
1995, and 1994 as follows:

(In millions of dollars)                     1996    1995    1994
Provision, net of reimbursements              $43     $54     $10
Reimbursements received                        10      11       8

    The reimbursements  were received pursuant to the Energy Policy Act of 1992.
With the exception of $1 million received in 1994, all reimbursements pertain to
the former  facility in West Chicago,  Illinois (see Note 10). An additional $49
million  was  provided  in 1995 for  refining  and  marketing-related  sites and
included in the discontinued operations (see Note 21). 

10. Contingencies

West Chicago
    In 1973, a wholly owned subsidiary,  Kerr-McGee Chemical Corporation (KMCC),
closed the facility located in West Chicago,  Illinois,  that processed  thorium
ores.  Operations  resulted in some low-level  radioactive  contamination at the
site,  and in 1979,  KMCC filed a plan with the  Nuclear  Regulatory  Commission
(NRC) to decommission  the facility.  The NRC  transferred  jurisdiction of this
site to the State of Illinois (the State) in 1990.  The following  discusses the
current status of various matters associated with this closed facility.
    Decommissioning  - In 1994,  KMCC, the City of West Chicago (the City),  and
the  State  reached  agreement  on Phase I of the  decommissioning  plan for the
closed West  Chicago  facility.  Pursuant to the Phase I  agreement,  KMCC began
shipping  material from the site to a licensed  permanent  disposal  facility in
Utah during 1994.
    In February  1997,  KMCC executed an agreement with the City as to the terms
and conditions for completing the final phase of the  decommissioning  work, the
bulk of  which  is  expected  to be  completed  about  four to six  years  after
receiving the necessary license  amendment.  The State has indicated approval of
this agreement,  and KMCC now expects to receive the license amendment that will
enable KMCC to proceed with the final phase of the decommissioning work.
    Under the Illinois  Uranium and Thorium Mill Tailings Control Act (the Act),
KMCC is obligated to pay an annual storage fee of $2 per cubic foot of byproduct
material located at the former facility. Under the Phase I agreement, the amount
of the storage fee paid each year shall not exceed $26 million,  and all amounts
paid  pursuant  to the Act  are to be  reimbursed  to  KMCC  as  decommissioning
expenditures are incurred.  KMCC has received reimbursement for all amounts paid
under the Act and will continue to seek  reimbursement  for future  amounts paid
under the Act as decommissioning costs are incurred.
    Pursuant  to Title X of the Energy  Policy Act of 1992 (Title X), the United
States  Department  of  Energy  is  obligated  to  reimburse  KMCC  for  certain
decommissioning  costs.  Title X was  amended  in 1996 to  increase  the  amount
authorized to $65 million plus  inflation  adjustments.  Through  February 1997,
KMCC has been reimbursed approximately $28 million under Title X.
    The  aggregate  cost to  decommission  the former  facility is  difficult to
estimate  because  of the many  contingencies  and will be  reduced  by  amounts
recovered under Title X. At December 31, 1996, the remaining  reserves  provided
for the cost to  decommission  the site total $171  million  (before any further
recovery under Title X), payable over the course of the decommissioning work.
    Offsite Areas - The U.S.  Environmental  Protection  Agency (EPA) has listed
four areas in the vicinity of the West Chicago facility on the National Priority
List that the EPA promulgates under authority of the Comprehensive Environmental
Response,  Compensation,  and  Liability  Act  of  1980,  as  amended,  and  has
designated KMCC as a potentially  responsible party in these four areas. The EPA
issued unilateral  administrative  orders for two of these areas (referred to as
the  residential  area and  Reed-Keppler  Park),  which  require KMCC to conduct
removal actions to excavate  contaminated soils and ship the soils elsewhere for
disposal.  At  December  31,  1996,  the  remaining  reserves  to  clean  up the
residential area and Reed-Keppler Park total $16 million. Without waiving any of
its rights or defenses,  KMCC began the cleanup of the residential  area site in
May 1995 and anticipates  completing the cleanup of this site within four years.
KMCC expects to begin the cleanup of the Reed-Keppler Park site in 1997.
    Judicial  Proceedings  - In December  1996, a lawsuit was filed  against the
company  and its  subsidiary,  KMCC,  in  Illinois  state  court on  behalf of a
purported class of present and former West Chicago residents seeking damages for
alleged  diminution  in  property  values  and the  establishment  of a  medical
monitoring fund to benefit those allegedly exposed to thorium wastes originating
from the former  facility.  The case  recently has been removed to federal court
and is being vigorously defended.

Summary
    The plants and facilities of the company and its subsidiaries are subject to
various environmental laws and regulations. The company or its subsidiaries have
been notified that they may be responsible  in varying  degrees for a portion of
the costs to clean up certain waste  disposal  sites and former plant sites.  At
year-end  1996,  the  remaining  reserves  provided for the cost to  investigate
and/or remediate all presently  identified sites of former or current operations
total $296  million,  which  includes  $187  million for the former West Chicago
facility,  the  residential  area,  and  Reed-Keppler  Park.  Expenditures  from
inception  through  December 31, 1996,  totaled $341 million for currently known
sites.
    In addition to the environmental issues previously discussed, the company or
its subsidiaries are also a party to a number of other legal proceedings pending
in various  courts or agencies in which the company or a  subsidiary  appears as
plaintiff or defendant.  Because of continually  changing laws and  regulations,
the nature of the company's businesses, and pending legal proceedings, it is not
possible to reliably  estimate  the amount or timing of all future  expenditures
relating to  environmental  and other  contingencies.  The company  provides for
costs  related  to  contingencies  when a loss is  probable  and the  amount  is
reasonably  estimable.  Although  management  believes,  after consultation with
general  counsel,  that  adequate  reserves  have  been  provided  for all known
contingencies,  the ultimate cost will depend on the outcomes of the above-noted
uncertainties.  Therefore,  it is possible  that  additional  reserves  could be
required  in the  future  that  could  have a  material  effect  on  results  of
operations  in a  particular  quarter or annual  period.  However,  the ultimate
resolution of these commitments and contingencies,  to the extent not previously
provided  for,  should  not have a  material  adverse  effect  on the  company's
financial position.
    
11. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
                                          
Assets to Be Held and Used
    Certain  oil and gas  fields in North  America  and  certain  coal and other
assets have been deemed to be impaired  because the assets were not  expected to
recover their entire  carrying value through  future cash flows.  The impairment
loss, included in the Consolidated Statement of Income as Asset impairment,  was
determined as the  difference  between the carrying value and the estimated fair
value of the  assets.  The fair  value  was  generally  determined  based on the
estimated  present value of future cash flows. The impairment  losses by segment
for 1996 and 1995 are as follows:

(In millions of dollars)                     1996      1995
Exploration and production                    $22      $ 99
Coal                                           --        23 
Other                                          --         1
  Total                                       $22      $123

Assets to Be Disposed Of
    During  1995,  the  company's  exploration  and  production  operating  unit
announced a  divestiture  and  restructuring  program (see Note 12). The program
included a number of crude oil and natural gas producing  properties  considered
to be nonstrategic.  Most of these properties were located onshore in the United
States; however, certain of these properties were located in the Gulf of Mexico,
Canada,  and the North Sea. Prior to the recognition of the 1995 impairment loss
discussed in the  following  paragraph,  the carrying  value of the  divestiture
program properties was $172 million.
    As a result  of the  divestiture  program,  these  nonstrategic  oil and gas
properties  were reduced in 1995 to their  estimated fair value less the cost to
sell if the carrying  value of the property  exceeded such fair value net of the
estimated cost of selling the property.  The  impairment  loss on the properties
for which a loss was indicated totaled $104 million and has been included in the
Consolidated  Statement  of  Income  as Asset  impairment.  There  have  been no
subsequent revisions to the carrying values of these properties.
    Net gains recognized on the sales of properties  included in the divestiture
program  totaled $13 million in 1996. The program is expected to be completed by
mid-1997.  At year-end  1996,  the remaining  assets had a carrying  value of $9
million and did not  constitute a material  portion of the company's oil and gas
reserves.  Also,  these  assets  did not have a  material  effect on oil and gas
production, or cash flows from operations for 1996.
    Certain  chemical  facilities were closed during 1996, which resulted in the
recognition of a $3 million  impairment loss. Also held for sale at December 31,
1995,  were the net long-term  assets totaling $5 million of a wholly owned coal
mining operation in West Virginia. This sale was completed in February 1996. The
gain on the sale was immaterial.
    Following  are the sales and pretax  income (loss) for assets to be disposed
of at December 31, 1996 and 1995, as included in the  Consolidated  Statement of
Income. The impairment losses are included in the pretax losses.

