**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D. C. 20549





**FORM
      10-Q**





x **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      Quarterly Period Ended September 30, 2005





**OR**





o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      Transition Period from _____ to _____





Commission
      File Number 1-16619








**KERR-McGEE
      CORPORATION**


(Exact
      Name of Registrant as Specified in its Charter)











Delaware
            73-1612389(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)








123
      Robert S. Kerr Avenue, Oklahoma City, Oklahoma 73102


(Address
      of Principal Executive Offices and Zip Code)





Registrant's
      telephone number, including area code (405)
      270-1313








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes x    No o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).





Yes x    No o





Number
      of shares of common stock, $1.00 par value, outstanding as of October 31, 2005:
      115,992,412.







**KERR-McGEE
                CORPORATION****INDEX**PAGE**PART
                I - FINANCIAL INFORMATION**Item
                1. Financial StatementsCondensed
                Consolidated Statement of Income for the Three and Nine Months Ended
                September 30, 2005 and 2004
            1Condensed
                Consolidated Balance Sheet at September 30, 2005 and December 31,
                2004
            2Condensed
                Consolidated Statement of Cash Flows for the Nine Months Ended September
                30, 2005 and 2004
            3Condensed
                Consolidated Statement of Comprehensive Income (Loss) and Stockholders’
                Equity for the Nine Months Ended September 30, 2005 and
                2004
            4Notes
                to Condensed Consolidated Financial Statements
            5Item
                2. Management's Discussion and Analysis of Financial Condition
              and
                Results of Operations
            42Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            66Item
                4. Controls and Procedures
            70Forward-Looking
                Information
            70**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            70Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            71Item
                6. Exhibits
            71SIGNATURE
            72
















**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements** .





**KERR-McGEE
      CORPORATION AND SUBSIDIARY COMPANIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF INCOME**


**(UNAUDITED)**




Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,(Millions
                  of dollars, except per-share amounts)
              
              **2005**
              
              2004
              
              **2005**
              
              2004**Revenues**
              
              **$**
              **1,208**
              
              $
              1,203
              
              **$**
              **4,152**
              
              $
              3,006**Costs
                  and Expenses**Costs
                  and operating expenses
              
              
              **554**
              
              
              488
              
              
              **1,544**
              
              
              1,238Selling,
                  general and administrative expenses
              
              
              **104**
              
              
              81
              
              
              **302**
              
              
              231Shipping
                  and handling expenses
              
              
              **34**
              
              
              35
              
              
              **109**
              
              
              90Depreciation
                  and depletion
              
              
              **233**
              
              
              320
              
              
              **729**
              
              
              583Accretion
                  expense
              
              
              **6**
              
              
              5
              
              
              **17**
              
              
              13Asset
                  impairments
              
              
              **-**
              
              
              7
              
              
              **5**
              
              
              22(Gain)
                  loss on sale of assets
              
              
              **4**
              
              
              -
              
              
              **(42**
              **)**
              
              7Exploration,
                  including dry holes and amortizationof
                  undeveloped leases
              
              
              **61**
              
              
              95
              
              
              **228**
              
              
              195Taxes,
                  other than income taxes
              
              
              **52**
              
              
              44
              
              
              **141**
              
              
              98Provision
                  for environmental remediation and restoration,net
                  of reimbursements
              
              
              **7**
              
              
              72
              
              
              **33**
              
              
              75Interest
                  and debt expense
              
              
              **68**
              
              
              68
              
              
              **190**
              
              
              180Loss
                  on early repayment and modification of debt
              
              
              **9**
              
              
              -
              
              
              **9**
              
              
              -Total
                  Costs and Expenses
              
              
              **1,132**
              
              
              1,215
              
              
              **3,265**
              
              
              2,732**76**
              
              
              (12
              )
              
              **887**
              
              
              274**Other
                  Income (Expense)**
              
              
              **(3**
              **)**
              
              (20
              )
              
              **(16**
              **)**
              
              (27
              )**Income
                  (Loss) from Continuing Operations****before
                  Income Taxes**
              
              
              **73**
              
              
              (32
              )
              
              **871**
              
              
              247**Benefit
                  (Provision) for Income Taxes**
              
              
              **(19**
              **)**
              
              8
              
              
              **(301**
              **)**
              
              (89
              )**Income
                  (Loss) from Continuing Operations**
              
              
              **54**
              
              
              (24
              )
              
              **570**
              
              
              158**Income
                  from Discontinued Operations, net of taxes (Note
                  2)**
              
              
              **306**
              
              
              31
              
              
              **515**
              
              
              112**Net
                  Income**
              
              **$**
              **360**
              
              $
              7
              
              **$**
              **1,085**
              
              $
              270**Income
                  (Loss) per Common Share**Basic
                  -Continuing
                  operations
              
              **$**
              **.46**
              
              $
              (.16
              )
              **$**
              **4.18**
              
              $
              1.34Discontinued
                  operations
              
              
              **2.68**
              
              
              .21
              
              
              **3.77**
              
              
              .95Net
                  income
              
              **$**
              **3.14**
              
              $
              .05
              
              **$**
              **7.95**
              
              $
              2.29Diluted
                  -Continuing
                  operations
              
              **$**
              **.46**
              
              $
              (.16
              )
              **$**
              **4.09**
              
              $
              1.33Discontinued
                  operations
              
              
              **2.63**
              
              
              .21
              
              
              **3.66**
              
              
              .94Net
                  income
              
              **$**
              **3.09**
              
              $
              .05
              
              **$**
              **7.75**
              
              $
              2.27**Dividends
                  Declared per Common Share**
              
              **$**
              **.05**
              
              $
              .45
              
              **$**
              **.55**
              
              $
              1.35







The
      accompanying notes are an integral part of this statement.


-
          1
          -


**KERR-McGEE
      CORPORATION AND SUBSIDIARY COMPANIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**(UNAUDITED)**





**September
                30,**
            
            December
                31,(Millions
                of dollars)
            
            **2005**
            
            2004**ASSETS****Current
                Assets**Cash
                and cash equivalents (Note 2)
            
            **$**
            **662**
            
            $
            76Accounts
                receivable
            
            
            **980**
            
            
            825Inventories
            
            
            **339**
            
            
            314Derivatives
                and other current assets
            
            
            **274**
            
            
            151Deferred
                income taxes
            
            
            **714**
            
            
            327Assets
                held for sale (Note 2)
            
            
            **295**
            
            
            194**Total
                Current Assets**
            
            
            **3,264**
            
            
            1,887**Property,
                Plant and Equipment**
            
            
            **15,331**
            
            
            14,806**Less
                reserves for depreciation, depletion and
                amortization**
            
            
            **(6,199**
            **)**
            
            (5,733
            )**9,132**
            
            
            9,073**Investments,
                Derivatives and Other Assets**
            
            
            **538**
            
            
            484**Goodwill
                and Other Intangible Assets**
            
            
            **1,277**
            
            
            1,288**Assets
                Held for Sale (Note 2)**
            
            
            **1,846**
            
            
            1,786**Total
                Assets**
            
            **$**
            **16,057**
            
            $
            14,518





**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Accounts
                payable
            
            **$**
            **623**
            
            $
            607Long-term
                debt due within one year
            
            
            **433**
            
            
            463Income
                taxes payable
            
            
            **101**
            
            
            138Derivative
                liabilities
            
            
            **2,219**
            
            
            350Accrued
                liabilities
            
            
            **798**
            
            
            755Liabilities
                associated with assets held for sale (Note 2)
            
            
            **491**
            
            
            192**Total
                Current Liabilities**
            
            
            **4,665**
            
            
            2,505**Long-Term
                Debt**
            
            
            **5,912**
            
            
            3,236**Noncurrent
                Liabilities**Deferred
                income taxes
            
            
            **1,552**
            
            
            1,727Asset
                retirement obligations
            
            
            **324**
            
            
            336Derivative
                liabilities
            
            
            **977**
            
            
            208Other
            
            
            **595**
            
            
            571Liabilities
                associated with assets held for sale (Note 2)
            
            
            **689**
            
            
            617**Total
                Noncurrent Liabilities**
            
            
            **4,137**
            
            
            3,459**Contingencies
                and Commitments (Notes 16 and 17)****Stockholders'
                Equity**Common
                stock, par value $1 - 500,000,000 and 300,000,000 sharesauthorized,
                119,351,451 and 152,049,127 shares issued atSeptember
                30, 2005 and December 31, 2004, respectively
            
            
            **119**
            
            
            152Capital
                in excess of par value
            
            
            **3,635**
            
            
            4,205Preferred
                stock purchase rights
            
            
            **1**
            
            
            2Retained
                earnings (accumulated deficit)
            
            
            **(416**
            **)**
            
            1,102Accumulated
                other comprehensive loss
            
            
            **(1,677**
            **)**
            
            (79
            )Common
                shares in treasury, at cost - 3,371,782 and 159,856 sharesat
                September 30, 2005 and December 31, 2004, respectively
            
            
            **(262**
            **)**
            
            (8
            )Deferred
                compensation
            
            
            **(57**
            **)**
            
            (56
            )**Total
                Stockholders' Equity**
            
            
            **1,343**
            
            
            5,318**Total
                Liabilities and Stockholders’ Equity**
            
            **$**
            **16,057**
            
            $
            14,518





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 statement .




-
          2
          -


**KERR-McGEE
      CORPORATION AND SUBSIDIARY COMPANIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS**


**(UNAUDITED)**








Nine
                Months EndedSeptember
                30,(Millions
                of dollars)
            
            **2005**
            
            2004**Cash
                Flows from Operating Activities**Net
                income
            
            **$**
            **1,085**
            
            $
            270Adjustments
                to reconcile net income to net cashprovided
                by operating activities -Depreciation,
                depletion and amortization
            
            
            **908**
            
            
            785Deferred
                income taxes
            
            
            **179**
            
            
            86Dry
                hole expense
            
            
            **125**
            
            
            80Asset
                impairments
            
            
            **5**
            
            
            22Gain
                on sale of North Sea oil and gas assets
            
            
            **(306**
            **)**
            
            -(Gain)
                loss on sale of other assets
            
            
            **(42**
            **)**
            
            7Loss
                on early repayment and modification of debt
            
            
            **9**
            
            
            -Accretion
                expense
            
            
            **24**
            
            
            22Provision
                for environmental remediation and restoration,net
                of reimbursements
            
            
            **44**
            
            
            81Other
                noncash items affecting net income
            
            
            **497**
            
            
            165Changes
                in assets and liabilities
            
            
            **(27**
            **)**
            
            (191
            )**Net
                Cash Provided by Operating Activities**
            
            
            **2,501**
            
            
            1,327**Cash
                Flows from Investing Activities**Capital
                expenditures
            
            
            **(1,292**
            **)**
            
            (832
            )Dry
                hole costs
            
            
            **(118**
            **)**
            
            (46
            )Acquisitions,
                net of cash acquired(1)
            
            
            **-**
            
            
            43Proceeds
                from sale of North Sea oil and gas assets
            
            
            **547**
            
            
            -Proceeds
                from sale of other assets
            
            
            **68**
            
            
            11Proceeds
                from sale of investments
            
            
            **-**
            
            
            39Other
                investing activities
            
            
            **(7**
            **)**
            
            (31
            )**Net
                Cash Used in Investing Activities**
            
            
            **(802**
            **)**
            
            (816
            )**Cash
                Flows from Financing Activities**Issuance
                of common stock
            
            
            **206**
            
            
            34Purchases
                of treasury stock
            
            
            **(250**
            **)**
            
            -Shares
                repurchased under the tender offer
            
            
            **(3,975**
            **)**
            
            -Dividends
                paid
            
            
            **(148**
            **)**
            
            (137
            )Repayment
                of debt
            
            
            **(998**
            **)**
            
            (1,278
            )Proceeds
                from borrowings
            
            
            **4,250**
            
            
            906Costs
                of obtaining financing
            
            
            **(58**
            **)**
            
            (6
            )Cash
                paid for modification of debt
            
            
            **(9**
            **)**
            
            -Settlement
                of Westport derivatives
            
            
            **(134**
            **)**
            
            (45
            )**Net
                Cash Used in Financing Activities**
            
            
            **(1,116**
            **)**
            
            (526
            )**Effects
                of Exchange Rate Changes on Cash and Cash
                Equivalents**
            
            
            **3**
            
            
            1**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            **586**
            
            
            (14
            )**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            **76**
            
            
            142**Cash
                and Cash Equivalents at End of Period**
            
            **$**
            **662**
            
            $
            128





(1)  In
      June
      2004, the company completed a merger with Westport Resources Corporation
      (Westport). In exchange for Westport’s   common stock and options,
      Kerr-McGee issued stock valued at $2.4 billion, options valued at
      $34 million and assumed debt of $1 billion, for a total of $3.5 billion
      (net of $43 million of cash acquired).





The
      accompanying notes are an integral part of this statement.


-
          3
          -


**KERR-McGEE
      CORPORATION AND SUBSIDIARY COMPANIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF COMPREHENSIVE**


**INCOME
      (LOSS) AND STOCKHOLDERS' EQUITY**


**(UNAUDITED)**








(Millions
                of dollars)
            
            Common
              Stock
            
            Capital
                in
              Excess
                of
              Par
                Value
            
            Retained
              Earnings
              (Accumulated
                Deficit)
            
            Accumulated
              Other
              Comprehensive
              Loss
            
            Treasury
              Stock
            
            Deferred
              Compensation
              and
                Other
            
            Total
              Stockholders'
              Equity**Balance
                at December 31, 2003**
            
            **$**
            **101**
            
            **$**
            **1,708**
            
            **$**
            **927**
            
            **$**
            **(45**
            **)**
            **$**
            **(2**
            **)**
            **$**
            **(53**
            **)**
            **$**
            **2,636**Comprehensive
                Loss:Net
                income
            
            
            -
            
            
            -
            
            
            270
            
            
            -
            
            
            -
            
            
            -
            
            
            270Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (345
            )
            
            -
            
            
            -
            
            
            (345
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (75
            )Westport
                merger
            
            
            49
            
            
            2,402
            
            
            -
            
            
            -
            
            
            -
            
            
            (3
            )
            
            2,448Exercise
                of stock options
            
            
            2
            
            
            33
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            35Restricted
                stock activity
            
            
            -
            
            
            24
            
            
            -
            
            
            -
            
            
            (6
            )
            
            (9
            )
            
            9ESOP
                deferred compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5
            
            
            5Tax
                benefit from stock-based awards
            
            
            -
            
            
            15
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15Dividends
                declared ($1.35 per share)
            
            
            -
            
            
            -
            
            
            (160
            )
            
            -
            
            
            -
            
            
            -
            
            
            (160
            )**Balance
                at September 30, 2004**
            
            **$**
            **152**
            
            **$**
            **4,182**
            
            **$**
            **1,037**
            
            **$**
            **(390**
            **)**
            **$**
            **(8**
            **)**
            **$**
            **(60**
            **)**
            **$**
            **4,913****Balance
                at December 31, 2004**
            
            **$**
            **152**
            
            **$**
            **4,205**
            
            **$**
            **1,102**
            
            **$**
            **(79**
            **)**
            **$**
            **(8**
            **)**
            **$**
            **(54**
            **)**
            **$**
            **5,318**Comprehensive
                Loss:Net
                income
            
            
            -
            
            
            -
            
            
            1,085
            
            
            -
            
            
            -
            
            
            -
            
            
            1,085Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,598
            )
            
            -
            
            
            -
            
            
            **(**1,598
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (513
            )Shares
                issued upon conversionof
                5.25% debentures
            
            
            10
            
            
            583
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            593Purchases
                of treasury shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (250
            )
            
            -
            
            
            (250
            )Shares
                repurchased and retired
            
            
            (47
            )
            
            (1,410
            )
            
            (2,517
            )
            
            -
            
            
            -
            
            
            (1
            )
            
            (3,975
            )Exercise
                of stock options
            
            
            3
            
            
            203
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            206Restricted
                stock activity
            
            
            1
            
            
            25
            
            
            -
            
            
            -
            
            
            (4
            )
            
            (7
            )
            
            15ESOP
                deferred compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6
            
            
            6Tax
                benefit from stock-based awards
            
            
            -
            
            
            29
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            29Dividends
                declared ($.55 per share)
            
            
            -
            
            
            -
            
            
            (86
            )
            
            -
            
            
            -
            
            
            -
            
            
            (86
            )**Balance
                at September 30, 2005**
            
            **$**
            **119**
            
            **$**
            **3,635**
            
            **$**
            **(416**
            **)**
            **$**
            **(1,677**
            **)**
            **$**
            **(262**
            **)**
            **$**
            **(56**
            **)**
            **$**
            **1,343**


































The
      accompanying notes are an integral part of this statement.


-
          4
          -


**KERR-McGEE
      CORPORATION AND SUBSIDIARY COMPANIES**


**NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**








**1.**
            **The
                Company, Basis of Presentation and Accounting
                Policies**





**The
      Company**





Kerr-McGee
      is an energy and inorganic chemical company with worldwide operations. The
      exploration and production unit explores for, develops, produces and markets
      crude oil and natural gas, with major areas of operation in the United States,
      the United Kingdom sector of the North Sea and China. Exploration efforts also
      extend to Angola, Australia, Benin, Bahamas, Brazil, Morocco, Canada and
      Trinidad. The chemical unit is primarily engaged in the production and marketing
      of titanium dioxide pigment and has production facilities in the United States,
      Australia, Germany and the Netherlands. The terms “Kerr-McGee,”“the
      company,”“we,”“our,” and similar terms are used interchangeably in these
      condensed consolidated financial statements to refer to the consolidated group
      or to one or more of the companies that are part of the consolidated
      group.





In
      2005, the company has made a number of strategic decisions in an effort to
      reposition Kerr-McGee as a pure-play exploration and production company and
      enhance value for its stockholders. The company’s strategic plan includes the
      separation of the chemical business and divestitures of certain oil and gas
      assets. These transactions are expected to result in aggregate net cash proceeds
      of approximately $4.4 billion by the end of 2005, which will be used
      for
      debt reduction and other corporate purposes.





·
            In
                March 2005, the company’s Board of Directors (the Board) authorized
                management to pursue alternatives for the separation of the chemical
                business, including a spinoff or sale. In October 2005, the company
                completed its evaluation and the Board approved the separation of
                the
                chemical business through an initial public offering (IPO), followed
                by a
                distribution of Kerr-McGee’s remaining ownership in the chemical business
                subsidiary to Kerr-McGee’s stockholders through a spinoff, splitoff or a
                combination of these transactions, planned for 2006. Note 3 provides
                additional information about the
                IPO.





·
            In
                April 2005, the company announced its decision to divest lower-growth
                or
                shorter-life and higher-decline oil and gas properties. In connection
                with
                the divestiture program, in August 2005, the company entered into
                agreements to sell its North Sea oil and gas business for aggregate
                cash
                proceeds of $3.5 billion. Additionally, in October 2005, the company
                entered into agreements to divest certain noncore oil and gas properties
                onshore in the United States. Information about these transactions
                is
                provided in Note 2. Other selected oil and gas properties in the
                U.S. are
                also being considered for divestiture. The total combined divestitures
                may
                represent up to 30% of the company’s proved reserves at December 31, 2004,
                and up to 35% of its average daily production for the first nine
                months of
                2005. However, the actual impact of any divestitures may differ materially
                from management’s estimates due to a change in market conditions or in the
                composition of the properties to be divested, as well as other
                factors.





·
            In
                March 2005, the Board authorized a share repurchase program initially
                set
                at $1 billion, with an expectation to expand the program as
                the
                chemical business separation proceeded.The
                company repurchased 3.1 million shares of its common stock
                at an
                aggregate cost of $250 million under this program before its
                termination in connection with the Board's approval of the tender
                offer
                discussed below.





·
            On
                April 14, 2005, the company announced its intention to commence a
                modified
                "Dutch Auction" self tender offer for its common stock with an aggregate
                purchase cost of up to $4 billion. Under the tender offer,
                which was
                completed in May 2005, the company repurchased 46.7 million
                of its
                shares at $85 per share, which represented 29% of shares outstanding
                at
                March 31, 2005. Note 15 provides additional information regarding
                this
                transaction. The tender offer was financed with the net proceeds
                of
                borrowings, which are discussed in Note 10, and cash on hand.





-
          5
          -


·
            In
                May 2005, the Board approved a recommendation to revise the company’s
                dividend policy to a level consistent with that of other pure-play
                exploration and production companies. Starting with the July 2005
                dividend
                payment, the annual dividend was reduced from $1.80 to $.20 per
                share.





**Basis
      of Presentation**





The
      unaudited condensed consolidated financial statements included herein have
      been
      prepared by the company, pursuant to the rules and regulations of the Securities
      and Exchange Commission (SEC) and, in the opinion of management, include all
      adjustments necessary to a fair statement of the results for the interim periods
      presented. Except as indicated below, such adjustments are normal and recurring
      in nature. Certain information and footnote disclosures normally included in
      financial statements prepared in accordance with accounting principles generally
      accepted in the United States have been condensed or omitted pursuant to such
      rules and regulations. Although the company believes that the disclosures are
      adequate to make the information presented not misleading, these financial
      statements should be read in conjunction with the consolidated financial
      statements and the notes thereto included in the company's latest annual report
      on Form 10-K.





Certain
      2004 amounts included in these condensed consolidated financial statements
      have
      been reclassified to conform to the 2005 presentation. Income from discontinued
      operations in the accompanying Condensed Consolidated Statement of Income for
      all periods presented relates to the company’s North Sea oil and gas business
      and former forest products operations. Note 2 provides additional information
      with respect to discontinued operations.





**Accounting
      Policies**





***Repurchases
      and Retirements of Capital Stock*** - The
      company records treasury stock purchases at cost, which includes incremental
      direct transaction costs. Upon retirement of repurchased shares, the excess
      of
      purchase cost over associated common stock par value and preferred stock
      purchase rights is allocated to capital in excess of par value, with the
      remaining cost, if any, charged against retained earnings. The allocation to
      capital in excess of par value is based on the per-share amount of capital
      in
      excess of par value for all shares.





***Asset
      Exchanges*** -
      Effective July 1, 2005, the company implemented Statement of Financial
      Accounting Standards No. 153, “Exchanges of Nonmonetary Assets, an Amendment of
      APB Opinion No. 29” (FAS No. 153), for exchanges of nonmonetary assets occurring
      after the implementation date. Prior to implementing FAS No. 153, the company
      generally did not recognize gains on nonmonetary exchanges of its interest
      in
      oil and gas properties. However, for exchange transactions involving monetary
      consideration (if such consideration was less than 25% of the fair value of
      assets exchanged), a proportionate amount of the total gain was recognized.
      Exchanges of an interest in oil and gas properties involving receipt of monetary
      consideration of 25% or more were accounted for at fair value and the full
      amount of realized gain was recognized. According to the provisions of FAS
      No.
      153, all nonmonetary asset exchanges that have commercial substance will be
      measured based on the fair values exchanged with any resulting gain or loss
      recognized in earnings. An exchange is deemed to have commercial substance
      if it
      results in a significant change in expected future cash flows.





***Employee
      Stock-Based Compensation*** ** -
      The
      company accounts for its stock-based awards under the intrinsic-value method
      permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock
      Issued to Employees” (APB No. 25). Accordingly, net income reflects no
      stock-based employee compensation expense for the issuance of stock options
      under the company’s plans, since all options were fixed-price options with an
      exercise price equal to the market value of the underlying common stock on
      the
      date of grant.





Statement
      of Financial Accounting Standards No. 123, "Accounting for Stock-Based
      Compensation” (FAS No. 123), prescribes a fair-value method of accounting for
      employee stock-based awards. Following this method, compensation expense for
      such awards is measured based on the estimated grant-date fair value and
      recognized as the related employee services are provided. If compensation
      expense for stock-based awards had been determined using the fair value-based
      method, net income would have been lower, as presented in the following
      table.





-
          6
          -





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars, except per-share amounts)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Net
                income, as reported
            
            **$**
            **360**
            
            $
            7
            
            **$**
            **1,085**
            
            $
            270Add:
                stock-based employee compensation expenseincluded
                in reported net income, net of taxes
            
            
            **7**
            
            
            4
            
            
            **20**
            
            
            10Deduct:
                stock-based compensation expense determinedusing
                a fair-value method, net of taxes
            
            
            **(10**
            **)**
            
            (7
            )
            
            **(32**
            **)**
            
            (20
            )Pro
                forma net income
            
            **$**
            **357**
            
            $
            4
            
            **$**
            **1,073**
            
            $
            260Net
                income per share -Basic
                -As
                reported
            
            **$**
            **3.14**
            
            $
            .05
            
            **$**
            **7.95**
            
            $
            2.29Pro
                forma
            
            
            **3.13**
            
            
            .03
            
            
            **7.86**
            
            
            2.20Diluted
                -As
                reported
            
            **$**
            **3.09**
            
            $
            .05
            
            **$**
            **7.75**
            
            $
            2.27Pro
                forma
            
            
            **3.07**
            
            
            .03
            
            
            **7.67**
            
            
            2.19








The
      fair value of each option granted in 2005 and 2004 was estimated as of the
      grant
      date using the Black-Scholes option pricing model with the following
      weighted-average assumptions:




Assumptions
              Weighted-AverageRisk-Free
              Expected
              Expected
              Expected
              Fair
                  Value ofInterest
                  Rate
              Dividend
                  Yield
              Life
                  (years)
              Volatility
              Options
                  Granted2005
              3.9%
              3.5%
              6.0
              27.4%
              $12.502004
              3.5
              3.6
              5.8
              22.6
              8.63





***New/Revised
      Accounting Standards*** - In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      No. 123 (revised 2004), “Share-Based Payment” (FAS No. 123R), which replaces FAS
      No. 123 and supersedes APB No. 25. FAS No. 123R requires all share-based
      payments to employees, including grants of employee stock options, to be
      recognized in the financial statements based on their fair values beginning
      with
      the first interim period after June 15, 2005, with early adoption encouraged.
      In
      April 2005, the SEC amended its rules to allow public companies more time to
      implement the standard. Following the SEC’s rule, the company intends to
      implement FAS No. 123R effective January 1, 2006. The company plans to adopt
      the
      standard using the modified prospective method, as permitted by the standard.
      The modified prospective method requires that compensation expense be recorded
      for all unvested share-based compensation awards at the beginning of the first
      quarter of adoption. The company expects that the adoption will not have a
      material effect on its financial condition and cash flows. The company is
      evaluating the effect of implementation on its results of
      operations.





In
      March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for
      Conditional Asset Retirement Obligations” (FIN No. 47), to clarify that an
      entity must recognize a liability for the fair value of a conditional asset
      retirement obligation when incurred, if the liability’s fair value can be
      reasonably estimated. Conditional asset retirement obligations under this
      pronouncement are legal obligations to perform asset retirement activities
      when
      the timing and/or method of settlement are conditional on a future event or
      may
      not be within the control of the entity. FIN No. 47 also provides additional
      guidance for evaluating whether sufficient information to reasonably estimate
      the fair value of an asset retirement obligation is available. FIN No. 47 is
      effective for the company as of December 31, 2005. The company is evaluating
      the
      effect of implementation and at this time does not expect it to have a material
      effect on its financial statements.





-
          7
          -




In
      April 2005, the
      FASB issued a FASB Staff Position FAS 19-1, "Accounting for Suspended Well
      Costs" (FSP FAS 19-1) which amends FASB Statement No. 19, "Financial Accounting
      and Reporting by Oil and Gas Producing Companies." FSP FAS 19-1 requires the
      continued capitalization of drilling costs if the well has found a sufficient
      quantity of reserves to justify its completion as a producing well and
      the
      enterprise is making sufficient progress assessing the reserves and the economic
      and operating viability of the project. The FSP provides a number of indicators
      that can assist an entity in evaluating whether sufficient progress is being
      made in assessing the reserves and economic viability of the project and
      includes new disclosure requirements with respect to capitalized exploratory
      drilling costs. The company adopted FSP FAS 19-1 effective July 1, 2005. The
      adoption had no effect on the company's financial statements. Disclosures
      required by the FSP were provided in the notes to the consolidated financial
      statements included in the company's latest annual report on Form
      10-K.






**2.**
            **Discontinued
                Operations and Assets Held for
                Sale**





***Overview*** - As
      discussed in Note 1, in 2005, the company made a number of strategic decisions
      with the goal of repositioning Kerr-McGee as a pure-play exploration and
      production company and enhancing value for its stockholders. The company’s
      strategic plan includes the separation of the chemical business and divestitures
      of certain lower-growth or shorter-life and higher-decline oil and gas assets,
      including the company’s North Sea oil and gas business and selected oil and gas
      properties in the U.S. At the same time, the company is accelerating its U.S.
      onshore development activities, with a focus on the Wattenberg and Greater
      Natural Buttes areas. Management believes this strategy will result in an asset
      base weighted toward longer-life, less capital-intensive properties that will
      provide greater stability of production and production replacement, while the
      company’s exploration program in the deepwater Gulf of Mexico, Alaska, Brazil,
      China, Trinidad and other areas will continue to provide growth opportunities.





The
      following summarizes divestiture transactions completed or which the company
      expects to complete in the fourth quarter. In addition, as discussed in Note
      3,
      the company expects to realize net proceeds of $800 million to $900 million
      from
      the pending separation of its chemical business. The company intends to use
      net
      proceeds from the divestitures and the separation of the chemical business
      for
      debt repayment and other corporate purposes. Debt repayments made during the
      third and fourth quarters of 2005 in connection with completed transactions
      are
      discussed in Note 10.


(Millions
                      of dollars)
                  
                  **Gross
                      Proceeds***Completed
                      Divestiture Transactions -*September
                  Nonoperated
                      North Sea fields
                  
                  $
                      554
                  (1)November
                  Nonoperating
                      interest in gas processing facility
                  
                  156*Expected
                      Divestiture Transactions -*Fourth
                      quarter
                  Remaining
                      oil and gas operations in the North Sea
                  
                  $2,950
                  (2)Fourth
                      quarter
                  Selected
                      oil and gas properties onshore in the U.S.
                  
                  476
                  (2)





(1)
            Includes
                $7 million of proceeds expected to be released from escrow in the
                fourth
                quarter and net of cash on hand of $4 million acquired by
                the
                purchaser at closing.




(2)
            Represents
                expected cash proceeds before considering working capital, interest
                or
                other adjustments.





***Discontinued
      Operations -*** Income
      from discontinued operations in the Condensed Consolidated Statement of Income
      relates primarily to the company’s North Sea oil and gas business, but also
      includes losses from the former forest products operations, which the company
      exited in the fourth quarter of 2004.





-
          8
          -


The
      following summarizes the amounts included in income from discontinued operations
      for all periods presented:





Three
                Months Ended September 30,**2005**
            
            2004**North
                Sea**
            ****
            **Forest**
            
            
            
            North
                Sea
            
            Forest**Oil
                and Gas**
            ****
            **Products**
            
            
            
            Oil
                and Gas
            
            Products(Millions
                of dollars)
            
            **Business**
            ****
            **Business**
            ****
            **Total**
            
            Business
            
            Business
            
            TotalRevenues
            
            **$**
            **285**
            ****
            **$**
            **-**
            ****
            **$**
            **285**
            
            $
            159
            
            $
            5
            
            $
            164Income
                from Discontinued Operations:Income
                (loss) from operations
            
            **$**
            **157**
            ****
            **$**
            **-**
            ****
            **$**
            **157**
            
            $
            59
            
            $
            (5
            )
            $
            54Gain
                on sale
            
            
            **306**
            ****
            ****
            **-**
            ****
            ****
            **306**
            
            
            -
            
            
            -
            
            
            -Adjustments
                for contingencies(1)
            
            
            **-**
            ****
            ****
            **(14**
            **)**
            ****
            **(14**
            **)**
            
            -
            
            
            -
            
            
            -Pretax
                income (loss) from discontinuedoperations
            
            
            **463**
            ****
            ****
            **(14**
            **)**
            ****
            **449**
            
            
            59
            
            
            (5
            )
            
            54Income
                tax (expense) benefit
            
            
            **(148**
            **)**
            ****
            **5**
            ****
            ****
            **(143**
            **)**
            
            (25
            )
            
            2
            
            
            (23
            )Income
                (loss) from discontinued operations,net
                of tax
            
            **$**
            **315**
            ****
            **$**
            **(9**
            **)**
            **$**
            **306**
            
            $
            34
            
            $
            (3
            )
            $
            31





Nine
                Months Ended September 30,**2005**
            
            2004**North
                Sea**
            ****
            **Forest**
            
            
            
            North
                Sea
            
            Forest**Oil
                and Gas**
            ****
            **Products**
            
            
            
            Oil
                and Gas
            
            Products(Millions
                of dollars)
            
            **Business**
            ****
            **Business**
            ****
            **Total**
            
            Business
            
            Business
            
            TotalRevenues
            
            **$**
            **908**
            ****
            **$**
            **-**
            ****
            **$**
            **908**
            
            $
            555
            
            $
            18
            
            $
            573Income
                from Discontinued Operations:Income
                (loss) from operations
            
            **$**
            **500**
            ****
            **$**
            **-**
            ****
            **$**
            **500**
            
            $
            212
            
            $
            (14
            )
            $
            198Gain
                (loss) on sale
            
            
            **306**
            ****
            ****
            **(1**
            **)**
            ****
            **305**
            
            
            -
            
            
            -
            
            
            -Adjustments
                for contingencies(1)
            
            
            **-**
            ****
            ****
            **(16**
            **)**
            ****
            **(16**
            **)**
            
            -
            
            
            -
            
            
            -Pretax
                income (loss) from discontinuedoperations
            
            
            **806**
            ****
            ****
            **(17**
            **)**
            ****
            **789**
            
            
            212
            
            
            (14
            )
            
            198Income
                tax (expense) benefit
            
            
            **(280**
            **)**
            ****
            **6**
            ****
            ****
            **(274**
            **)**
            
            (91
            )
            
            5
            
            
            (86
            )Income
                (loss) from discontinued operations,net
                of tax
            
            **$**
            **526**
            ****
            **$**
            **(11**
            **)**
            **$**
            **515**
            
            $
            121
            
            $
            (9
            )
            $
            112





(1)
            These
                adjustments represent provisions for environmental remediation and
                restoration and other contingencies incurred subsequent to the exit
                of the
                forest products business.





