The oil company is making rapid progress on its debt reduction plan.
Western Oil (OXY -0.59%) Last year, the US oil major made a big splash by agreeing to buy CrownRock for $12 billion. The company is paying mostly cash for the oil and gas producer, which is worrying. The oil major nearly went under in 2020 after buying Anadarko Petroleum in a cash-heavy deal the year before.
The oil company is taking steps to ensure It won’t repeat its past mistakes by selling assets before closing its transaction with CrownRock, which should relieve some of the pressure on its balance sheet and reduce the risk of running into financial trouble again if oil prices unexpectedly fall.
A higher-risk acquisition financing strategy
Occidental Petroleum sealed a deal to buy CrownRock last December, agreeing to pay $12 billion in cash and stock for the Permian-focused producer. The company initially planned to issue $9.1 billion of new debt to fund the deal and assume $1.2 billion of CrownRock’s debt. That debt-heavy financing strategy echoed the company’s previous plans. The path he took to fund its 2019 deal with Anadarko, which nearly bankrupted the company when crude oil prices plummeted in 2020.
He oil company The acquisition financing strategy differs materially from its rivals’ approach in the current wave of consolidation sweeping the oil sector. ExxonMobil, Chevronand ConocoPhillips to have everything Last year, they agreed to acquire smaller competitors, but each is doing a stock-only deal, preserving the strength of their balance sheets.
Occidental is taking a different approach. It plans to finance part of its deal through capital recycling Occidental has decided to sell non-core assets to pay down a portion of the debt it will incur to acquire CrownRock. The oil company plans to pay down at least $4.5 billion in debt within 12 months of closing the CrownRock deal. It expects to achieve that goal with free cash flow and proceeds from asset sales. Occidental has targeted selling between $4.5 billion and $6 billion in assets within 18 months of closing the deal to pay down the debt.
Get ahead of the situation
In light of what happened last time, Occidental Petroleum has already begun working on asset sales to achieve its debt reduction plan. It recently agreed to sell 27,500 acres in the Barilla Draw field in the Delaware Basin of Texas to Permian Resources for $818 million. It also separately sold 2,000 net acres in New Mexico’s Delaware Basin to undisclosed buyers for $152 million. Those assets produce about 15,000 barrels of oil equivalent per day. Total combined sales of $970 million is a bit more than 20% of the lower limit of its asset sales target.
Occidental is working on additional transactions to accelerate its ability to achieve its debt reduction goal. For example, it is in talks to sell a stake in CrownRock to EcopetrolColombia’s largest oil company. According to a Reuters report, Ecopetrol could buy up to a 30% stake in CrownRock for up to $3.6 billion. A deal with Ecopetrol at that valuation would allow Occidental to To quickly reach the lower limit of your asset sales target..
The company has other non-core assets it could sell. For example, Reuters reported earlier this year that Occidental was exploring the possibility of selling its stake in MLP Western intermediate partnersIt owns a 50% stake in the pipeline operator, what’s wrong with it a current market value of more than $15 billion. Occidental could sell its entire stake to another intermediate operator or private equity fund. It could also monetize a portion by selling units of the MLP on the open market.
Making sure the past doesn’t repeat itself
Occidental has taken a more aggressive approach than its peers in financing acquisitions using more cash than stock. While that strategy has failed in the past, Occidental is looking to get ahead of any potential problems this time around by working to sell assets and pay down debt as quickly as possible. It has already made some progress and has more options in the works. Its quick work to reduce debt after the deal will help ensure it doesn’t face financial trouble. by the way.
Matt DiLallo has positions in Chevron and ConocoPhillips. The Motley Fool has positions in Chevron and recommends it. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