(In millions of dollars)                 1996     1995     1994
 Sales -
  Exploration and production              $42    $  64     $ 81
  Chemicals                                 6        7       12
  Coal                                     --       18       25
    Total                                 $48    $  89     $118
Income (Loss) -
  Exploration and production              $ 9    $(108)    $ (6)
  Chemicals                                (7)      --        1
  Coal                                     --       (7)       1
    Total                                $  2    $(115)    $ (4)

12. Restructuring Charges

    Restructuring  of the  exploration  and production  operating unit continued
during 1996 with the planned  relocation of the unit to Houston,  Texas, and the
merger of its North American  onshore  properties into Devon (see Note 4). This,
in  conjunction  with  the  unit's  reorganization  of  its  administrative  and
operating functions,  which began in 1995 (see Note 11), resulted or will result
in approximately 300 employees  terminating  their  employment.  Of this number,
approximately 200 and 50 were terminated in 1996 and 1995, respectively,  and it
is expected that the additional employees will be terminated in 1997.
    During the two-year  period ended December 31, 1996,  the company  accrued a
total of $17 million for future  compensation,  relocation,  lease cancellation,
outplacement,  and  the  cost  of  special  termination  benefits  for  retiring
employees  to be paid from  retirement  plan  assets.  The $10  million  reserve
balance remaining at December 31, 1996, represents primarily  relocation,  lease
cancellation, and future compensation, which are expected to be paid and charged
to the reserve  during 1997 and 1998.  The accruals,  expenditures,  and reserve
balances related to the restructuring of the exploration and production unit are
set forth below:

(In millions of dollars)                                  1996        1995
Beginning balance                                          $ 5         $--
  Accruals                                                  10           7
  Retirement benefits to be paid from plan assets           (2)         (1)
  Payments                                                  (3)         (1)
Ending balance                                             $10         $ 5

    The company also  implemented a  restructuring  program in 1994,  consisting
principally of a reorganization of corporate support  functions,  and terminated
237 employees. The company accrued a total of $8 million related to this program
for  future  compensation,  outplacement,  and the cost of  special  termination
benefits for retiring  employees to be paid from  retirement  plan assets.  This
amount was paid and charged to the reserve during 1995 and 1994.

13. Financial Instruments and Hedging Activities

Investments in Certain Debt and Equity Securities
    The company has investments in equity securities and certain  obligations of
the  U.S.  government  that are  considered  to be  available  for  sale.  These
financial  instruments  are carried in the  Consolidated  Balance  Sheet at fair
value,  which is based on quoted market  prices.  The company held no securities
classified  as held to  maturity or trading  during the  two-year  period  ended
December 31, 1996. At December 31, 1996 and 1995,  available-for-sale securities
for which fair values can be estimated are as follows:
<TABLE>
<CAPTION>

                                                     1996                                  1995
                                             Fair            Gross Unrealized     Fair             Gross Unrealized
(In millions of dollars)                    Value    Cost       Holding Gains     Value    Cost       Holding Gains
<S>                                           <C>     <C>                 <C>       <C>     <C>                <C> 
Equity securities                             $22     $ 3                 $19       $53     $12                $ 41
U.S. government obligations -
  Maturing within one year                     26      26                  --        10      10                  --
  Maturing between one year and four years     --      --                  --        17      17                  --
    Total                                     $48     $29                 $19       $80     $39                $ 41
</TABLE>


    Equity  securities  are  carried  in  the  Consolidated  Balance  Sheet  as
Investments - Other assets. U.S.  government  obligations are carried as Current
Assets or as Investments - Other assets, depending upon their maturity.
    During 1996, the company sold equity  securities  considered to be available
for sale.  Proceeds from the sales totaled $29 million.  The average cost of the
securities was used in the  determination  of the realized gains,  which totaled
$23 million before income taxes. Also during 1996, the company donated a portion
of its equity  securities to  Kerr-McGee  Foundation  Corporation,  a tax-exempt
entity whose purpose is to contribute to not-for-profit organizations.  The fair
value of these donated shares totaled $16 million,  which included  appreciation
of $13 million before income taxes.
    The change in unrealized  holding gains,  net of income taxes,  as shown in
the separate  component of  stockholders'  equity during the  three-year  period
ended December 31, 1996, is as follows:

(In millions of dollars)                       1996      1995      1994
Beginning balance                               $26       $12       $20
  Net unrealized holding gains (losses)           9        14        (8)
  Net realized gains                            (15)       --        --
  Net appreciation of donated securities         (8)       --        --
Ending balance                                  $12       $26       $12

Financial Instruments for Other than Trading Purposes
    In addition to the investments  discussed above, the company holds or issues
financial  instruments for other than trading purposes. At December 31, 1996 and
1995, the carrying amount and estimated fair value of such financial instruments
for which fair value can be determined are as follows:

                                                  1996            1995
                                          Carrying    Fair  Carrying   Fair
(In millions of dollars)                    Amount   Value    Amount  Value
Cash and cash
  equivalents                                 $121    $121      $ 87   $ 87
Long-term notes
  receivable                                    17      17        21     21
Contracts to sell
  foreign currencies                            13      33        15     34
Contracts to purchase
  foreign currencies                            --      29        --     54
Short-term borrowings                           37      37        94     94
Total long-term debt                           626     737       641    763

    The carrying amount of cash and cash equivalents  approximates fair value of
those  instruments  due to  their  short  maturity.  The  fair  value  of  notes
receivable  is based on  discounted  cash  flows or the fair value of the note's
collateral.  The fair value of the company's  short-term  and long-term  debt is
based on the quoted  market prices for the same or similar debt issues or on the
current rates offered to the company for debt with the same remaining  maturity.
The fair value of foreign  currency forward  contracts  represents the aggregate
replacement cost based on financial institutions' quotes.

 Hedging Activities
    Most of the company's foreign currency  contracts are hedges principally for
chemicals'  accounts  receivable  generated from titanium  dioxide pigment sales
denominated in foreign  currencies ($68 million in 1996 and $71 million in 1995)
and the  operating  costs and capital  expenditures  of  international  chemical
operations  ($28  million in 1996 and $27 million in 1995) and  exploration  and
production  joint-venture operations ($64 million in 1995). The purpose of these
foreign currency hedging activities is to protect the company from the risk that
the eventual U.S.  dollar  amount from sales to foreign  customers and purchases
from foreign  suppliers will be adversely  affected by foreign currency exchange
rates.  The company  recognized net foreign currency hedging gains of $3 million
in 1996 and $8 million in 1995; net gains and losses in 1994 were immaterial.
    At December 31, 1996, the company had foreign  currency  contracts  maturing
between  January and December  1997 to purchase $36 million  Australian  for $25
million.  Additionally,  at December 31, 1996, the company had contracts to sell
for $34 million various foreign  currencies,  principally  European  currencies,
which mature between January and December 1997. This includes contracts totaling
$14 million for anticipated  pigment sales that have been  marked-to-market.  At
December 31, 1995, the company had foreign currency  contracts  maturing between
January  1996 and  December  1997 to  purchase  $74 million  Australian  for $51
million.  Additionally,  at December 31, 1995, the company had contracts to sell
for $34 million various foreign  currencies,  principally  European  currencies,
which  matured  between  January and  December  1996.  This  included  contracts
totaling $15 million for anticipated  pigment sales that were  marked-to-market.
Net  unrealized  gains on  foreign  currency  contracts  totaled  $4  million at
year-end 1996, $3 million at year-end 1995, and $9 million at year-end 1994.
    The company also  periodically  uses futures and option  contracts to reduce
the effect of the price  volatility of crude oil, natural gas, and, prior to the
sale of the refining and marketing  operations,  refined  products.  The futures
contracts permit settlement by delivery of commodities.
    During 1996, the company sold forward 10 million barrels of crude oil and 37
billion cubic feet of natural gas representing  approximately 40% and 36% of its
worldwide crude oil and natural gas production, respectively. Net hedging losses
on crude oil and natural gas recognized in 1996 totaled $37 million.  The effect
of the losses was to reduce the  company's  1996 average  gross margin for crude
oil and  natural  gas by $1.04 per  barrel  and $.11 per MCF,  respectively.  At
year-end 1996, there were no open crude oil or natural gas contracts.
    During 1995, the company sold forward 13 million barrels of crude oil and 19
billion cubic feet of natural gas representing  approximately 49% and 18% of its
worldwide  crude oil and natural gas  production,  respectively,  and 35% of the
refined-product sales of the discontinued refining and marketing operations. Net
recognized  hedging  gains  and  losses  for 1995 and 1994 were  immaterial.  At
year-end 1995,  open crude oil and natural gas contracts had an aggregate  value
of $151  million,  and the  unrecognized  loss on these  contracts  totaled  $14
million.
    Contract  amounts do not quantify risk or represent assets or liabilities of
the  company  but are used in the  calculation  of cash  settlements  under  the
contracts.  These financial  instruments  limit the company's  market risks, are
with major financial  institutions,  expose the company to credit risks, and may
at times be concentrated  with certain  institutions or groups of  institutions.
However,  the credit  worthiness of these  institutions is subject to continuing
review, and full performance is anticipated.
    Year-end  hedge  positions and activities  during a particular  year are not
necessarily indicative of future activities and results.