As
      discussed in Note 10, the company is required to use 100% of the net after-tax
      cash proceeds from sales of certain assets for debt repayment. Because the
      North
      Sea oil and gas assets are subject to this requirement, interest expense on
      debt
      that is required to be repaid upon their sale is classified as a component
      of
      income from discontinued operations. For the three and nine months ended
      September 30, 2005, pretax interest expense so classified totaled $49 million
      and $67 million, respectively. These amounts represent interest expense on
      approximately $3 billion of the company’s obligations under the term loans
      described in Note 10 expected to be repaid upon completing the North Sea
      divestiture transactions. Interest expense was allocated to discontinued
      operations beginning in May 2005, to coincide with initial borrowings under
      the
      term loans requiring mandatory prepayments.





In
      connection with classifying the North Sea oil and gas business as held for
      sale,
      the company recognized certain provisions for income taxes on unremitted foreign
      earnings. Discussion of tax effects is provided in Note 9.


-
          9
          -


North
      Sea Oil and Gas Business - In
      August 2005, the company entered into agreements to sell its North Sea oil
      and
      gas business for cash consideration of approximately $3.5 billion. The North
      Sea
      business included proved reserves of approximately 242 million barrels of oil
      equivalent at December 31, 2004, and produced a daily average of 76
      thousand barrels of oil equivalent during the first nine months of 2005,
      representing approximately 21% of the company’s production. The two-step
      transaction pursuant to the agreements includes:





·
            The
                sale of the company’s interests in four nonoperated fields and related
                exploratory acreage and facilities in the North Sea, which was completed
                on September 30, 2005, and





·
            The
                sale of all remaining North Sea operations through the sale of the
                stock
                of Kerr-McGee (G.B.) Ltd., the company’s wholly-owned subsidiary, and
                other affiliated entities, which is expected to close in November
                2005.





The
      following summarizes assets and liabilities of the North Sea oil and gas
      business and their classification in the accompanying Condensed Consolidated
      Balance Sheet. Additionally, at September 30, 2005, a net after-tax loss of
      $171
      million associated with cash flow hedges of the North Sea business was included
      in equity, as a component of accumulated other comprehensive loss. Upon the
      sale
      of Kerr-McGee (G.B.) Ltd., unrealized losses on these instruments,
      which will be assumed by the buyer, will be recognized in income from
      discontinued operations, as a component of gain on sale.





**September
                30,**
            
            December
                31,(Millions
                of dollars)
            
            **2005**
            
            2004Cash
                and Cash Equivalents(1)
            
            **$**
            **447**
            
            $
            14Current
                Assets
            
            
            **295**
            
            
            195Long-Term
                Assets
            
            
            **1,535**
            
            
            1,778Current
                Liabilities
            
            
            **(490**
            **)**
            
            (192
            )Noncurrent
                Liabilities
            
            
            **(680**
            **)**
            
            (616
            )Net
                Investment
            
            **$**
            **1,107**
            
            $
            1,179





(1)
            Of
                the total cash and cash equivalents of the North Sea business at
                September
                30, 2005, approximately $330 million represents proceeds from
                the
                third-quarter asset sales that were not repatriated to the U.S. This
                amount will be received as additional consideration upon the sale
                of
                Kerr-McGee (G.B.) Ltd.





Forest
      Products Business -
      During 2002, the company approved a plan to exit its forest products business,
      which was part of the chemical - other operating unit. At that time, five plants
      were in operation. Four of these plants were closed and abandoned during 2003.
      The fifth plant, a leased facility, was operated throughout 2004 until the
      lease
      expired and the fixed assets at the facility were sold in January 2005. Criteria
      for classification of these assets as held for sale were met in the fourth
      quarter of 2004, at which time the results of the forest products operations
      met
      the requirements for reporting as discontinued operations. The carrying value
      of
      assets of discontinued forest products operations was $3  million
      at December 31, 2004, and is included in assets held for sale in the
      accompanying Condensed Consolidated Balance Sheet. Proceeds from the sale
      approximated the carrying value of the assets. As discussed in Note 16, the
      company retained obligations for environmental remediation and restoration
      at
      several wood-treating sites and other contingencies. Charges associated with
      such retained obligations have been incurred subsequent to the exit of the
      forest products business as a result of changes in estimates of remediation
      and
      restoration costs.





***Assets
      Held for Sale*** - In
      addition to assets and liabilities of discontinued operations discussed above,
      assets held for sale at September 30, 2005 include the carrying value of certain
      U.S. onshore oil and gas properties, as well as the company’s nonoperating
      interest in the Javelina gas processing and fractionation facility. Based on
      the
      estimated fair value less cost to sell in relation to the carrying value, a
      loss
      of $6 million was recognized in the third quarter of 2005 for one U.S. onshore
      divestiture package. All other assets held for sale are expected to result
      in
      gains upon disposition.








-
          10
          -


**3.**
            **Pending
                Separation of Tronox
                Incorporated**





In
      October 2005, the Board approved the separation of the chemical business through
      an IPO of shares of Class A common stock of the company’s wholly-owned
      subsidiary, Tronox Incorporated (Tronox). An amended registration statement
      was
      filed with the SEC relating to the proposed IPO, and is currently under review
      by the SEC.  Assuming the review is completed and the registration statement is declared
      effective by the SEC, the company expects to complete the IPO in the fourth
      quarter of 2005. Following the IPO, the company will continue to hold a
      controlling interest in Tronox through ownership of Tronox’s Class B common
      stock. The company expects to distribute those shares to its stockholders during
      2006 through a spinoff, splitoff or a combination of those transactions
      (Distribution). It is expected that Tronox will be included in the company’s
      consolidated financial statements through the Distribution date. The
      Distribution is subject to certain conditions, including receipt of a favorable
      tax opinion, necessary regulatory approvals and approval by the company’s Board
      of Directors of the final form, structure and other terms of any transaction
      to
      effect the Distribution.





Prior
      to the completion of the IPO, the company will transfer subsidiaries that
      conduct Kerr-McGee’s chemical business to Tronox. Some of these subsidiaries
      previously were engaged in the production of ammonium perchlorate, the
      manufacturing of thorium, treatment of forest products, the refining and
      marketing of petroleum products, the mining, milling and processing of nuclear
      materials and other businesses. These subsidiaries are subject to environmental
      obligations associated with their current and former operations. Additional
      discussion regarding environmental obligations is provided below.





Historically,
      employees of the company’s chemical business participated in stock-based
      compensation, pension and postretirement plans established by Kerr-McGee. It
      is
      expected that in connection with the IPO, Tronox will issue stock-based awards
      to certain of its employees and non-management directors, while unvested
      Kerr-McGee stock options and restricted stock held by employees of Tronox will
      be converted to Tronox stock-based awards on the effective date of the
      Distribution. Tronox is also expected to establish pension and postretirement
      plans for its U.S. employees and assume the benefit obligations associated
      with
      its current and former employees following the Distribution. The anticipated
      effects of the separation on the company’s obligations for employee compensation
      and benefits are more fully discussed below.





It
      is
      expected that concurrent with the IPO, Tronox, through its wholly-owned
      subsidiary, will issue $350 million of unsecured notes in a private
      offering and will borrow $200 million in term loans. The net proceeds from
      these
      borrowings and from the offering of Tronox Class A common stock are expected
      to
      be $800 million to $900 million and will be distributed to Kerr-McGee. Any
      debt
      incurred by Tronox will affect the consolidated financial statements of
      Kerr-McGee until Tronox is no longer consolidated by the company.





***Obligations
      for Environmental Remediation*** **-** Tronox
      and its subsidiaries will be subject to obligations for environmental
      remediation and restoration associated with the chemical business currently
      in
      operation, as well as with former operations described above. The carrying
      value
      of liabilities associated with such operations is $239 million as of September
      30, 2005. Tronox and its subsidiaries also are expected to have contingent
      obligations of such current and former operations for which no liability is
      recognized as of September 30, 2005 because the loss is not considered probable
      or is not estimable. Discussion of the company’s material environmental
      obligations and other contingencies is provided in Note 16.





Upon
      completion of the IPO, Kerr-McGee is expected to agree to reimburse Tronox
      for a
      portion of the environmental costs incurred and paid by Tronox and its
      subsidiaries during the seven-year period following the IPO, to the extent
      such
      costs, net of any reimbursements received from insurers or other parties, exceed
      the carrying value of reserves at the time of the IPO. The reimbursement
      obligation extends to costs incurred at any site associated with any of the
      former businesses and operations of Tronox and is limited to a maximum aggregate
      reimbursement of $100 million for all covered sites. The company’s reimbursement
      obligation will be reflected in its Consolidated Balance Sheet at its estimated
      fair value at the time of origination. The estimated fair value will be
      determined considering expected cash outflows pursuant to the reimbursement
      obligation, their timing and probability of payment.





-
          11
          -


***Pension
      and Postretirement Obligations -*** As
      discussed above, it is anticipated that Tronox will establish its own retirement
      and postretirement benefit plans for its current and former employees in the
      U.S. and assume the related benefit obligations. As of September 30, 2005,
      Kerr-McGee's Condensed Consolidated Balance Sheet included a prepaid pension
      cost associated with its U.S. qualified retirement plan of $239 million and
      a
      liability associated with the postretirement benefit plan of $231 million.
      It is
      estimated that upon completion of the Distribution, Kerr-McGee will transfer
      to
      Tronox approximately 40% of its pension benefit obligation as of that date.
      Kerr-McGee will also transfer trust assets to the newly established Tronox
      plan
      necessary to fund the transferred obligation in compliance with applicable
      regulatory requirements. It is also expected that approximately half of the
      benefit obligation associated with the U.S. postretirement plan, which is
      unfunded, will be transferred to Tronox following the Distribution. Actual
      values of the benefit obligation and associated plan assets transferred to
      Tronox will be determined at the time of the Distribution and will depend on
      the
      level of retirement plan assets, interest rates and other factors relevant
      to
      the measurement of the benefit obligation and determination of asset values
      to
      be transferred.





***Stock-Based
      Awards*** - It
      is expected that the terms of the employee benefits agreement between Kerr-McGee
      and Tronox will provide that Tronox employees will have the right to exercise
      their vested Kerr-McGee stock options in accordance with the original terms
      of
      the awards. All unvested Kerr-McGee stock options held by Tronox employees
      on
      the effective date of the Distribution will be converted into options to
      purchase Tronox Class A common stock. The converted options will have the same
      terms and conditions, including the same vesting provisions and exercise
      periods, as the unvested Kerr-McGee stock options immediately prior to their
      conversion. The number of shares and exercise price of each Kerr-McGee stock
      option will be adjusted so that each Tronox option will have the same ratio
      of
      the exercise price per share to the market value per share and the same
      aggregate difference between market value and exercise price as the Kerr-McGee
      options prior to conversion. All shares of Kerr-McGee restricted stock held
      by
      Tronox employees on the effective date of the Distribution will be converted
      into restricted shares of Tronox Class A common stock with the same terms and
      conditions, except that the number of shares covered by the awards will be
      adjusted as specified in the employee benefits agreement. Based on the number
      of
      Kerr-McGee stock options and restricted stock held at September 30, 2005 by
      the
      company’s employees that are or are expected to become employees of Tronox, the
      company estimates that approximately 84,000 restricted shares of Kerr-McGee
      common stock and approximately 167,000 stock options will be unvested as of
      the
      date of the Distribution and will be converted into Tronox awards as described
      above. The conversion ratio will be determined on the effective date of the
      Distribution based on the relative values of Kerr-McGee common stock and Tronox
      Class A common stock.





As
      long
      as Tronox is included in the company’s consolidated financial statements,
      potentially issuable shares of Tronox common stock will continue to affect
      the
      company’s diluted earnings per share.








**4.**
            **Comprehensive
                Loss**





Comprehensive
      loss for the three and nine months ended September 30, 2005 and 2004, is as
      follows:





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Net
                income
            
            **$**
            **360**
            
            $
            7
            
            **$**
            **1,085**
            
            $
            270After-tax
                changes in:Loss
                on cash flow hedges
            
            
            **(1,022**
            **)**
            
            (159
            )
            
            **(1,570**
            **)**
            
            (344
            )Foreign
                currency translation adjustments
            
            
            **(14**
            **)**
            
            7
            
            
            **(28**
            **)**
            
            (3
            )Reclassification
                of foreign currency translationlosses
            
            
            **-**
            
            
            7
            
            
            **-**
            
            
            7Reclassification
                of unrealized gain onavailable-for-sale
                securities
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            (5
            )Comprehensive
                loss
            
            **$**
            **(676**
            **)**
            $
            (138
            )
            **$**
            **(513**
            **)**
            $
            (75
            )








-
          12
          -




**5.**
            **Derivative
                Instruments**




The
      company is exposed to risk from fluctuations in crude oil and natural gas
      prices, foreign currency exchange rates and interest rates. To reduce the impact
      of these risks on earnings and to increase the predictability of its cash flows,
      the company enters into certain derivative contracts, primarily swaps and
      collars for a portion of its future oil and gas production, forward contracts
      to
      buy and sell foreign currencies and interest rate swaps to hedge the fair value
      of its fixed-rate debt. Gains and losses on derivatives designated as cash
      flow
      hedges are deferred in accumulated other comprehensive income (loss) and
      reclassified into earnings when the hedged forecasted transactions affect
      earnings. Gains and losses associated with hedge ineffectiveness and with
      positions in excess of expected physical deliveries are recognized in current
      earnings as a component of revenues.





For
      the
      three- and nine-month periods ended September 30, 2005, as a result of
      significantly increased commodity prices and widening natural gas basis
      differentials, the company recognized losses on hedge ineffectiveness of $212
      million and $256 million, respectively, associated with its commodity derivative
      instruments designated as hedges of future oil and gas sales. These losses
      represent the excess of mark-to-market losses on the company’s commodity
      derivatives over the higher cash flows expected to be realized upon sales of
      hedged production.





As
      a
      result of two major hurricanes in the Gulf of Mexico late in the third quarter
      of 2005, the company’s physical deliveries to certain Gulf of Mexico sales
      indices for the fourth quarter of 2005 are expected to be insufficient to cover
      the associated derivative contracts in place. Consequently, the company
      recognized an unrealized loss of $103 million in the third quarter associated
      with certain fourth-quarter 2005 derivative contracts assigned to hedge cash
      flows from sales of Gulf of Mexico natural gas production, although total U.S.
      natural gas production in the fourth quarter is still expected to exceed volumes
      covered by hedge instruments. Additionally, realized losses of $22 million
      associated with September derivative contracts in excess of hedged physical
      deliveries for that month are reported as overhedge derivative loss in revenues.
      The company believes that it is probable that by January 2006 deliveries in
      the Gulf of Mexico will resume in sufficient volumes to match its remaining
      2006
      and 2007 derivative contracts.





At
      September 30, 2005, the net after-tax loss on oil and gas derivatives in
      accumulated other comprehensive loss relates to a portion of the company’s
      expected production through 2007. The company expects to reclassify $1.1 billion
      of the total net after-tax derivative loss from accumulated other comprehensive
      loss to earnings during the next 12 months, assuming no further changes in
      the
      fair value of the related contracts. This excludes $171 million of net after-tax
      losses associated with derivatives of our North Sea oil and gas business which
      will be recognized in income from discontinued operations, as a component of
      gain on sale, in connection with the expected completion of the divestiture
      transactions in November 2005.





Realized
      and unrealized gains and losses arising from derivative instruments that have
      not been designated as hedges or that do not qualify for hedge accounting
      (“nonhedge derivatives”) are recognized in current earnings. In June 2004, the
      company assumed a net liability associated with commodity derivatives in
      connection with the Westport merger. While the company designated Westport’s
      fixed-price oil and gas swaps as hedges after the merger, costless and three-way
      collars do not qualify for hedge accounting treatment because they represented
      “net written options” at the merger date. As a result, even though these collars
      help mitigate commodity price risk, the company will recognize mark-to-market
      gains and losses in earnings until the collars mature, rather than deferring
      such amounts in accumulated other comprehensive income (loss). The net fair
      value of these derivatives at September 30, 2005 was a liability of $130
      million.





-
          13
          -


The
      following tables summarize the balance sheet presentation of the company’s
      derivatives and the related cash collateral held by counterparties as of
      September 30, 2005 and December 31, 2004. Derivative assets and liabilities
      associated with the company’s North Sea oil and gas business, which will be
      assumed by the buyer at closing, are included in assets and liabilities held
      for
      sale in the Condensed Consolidated Balance Sheet.








**As
                of September 30, 2005****Derivative
                Fair Value****Current**
            
            **Long-Term**
            
            **Current**
            
            **Long-Term**
            
            **Deferred
                Gain**(Millions
                of dollars)
            
            **Asset**
            
            **Asset**
            
            **Liability**
            
            **Liability**
            
            **(Loss)
                in AOCI****(1)**Oil
                and gas commodity derivatives -Kerr-McGee
                positions
            
            **$**
            **154**
            
            **$**
            **36**
            
            **$**
            **(2,006**
            **)**
            **$**
            **(959**
            **)**
            **$**
            **(1,532**
            **)**Acquired
                Westport positions
            
            
            **2**
            
            
            **-**
            
            
            **(184**
            **)**
            
            **(15**
            **)**
            
            **(29**
            **)**Cash
                collateral
            
            
            **2**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**Gas
                marketing-related derivatives
            
            
            **23**
            
            
            **1**
            
            
            **(23**
            **)**
            
            **(1**
            **)**
            
            **-**Foreign
                currency forward contracts
            
            
            **1**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **1**Interest
                rate swaps
            
            
            **2**
            
            
            **-**
            
            
            **(6**
            **)**
            
            **(2**
            **)**
            
            **-**Other
                derivatives
            
            
            **5**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **4**Total
                - continuing operations
            
            
            **189**
            
            
            **37**
            
            
            **(2,219**
            **)**
            
            **(977**
            **)**
            
            **(1,556**
            **)**North
                Sea oil and gas business
            
            
            **28**
            
            
            **-**
            
            
            **(184**
            **)**
            
            **(145**
            **)**
            
            **(171**
            **)**Total
                derivative contracts
            
            **$**
            **217**
            
            **$**
            **37**
            
            **$**
            **(2,403**
            **)**
            **$**
            **(1,122**
            **)**
            **$**
            **(1,727**
            **)**








As
                of December 31, 2004Derivative
                Fair ValueCurrent
            
            Long-Term
            
            Current
            
            Long-Term
            
            Deferred
                Gain(Millions
                of dollars)
            
            Asset
            
            Asset
            
            Liability
            
            Liability
            
            (Loss)
                in AOCI(1)Oil
                and gas commodity derivatives -Kerr-McGee
                positions
            
            $
            41
            
            $
            12
            
            $
            (213
            )
            $
            (188
            )
            $
            (174
            )Acquired
                Westport positions
            
            
            1
            
            
            1
            
            
            (123
            )
            
            (16
            )
            
            (7
            )Gas
                marketing-related derivatives
            
            
            6
            
            
            2
            
            
            (6
            )
            
            (2
            )
            
            -Foreign
                currency forward contracts
            
            
            (2
            )
            
            -
            
            
            (6
            )
            
            -
            
            
            (2
            )Interest
                rate swaps
            
            
            4
            
            
            -
            
            
            (1
            )
            
            (2
            )
            
            -Other
                derivatives
            
            
            3
            
            
            -
            
            
            (1
            )
            
            -
            
            
            1Total
                - continuing operations
            
            
            53
            
            
            15
            
            
            (350
            )
            
            (208
            )
            
            (182
            )North
                Sea oil and gas business
            
            
            35
            
            
            -
            
            
            (22
            )
            
            -
            
            
            25Total
                derivative contracts
            
            $
            88
            
            $
            15
            
            $
            (372
            )
            $
            (208
            )
            $
            (157
            )





(1)  Amounts
      deferred in accumulated other comprehensive income (AOCI) are reflected net
      of
      tax.





-
          14
          -


The
      following tables summarize the income statement classification of gain (loss)
      on
      derivative instruments associated with continuing operations for the three-
      and nine-month periods ended September 30, 2005 and 2004:





**Three
                Months Ended**
            
            Three
                Months Ended**September
                30, 2005**
            
            September
                30, 2004**Costs
                and**
            
            **Other
                Income**
            
            
            
            Costs
                and
            
            Other
                Income(Millions
                of dollars)
            
            **Revenues**
            
            **Expenses**
            
            **(Expense)**
            
            Revenues
            
            Expenses
            
            (Expense)Hedge
                Activity:Oil and gas commodity derivatives
            
            **$**
            **(180**
            **)**
            **$**
            **-**
            
            **$**
            **-**
            
            $
            (132
            )
            $
            -
            
            $
            -Foreign currency contracts
            
            
            **1**
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            2
            
            
            -Interest rate swaps
            
            
            **-**
            
            
            **(2**
            **)**
            
            **-**
            
            
            -
            
            
            4
            
            
            -Other derivatives
            
            
            **-**
            
            
            **3**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            -Gain (loss) on hedge ineffectiveness
            
            
            **(212**
            **)**
            
            **-**
            
            
            **-**
            
            
            3
            
            
            -
            
            
            -Total
                hedging contracts
            
            
            **(391**
            **)**
            
            **1**
            
            
            **-**
            
            
            (129
            )
            
            6
            
            
            -Nonhedge
                Activity:Oil and gas commodity derivatives -Kerr-McGee
                positions
            
            
            **48**
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            1Acquired
                Westport positions
            
            
            **(77**
            **)**
            
            **-**
            
            
            **-**
            
            
            (42
            )
            
            -
            
            
            -Overhedge
                derivative loss
            
            
            **(125**
            **)**
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            -Gas
                marketing-related derivatives
            
            
            **1**
            
            
            **-**
            
            
            **-**
            
            
            1
            
            
            -
            
            
            -DECS
                call option(1)
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            (29
            )Other
                derivatives
            
            
            **-**
            
            
            **-**
            
            
            **1**
            
            
            -
            
            
            -
            
            
            -Total
                nonhedge contracts
            
            
            **(153**
            **)**
            
            **-**
            
            
            **1**
            
            
            (41
            )
            
            -
            
            
            (28
            )Total
                derivative contracts
            
            **$**
            **(544**
            **)**
            **$**
            **1**
            
            **$**
            **1**
            
            $
            (170
            )
            $
            6
            
            $
            (28
            )








**Nine
                Months Ended**
            
            Nine
                Months Ended**September
                30, 2005**
            
            September
                30, 2004**Costs
                and**
            
            **Other
                Income**
            
            
            
            Costs
                and
            
            Other
                Income(Millions
                of dollars)
            
            **Revenues**
            
            **Expenses**
            
            **(Expense)**
            
            Revenues
            
            Expenses
            
            (Expense)Hedge
                Activity:Oil and gas commodity derivatives
            
            **$**
            **(265**
            **)**
            **$**
            **-**
            
            **$**
            **-**
            
            $
            (283
            )
            $
            -
            
            $
            -Foreign currency contracts
            
            
            **-**
            
            
            **(4**
            **)**
            
            **-**
            
            
            -
            
            
            7
            
            
            -Interest rate swaps
            
            
            **-**
            
            
            **(2**
            **)**
            
            **-**
            
            
            -
            
            
            13
            
            
            -Other derivatives
            
            
            **-**
            
            
            **4**
            
            
            **-**
            
            
            -
            
            
            1
            
            
            -Gain (loss) on hedge ineffectiveness
            
            
            **(256**
            **)**
            
            **-**
            
            
            **-**
            
            
            2
            
            
            -
            
            
            -Total
                hedging contracts
            
            
            **(521**
            **)**
            
            **(2**
            **)**
            
            **-**
            
            
            (281
            )
            
            21
            
            
            -Nonhedge
                Activity:Oil and gas commodity derivatives -Kerr-McGee
                positions
            
            
            **62**
            
            
            **-**
            
            
            **-**
            
            
            (10
            )
            
            -
            
            
            3Acquired
                Westport positions
            
            
            **(130**
            **)**
            
            **-**
            
            
            **-**
            
            
            (27
            )
            
            -
            
            
            -Overhedge
                derivative loss
            
            
            **(125**
            **)**
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            -Gas
                marketing-related derivatives
            
            
            **5**
            
            
            **-**
            
            
            **-**
            
            
            5
            
            
            -
            
            
            (1
            )DECS
                call option(1)
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            (101
            )Other
                derivatives
            
            
            **-**
            
            
            **-**
            
            
            **2**
            
            
            -
            
            
            -
            
            
            (1
            )Total
                nonhedge contracts
            
            
            **(188**
            **)**
            
            **-**
            
            
            **2**
            
            
            (32
            )
            
            -
            
            
            (100
            )Total
                derivative contracts
            
            **$**
            **(709**
            **)**
            **$**
            **(2**
            **)**
            **$**
            **2**
            
            $
            (313
            )
            $
            21
            
            $
            (100
            )





(1)
            Other
                income (expense) for the three- and nine-month periods ended September
                30,
                2004 also includes unrealized gains on Devon Energy Corporation common
                stock of $29 million and $103 million,
                respectively.








-
          15
          -


**6.**
            **Accounts
                Receivable Sales**





Through
      April 2005, the company had an accounts receivable monetization program with
      a
      maximum availability of $165 million. Under the terms of the program, selected
      qualifying customer accounts receivable of the company’s chemical - pigment
      business were sold monthly to a special-purpose entity (SPE), which in turn
      sold
      an undivided ownership interest in the receivables to a third-party multi-seller
      commercial paper conduit sponsored by an independent financial institution.
      The
      company sold, and retained an interest in, excess receivables to the SPE as
      over-collateralization for the program. The retained interest in sold
      receivables was subordinate to, and provided credit enhancement for, the
      conduit's ownership interest in the SPE's receivables, and was available to
      the
      conduit to pay certain fees or expenses due to the conduit, and to absorb credit
      losses incurred on any of the SPE's receivables in the event of program
      termination. No recourse obligations were recorded since the company had no
      obligations for any recourse actions on the sold receivables. At December 31,
      2004, the outstanding balance of receivables sold (and excluded from the
      company's Condensed Consolidated Balance Sheet as of that date) was $165
      million, which was net of the company's retained interest in receivables serving
      as over-collateralization of $39 million.





The
      accounts receivable monetization program included ratings downgrade triggers
      that provided for certain program modifications, including a program termination
      event upon which the program would effectively liquidate over time and the
      third-party multi-seller commercial paper conduit would be repaid with the
      collections on accounts receivable sold by the SPE. In April 2005, following
      the
      announcement of the self tender offer and the related increase in the company’s
      leverage discussed in Note 1, the company’s senior unsecured debt was
      downgraded, triggering program termination. As opposed to liquidating the
      program over time in accordance with its terms, the company entered into an
      agreement to terminate the program by repurchasing the then outstanding balance
      of receivables sold of $165 million. Repurchased accounts
      receivable have subsequently been collected by the company.





In
      2005, while the program was in effect, the company sold $384 million of pigment
      receivables.  During the three and nine months ended September
      30, 2004, the company sold $297 million and $838 million,
      respectively, of its pigment accounts receivable. Losses on sales of accounts
      receivable are included in other income (expense) and are not material for
      all
      periods presented.








**7.**
            **Inventories**





Major
      categories of inventories at September 30, 2005 and December 31, 2004 are as
      follows:





**September
                30,**
            
            December
                31,(Millions
                of dollars)
            
            **2005**
            
            2004Chemicals
                and other products
            
            **$**
            **249**
            
            $
            236Materials
                and supplies
            
            
            **84**
            
            
            71Crude
                oil and natural gas liquids
            
            
            **6**
            
            
            7Total
            
            **$**
            **339**
            
            $
            314








**8.**
            **Asset
                Exchanges and Exploratory Drilling
                Costs**





***Exchanges
      of Assets*** - In
      the first quarter of 2005, the company acquired a 37.5% interest in the Blind
      Faith discovery in the deepwater Gulf of Mexico from BP Exploration &
      Production in exchange for the company's interests in various proved oil and
      gas
      properties in the Arkoma Basin of southeast Oklahoma. In connection with this
      transaction, the company received $24 million in cash and recognized a
      $19  million
      gain on sale based on the percentage of the Arkoma properties' fair value that
      was received in cash.





In
      the
      second quarter of 2005, the company sold its interests in oil and gas properties
      in the Table Mountain and Culp Draw fields of Wyoming to Anadarko Petroleum
      Corporation in exchange for Anadarko’s overriding royalty interests in the
      Greater Natural Buttes area and $27 million in cash. The company recognized
      a
      gain of $25 million in connection with this transaction.





-
          16
          -


***Exploratory
      Drilling Costs*** -
      At
      September 30, 2005, the company had capitalized exploratory drilling costs
      of
      approximately $224 million associated with ongoing exploration and/or appraisal
      activities primarily in the deepwater Gulf of Mexico, Alaska, Brazil and China.
      Such capitalized costs may be charged against earnings in a future period if
      management determines that commercial quantities of hydrocarbons have not been
      discovered or that future appraisal drilling or development activities are
      not
      likely to occur.  Capitalized exploratory well costs have increased
      by $88
      million from December 31, 2004 primarily due to additional exploration
      activities in the Gulf of Mexico ($49 million), Alaska ($44 million) and Brazil
      ($18 million) partially offset by successful exploration costs in China that
      were reclassified to proved oil and gas properties.








**9.**
            **Income
                Taxes**





***The
      American Jobs Creation Act of 2004*** - On
      October 22, 2004, the President of the United States signed into law the
      American Jobs Creation Act of 2004 (the “Act”). A provision of the Act includes
      a one-time dividends received deduction of 85% of certain foreign earnings
      that
      are repatriated, as defined in the Act. On April 11, 2005, management completed
      its analysis of the impact of the Act on the company's plans for repatriation.
      Based on this analysis, the company decided to repatriate up to $500 million
      in
      extraordinary dividends, as defined in the Act. During the second quarter of
      2005, the company repatriated $200 million under the provisions of the Act
      and
      recognized income tax expense of $12 million. During the third quarter
      of
      2005, an additional $21 million of foreign earnings were repatriated. However,
      the company reduced its provision for income taxes for repatriation of dividends
      under the provisions of the Act by $4 million, reflecting a change in the
      company’s expected utilization of foreign tax credits. The company may
      repatriate up to an additional $279 million in extraordinary dividends under
      the
      provisions of the Act. Pending completion of the divestiture of the company’s
      North Sea operations, management has not yet decided whether, and to what
      extent, additional amounts of foreign earnings will be repatriated, but will
      make this determination in the fourth quarter of 2005. Accordingly, the
      accompanying financial statements do not reflect any additional provision for
      taxes on unremitted foreign earnings that may be repatriated under the
      provisions of the Act. If the company decides to repatriate up to an additional
      $279 million as discussed above, additional income tax expense of up to $15
      million may be recognized in the fourth quarter.





***Income
      Tax, Continuing Operations*** -
      The
      effective tax rate for income from continuing operations for the three and
      nine
      months ended September 30, 2005 is 26% and 35%, respectively. Excluding the
      effect of the income tax provision for repatriation of foreign earnings under
      the Act discussed above and a $1 million tax benefit resulting from a change
      in
      estimated income tax obligations for 2004, the effective tax rate on income
      from
      continuing operations is 33% and 34% for the three and nine months ended
      September 30, 2005, respectively. The company expects that the effective tax
      rate for income from continuing operations for the full year 2005 will be
      approximately 35%.





***Income
      Tax, Discontinued Operations*** -
      As
      discussed in Note 2, beginning with the third quarter of 2005, results of the
      company’s North Sea oil and gas business are reported as a discontinued
      operation. In connection with the divestiture of this business, management
      determined in June 2005 that the sale of the company’s investment in the stock
      of a foreign subsidiary was likely to occur, which resulted in recognizing
      a tax
      benefit of $27 million in the second quarter of 2005 related to the estimated
      difference between the book and tax bases of the company’s investment in the
      subsidiary. Investment in the stock of that subsidiary was sold on September
      30,
      2005, and the company revised its estimate of the related income tax benefit
      from $27 million to $24 million. Additionally, in connection with the
      third-quarter divestiture of the company’s interests in four nonoperated fields
      in the North Sea, the company recognized a provision for foreign income and
      withholding taxes of $29 million and a U.K. income tax benefit of $9 million.
      The combined tax effect of the September divestiture transactions was a benefit
      of $4 million for the first nine months of 2005, in relation to a pretax gain
      on
      sale of $306 million. The relationship between pretax gain on sale and the
      related tax effects is affected by the company’s utilization of capital loss
      carryforwards in the U.K. not previously benefited for income tax purposes
      and
      the difference between the book and tax bases of the company’s investment in the
      stock of a foreign subsidiary.





As
      discussed in Note 10, the company is required to use 100% of the net cash
      proceeds from sales of certain assets for debt repayment. Because the North
      Sea
      oil and gas assets are subject to this requirement and the related sales
      proceeds will be remitted to the United States for debt repayment, the company
      recognized $11 million and $57 million in the second and third quarters of
      2005,
      respectively, of U.S. income tax expense on foreign earnings previously intended
      to have been indefinitely reinvested overseas (in addition to a previously
      established liability for U.S. income taxes on U.K. earnings of $59  million).
      The second-quarter income tax provision of $11 million reflected the company’s
      expected repatriation to the U.S. of foreign earnings associated with the
      company’s interests in nonoperated North Sea fields. During the third quarter,
      the sale of the entire North Sea oil and gas business became probable.
      Consequently, additional U.S. deferred tax provision of $57 million was
      recognized, primarily associated with an increase in foreign earnings expected
      to be remitted to the U.S. that are not sheltered by foreign tax credits. Any
      amounts remitted to the U.S. in connection with the divestiture of oil and
      gas
      properties in the U.K. will not be considered repatriated under the provisions
      of the Act as discussed above.





