Occidental Petroleum's (OXY 0.00%) ambitious plan to pay off the debt it took on to acquire Anadarko Petroleum has encountered many obstacles. Not only has it been unable to close some asset sales, but plummeting crude oil prices took asset values with them, which will make it impossible to achieve the company's target. Because of that, the oil company has had to shift gears as it works to address its massive debt load.
The company's management team discussed its options on its first-quarter conference call. Here's a look at what it might do to stay afloat during these very challenging times.
The best-laid plans often go awry
Occidental Petroleum initially anticipated that it could net $15 billion from selling assets following the acquisition of Anadarko Petroleum. It signed deals to sell $10.2 billion of assets by the end of last year, including Anadarko's African assets, which it planned to flip to French oil giant Total for $8.8 billion. It closed several of those transactions last year, -- including the sale of Anadarko's Mozambique business to Total for $3.9 billion -- which, when combined with its free cash flow, enabled Occidental to pay off $7 billion of debt by the end of the year.
Unfortunately, the company hasn't been as successful this year. CEO Vicki Hollub provided an update on its progress during the first-quarter call. She stated that:
Turning to divestitures, we did not disclose any additional material transactions in the first quarter as travel restrictions and the fall in commodity prices have severely disrupted the market for asset sales. While we remain committed to closing divestitures over time, we will not sacrifice value to close transactions quickly. Given the market condition, we are no longer confident in raising sufficient funds from just divestitures to address all of our near-term debt maturities but have numerous options available.
Its asset sales plan hit a major snag during the quarter. Not only did prices collapse, taking asset values with them, but the company has run into issues closing its remaining African assets. Because of that, it abandoned its plan to sell its assets in Algeria and might not be able to sell its business in Ghana.
As a result, Occidental has a looming problem in the form of a significant amount of debt coming due over the next couple of years. On a positive note, it doesn't technically have any debt maturing this year, though holders of its 2036 zero-coupon notes could force the company to redeem them in October, which could cost as much as $992 million. Things get worse next year as it has $6.4 billion of notes maturing. It also has $4.7 billion of debt coming due in 2022. With only $1 billion of cash on its balance sheet, Occidental needs to work fast to address those upcoming debt maturities.
Laying out a potential plan B
Occidental Petroleum's new CFO Rob Peterson discussed the options at its disposal for addressing this debt on the call. He stated that:
Looking toward our 2021 and 2022 debt maturities, we are taking significant steps to preserve liquidity, including the board's announced intent to reduce our common stock dividend and the payment of the deferred dividend in common shares and a little cash in the second quarter. We are intent on raising as much cash as possible from divestitures and expect to raise over $2 billion in the near-term. It may take us longer to close divestitures in excess of this near-term estimate as we are not prepared to sacrifice in today's challenging environmental conditions.
By paying the dividend on the preferred shares owned by Warren Buffett's Berkshire Hathaway in stock instead of cash, Occidental will save about $200 million per quarter. Add that to the potential of raising $2 billion from asset sales, and Occidental is still well short of what it needs to retire next year's debt maturities.
The company aims to bridge that gap by "actively reviewing and evaluating our capital structure and options available to match our near-term debt maturities," according to Peterson. Among the options it's reviewing are "debt exchanges and extension maturities, the refinancing of debt and accessing capital markets."
Despite its junk credit rating, Peterson said that the debt markets are "absolutely" open to Occidental to refinance its upcoming maturities. However, that window to refinance could close at any moment, especially if market conditions deteriorate. Meanwhile, the cost will likely be quite high.
Companies in troubled industries like auto manufacturing, cinema, and cruise lines, for example, have been able to tap into the capital markets in recent weeks to raise cash but paid an exorbitant price for that funding. Given Occidental's situation, it likely would also pay a high price to refinance its debt.
The weight isn't dropping fast enough
Occidental's brash move to acquire Anadarko saddled it with an enormous pile of debt. While the company thought it could quickly sell assets to bolster its balance sheet, cratering crude prices upended that plan.
Because of that, it's quickly pivoting to "plan B" to stay afloat while it waits for oil prices and asset values to recover. It must rapidly execute this strategy since it doesn't have much time before it hits a maturity wall. Any further delays or market deterioration and Occidental might find itself with bankruptcy as its only remaining option.