14. Income Taxes

    The taxation of a company that has operations in several countries  involves
many complex variables, such as differing tax structures from country to country
and the effect on U.S. taxation of international earnings. These complexities do
not  permit  meaningful  comparisons  between  the  domestic  and  international
components of income before income taxes and the provision for income taxes, and
disclosures  of  these  components  do  not  provide   reliable   indicators  of
relationships in future periods. Income (loss) from continuing operations before
income taxes is composed of the  following:

(In millions of dollars)                 1996     1995     1994
 Domestic                                $216    $(125)     $57
 International                            107       56       42
    Total                                $323    $ (69)     $99

    Effective  January 1, 1995, the income tax rate in Australia  increased from
33% to 36%.  The  deferred  income tax  balances  were  adjusted to reflect this
revised rate,  which  decreased the 1995  international  deferred  provision for
income taxes by $2 million.  The 1996,  1995, and 1994  provision  (benefit) for
income taxes on income from  continuing  operations  is  summarized  below:

(In millions of dollars)                 1996     1995     1994
 U.S. Federal -
  Current                                $ 37     $ (4)     $12
  Deferred                                 25      (63)      (2)
                                           62      (67)      10
International -
  Current                                   5        9       16
  Deferred                                 32        9        2
                                           37       18       18

State                                       4        4        2
    Total                                $103     $(45)     $30

    The net deferred tax asset shown in the following  table  represents the net
deferred  taxes in certain  foreign tax  jurisdictions,  which is  classified as
Investments - Other assets in the  Consolidated  Balance Sheet.  At December 31,
1996,  the net deferred  tax asset  includes the benefit for $101 million in net
operating  loss  carryforwards  that have no expiration  dates.  Realization  is
dependent on generating  sufficient taxable income.  Although realization is not
assured,  the  company  believes  it is more likely than not that all of the net
deferred tax asset will be realized.
    At December 31, 1996, the company has additional  foreign net operating loss
carryforwards  totaling $31 million that also have no  expiration  dates.  These
loss carryforwards offset a portion of the foreign net deferred tax liability.
    Deferred  tax  liabilities  (assets)  at  December  31,  1996 and 1995,  are
composed of the following:

(In millions of dollars)                            1996         1995
Net deferred tax liability -
  Accelerated depreciation                          $259         $258
  Exploration and development                         65           69
  Undistributed earnings of foreign
    subsidiaries                                      23           29
  Postretirement benefits                            (46)         (48)
  Dismantlement, reclamation, remediation,
    and other reserves                              (113)        (128)
  Foreign operating loss carryforward                (10)         (40)
  Other                                              (47)         (48)
                                                     131           92
Net deferred tax asset -
  Accelerated depreciation                            16            8
  Foreign operating loss carryforward                (36)         (28)
  Other                                               (3)          (1)
                                                     (23)         (21)
        Total deferred taxes                        $108          $71

    In the following  table,  the U.S.  Federal income tax rate is reconciled to
the  company's  effective  tax rates for income from  continuing  operations  as
reflected in the Consolidated Statement of Income.

                                                   1996       1995     1994
U.S. statutory rate                                35.0%    (35.0)%    35.0%
  Increases (decreases) resulting from -
    Statutory depletion in excess
      of cost depletion                            (2.6)    (10.4)     (4.7)
    Taxation of foreign operations                   .9      (2.0)      (.7)
    State income taxes                               .9      (2.2)      2.5
    Adjustment of prior years' accruals              --      (2.0)       -- 
    Federal income tax credits                      (.2)     (4.1)     (1.5)
    Dividends paid on employee
      stock ownership plan                           --      (2.0)     (1.4)
    Foreign equity income                            --      (2.6)       --
    Contribution of appreciated
      equity securities                            (1.4)       --        --
    Adjustment of deferred tax balances
      due to tax rate changes                        --      (3.1)       --
    Other - net                                     (.7)     (1.6)      1.2
        Total                                       31.9%   (65.0)%    30.4%

    The Internal  Revenue Service has examined the company's  Federal income tax
returns for all years through 1994, and the years have been closed through 1983.
The company  believes that it has made adequate  provision for income taxes that
may become payable with respect to open tax years.

15. Taxes, Other than Income Taxes

    Taxes,  other than income taxes,  during the years ended December 31, 1996,
1995, and 1994, are composed of the following:

(In millions of dollars)                        1996        1995        1994
Production/severance                             $25         $22         $27
Payroll                                           15          14          14
Property                                          10          10          13
Other                                             16          15          10
    Total                                        $66         $61         $64

16. Postretirement Benefits

    The company sponsors  contributory  plans to provide certain health care and
life insurance benefits for retired  employees.  Substantially all the company's
employees may become  eligible for these  benefits if they reach  retirement age
while  working  for the  company;  however,  benefits  available  and  costs  to
individual  employees vary  depending on the  employee's  date of retirement and
date of employment with the company.
    At December 31, 1996 and 1995,  the actuarial and recorded  liabilities  for
postretirement benefits, none of which has been funded, are as follows:

                                                  1996                 1995
(In millions of dollars)                   Health     Life      Health     Life
Actuarial present value of accumulated
  postretirement benefit obligations -
     Retirees                               $(69)    $(18)       $(75)    $(19)
  Fully eligible active participants         (11)      (1)        (11)      (1)
  Other active participants                  (18)      (4)        (20)      (3)
       Total                                 (98)     (23)       (106)     (23)
Unrecognized net (gain) loss                  --       (4)         12       (3)
         Accrued postretirement expense     $(98)    $(27)       $(94)    $(26)


<TABLE>
    For the years ended December 31, 1996, 1995, and 1994, the components of net
periodic expense for postretirement benefits are as follows:
<CAPTION>

                                                                       1996           1995            1994
(In millions of dollars)                                          Health  Life    Health  Life    Health  Life
<S>                                                                   <C>   <C>       <C>   <C>       <C>   <C>
Service cost - benefits earned during the period                      $1    $1        $1    $1        $2    $1
Interest cost on accumulated postretirement benefit obligations        8     1         8     1         7     1
    Net postretirement expense                                        $9    $2        $9    $2        $9    $2
</TABLE>

    The following assumptions are used in estimating the actuarial present value
of  the  accumulated   postretirement   benefit  obligations  and  net  periodic
postretirement benefit expense:

                                         1996    1995    1994
Future compensation increases             5.0%   5.00%    5.0%
Discount rate                             7.5    7.25     8.5

    The  health  care  cost  trend  rate used to  determine  the  year-end  1996
accumulated  postretirement  benefit  obligation  was  8.5% in  1997,  gradually
declining to 5% in the year 2009 and thereafter.
    A 1% increase  in the  assumed  health care cost trend rates for each future
year would increase the  accumulated  postretirement  benefit  obligation by $11
million at December 31,  1996.  In  addition,  the  aggregate of the service and
interest cost components of net periodic  postretirement  expense for 1996 would
increase by $1 million.

17. Retirement Plans

    Most of the company's employees are covered under noncontributory retirement
plans of the  company  and certain of its  subsidiaries.  The  benefits of these
plans are based primarily on years of service and employees'  remuneration  near
retirement.  The company's policy is to fund the minimum amounts as permitted by
the Employee Retirement Income Security Act of 1974 (ERISA).
<TABLE>
    The funded status of plans with assets in excess of accumulated  benefits at
December 31, 1996 and 1995, is as follows:
<CAPTION>


(In millions of dollars)                                                      1996            1995
<S>                                                                           <C>            <C>  
Plan assets at fair value                                                     $538           $ 492
Actuarial present value of accumulated benefit obligations -
   Vested                                                                     (322)           (323)
   Nonvested                                                                   (13)            (10)
     Total                                                                    (335)           (333)
     Plan assets in excess of accumulated benefit obligations                 $203           $ 159

Plan assets at fair value                                                     $538           $ 492
Projected benefit obligations -
   Actuarial present value of accumulated benefit obligations                 (335)           (333)
   Projected salary increases                                                  (46)            (48)
     Total                                                                    (381)           (381)
     Plan assets in excess of projected benefit obligations                    157             111
Unrecognized net asset at January 1, 1987                                      (17)            (22)
Unrecognized prior service costs                                                12              12
Unrecognized net gain                                                         (119)            (73)
     Pension prepayment at end of year                                        $ 33           $  28
</TABLE>

    The net  periodic  pension  credit,  excluding  charges  of $2  million,  $1
million,  and $2 million in 1996, 1995, and 1994,  respectively,  related to the
restructuring programs (see Note 12), for each of the three years ended December
31, 1996,  1995,  and 1994, is  summarized as follows:

(In millions of dollars)                          1996    1995    1994
Service cost - benefits earned
  during the period                                $ 9    $  8     $10
Interest cost on projected
  benefit  obligations                              27      27      24
Return on plan assets                              (70)   (115)     (6)
Net amortization and deferral                       27      71     (35)
    Net pension credit                             $(7)   $ (9)    $(7)