-
          17
          -





**10.**
            **Debt**





Long-term
      debt consisted of the following at September 30, 2005 and December 31,
      2004:




**September
                    30,**
                
                December
                    31,(Millions
                    of
                    dollars)
                
                **2005**
                
                2004Debentures
                    -5.25%
                    Convertible subordinated debentures due February 15, 2010(convertible
                    at $61.08 per share)
                
                **$**
                **-**
                
                $
                6007%
                    Debentures
                    due November 1, 2011, net of unamortized debtdiscount
                    of
                    $72 and $77 (14.25% effective rate)
                
                
                **178**
                
                
                1737.125%
                    Debentures due October 15, 2027
                
                
                **150**
                
                
                150Notes
                    payable
                    -5.375%
                    Notes
                    due April 15, 2005 (includes a premium of $4 in 2004for
                    fair value
                    hedge adjustment)
                
                
                **-**
                
                
                3548.125%
                    Notes
                    due October 15, 2005 (includes a premium of $2 in 2005and
                    a discount
                    of $1 in 2004 for fair value hedge adjustment)
                
                
                **111**
                
                
                1085.875%
                    Notes
                    due September 15, 2006, net of unamortized debt discountof
                    $1 and a
                    fair value hedge discount of $6 in 2005 (5.89% effective
                    rate)
                
                
                **300**
                
                
                3076.625%
                    Notes
                    due October 15, 2007, net of discount of $2for
                    fair value
                    hedge adjustment in both 2005 and 2004
                
                
                **148**
                
                
                1486.875%
                    Notes
                    due September 15, 2011, net of unamortized debt discountof
                    $2 and $1
                    (6.90% effective rate)
                
                
                **673**
                
                
                6746.95%
                    Notes
                    due July 1, 2024, net of unamortized debt discount of $6in
                    2005 and $5
                    in 2004 (7.02% effective rate)
                
                
                **644**
                
                
                6457.875%
                    Notes
                    due September 15, 2031, net of unamortized debtdiscount
                    of $3
                    and $2 (7.91% effective rate)
                
                
                **497**
                
                
                498Term
                  Loans
                  -Variable
                    rate
                    Tranche X term loan due May 24, 2007 (1)
                
                
                **1,400**
                
                
                -Variable
                    rate
                    Tranche B term loan due in installments through May 24, 2011
(1)
                    (2)
                
                
                **2,244**
                
                
                -Commercial
                  paper
                
                
                -
                
                
                41Guaranteed
                  Debt of Employee Stock Ownership Plan 9.61% Notesdue
                    in
                    installments through January 2, 2005
                
                
                **-**
                
                
                1**6,345**
                
                
                3,699Long-term
                  debt
                  due within one year
                
                
                (433
                )
                
                (463)Total
                
                **$**
                **5,912**
                
                $
                3,236





(1)
            The
                term loans are subject to certain mandatory prepayment provisions,
                as more
                fully described below.





(2)
            The
                scheduled principal payments on the Tranche B term loan are as follows:
                Commencing September 30, 2005, in twenty quarterly payments, each
                equal to
                0.25% of the outstanding principal balance, followed by four quarterly
                payments commencing September 30, 2010 through the maturity date,
                each
                equal to 23.75% of the outstanding principal
                balance.





-
          18
          -


The
      following summarizes the scheduled maturities of our debt at September 30,
      2005:


Scheduled(Millions
                of dollars)
            
            Maturities
            (1)Fourth
                quarter of 2005
            
            $
            116
            (2)2006
            
            
            3232007
            
            
            1,570
            (3)2008
            
            
            232009
            
            
            232010
            
            
            1,080Thereafter
            
            
            3,210Total
            
            $
            6,345





(1)
            These
                amounts are inclusive of the unamortized discount of $84 million
                and the
                net discount arising from fair value hedge adjustments of $6
                million.




(2)
            In
                October 2005, the company repaid $109 million principal amount of
                8.125%
                notes upon maturity using cash on
                hand.




(3)
            In
                November 2005, the company repaid $150 million of the Tranche X term
                loan
                balance using proceeds from asset sales and cash on
                hand.





In
      February 2005, the company called for redemption all of the $600 million
      aggregate principal amount of its 5.25% convertible subordinated debentures
      due
      2010 at a price of 102.625%. Prior to March 4, 2005, the redemption date, all
      of
      the debentures were converted by the holders into approximately 9.8 million
      shares of common stock.





As
      discussed in Note 15, in May 2005, the company completed a self tender offer
      for
      its common stock for an aggregate cost of $4 billion. In connection with the
      tender offer, the company entered into a $5.5 billion credit agreement
      (Credit Agreement) consisting of a $2 billion two-year term loan (Tranche X),
      a
      $2.25 billion six-year term loan (Tranche B) and a $1.25 billion five-year
      revolving credit facility (Revolving Facility). In satisfaction of one of the
      closing conditions, the company repaid all outstanding indebtedness under the
      $1.5 billion revolving credit agreement previously in effect and terminated
      the
      agreement. No penalties were incurred in connection with the early termination.





Interest
      on amounts borrowed under the Credit Agreement is payable, at the company’s
      election, at an alternate base rate (ABR) or a Eurodollar rate, in each case
      as
      defined in the Credit Agreement, plus a margin, as summarized below. Interest
      is
      paid at the end of an interest period selected by the company, but not less
      frequently than quarterly. The applicable margin may vary based on the company’s
      Consolidated Leverage Ratio, as defined in the Credit Agreement, and other
      specified events and conditions. The Consolidated Leverage Ratio determined
      pursuant to the terms of the Credit Agreement is based on the company's total
      funded debt and its earnings over a period of four consecutive quarters (before
      considering interest, taxes, depreciation, depletion and amortization, noncash
      exploration expense and other specified noncash items).





Applicable
                Interest Rate Margin**At
                September 30, 2005**
            
            Over
                the TermMaturity
            
            **ABR**
            
            **Eurodollar**
            
            ABR
            
            EurodollarRevolving
                Facility
            May
                2010
            
            **1.25%**
            
            **2.25%**
            
            0.25
                - 1.25%
            
            1.25
                - 2.25%Tranche
                X Term Loan
            May
                2007
            
            **1.25%**
            
            **2.25%**
            
            1.25%
            
            2.25%Tranche
                B Term Loan
            May
                2011
            
            **1.50%**
            
            **2.50%**
            
            1.25
                - 1.50%
            
            2.25
                - 2.50%





During
      the third quarter of 2005, the company incurred losses associated with early
      repayment of debt and modification of the terms of certain registered notes,
      as
      described below under *Tranche
      X and Tranche B Term Loans* and *Guarantee
      and Collateral Provisions* .





Debt
                IssueTransaction
            
            Costs(Millions
                of dollars)
            
            Costs
            
            Written
                Off
            
            TotalTranche
                X term loan repayment
            
            $
            -
            
            $
            5
            
            $
            5Consent
                solicitation costs
            
            
            4
            
            
            -
            
            
            4Loss
                on early repayment and modification of debt
            
            $
            4
            
            $
            5
            
            $
            9




-
          19
          -


***Revolving
      Facility*** -
      The
      $1.25 billion Revolving Facility provides for borrowings and issuances of
      letters of credit. The commitment fee payable on the unused portion of the
      Revolving Facility is currently set at 0.5% annually. At September 30, 2005,
      no
      borrowings were outstanding under the Revolving Facility and outstanding letters
      of credit totaled $96 million. The company had total unused bank and revolving
      lines of credit of $1.2 billion at September 30, 2005.





***Tranche
      X and Tranche B Term Loans*** -
      The
      term loans were fully funded at closing, with proceeds used to finance the
      tender offer and to pay fees and expenses associated with the Credit Agreement.
      From origination through September 30, 2005, the weighted average interest
      rates
      on the Tranche X and Tranche B term loans were 5.72% and 5.98%,
      respectively.





The
      company may make prepayments on the term loans at any time without penalty.
      Additionally, the term loans are subject to the following mandatory prepayment
      provisions:





·
            As
                long as the Tranche X loan is outstanding, 50% of the net cash proceeds,
                as defined, of certain equity
                issuances;




·
            100%
                of the net cash proceeds, as defined, from incurrence of certain
                indebtedness;




·
            Subject
                to certain exceptions, 100% of the net cash proceeds, as defined,
                from
                asset disposals; and




·
            Annually,
                a specified percentage of excess cash flow, as defined, ranging from
                zero
                to 50%. This prepayment requirement is reduced or eliminated upon
                repayment of the Tranche X loan and the achievement of a Consolidated
                Leverage Ratio below specified thresholds. Excess cash flow as calculated
                under the Credit Agreement is reduced by mandatory prepayments made
                with
                the net cash proceeds from asset disposals.





As
      discussed in Note 2, the company has completed the sales of its interests in
      four nonoperated fields in the North Sea and its nonoperating interest in a
      gas
      processing facility. In connection with these sales, the company repaid a
      portion of the Tranche X loan balance using proceeds from the divestiture
      transactions and cash on hand, as summarized below. Mandatory prepayments were
      made in satisfaction of the prepayment requirement associated with asset
      disposals.





Amount
                of PrepaymentPeriod
            
            Assets
                Divested
            
            Mandatory
            
            Optional
            
            Total(Millions
                of dollars)September
            
            
            Nonoperated
                North Sea fields
            
            $
            504
            
            $
            96
            
            $
            600November
            
            
            Nonoperating
                interest in gas processing facility
            
            
            111
            
            
            39
            
            
            150$
            615
            
            $
            135
            
            $
            750





***Guarantee
      and Collateral Provisions*** -
      The
      company’s obligations under the Credit Agreement are (a) unconditionally
      guaranteed, jointly and severally, by certain of the company’s domestic
      subsidiaries and (b) secured by a perfected first priority security interest,
      subject to existing liens and customary exceptions and to the rights of the
      company’s existing bondholders to be equally and ratably secured, in a
      substantial portion of the company’s tangible and intangible assets located in
      the United States (excluding assets relating to the company’s chemical
      business), and all of the capital stock of specified direct and indirect
      subsidiaries (limited, in the case of foreign subsidiaries, to 66% of the
      capital stock of the company’s first tier foreign subsidiaries).





To
      the
      extent required under the terms of the company’s existing indentures, all
      obligations under previously unsecured bonds became equally and ratably secured
      with the company’s obligations under the Credit Agreement.





As
      discussed in Note 1, the company decided to separate its chemical business.
      The
      company’s chemical business subsidiary, Tronox Worldwide LLC (formerly
      Kerr-McGee Chemical Worldwide LLC), is one of the guarantor subsidiaries of
      the
      company’s 5.875% Notes due 2006, 6.875% Notes due 2011, 6.95% Notes due 2024 and
      7.875% Notes due 2031 (collectively referred to herein as the Notes). In
      September 2005, the company received consent from a majority of the noteholders
      to amend the indenture governing the Notes. The supplemental indenture, which
      became effective as of September 21, 2005, provides for the release
      of
      Tronox Worldwide LLC as a guarantor of the Notes upon an IPO by Tronox Worldwide
      LLC, or upon a spinoff or splitoff of Tronox Worldwide LLC, or its parent,
      Tronox Incorporated.





-
          20
          -


Pursuant
      to the terms of the consent solicitation, the company paid an initial consent
      fee (execution fee) of $2.50 for each $1,000 principal to each consenting
      holder, for a total of approximately $5 million, which was recorded as a
      reduction in the carrying value of the associated debt securities and will
      increase interest expense over the remaining terms of the Notes. If an IPO,
      spinoff or splitoff occurs and Tronox Worldwide LLC is released from its
      guaranty of the Notes, the company will pay an additional consent fee to each
      consenting holder. This additional payment is estimated to be $13 million in
      the
      aggregate and will be accounted for in the same manner as the execution fee.
      In
      connection with the consent solicitation, the company incurred transaction
      costs
      of $4 million in the third quarter, which is included in loss on early repayment
      and modification of debt in the accompanying Condensed Consolidated Statement
      of
      Income.





***Debt
      Covenants*** -
      The
      terms of the Credit Agreement provide for customary representations and
      warranties, affirmative and negative covenants, and events of default.
      Specifically, the Credit Agreement limits the company’s ability to incur or
      secure other debt, make investments, sell assets, pay dividends and repurchase
      stock. Additionally, the company’s ability to make capital expenditures
      (including dry hole costs) is limited by the provisions of the Credit Agreement
      to $2.35 billion in any given year. The company also is required to maintain
      compliance with the following financial covenants (in each case, as defined
      in
      the Credit Agreement):





·
            Consolidated
                Leverage Ratio of no more than 4:1 in 2005, 3.75:1 in 2006 and 3.50:1
                thereafter


·
            Consolidated
                Interest Coverage Ratio over a specified period of at least
                3:1


·
            Asset
                Coverage Ratio of more than 1.25:1 in 2005, 1.50:1 in 2006 and 1.75:1
                thereafter





The
      company’s current dividend level ($.20 per share annually) is expected to be in
      compliance with the annual limitation on dividend payments of $50 million.





For
      the
      third quarter of 2005, the company had a Consolidated Leverage Ratio of 1.7:1,
      a
      Consolidated Interest Coverage Ratio of approximately 11:1 and an Asset Coverage
      Ratio of 1.92:1, and was in compliance with its other debt
      covenants.








**11.**
            **Asset
                Retirement Obligations**





The
      following presents a summary of the changes in the abandonment liability during
      the first nine months of 2005.





(Millions
                of dollars)Balance
                at December 31, 2004
            
            **$**
            **524**New
                obligations incurred, including obligations acquired
            
            
            **15**Accretion
                expense
            
            
            **24**Changes
                in estimates, including timing
            
            
            **(6**
            **)**Abandonment
                expenditures
            
            
            **(15**
            **)**Abandonment
                obligations settled through property divestitures
            
            
            **(41**
            **)**Balance
                at September 30, 2005
            
            
            **501**Less:
                asset retirement obligations associated with assets held for
                sale
            
            
            **(153**
            **)**Less:
                current asset retirement obligation
            
            
            **(24**
            **)**Noncurrent
                asset retirement obligation
            
            **$**
            **324**








-
          21
          -


**12.**
            **Exit,
                Disposal and Restructuring
                Activities**





Following
      are the changes in the reserve for exit and restructuring activities during
      the
      nine months ended September 30, 2005. Except as discussed below, no significant
      changes in the status of such activities occurred during this period. Condensed
      Consolidated Statement of Income for the three and nine months of 2004 includes
      a pretax charge of $123 million for costs associated with the shutdown of
      sulfate and gypsum production at the company’s Savannah, Georgia, facility and
      accelerated depreciation of other assets at that facility. Of the total charge,
      $86 million is reflected in depreciation and depletion expense, $30 million
      in
      costs and operating expenses and $7 million in asset impairments.





Dismantlement
            
            Personnel(Millions
                of dollars)
            
            and
                Closure
            
            Costs
            
            TotalBalance
                at December 31, 2004
            
            $
            10
            
            $
            8
            
            $
            18Provisions
            
            
            -
            
            
            18
            
            
            18Payments
                / Adjustments
            
            
            (4
            )
            
            (5
            )
            
            (9
            )Balance
                at September 30, 2005
            
            $
            6
            
            $
            21
            
            $
            27





As
      discussed in Note 2, the company plans to separate its chemical business unit
      and divest selected oil and gas properties. In April 2005, in connection with
      the planned exit activities, the company initiated employee compensation
      programs designed to provide an incentive to certain employees to remain with
      the company over a stated period ranging from six to 18
      months.
      The total cost of the retention programs is expected to be $34 million, assuming
      all participating employees meet the service and other conditions and before
      considering any awards that may be made in future periods upon successful
      disposition of certain assets, as discussed below. Of the total expected cost,
      $21 million is associated with the company’s exploration and production
      segment, $4 million with the chemical-pigment segment and $9 million with
      corporate activities. Through September 30, 2005, the company recognized $16
      million as a component of selling, general and administrative expenses in
      connection with the retention programs. The remaining cost of $18 million will
      be recognized as the related services are provided by the participating
      employees. Under the plan covering employees of the chemical business unit,
      awards totaling $2 million are payable upon the earlier of the disposition
      of the chemical business or the end of a  one-year
      service period. Additional payments may be due to certain employees upon
      successful disposition of the chemical business or divestiture of certain oil
      and gas assets.





In
      connection with the separation of Tronox, the company and its affiliates are
      evaluating organizational needs for both Kerr-McGee as a pure-play exploration
      and production company and Tronox as a separate publicly-traded chemical
      company. As part of this process, in October 2005, the company identified 75
      employees that are expected to be involuntarily terminated by the end of 2006.
      The majority of these employees will receive severance payments and other
      benefits upon completion of a specified service period of up to fourteen months.
      Assuming all employees meet the service and other conditions, the company's
      obligation for severance, outplacement assistance and other benefits will result
      in payments totaling $5 million by the end of 2006. Qualifying employees
      terminated under this program will also be eligible for enhanced benefits under
      the company's pension and postretirement plans.








**13.**
            **Employee
                Stock-Based Compensation and Benefit
                Plans**





***Stock-Based
      Compensation*** - In
      January 2005, annual stock-based compensation awards were granted to eligible
      employees and directors under the company’s 2002 Long Term Incentive Plan. The
      awards included approximately 450,000 shares of restricted stock,
      1.7 million stock options and 16.3 million performance units
      that
      provide for cash awards based on the company’s achievement of certain financial
      performance measures over a stated period. The fair value of the restricted
      stock grant on the grant date was $25 million, which will be recognized
      as
      compensation expense (net of forfeitures) ratably over a three-year vesting
      period or the service period, if shorter. The exercise price of the options
      granted of $56.57 per share equaled the fair value of the underlying stock
      on
      the date of grant, and therefore, did not result in any compensation expense.
      As
      of September 30, 2005, the company had 5.3 million stock options and
      1.3
      million shares of restricted stock outstanding.





-
          22
          -


In
      May
      2005, the shareholders approved the 2005 Long Term Incentive Plan (2005 Plan),
      which authorizes the issuance of shares of the company’s common stock to certain
      employees and non-employee directors in the form of stock options, restricted
      stock or performance awards. The options may be accompanied by stock
      appreciation rights. A total of 10 million shares of the company’s common stock
      is authorized to be issued under the 2005 Plan any time prior to May 10, 2015,
      of which a maximum of 3 million shares of common stock is authorized for
      issuance in connection with awards of restricted stock and performance awards.
      Performance awards may be granted in the form of performance shares or
      performance units. Performance shares define a benefit to the grantee by
      reference to shares of stock, while performance units provide for cash awards
      based on the company’s achievement of certain financial performance measures
      over a stated period. As of September 30, 2005, no awards have been made under
      this plan.





***Retirement
      and Postretirement Benefits*** -
      The
      company has both noncontributory and contributory defined-benefit retirement
      plans and company-sponsored contributory postretirement plans for health care
      and life insurance. Most employees are covered under the company’s retirement
      plans, and substantially all U.S. employees may become eligible for
      postretirement benefits if they reach retirement age while working for the
      company.





The
      components of net periodic cost included in income from continuing operations
      for the third quarter of 2005 and 2004 are as follows:


PostretirementRetirement
                Plans
            
            Health
                and Life PlansThree
                Months Ended
            
            Three
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Net
                periodic cost -Service
                cost
            
            **$**
            **8**
            
            $
            7
            
            **$**
            **1**
            
            $
            1Interest
                cost
            
            
            **17**
            
            
            17
            
            
            **4**
            
            
            4Expected
                return on plan assets
            
            
            **(25**
            **)**
            
            (28
            )
            
            **-**
            
            
            -Net
                amortization -Prior
                service cost
            
            
            **2**
            
            
            2
            
            
            **-**
            
            
            -Net
                actuarial loss
            
            
            **1**
            
            
            1
            
            
            **-**
            
            
            -Special
                termination benefits andcurtailment
                losses(1)
            
            
            **-**
            
            
            2
            
            
            **-**
            
            
            -Total
                net periodic cost
            
            **$**
            **3**
            
            $
            1
            
            **$**
            **5**
            
            $
            5








Income
      from continuing operations for the first nine months of 2005 and 2004 includes
      the following components of net periodic cost:





PostretirementRetirement
                Plans
            
            Health
                and Life PlansNine
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Net
                periodic cost -Service
                cost
            
            **$**
            **24**
            
            $
            19
            
            **$**
            **3**
            
            $
            2Interest
                cost
            
            
            **49**
            
            
            52
            
            
            **12**
            
            
            14Expected
                return on plan assets
            
            
            **(74**
            **)**
            
            (86
            )
            
            
            
            
            -Net
                amortization -Prior
                service cost
            
            
            **6**
            
            
            6
            
            
            **(2**
            **)**
            
            1Net
                actuarial loss
            
            
            **3**
            
            
            2
            
            
            **2**
            
            
            2Special
                termination benefits andcurtailment
                losses(1)
            
            
            **-**
            
            
            2
            
            
            **-**
            
            
            -Total
                net periodic cost (benefit)
            
            **$**
            **8**
            
            $
            (5
            )
            **$**
            **15**
            
            $
            19





(1)
            The
                2004 periods include special termination benefit and curtailment
                costs
                associated with the shutdown of sulfate production facility at the
                Savannah, Georgia, pigment plant.


-
          23
          -


**14.**
            **Earnings
                Per Share**





The
      following tables set forth the computation of basic and diluted earnings per
      share from continuing operations for the three and nine months ended September
      30, 2005 and 2004. All options outstanding at September 30, 2005 were
      in-the-money, and therefore, the dilutive effect of such options is reflected
      in
      diluted earnings per share for the three and nine months ended September 30,
      2005. As discussed in Note 10, during the first quarter of 2005, the company’s
      5.25% convertible subordinated debentures were converted by the holders into
      approximately 9.8 million shares of common stock. The effect of convertible
      debentures was excluded from the determination of diluted earnings per share
      for
      the nine months ended September 30, 2004, because they were antidilutive. For
      the three months ended September 30, 2004, all potentially issuable shares
      were
      antidilutive due to loss from continuing operations for that
      period.





Three
                Months Ended September 30,**2005**
            
            
            
            
            
            2004**Income
                from**
            
            **Weighted-**
            
            
            
            Loss
                from
            
            Weighted-(In
                millions, except
            
            **Continuing**
            
            **Average**
            
            **Per-Share**
            
            Continuing
            
            Average
            
            Per-Shareper-share
                amounts)
            
            **Operations**
            
            **Shares**
            
            **Income**
            
            Operations
            
            Shares
            
            LossBasic
                earnings per share
            
            **$**
            **54**
            
            
            **114**
            
            **$**
            **.46**
            
            $
            (24
            )
            
            150
            
            $
            (.16
            )Effect
                of dilutive securities:Restricted
                stock
            
            
            **-**
            
            
            **1**
            
            
            
            
            
            -
            
            
            -Stock
                options
            
            
            **-**
            
            
            **1**
            
            
            
            
            
            -
            
            
            -Diluted
                earnings per share
            
            **$**
            **54**
            
            
            **116**
            
            **$**
            **.46**
            
            $
            (24
            )
            
            150
            
            $
            (.16
            )








Nine
                Months Ended September 30,**2005**
            
            
            
            
            
            2004**Income
                from**
            
            **Weighted-**
            
            
            
            Income
                from
            
            Weighted-(In
                millions, except
            
            **Continuing**
            
            **Average**
            
            **Per-Share**
            
            Continuing
            
            Average
            
            Per-Shareper-share
                amounts)
            
            **Operations**
            
            **Shares**
            
            **Income**
            
            Operations
            
            Shares
            
            IncomeBasic
                earnings per share
            
            **$**
            **570**
            
            
            **137**
            
            **$**
            **4.18**
            
            $
            158
            
            
            118
            
            $
            1.34Effect
                of dilutive securities:5.25%
                convertible debentures
            
            
            **4**
            
            
            **2**
            
            
            
            
            
            -
            
            
            -Restricted
                stock
            
            
            **-**
            
            
            **1**
            
            
            
            
            
            -
            
            
            -Stock
                options
            
            
            **-**
            
            
            **1**
            
            
            
            
            
            -
            
            
            1Diluted
                earnings per share
            
            **$**
            **574**
            
            
            **141**
            
            **$**
            **4.09**
            
            $
            158
            
            
            119
            
            $
            1.33








**15.**
            **Capital
                Stock**





In
      May
      2005, the stockholders approved an increase in the authorized number of shares
      of common stock from 300 million to 500 million shares. Following this approval,
      authorized capital stock of the company consists of 500 million shares of common
      stock with a par value of $1.00 per share and 40 million shares of
      preferred stock without par value. No shares of preferred stock have been
      issued.





As
      discussed in Note 1, in March 2005, the company's Board of Directors authorized
      a share repurchase program initially set at $1 billion, with an expectation
      to expand
      the program as the chemical business separation proceeded. Before terminating
      this program in
      connection with the Board's approval of the tender offer discussed below, the
      company repurchased 3.1 million shares of its common stock in the open market
      at
      an aggregate cost of $250 million. Shares repurchased under this program are
      held in treasury.





On
      April 18, 2005, the company commenced a modified "Dutch Auction" self tender
      offer to repurchase 43.5 million shares of its common stock at a price not
      lower
      than $85 or higher than $92 per share. The terms of the tender offer provided
      for the company to determine the lowest per-share price within the range that
      would enable it to buy up to $4 billion of its common stock based on
      the
      number of shares tendered and the prices specified by the tendering
      stockholders. Under the tender offer, which expired on May 18, 2005,
      approximately 138.9 million shares were properly tendered at a price of $85
      per
      share and not withdrawn. Since the number of shares tendered exceeded 43.5
      million, purchases of shares by the company were made based on a proration
      factor of 33.64%. In accordance with applicable securities laws, the company
      exercised its right to increase the number of shares purchased pursuant to
      the
      tender offer by 3.2 million shares, which resulted in repurchasing 46.7 million
      shares of common stock at $85 per share, for an aggregate cost of approximately
      $4 billion (including transaction costs of approximately $3 million).
      All of the shares repurchased under the tender offer were retired immediately.
      The cost of the repurchase was financed with a portion of the net proceeds
      of
      the borrowings under the Credit Agreement discussed in Note 10 and cash on
      hand.


-
          24
          -


Changes
      in common stock issued and treasury stock held for the nine-month periods ended
      September 30, 2005 and 2004, are as follows:





Common
            
            Treasury(Thousands
                of shares)
            
            Stock
            
            StockBalance
                at December 31, 2003
            
            
            100,892
            
            
            32Shares
                issued in Westport merger
            
            
            48,949
            
            
            -Exercise
                of stock options
            
            
            1,268
            
            
            -Issuance
                of restricted stock
            
            
            483
            
            
            -Forfeiture
                of restricted stock
            
            
            -
            
            
            118Balance
                at September 30, 2004
            
            
            151,592
            
            
            150Balance
                at December 31, 2004
            
            
            **152,049**
            
            
            **160**Exercise
                of stock options
            
            
            **3,762**
            
            
            **-**Issuance
                of restricted stock
            
            
            **450**
            
            
            **-**Forfeiture
                of restricted stock
            
            
            **-**
            
            
            **67**Shares
                issued upon conversion of 5.25% debentures
            
            
            **9,818**
            
            
            **-**Purchases
                of treasury shares
            
            
            **-**
            
            
            **3,145**Shares
                repurchased and retired
            
            
            **(46,728**
            **)**
            
            **-**Balance
                at September 30, 2005
            
            
            **119,351**
            
            
            **3,372**








**16.**
            **Contingencies**




The
      following table summarizes the contingency reserve balances, provisions,
      payments and settlements for the nine-month period ended September 30, 2005,
      as
      well as balances, accruals and receipts of environmental cost reimbursements
      from other parties.





Reserves
                forReserves
                for
            
            Environmental
            
            Reimbursements(Millions
                of dollars)
            
            Litigation
            
            Remediation(1)
            
            ReceivableBalance
                at December 31, 2004
            
            $
            39
            
            $
            255
            
            $
            94Provisions
                / Accruals
            
            
            -
            
            
            73
            
            
            29Payments
                / Settlements
            
            
            (15
            )
            
            (49
            )
            
            (70
            )Balance
                at September 30, 2005
            
            $
            24
            
            $
            279
            
            $
            53





(1)
            Provisions
                for environmental remediation include $11 million related to the
                company’s
                former forest products operations reflected in the Condensed Consolidated
                Statement of Income as a component of income from discontinued operations,
                net of taxes.





Management
      believes, after consultation with its internal legal counsel, that currently
      the
      company has reserved adequately for the reasonably estimable costs of
      environmental matters and other contingencies. However, additions to the
      reserves may be required as additional information is obtained that enables
      the
      company to better estimate its liabilities, including liabilities at sites
      now
      under review, though the company cannot now reliably estimate a range of future
      additions to the reserves for any individual site or for all sites collectively.
      Following are discussions regarding certain environmental sites and litigation.
      Reserves for each environmental site are based on assumptions regarding the
      volumes of contaminated soils and groundwater involved, as well as associated
      excavation, transportation and disposal costs.





-
          25
          -





The
      company provides for costs related to contingencies when a loss is probable
      and
      the amount is reasonably estimable. It is not possible for the company to
      reliably estimate the amount and timing of all future expenditures related
      to
      environmental and legal matters and other contingencies because, among other
      reasons:





·
            some
                sites are in the early stages of investigation, and other sites may
                be
                identified in the future;




·
            remediation
                activities vary significantly in duration, scope and cost from site
                to
                site depending on the mix of unique site characteristics, applicable
                technologies and regulatory agencies
                involved;




·
            cleanup
                requirements are difficult to predict at sites where remedial
                investigations have not been completed or final decisions have not
                been
                made regarding cleanup requirements, technologies or other factors
                that
                bear on cleanup costs;




·
            environmental
                laws frequently impose joint and several liability on all potentially
                responsible parties, and it can be difficult to determine the number
                and
                financial condition of other potentially responsible parties and
                their
                respective shares of responsibility for cleanup
                costs;




·
            environmental
                laws and regulations, as well as enforcement policies, are continually
                changing, and the outcome of court proceedings and discussions with
                regulatory agencies are inherently
                uncertain;




·
            some
                legal matters are in the early stages of investigation or proceeding
                or
                their outcomes otherwise may be difficult to predict, and other legal
                matters may be identified in the
                future;




·
            unanticipated
                construction problems and weather conditions can hinder the completion
                of
                environmental remediation; the inability to implement a planned
                engineering design or use planned technologies and excavation methods
                may
                require revisions to the design of remediation measures, resulting
                in
                delayed remediation and increased costs; and the identification of
                additional areas or volumes of contamination and changes in costs
                of
                labor, equipment and technology generate corresponding changes in
                environmental remediation costs.




**Environmental
      Matters**




**Henderson,
      Nevada**





In
      1998, Tronox LLC (formerly Kerr-McGee Chemical LLC) decided to exit the ammonium
      perchlorate business. At that time, Tronox LLC curtailed operations and began
      preparation for the shutdown of the associated production facilities in
      Henderson, Nevada, that produced ammonium perchlorate and other related
      products. Manufacture of perchlorate compounds began at Henderson in 1945 in
      facilities owned by the U.S. government. The U.S. Navy expanded production
      significantly in 1953 when it completed construction of a plant for the
      manufacture of ammonium perchlorate. The Navy continued to own the ammonium
      perchlorate plant as well as other associated production equipment at Henderson
      until 1962, when the plant was purchased by a predecessor of Tronox LLC. The
      ammonium perchlorate produced at the Henderson facility was used primarily
      in
      federal government defense and space programs. Perchlorate that may have
      originated, at least in part, from the Henderson facility has been detected
      in
      nearby Lake Mead and the Colorado River, which contribute to municipal water
      supplies in Arizona, Southern California and Southern Nevada.





Tronox
      LLC began decommissioning the facility and remediating associated perchlorate
      contamination, including surface impoundments and groundwater, when it decided
      to exit the business in 1998. In 1999 and 2001, Tronox LLC entered into consent
      orders with the Nevada Division of Environmental Protection (NDEP) that requires
      it to implement both interim and long-term remedial measures to capture and
      remove perchlorate from groundwater. In April 2005, Tronox LLC entered into
      an
      amended consent order with NDEP that requires, in addition to the capture and
      treatment of groundwater, the closure of a certain impoundment related to the
      past production of ammonium perchlorate, including treatment and disposal of
      solution and sediment contained in the impoundment.





-
          26
          -





In
      1999, Tronox LLC initiated the interim measures required by the consent orders.
      A long-term remediation system is operating in compliance with the consent
      orders. Initially, the remediation system was projected to operate through
      2007.
      However, studies of the decline of perchlorate levels in the groundwater
      indicate that Tronox LLC may need to operate the system through 2011. The scope,
      duration and cost of groundwater remediation ultimately will be driven in the
      long term by drinking water standards regarding perchlorate, which to date
      have
      not been formally established by applicable state or federal regulatory
      authorities. The Environmental Protection Agency (EPA) and other federal and
      state agencies continue to evaluate the health and environmental risks
      associated with perchlorate as part of the process for ultimately setting
      drinking water standards. One state agency, the California Environmental
      Protection Agency (CalEPA), has set a public health goal for perchlorate, and
      the federal EPA has established a reference dose for perchlorate, which are
      preliminary steps to setting drinking water standards. The establishment of
      drinking water standards could materially affect the scope, duration and cost
      of
      the long-term groundwater remediation that Tronox LLC is required to
      perform.