    The amount of benefits that can be covered by the funded plans is limited by
ERISA and the  Internal  Revenue  Code.  Therefore,  the  company  has  unfunded
supplemental  plans designed to maintain  benefits for all employees at the plan
formula  level  and to  provide  senior  executives  with  benefits  equal  to a
specified percentage of their final average compensation.  The projected benefit
obligation  for these  unfunded  plans  totaled  $19  million and $15 million at
December  31,  1996 and 1995,  respectively.  To reflect the amount by which the
accumulated  benefit  obligation  exceeded the accrued pension expense for these
plans, an additional  liability is recorded in the Consolidated Balance Sheet at
both December 31, 1996 and 1995. Offsetting is an intangible asset (see Note 7).
Although not considered plan assets,  a grantor trust has been  established from
which  payments  for  certain of these  supplemental  plans are made.  The trust
assets  totaled  $12  million  and $6 million  at  December  31,  1996 and 1995,
respectively.  Net periodic  pension  expense for these plans was $4 million for
each of the years 1996, 1995, and 1994.
    The following are the assumptions  used in estimating the actuarial  present
value of the projected benefit obligation and net periodic pension costs:

                                                  1996    1995    1994
Future compensation increases                      5.0%   5.00%    5.0%
Discount rate                                      7.5    7.25     8.5
Long-term rate of return on plan assets            9.0    9.00     9.0

18. Other Income

    Other  income is as  follows  during  each of the  years in the  three-year
period ended December 31, 1996:

(In millions of dollars)                          1996    1995     1994
Settlements with insurance carriers                $67     $--     $ --
Gain on sale of assets                              24       2        5
Gain on sale of available-for-sale securities       23      --       --
Interest                                             9      15       20
Other                                                9      12        2
  Total                                           $132     $29     $ 27

19. Employee Stock Ownership Plan

    In 1989,  the  company's  Board of Directors  approved a leveraged  Employee
Stock  Ownership  Plan  (ESOP)  into  which  is  paid  the  company's   matching
contribution  for the employees'  contributions  to the  Kerr-McGee  Corporation
Savings  Investment Plan (SIP). Most of the company's  employees are eligible to
participate  in both the ESOP  and the  SIP.  Although  the ESOP and the SIP are
separate  plans,  matching   contributions  to  the  ESOP  are  contingent  upon
participants' contributions to the SIP.
    In 1989, the ESOP borrowed $125 million from a group of lending institutions
and used the proceeds to purchase 2.7 million  shares of the company's  treasury
stock.  The company used the $125 million in proceeds from the sale of the stock
to  acquire  shares of its  common  stock on the open  market  and in  privately
negotiated  transactions.  A portion of the borrowings was replaced in 1996 with
sponsor  financing  (see the  Financial  Condition  discussion  in  Management's
Discussion  and  Analysis).  The  third-party  borrowings  are guaranteed by the
company and are reflected in the  Consolidated  Balance Sheet as Long-Term Debt,
while the sponsor  financing  does not appear in the  company's  balance  sheet.
Deferred compensation, representing the unallocated ESOP shares discussed in the
following paragraph, is reflected as a reduction of stockholders' equity.
    The  company  stock  acquired  by the ESOP trust is held in a loan  suspense
account. The company's matching contribution and dividends on the shares held by
the ESOP are  used to repay  the  loans,  and  stock is  released  from the loan
suspense  account as the  principal  and  interest  are paid.  The stock is then
allocated  to  participants'  accounts  at  market  value  as the  participants'
contributions  are  made to the  SIP.  Deferred  compensation  reflected  in the
company's  Consolidated  Balance  Sheet is reduced as the ESOP loans are repaid.
Long-term  debt  is  also  reduced  as  payments  are  made  on the  third-party
financing. Dividends paid on the common stock held in participants' accounts are
also used to repay the loans,  and stock with a market value equal to the amount
of dividends is allocated to participants' accounts.
    At December  31, 1996 and 1995,  the ESOP held shares of stock  allocated to
participants' accounts and in the loan suspense account as follows:

(In thousands of shares)           1996    1995
Participants' accounts            1,251   1,151
Loan suspense account             1,290   1,460

    The  shares  allocated  to  participants  at  December  31,  1996,   include
approximately 14,000 shares released in January 1997. In addition, approximately
19,000 shares released during 1995 were allocated to participants in 1996.
    All  ESOP  shares  are   considered   outstanding   for   earnings-per-share
calculations. Dividends on ESOP shares are charged to retained earnings.
    Compensation  expense is recognized using the cash method and is reduced for
dividends paid on the ESOP shares. The company recognized  ESOP-related  expense
of $12  million,  $14  million,  and  $15  million  in  1996,  1995,  and  1994,
respectively. These amounts include interest expense incurred on the third-party
ESOP debt of $6 million,  $8 million,  and $9 million in 1996,  1995,  and 1994,
respectively.  The company contributed $9 million,  $15 million, and $14 million
to the ESOP in 1996, 1995, and 1994,  respectively.  The cash  contributions are
net of $4 million for the  dividends  paid on the company stock held by the ESOP
in each of the years 1996, 1995, and 1994.

20. Employee Stock Option Plans

    The 1987 Long Term  Incentive  Program  authorized the issuance of shares of
the  company's  common stock  through  December  31, 2002,  in the form of stock
options,  restricted stock, or long-term  performance awards. The options may be
accompanied by stock  appreciation  rights.  The plan was amended in May 1995 to
restore the number of shares available to be granted to 1,000,000,  bringing the
total number of shares authorized to be granted through the plan to 2,740,000.
    The company's employee stock options are fixed-price  options granted at the
fair  market  value of the  underlying  common  stock on the date of the  grant.
Generally,  one-third of each grant vests and becomes exercisable each year over
a three-year  period  immediately  following the grant date and expires 10 years
after the grant date.
    The 1984 Employee Stock Option Plan  authorized the granting of options over
a 10-year  period for up to 1,000,000  shares of common  stock and  accompanying
stock  appreciation  rights.  The 1984 plan was terminated on May 3, 1988. After
that date, no further options could be granted under this plan, although options
and any accompanying stock appreciation rights outstanding at that time could be
exercised prior to their respective expiration dates.
<TABLE>
    Transactions  during the past three years under these plans are  summarized
below:
<CAPTION>

                                               1987 Incentive Program          1984 Stock Option Plan
                                                   Weighted-Average               Weighted-Average
                                                     Exercise Price                 Exercise Price
                                                Options  per Option            Options  per Option
<S>                                           <C>            <C>               <C>          <C>   
Balance outstanding December 31, 1993           859,622      $44.80             57,500      $28.62
   Options granted                              380,900       45.66                 --          --
   Options exercised                            (21,151)      38.13            (13,000)      27.06
   Options surrendered upon exercise
     of stock appreciation rights                (8,500)      43.68            (11,500)      33.38
   Options forfeited                            (32,468)      48.14                 --          --
Balance outstanding December 31, 1994         1,178,403       45.11             33,000       27.58
   Options granted                              409,000       49.31                 --          --
   Options exercised                           (206,821)      43.81             (3,000)      27.06
   Options surrendered upon exercise
     of stock appreciation rights                (6,850)      39.80            (20,000)      27.91
   Options forfeited                            (49,369)      45.87                 --          --
Balance outstanding December 31, 1995         1,324,363       46.61             10,000       27.06
   Options granted                              310,800       63.56                 --          --
   Options exercised                           (333,594)      46.40                 --          --
   Options surrendered upon exercise
     of stock appreciation rights               (48,634)      43.63            (10,000)      27.06
   Options forfeited                             (6,469)      53.00                 --          --
Balance outstanding December 31, 1996         1,246,466       50.98                 --          --

Options exercisable -
   December 31, 1994                            561,534       43.96             33,000       27.58
   December 31, 1995                            626,759       44.87             10,000       27.06
   December 31, 1996                            623,461       46.44                 --          --
</TABLE>

<TABLE>
    Following are the range of exercise prices, the  weighted-average  remaining
life  of  all  stock  options   outstanding   at  December  31,  1996,  and  the
weighted-average  price within each price range of those options outstanding and
those options exercisable at year-end 1996.
<CAPTION>

                   Options Outstanding at December 31, 1996               Options Exercisable at December 31, 1996
                 Range of        Weighted-Average    Weighted-Average                             Weighted-Average
          Exercise Prices    Remaining Contractual     Exercise Price                               Exercise Price
Options        per Option             Life (Years)         per Option        Options                    per Option
<S>            <C>    <C>                      <C>             <C>           <C>                            <C>   
   73,184      $32.38-$39.57                   3.6             $36.87         73,184                        $36.87
  609,996       40.81- 49.25                   6.7              45.60        402,554                         45.86
  264,186       50.56- 54.50                   7.9              53.08        138,523                         52.08
  299,100       62.13- 64.88                   9.3              63.53          9,200                         63.32
1,246,466       32.38- 64.88                   7.4              50.98        623,461                         46.44
</TABLE>


    FAS  No.  123,  "Accounting  for  Stock-Based  Compensation,"  prescribes  a
fair-value   method  of  accounting  for  employee  stock  options  under  which
compensation  expense is  measured  based on the  estimated  fair value of stock
options at the grant date and recognized  over the period that the options vest.
The  company,  however,  chooses to account for its stock  option plan under the
optional  intrinsic value method of APB No. 25, whereby no compensation  expense
is  recognized  for  fixed-price  stock  options.  Compensation  cost for  stock
appreciation  rights,  which is recognized  under both accounting  methods,  was
immaterial for 1996, 1995, and 1994.
    Had compensation expense been determined in accordance with FAS No. 123, the
estimated  weighted-average,  grant-date  fair value  would have been $13.17 and
$14.54 per option for those options granted in 1996 and 1995, respectively,  and
the  resulting  compensation  expense would have reduced net income and earnings
per share as shown in the following pro forma amounts.  These amounts may not be
representative  of  compensation  expense  that might be  expected  to result in
future  years using the  fair-value  method of  accounting  for  employee  stock
options,  as the  number of  options  granted  in a  particular  year may not be
indicative of the number of options granted in future years,  and the fair-value
method of accounting has not been applied to options granted prior to January 1,
1995.

(In millions of dollars, except per-share amounts)    1996      1995
Net Income (Loss) -
  As reported                                        $ 220    $ (31)
  Pro forma                                            218      (32)
Earnings (Loss) per Share -
  As reported                                        $4.43    $(.60)
  Pro forma                                           4.40     (.62)

    The fair value of each option  granted in 1996 and 1995 was  estimated as of
the grant date using the  Black-Scholes  option pricing model with the following
weighted-average assumptions.

                                                      1996      1995
Expected life (years)                                  5.8      10.0
Risk-free interest rate                                6.1%      7.1%
Expected dividend yield                                3.1       3.1
Expected volatility                                   17.9      19.4

21. Discontinued Operations

    During 1995, the company disposed of  substantially  all of its refining and
marketing  operations,  which had been  conducted by wholly owned  subsidiaries,
Kerr-McGee Refining Corporation and Cato Oil and Grease Co. The 1995 gain on the
sale was $2 million,  net of $1 million for income taxes. The operating  results
of the discontinued refining and marketing operations are reported separately in
the Consolidated  Statement of Income.  Revenues  applicable to the discontinued
operations  totaled $1.1  billion in 1995 and $1.9  billion in 1994.  All of the
crude oil and  refined-product  inventories  of the  discontinued  refining  and
marketing  operations  were valued using the LIFO method until sold during 1995.
LIFO  reserves  of $12  million  were  reversed at the time of the sale of these
inventories.  The remaining net assets of the  discontinued  operations  are not
segregated in the  Consolidated  Balance  Sheet at December 31, 1995,  since the
amounts are immaterial.  The sales of the remaining assets were completed during
1996, and the resulting gains and losses were immaterial.

22. Stockholders' Equity

<TABLE>
    Changes in common stock,  capital in excess of par value, and treasury stock
for 1996, 1995, and 1994 are as follows:
<CAPTION>

                                                               Common Stock                    Treasury Stock
                                                                               Capital in
                                                            Shares       Par    Excess of
(In millions of dollars and thousands of shares)            Issued     Value    Par Value     Shares      Cost
<S>              <C> <C>                                    <C>          <C>         <C>       <C>        <C> 
Balance December 31, 1993                                   53,268       $53         $308      1,613      $ 63
  Exercise of stock options and stock appreciation rights       36        --            1         --        --
  Issuance of shares for achievement awards                     --        --           --         (3)       --
Balance December 31, 1994                                   53,304        53          309      1,610        63
  Exercise of stock options and stock appreciation rights      210         1            9         --        --
  Stock purchase program                                        --        --           --        835        48
Balance December 31, 1995                                   53,514        54          318      2,445       111
  Exercise of stock options and stock appreciation rights      348        --           16         --        --
  Issuance of shares for achievement awards                     --        --           --         (3)       --
  Stock purchase program                                        --        --           --      3,127       195
Balance December 31, 1996                                   53,862       $54         $334      5,569     $ 306
</TABLE>

    The  company  has 40 million  shares of  preferred  stock  without par value
authorized, and none is issued.
    During 1995, the Board of Directors authorized  management to purchase up to
$300  million of the common  stock of the  company.  Since the  inception of the
program, which the company expects to complete by mid-1997, a total of 3,962,000
shares have been acquired at a cost of $243 million.
    In  1996,   the   company's   Board  of  Directors   replaced  the  existing
stockholder-rights  plan,  which  expired in July 1996,  with a new rights  plan
dated July 9, 1996.  Such rights were  distributed  as a dividend at the rate of
one right for each share of the company's  common stock.  Generally,  the rights
may be redeemed at $.01 per right 10 days after a person or group  acquires  15%
or  more  of the  company's  common  stock.  After  the  rights  are  no  longer
redeemable,  each right would then entitle the holder  (other than a 15% holder)
to buy the  company's  common  stock having a market value of twice the exercise
price of $215.  In the  event  the  company  is  acquired  in a merger  or other
business combination transaction, each right would entitle the holder to buy, at
the  exercise  price of $215,  the number of shares of the  acquiring  company's
common  stock  having a market value of twice the right's  exercise  price.  The
rights expire in July 2006.

23. Other Financial Information

    Condensed  financial   information  relating  to  the  company's  previously
unconsolidated,  wholly owned finance  subsidiary is summarized below:

(In millions of dollars)            1996    1995    1994
 Results of operations -
   Interest income                   $25     $25     $20
   Net income                          6       5       4
 

                                    1996    1995    1994
Financial position -
  Assets                            $367    $360    $460
  Liabilities                       (258)   (257)   (362)
    Stockholder's equity            $109    $103    $ 98

24. Reporting by Business Segments

    The company is an international  energy and chemical company.  The principal
areas of oil and gas  exploration  and  production  are the United  States,  the
United  Kingdom  sector of the North Sea,  China,  Southeast  Asia, and prior to
December 31, 1996, Canada. The company has domestic coal and chemical operations
and interests in chemical  operations in Western Australia and Saudi Arabia.

(In millions of dollars)                           1996        1995        1994
Sales -
   Exploration and production(1)                 $  874      $  690      $  633
   Chemicals                                        692         707         639
   Coal                                             365         353         294
   Other                                             --           4          --
        Total                                    $1,931      $1,754      $1,566
Operating profit (loss)(2) -
   Exploration and production                    $  204      $  (97)     $   74
   Chemicals                                         85         122          92
   Coal                                              75          43          45
   Other                                              7          (4)         (4)
        Total                                    $  371      $   64      $  207
Net operating profit (loss)(2) -
   Exploration and production                    $  136      $  (56)     $   49
   Chemicals                                         53          81          59
   Coal                                              57          35          34
   Other                                              5          (2)         (3)
        Total                                       251          58         139
Net interest expense                                (30)        (29)        (25)
Net nonoperating expense(2)                          (1)        (53)        (45)
Income (loss) from discontinued operations           --          (7)         21
Net income (loss)                                $  220      $  (31)     $   90
Sales -
   U.S. operations(3)                            $1,391      $1,237      $1,143
   International operations(4):
     North Sea - exploration and production         289         272         199
     China - exploration and production              25          --          --
     Canada - exploration and production             37          42          54
     Australia - chemicals                          151         158         114
     Other                                           38          45          56
                                                    540         517         423
        Total                                    $1,931      $1,754      $1,566
Operating profit (loss)(2) -
   U.S. operations                               $  256      $   (5)     $  148
   International operations:
     North Sea - exploration and production          93         108          54
     China - exploration and production               2          (5)         (2)
     Canada - exploration and production              7         (54)          8
     Australia - chemicals                            9          24           7
     Other                                            4          (4)         (8)
                                                    115          69          59
        Total                                    $  371      $   64      $  207

(1)  Includes  sales to the  discontinued  refining  and  marketing  operations,
     primarily  crude oil sales,  of $112  million and $151  million in 1995 and
     1994, respectively.
(2)  Includes unusual items.  Refer to Management's Discussion and Analysis.
(3)  Includes U.S.  crude oil sales to the  discontinued  refining and marketing
     operations of $105 million and $123 million in 1995 and 1994, respectively.
(4)  Includes  international  crude oil sales to the  discontinued  refining and
     marketing  operations  of $7  million  and $28  million  in 1995 and  1994,
     respectively.
<TABLE>

<CAPTION>

(In millions of dollars)                                                  1996        1995        1994
<S>                                                                     <C>         <C>         <C>  
Depreciation, depletion, and amortization expense - 
   Exploration and production                                           $  218      $  231      $  228
   Chemicals                                                                55          52          51
   Coal                                                                     30          29          24
   Other                                                                     4           6           9
   Discontinued operations                                                  --          16          28
        Total                                                           $  307      $  334      $  340

Cash capital expenditures -  
   Exploration and production                                           $  239      $  371      $  304
   Chemicals                                                               118          69          52
   Coal                                                                     29          36          33
   Other                                                                     6           2           3
   Discontinued operations                                                  --           6          18
        Total                                                              392         484         410

Exploration expenses Petroleum exploration and production:
     Dry hole costs                                                         37          34          30
     Amortization of undeveloped leases                                      9          14          17
     Other                                                                  34          41          35
        Total                                                               80          89          82
   Minerals and other                                                        3           3           3
        Total exploration expenses                                          83          92          85
   Less - Amortization of oil and gas and minerals leases
     and other noncash expenses                                            (14)        (19)        (18)
                                                                            69          73          67
        Total cash capital expenditures and cash exploration expenses   $  461      $  557      $  477