***Financial
      Reserves*** *-* As
      of
      September 30, 2005, reserves for environmental remediation at Henderson totaled
      $38 million. This amount includes $2 million added to the reserve during the
      third quarter because of increased costs for removing and treating ammonium
      perchlorate solids contained in a lined pond and purchasing additional equipment
      to perform clean-up. As noted above, the long-term scope, duration and cost
      of
      groundwater remediation and impoundment closure are uncertain and, therefore,
      additional costs beyond those accrued may be incurred in the future. However,
      the amount of any additional costs cannot be reasonably estimated at this
      time.





***Litigation*** - ****** In
      2000, Tronox LLC initiated litigation against the United States seeking
      contribution for its Henderson response costs. The suit is based on the fact
      that the government owned the plant in the early years of its operation,
      exercised significant control over production at the plant and the sale of
      products produced at the plant, even while not the owner, and was the largest
      consumer of products produced at the plant. The discovery stage of litigation
      is
      complete, and the parties are engaged in settlement negotiations. Although
      the
      outcome of the litigation is uncertain, the company believes it is likely to
      recover a portion of its costs from the government. The amount and timing of
      any
      recovery cannot be estimated at this time and, accordingly, the company has
      not
      recorded a receivable or otherwise reflected in the financial statements any
      potential recovery from the government.





***Insurance*** - ****** In
      2001, Tronox LLC purchased a 10-year, $100 million environmental cost cap
      insurance policy for groundwater and other remediation at Henderson. The
      insurance policy, which began to provide coverage after Tronox LLC exhausted
      a
      self-insured retention of approximately $61 million, covers only those costs
      incurred to achieve a cleanup level specified in the policy. As noted above,
      federal and state agencies have not established a drinking water standard and,
      therefore, it is possible that Tronox LLC may be required to achieve a cleanup
      level more stringent than that covered by the policy. If so, the amount
      recoverable under the policy may be less than the ultimate cleanup
      cost.





At
      September 30, 2005, Tronox LLC had received $4 million of cost reimbursement
      under the insurance policy, and expects additional estimated aggregate cleanup
      costs of $93 million less the $61 million self-insured retention to be covered
      by the policy (for a net amount of $32 million in additional reimbursement).
      The
      company believes that additional reimbursement of approximately $32 million
      is
      probable, and, accordingly, the company has recorded a receivable in the
      financial statements for that amount.




**West
      Chicago, Illinois**





In
      1973, Tronox LLC closed a facility in West Chicago, Illinois, that processed
      thorium ores for the federal government and for certain commercial purposes.
      Historical operations had resulted in low-level radioactive contamination at
      the
      facility and in surrounding areas. The original processing facility is regulated
      by the State of Illinois (the State), and four vicinity areas are designated
      as
      Superfund sites on the National Priorities List (NPL).





-
          27
          -





***Closed
      Facility*** -
      Pursuant to agreements reached in 1994 and 1997 among Tronox LLC, the City
      of
      West Chicago and the State regarding the decommissioning of the closed West
      Chicago facility, Tronox LLC has substantially completed the excavation of
      contaminated soils and has shipped those soils to a licensed disposal facility.
      Surface restoration was completed in 2004, except for areas designated for
      use
      in connection with the Kress Creek and Sewage Treatment Plant remediation
      discussed below. Groundwater monitoring and remediation is expected to continue
      for approximately 10 years.





***Vicinity
      Areas*** -
      EPA
      has listed four areas in the vicinity of the closed West Chicago facility on
      the
      NPL and has designated Tronox LLC as a Potentially Responsible Party (PRP)
      in
      these four areas. Tronox LLC has substantially completed remedial work for
      two
      of the areas (known as the Residential Areas and Reed-Keppler Park). The other
      two NPL sites, known as Kress Creek and the Sewage Treatment Plant, are
      contiguous and involve low levels of insoluble thorium residues, principally
      in
      streambanks and streambed sediments, virtually all within a floodway. Tronox
      LLC
      has reached an agreement with the appropriate federal and state agencies and
      local communities regarding the characterization and cleanup of the sites,
      past
      and future government response costs, and the waiver of natural resource damages
      claims. The agreement is incorporated in consent decrees, which were approved
      and entered by the federal court in August 2005. The cleanup work, which is
      expected to take about four to five years to complete, will require excavation
      of contaminated soils and stream sediments, shipment of excavated materials
      to a
      licensed disposal facility and restoration of affected areas.





***Financial
      Reserves*** - ****** As
      of
      September 30, 2005, reserves for environmental remediation costs related to
      the
      West Chicago facility and vicinity properties totaled $97 million. Although
      actual costs may differ from current estimates, the amount of any revisions
      in
      remediation costs cannot be reasonably estimated at this time. The amount of
      the
      reserve is not reduced by reimbursements expected from the federal government
      under Title X of the Energy Policy Act of 1992 (Title X) (discussed
      below).





***Government
      Reimbursement*** -
      Pursuant to Title X, the U.S. Department of Energy (DOE) is obligated to
      reimburse Tronox LLC for certain decommissioning and cleanup costs incurred
      in
      connection with the West Chicago sites in recognition of the fact that about
      55%
      of the facility’s production was dedicated to U.S. government contracts. The
      amount authorized for reimbursement under Title X is $365 million plus inflation
      adjustments. That amount is expected to cover the government’s full share of
      West Chicago cleanup costs. Through September 30, 2005, Tronox LLC had been
      reimbursed approximately $281 million under Title X.





Reimbursements
      under Title X are provided by congressional appropriations. Historically,
      congressional appropriations have lagged Tronox LLC’s cleanup expenditures. As
      of September 30, 2005, the government’s share of costs incurred by Tronox LLC
      but not yet reimbursed by the DOE totaled approximately $21 million. The company
      believes receipt of the $21 million government share in due course following
      additional congressional appropriations is probable and has reflected that
      amount as a receivable in the financial statements. The company will recognize
      recovery of the government’s share of future remediation costs for the West
      Chicago sites as it incurs the cash expenditures.




**Ambrosia
      Lake, New Mexico**





From
      the late 1950s until 1988, an affiliate of Tronox Worldwide LLC (formerly
      Kerr-McGee Chemical Worldwide LLC), an affiliate of the company, operated a
      uranium mining and milling operation at Ambrosia Lake near Grants, New Mexico,
      pursuant to a license issued by the Atomic Energy Commission (AEC) (now the
      Nuclear Regulatory Commission (NRC)). When the operation was sold to an
      unaffiliated third party in 1989, Tronox Worldwide LLC retained responsibility
      for certain environmental conditions existing at the site, including mill
      tailings, selected ponds and groundwater contamination related to the mill
      tailings and unlined ponds. Since 1989, the unaffiliated current owner of the
      site has been decommissioning the site pursuant to the license issued by NRC.
      Mill tailings, certain impacted surface soils, and selected pond sediments
      have
      been consolidated in an onsite containment unit, and groundwater treatment
      has
      been ongoing. Under terms of the sales agreement, which included provisions
      capping the liability of the current owner, Tronox Worldwide LLC became
      obligated to solely fund the remediation for the items described above when
      total expenditures exceeded $30 million, which occurred in late 2000. A request
      to cease groundwater treatment has been under review by the NRC since 2001.
      In
      addition, a decommissioning plan for remaining impacted soil was submitted
      by
      the current owner to the NRC in January 2005 and is currently under review.
      If
      approved, the soil decommissioning plan would take two to three years to
      complete. The State of New Mexico has recently raised issues about certain
      nonradiological constituents in the groundwater at the site. The request to
      cease groundwater treatment, which is being reviewed by the NRC, was amended
      to
      address these non-radiological constituents. Discussions regarding these issues
      are ongoing, and resolution of them could affect remediation costs and/or delay
      ultimate site closure. In addition to those remediation activities described
      above for which reserves have been established as described below, the current
      owner is investigating soil contamination potentially caused by past discharge
      of mine water from the site, for which no reserve has been
      established.





-
          28
          -


***Financial
      Reserves*** - As
      of September 30, 2005, reserves for the costs of the remediation activities
      described above, including groundwater remediation, totaled $13 million.
      Although actual costs may differ from current estimates, the amount of any
      revisions in remediation costs cannot be reasonably estimated at this time.




**Milwaukee,
      Wisconsin**





In
      1976, Tronox LLC closed a wood-treatment facility it had operated in Milwaukee,
      Wisconsin. Operations at the facility prior to its closure had resulted in
      the
      contamination of soil and groundwater at and around the site with creosote
      and
      other substances used in wood treating. In 1984, EPA designated the Milwaukee
      wood-treatment facility as a Superfund site under CERCLA, listed the site on
      the
      NPL and named Tronox LLC as a PRP. Tronox LLC executed a consent decree in
      1991
      that required it to perform soil and groundwater remediation at and below the
      former wood-treatment area and to address a tributary creek of the Menominee
      River that had become contaminated as a result of the wood-treatment operations.
      Actual remedial activities were deferred until after the decree was finally
      entered in 1996 by a federal court in Milwaukee.





Groundwater
      treatment was initiated in 1996 to remediate groundwater contamination below
      and
      in the vicinity of the former wood-treatment area. It is not possible to
      reliably predict how groundwater conditions will be affected by soil removal
      in
      the vicinity of the former wood-treatment area, which has been completed, and
      by
      ongoing groundwater treatment. It is unknown, therefore, how long groundwater
      treatment will continue. Soil cleanup of the former wood-treatment area began
      in
      2000 and was completed in 2002. Also in 2002, remedial designs for the upper
      portion of the tributary creek were agreed to with EPA, after which Tronox
      LLC
      began the implementation of a remedy to reroute the creek and to remediate
      associated sediment and stream bank soils. Remediation of the upper portion
      of
      the creek is expected to take about three more years. Tronox LLC has not yet
      agreed with relevant regulatory authorities regarding remedial designs for
      the
      lower portion of the tributary creek.





***Financial
      Reserves*** - As
      of September 30, 2005, reserves for the costs of the remediation work described
      above totaled $5 million. Although actual costs may differ from current
      estimates, the amount of any revisions in remediation costs cannot be reasonably
      estimated at this time. The costs associated with remediation, if any, of the
      lower portion of the tributary creek are not reasonably estimable.




**New
      Jersey Wood-Treatment Site**





Tronox
      LLC was named in 1999 as a PRP under CERCLA at a former wood-treatment site
      in
      New Jersey at which EPA is conducting a cleanup. On April 15, 2005, Tronox
      LLC
      and its ultimate parent received a letter from EPA asserting that they are
      liable under CERCLA as a former owner or operator of the site and demanding
      reimbursement of costs expended by EPA at the site. The demand is for payment
      of
      past costs in the amount of approximately $179 million, plus interest. Tronox
      LLC did not operate the site, which had been sold to a third party before Tronox
      LLC succeeded to the interests of a predecessor owner in the 1960’s. The
      predecessor also did not operate the site, which had been closed down before
      it
      was acquired by the predecessor. Based on historical records, there are
      substantial uncertainties about whether or under what terms the predecessor
      assumed liabilities for the site. In addition, it appears there may be other
      PRPs, though it is not known whether the other PRPs have received similar
      letters from EPA, whether there are any defenses to liability available to
      the
      other PRPs or whether any other PRPs have the financial resources necessary
      to
      meet their obligations. Tronox LLC intends to vigorously defend against EPA’s
      demand. No reserve for reimbursement of cleanup costs at the site has been
      recorded, as it is not possible to reliably estimate the liability, if any,
      Tronox LLC may have for the site because of the aforementioned defenses and
      uncertainties.





-
          29
          -
 **Cushing,
        Oklahoma**





In
      1972, Kerr-McGee Refining Corporation (“KM Refining”), an affiliate of the
      company, closed a petroleum refinery it had operated near Cushing, Oklahoma.
      Prior to closing the refinery, KM Refining also had produced uranium and thorium
      fuel and metal at the site pursuant to licenses issued by the AEC. The uranium
      and thorium operations commenced in 1962 and were shut down in 1966, at which
      time KM Refining decommissioned and cleaned up to applicable standards the
      portion of the facility related to uranium and thorium operations. The refinery
      also was cleaned up to applicable standards at the time of closing.





Subsequent
      regulatory changes have required more extensive remediation at the site. In
      1990, KM Refining entered into a consent agreement with the State of Oklahoma
      to
      investigate the site and take appropriate remedial actions related to petroleum
      refining and uranium and thorium residuals. Investigation and remediation of
      hydrocarbon contamination is being performed under the oversight of the Oklahoma
      Department of Environmental Quality (ODEQ). Soil remediation to address
      hydrocarbon contamination is expected to take about four more years. The
      long-term scope, duration and cost of groundwater remediation are uncertain
      and,
      therefore, additional costs beyond those accrued may be incurred in the
      future.





Additionally,
      in 1993, KM Refining received a decommissioning license from the NRC, the
      successor to AEC’s licensing authority, to perform certain cleanup of uranium
      and thorium residuals. All known radiological contamination has been removed
      from the site and shipped to a licensed disposal facility.





***Financial
      Reserves*** -
      As of
      September 30, 2005, reserves for the costs of the ongoing remediation and
      decommissioning work described above totaled $14 million. Although actual costs
      may differ from current estimates, the amount of any revisions in remediation
      costs cannot be reasonably estimated at this time.





**Los
      Angeles County, California**





During
      2004, the company began remediation and restoration of an oil and gas field
      that
      was operated by an affiliate of the company and its predecessors from about
      1936
      to 1990 in Los Angeles County, California. The company is obligated to remediate
      soils contaminated with petroleum hydrocarbons associated with certain early
      drilling and production pits and sumps and other historic leaks and spills.
      The
      remediation and restoration of this oil and gas field is expected to take about
      five years.





***Financial
      Reserves*** -
      As of
      September 30, 2005, environmental reserves for this project totaled
      $24 million. Although actual costs may differ from current estimates,
      the
      amount of any revisions in remediation costs cannot be reasonably estimated
      at
      this time.





**Other
      Sites and Matters**





In
      addition to the sites described above, the company and its affiliates are
      responsible for environmental costs related to certain other sites. These sites
      relate primarily to wood-treating, chemical production, landfills, mining,
      and
      oil and gas refining, distribution and marketing. As of September 30, 2005,
      the
      company and its affiliates had reserves of $88 million for the environmental
      costs in connection with these other sites. This amount includes $23 million
      added to reserves in the third quarter for additional costs estimated at various
      of these other sites. Although actual costs may differ from current estimates,
      the amount of any revisions in remediation costs cannot be reasonably estimated
      at this time.





**Litigation
      and Claims**





**Coal
      Supply Contract**





A
      predecessor of Tronox Worldwide LLC, an affiliate of the company, entered into
      a
      coal supply contract with Peabody Coaltrade, Inc. (‘‘PCI’’) in February 1998. In
      1998, the predecessor exited the coal business and assigned its rights and
      obligations under the coal supply contract to a third party. In connection
      with
      the assignment, the predecessor agreed to guarantee performance under the
      contract. PCI has notified Tronox Worldwide LLC of a threatened default by
      the
      assignee under the coal supply contract and that PCI may seek to hold Tronox
      Worldwide LLC liable under the 1998 guaranty in the event of a default. In
      addition to other defenses to the enforceability of the guaranty, the company
      believes the guaranty expired in January 2003 when the primary term of the
      coal
      supply contract expired. No reserve has been provided for performance under
      the
      guaranty because the company does not believe a loss is probable and the amount
      of any loss is not reasonably estimable.





-
          30
          -


**CNR
      Contract**





In
      2002, Kerr-McGee North Sea (U.K.) Limited, an affiliate of the company (“KM
      North Sea”), entered into a contract with CNR International (“CNR”) to sell
      certain assets located in the United Kingdom sector of the North Sea. In the
      fourth quarter of 2004, CNR asserted claims for alleged breaches of contractual
      representations and warranties and demanded damages.  The company’s
      evaluation of the claims is in its early stages. The company has not provided
      a
      reserve for the claims because at this time the company cannot reasonably
      determine the probability of a loss and the amount of loss, if any, cannot
      be
      reasonably estimated. The company does not expect the resolution of the claims
      to have a material adverse effect on the company.





**Forest
      Products Litigation**





Between
      1999 and 2001, Tronox LLC was named in 22 lawsuits in three states (Mississippi,
      Louisiana and Pennsylvania) in connection with former forest products operations
      located in those states (in Columbus, Mississippi; Bossier City, Louisiana;
      and
      Avoca, Pennsylvania). The lawsuits sought recovery under a variety of common
      law
      and statutory legal theories for personal injuries and property damages
      allegedly caused by exposure to and/or release of creosote and other substances
      used in the wood-treatment process. Tronox LLC has executed settlement
      agreements that are expected to resolve substantially all of the Louisiana,
      Pennsylvania and Mississippi lawsuits described above. Resolution of the
      remaining cases is not expected to have a material adverse effect on the
      company.





Following
      the adoption by the Mississippi legislature of tort reform, plaintiffs’ lawyers
      filed many new lawsuits across the state of Mississippi in advance of the
      reform’s effective date. On December 31, 2002, August 31, 2004, September 27,
      2004 and May 2, 2005, approximately 250 lawsuits were filed against Tronox
      LLC
      on behalf of approximately 5,100 claimants in connection with Tronox LLC’s
      Columbus, Mississippi, operations, seeking recovery on legal theories
      substantially similar to those advanced in the litigation referred to above.
      Substantially all of these lawsuits were filed in or have been removed to the
      U.S. District Court for the Northern District of Mississippi, and the court
      has
      consolidated these lawsuits for pretrial and discovery purposes. On December
      31,
      2002, June 13, 2003, and June 25, 2004, three lawsuits were filed against Tronox
      LLC in connection with a former wood-treatment plant located in Hattiesburg,
      Mississippi. On September 9, 2004, February 11, 2005, and March 2, 2005, three
      lawsuits were filed against Tronox LLC in connection with a former
      wood-treatment plant located in Texarkana, Texas. In addition, on January 3,
      2005, February 16, 2005, March 11, 2005, May 24, 2005, June 27, 2005 and July
      26, 2005, 35 lawsuits were filed against Tronox LLC and Tronox Worldwide LLC
      in
      connection with the Avoca, Pennsylvania, facility described above. These
      lawsuits seek recovery on legal theories substantially similar to those advanced
      in the litigation referred to above. A total of approximately 3,300 claimants
      now have asserted claims in connection with the Hattiesburg plant, there are
      64
      plaintiffs named in the Texarkana lawsuits and approximately 4,600 plaintiffs
      are named in the new Avoca lawsuits. Tronox LLC has resolved approximately
      1,490
      of the Hattiesburg claims pursuant to a settlement reached in April 2003, which
      has resulted in aggregate payments by Tronox LLC of approximately $600,000.





Tronox
      LLC believes that the follow-on Columbus and Avoca claims, the remaining
      Hattiesburg claims and the claims related to the Texarkana plants are without
      substantial merit and it is vigorously defending against them. There is not
      a
      reserve for these lawsuits because at this time, it is not possible to
      reasonably determine the probability of a loss, and the amount of loss, if
      any,
      cannot be reasonably estimated. The company believes that the ultimate
      resolution of the forest products litigation will not have a material adverse
      effect on the company.





-
          31
          -


**Kemira**





In
      2000, Tronox LLC acquired its titanium dioxide production facility in Savannah,
      Georgia, from Kemira Pigments Oy, a Finnish company, and its parent, Kemira
      Oyj
      (together, ‘‘the Sellers’’). After acquiring the facility, Tronox LLC discovered
      that certain matters associated with environmental conditions and plant
      infrastructure were not consistent with representations made by the Sellers.
      Tronox LLC sought recovery for breach of representations and warranties in
      a
      proceeding before the London Court of International Arbitration (LCIA). On
      May
      9, 2005, Tronox LLC received notice from the LCIA that the LCIA had found in
      favor of Tronox LLC as to liability with respect to certain of the claims.
      The
      LCIA still must determine the amount of damages. The company currently cannot
      reasonably estimate the amount of damages that will be awarded. The company
      will
      recognize a receivable, if and when damages are awarded and all contingencies
      associated with any recovery are resolved.





**Other
      Matters**





The
      company and its affiliates are parties to a number of legal and administrative
      proceedings involving environmental and/or other matters pending in various
      courts or agencies. These proceedings, individually and in the aggregate, are
      not expected to have a material adverse effect on the company. These also are
      proceedings associated with facilities currently or previously owned, operated
      or used by the company and/or its predecessors, some of which include claims
      for
      personal injuries, property damages, cleanup costs and other environmental
      matters. Current and former operations of the company also involve management
      of
      regulated materials and are subject to various environmental laws and
      regulations. These laws and regulations will obligate the company to clean
      up
      various sites at which petroleum and other hydrocarbons, chemicals, low-level
      radioactive substances and/or other materials have been contained, disposed
      of
      or released. Some of these sites have been designated Superfund sites by EPA
      pursuant to CERCLA or state equivalents. Similar environmental laws and
      regulations and other requirements exist in foreign countries in which the
      company operates.








**17.**
            **Commitments**





In
      2005, the company entered into additional drilling rig commitments to assure
      availability for executing our drilling program. The company’s commitments under
      these arrangements total $601 million, $52 million of which relates
      to rig
      utilization in 2005, $441 million in 2006-2007, $38 million in 2008-2009 and
      $70
      million thereafter. A portion of expenditures under these commitments will
      be
      billed to other working interest partners once actual utilization is known.
      The
      company has also entered into additional international exploration licenses,
      which carry work commitments of approximately $31 million and expects to incur
      $16 million of associated expenditures in 2005 and a total of $15 million
      in 2006 and 2007.





As
      of
      September 30, 2005, the company had outstanding letters of credit totaling
      $121
      million (including letters of credit issued under the Revolving Facility
      discussed in Note 10).











-
          32
          -


**18.**
            **Business
                Segments**





The
      company has three reportable segments: oil and gas exploration and production,
      production and marketing of titanium dioxide pigment, and production and
      marketing of other chemical products. As discussed in Note 1, the company
      intends to separate its chemical business unit and expects to complete the
      divestiture of its North Sea oil and gas business in the fourth quarter of
      2005.





Segment
      performance is evaluated using operating profit (loss), which represents the
      results of segment operations before considering interest and debt expense,
      loss
      on early repayment and modification of debt, general corporate expenses,
      environmental provisions related to businesses in which the company’s affiliates
      are no longer engaged, other income (expense) and income taxes. Following is
      a
      summary of revenues and operating profit (loss) from continuing operations
      for
      each of the company's business segments for the three and nine months ended
      September 30, 2005 and 2004.





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004**Revenues**Exploration
                and production(1)
            
            **$**
            **881**
            
            $
            864
            
            **$**
            **3,135**
            
            $
            2,066Chemical
                - Pigment
            
            
            **302**
            
            
            315
            
            
            **944**
            
            
            870Chemical
                - Other
            
            
            **25**
            
            
            24
            
            
            **73**
            
            
            70Total
                Revenues
            
            **$**
            **1,208**
            
            $
            1,203
            
            **$**
            **4,152**
            
            $
            3,006**Operating
                Profit (Loss)**Exploration
                and production(1)
            
            **$**
            **185**
            
            $
            267
            
            **$**
            **1,166**
            
            $
            707Chemical
                - Pigment(2)
            
            
            **16**
            
            
            (110
            )
            
            **80**
            
            
            (89
            )Chemical
                - Other
            
            
            **1**
            
            
            1
            
            
            **(6**
            **)**
            
            (2
            )**202**
            
            
            158
            
            
            **1,240**
            
            
            616Interest
                and debt expense
            
            
            **(68**
            **)**
            
            (68
            )
            
            **(190**
            **)**
            
            (180
            )Loss
                on early repayment and modification of debt
            
            
            **(9**
            **)**
            
            -
            
            
            **(9**
            **)**
            
            -Corporate
                expenses
            
            
            **(45**
            **)**
            
            (31
            )
            
            **(135**
            **)**
            
            (88
            )Provision
                for environmental remediation andrestoration,
                net of reimbursements(3)
            
            
            **(4**
            **)**
            
            (71
            )
            
            **(19**
            **)**
            
            (74
            )Other
                income (expense)(4)
            
            
            **(3**
            **)**
            
            (20
            )
            
            **(16**
            **)**
            
            (27
            )Income
                from Continuing Operationsbefore
                Income Taxes
            
            **$**
            **73**
            
            $
            (32
            )
            **$**
            **871**
            
            $
            247





(1)
            Revenuesand operating profit of the exploration and production segment for
                the
                three and nine months ended September 30, 2005 include $315 million
                and
                $359 million, respectively, of unrealized losses on hedge ineffectiveness
                and overhedge positions. Revenues and operating profit for the three
                and
                nine months ended September 30, 2004 include unrealized gains on
                hedge
                ineffectiveness of $3 million and $2 million, respectively. Refer
                to Note
                5 for additional information.





(2)
            Operatingloss of the chemical - pigment segment for the three and nine months
                ended
                September 30, 2004 includes charges totaling $123 million associated
                with
                the shutdown of a production facility in Savannah, Georgia. Refer
                to Note
                12 for additional information*.*





(3)
            Includes
                provisions, net of reimbursements, related to sites with no ongoing
                operations or various businesses in which the company’s affiliates are no
                longer engaged; for example, the refining and marketing of oil and
                gas and
                associated petroleum products, and the mining and processing of uranium
                and thorium. See Note 16.





(4)
            The
                company owns a 50% interest in Avestor, a joint venture involved
                in the
                production of lithium-metal-polymer batteries, and accounts for its
                investment under the equity method. The company’s equity in the net losses
                of Avestor was $13 million and $10 million during the three months
                ended
                September 30, 2005 and 2004, respectively, and $28 million
                and $29
                million during the nine months ended September 30, 2005 and 2004,
                respectively. The carrying value of the company’s investment in Avestor at
                September 30, 2005 and December 31, 2004 was $71 million and $60
                million,
                respectively.




-
          33
          -


**19.**
            **Condensed
                Consolidating Financial
                Information**





The
      company’s Notes (as defined in Note 10, under *Guarantee
      and Collateral Provisions* )
      with
      an aggregate principal amount of $2.1 billion have been fully and
      unconditionally guaranteed, on a joint and several basis, by Tronox Worldwide
      LLC and Kerr-McGee Rocky Mountain Corporation. Additionally, Kerr-McGee
      Corporation has guaranteed all indebtedness of its subsidiaries. As a result
      of
      these guarantee arrangements, the company is required to present condensed
      consolidating financial information.





The
      following tables present condensed consolidating financial information for
      (a)
      Kerr-McGee Corporation, the parent company, (b) the guarantor subsidiaries
      and
      (c) the nonguarantor subsidiaries. The guarantor subsidiaries include Tronox
      Worldwide LLC and Kerr-McGee Rocky Mountain Corporation, wholly-owned
      subsidiaries of Kerr-McGee Corporation. Other income (expense) in the Condensed
      Consolidating Statement of Income for all periods presented includes equity
      interest in income (loss) of subsidiaries.





As
      discussed in Note 10, Tronox Worldwide LLC will be released from its guarantee
      of the Notes upon the earlier of an IPO, spinoff or splitoff of Tronox Worldwide
      LLC, or its parent, Tronox Incorporated.








**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Statement of Income**


**For
      the Three Months Ended September 30, 2005**





Kerr-McGee
            
            Guarantor
            
            Non-Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**Revenues**
            
            $
            -
            
            $
            351
            
            $
            857
            
            $
            -
            
            $
            1,208**Costs
                and Expenses**Costs
                and operating expenses
            
            
            -
            
            
            200
            
            
            354
            
            
            -
            
            
            554Selling,
                general and administrative expenses
            
            
            -
            
            
            3
            
            
            101
            
            
            -
            
            
            104Shipping
                and handling expenses
            
            
            -
            
            
            4
            
            
            30
            
            
            -
            
            
            34Depreciation
                and depletion
            
            
            -
            
            
            30
            
            
            203
            
            
            -
            
            
            233Accretion
                expense
            
            
            -
            
            
            1
            
            
            5
            
            
            -
            
            
            6Loss
                on sale of assets
            
            
            -
            
            
            -
            
            
            4
            
            
            -
            
            
            4Exploration,
              including dry holes and amortizationof
                undeveloped leases
            
            
            -
            
            
            1
            
            
            60
            
            
            -
            
            
            61Taxes,
                other than income taxes
            
            
            -
            
            
            9
            
            
            43
            
            
            -
            
            
            52Provision
                for environmental remediationand
                restoration, net of reimbursements
            
            
            -
            
            
            4
            
            
            3
            
            
            -
            
            
            7Interest
                and debt expense
            
            
            61
            
            
            -
            
            
            122
            
            
            (115
            )
            
            68Loss
                on early repayment and modification of debt
            
            
            9
            
            
            -
            
            
            -
            
            
            -
            
            
            9Total
                Costs and Expenses
            
            
            70
            
            
            252
            
            
            925
            
            
            (115
            )
            
            1,132(70
            )
            
            99
            
            
            (68
            )
            
            115
            
            
            76**Other
                Income (Expense)**
            
            
            444
            
            
            (89
            )
            
            91
            
            
            (449
            )
            
            (3
            )**Income
                from Continuing Operations****before
                Income Taxes**
            
            
            374
            
            
            10
            
            
            23
            
            
            (334
            )
            
            73**Benefit
                (Provision) for Income Taxes**
            
            
            41
            
            
            (39
            )
            
            (21
            )
            
            -
            
            
            (19
            )**Income
                (Loss) from Continuing Operations**
            
            
            415
            
            
            (29
            )
            
            2
            
            
            (334
            )
            
            54**Income
                (Loss) from Discontinued Operations,****net
                of taxes**
            
            
            (32
            )
            
            (7
            )
            
            345
            
            
            -
            
            
            306**Net
                Income (Loss)**
            
            $
            383
            
            $
            (36
            )
            $
            347
            
            $
            (334
            )
            $
            360





-
          34
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Statement of Income**


**For
      the Three Months Ended September 30, 2004**





Kerr-McGee
            
            Guarantor
            
            Non-Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**Revenues**
            
            $
            -
            
            $
            235
            
            $
            968
            
            $
            -
            
            $
            1,203**Costs
                and Expenses**Costs
                and operating expenses
            
            
            -
            
            
            123
            
            
            365
            
            
            -
            
            
            488Selling,
                general and administrative expenses
            
            
            -
            
            
            5
            
            
            76
            
            
            -
            
            
            81Shipping
                and handling expenses
            
            
            -
            
            
            2
            
            
            33
            
            
            -
            
            
            35Depreciation
                and depletion
            
            
            -
            
            
            30
            
            
            290
            
            
            -
            
            
            320Accretion
                expense
            
            
            -
            
            
            1
            
            
            4
            
            
            -
            
            
            5Asset
                impairments
            
            
            -
            
            
            -
            
            
            7
            
            
            -
            
            
            7Exploration,
                including dry holes andamortization
                of undeveloped leases
            
            
            -
            
            
            1
            
            
            94
            
            
            -
            
            
            95Taxes,
                other than income taxes
            
            
            -
            
            
            10
            
            
            34
            
            
            -
            
            
            44Provision
                for environmental remediationand
                restoration, net of reimbursements
            
            
            -
            
            
            48
            
            
            24
            
            
            -
            
            
            72Interest
                and debt expense
            
            
            41
            
            
            8
            
            
            82
            
            
            (63
            )
            
            68Total
                Costs and Expenses
            
            
            41
            
            
            228
            
            
            1,009
            
            
            (63
            )
            
            1,215(41
            )
            
            7
            
            
            (41
            )
            
            63
            
            
            (12
            )**Other
                Income (Expense)**
            
            
            64
            
            
            (136
            )
            
            21
            
            
            31
            
            
            (20
            )**Income
                (Loss) from Continuing Operations****before
                Income Taxes**
            
            
            23
            
            
            (129
            )
            
            (20
            )
            
            94
            
            
            (32
            )**Benefit
                (Provision) for Income Taxes**
            
            
            (16
            )
            
            62
            
            
            (22
            )
            
            (16
            )
            
            8**Income
                (Loss) from Continuing Operations**
            
            
            7
            
            
            (67
            )
            
            (42
            )
            
            78
            
            
            (24
            )**Income
                from Discontinued Operations,****net
                of taxes**
            
            
            -
            
            
            (2
            )
            
            33
            
            
            -
            
            
            31**Net
                Income (Loss)**
            
            $
            7
            
            $
            (69
            )
            $
            (9
            )
            $
            78
            
            $
            7




















-
          35
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Statement of Income**


**For
      the Nine Months Ended September 30, 2005**





Kerr-McGee
            
            Guarantor
            
            Non-Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**Revenues**
            
            $
            -
            
            $
            905
            
            $
            3,247
            
            $
            -
            
            $
            4,152**Costs
                and Expenses**Costs
                and operating expenses
            
            
            -
            
            
            524
            
            
            1,021
            
            
            (1
            )
            
            1,544Selling,
                general and administrative expenses
            
            
            -
            
            
            3
            
            
            299
            
            
            -
            
            
            302Shipping
                and handling expenses
            
            
            -
            
            
            10
            
            
            99
            
            
            -
            
            
            109Depreciation
                and depletion
            
            
            -
            
            
            88
            
            
            641
            
            
            -
            
            
            729Accretion
                expense
            
            
            -
            
            
            2
            
            
            15
            
            
            -
            
            
            17Asset
                impairments
            
            
            -
            
            
            -
            
            
            5
            
            
            -
            
            
            5Gain
                on sale of assets
            
            
            -
            
            
            -
            
            
            (42
            )
            
            -
            
            
            (42
            )Exploration,
              including dry holes and amortizationof
                undeveloped leases
            
            
            -
            
            
            5
            
            
            223
            
            
            -
            
            
            228Taxes,
                other than income taxes
            
            
            -
            
            
            25
            
            
            116
            
            
            -
            
            
            141Provision
                for environmental remediationand
                restoration, net of reimbursements
            
            
            -
            
            
            20
            
            
            13
            
            
            -
            
            
            33Interest
                and debt expense
            
            
            157
            
            
            9
            
            
            317
            
            
            (293
            )
            