Identifiable assets -
   Exploration and production                                           $1,667      $1,748      $1,781
   Chemicals                                                               886         802         735
   Coal                                                                    276         327         320
   Other                                                                    39          36          47
        Total                                                            2,868       2,913       2,883
Corporate assets                                                           256         261         234
Discontinued operations                                                     --          39         579
        Total                                                           $3,124      $3,213      $3,696

Identifiable assets -
   U.S. operations                                                      $1,684      $1,663      $1,642
   International operations:
     North Sea - exploration and production                                651         669         679
     China - exploration and production                                    180         149          78
     Canada - exploration and production                                    --         124         193
     Australia - chemicals                                                 268         260         257
     Other                                                                  85          48          34
                                                                         1,184       1,250       1,241
        Total                                                           $2,868      $2,913      $2,883
</TABLE>

<TABLE>
<CAPTION>
(In millions of dollars)                                                  1996        1995        1994
<S>                                                                     <C>         <C>         <C>   
Net assets -
   U.S. operations                                                      $ 582       $  623      $  824
   International operations:
     North Sea - exploration and production                                413         409         354
     China - exploration and production                                    109         106          65
     Canada - exploration and production                                    --          44          69
     Australia - chemicals                                                 211         199         212
     Other                                                                  52          35          19
                                                                           785         793         719
        Total                                                           $1,367      $1,416      $1,543
</TABLE>

25. Results of Operations from Crude Oil and Natural Gas Activities

    The table below presents the company's average per-unit sales price of crude
oil and natural gas and  production  costs per barrel of oil equivalent for each
of the past three years.  Natural gas  production has been converted to a barrel
of oil equivalent  based on approximate  relative  heating value (6 MCF equals 1
barrel).
                                        
                                           1996       1995       1994
Average sales price -
  Crude oil (per barrel)
    Domestic                             $19.36     $15.69     $14.64
    North Sea                             19.08      16.31      15.15
    China                                 19.53         --         --
    Canada                                17.69      15.21      13.39
    Other international                      --         --      14.48
      Average                             19.16      15.99      14.81

   Natural gas (per MCF)
    Domestic                               2.16       1.56       1.83
    North Sea                              2.64       2.66       2.11
    Canada                                 1.14        .85       1.37
      Average                              2.12       1.52       1.76

Production costs -
  (Per barrel of oil equivalent)
    Domestic                               3.73       3.96       4.34
    North Sea                              4.88       4.44       5.25
    China                                  6.70         --         --
    Canada                                 3.49       2.94       2.75
    Other international                      --         --       4.91
      Average                              4.21       4.02       4.47


<TABLE>
    The results of operations  from crude oil and natural gas activities for the
three years ended December 31, 1996, consist of the following:
<CAPTION>

                                Gross Revenues                                                                            Results of
                        Sales to    Sales to        Production    Other               Depreciation            Income Tax Operations,
(In millions        Unaffiliated  Affiliated          (Lifting) Related  Exploration and Depletion      Asset   Expenses   Producing
(of dollars)            Entities    Entities   Total     Costs  Costs(1)  Expenses(1)     Expenses Impairment  (Benefits) Activities
<S>                         <C>         <C>     <C>       <C>       <C>          <C>          <C>        <C>        <C>        <C>
1996 - 
 Domestic                   $397        $ --    $397      $ 93      $21          $26          $127       $ 22       $ 35       $ 73
 North Sea                   240          --     240        64        4           36            57         --         29         50
 China                        25          --      25         9       --            6             8         --          1          1
 Canada                       32          --      32        12        1            3            15         --         --          1
 Other international          --          --      --        --       --            9            --         --         (3)        (6)
  Total crude oil
   and natural gas
    activities               694          --     694       178       26           80           207         22         62        119
 Other(2)                    180          --     180       155        1           --             1         --          6         17
    Total                   $874        $ --    $874      $333      $27          $80          $208       $ 22       $ 68       $136

1995 -
 Domestic                   $197        $ 97    $294      $ 96      $11          $59          $128       $144       $(58)      $(86)
 North Sea                   235           7     242        65        3           15            66         --         31         62
 Canada                       40          --      40        13        2            6            20         53        (17)       (37)
 Other international          --          --      --        --       --            9            --         --         (3)        (6)
  Total crude oil
   and natural gas
    activities               472         104     576       174       16           89           214        197        (47)       (67)
 Other(2)                    106           8     114        84        4           --             3          6          6         11
    Total                   $578        $112    $690      $258      $20          $89          $217       $203       $(41)      $(56)

1994 -
 Domestic                   $169        $108    $277      $ 96      $ 6          $45          $115       $ --       $  4       $ 11
 North Sea                   182          14     196        70       --           17            61         --         17         31
 Canada                       48          --      48        13        1            6            26         --          1          1
 Other international          --          14      14         5        1           14             5         --         (3)        (8)
  Total crude oil
   and natural gas
    activities               399         136     535       184        8           82           207         --         19         35
 Other(2)                     83          15      98        73        1           --             4         --          6         14
    Total                   $482        $151    $633      $257      $ 9          $82          $211       $ --       $ 25        $49

(1) Includes  restructuring  charges of $10 million  classified as Other Related
Costs in 1996 and $6 million and $1 million  classified  as Other  Related Costs
and Exploration Expenses, respectively, in 1995 (see Note 12).
(2) Includes gas marketing,  gas processing plants,  pipelines,  and other items
that do not fit the  definition of crude oil and natural gas activities but have
been included above to reconcile to the segment presentations.
</TABLE>


26. Costs Incurred in Crude Oil and Natural Gas Activities

    Total expenditures, both capitalized and expensed, for crude oil and natural
gas property acquisition,  exploration, and development activities for the three
years ended December 31, 1996, are reflected in the following table:
                                             
                                             
                                             
                                       Property
                                    Acquisition   Exploration   Development
(In millions of dollars)               Costs(1)      Costs(2)      Costs(3)
1996 -
   Domestic                                 $ 6          $ 53         $  99
   North Sea                                 --            49            21
   China                                      1            10            25
   Canada                                    --             2             5
   Other international                       --            10             5
     Total                                  $ 7          $124         $ 155
1995 -
   Domestic                                 $84          $ 64         $ 128
   North Sea                                  7            28            23
   China                                      1             4            82
   Canada                                     1             5            10
   Other international                       --             8            --
     Total                                  $93          $109         $ 243
1994 -
   Domestic                                 $43          $ 67         $ 125
   North Sea                                 --            16            39
   China                                     --             1            56
   Canada                                     1             5             9
   Other international                        3            12             2
     Total                                  $47          $101        $  231


(1) Includes $29 million and $36 million  applicable to purchases of reserves in
place in 1995 and 1994, respectively.
(2) Exploration costs include delay rentals,  exploration staff, exploratory dry
holes,  dry hole and  bottom  hole  contributions,  geological  and  geophysical
studies,  costs  of  carrying  and  retaining  properties,  etc.,  plus  capital
expenditures,  such as costs of drilling and  equipping  successful  exploratory
wells, etc.
(3) Development costs include costs incurred to obtain access to proved reserves
(surveying,   clearing  ground,  building  roads,  etc.),  to  drill  and  equip
development wells, and to acquire,  construct, and install production facilities
and  improved  recovery  systems.   Development  costs  also  include  costs  of
developmental dry holes.

27. Capitalized Costs of Crude Oil and Natural Gas Activities

    Capitalized  costs of crude oil and natural gas  activities  and the related
reserves for  depreciation,  depletion,  and amortization at the end of 1996 and
1995 are set forth in the table below. Not included in the amounts shown is $209
million  that  represents  the  company's  proportional  interest  in an  equity
affiliate's net capitalized cost at December 31, 1996 (see Note 4).
                                             

                                             
(In millions of dollars)                                    1996           1995
Capitalized costs -
  Proved properties                                       $3,054         $3,921
  Unproved properties                                        104            173
  Other                                                       34             68
                                                           3,192          4,162
Reserves for depreciation, depletion,
  and amortization -
  Proved properties                                        1,953          2,574
  Unproved properties                                         29             62
  Other                                                       23             50
                                                           2,005          2,686
     Net capitalized costs                                $1,187         $1,476


28. Crude Oil, Condensate, and Natural Gas Net Reserves (Unaudited)

    The  estimates  of proved  reserves  have  been  prepared  by the  company's
geologists and engineers.  Such estimates include reserves on certain properties
that are partially  undeveloped  and reserves that may be obtained in the future
by improved recovery operations now in operation or for which successful testing
has been  demonstrated.  The  company  has no proved  reserves  attributable  to
long-term  supply  agreements with  governments or consolidated  subsidiaries in
which there are  significant  minority  interests.  At December  31,  1996,  the
company merged its North American  onshore  properties into an equity  affiliate
(see Note 4).
<TABLE>
    The following  table  summarizes the changes in the estimated  quantities of
the company's  crude oil and  condensate  and natural gas reserves for the three
years ended December 31, 1996.