            190Loss
                on early repayment and modification of debt
            
            
            9
            
            
            -
            
            
            -
            
            
            -
            
            
            9Total
                Costs and Expenses
            
            
            166
            
            
            686
            
            
            2,707
            
            
            (294
            )
            
            3,265(166
            )
            
            219
            
            
            540
            
            
            294
            
            
            887**Other
                Income (Expense)**
            
            
            1,258
            
            
            41
            
            
            306
            
            
            (1,621
            )
            
            (16
            )**Income
                from Continuing Operations****before
                Income Taxes**
            
            
            1,092
            
            
            260
            
            
            846
            
            
            (1,327
            )
            
            871**Benefit
                (Provision) for Income Taxes**
            
            
            60
            
            
            (81
            )
            
            (280
            )
            
            -
            
            
            (301
            )**Income
                from Continuing Operations**
            
            
            1,152
            
            
            179
            
            
            566
            
            
            (1,327
            )
            
            570**Income
                (Loss) from Discontinued Operations,****net
                of taxes**
            
            
            (44
            )
            
            (7
            )
            
            566
            
            
            -
            
            
            515**Net
                Income**
            
            $
            1,108
            
            $
            172
            
            $
            1,132
            
            $
            (1,327
            )
            $
            1,085



















-
          36
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Statement of Income**


**For
      the Nine Months Ended September 30, 2004**





Kerr-McGee
            
            Guarantor
            
            Non-Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**Revenues**
            
            $
            -
            
            $
            662
            
            $
            2,344
            
            $
            -
            
            $
            3,006**Costs
                and Expenses**Costs
                and operating expenses
            
            
            -
            
            
            342
            
            
            897
            
            
            (1
            )
            
            1,238Selling,
                general and administrative expenses
            
            
            1
            
            
            5
            
            
            225
            
            
            -
            
            
            231Shipping
                and handling expenses
            
            
            -
            
            
            6
            
            
            84
            
            
            -
            
            
            90Depreciation
                and depletion
            
            
            -
            
            
            90
            
            
            493
            
            
            -
            
            
            583Accretion
                expense
            
            
            -
            
            
            2
            
            
            11
            
            
            -
            
            
            13Asset
                impairments
            
            
            -
            
            
            1
            
            
            21
            
            
            -
            
            
            22Loss
                on sale of assets
            
            
            -
            
            
            -
            
            
            7
            
            
            -
            
            
            7Exploration,
              including dry holes andamortization
                of undeveloped leases
            
            
            -
            
            
            8
            
            
            187
            
            
            -
            
            
            195Taxes,
                other than income taxes
            
            
            -
            
            
            27
            
            
            71
            
            
            -
            
            
            98Provision
                for environmental remediationand
                restoration, net of reimbursements
            
            
            -
            
            
            51
            
            
            24
            
            
            -
            
            
            75Interest
                and debt expense
            
            
            95
            
            
            27
            
            
            220
            
            
            (162
            )
            
            180Total
                Costs and Expenses
            
            
            96
            
            
            559
            
            
            2,240
            
            
            (163
            )
            
            2,732(96
            )
            
            103
            
            
            104
            
            
            163
            
            
            274**Other
                Income (Expense)**
            
            
            541
            
            
            (127
            )
            
            71
            
            
            (512
            )
            
            (27
            )**Income
                (Loss) from Continuing Operations****before
                Income Taxes**
            
            
            445
            
            
            (24
            )
            
            175
            
            
            (349
            )
            
            247**Benefit
                (Provision) for Income Taxes**
            
            
            (175
            )
            
            24
            
            
            (90
            )
            
            152
            
            
            (89
            )**Income
                (Loss) from Continuing Operations**
            
            
            270
            
            
            -
            
            
            85
            
            
            (197
            )
            
            158**Income
                from Discontinued Operations,****net
                of taxes**
            
            
            -
            
            
            (4
            )
            
            116
            
            
            -
            
            
            112**Net
                Income (Loss)**
            
            $
            270
            
            $
            (4
            )
            $
            201
            
            $
            (197
            )
            $
            270






















-
          37
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Balance Sheet**


**September
      30, 2005**





Kerr-McGee
            
            Guarantor
            
            Non-Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            3
            
            $
            -
            
            $
            659
            
            $
            -
            
            $
            662Accounts
                receivable
            
            
            -
            
            
            264
            
            
            716
            
            
            -
            
            
            980Inventories
            
            
            -
            
            
            3
            
            
            336
            
            
            -
            
            
            339Derivatives
                and other current assets
            
            
            -
            
            
            24
            
            
            250
            
            
            -
            
            
            274Deferred
                income taxes
            
            
            -
            
            
            24
            
            
            690
            
            
            -
            
            
            714Assets
                held for sale
            
            
            -
            
            
            -
            
            
            295
            
            
            -
            
            
            295Total
                Current Assets
            
            
            3
            
            
            315
            
            
            2,946
            
            
            -
            
            
            3,264**Property,
                Plant and Equipment - Net**
            
            
            -
            
            
            1,922
            
            
            7,210
            
            
            -
            
            
            9,132**Investment
                in Subsidiaries**
            
            
            5,906
            
            
            597
            
            
            -
            
            
            (6,503
            )
            
            -**Investments,
                Derivatives and Other Assets**
            
            
            60
            
            
            23
            
            
            535
            
            
            (80
            )
            
            538**Goodwill
                and Other Intangible Assets**
            
            
            -
            
            
            349
            
            
            928
            
            
            -
            
            
            1,277**Assets
                Held for Sale**
            
            
            -
            
            
            -
            
            
            1,846
            
            
            -
            
            
            1,846**Total
                Assets**
            
            $
            5,969
            
            $
            3,206
            
            $
            13,465
            
            $
            (6,583
            )
            $
            16,057





**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Intercompany
                borrowings
            
            $
            60
            
            $
            519
            
            $
            1,197
            
            $
            (1,776
            )
            $
            -Accounts
                payable
            
            
            6
            
            
            55
            
            
            562
            
            
            -
            
            
            623Long-term
                debt due within one year
            
            
            323
            
            
            -
            
            
            110
            
            
            -
            
            
            433Derivative
                liabilities
            
            
            6
            
            
            23
            
            
            2,190
            
            
            -
            
            
            2,219Accrued
                liabilities
            
            
            (79
            )
            
            242
            
            
            736
            
            
            -
            
            
            899Liabilities
                associated with assets held for sale
            
            
            -
            
            
            -
            
            
            491
            
            
            -
            
            
            491Total
                Current Liabilities
            
            
            316
            
            
            839
            
            
            5,286
            
            
            (1,776
            )
            
            4,665**Long-Term
                Debt**
            
            
            5,436
            
            
            -
            
            
            476
            
            
            -
            
            
            5,912**Noncurrent
                Liabilities**Deferred
                income taxes
            
            
            (19
            )
            
            504
            
            
            1,067
            
            
            -
            
            
            1,552Derivative
                liabilities
            
            
            -
            
            
            1
            
            
            976
            
            
            -
            
            
            977Other
                noncurrent liabilities
            
            
            -
            
            
            189
            
            
            732
            
            
            (2
            )
            
            919Liabilities
                associated with assets held for sale
            
            
            -
            
            
            -
            
            
            689
            
            
            -
            
            
            689Total
                Noncurrent Liabilities
            
            
            (19
            )
            
            694
            
            
            3,464
            
            
            (2
            )
            
            4,137**Stockholders'
                Equity**
            
            
            236
            
            
            1,673
            
            
            4,239
            
            
            (4,805
            )
            
            1,343**Total
                Liabilities and Stockholders' Equity**
            
            $
            5,969
            
            $
            3,206
            
            $
            13,465
            
            $
            (6,583
            )
            $
            16,057









-
          38
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Balance Sheet**


**December
      31, 2004**





Kerr-McGee
            
            Guarantor
            
            Non-Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            2
            
            $
            -
            
            $
            74
            
            $
            -
            
            $
            76Intercompany
                receivables
            
            
            -
            
            
            -
            
            
            58
            
            
            (58
            )
            
            -Accounts
                receivable
            
            
            -
            
            
            206
            
            
            619
            
            
            -
            
            
            825Inventories
            
            
            -
            
            
            5
            
            
            309
            
            
            -
            
            
            314Derivatives
                and other current assets
            
            
            4
            
            
            24
            
            
            123
            
            
            -
            
            
            151Deferred
                income taxes
            
            
            2
            
            
            13
            
            
            312
            
            
            -
            
            
            327Assets
                held for sale
            
            
            -
            
            
            -
            
            
            194
            
            
            -
            
            
            194Total
                Current Assets
            
            
            8
            
            
            248
            
            
            1,689
            
            
            (58
            )
            
            1,887**Property,
                Plant and Equipment - Net**
            
            
            -
            
            
            1,947
            
            
            7,126
            
            
            -
            
            
            9,073**Investment
                in Subsidiaries**
            
            
            6,306
            
            
            645
            
            
            -
            
            
            (6,951
            )
            
            -**Investments,
                Derivatives and Other Assets**
            
            
            17
            
            
            24
            
            
            523
            
            
            (80
            )
            
            484**Goodwill
                and Other Intangible Assets**
            
            
            -
            
            
            351
            
            
            937
            
            
            -
            
            
            1,288**Assets
                Held for Sale**
            
            
            -
            
            
            -
            
            
            1,786
            
            
            -
            
            
            1,786**Total
                Assets**
            
            $
            6,331
            
            $
            3,215
            
            $
            12,061
            
            $
            (7,089
            )
            $
            14,518





**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Intercompany
                borrowings
            
            $
            68
            
            $
            598
            
            $
            1,189
            
            $
            (1,855
            )
            $
            -Accounts
                payable
            
            
            68
            
            
            55
            
            
            484
            
            
            -
            
            
            607Long-term
                debt due within one year
            
            
            354
            
            
            -
            
            
            109
            
            
            -
            
            
            463Derivative
                liabilities
            
            
            6
            
            
            71
            
            
            273
            
            
            -
            
            
            350Accrued
                liabilities
            
            
            10
            
            
            203
            
            
            680
            
            
            -
            
            
            893Liabilities
                associated with assets held for sale
            
            
            -
            
            
            -
            
            
            192
            
            
            -
            
            
            192Total
                Current Liabilities
            
            
            506
            
            
            927
            
            
            2,927
            
            
            (1,855
            )
            
            2,505**Long-Term
                Debt**
            
            
            2,125
            
            
            -
            
            
            1,111
            
            
            -
            
            
            3,236**Noncurrent
                Liabilities**Deferred
                income taxes
            
            
            (2
            )
            
            545
            
            
            1,184
            
            
            -
            
            
            1,727Derivative
                liabilities
            
            
            -
            
            
            59
            
            
            149
            
            
            -
            
            
            208Other
                noncurrent liabilities
            
            
            -
            
            
            224
            
            
            686
            
            
            (3
            )
            
            907Liabilities
                associated with assets held for sale
            
            
            -
            
            
            -
            
            
            617
            
            
            -
            
            
            617Total
                Noncurrent Liabilities
            
            
            (2
            )
            
            828
            
            
            2,636
            
            
            (3
            )
            
            3,459**Stockholders'
                Equity**
            
            
            3,702
            
            
            1,460
            
            
            5,387
            
            
            (5,231
            )
            
            5,318**Total
                Liabilities and Stockholders' Equity**
            
            $
            6,331
            
            $
            3,215
            
            $
            12,061
            
            $
            (7,089
            )
            $
            14,518








-
          39
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Statement of Cash Flows**


**For
      the Nine Months Ended September 30, 2005**








Non-Kerr-McGee
            
            Guarantor
            
            Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**Cash
                Flows from Operating Activities**Net
                income
            
            $
            1,108
            
            $
            172
            
            $
            1,132
            
            $
            (1,327
            )
            $
            1,085Adjustments
                to reconcile net income to net cashprovided
                by (used in) operating activities-Depreciation,
                depletion and amortization
            
            
            -
            
            
            89
            
            
            819
            
            
            -
            
            
            908Deferred
                income taxes
            
            
            (17
            )
            
            35
            
            
            161
            
            
            -
            
            
            179Dry
                hole expense
            
            
            -
            
            
            -
            
            
            125
            
            
            -
            
            
            125Asset
                impairments
            
            
            -
            
            
            -
            
            
            5
            
            
            -
            
            
            5Gain
                on sale of North Sea oil and gas assets
            
            
            -
            
            
            -
            
            
            (306
            )
            
            -
            
            
            (306
            )Gain
                on sale of other assets
            
            
            -
            
            
            -
            
            
            (42
            )
            
            -
            
            
            (42
            )Loss
                on early repayment and modification of debt
            
            
            9
            
            
            -
            
            
            -
            
            
            -
            
            
            9Accretion
                expense
            
            
            -
            
            
            2
            
            
            22
            
            
            -
            
            
            24Provision
                for environmental remediationand
                restoration, net of reimbursements
            
            
            -
            
            
            31
            
            
            13
            
            
            -
            
            
            44Equity
                in earnings of subsidiaries
            
            
            (1,197
            )
            
            (39
            )
            
            -
            
            
            1,236
            
            
            -Other
                noncash items affecting net income
            
            
            (11
            )
            
            46
            
            
            369
            
            
            93
            
            
            497Changes
                in assets and liabilities
            
            
            (79
            )
            
            (77
            )
            
            131
            
            
            (2
            )
            
            (27
            )Net
                Cash Provided by (Used in)Operating
                Activities
            
            
            (187
            )
            
            259
            
            
            2,429
            
            
            -
            
            
            2,501**Cash
                Flows from Investing Activities**Capital
                expenditures
            
            
            -
            
            
            (93
            )
            
            (1,199
            )
            
            -
            
            
            (1,292
            )Dry
                hole costs
            
            
            -
            
            
            -
            
            
            (118
            )
            
            -
            
            
            (118
            )Proceeds
                from sale of North Sea oil and gas assets
            
            
            -
            
            
            -
            
            
            547
            
            
            -
            
            
            547Proceeds
                from sale of other assets
            
            
            -
            
            
            -
            
            
            68
            
            
            -
            
            
            68Accounts
              receivable purchase and collection
            
            
            (165
            )
            
            -
            
            
            165
            
            
            -
            
            
            -Other
                investing activities
            
            
            -
            
            
            -
            
            
            (7
            )
            
            -
            
            
            (7
            )Net
                Cash Used in Investing Activities
            
            
            (165
            )
            
            (93
            )
            
            (544
            )
            
            -
            
            
            (802
            )**Cash
                Flows from Financing Activities**Issuance
                of common stock
            
            
            206
            
            
            -
            
            
            -
            
            
            -
            
            
            206Purchases
                of treasury stock
            
            
            (250
            )
            
            -
            
            
            -
            
            
            -
            
            
            (250
            )Shares
                repurchased under the tender offer
            
            
            (3,975
            )
            
            -
            
            
            -
            
            
            -
            
            
            (3,975
            )Dividends
                paid
            
            
            (148
            )
            
            -
            
            
            -
            
            
            -
            
            
            (148
            )Repayment
                of debt
            
            
            (956
            )
            
            -
            
            
            (42
            )
            
            -
            
            
            (998
            )Proceeds
                from borrowings
            
            
            4,250
            
            
            -
            
            
            -
            
            
            -
            
            
            4,250Costs
                of obtaining financing
            
            
            (58
            )
            
            -
            
            
            -
            
            
            -
            
            
            (58
            )Cash
                paid for modification of debt
            
            
            (9
            )
            
            -
            
            
            -
            
            
            -
            
            
            (9
            )Increase
                (decrease) in intercompanynotes
                payable
            
            
            1,293
            
            
            (166
            )
            
            (1,127
            )
            
            -
            
            
            -Settlement
                of Westport derivatives
            
            
            -
            
            
            -
            
            
            (134
            )
            
            -
            
            
            (134
            )Net
                Cash Provided by (Used in)Financing
                Activities
            
            
            353
            
            
            (166
            )
            
            (1,303
            )
            
            -
            
            
            (1,116
            )**Effects
                of Exchange Rate Changes on Cash****and
                Cash Equivalents**
            
            
            -
            
            
            -
            
            
            3
            
            
            -
            
            
            3**Net
                Increase in Cash and Cash Equivalents**
            
            
            1
            
            
            -
            
            
            585
            
            
            -
            
            
            586**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            2
            
            
            -
            
            
            74
            
            
            -
            
            
            76**Cash
                and Cash Equivalents at End of Period**
            
            $
            3
            
            $
            -
            
            $
            659
            
            $
            -
            
            $
            662




-
          40
          -


**Kerr-McGee
      Corporation and Subsidiary Companies**


**Condensed
      Consolidating Statement of Cash Flows**


**For
      the Nine Months Ended September 30, 2004**





Non-Kerr-McGee
            
            Guarantor
            
            Guarantor(Millions
                of dollars)
            
            Corporation
            
            Subsidiaries
            
            Subsidiaries
            
            Eliminations
            
            Consolidated**Cash
                Flows from Operating Activities**Net
                income (loss)
            
            $
            270
            
            $
            (4
            )
            $
            201
            
            $
            (197
            )
            $
            270Adjustments
                to reconcile net income (loss) to netcash
                provided by (used in) operating activities -Depreciation,
                depletion and amortization
            
            
            -
            
            
            95
            
            
            690
            
            
            -
            
            
            785Deferred
                income taxes
            
            
            37
            
            
            (9
            )
            
            58
            
            
            -
            
            
            86Dry
                hole expense
            
            
            -
            
            
            -
            
            
            80
            
            
            -
            
            
            80Asset
                impairments
            
            
            -
            
            
            1
            
            
            21
            
            
            -
            
            
            22Loss
                on sale of assets
            
            
            -
            
            
            -
            
            
            7
            
            
            -
            
            
            7Accretion
                expense
            
            
            -
            
            
            2
            
            
            20
            
            
            -
            
            
            22Provision
                for environmental remediationand
                restoration, net of reimbursements
            
            
            -
            
            
            57
            
            
            24
            
            
            -
            
            
            81Equity
                in losses (earnings) of subsidiaries
            
            
            (292
            )
            
            94
            
            
            -
            
            
            198
            
            
            -Other
                noncash items affecting net income
            
            
            1
            
            
            29
            
            
            135
            
            
            -
            
            
            165Changes
                in assets and liabilities
            
            
            (86
            )
            
            (8
            )
            
            (96
            )
            
            (1
            )
            
            (191
            )Net
                Cash Provided by (Used in)Operating
                Activities
            
            
            (70
            )
            
            257
            
            
            1,140
            
            
            -
            
            
            1,327**Cash
                Flows from Investing Activities**Capital
                expenditures
            
            
            -
            
            
            (83
            )
            
            (749
            )
            
            -
            
            
            (832
            )Dry
                hole costs
            
            
            -
            
            
            -
            
            
            (46
            )
            
            -
            
            
            (46
            )Acquisitions,
                net of cash acquired
            
            
            -
            
            
            -
            
            
            43
            
            
            -
            
            
            43Proceeds
                from sale of assets
            
            
            -
            
            
            7
            
            
            4
            
            
            -
            
            
            11Proceeds
                from sale of investments
            
            
            -
            
            
            -
            
            
            39
            
            
            -
            
            
            39Other
                investing activities
            
            
            -
            
            
            -
            
            
            (31
            )
            
            -
            
            
            (31
            )Net
                Cash Used in Investing Activities
            
            
            -
            
            
            (76
            )
            
            (740
            )
            
            -
            
            
            (816
            )**Cash
                Flows from Financing Activities**Issuance
                of common stock
            
            
            34
            
            
            -
            
            
            -
            
            
            -
            
            
            34Dividends
                paid
            
            
            (137
            )
            
            -
            
            
            -
            
            
            -
            
            
            (137
            )Repayment
                of debt
            
            
            -
            
            
            -
            
            
            (1,278
            )
            
            -
            
            
            (1,278
            )Proceeds
                from borrowings
            
            
            745
            
            
            -
            
            
            161
            
            
            -
            
            
            906Costs
                of obtaining financing
            
            
            (6
            )
            
            -
            
            
            -
            
            
            -
            
            
            (6
            )Settlement
                of Westport derivatives
            
            
            -
            
            
            -
            
            
            (45
            )
            
            -
            
            
            (45
            )Increase
                (decrease) in intercompanynotes
                payable
            
            
            (567
            )
            
            (181
            )
            
            748
            
            
            -
            
            
            -Net
                Cash Provided by (Used in)Financing
                Activities
            
            
            69
            
            
            (181
            )
            
            (414
            )
            
            -
            
            
            (526
            )**Effects
                of Exchange Rate Changes on Cash****and
                Cash Equivalents**
            
            
            -
            
            
            -
            
            
            1
            
            
            -
            
            
            1**Net
                Decrease in Cash and Cash Equivalents**
            
            
            (1
            )
            
            -
            
            
            (13
            )
            
            -
            
            
            (14
            )**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            2
            
            
            -
            
            
            140
            
            
            -
            
            
            142**Cash
                and Cash Equivalents at End of Period**
            
            $
            1
            
            $
            -
            
            $
            127
            
            $
            -
            
            $
            128




-
          41
          -


**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations.**





**Overview
      and Recent Developments**





Kerr-McGee
      Corporation is one of the largest U.S.-based independent oil and gas exploration
      and production companies in terms of production volumes and the world's
      third-largest producer and marketer of titanium dioxide pigment based on
      reported industry capacity by the leading titanium dioxide producers. Kerr-McGee
      has three reportable business segments, oil and gas exploration and production,
      production and marketing of titanium dioxide pigment (chemical - pigment),
      and
      production and marketing of other chemical products (chemical - other). The
      terms “Kerr-McGee,”“the company,”“we,”“our,” and similar terms are used
      interchangeably in this Form 10-Q to refer to the consolidated group or to
      one
      or more of the companies that are part of the consolidated group.





In
      2005, we made a number of strategic decisions in an effort to reposition
      Kerr-McGee as a pure-play exploration and production company and enhance value
      for our stockholders. Our strategic plan includes the separation of the chemical
      business and divestitures of certain lower-growth or shorter-life and
      higher-decline oil and gas assets, including our North Sea oil and gas business
      and selected properties in the U.S. We expect to realize aggregate net cash
      proceeds from asset divestitures, including the separation of the chemical
      business, of approximately $4.4 billion by the end of 2005 and plan to use
      the
      proceeds for debt reduction and other corporate purposes. At the same time,
      we
      are accelerating our U.S. onshore development activities, with a focus on the
      Wattenberg and Greater Natural Buttes areas. Management believes this strategy
      will result in an asset base weighted toward longer-life, less capital-intensive
      properties that will provide greater stability of production and production
      replacement, while the company’s exploration program in the deepwater Gulf of
      Mexico, Alaska, Brazil, China, Trinidad and other areas will continue to provide
      growth opportunities.




***Separation
      of the Chemical Business*** ** - ** In
      March 2005, the company’s Board of Directors (the Board) authorized management
      to pursue alternatives for the separation of the chemical business, including
      a
      spinoff or sale. In October 2005, the company completed its evaluation and
      the
      Board approved the separation of the chemical business through an initial public
      offering (IPO) of shares of Class A common stock of the company’s wholly-owned
      subsidiary, Tronox Incorporated (Tronox). The IPO is planned for the fourth
      quarter of 2005. Following the IPO, Kerr-McGee will have at least 50.1% equity
      interest in Tronox and at least 80% of Tronox’s total voting power. The
      separation of the chemical business is expected to result in net proceeds of
      $800 million to $900 million. The company expects to distribute the remaining
      ownership interest in Tronox to Kerr-McGee stockholders through a spinoff,
      splitoff or a combination of those transactions during 2006. Additional
      information regarding the separation is provided under *Pending
      Separation of Tronox Incorporated* below *.*





***Divestitures
      of Oil and Gas Assets*** -
      The
      following summarizes divestiture transactions already completed or which the
      company expects to complete in the fourth quarter.


(Millions
                of dollars)
            
            **Gross
                Proceeds***Completed
                Divestiture Transactions -*September
            
            
            Nonoperated
                North Sea fields
            
            $
            554
            (1)November
            
            
            Nonoperating
                interest in gas processing facility
            
            
            156*Expected
                Divestiture Transactions -*Fourth
                quarter
            
            
            Remaining
                oil and gas operations in the North Sea
            
            $
            2,950
            (2)Fourth
                quarter
            
            
            Selected
                oil and gas properties onshore in the U.S.
            
            
            476
            (2)





(1)
            Includes
                $7 million of proceeds expected to be released from escrow in the
                fourth
                quarter and net of cash on hand of $4 million acquired by
                the
                purchaser at closing.




(2)
            Represents
                expected cash proceeds before considering working capital, interest
                or
                other adjustments.












-
          42
          -
 In
        August 2005, the company entered into agreements to sell its North Sea oil
        and
        gas business for cash consideration of approximately $3.5 billion.





The
      two-step transaction pursuant to the agreements includes:





·
            The
                sale of the company’s interests in four nonoperated fields and related
                exploratory acreage and facilities in the North Sea, which was completed
                on September 30, 2005, and





·
            The
                sale of all remaining North Sea operations through the sale of the
                stock
                of Kerr-McGee (G.B.) Ltd., the company’s wholly-owned subsidiary, and
                other affiliated entities, which is expected to close in November
                2005.





The
      following presents summarized information about our North Sea oil and gas
      business:





North
                Sea
            
            PercentBusiness
            
            of
                TotalProved
                reserves at December 31, 2004(millions of barrels of oil equivalent)
            
            
            242
            
            
            20
            %*For
                the nine months ended September 30, 2005:*Average
                daily production -Crude oil and condensate (thousands of barrels per day)
            
            
            62
            
            
            36
            %Natural gas (millions of cubic feet per day)
            
            
            81
            
            
            8
            %Energy equivalent volumes produced (thousands of barrelsof
                oil equivalent per day)
            
            
            76
            
            
            21
            %




In
      addition to the North Sea oil and gas business, selected properties in the
      U.S.
      also are being considered for divestiture. The total combined divestitures
      may
      represent up to 30% of the company’s proved reserves at December 31, 2004, and
      up to 35% of its average daily production for the first nine months of 2005.





***Repurchases
      of Common Stock and Related Financing*** *-* Concurrent
      with the decision to pursue the separation of the chemical business, the Board
      authorized a share repurchase program initially set at $1 billion, with
      an
      expectation to expand the program as the chemical business separation proceeded.
      The company repurchased 3.1 million shares of its common stock at an aggregate
      cost of $250 million under this program before its termination in connection
      with the Board's approval of the tender offer discussed below.





On
      April 14, 2005, the company announced its intention to commence a modified
      "Dutch Auction" self tender offer for its common stock with an aggregate
      purchase cost of up to $4 billion. Under the tender offer, which was completed
      in May 2005, the company repurchased 46.7 million of its shares at $85 per
      share, which represented 29% of shares outstanding at March 31, 2005. The tender
      offer was financed with the net proceeds of borrowings and cash on hand. Effects
      of the tender offer on our results of operations and financial condition are
      discussed under *Results
      of Consolidated Operations* and *Financial
      Condition and Liquidity* below.





As
      a
      result of our decision to consummate the tender offer and the related increase
      in the company’s leverage, the company’s credit rating was lowered and is no
      longer investment grade. We plan to repay debt associated with the tender offer
      in the fourth quarter using proceeds from the planned divestitures discussed
      above and cash flow, which has been underpinned by an expanded oil and gas
      hedging program. As of November 8, 2005, we have prepaid $750 million of debt
      incurred in connection with the tender offer using proceeds from asset sales
      and
      cash on hand. Refer to *Financial
      Condition and Liquidity - Repurchases of Common Stock and Related Financing
      -
      Tranche X and Tranche B Term Loans* for
      additional information on such prepayments.





-
          43
          -


***Expanded
      Hedging Program*** ** - ** To
      increase the predictability of cash flows, we expanded our hedging program
      in
      April 2005 and, as of September 30, 2005, had costless collars and fixed-priced
      swaps covering at least 75% of the company’s 2005 and 2006 expected eligible
      production (after the possible divestitures) and approximately 50% of its 2007
      expected eligible production. Eligible production excludes oil production in
      China. Additional information regarding our commodity price risk management
      activities is included in Item 3, *Quantitative
      and Qualitative Disclosures about Market Risk* .





***Revised
      Dividend Policy*** ** - ** In
      May
      2005, the Board approved a recommendation to revise the company’s dividend
      policy to a level consistent with that of other pure-play exploration and
      production companies. Starting with the July 2005 dividend payment, the annual
      dividend was reduced from $1.80 to $.20 per share.








**Results
      of Consolidated Operations**





The
      following table summarizes revenues and segment operating profit with a
      reconciliation to consolidated net income for the three and nine months ended
      September 30, 2005 and 2004:


Three
                    Months
                    Ended
                
                Nine
                    Months
                    endedSeptember
                    30,
                
                September
                    30,(Millions
                    of dollars)
                
                **2005**
                
                2004
                
                **2005**
                
                2004Revenues(2)
                
                **$**
                **1,208**
                
                $
                1,203
                
                **$**
                **4,152**
                
                $
                3,006Segment
                    operating profit (loss) (1)Exploration
                    and production (2)
                
                **$**
                **185**
                
                $
                267
                
                **$**
                **1,166**
                
                $
                707Chemical
                    -Pigment
                    (3)
                
                
                **16**
                
                
                (110
                )
                
                **80**
                
                
                (89
                )Other
                
                
                **1**
                
                
                1
                
                
                **(6**
                **)**
                
                (2
                )Total
                    Chemical
                
                
                **17**
                
                
                (109
                )
                
                **74**
                
                
                (91
                )Total
                    segment operating profit
                
                
                **202**
                
                
                158
                
                
                **1,240**
                
                
                616Interest
                    and debt expense
                
                
                **(68**
                **)**
                
                (68
                )
                
                **(190**
                **)**
                
                (180
                )Loss
                    on early repayment and modification of debt
                
                
                **(9**
                **)**
                
                -
                
                
                **(9**
                **)**
                
                -Corporate
                    expenses
                
                
                **(45**
                **)**
                
                (31
                )
                
                **(135**
                **)**
                
                (88
                )Environmental
                    provisions, net of reimbursements
                
                
                **(4**
                **)**
                
                (71
                )
                
                **(19**
                **)**
                
                (74
                )**76**
                
                
                (12
                )
                
                **887**
                
                
                274Other
                    income (expense)
                
                
                **(3**
                **)**
                
                (20
                )
                
                **(16**
                **)**
                
                (27
                )Benefit
                    (provision) for income taxes
                
                
                **(19**
                **)**
                
                8
                
                
                **(301**
                **)**
                
                (89
                )Income
                    (loss) from continuing operations
                
                
                **54**
                
                
                (24
                )
                
                **570**
                
                
                158Income
                    from discontinued operations, net of taxes
                
                
                **306**
                
                
                31
                
                
                **515**
                
                
                112Net
                    Income
                
                **$**
                **360**
                
                $
                7
                
                **$**
                **1,085**
                
                $
                270Net
                    Income per Common Share:Basic
                
                **$**
                **3.14**
                
                $
                0.05
                
                **$**
                **7.95**
                
                $
                2.29Diluted
                
                
                **3.09**
                
                
                0.05
                
                
                **7.75**
                
                
                2.27




(1)
            Segment
                operating profit represents results of segment operations before
                considering interest and debt expense, loss on early repayment and
                modification of debt, general corporate expenses, environmental provisions
                related to sites with no ongoing operations or businesses in which
                the
                company’s affiliates are no longer engaged, other income (expense) and
                income taxes.




(2)
            Revenues
                and operating profit of the exploration and production segment for
                the
                three and nine months ended September 30, 2005 include $315 million
                and $359 million, respectively, of unrealized losses on hedge
                ineffectiveness and overhedge positions. Revenues and operating profit
                for
                the three and nine months ended September 30, 2004 include unrealized
                gains on hedge ineffectiveness of $3 million and $2 million,
                respectively. Refer to*Results of Operations by Segment - Exploration and Production -
                Revenues.*




*(3)*
            Operatingloss
                of the chemical - pigment segment for the three and nine months ended
                September 30, 2004 includes charges totaling $123 million
                associated
                with the shutdown of a production facility in Savannah, Georgia.
                Refer to*Results
                of Ope*rations*by Segment - Chemical.*







-
          44
          -


**Third
      Quarter 2005 vs. Third Quarter 2004**





***General*** -
      Income from continuing operations for the third quarter of 2005 was $54 million,
      compared with a loss of $24 million in the same 2004 period. The increase is
      primarily due to $126 million better operating results of the chemical business
      unit and a decrease in environmental provisions, net of reimbursements, of
      $67
      million, partially offset by $82 million lower operating profit of our
      exploration and production segment and an increase in income tax expense of
      $27
      million. Lower operating profit of the exploration and production segment in
      2005 reflects higher lifting costs, partially offset by lower exploration
      expense, and a decline in revenues (excluding gas marketing revenues) due to
      the
      net effect of higher oil and gas sales prices, lower sales volumes due to recent
      hurricanes and higher losses on nonhedge derivatives and hedge ineffectiveness.
      The improvement in chemical operating profit is largely attributable to charges
      totaling $123 million in 2004 associated with the shutdown of a production
      facility in Savannah, Georgia. An analysis of operating profit for each of
      our
      segments is provided under *Results
      of Operations by Segment* that
      follows. **





***Revenues*** -
      Significant factors contributing to the change in consolidated revenues are
      summarized below. Third-quarter 2005 revenues were reduced by $366 million
      of
      losses on hedge ineffectiveness, overhedge positions and nonhedge derivatives.
      Discussion of losses associated with commodity derivatives and other factors
      affecting revenues in 2005 is provided under *Results
      of Operations by Segment* .