<CAPTION>



                                              Crude Oil and Condensate                                   Natural Gas
                                              (In millions of barrels)                          (In billions of cubic feet)
                                                   North                                             North
                                        Domestic     Sea   China   Canada   Other   Total  Domestic    Sea   Canada   Other   Total
<S>                                          <C>     <C>      <C>      <C>     <C>    <C>       <C>    <C>      <C>      <C>    <C> 
Proved developed and
undeveloped reserves -
    Balance December 31, 1993                 76      81      26       13       3     199       413    184      111      --     708
      Revisions of previous estimates          5       6      --        2      --      13        36     19      (17)     --      38
      Purchases of reserves in place           1      --      --       --      --       1        16     --        1      --      17
      Sales of reserves in place              (1)     --      --       --      (2)     (3)       (1)    --       (1)     --      (2)
      Extensions, discoveries, and
        other additions                        6      --      --       --      --       6       181     --        6      --     187
      Production                             (10)    (12)     --       (2)     (1)    (25)      (77)    (4)     (18)     --     (99)
    Balance December 31, 1994                 77      75      26       13      --     191       568    199       82      --     849
      Revisions of previous estimates          2       1       4        1      --       8        (6)    --        3      --      (3)
      Purchases of reserves in place           1      --      --       --      --       1        45     --       --      --      45
      Sales of reserves in place              (5)     --      --       --      --      (5)      (31)    --       (1)     --     (32)
      Extensions, discoveries, and
        other additions                        1      --      --       --      --       1        25     --        1      --      26
      Production                             (10)    (14)     --       (2)     --     (26)      (82)    (8)     (16)     --    (106)
    Balance December 31, 1995(1)              66      62      30       12      --     170       519    191       69      --     779
      Revisions of previous estimates         12      (1)     --       (1)     --      10        (1)   (10)      (1)     --     (12)
      Purchases of reserves in place          --      --      --       --      --      --         1     --       --      --       1
      Sales of reserves in place             (10)     --      --       (1)     --     (11)      (28)    --      (18)     --     (46)
      Reserves merged into
        equity affiliate                     (16)     --      --       (9)     --     (25)     (122)    --      (41)     --    (163)
      Extensions, discoveries, and
        other additions                        3      39      --       --       7      49        27      2       --      39      68
      Production                             (11)    (11)     (2)      (1)     --     (25)      (84)   (11)      (9)     --    (104)
    Balance December 31, 1996(1)              44      89      28       --       7     168       312    172       --      39     523
   
    Proportional interest in
      equity affiliate's reserves
        December 31, 1996                     22      --      --        3      --      25       172     --       13      --     185

Proved developed reserves -
    December 31, 1993                         45      40      --       13       3     101       347    113      107      --     567
    December 31, 1994                         45      49      --       12      --     106       346    134       79      --     559
    December 31, 1995(1)                      45      50      --       12      --     107       329    156       65      --     550
    December 31, 1996(1)                      26      45      20       --      --      91       183    161       --      --     344
    Proportional interest in
      equity affiliate's reserves
        December 31, 1996                     20      --      --        3      --      23       164     --       13      --     177

(1)  Includes 1 million  barrels of oil and 3 billion  cubic feet of natural gas
held for sale at December 31, 1996, and 12 million barrels of oil and 57 billion
cubic feet of natural gas held for sale at December 31, 1995 (see Note 11).
</TABLE>

<TABLE>
    The  following  presents  the  company's  barrel  of oil  equivalent  proved
developed and undeveloped  reserves based on approximate  relative heating value
(6 MCF equals 1 barrel).
<CAPTION>

                                          North
(In millions of equivalent barrels)    Domestic          Sea        China      Canada        Other      Total
<S>                                         <C>          <C>           <C>         <C>          <C>       <C>
December 31, 1993                           144          112           26          32            3        317
December 31, 1994                           172          107           26          27           --        332
December 31, 1995(1)                        152           94           30          24           --        300
December 31, 1996(1)                         96          118           28          --           14        256
Proportional interest in
  equity affiliate's reserves
December 31, 1996                            51           --           --           5           --         56

(1) Includes 2 million  barrels of oil equivalent and 21 million  barrels of oil
equivalent held for sale at December 31, 1996 and 1995,  respectively  (see Note
11).
</TABLE>

29.  Standardized  Measure of and Reconciliation of Changes in Discounted Future
     Net Cash Flows (Unaudited)

    The standardized measure of future net cash flows presented in the following
table was computed  using year-end  prices and costs and a 10% discount  factor.
The future income tax expense was computed by applying the appropriate  year-end
statutory rates, with consideration of future tax rates already  legislated,  to
the future pre-tax net cash flows less the tax basis of the properties involved.
However,  the  company  cautions  that  actual  future  net cash  flows may vary
considerably  from these  estimates.  Although the company's  estimates of total
reserves,  development  costs,  and  production  rates  were based upon the best
information  available,  the  development  and  production  of the  oil  and gas
reserves may not occur in the periods assumed.  Actual prices realized and costs
incurred  may vary  significantly  from those used.  Therefore,  such  estimated
future net cash flow  computations  should not be  considered  to represent  the
company's  estimate of the  expected  revenues or the current  value of existing
proved reserves.
<TABLE>
<CAPTION>
                                             
                                                                                             Standardized         Proportional
                                                 Future                                       Measure of    Interest in Equity
                                Future      Development     Future                    10%     Discounted           Affiliate's
                                  Cash   and Production     Income   Future Net     Annual     Future Net         Standardized
(In millions of dollars)       Inflows            Costs      Taxes   Cash Flows   Discount   Cash Flows(1)             Measure
<S>                             <C>              <C>        <C>          <C>          <C>          <C>                    <C> 
1996 -
  Domestic                      $2,217           $  435     $  552       $1,230       $411         $  819                 $336
  North Sea                      2,610              841        638        1,131        382            749                   --
  China                            658              248         95          315         91            224                   --
  Canada                            --               --         --           --         --             --                   28
  Other international              246              147         38           61         26             35                   --
    Total                       $5,731           $1,671     $1,323       $2,737       $910         $1,827                 $364

1995 -
  Domestic                      $2,320           $  910     $  350       $1,060       $339         $  721                 $ --
  North Sea                      1,494              418        328          748        254            494                   --
  China                            551              179         96          276         81            195                   --
  Canada                           295               94         61          140         54             86                   --
  Other international                2               --          1            1         --              1                   --
    Total                       $4,662           $1,601     $  836       $2,225       $728         $1,497                 $ --

1994 -
  Domestic                      $2,124           $1,013     $  257       $  854       $312         $  542                 $ --
  North Sea                      1,679              596        280          803        237            566                   --
  China                            418              193         52          173         77             96                   --
  Canada                           297               79         65          153         63             90                   --
  Other international                3               --          1            2          1              1                   --
    Total                       $4,521           $1,881     $  655       $1,985       $690         $1,295                 $ --


(1) Includes $(8) million in 1996 and $51 million in 1995 from  properties  held
    for sale (see Note 11).
</TABLE>


<TABLE>
    The  changes  in the  standardized  measure  of future  net cash  flows are
presented below for each of the past three years:
<CAPTION>


(In millions of dollars)                                              1996        1995        1994
<S>                                                                 <C>         <C>         <C>   
Net change in sales, transfer prices, and production costs          $  847      $  451      $  250
Changes in estimated future development costs                           45        (165)        (52)
Sales and transfers less production costs                             (516)       (402)       (351)
Purchases of reserves in place                                           1          62          20
Changes due to extensions, discoveries, etc.                           474          58          97
Changes due to revisions in quantity estimates                         116          17         171
Changes due to sales of reserves in place                             (139)        (86)        (17)
Changes due to reserves merged into equity affiliate                  (511)         --          --
Current period development costs                                       155         243         231
Accretion of discount                                                  199         167         120
Changes in income taxes                                               (289)       (124)       (135)
Timing and other                                                       (52)        (19)         (1)
  Net change                                                           330         202         333
Total at beginning of year                                           1,497       1,295         962
Total at end of year                                                $1,827      $1,497      $1,295
</TABLE>


30. Supplementary Mineral Ore Reserve and Price Data (Unaudited)

    The following table presents  selected  statistics  related to the company's
mineral operations.  Mineral reserves presented in the following table represent
those  estimated  quantities  of proved and probable ore that,  under  presently
anticipated  conditions,  may be  profitably  recovered  and  processed  for the
extraction of their mineral  content.  Future  production of these  resources is
dependent  on  many  factors,   including  market  conditions  and  governmental
regulations.
<TABLE>
       
<CAPTION>

(In thousands of tons)                                          1996       1995       1994      1993      1992
<S>                                                          <C>        <C>        <C>       <C>       <C>      
Proved and probable (demonstrated) reserves, December 31 -
  Coal                                                       810,400    833,700    864,200   887,900   906,400
  Heavy minerals                                               5,500(1)   5,700      6,000     8,000     8,600
Production -
  Coal                                                        31,300     31,100     25,600    23,300    20,800
  Heavy minerals                                                 149        238        268       263       262
Average market price (per ton) -
  Coal                                                       $ 10.48    $ 10.12     $10.73    $13.78    $14.57
  Heavy minerals                                              142.60     104.40      85.43     69.47     77.99

(1)  Represents  161  million  tons of sand  containing  3.4% heavy  minerals in
     Western  Australia.  The  percentages of valuable heavy minerals within the
     heavy-mineral  concentrate are 4.3% rutile, 60.9% ilmenite, 3.5% leucoxene,
     and 11.2% zircon.
</TABLE>

31. Quarterly Financial Information (Unaudited)
<TABLE>

    A summary of quarterly  consolidated results for 1996 and 1995 is presented
below.
<CAPTION>

                                                                                   Income (Loss)
                                                                                 per Common Share
                                       Operating    Income (Loss)      Net                                                
(In millions of dollars,                  Profit  from Continuing   Income     Continuing
  except per-share amounts)   Sales       (Loss)       Operations    (Loss)    Operations   Net Income

<S>                          <C>            <C>              <C>      <C>           <C>          <C> 
1996 Quarter Ended -
  March 31                   $  455         $ 85             $ 48     $ 48          $ .94        $ .94
  June 30                       470           83               51       51           1.01         1.01
  September 30                  488           89               62       62           1.27         1.27
  December 31                   518          114               59       59           1.21         1.21
    Total(1)                 $1,931         $371             $220     $220          $4.43        $4.43
1995 Quarter Ended -
  March 31                   $  452         $ 81             $ 37      $38          $ .71        $ .73
  June 30                       442           76               35       45            .68          .86
  September 30                  444         (174)            (133)    (143)         (2.56)       (2.76)
  December 31                   416           81               37       29            .70          .57
    Total(1)                 $1,754         $ 64             $(24)    $(31)         $(.47)       $(.60)

(1) Includes unusual items.  Refer to Management's Discussion and Analysis.
</TABLE>


    The  company's  common  stock is listed  for  trading  on the New York Stock
Exchange and was held by approximately 11,500 stockholders of record at year-end
1996.  The ranges of sales  prices and  dividends  declared  during the last two
years are as follows:  

                                     Market Prices
                                                                     Dividends
                                1996               1995              per Share
                           High      Low      High      Low       1996     1995
Quarter Ended -
  March 31               65 3/4   59 3/8      51         44        $.41    $.38
  June 30                67 3/8   56 5/8      56 1/4     49 1/8     .41     .38
  September 30           63 3/8   55 3/4      59 7/8     53 1/8     .41     .38
  December 31            74 1/8   60 5/8      64         52 3/4     .41     .41


<TABLE>

Six-Year Financial Summary
<CAPTION>


(In millions of dollars, except per-share amounts)   1996       1995       1994       1993       1992       1991

<S>                                                <C>        <C>        <C>        <C>        <C>        <C>
Summary of Net Income (Loss)
Sales                                              $1,931     $1,754     $1,566     $1,445     $1,379     $1,325
Operating costs and expenses                        1,688      1,791      1,436      1,267      1,397      1,165
Interest and debt expense                              52         61         58         45         64         77
  Total costs and expenses                          1,740      1,852      1,494      1,312      1,461      1,242
                                                      191        (98)        72        133        (82)        83
Other income                                          132         29         27         16         47         55
Provision (benefit) for income taxes                  103        (45)        30         54        (23)        53
Income (loss) from continuing operations
  before extraordinary charge and cumulative
    effect of accounting changes                      220        (24)        69         95        (12)        85
Income (loss) from discontinued operations             --         (7)        21        (18)       (14)        17
Extraordinary charge                                   --         --         --         --         (5)        --
Cumulative effect of accounting changes                --         --         --         --        (70)        --
Net income (loss)                                  $  220     $  (31)    $   90     $   77     $ (101)    $  102
Common Stock Information, per Share
Net income (loss) per common share
  Continuing operations                            $ 4.43     $ (.47)    $ 1.33     $ 1.93     $ (.25)    $ 1.75
  Discontinued operations                              --       (.13)       .41       (.36)      (.28)       .35
  Extraordinary charge                                 --         --         --         --       (.10)        --
  Cumulative effect of accounting changes              --         --         --         --      (1.45)        --
      Total                                        $ 4.43     $ (.60)    $ 1.74     $ 1.57     $(2.08)    $ 2.10
Dividends declared                                   1.64       1.55       1.52       1.52       1.52       1.50
Stockholders' equity                                28.10      27.52      29.82      29.24      27.93      31.43
Market high for the year                            74.13      64.00      51.00      56.00      46.38      46.88
Market low for the year                             55.75      44.00      40.00      41.75      35.63      35.13
Market price at year-end                           $72.00     $63.50     $46.25     $45.25     $45.00     $38.63
Shares outstanding at year-end (thousands)         48,294     51,069     51,694     51,655     48,284     48,229
Balance Sheet Information
Working capital                                    $  320     $  189     $   52     $  102     $  204     $  346
Property, plant, and equipment - net                1,948      2,210      2,489      2,446      2,351      2,224
Total assets                                        3,124      3,213      3,696      3,506      3,482      3,362
Long-term debt                                        626        632        673        590        756        886
Total debt                                            663        735        993        859        930        935
Stockholders' equity                                1,367      1,416      1,543      1,512      1,350      1,516
Cash Flow Information
Net cash provided by operating activities             645        369        356        427        275        193
Cash capital expenditures                             392        484        410        449        372        491
Dividends paid                                         83         79         78         73         73         72
Purchase of treasury stock                         $  195     $   45     $   --     $   --     $   --     $   13
Ratios and Percentage
Current ratio                                         1.7        1.3        1.1        1.1        1.3        1.6
Average price/earnings ratio                         14.7         NM       26.1       31.1         NM       19.5
Total debt to total capitalization                     33%        34%        39%        36%        41%        38%
Employees
Total wages and benefits                           $  289     $  314     $  319     $  319     $  326     $  323
Number of employees at year-end                     3,851      3,976      5,524      5,812      5,866      6,072
</TABLE>




<TABLE>
Six-Year Operating Summary
<CAPTION>

                                                     1996       1995       1994       1993       1992       1991
<S>                                                <C>        <C>        <C>        <C>        <C>        <C>
Exploration and Production
Net production of crude oil and condensate
  (thousands of barrels per day)
    Domestic                                         30.6       28.9       25.5       27.8       25.5       23.0
    North Sea                                        30.9       36.7       34.3       16.7       16.0       18.6
    China                                             3.7         --         --         --         --         --
    Canada                                            3.4        4.8        4.7        4.7        4.5        4.6
    Other international                                --         --        2.8        4.0        4.5        4.2
      Total                                          68.6       70.4       67.3       53.2       50.5       50.4
Average price of crude oil sold (per barrel)
    Domestic                                       $19.36     $15.69     $14.64     $15.76     $18.17     $19.24
    North Sea                                       19.08      16.31      15.15      15.90      18.71      19.64
    China                                           19.53         --         --         --         --         --
    Canada                                          17.69      15.21      13.39      14.65      16.24      17.36
    Other international                                --         --      14.48      14.97      17.44      16.71
      Average                                      $19.16     $15.99     $14.81     $15.64     $18.11     $19.01
Natural gas deliveries (MMCF per day)                 281        291        271        286        296        281
Average price of natural gas delivered (per MCF)   $ 2.12     $ 1.52     $ 1.76     $ 1.92     $ 1.56     $ 1.44
Net exploratory wells drilled
    Productive                                       4.91       3.71       9.61       2.22       2.59       5.63
    Dry                                              3.52       9.16       8.47      10.09       5.53       9.18
      Total                                          8.43      12.87      18.08      12.31       8.12      14.81
Net development wells drilled
    Productive                                      21.33      40.86      22.27      43.90      27.26      40.19
    Dry                                              1.04       2.95       4.63       2.33       3.05       3.04
      Total                                         22.37      43.81      26.90      46.23      30.31      43.23
Undeveloped net acreage (thousands)
    Domestic                                          265        472        499        523        620        690
    North Sea                                         428        358        363        243        184        188
    China                                             925        341        282         --         --         --
    Canada                                             --        115        154        161        184        209
    Other international                               927      1,309      1,309      1,926        217      4,092
      Total                                         2,545      2,595      2,607      2,853      1,205      5,179
Developed net acreage (thousands)
    Domestic                                          209        537        542        539        549        591
    North Sea                                          33         22         21         21         18         17
    China                                              19         19         19         19         --         --
    Canada                                             --        159        165        156        163        202
    Other international                               104         --         --         24         24         24
      Total                                           365        737        747        759        754        834
Estimated proved reserves
 (millions of equivalent barrels)                     256        300        332        317        302        301
Chemicals
Industrial and specialty chemical sales
 (thousands of tons)                                  446        445        381        331        314        263
Coal
Sales (millions of tons)                             35.3       34.5       27.5       23.5       20.8       21.9
Recoverable reserves (millions of tons)               810        834        864        888        906        775
</TABLE>