Three
                Months Ended September 30,(Millions
                of dollars)
            
            2005
            
            2005
                vs. 2004
            
            2004***Revenues***
            
            $
            1,208
            
            $
            5
            
            $
            1,203Increase
                (decrease) in:Oil
                and gas sales revenues due to changes in realized prices
            
            
            
            
            $
            311Oil
                and gas sales revenues due to volume changes
            
            
            
            
            
            (47
            )Hedge
                ineffectiveness, overhedge positions and nonhedge derivative losses
            
            
            
            
            
            (327
            )Other
                exploration and production segment revenues
            
            
            
            
            
            80Pigment
                sales revenues due to changes in realized prices
            
            
            
            
            
            33Pigment
                sales revenues due to volume changes
            
            
            
            
            
            (46
            )Other
                chemical segment revenues
            
            
            
            
            
            1**Total
                change in revenues**
            
            
            
            
            $
            5





***Interest
      and Debt Expense*** -
      Interest and debt expense affecting income (loss) from continuing operations
      was
      $68 million in the third quarter of 2005, unchanged from 2004. As discussed
      below, a portion of 2005 interest and debt expense is reported in income from
      discontinued operations (net of tax) in connection with the anticipated
      divestiture of the company’s North Sea oil and gas business. Including amounts
      reported in income from discontinued operations, our total interest and debt
      expense was $117  million,
      $49 million higher than in the third quarter of 2004. This increase is primarily
      the result of $2.8 billion higher average outstanding debt in the 2005 third
      quarter.





In
      May
      2005, the company entered into a credit agreement for three credit facilities
      with an aggregate commitment of $5.5 billion (Credit Agreement), as
      more
      fully discussed under *Financial
      Condition and Liquidity.* Financing costs of $58 million were capitalized when incurred and are being
      amortized as interest expense over the terms of the related facilities. Total
      interest and debt expense for the third quarter of 2005 related to borrowings
      under the Credit Agreement was $67 million (including amortization of financing
      costs). Provisions of the Credit Agreement require the company to use 100%
      of
      the net after-tax cash proceeds from sales of certain assets for debt repayment.
      Because the company’s North Sea assets are subject to this requirement, interest
      expense on debt that is required to be repaid upon their sale is classified
      as a
      component of income from discontinued operations. For the third quarter of
      2005,
      pretax interest expense so classified totaled $49 million. The amount
      of
      interest and debt expense allocated to discontinued operations is based on
      approximately $3 billion of the company’s obligations under the term loans
      expected to be repaid with the net after-tax cash proceeds from the divestiture
      of the North Sea oil and gas business *.* Interest
      expense was allocated to discontinued operations beginning in May 2005, to
      coincide with initial borrowings under the term loans requiring mandatory
      prepayments.





-
          45
          -


***Loss
      on Early Repayment and Modification of Debt*** -
      The
      following presents information regarding charges incurred in 2005 in connection
      with early repayment of debt and modification of the terms of certain debt
      instruments upon receiving consent from debt holders.





Debt
                IssueTransaction
            
            Costs(Millions
                of dollars)
            
            Costs
            
            Written
                Off
            
            TotalTranche
                X term loan repayment
            
            $
            -
            
            $
            5
            
            $
            5Consent
                solicitation costs
            
            
            4
            
            
            -
            
            
            4Loss
                on early repayment and modification of debt
            
            $
            4
            
            $
            5
            
            $
            9





As
      discussed under *Financial
      Condition and Liquidity* ,
      during the third quarter of 2005, we made an aggregate of $600 million in
      mandatory and optional term loan prepayments, which resulted in accelerated
      amortization of debt issuance costs. Assuming the planned asset divestitures
      discussed under *Overview
      and Recent Developments* ,
      including the IPO of Tronox, are completed by the end of 2005, we expect to
      fully repay the outstanding term loan balances, which would result in the
      write-off of any unamortized debt issuance costs at that time. As of September
      30, 2005, the unamortized balance of debt issuance costs associated with the
      term loans was $34 million.





The
      modification to the indenture terms for certain notes payable provides for
      the
      release of the company's chemical business subsidiary, Tronox Worldwide LLC,
      as
      a guarantor of the notes in connection with the pending IPO of our chemical
      business. Additional information about this amendment to the terms of the
      indentures is provided in Note 10 to the Condensed Consolidated Financial
      Statements included in Item 1, Part I of this Form 10-Q.





***Corporate
      Expenses*** -
      Corporate expenses for the third quarter of 2005 were $45 million, reflecting
      an
      increase of $14 million compared with 2004. The increase is due in part to
      $7
      million higher expense associated with performance unit awards. The per-unit
      liability associated with these awards increased as a result of Kerr-McGee’s
      higher total shareholder return relative to selected peer companies.
      Additionally, the number of outstanding performance units increased following
      the January 2005 grant. Corporate expenses for the third quarter of 2005 also
      included $3 million of costs incurred in connection with the separation of
      the
      chemical business and $2 million associated with the employee retention
      programs initiated in April 2005. The retention programs are discussed under *Obligations
      and Commitments* below.





In
      the
      fourth quarter of 2005 and in 2006 we expect to recognize additional expenses
      related to an involuntary termination program initiated in October of 2005,
      as
      part of our evaluation of organizational needs for both Kerr-McGee as a
      pure-play exploration and production company and Tronox as a separate
      publicly-traded chemical company. The company identified 75 employees that
      are
      expected to be involuntarily terminated by the end of 2006. The majority of
      these employees will receive severance payments and other benefits upon
      completion of a specified service period of up to fourteen months. Assuming
      all
      employees meet the service and other conditions, the company's obligation for
      severance, outplacement assistance and other benefits will result in payments
      totaling $5 million by the end of 2006. Qualifying employees terminated under
      this program will also be eligible for enhanced benefits under the company's
      pension and postretirement plans, which is expected to result in additional
      fourth-quarter charges for special termination benefits.





***Environmental
      Provisions*** -
      Environmental provisions, net of reimbursements, were $4 million for the third
      quarter of 2005, $67 million lower compared with 2004. The company monitors
      reserves for environmental remediation and adjusts reserves, as needed, based
      upon new facts affecting completion of remediation projects. In the 2004 third
      quarter, environmental provisions were recognized for the following sites,
      primarily due to changes in estimates of contaminated soil volumes and
      groundwater remediation: West Chicago, Illinois ($28 million); Los Angeles
      County, California ($14 million); and Cushing, Oklahoma ($10 million). Total
      environmental provisions, net of reimbursements, for the third quarter of 2005
      were $17 million, of which $10 million relates to our former forest products
      business and is reported in income from discontinued operations (net of tax)
      and
      $3 million is included in operating profit of our business
      segments.





-
          46
          -


***Provision
      for Income Taxes*** -
      Third-quarter 2005 income tax expense on income from continuing operations
      was
      $19 million, reflecting an effective tax rate of 26%. Excluding the effect
      of
      reduced income taxes for repatriation of foreign earnings under the American
      Jobs Creation Act of 2004 discussed below and a $1 million tax benefit resulting
      from a change in estimated income tax obligations for 2004, the effective tax
      rate on income from continuing operations was 33%.





On
      October 22, 2004, the President of the United States signed into law the
      American Jobs Creation Act of 2004 (the “Act”). A provision of the Act includes
      a one-time dividends received deduction of 85% of certain foreign earnings
      that
      are repatriated, as defined in the Act. On April 11, 2005, management completed
      its analysis of the impact of the Act on the company's plans for repatriation.
      Based on this analysis, the company decided to repatriate up to $500 million
      in
      extraordinary dividends, as defined in the Act. During the second quarter of
      2005, we repatriated $200 million under the provisions of the Act and recognized
      income tax expense of $12 million. During the third quarter of 2005,
      an
      additional $21 million of foreign earnings were repatriated. However,
      we
      reduced the provision for income taxes for repatriation of dividends under
      the
      provisions of the Act by $4 million, reflecting a change in the expected
      utilization of foreign tax credits. We may repatriate up to an additional $279
      million in extraordinary dividends under the provisions of the Act. Pending
      completion of the divestiture of the company’s North Sea operations, management
      has not yet decided whether, and to what extent, additional amounts of foreign
      earnings will be repatriated, but will make that determination in the fourth
      quarter of 2005. Accordingly, the accompanying financial statements do not
      reflect any additional provision for taxes on unremitted foreign earnings that
      may be repatriated under the provisions of the Act. If the company decides
      to
      repatriate up to an additional $279 million as discussed above, additional
      income tax expense of up to $15 million may be recognized in the fourth quarter.





***Income
      from Discontinued Operations -*** Income
      from discontinued operations, net of taxes, for all periods presented primarily
      relates to the company’s North Sea oil and gas business, but also includes
      losses from the former forest products operations, which the company exited
      in
      the fourth quarter of 2004.





The
      following table summarizes the components of income from discontinued operations
      for the three months ended September 30, 2005 and 2004:





Three
                Months Ended September 30,**2005**
            
            2004**North
                Sea**
            ****
            **Forest**
            
            
            
            North
                Sea
            
            Forest**Oil
                and Gas**
            ****
            **Products**
            
            
            
            Oil
                and Gas
            
            Products(Millions
                of dollars)
            
            **Business**
            ****
            **Business**
            ****
            **Total**
            
            Business
            
            Business
            
            TotalRevenues
            
            **$**
            **285**
            ****
            **$**
            **-**
            ****
            **$**
            **285**
            
            $
            159
            
            $
            5
            
            $
            164Income
                from Discontinued Operations:Income
                (loss) from operations
            
            **$**
            **157**
            ****
            **$**
            **-**
            ****
            **$**
            **157**
            
            $
            59
            
            $
            (5
            )
            $
            54Gain
                on sale
            
            
            **306**
            ****
            ****
            **-**
            ****
            ****
            **306**
            
            
            -
            
            
            -
            
            
            -Adjustments
                for contingencies(1)
            
            
            **-**
            ****
            ****
            **(14**
            **)**
            ****
            **(14**
            **)**
            
            -
            
            
            -
            
            
            -Pretax
                income (loss) fromdiscontinued
                operations
            
            
            **463**
            ****
            ****
            **(14**
            **)**
            ****
            **449**
            
            
            59
            
            
            (5
            )
            
            54Income
                tax (expense) benefit
            
            
            **(148**
            **)**
            ****
            **5**
            ****
            ****
            **(143**
            **)**
            
            (25
            )
            
            2
            
            
            (23
            )Income
                (loss) from discontinuedoperations,
                net of tax
            
            **$**
            **315**
            ****
            **$**
            **(9**
            **)**
            **$**
            **306**
            
            $
            34
            
            $
            (3
            )
            $
            31





(1)
            These
                adjustments represent provisions for environmental remediation and
                restoration and other contingencies incurred subsequent to the exit
                of the
                forest products business.





Pretax
      income from our oil and gas operations in the North Sea increased by $98 million
      in the 2005 third quarter primarily as a result of $126 million higher revenues
      due to higher realized commodity prices, partially offset by interest and debt
      expense of $49 million allocated to discontinued operations in 2005, as
      discussed under *Interest
      and Debt Expense* above.





Gain
      on
      sale of discontinued operations in the third quarter of 2005 is the result
      of
      the North Sea divestiture transactions completed in September 2005, as discussed
      under *Overview
      and Recent Developments* .
      We
      expect that additional gain on sale will be realized in November 2005 upon
      completing the two-step divestiture of our North Sea oil and gas
      business.




-
          47
          -


**Year-to-Date
      2005 vs. Year-to-Date 2004**





***General*** -
      Income from continuing operations for the first nine months of 2005 was $570
      million compared with $158 million for the prior-year period. The increase
      in
      2005 is primarily attributable to $459 million higher operating profit from
      our
      exploration and production segment and an improvement of $165 million in the
      operating results of our chemical business. Operating performance of our
      exploration and production operations was favorably affected by higher realized
      commodity prices and higher sales volumes, partially offset by increased
      operating costs and losses associated with commodity derivatives. The
      improvement in chemical operating results is largely attributable to charges
      totaling $123 million associated with the shutdown of a production facility
      in
      Savannah, Georgia, which affected third-quarter 2004 results. An analysis of
      operating profit for each of our segments is provided under *Results
      of Operations by Segment* below.





***Revenues*** -
      Revenues for the nine-month period ended September 30, 2005 increased 38% over
      the prior-year period. Year-to-date oil and gas sales volumes increased
      primarily due to the contribution from Westport properties acquired in June
      2004
      and increased production in China, partially offset by production losses as
      a
      result of hurricane activity in the third quarter of 2005. The main factors
      contributing to the increase in consolidated revenues are summarized below,
      with
      additional analysis provided under *Results
      of Operations by Segment* .





Nine
                Months Ended September 30,(Millions
                of dollars)
            
            2005
            
            2005
                vs. 2004
            
            2004***Revenues***
            
            $
            4,152
            
            $
            1,146
            
            $
            3,006Increase
                (decrease) in:Oil
                and gas sales revenues due to changes in realized prices
            
            
            
            
            $
            785Oil
                and gas sales revenues due to volume changes
            
            
            
            
            
            511Hedge
                ineffectiveness, overhedge positions and nonhedge derivative
                losses
            
            
            
            
            
            (414
            )Other
                exploration and production segment revenues
            
            
            
            
            
            187Pigment
                sales revenues due to changes in realized prices
            
            
            
            
            
            113Pigment
                sales revenues due to volume changes
            
            
            
            
            
            (39
            )Other
                chemical segment revenues
            
            
            
            
            
            3**Total
                change in revenues**
            
            
            
            
            $
            1,146








***Interest
      and Debt Expense*** - As
      discussed in the preceding analysis of results of operations for the third
      quarter, the company allocated a portion of total interest and debt expense
      to
      discontinued operations in 2005. Total interest and debt expense for the first
      nine months of 2005 was $257 million ($67 million of which is reported
      in
      income from discontinued operations, net of tax) compared with $180 million
      for
      the same 2004 period. The increase in the total interest and debt expense
      reflects primarily higher debt balances as a result of borrowings under the
      Credit Agreement and a $15 million reduction in gains on interest rate swaps
      designated to hedge the fair value of our debt, partially offset by $8 million
      higher capitalized interest driven by increased qualifying capital expenditures.
      Additional information regarding borrowings incurred under the Credit Agreement
      is provided under *Financial
      Condition and Liquidity* .





***Loss
      on Early Repayment and Modification of Debt*** - ****** Reference
      is made to discussion included in the analysis of third-quarter results of
      consolidated operations above.





***Corporate
      Expenses*** - The
      year-to-date increase in corporate expenses of $47 million is due primarily
      to
      approximately $29 million higher cost of employee compensation and benefits
      and
      $11 million of consulting and other costs incurred in 2005 in connection with
      the company’s consideration of strategic alternatives, including the separation
      of the chemical business. Employee compensation expense increased in part due
      to
      $4 million recognized in connection with employee retention programs implemented
      in April 2005, as discussed under *Obligations
      and Commitments* below,
      $7 million related to higher pension and other postretirement benefit cost
      and
      $12 million higher expense associated with performance unit awards. The per-unit
      liability associated with these awards increased as a result of Kerr-McGee’s
      higher total shareholder return relative to selected peer companies.
      Additionally, the number of outstanding performance units increased following
      the January 2005 grant.





-
          48
          -


As
      discussed under *Results
      of Consolidated Operations - Third Quarter 2005 vs. Third Quarter 2004 -
      Corporate Expenses* ,
      we
      expect to incur additional expenses in the fourth quarter of 2005 and in 2006
      as
      a result of an involuntary termination program initiated in October
      2005.





***Environmental
      Provisions*** -
      For
      the nine-month periods ended September 30, 2005 and 2004, environmental
      provisions, net of reimbursements, were $19 million and $74 million,
      respectively. The decrease is primarily attributable to three sites with ongoing
      remediation activities. The following are the provisions for these sites for
      the
      first nine months of 2004: West Chicago, Illinois ($28 million); Cushing,
      Oklahoma ($16 million); and Los Angeles County, California ($14 million). During
      the 2005 nine-month period, changes in the estimated remediation and restoration
      costs for these sites resulted in a provision of $9 million. Total environmental
      provisions, net of reimbursements, for the first nine months of 2005 totaled
      $44
      million, of which $11 million relates to our former forest products business
      and
      is reported in income from discontinued operations (net of tax) and
      $14 million is included in operating profit of our business
      segments.





***Provision
      for Income Taxes*** -
      Higher income tax expense for the nine-month period ended September 30, 2005
      of
      $212 million resulted primarily from the increase in pretax income from
      continuing operations, partially offset by a decrease in the effective tax
      rate
      for the nine-month period, from 36% in 2004 to 35% in 2005.





***Income
      from Discontinued Operations -*** The
      following table summarizes the components of income from discontinued operations
      for the nine months ended September 30, 2005 and 2004:





Nine
                Months Ended September 30,**2005**
            
            2004**North
                Sea**
            ****
            **Forest**
            
            
            
            North
                Sea
            
            Forest**Oil
                and Gas**
            ****
            **Products**
            
            
            
            Oil
                and Gas
            
            Products(Millions
                of dollars)
            
            **Business**
            ****
            **Business**
            ****
            **Total**
            
            Business
            
            Business
            
            TotalRevenues
            
            **$**
            **908**
            ****
            **$**
            **-**
            ****
            **$**
            **908**
            
            $
            555
            
            $
            18
            
            $
            573Income
                from Discontinued Operations:Income
                (loss) from operations
            
            $
            **500**
            ****
            **$**
            **-**
            ****
            **$**
            **500**
            
            $
            212
            
            $
            (14
            )
            $
            198Gain
                (loss) on sale
            
            
            **306**
            ****
            ****
            **(1**
            **)**
            ****
            **305**
            
            
            -
            
            
            -
            
            
            -Adjustments
                for contingencies (1)
            
            
            **-**
            ****
            ****
            **(16**
            **)**
            ****
            **(16**
            **)**
            
            -
            
            
            -
            
            
            -Pretax
                income (loss) from discontinuedoperations
            
            
            **806**
            ****
            ****
            **(17**
            **)**
            ****
            **789**
            
            
            212
            
            
            (14
            )
            
            198Income
                tax (expense) benefit
            
            
            **(280**
            **)**
            ****
            **6**
            ****
            ****
            **(274**
            **)**
            
            (91
            )
            
            5
            
            
            (86
            )Income
                (loss) from discontinued operations,net
                of tax
            
            **$**
            **526**
            ****
            **$**
            **(11**
            **)**
            **$**
            **515**
            
            $
            121
            
            $
            (9
            )
            $
            112





(1)
            These
                adjustments represent provisions for environmental remediation and
                restoration and other contingencies incurred subsequent to the exit
                of the
                forest products business.





Pretax
      income from our oil and gas operations in the North Sea increased by $288
      million, primarily as a result of $353 million higher revenues which were
      favorably affected by higher realized commodity prices, partially offset by
      interest and debt expense allocated to discontinued operations of $67 million.
      For additional information regarding the allocation of interest and debt expense
      and gain on sale of North Sea assets, refer to the analysis of results of
      consolidated operations for the three months ended September 30, 2005
      and
      2004 provided above.





-
          49
          -


**Results
      of Operations by Segment -**


**Exploration
      and Production**








**Segment
      Operating Profit**





Revenues,
      operating costs and expenses, and marketing activities associated with the
      continuing operations of the exploration and production segment are shown in
      the
      following table.





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Revenues,
                excluding marketing revenues
            
            **$**
            **704**
            
            $
            766
            
            **$**
            **2,688**
            
            $
            1,799Operating
                costs and expenses -Lifting
                costs:Lease
                operating expense
            
            
            **120**
            
            
            89
            
            
            **321**
            
            
            188Production
                and ad valorem taxes
            
            
            **43**
            
            
            34
            
            
            **107**
            
            
            67Total
                lifting costs
            
            
            **163**
            
            
            123
            
            
            **428**
            
            
            255Depreciation,
                depletion and amortization
            
            
            **206**
            
            
            203
            
            
            **643**
            
            
            408Accretion
                expense
            
            
            **6**
            
            
            5
            
            
            **16**
            
            
            13Asset
                impairments
            
            
            -
            
            
            -
            
            
            **5**
            
            
            14(Gain)
                loss associated with assets held for sale
            
            
            **4**
            
            
            -
            
            
            **(42**
            **)**
            
            7General
                and administrative expense
            
            
            **39**
            
            
            32
            
            
            **108**
            
            
            89Transportation
                expense
            
            
            **22**
            
            
            21
            
            
            **69**
            
            
            51Exploration
                expense
            
            
            **61**
            
            
            95
            
            
            **228**
            
            
            195Gas
                gathering, pipeline and other expenses
            
            
            **21**
            
            
            20
            
            
            **71**
            
            
            61Total
                operating costs and expenses
            
            
            **522**
            
            
            499
            
            
            **1,526**
            
            
            1,093Operating
                profit, excluding net marketing margin
            
            
            **182**
            
            
            267
            
            
            **1,162**
            
            
            706Marketing
                - Gas sales revenues
            
            
            **177**
            
            
            98
            
            
            **447**
            
            
            267Marketing
                - Gas purchase costs (including transportation)
            
            
            **(174**
            **)**
            
            (98
            )
            
            **(443**
            **)**
            
            (266
            )Net
                marketing margin
            
            
            **3**
            
            
            -
            
            
            **4**
            
            
            1Total
                Operating Profit
            
            **$**
            **185**
            
            $
            267
            
            **$**
            **1,166**
            
            $
            707





-
          50
          -


**Revenues**





Revenues,
      production statistics and average prices realized from sales of crude oil,
      condensate and natural gas are shown in the following table (exclusive of
      discontinued operations).





Three
                Months Ended
            
            Nine
                months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars, except per-unit amounts)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Revenues
                -Crude
                oil and condensate sales
            
            **$**
            **439**
            
            $
            305
            
            **$**
            **1,300**
            
            $
            690Natural
                gas sales
            
            
            **613**
            
            
            483
            
            
            **1,781**
            
            
            1,095Gain
                (loss) on hedge ineffectiveness
            
            
            **(212**
            **)**
            
            3
            
            
            **(256**
            **)**
            
            2Losses
                on overhedge positions(1)
            
            
            **(125**
            **)**
            
            -
            
            
            **(125**
            **)**
            
            -Nonhedge
                derivative losses
            
            
            **(29**
            **)**
            
            (42
            )
            
            **(68**
            **)**
            
            (37
            )Gas
                marketing activities
            
            
            **177**
            
            
            98
            
            
            **447**
            
            
            267Other
                revenues
            
            
            **18**
            
            
            17
            
            
            **56**
            
            
            49Total
            
            **$**
            **881**
            
            $
            864
            
            **$**
            **3,135**
            
            $
            2,066Production
                -Crude
                oil and condensate (thousands of barrels per day):U.S.
                Gulf of Mexico
            
            
            **49**
            
            
            62
            
            
            **57**
            
            
            59U.S.
                onshore
            
            
            **37**
            
            
            37
            
            
            **37**
            
            
            25China
            
            
            **19**
            
            
            11
            
            
            **19**
            
            
            4Total
            
            
            **105**
            
            
            110
            
            
            **113**
            
            
            88Natural
                gas (million cubic feet per day):U.S.
                Gulf of Mexico
            
            
            **360**
            
            
            394
            
            
            **408**
            
            
            345U.S.
                onshore
            
            
            **577**
            
            
            605
            
            
            **582**
            
            
            421Total
            
            
            **937**
            
            
            999
            
            
            **990**
            
            
            766Total
                equivalent barrels of oil (thousands of boe per day)
            
            
            **261**
            
            
            277
            
            
            **278**
            
            
            216Average
                sales prices (excluding hedges) -Crude
                oil and condensate (per barrel):U.S.
                Gulf of Mexico
            
            **$**
            **57.90**
            
            $
            39.45
            
            **$**
            **49.55**
            
            $
            36.04U.S.
                onshore
            
            
            **52.92**
            
            
            39.31
            
            
            **46.19**
            
            
            35.27China
            
            
            **50.34**
            
            
            36.38
            
            
            **43.45**
            
            
            36.38Average
            
            
            **54.86**
            
            
            39.13
            
            
            **47.43**
            
            
            35.83Natural
                gas (per thousand cubic feet):U.S.
                Gulf of Mexico
            
            **$**
            **8.78**
            
            $
            5.93
            
            **$**
            **7.42**
            
            $
            5.98U.S.
                onshore
            
            
            **7.90**
            
            
            5.61
            
            
            **6.71**
            
            
            5.59Average
            
            
            **8.24**
            
            
            5.74
            
            
            **7.00**
            
            
            5.77Average
                realized sales prices (including hedges) -Crude
                oil and condensate (per barrel):U.S.
                Gulf of Mexico
            
            **$**
            **47.58**
            
            $
            29.86
            
            **$**
            **43.60**
            
            $
            28.93U.S.
                onshore
            
            
            **42.60**
            
            
            29.73
            
            
            **39.91**
            
            
            27.68China
            
            
            **50.34**
            
            
            36.38
            
            
            **43.45**
            
            
            36.38Average
            
            
            **46.26**
            
            
            30.40
            
            
            **42.38**
            
            
            28.85Natural
                gas (per thousand cubic feet):U.S.
                Gulf of Mexico
            
            **$**
            **7.65**
            
            $
            5.45
            
            **$**
            **7.03**
            
            $
            5.43U.S.
                onshore
            
            
            **6.76**
            
            
            5.13
            
            
            **6.29**
            
            
            5.04Average
            
            
            **7.10**
            
            
            5.25
            
            
            **6.59**
            
            
            5.22





(1)
            Represents
                realized and unrealized losses on derivative contracts assigned to
                the
                Gulf of Mexico where deliveries to specific sales indices were or
                are
                expected to be less than the associated hedged volumes due to recent
                hurricanes.


-
          51
          -


***Crude
      Oil Sales Revenues and Production*** - Oil
      sales revenues increased $134 million or 44% in the third quarter of 2005
      compared with the same period of 2004 due to higher realized commodity prices,
      partially offset by slightly lower sales volumes. Average oil prices, including
      the effect of hedging activity, increased $15.86 per barrel in the third quarter
      of 2005, contributing $151 million to the increase in oil sales revenues.
      Third-quarter 2005 oil production of 105 thousand barrels per day (Mbbls/d)
      was
      a 5 Mbbls/d decrease from the same 2004 period. This decrease in oil
      production was primarily due to hurricane-related disruptions in the Gulf of
      Mexico and U.S. onshore Gulf Coast areas, which impacted oil production by
      an
      estimated 12 Mbbls/d in the third quarter of 2005. Partially offsetting the
      hurricane-related production losses was an 8 Mbbls/d increase due to first
      oil
      production from China’s CFD 11-3/5 field in July 2005.





For
      the
      first nine months of 2005, oil sales revenues increased $610 million compared
      with 2004, due to a combination of higher realized prices and increased oil
      production. The average oil sales price, including the effect of hedging
      activity, increased $13.53 per barrel compared with the same period in 2004,
      contributing $415 million to oil sales revenues. Oil production for 2005
      increased to 113 Mbbls/d, a 28% increase over 2004. The increase is
      attributable, in part, to the full year-to-date contribution from former
      Westport properties that were acquired in June 2004 (15 Mbbls/d). Additionally,
      start-up of production in China from CFD 11-1 and 11-2 fields in July 2004
      and
      from CFD 11-3/5 field in July 2005 contributed to the increase (15 Mbbls/d).
      These increases were partially offset by hurricane-related production losses
      in
      the Gulf of Mexico and U.S. onshore Gulf Coast areas, estimated at 4 Mbbls/d
      for
      the period.





***Natural
      Gas Sales Revenues and Production*** -
      Natural gas sales revenues increased $130 million in the third quarter of 2005
      compared to 2004 as a result of a $1.85 per thousand cubic feet (Mcf) increase
      in the average realized price. Higher realized gas prices provided a $160
      million increase in gas sales revenues, averaging $7.10 per Mcf (including
      the
      impact of hedging activity). Gas production in the third quarter of 2005 was
      937
      million cubic feet per day (MMcf/d), 62 MMcf/d lower than 2004 third-quarter
      production, resulting in a $30 million reduction in gas sales revenues.
      Hurricane-related disruptions in the Gulf of Mexico and U.S. onshore Gulf Coast
      areas decreased gas production by an estimated 102 MMcf/d in the third quarter
      of 2005.





Natural
      gas revenues increased $686 million for the nine months ended September 30,
      2005, due to the combined impact of higher commodity prices and increased gas
      production for the period. The average gas price, including the effect of
      hedging activity, increased $1.37 per Mcf compared with 2004, contributing
      an
      additional $370 million to gas sales revenues. Year-to-date 2005 gas production
      increased to 990 MMcf/d, 224 MMcf/d higher than 2004. Contributing to the
      increase was the addition of Westport properties (267 MMcf/d), as well as
      production from the Gulf of Mexico’s Red Hawk field that began producing in July
      2004. These increases in production were partially offset by hurricane-related
      production losses estimated at 34 MMcf/d, primarily in the Gulf of Mexico.





***Other
      Revenues*** -
      Other revenues include gas processing plant and gathering system revenues in
      the
      U.S. onshore area. Gas marketing activities in the Rocky Mountain area are
      discussed below.





For
      the
      nine months ended September 30, 2005, other revenues were $7 million higher
      in
      comparison to 2004, resulting primarily from higher gas processing revenues
      from
      the company's nonoperated ownership interest in a Wattenberg-area gas plant
      driven by higher U.S. commodity prices. Gas processing and gathering revenues
      in
      the third quarter of 2005 were approximately the same as in 2004.





***Gains
      (Losses) Associated with Commodity Derivatives*** - Gains
      and losses on derivatives designated as hedges of forecasted oil and gas sales
      are deferred in accumulated other comprehensive income (loss) and reclassified
      into earnings when the hedged sales transactions affect earnings. Gains and
      losses associated with hedge ineffectiveness and with positions in excess of
      expected physical deliveries are recognized in current earnings as a component
      of revenues.





For
      the
      three- and nine-month periods ended September 30, 2005, we recognized hedge
      ineffectiveness losses of $212 million and $256 million, respectively,
      associated with commodity derivative instruments designated as hedges of future
      oil and gas sales. These losses represent the excess of mark-to-market losses
      on
      our commodity derivatives over the higher cash flows we expect to realize upon
      sales of hedged production. Higher ineffectiveness losses in 2005 are due to
      our
      expanded hedging program that now extends through 2007, as well as significantly
      increased commodity prices and widening natural gas basis differentials between
      NYMEX and actual physical indices.





-
          52
          -


As
      a
      result of two major hurricanes in the Gulf of Mexico late in the third quarter
      of 2005, the company’s physical deliveries to certain Gulf of Mexico sales
      indices for the fourth quarter of 2005 are expected to be insufficient to cover
      the associated derivative contracts in place. Consequently, we recognized an
      unrealized loss of $103 million in the third quarter associated with certain
      fourth-quarter 2005 derivative contracts assigned to hedge cash flows from
      sales
      of Gulf of Mexico natural gas production, although total U.S. natural gas
      production in the fourth quarter is still expected to exceed volumes covered
      by
      hedge instruments. Additionally, realized losses of $22 million associated
      with
      September derivative contracts in excess of hedged physical deliveries for
      that
      month are reported separately from oil and gas sales revenues. The company
      currently estimates that fourth quarter 2005 daily oil production from the
      Gulf
      of Mexico will average 48-52 Mbbls/d and that natural gas production will
      average 310-375 MMcf/d. The company believes that it is probable that by January
      2006 deliveries in the Gulf of Mexico will resume in sufficient volumes
      to
      match its remaining 2006 and 2007 derivative contracts.





Nonhedge
      derivative losses represent net realized and unrealized gains and losses related
      to crude oil and natural gas derivative instruments that have not been
      designated as hedges or that do not qualify for hedge accounting treatment.
      Such
      gains and losses primarily relate to certain contracts assumed in connection
      with the Westport merger. While the company designated Westport’s fixed-price
      oil and gas swaps as hedges after the merger, costless and three-way collars
      do
      not qualify for hedge accounting treatment because they represented “net written
      options” at the merger date. As a result, even though these collars help
      mitigate commodity price risk, the company will recognize mark-to-market gains
      and losses in earnings until the collars mature, rather than deferring such
      amounts in accumulated other comprehensive income (loss). The net fair value
      of
      these derivatives at September 30, 2005 was a liability of $130
      million.





For
      further discussion of the company’s derivative activities see Note 5 to the
      accompanying condensed consolidated financial statements and information
      included below in Item 3, *Quantitative
      and Qualitative Disclosures about Market Risk.*





**Lease
      Operating Expense**





In
      the
      third quarter of 2005, lease operating expense increased $31 million compared
      with 2004. On a per-unit basis, lease operating expense increased $1.53 per
      barrel of oil equivalent (boe), from $3.52 per boe in 2004 to $5.05 per boe
      in
      2005. The increase was primarily due to higher cost of property insurance
      coverage ($14 million), higher nonoperating expenses in the Gulf of Mexico
      ($7
      million) and new production from China’s CFD 11-3/5 field ($3 million).  In
      addition, increased well workover expense and overall inflationary cost
      increases contributed to higher U.S. onshore operating costs in the
      third
      quarter of 2005.





Lease
      operating expense for the first nine months of 2005 was $321 million, an
      increase of $133 million compared with 2004. On a per-unit basis, lease
      operating expense increased $1.04 per boe, from $3.20 per boe in 2004 to $4.24
      per boe in 2005. The increase was primarily due to additional operating expenses
      associated with Westport properties acquired in June 2004 ($81  million)
      and three fields in Bohai Bay, China, one of which started producing in July
      2005 and two in July 2004 ($21 million). Higher cost of property insurance
      coverage contributed an additional $16 million to the increase in
      year-to-date lease operating expense. The remaining increase of $15 million
      was
      primarily attributable to the company’s nonoperated Gulf of Mexico properties.





**Production
      and Ad Valorem Taxes**





Production
      and ad valorem taxes are comprised primarily of severance taxes associated
      with
      properties located onshore and in state waters in the U.S. These taxes, which
      usually are based on a percentage of oil and gas sales revenues, increased
      $9
      million in the third quarter of 2005 and $40 million for the first nine months
      of 2005 as a result of higher commodity prices compared with the respective
      prior-year periods. Also contributing to the year-to-date increase were higher
      sales volumes in 2005 compared with 2004. The addition of Westport's properties
      in 2004 resulted in higher production taxes as a percentage of sales revenues
      by
      increasing the proportion of U.S. onshore properties subject to production
      taxes
      in our portfolio.





-
          53
          -


**Depreciation,
      Depletion and Amortization (DD&A)**





DD&A
      expense of $206 million for the third quarter of 2005 increased $3 million
      over
      2004, primarily due to new production from China’s CFD 11-3/5 field. On a
      per-unit basis, DD&A expense increased from $8.01 per boe in the third
      quarter of 2004 to $8.61 per boe in 2005.





DD&A
      expense for the first nine months of 2005 was $643 million, a $235 million
      increase from the same period in 2004 . Contributing
      to the increase was additional DD&A expense for the Westport properties
      ($201 million) and new production from three fields in Bohai Bay, China
      ($34 million). On a per-unit basis, DD&A expense increased from $6.93 per
      boe in 2004 to $8.49 per boe in 2005, primarily reflecting the Westport merger
      which had a higher acquisition cost per boe than our historical asset
      base.





**Asset
      Impairments and Gain/Loss on Sales of Assets**





Kerr-McGee
      records impairment losses when performance analysis and other factors indicate
      that future net cash flows from production will not be sufficient to recover
      the
      carrying amounts of the related assets. In general, such write-downs most often
      occur on mature properties that are nearing the end of their productive lives
      or
      cease production sooner than anticipated. Impairment losses recorded in the
      first nine months of 2005 and 2004 totaled $5 million and $14 million,
      respectively. Impairment losses in 2005 related primarily to two U.S. Gulf
      of
      Mexico shelf properties that ceased producing in the first quarter. Impairment
      losses in 2004 related primarily to a U.S. Gulf of Mexico field that experienced
      premature water breakthrough and ceased production sooner than
      expected.





We
      recognized a net gain on disposition of assets of $42 million in the first
      nine
      months of 2005, related primarily to two transactions. In the first quarter
      of
      2005, we acquired a 37.5% interest in the Blind Faith discovery in the deepwater
      Gulf of Mexico from BP Exploration & Production in exchange for our
      interests in various proved oil and gas properties in the Arkoma basin of
      southeast Oklahoma. In connection with this transaction, we received $24 million
      in cash and recognized a $19 million gain on sale based on the percentage of
      the
      Arkoma properties' fair value that was received in cash. In the second quarter
      of 2005, we sold our interests in oil and gas properties in the Table Mountain
      and Culp Draw fields of Wyoming to Anadarko Petroleum Corporation in exchange
      for Anadarko’s overriding royalty interests in the Greater Natural Buttes area
      and $27 million in cash. We recognized a gain of $25 million in connection
      with
      this transaction. Partially offsetting these gains was a $6 million loss in
      the
      2005 third quarter related to one U.S. onshore divestiture package held for
      sale, the carrying value of which was reduced based on estimated fair value
      less
      cost to sell. All other assets held for sale are expected to result in gains
      upon disposition.





**General
      and Administrative Expense**





Third-quarter
      2005 general and administrative expense of $39 million was $7 million higher
      than 2004. For the first nine months of 2005, general and administrative expense
      increased $19 million, to $108 million, compared to the prior-year
      period . General and administrative expense for the three and nine months ended September
      30, 2005 includes $6 million and $10 million, respectively, associated with
      employee retention programs initiated in April 2005. Additional information
      on
      these programs is provided under *Obligations
      and Commitments* below *.* Additional expense increases over the corresponding 2004 periods were due to
      higher cost of employee compensation and benefits, partially offset by higher
      overhead charge-outs for U.S. onshore and Gulf of Mexico properties.





**Transportation
      Expense**





Transportation
      expense, representing the costs paid to third-party providers to transport
      oil
      and gas  production,
      increased by $1 million in the third quarter of 2005, to $22 million. In early
      2005, we began transporting gas from the Rocky Mountain area under a new
      contract, increasing overall transportation costs. Higher costs associated
      with
      the new contract are expected to be offset by increased realized gas prices
      as a
      result of greater access to more competitive gas markets. On a per-unit basis,
      third-quarter 2005 transportation expense was $.93 per boe compared to $.82
      per
      boe in 2004.





For
      the
      first nine months of 2005, transportation expense of $69 million was $18 million
      higher compared with 2004, primarily due to the contribution of Westport
      properties ($16 million), as well as the new Rocky Mountain area gas
      transportation contract. On a per-unit basis, year-to-date 2005 transportation
      expense was $.91 per boe, a $.05 per boe increase from 2004.




-
          54
          -


**Exploration
      Expense**





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Exploration
                costs(1)
            
            **$**
            **9**
            
            $
            13
            
            **$**
            **32**
            
            $
            33Geological
                and geophysical costs
            
            
            **10**
            
            
            17
            
            
            **39**
            
            
            51Dry
                hole expense
            
            
            **26**
            
            
            54
            
            
            **112**
            
            
            76Amortization
                of undeveloped leases
            
            
            **16**
            
            
            13
            
            
            **46**
            
            
            37Gain
                on sales of unproved properties
            
            
            **-**
            
            
            (2
            )
            
            **(1**
            **)**
            
            (2
            )Total
                exploration expense
            
            **$**
            **61**
            
            $
            95
            
            **$**
            **228**
            
            $
            195





(1)
            Exploration
                costs include delay rentals, cost of retaining and carrying unproved
                properties and exploration department
                overhead.





In
      the
      third quarter of 2005, total exploration expense was $61 million, a decrease
      of
      $34 million versus 2004, primarily related to $28 million lower dry hole expense
      and $7 million lower geological and geophysical costs. For the third quarter
      of
      2005, one unsuccessful Gulf of Mexico exploratory prospect contributed $17
      million to dry hole expense, with the remainder primarily associated with
      exploration activity in Trinidad. Geological and geophysical data acquisition
      and processing costs decreased $7 million in the third quarter of 2005,
      with lower spending in the Gulf of Mexico shelf and U.S. onshore areas,
      partially offset by increased costs in China.





For
      the
      first nine months of 2005, total exploration expense was $228 million, an
      increase of $33 million compared with 2004, primarily due to an increase in
      dry
      hole expense of $36 million. Amortization of undeveloped leases also increased
      by $9 million, largely as a result of additional Westport leases. Geological
      and
      geophysical data acquisition and processing costs decreased by $12 million
      for
      the nine-month period ended September 30, 2005, as compared to 2004. Increased
      spending in China and Brazil was offset by lower costs in various international
      locations and the Gulf of Mexico shelf and U.S. onshore areas.





Capitalized
      exploratory well costs associated with ongoing exploration and/or appraisal
      activities may be charged to earnings in a future period if management
      determines that commercial quantities of hydrocarbons have not been discovered
      or that future appraisal drilling or development activities are not likely
      to
      occur. At September 30, 2005, the company had capitalized exploratory well
      costs
      of approximately $224 million associated with such ongoing exploration
      activities, primarily in the deepwater Gulf of Mexico, Alaska, Brazil and
      China.  Capitalized exploratory well costs have increased by $88 million
      from December 31, 2004 primarily due to additional exploration activities in
      the
      Gulf of Mexico ($49 million), Alaska ($44 million) and Brazil ($18 million)
      partially offset by successful exploration costs in China that were reclassified
      to proved oil and gas properties.





**Gas
      Marketing Activities**





Kerr-McGee
      purchases third-party natural gas for aggregation and sale with the company's
      own production in the Rocky Mountain area. In addition, we have transportation
      capacity to markets in the Midwest to facilitate sale of natural gas outside
      the
      immediate vicinity of our production.





Marketing
      revenues were $177 million in the third quarter of 2005, an increase of $79
      million over 2004. Marketing revenues for the first nine months of 2005 totaled
      $447 million, or $180 million higher than 2004. The increase in both periods
      was
      primarily the result of higher purchase and resale of natural gas in the Rocky
      Mountain area and higher natural gas sales prices. Marketing volumes (MMBtu/day)
      were 262,000 and 209,000 in the third quarter of 2005 and 2004, respectively.
      For the first nine months of 2005 and 2004, marketing volumes (MMBtu/day)
      averaged 253,000 and 189,000, respectively. Gas purchase costs increased $76
      million for the third quarter of 2005 and $177 million for the first nine months
      of 2005.





-
          55
          -





**Results
      of Operations by Segment -**


**Chemical**





Chemical
      segment revenues, operating profit (loss) and pigment production volumes are
      shown in the following table (exclusive of discontinued
      operations):





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,(Millions
                of dollars)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Revenues
                -Pigment
            
            **$**
            **302**
            
            $
            315
            
            **$**
            **944**
            
            $
            870Other
            
            
            **25**
            
            
            24
            
            
            **73**
            
            
            70Total
            
            **$**
            **327**
            
            $
            339
            
            **$**
            **1,017**
            
            $
            940Operating
                profit (loss) -Pigment
            
            **$**
            **16**
            
            $
            (110
            )
            **$**
            **80**
            
            $
            (89
            )Other
            
            
            **1**
            
            
            1
            
            
            **(6**
            **)**
            
            (2
            )Total
            
            **$**
            **17**
            
            $
            (109
            )
            **$**
            **74**
            
            $
            (91
            )Titanium
                dioxide pigment production(thousands
                of tonnes)
            
            
            **132**
            
            
            137
            
            
            **396**
            
            
            417








**Chemical
      - Pigment**





Operating
      profit for the third quarter of 2005 was $16 million on revenues of $302
      million, compared with operating loss of $110 million on revenues of $315
      million for the same 2004 period. Of the $13 million decrease in revenues,
      $46 million was due to decreased sales volumes. This decrease was partially
      offset by $33 million due to an increase in average selling prices of
      approximately 13%. Sales volumes were approximately 23,900 tonnes lower
      primarily due to the tonnes sold from the Savannah sulfate production facility
      that was shut down during 2004, lower European volumes due to weak economic
      conditions in Europe combined with lower volumes also experienced in the
      Americas and Asia/Pacific regions, which saw record sales volumes in the third
      quarter of 2004. The improvement in operating results is primarily due to
      shutdown provisions incurred in the third quarter of 2004 of $123 million
      related to the sulfate-process titanium dioxide pigment production at the
      Savannah, Georgia facility. The decrease in sales volumes also reduced costs
      by
      $40 million, which was partially offset by an increase in manufacturing
      costs of $22 million due to higher raw material and energy costs and increased
      maintenance. Selling and administrative costs were $2 million higher,
      primarily due to an increase in employee incentive compensation related to
      cash
      bonuses resulting from improved operating performance during the
      quarter.





For
      the
      first nine months of 2005, operating profit was $80 million on revenues of
      $944
      million, compared with an operating loss of $89 million on revenues of $870
      million in the respective prior-year period. The improvement in operating
      results for the first nine months of 2005 compared with the same 2004 period
      was
      primarily attributable to the shutdown provisions incurred in 2004 of $123
      million related to the Savannah facility , combined with higher average sales prices in 2005. Revenues increased $74
      million, or 9%, for the first nine months of 2005, of which $113 million
      resulted from higher average sales prices and was offset by $39 million due
      to
      lower pigment sales volumes of approximately 20,200 tonnes. The decreased sales
      volume also resulted in $38 million lower manufacturing and transportation
      costs. These improvements were partially offset by higher average product costs
      of $56 million due to higher raw material and energy costs and increased costs
      resulting from production maintenance. Selling and administrative costs were
      also higher by $10 million compared to the same period in 2004, primarily
      due to an increase in employee incentive compensation related to cash bonuses
      resulting from improved operating performance for the year.





-
          56
          -


**Chemical
      - Other**





Operating
      profit in the third quarter of 2005 was substantially unchanged with $1 million
      on revenues of $25 million, compared with an operating profit of $1 million
      on
      revenues of $24 million in the same 2004 period.





For
      the
      nine months ended September 30, 2005, operating loss was $6 million on revenues
      of $73 million, compared with an operating loss of $2 million on revenues
      of $70 million in the same 2004 period. The $4 million increase in operating
      loss for the first nine months of 2005 resulted from a net $11 million
      environmental provision (net of expected insurance reimbursement of $21 million)
      incurred in the first quarter of 2005 related primarily to ammonium perchlorate
      remediation associated with the company's Henderson, Nevada, operations. This
      charge was partially offset by improved operations at the company’s Henderson,
      Nevada, electrolytic manganese dioxide manufacturing facility compared to the
      prior year.





**Pending
      Separation of Tronox Incorporated**





In
      October 2005, the Board approved the separation of the chemical business through
      an initial public offering (IPO) of shares of Class A common stock of Tronox,
      the company’s wholly-owned subsidiary. An amended registration statement was
      filed with the Securities and Exchange Commission (SEC) relating to the proposed
      IPO and is currently under review by the SEC.  Assuming the review is completed and the registration statement is declared
      effective by the SEC, the company expects to complete the IPO in the fourth
      quarter of 2005. Following the IPO, Kerr-McGee will continue to hold a
      controlling interest in Tronox through ownership of Tronox’s Class B common
      stock. We expect to distribute those shares to Kerr-McGee stockholders during
      2006 through a spinoff, splitoff or a combination of those transactions
      (Distribution). It is expected that Tronox will be included in our consolidated
      financial statements through the Distribution date. The Distribution is subject
      to certain conditions, including receipt of a favorable tax opinion, necessary
      regulatory approvals and approval by the company’s Board of Directors of the
      final form, structure and other terms of any transaction to effect the
      Distribution.





Prior
      to the completion of the IPO, Kerr-McGee will transfer subsidiaries that conduct
      Kerr-McGee’s chemical business to Tronox. Some of these subsidiaries previously
      were engaged in the production of ammonium perchlorate, the manufacturing of
      thorium, treatment of forest products, the refining and marketing of petroleum
      products, the mining, milling and processing of nuclear materials and other
      businesses. These subsidiaries are subject to environmental obligations
      associated with their current and former operations. Additional discussion
      regarding environmental obligations is provided below.





Historically,
      employees of Kerr-McGee’s chemical business participated in stock-based
      compensation, pension and postretirement plans established by Kerr-McGee. It
      is
      expected that in connection with the IPO, Tronox will issue stock-based awards
      to certain of its employees and non-management directors, while unvested
      Kerr-McGee stock options and restricted stock held by employees of Tronox will
      be converted to Tronox stock-based awards on the effective date of the
      Distribution. Tronox also is expected to establish pension and postretirement
      plans for its U.S. employees and assume the benefit obligations associated
      with
      its current and former employees following the Distribution. The anticipated
      effects of the separation on our obligations for employee benefits are more
      fully discussed below.





It
      is
      expected that concurrent with the IPO, Tronox, through its wholly-owned
      subsidiary, will issue $350 million of unsecured notes in a private
      offering and will borrow $200 million in term loans. The net proceeds from
      these
      borrowings and from the offering of Tronox Class A common stock are expected
      to
      be $800 million to $900 million and will be distributed to Kerr-McGee. Any
      debt
      incurred by Tronox will affect consolidated financial statements of Kerr-McGee
      until Tronox is no longer consolidated by the company.





-
          57
          -


***Obligations
      for Environmental Remediation*** **-** Tronox
      and its subsidiaries will be subject to obligations for environmental
      remediation and restoration associated with the chemical business currently
      in
      operation, as well as with former operations described above. The carrying
      value
      of liabilities associated with such operations is $239 million as of September
      30, 2005. Tronox and its subsidiaries also are expected to have contingent
      obligations of such current and former operations for which no liability is
      recognized as of September 30, 2005 because the loss is not considered probable
      or is not estimable. Discussion of the company’s material environmental
      obligations and other contingencies is provided in Note 16 to our consolidated
      financial statements included in Part 1 of this Form 10-Q.





Upon
      completion of the IPO, Kerr-McGee is expected to agree to reimburse Tronox
      for a
      portion of the environmental costs incurred and paid by Tronox and its
      subsidiaries during the seven-year period following the IPO, to the extent
      such
      costs, net of any reimbursements received from insurers or other parties, exceed
      the carrying value of reserves at the time of the IPO. The reimbursement
      obligation extends to costs incurred at any site associated with any of the
      former businesses and operations of Tronox and is limited to a maximum aggregate
      reimbursement of $100 million for all covered sites. The company’s reimbursement
      obligation will be reflected in our Consolidated Balance Sheet at its estimated
      fair value at the time of origination. The estimated fair value will be
      determined considering expected cash outflows pursuant to the reimbursement
      obligation, their timing and probability of payment.





***Pension
      and Postretirement Obligations -*** As
      discussed above, it is anticipated that Tronox will establish its own retirement
      and postretirement benefit plans for its current and former employees in the
      U.S. and assume the related benefit obligations. As of September 30, 2005,
      Kerr-McGee's Condensed Consolidated Balance Sheet included a prepaid pension
      cost associated with its U.S. qualified retirement plan of $239 million and
      a
      liability associated with the postretirement benefit plan of $231 million.
      It is
      estimated that upon completion of the Distribution, Kerr-McGee will transfer
      to
      Tronox approximately 40% of its pension benefit obligation as of that date.
      Kerr-McGee will also transfer trust assets to the newly established Tronox
      plan
      necessary to fund the transferred obligation in compliance with applicable
      regulatory requirements. It is also expected that approximately half of the
      benefit obligation associated with the U.S. postretirement plan, which is
      unfunded, will be transferred to Tronox following the Distribution. Actual
      values of the benefit obligation and associated plan assets transferred to
      Tronox will be determined at the time of the Distribution and will depend on
      the
      level of retirement plan assets, interest rates and other factors relevant
      to
      the measurement of the benefit obligation and determination of asset values
      to
      be transferred.





**Financial
      Condition and Liquidity**





The
      following provides certain information useful in the analysis of the company's
      financial condition and liquidity.





**September
                30,**
            
            December
                31,(Millions
                of dollars)
            
            **2005**
            
            2004Current
                ratio(1)
            
            
            **0.7
                to 1**
            
            
            0.8
                to 1Cash
                and cash equivalents
            
            **$**
            **662**
            
            $
            76Debt
                repayment obligations due within one year
            
            
            **433**
            
            
            463Unused
                capacity under bank and revolving lines of credit
            
            
            **1,199**
            
            
            1,550Total
                debt
            
            
            **6,345**
            
            
            3,699Stockholders’
                equity
            
            **$**
            **1,343**
            
            $
            5,318Debt
                to total capitalization(2)
            
            
            **83**
            **%**
            
            41
            %





(1)
            Represents a
                ratio of current assets to current
                liabilities.




(2)
            Total
                capitalization is determined as total debt plus stockholders'
                equity.





To
      meet
      our short- and long-term liquidity requirements, we expect to fund capital
      expenditures, debt payments and working-capital requirements through cash on
      hand, cash generated from operating activities, the sales of assets, issuance
      of
      debt and/or borrowings under our $1.25 billion revolving credit facility. Based
      on the company's forecast of cash flows and liquidity, the company believes
      that
      it has and will continue to have the financial resources and liquidity to meet
      future cash requirements. Included in that forecast are expected proceeds from
      the separation of the chemical business unit and sales of selected oil and
      gas
      properties and other assets which are expected to be realized during the fourth
      quarter of 2005. We expect these asset divestitures to result in net cash
      proceeds of approximately $4.4 billion, which will be used for debt
      reduction and other corporate purposes. We plan to reduce debt by approximately
      $3.8 billion in the fourth quarter, using proceeds of the planned
      divestitures discussed under *Overview
      and Recent Developments* above
      and cash flow from operating activities which has been underpinned by an
      expanded oil and gas hedging program. Additional information regarding our
      commodity derivative instruments is provided in Item 3, *Quantitative
      and Qualitative Disclosures about Market Risk.*





-
          58
          -


As
      of
      September 30, 2005, we had cash on hand of $662  million,
      of which $447 million relates to the company’s North Sea operations and
      will be transferred to the buyer at closing in connection with the sale of
      the
      remaining North Sea operations. Of this amount, approximately $330 million
      represents proceeds from the third-quarter North Sea asset sales that was not
      repatriated to the U.S. The $330 million will be received as additional
      consideration upon completing the sale of the North Sea oil and gas
      business.





The
      company had negative working capital of $1.4 billion at September 30, 2005;
      however, this is not indicative of a lack of liquidity, as the company maintains
      sufficient current assets to settle current liabilities when due. Our working
      capital position is significantly affected by current liabilities associated
      with our financial derivatives. At September 30, 2005, the company had recorded
      approximately $2.2 billion of net current derivative liabilities for
      contracts that will effectively adjust the cash flows to be realized upon the
      sale of our future oil and gas production. Because those sales have not yet
      occurred, the associated accounts receivable are not yet reflected in our
      Condensed Consolidated Balance Sheet, while derivative assets and liabilities
      are reflected in the Condensed Consolidated Balance Sheet at their estimated
      fair values. Because of the high degree of volatility in oil and natural gas
      commodity markets and increased volume of outstanding commodity derivative
      contracts, our working capital position will be continually affected by changes
      in the fair value of derivative instruments.





Since
      December 31, 2004, the percentage of debt to total capitalization increased
      from
      41% to 83%. Significant 2005 transactions affecting our capital structure and
      level of leverage are summarized below. In addition to these transactions,
      after-tax losses on cash flow hedges of $1.7 billion reflected in equity at
      September 30, 2005, contributed 15% of the increase in the debt to total
      capitalization ratio.





Increase
                (Decrease) in(Millions
                of dollars)
            
            Total
                Debt
            
            Total
                EquityRepurchases
                of common stock
            
            $
            -
            
            $
            (4,225
            )Conversion
                of 5.25% debentures to common stock
            
            
            (600
            )
            
            593Exercises
                of employee stock options
            
            
            -
            
            
            206Gross
                proceeds from borrowings
            
            
            4,250
            
            
            -Repayment
                of debt -Maturity
                of 5.375% Notes
            
            
            (350
            )
            
            -Paydown
                on term loans
            
            
            (606
            )
            
            -Scheduled
                payments and maturities of other debt
            
            
            (42
            )
            
            -





Subsequent
      to September 30, 2005, the company repaid $109 million principal amount of
      its
      8.125% Notes upon their scheduled maturity and $150 million of outstanding
      term
      loans. Additional information regarding repayments of the term loan balance
      is
      provided under *Tranche
      X and Tranche B Term Loans* below.





***Repurchases
      of Common Stock and Related Financing*** - As
      discussed under *Overview
      and Recent Developments* ,
      in
      March 2005, the company's Board of Directors authorized a share repurchase
      program initially set at $1 billion, with an expectation to expand the program
      as the chemical business separation proceeded. Before terminating this program
      in connection with the Board's approval of the tender offer discussed below,
      the
      company repurchased 3.1 million shares of its common stock in the open market
      at
      an aggregate cost of $250 million. Shares repurchased under this program are
      held in treasury.





On
      April 18, 2005, the company commenced a modified "Dutch Auction" self tender
      offer to repurchase 43.5 million shares of its common stock at a price not
      lower
      than $85 or higher than $92 per share. The terms of the tender offer provided
      for the company to determine the lowest per-share price within the range that
      would enable it to buy up to $4 billion of its common stock based on the number
      of shares tendered and the prices specified by the tendering stockholders.
      Under
      the tender offer, which expired on May 18, 2005, approximately 138.9 million
      shares were properly tendered at a price of $85 per share and not withdrawn.
      Since the number of shares tendered exceeded 43.5 million, purchases of shares
      by the company were made based on a proration factor of 33.64%. In accordance
      with applicable securities laws, the company exercised its right to increase
      the
      number of shares purchased pursuant to the tender offer by 3.2 million shares,
      which resulted in repurchasing 46.7 million shares of common stock at $85 per
      share, for an aggregate cost of approximately $4 billion (including transaction
      costs of approximately $3 million). All of the shares repurchased under
      the
      tender offer were retired immediately. The cost of the repurchase was financed
      with a portion of the net proceeds of the borrowings under the $5.5 billion
      credit agreement (Credit Agreement) discussed below and cash on
      hand.





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          59
          -


In
      connection with the tender offer, the company entered into the Credit Agreement
      consisting of a $2 billion two-year term loan (Tranche X), a $2.25 billion
      six-year term loan (Tranche B) and a $1.25 billion five-year revolving
      credit facility (Revolving Facility). In satisfaction of one of the closing
      conditions, we repaid all outstanding indebtedness under the $1.5 billion
      revolving credit agreement previously in effect and terminated the agreement.
      No
      penalties were incurred in connection with the early termination.





Interest
      on amounts borrowed under the Credit Agreement is payable, at our election,
      at
      an alternate base rate (ABR) or a Eurodollar rate, in each case as defined
      in
      the Credit Agreement, plus a margin, as summarized below. The applicable margin
      may vary based on the company’s Consolidated Leverage Ratio, as defined in the
      Credit Agreement, and other specified events and conditions. The Consolidated
      Leverage Ratio determined pursuant to the terms of the Credit Agreement is
      based
      on the company's total funded debt and its earnings over a period of four
      consecutive quarters before considering interest, taxes, depreciation, depletion
      and amortization, noncash exploration expense and other specified noncash items
      (EBITDAX).





Applicable
                Interest Rate Margin**At
                September 30, 2005**
            
            Over
                the TermMaturity
            
            **ABR**
            
            **Eurodollar**
            
            ABR
            
            EurodollarRevolving
                Facility
            May
                2010
            
            **1.25%**
            
            **2.25%**
            
            0.25
                - 1.25%
            
            1.25
                - 2.25%Tranche
                X Term Loan
            May
                2007
            
            **1.25%**
            
            **2.25%**
            
            1.25%
            
            2.25%Tranche
                B Term Loan
            May
                2011
            
            **1.50%**
            
            **2.50%**
            
            1.25
                - 1.50%
            
            2.25
                - 2.50%





Revolving
      Facility - The
      $1.25 billion Revolving Facility provides for borrowings and issuances of
      letters of credit. The commitment fee payable on the unused portion of the
      Revolving Facility is currently set at 0.5% annually. At September 30, 2005,
      no
      borrowings were outstanding under the Revolving Facility and outstanding letters
      of credit totaled $96 million.





Tranche
      X and Tranche B Term Loans ****** -
      The
      term loans were fully funded at closing, with proceeds used to finance the
      tender offer and to pay fees and expenses associated with the Credit Agreement,
      which totaled $58 million. From origination through September 30, 2005, the
      weighted average interest rates on the Tranche X and Tranche B term loans were
      5.72% and 5.98%, respectively.





We
      may
      make prepayments on the term loans at any time without penalty. Additionally,
      the term loans are subject to the following mandatory prepayment
      provisions:





·
            As
                long as the Tranche X loan is outstanding, 50% of the net cash proceeds,
                as defined, of certain equity
                issuances;




·
            100%
                of the net cash proceeds, as defined, from incurrence of certain
                indebtedness;




·
            Subject
                to certain exceptions, 100% of the net cash proceeds, as defined,
                from
                asset disposals; and




·
            Annually,
                a specified percentage of excess cash flow, as defined, ranging from
                zero
                to 50%. This prepayment requirement is reduced or eliminated upon
                repayment of the Tranche X loan and the achievement of a Consolidated
                Leverage Ratio below specified thresholds.





Excess
      cash flow as calculated under the Credit Agreement is reduced by mandatory
      prepayments made with the net cash proceeds from asset dispositions. Based
      on
      our current forecast of cash flows for the fourth quarter of 2005 and assuming
      application of the net proceeds from asset divestitures to repay debt under
      the
      Credit Agreement, we estimate that no payments will be due in 2006 under the
      excess cash flow prepayment provision.





-
          60
          -


As
      discussed under *Overview
      and Recent Developments* ,
      we
      have completed the sales of our interests in four nonoperated fields in the
      North Sea and our nonoperating interest in a gas processing facility. In
      connection with these sales, we repaid a portion of the Tranche X loan balance
      using proceeds from the divestiture transactions and cash on hand, as summarized
      below. Mandatory prepayments were made in satisfaction of the prepayment
      requirement associated with asset disposals.





Amount
                of PrepaymentPeriod
            
            Assets
                Divested
            
            Mandatory
            
            Optional
            
            Total(Millions
                of dollars)September
            
            
            Nonoperated
                North Sea fields
            
            $
            504
            
            $
            96
            
            $
            600November
            
            
            Nonoperating
                interest in gas processing facility
            
            
            111
            
            
            39
            
            
            150$
            615
            
            $
            135
            
            $
            750





Guarantee
      and Collateral Provisions - The
      company’s obligations under the Credit Agreement are (a) unconditionally
      guaranteed, jointly and severally, by certain of the company’s domestic
      subsidiaries and (b) secured by a perfected first priority security interest,
      subject to existing liens and customary exceptions and to the rights of the
      company’s existing bondholders to be equally and ratably secured, in a
      substantial portion of the company’s tangible and intangible assets located in
      the United States (excluding assets relating to the company’s chemical
      business), and all of the capital stock of specified direct and indirect
      subsidiaries (limited, in the case of foreign subsidiaries, to 66% of the
      capital stock of the company’s first tier foreign subsidiaries). To the extent
      required under the terms of the company’s existing indentures, all obligations
      under previously unsecured bonds became equally and ratably secured with the
      company’s obligations under the Credit Agreement.





As
      discussed in Note 10 to the Condensed Consolidated Financial Statements included
      in Item 1, Part I to this Form 10-Q, in September 2005, we received consent
      from
      a majority of noteholders to amend the indenture governing certain of our
      registered notes. The supplemental indenture, which became effective as of
      September 21, 2005, provides for the release of the company's chemical business
      subsidiary, Tronox Worldwide LLC, as a guarantor of the notes upon an IPO by
      Tronox Worldwide LLC, or upon a spinoff or splitoff of Tronox Worldwide LLC,
      or
      its parent, Tronox Incorporated.





Debt
      Covenants ****** -
      The
      terms of the Credit Agreement provide for customary representations and
      warranties, affirmative and negative covenants, and events of default.
      Specifically, the Credit Agreement limits our ability to incur or secure other
      debt, make investments, sell assets, pay dividends and repurchase stock.
      Additionally, the company’s ability to make capital expenditures (including dry
      hole costs) is limited by the provisions of the Credit Agreement to $2.35
      billion in any given year. The company also is required to maintain compliance
      with the following financial covenants (in each case, as defined in the Credit
      Agreement):





·
            Consolidated
                Leverage Ratio of no more than 4:1 in 2005, 3.75:1 in 2006 and 3.50:1
                thereafter




·
            Consolidated
                Interest Coverage Ratio over a specified period of at least
                3:1




·
            Asset
                Coverage Ratio of more than 1.25:1 in 2005, 1.50:1 in 2006 and 1.75:1
                thereafter





For
      the
      third quarter of 2005, the company had a Consolidated Leverage Ratio of 1.7:1,
      a
      Consolidated Interest Coverage Ratio of approximately 11:1 and an Asset Coverage
      Ratio of 1.92:1, and was in compliance with its other debt covenants. Based
      on
      total debt outstanding as of September 30, 2005, the company’s EBITDAX, as
      defined in the Credit Agreement, would have to decline by over 40% from the
      level incurred over the most recent four quarters, before the Consolidated
      Leverage Ratio would increase above 4:1. While a significant decline in
      commodity prices will reduce the company’s EBITDAX, our hedging program provides
      sufficient certainty of earnings and cash flows to make it unlikely in the
      near
      term that EBITDAX could decline below levels necessary to maintain compliance
      with the leverage ratio covenant. Additionally, based on current estimates
      of
      the present value of future cash flows (supported by the company’s hedging
      program), together with expected near-term debt reduction plans, management
      expects to continue to meet the asset coverage requirements under the Credit
      Agreement. The company also expects to be in compliance with the annual
      limitation on dividend payments of $50 million, based on the current
      dividend level of $.20 per share annually.





-
          61
          -


***Credit
      Ratings*** - In
      rating the company’s debt, rating agencies consider our financial and operating
      risk profile by analyzing our debt levels, growth profile, cost structure,
      oil
      and gas reserve replacement ratios, capital expenditure requirements,
      contingencies, dividend policy and any other factors they deem relevant that
      could potentially impact our ability to service debt. In response to the
      company’s April 2005 announcement of our intention to commence the tender offer
      and increase leverage in the near term, our credit ratings were downgraded
      and
      are no longer investment grade. The following table provides a summary of our
      senior unsecured debt ratings by selected rating agencies as of March 31, 2005,
      and subsequent to the downgrades:


March
                31,
              2005
            
            September
                30, 2005Standard
                & Poor’s
            BBB-
            
            BB+Moody’s
                Investors Service
            Baa3
            
            Ba3





As
      a
      result of the downgrades, the company’s borrowing costs increased. Additionally,
      as discussed below, certain counterparties to our derivative instruments
      required us to post cash collateral. Further, we had an accounts receivable
      monetization program under which selected qualifying customer accounts
      receivable of the company’s chemical - pigment business were sold to a
      special-purpose entity (SPE), which in turn sold an undivided ownership interest
      in the receivables to a third-party multi-seller commercial paper conduit
      sponsored by an independent financial institution. The program provided for
      termination upon a ratings downgrade below specified levels. Under that
      provision, the program would effectively liquidate over time and the third-party
      multi-seller commercial paper conduit would be repaid with the collections
      on
      accounts receivable sold. The ratings downgrades in April 2005 triggered the
      program termination event. As opposed to liquidating the program over
      time in accordance with its terms, the company entered into an
      agreement to terminate the program by repurchasing the then outstanding
      balance of receivables sold of $165 million.  Repurchased accounts
      receivable have subsequently been collected by the company.





Certain
      of our counterparties require margin deposits if unrealized losses on derivative
      instruments exceed limits established with individual counterparty institutions.
      Consequently, the company may be required from time to time to post collateral
      in the form of cash or letters of credit. As a result of our credit rating
      being
      lowered in April 2005, we were required to post cash collateral with one of
      our
      counterparties. However, our collateral requirements to date have not been
      significant. Future collateral requirements will depend on changes in the fair
      value of outstanding derivatives and other factors.








**Cash
      Flows**





The
      following
      provides selected cash flow information for the nine-month periods ended
      September 30, 2005. Unless indicated otherwise, discussion of cash flows
      reflects the company’s continuing and discontinued operations. Cash flows
      associated with discontinued operations are related primarily to the company’s
      North Sea oil and gas business, divestiture of which is expected to be completed
      in November 2005.





Nine
                Months
                EndedSeptember
                30,(Millions
                of
                dollars)
            
            **2005**
            
            2004Net
                cash
                provided by operating activities
            
            **$**
            **2,501**
            
            $
            1,327Net
                cash used
                in investing activities
            
            
            **(802**
            **)**
            
            (816
            )Net
                cash used
                in financing activities
            
            
            **(1,116**
            **)**
            
            (526
            )





***Operating
      Activities*****-**The $1.2 billion increase in cash
      flows from operating activities during the first nine months of 2005 over 2004
      is primarily attributable to higher average realized oil and gas sales prices
      and higher sales volumes. On a barrel of oil equivalent basis, average daily
      oil
      and gas production in 2005 was 21% higher than in 2004 as a result of the
      Westport merger and the start of new production in China, as discussed above
      under *Results of Operations by Segment - Exploration and Production*.
      Average realized sales prices on a barrel of oil equivalent basis (including
      the
      effect of our hedging program) increased by 42%, from $29.16 in 2004 to $41.26
      in 2005. Additionally, 2005 cash flows from operating activities were favorably
      affected by $22 million lower expenditures for environmental remediation and
      an
      increase of $26 million in receipts of environmental cost reimbursements. These
      increases in operating cash flows were partially offset by higher cash outflows
      for costs and operating expenses, production taxes, general and administrative
      and interest expense. Upon completion of the divestiture of our North Sea oil
      and gas business, we expect that cash flows from operating activities will
      decline. As discussed below, we also expect cash requirements for capital
      expenditures to decline. Summarized information related to this business and
      its
      relative size to the company is provided under *Overview and Recent
      Developments*.





-
          62
          -


***Investing
      Activities*** -******Significant sources
      (uses) of cash associated with investing activities were as
      follows:





Nine
                Months
                EndedSeptember
                30,(Millions
                of
                dollars)
            
            **2005**
            
            2004Capital
                expenditures -Exploration and production (including dry hole costs)
            
            **$**
            **(1,346**
            **)**
            $
            (805
            )Chemical - Pigment
            
            
            **(47**
            **)**
            
            (56
            )Chemical - Other
            
            
            **(5**
            **)**
            
            (7
            )Corporate and other
            
            
            **(12**
            **)**
            
            (10
            )Total capital expenditures (including dry hole costs)
            
            
            **(1,410**
            **)**
            
            (878
            )Acquisitions,
                net of cash acquired
            
            
            -
            
            
            43Proceeds
                from
                sale of North Sea oil and gas assets
            
            
            **547**
            
            
            -Proceeds
                from
                dispositions of other assets
            
            
            **68**
            
            
            50Other
                investing activities
            
            
            **(7**
            **)**
            
            (31
            )Total
                net
                cash used in investing activities
            
            **$**
            **(802**
            **)**
            $
            (816
            )





Capital
      expenditures in 2005 increased primarily as a result of approximately $270
      million higher capital spending associated with Westport properties focused
      largely on exploitation and development activities in the Rockies, increased
      expenditures on the company's exploratory and developmental drilling in the
      Gulf
      of Mexico and exploratory drilling in Alaska and Brazil. Additionally, capital
      expenditures for the first nine months of 2005 and 2004 included expenditures
      of
      approximately $180 million and $90 million, respectively, associated with our
      North Sea oil and gas business. Upon completion of the possible divestitures
      discussed under *Overview
      and Recent Developments,* we
      expect capital requirements associated with our drilling program to decline.
      The
      extent of the decline will depend upon the composition of the properties
      divested.





Cash
      flows from investing activities for the nine months ended September 30, 2005
      included cash proceeds of $547 million from the sale of our interests in four
      nonoperated fields and related exploratory acreage and facilities in the North
      Sea. The divestiture of our North Sea oil and gas business is expected to be
      completed in November 2005 with the sale of stock of our wholly-owned
      subsidiary, Kerr-McGee (G.B.) Ltd., and other affiliated entities for cash
      consideration of approximately $3 billion. In addition, by the end of 2005,
      we
      expect to realize proceeds from the proposed initial public offering of Tronox,
      the sale of our nonoperating interest in the Javelina gas processing and
      fractionation facility and divestitures of selected oil and gas properties
      in
      the U.S. These transactions are expected to result in aggregate net cash
      proceeds of approximately $4.4 billion, which will be used for debt reduction
      and other corporate purposes. The timing and magnitude of cash flows associated
      with the divestitures will depend on the market conditions, the composition
      of
      assets divested and transaction terms.





Proceeds
      from dispositions of other assets for 2005 include $51 million received in
      connection with two exchange transactions. In the first quarter of 2005, we
      acquired a 37.5% interest in the Blind Faith discovery in the deepwater Gulf
      of
      Mexico from BP Exploration & Production in exchange for the company's
      interests in various proved oil and gas properties in the Arkoma basin of
      southeast Oklahoma. We received cash of $24 million in connection with this
      transaction. In the second quarter of 2005, we received cash of $27 million
      in
      connection with the exchange of the company's interests in certain U.S. onshore
      properties for overriding royalty interests in the Greater Natural Buttes area.
      The 2004 proceeds from dispositions of other assets include $39
      million realized upon the sale of Devon Energy Corporation common
      stock.





-
          63
          -


In
      June
      2004, we completed our merger with Westport, which was financed by issuing
      our
      common stock and assuming Westport’s debt obligations and, therefore, did not
      affect investing cash flows, except for Westport cash balances of $43 million
      acquired in the merger.





***Financing
      Activities*** - The following provides a summary of significant
      components of cash used in financing activities for the nine-month periods
      ended
      September 30, 2005 and 2004:





Nine
                Months EndedSeptember
                30,(Millions
                of dollars)
            
            **2005**
            
            2004Proceeds
                of borrowings, net of related transaction costs
            
            **$**
            **4,192**
            
            $
            900Cash
                received upon exercises of employee stock options
            
            
            **206**
            
            
            34Repurchases
                of common stock, including transaction costs
            
            
            **(4,225**
            **)**
            
            -Payment
                of dividends
            
            
            **(148**
            **)**
            
            (137
            )Repayment
                of debt
            
            
            **(998**
            **)**
            
            (1,278
            )Cash
                paid for modification of debt
            
            
            **(9**
            **)**
            
            -Settlement
                of Westport derivatives
            
            
            **(134**
            **)**
            
            (45
            )Total
                cash used in financing activities
            
            **$**
            **(1,116**
            **)**
            $
            (526
            )





In
      2005, we spent
      $4.2 billion to repurchase 49.8 million shares of the company’s common stock in
      connection with two share repurchase programs approved by the Board, as more
      fully discussed above under *Repurchases of Common Stock and Related
      Financing*. The repurchases were financed with the net proceeds of
      borrowings and cash on hand. No additional repurchases can be made under these
      programs. As discussed above, in September 2005, we completed the sale of
      certain oil and gas assets in the North Sea. In connection with the sale, we
      made prepayments of $600 million on the term loans, of which approximately
      $504
      million represented a payment in satisfaction of our mandatory prepayment
      requirement associated with asset sales and the remaining $96 million
      represented an optional prepayment. As discussed above, we expect to realize
      additional proceeds from planned divestitures by the end of 2005. Assuming
      the
      divestiture transactions are completed as expected, we plan to repay
      approximately $3.8 billion of debt in the fourth quarter of 2005 using a portion
      of the net proceeds from planned divestitures, including the separation of
      Tronox, and cash flow from operating activities. Pro forma for such repayment,
      scheduled maturities of our debt would be $307 million in 2006 and
      $150 million in 2007. Refer to *Pending Separation of Tronox* for
      discussion of borrowings expected to be incurred by Tronox concurrent with
      its
      initial public offering.





As
      discussed under
*Financial Condition and Liquidity - Repurchases of Common Stock and Related
      Financing - Guarantee and Collateral Provisions*, in September of 2005, we
      received noteholders’ consent to amend the indenture governing certain of our
      registered notes. In connection with this transaction, we paid $5 million to
      consenting noteholders for consent execution and $4 million in third-party
      consent solicitation costs. Assuming the initial public offering of Tronox
      is
      completed in the fourth quarter, we will pay an additional $13 million to the
      noteholders upon the release of Tronox Worldwide LLC as the guarantor of the
      notes, as provided by the amended terms of the indenture.





As
      a result of
      increased market price of our common stock in 2005, employee stock option
      exercises increased substantially compared to the prior year. Based on the
      price
      of our common stock at September 30, 2005, all exercisable options held by
      our
      employees and nonemployee directors were in-the-money as of that
      date.





While
      cash used to
      pay dividends during the first nine months of 2005 was higher than in 2004
      primarily due to 48.9 million shares issued in the Westport merger in June
      2004,
      we expect our cash requirements for future dividend payments to decline based
      on
      the lower number of shares outstanding following the tender offer completed
      in
      May 2005 and due to the reduction in the quarterly per-share dividend from
      $.45
      to $.05. Assuming the number of shares outstanding at September 30, 2005 remains
      unchanged (116 million shares) and based on our current dividend payment
      policy, we expect to pay approximately $6 million in dividends during the fourth
      quarter of 2005 and approximately $23 million in 2006.





-
          64
          -


In
      2005
      and 2004, we paid $134 million and $45 million, respectively, to settle certain
      derivative instruments assumed in the Westport merger in June 2004. These
      instruments extend through 2006 and had a net liability fair value at September
      30, 2005 of $136 million, including $6 million payable for September
      settlements. Future settlement values may be higher or lower than the estimated
      fair value of unsettled contracts at September 30, 2005 and will be determined
      based on reference commodity prices in effect in the period of
      settlement.








**Obligations
      and Commitments**





In
      the
      normal course of business, the company enters into purchase obligations,
      contracts, leases and borrowing arrangements. As part of our project-oriented
      exploration and production business, we routinely enter into contracts for
      certain aspects of a project, such as engineering, drilling and subsea work.
      These contracts are generally not unconditional obligations; thus, the company
      accrues for the value of work done
      at any point in time, a portion of which is billed to partners. In 2005, the
      company entered into additional drilling rig commitments to assure availability
      for executing our drilling program. The company’s commitments under these
      arrangements total $601 million, $52 million of which relates to rig utilization
      in 2005, $441 million in 2006-2007, $38 million in 2008-2009 and $70 million
      thereafter. A portion of expenditures under these commitments will be billed
      to
      other working interest partners once actual utilization is known. The company
      also has entered into additional international exploration licenses, which
      carry
      work commitments of approximately $31 million, and expects to incur
      $16 million of associated expenditures in 2005 and a total of $15 million
      in 2006 and 2007.





In
      May
      2005, we incurred additional borrowings under the Credit Agreement, which
      affected the total amount of outstanding debt and expected contractual
      maturities. Information on contractual maturities of our debt outstanding at
      September 30, 2005 is provided below in the *Interest
      Rate Risk* section of Item 3.





As
      discussed above under *Overview
      and Recent Developments* ,
      the
      company plans to separate its chemical business unit and divest of selected
      oil
      and gas properties. In April 2005, in connection with planned exit activities,
      the company initiated employee compensation programs designed to provide an
      incentive to certain employees to remain with the company over a stated period
      ranging from six to 18 months.  The total cost of the retention programs
      is
      expected to be $34 million, assuming all participating employees meet the
      service and other conditions (and before considering any awards that may be
      made
      in future periods upon successful disposition of certain assets, as discussed
      below). The cost associated with these programs is generally recognized as
      the
      related services are provided by the participating employees. Under the plan
      covering employees of the chemical business unit, awards totaling
      $2 million are payable upon the earlier of the disposition of the chemical
      business or the end of a one-year service period. Additional payments may be
      due
      to certain employees upon successful disposition of the chemical business or
      divestiture of certain oil and gas assets.








**New/Revised
      Accounting Standards**





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      No. 123 (revised 2004), “Share-Based Payment” (FAS No. 123R), which replaces FAS
      No. 123 and supersedes Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees.” FAS No. 123R requires all share-based payments
      to employees, including grants of employee stock options, to be recognized
      in
      the financial statements based on their fair values beginning with the first
      interim period after June 15, 2005, with early adoption encouraged. In April
      2005, the Securities SEC amended its rules to allow public companies more time
      to implement the standard. Following the SEC’s rule, the company intends to
      implement FAS No. 123R effective January 1, 2006. We plan to adopt the standard
      using the modified prospective method, as permitted by the standard. The
      modified prospective method requires that compensation expense be recorded
      for
      all unvested share-based compensation awards at the beginning of the first
      quarter of adoption. We expect that the adoption will not have a material effect
      on our financial condition and cash flows. The company is evaluating the effect
      of implementation on its results of operations.





-
          65
          -


In
      March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for
      Conditional Asset Retirement Obligations” (FIN No. 47), to clarify that an
      entity must recognize a liability for the fair value of a conditional asset
      retirement obligation when incurred, if the liability’s fair value can be
      reasonably estimated. Conditional asset retirement obligations under this
      pronouncement are legal obligations to perform asset retirement activities
      when
      the timing and/or method of settlement are conditional on a future event or
      may
      not be within the control of the entity. FIN No. 47 also provides additional
      guidance for evaluating whether sufficient information to reasonably estimate
      the fair value of an asset retirement obligation is available. FIN No. 47 is
      effective for the company as of December 31, 2005. We are evaluating the effect
      of implementation and at this time do not expect it to have a material effect
      on
      our financial statements.





In
      April 2005, the FASB issued a FASB Staff Position FAS 19-1, "Accounting for
      Suspended Well Costs" (FSP FAS 19-1) which amends FASB Statement No. 19,
      "Financial Accounting and Reporting by Oil and Gas Producing Companies." FSP
      FAS
      19-1 requires the continued capitalization of drilling costs if the well has
      found a sufficient quantity of reserves to justify its completion as a producing
      well and the
      enterprise is making sufficient progress assessing the reserves and the economic
      and operating viability of the project. The FSP provides a number of indicators
      that can assist an entity in evaluating whether sufficient progress is being
      made in assessing the reserves and economic viability of the project and
      includes new disclosure requirements with respect to capitalized exploratory
      drilling costs. The company adopted FSP FAS 19-1 effective July 1, 2005. The
      adoption had no effect on our financial statements. Disclosures required by
      the
      FSP were provided in the notes to the consolidated financial statements included
      in our latest annual report on Form 10-K.








**Item
                3.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk.**





The
      company is exposed to a variety of market risk, including credit risk, changes
      in oil and gas commodity prices, foreign currency exchange rates and interest
      rates. We address these risks through a controlled program of risk management
      that includes the use of insurance and derivative financial instruments. In
      addition to information included in this section, see Note 5 to the Condensed
      Consolidated Financial Statements included in Item 1, Part I of this Form 10-Q
      for discussion of the company’s derivatives and hedging activities.








**Commodity
      Price Risk**





The
      company is exposed to market risk fluctuations in crude oil and natural gas
      prices. To increase the predictability of its cash flows and support capital
      expenditure plans, the company periodically enters into financial derivative
      instruments that generally fix the commodity prices to be received for a portion
      of the company’s future oil and gas production. We expanded our hedging program
      in April 2005 and, as of September 30, 2005, had costless collars and
      fixed-priced swaps covering at least 75% of the company’s 2005 and 2006 expected
      eligible production (after the possible divestitures) and approximately 50%
      of
      its 2007 expected eligible production. Eligible production excludes oil
      production in China.





-
          66
          -


At
      September 30, 2005, the following commodity-related derivatives were outstanding
      related to (i) the company’s hedging program and (ii) Westport’s derivative
      positions in place at the merger date. Derivative instruments referenced to
      Brent oil prices are associated with forecasted oil production from our North
      Sea fields. The company’s obligations under these instruments will be assumed by
      the buyer of our North Sea oil and gas business at closing.




**October
                    - December 2005**
                
                **2006**
                
                **2007**Average
                  Contract
                    Price
                  ($/Barrel)
                
                Average
                    Daily Volume
                  (Barrels)
                
                Average
                  Contract
                    Price
                  ($/Barrel)
                
                Average
                    Daily Volume
                  (Barrels)
                
                Average
                  Contract
                    Price
                  ($/Barrel)
                
                Average
                    Daily Volume
                  (Barrels)**Crude
                    Oil (WTI) -****Hedge:**Fixed
                    price swaps
                
                $
                29.23
                
                
                3,000
                (a)
                
                -
                
                
                -
                
                
                -
                
                
                -$
                50.62
                
                
                18,500
                
                $
                53.14
                
                
                18,781
                
                $
                51.45
                
                
                27,250Costless
                    collars
                
                $
                28.50
                    - $31.89
                
                
                14,000
                (b)
                $
                27.00
                    - $30.58
                
                
                19,000
                (b)
                
                -
                
                
                -$
                42.40
                    - $57.75
                
                
                24,000
                
                $
                45.00
                    - $65.58
                
                
                18,288
                
                $
                45.00
                    - $61.43
                
                
                18,000**Nonhedge:**Three-way
                    collars(1)
                
                $
                25.00
                    - $28.23
                
                
                5,000
                (a)
                $
                25.00
                    - $28.65
                
                
                2,000
                (a)
                
                -
                
                
                -Three-way
                    average floor
                
                $
                20.93
                
                
                
                
                $
                20.8864,500
                
                
                
                
                
                58,069
                
                
                
                
                
                45,250**Crude
                    Oil (Brent) -****Hedge:**Fixed
                    price swaps
                
                $
                47.06
                
                
                28,500
                
                $
                53.05
                
                
                12,512
                
                $
                49.91
                
                
                12,750Costless
                    collars
                
                $
                40.02
                    - $54.98
                
                
                26,000
                
                $
                43.00
                    - $62.51
                
                
                30,512
                
                $
                43.00
                    - $60.11
                
                
                12,75054,500
                
                
                
                
                
                43,024
                
                
                
                
                
                25,500




(a)
            Acquired
                in the Westport merger.


(b)
            Placed
                by Kerr-McGee in connection with the Westport
                merger.





(1)
            These
                derivatives function similar to a costless collar, with the exception
                that
                if the WTI price falls below the three-way floor, the company loses
                price
                protection. For example, the company only has $4.07/barrel of price
                protection if the WTI price falls below $20.93/barrel in the case
                of its
                2005 crude oil three-way collars ($25.00 -
                $20.93).

















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          67
          -




**October
                  - December 2005**
              
              **2006**
              
              **2007**Average
                Contract
                  Price
                ($/MMBtu)
              
              Average
                  Daily Volume
                (MMBtu)
              
              Average
                Contract
                  Price
                ($/MMBtu)
              
              Average
                  Daily Volume
                (MMBtu)
              
              Average
                Contract
                  Price
                ($/MMBtu)
              
              Average
                  Daily Volume
                (MMBtu)**Natural
                  Gas (NYMEX) -****Hedge:**Fixed
                  price swaps
              
              $
              4.42
              
              
              55,000
              (a)
              
              -
              
              
              -
              
              
              -
              
              
              -$
              7.54
              
              
              293,261
              
              $
              7.53
              
              
              196,000
              
              $
              7.03
              
              
              265,000Costless
                  collars
              
              $
              5.00
                  - $6.25
              
              
              280,000
              (b)
              $
              4.75
                  - $ 5.50
              
              
              340,000
              (b)
              
              -
              
              
              -$
              6.58
                  - $9.32
              
              
              308,424
              
              $
              6.00
                  - $10.80
              
              
              197,000
              
              $
              6.00
                  - $9.03
              
              
              265,000**Nonhedge:**Costless
                  collars
              
              $
              4.09
                  - $5.57
              
              
              60,000
              (a)
              
              -
              
              
              -
              
              
              -
              
              
              -Three-way
                  collars (1)
              
              
              -
              
              
              -
              
              $
              4.00
                  - $6.00
              
              
              20,000
              (a)
              
              -
              
              
              -Three-way
                  average floor
              
              
              
              
              
              
              
              $
              3.04996,685
              
              
              
              
              
              753,000
              
              
              
              
              
              530,000**Basis
                  Swaps vs. NYMEX -****Hedge:**CIG
                  (2)
              
              $
              0.60
              
              
              48,587
              
              $
              0.42
              
              
              21,233
              
              $
              0.39
              
              
              20,000
              (5)NWPL
                  (3)
              
              $
              0.61
              
              
              55,951
              
              $
              0.35
              
              
              19,932
              
              $
              0.20
              
              
              15,000
              (6)HSC
                  (4)
              
              $
              0.13
              
              
              23,587
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Nonhedge:**CIG
              
              $
              0.73
              
              
              40,435
              
              
              -
              
              
              -
              
              
              -
              
              
              -NWPL
              
              $
              0.68
              
              
              2,527
              
              
              -
              
              
              -
              
              
              -
              
              
              -HSC
              
              $
              0.24
              
              
              23,370
              
              
              -
              
              
              -
              
              
              -
              
              
              -




(a)
            Acquired
                in the Westport merger.


(b)
            Placed
                by Kerr-McGee in connection with the Westport
                merger.





(1)
            These
                derivatives function similar to a costless collar, with the exception
                that
                if the NYMEX price falls below the three-way floor, the company loses
                price protection. For example, the company only has $.96/MMBtu of
                price
                protection if the NYMEX price falls below $3.04/MMBtu in the case
                of its
                2006 natural gas three-way collars ($4.00 -
                $3.04).


(2)
            Colorado
                Interstate Gas pipeline index.


(3)
            Northwest
                Pipeline Rocky Mountain index.


(4)
            Houston
                Ship Channel index.


(5)
            These
                basis swaps continue until June 30,
                2008.


(6)
            These
                basis swaps continue until December 31,
                2008.




The
      fair value of the company’s oil and gas commodity derivative instruments was
      determined based on prices actively quoted, generally NYMEX and Dated Brent
      prices. Realized and unrealized gains and losses arising from derivative
      instruments that have not been designated as hedges or that do not qualify
      for
      hedge accounting (“nonhedge derivatives”) are recognized in current earnings.
      Gains and losses on derivatives designated as cash flow hedges are deferred
      in
      accumulated other comprehensive income (loss) and reclassified into earnings
      when the hedged forecasted transactions affect earnings. Net after-tax losses
      on
      oil and gas derivatives in accumulated other comprehensive loss were $1.7
      billion at September 30, 2005, and related to a portion of the company’s
      expected production through 2007. During the next 12 months, the company expects
      to reclassify net after-tax losses of $1.1 billion from accumulated other
      comprehensive loss into earnings, assuming no further changes in the fair value
      of the related contracts. This excludes $171 million of net after-tax losses
      associated with derivatives of our North Sea oil and gas business, which will
      be
      recognized in income from discontinued operations, as a component of gain on
      sale, in connection with the expected completion of the divestiture transactions
      in November 2005.


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          68
          -


**Interest
      Rate Risk**





The
      company is exposed to changes in interest rates, primarily as a result of its
      debt obligations. The fair value of our fixed-rate debt is affected by changes
      in market interest rates. To manage this risk, historically, we entered into
      interest rate swap agreements to effectively change the interest paid on a
      portion of our fixed-rate debt to a variable rate. No significant changes in
      our
      interest rate swap positions have occurred since December 31, 2004. Our
      variable-rate debt exposes us to the risk of higher interest cost if market
      interest rates increase. Based on the current mix of variable- and fixed-rate
      debt and our debt repayment plans, we do not expect the impact of changes in
      interest rates to be material to our earnings or cash flows.





The
      table below presents principal amounts and related weighted-average interest
      rates by maturity date for the company’s long-term debt obligations outstanding
      at September 30, 2005. All borrowings are in U.S. dollars. As discussed above
      under *Financial
      Condition and Liquidity* in
      Item
      2, certain of the company’s variable-rate term loans are subject to mandatory
      prepayment provisions upon occurrence of specified events.




Years
                of Maturity
            
            
            
            
            
            FairThere-
            
            
            
            Value
                at(Millions
                of dollars)
            
            2005
            
            2006
            
            2007
            
            2008
            
            2009
            
            after
            
            Total(2)
            
            9/30/05Fixed-rate
                debt -Principal
                amount
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            2,225
            
            $
            2,225
            
            $
            2,386Weighted-averageinterest
                rate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            7.15
            %
            
            7.15
            %Variable-rate
                debt(1)-Principal
                amount
            
            $
            114
            
            $
            329
            
            $
            1,572
            
            $
            23
            
            $
            23
            
            $
            2,149
            
            $
            4,210
            
            $
            4,210Weighted-averageinterest
                rate
            
            
            9.40
            %
            
            6.77
            %
            
            6.10
            %
            
            6.31
            %
            
            6.31
            %
            
            6.31
            %
            
            6.35
            %





(1)
            Includes
                fixed-rate debt with interest rate swaps to variable
                rate.





(2)
            Principal
                amounts represent future payments and exclude the unamortized discount
                of
                $84 million and the net discount arising from fair value hedge adjustments
                of $6 million.








**Foreign
      Currency Exchange Rate Risk**





The
      U.S. dollar is the functional currency for the company’s international
      operations, except for its European chemical operations, for which the euro
      is
      the functional currency. The company’s risk exposure to changes in foreign
      currency exchange rates arises primarily from its European chemical operations
      and exploration and production operations in the North Sea. As discussed under *Overview
      and Recent Developments* , we
      expect to complete the divestiture of our North Sea operations in November
      2005 and are pursuing the separation of all of our chemical operations.
      The
      company does not believe that its current level of foreign currency risk
      exposure is material to its results of operations and cash flows and expects
      the
      existing exposure to be further reduced following the planned divestitures.
      Accordingly, the company does not maintain material foreign currency derivative
      positions.

















-
          69
          -


**Item
                4.**
            **Controls
                and Procedures**.





As
      of
      the end of the period covered by this report, an evaluation was carried out
      under the supervision and with the participation of the company's management,
      including its Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the company's disclosure controls and procedures pursuant
      to
      Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer
      and Chief Financial Officer concluded that the company's disclosure controls
      and
      procedures are effective in alerting them in a timely manner to material
      information relating to the company (including its consolidated subsidiaries)
      required to be included in the company's periodic SEC filings.





During
      the quarter ended September 30, 2005, the company migrated the accounting
      functions for oil and gas sales revenues, accounts receivable and certain land
      department activities associated with certain of its U.S. onshore oil and gas
      properties to its own systems and personnel. Previously, these functions were
      performed by a third-party service provider.





There
      were no other changes in the company's internal control over financial reporting
      that occurred during the third quarter of 2005 that have materially affected
      or
      are reasonably likely to materially affect the company’s internal control over
      financial reporting.








**Forward-Looking
      Information**





Statements
      in this quarterly report regarding the company's or management's intentions,
      beliefs or expectations, or that otherwise speak to future events, are
“forward-looking statements.” Forward-looking
      statements are not guarantees of performance. They involve risks, uncertainties
      and assumptions. Accordingly, future results and developments discussed in these statements
      may
      be affected by numerous factors and risks, such as the accuracy of the
      assumptions that underlie the statements, the timing, manner and success of
      the
      planned separation of Kerr-McGee’s chemical business and the divestiture of
      certain oil and gas properties, the success of the oil and gas exploration
      and
      production program, drilling risks, the market value of Kerr-McGee's products,
      uncertainties in interpreting engineering data, demand for consumer products
      for
      which Kerr-McGee's businesses supply raw materials, the financial resources
      of
      competitors, changes in laws and regulations, the ability to respond to
      challenges in international markets, including changes in currency exchange
      rates, political or economic conditions, trade and regulatory matters, general
      economic conditions, and other factors and risks identified in the Risk Factors
      section of the company's latest Annual Report on Form 10-K and other SEC
      filings. Actual results and developments may differ materially from those
      expressed in this quarterly report.








**PART
      II - OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings.**





A.
            On
                September8,
                2003, the Environmental Protection Division (EPD) of the Georgia
                Department of Natural Resources issued a unilateral Administrative
                Order
                to our subsidiary, Kerr-McGee Pigments (Savannah) Inc., claiming
                that
                the Savannah plant exceeded emission allowances provided for in the
                facility's Title V air permit. On September 19, 2005, the EPD rescinded
                the Administrative Order and filed a Withdrawal of Petition for Hearing
                on
                Civil Penalties. Accordingly, the proceeding on administrative penalties
                has been dismissed. However, the EPD’s most recent actions do not resolve
                the alleged violations, and representatives of the company, EPD and
                the
                U.S. Environmental Protection Agency are engaged in discussions to
                resolve
                the existing air permit disputes and potential civil penalties. The
                company believes that penalties, if any, related to this matter will
                not
                have a material adverse effect on the
                company.





B.
            For
                a discussion of other legal proceedings and contingencies, reference
                is
                made to Note 16 to the Condensed Consolidated Financial Statements
                included in Item 1, Part I of this quarterly report on Form 10-Q,
                which is
                incorporated herein by reference.








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          70
          -


**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds.**





Issuer
      Purchases Of Equity Securities





The
      following table summarizes the company’s repurchases of equity securities
      registered under Section 12 of the Securities Exchange Act of 1934 that occurred
      in the quarter ended September 30, 2005.


Period
            
            Total
                Number of Shares Purchased(a)
            
            Average
                Price Paid per Share(a)
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
            
            Maximum
                Approximate Dollar Value of Shares that May Yet Be Purchased Under
                the
                Plans or ProgramsJuly
                1-31, 2005
            
            
            13,606
            
            $
            71.27
            
            
            -
            
            $
            -August
                1-31, 2005
            
            
            6,145
            
            
            50.60
            
            
            -
            
            
            -September
                1-30, 2005
            
            
            15,935
            
            
            78.64
            
            
            -
            
            
            -Total
            
            
            35,686
            
            $
            71.00
            
            
            -
            
            $
            -





(a)
            Includes
                19,500 shares purchased in the open market for the matching contributions
                to Kerr-McGee Corporation Savings Investment Plan and 16,186 shares
                delivered to the company by the employees in satisfaction of withholding
                taxes and upon forfeiture of restricted
                shares.








**Item
      6.**  **Exhibits.**





Exhibit
                No.4.1
            Supplemental
                Indenture, dated September 21, 2005, amending the Indenture, dated
                as of
                August 1, 2001, between Kerr-McGee and Citibank, filed as Exhibit
                99.1 to
                the current report on Form 8-K dated September 27, 2005, and incorporated
                herein by reference.10.1
            Sale
                and Purchase Agreement between Kerr-McGee North Sea (U.K.) Limited
                (“KM
                North Sea”) and Centrica Resources Limited (“Centrica”), dated August 6,
                2005, pursuant to which KM North Sea agreed to sell its non-operating
                interest in the Skene field assets to Centrica.10.2
            Sale
                and Purchase Agreement between KM North Sea and Centrica, dated August
                6,
                2005, pursuant to which KM North Sea agreed to sell its non-operating
                interest in the Buckland field assets to Centrica.10.3
            Letter
                Agreement between KM North Sea and Centrica dated August 30, 2005,
                amending (i) the Sale and Purchase Agreement between KM North Sea
                and
                Centrica, dated August 6, 2005, pursuant to which KM North Sea agreed
                to
                sell its nonoperating interest in the Skene field assets to Centrica
                and
                (ii) the Sale and Purchase Agreement between KM North Sea and Centrica,
                dated August 6, 2005, pursuant to which KM North Sea agreed to sell
                its
                nonoperating interest in the Buckland field assets to
                Centrica.10.4
            Sale
                and Purchase Agreement between KM North Sea and Talisman North Sea
                Limited
                (“Talisman”), dated September 30, 2005, pursuant to which KM North Sea
                agreed to sell its nonoperating interest in the Andrew field assets
                to
                Talisman.10.5
            Sale
                and Purchase Agreement between Kerr-McGee Oil (U.K.) Limited (“KM Oil”)
                and Centrica, dated August 6, 2005, pursuant to which KM Oil agreed
                to
                sell its nonoperating interest in the Brae field assets to Centrica.





-
          71
          -





10.6
            Sale
                and Purchase Agreement between KM Denmark Overseas ApS (“KM Denmark”) and
                Centrica Canada Limited (“Centrica Canada”), dated August 6, 2005,
                pursuant to which KM Denmark agreed to sell 100% of the stock of
                Kerr-McGee Canada Limited (“KM Canada”) to Centrica
                Canada.10.7
            Sale
                and Purchase Agreement between KM Denmark, Alnery No. 2524 Limited
                (“Maersk”), the Company and A.P. Moller-Maersk A/S, dated August 7, 2005,
                pursuant to which KM Denmark agreed to sell all of the company’s remaining
                North Sea assets through the sale of 100% of the stock of Kerr-McGee
                (G.B.) Limited and Kerr-McGee Norway AS to Maersk.10.8
            Sale
                and Purchase Agreement between KM North Sea and Amerada Hess Limited
                (“Hess”), dated September 30, 2005, pursuant to which KM North Sea agreed
                to sell its nonoperating interest in the UKCS License 103 Area W
                to
                Hess.10.9
            Amendment
                No. 1 to the Kerr-McGee Corporation Supplemental Executive Retirement
                Plan
                Amended and Restated Effective as of February 26, 1999, dated October
                19,
                2005.





31.1
            Certification
                pursuant to Securities Exchange Act Rule 15d-14(a), as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            Certification
                pursuant to Securities Exchange Act Rule 15d-14(a), as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.32.2
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.











**SIGNATURE**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.





**KERR-McGEE
      CORPORATION**





Date:November
                9, 2005
            By:
            /s/
                John M. RauhJohn
                M. RauhVice
                President and Controllerand
                Chief Accounting Officer
















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        72
        -