Occidental Petroleum Wants to Make Sure It Doesn't Repeat Its Past Mistakes

Occidental Petroleum (OXY 0.88%) is reportedly exploring the sale of a portion of its Permian Basin assets. The deal could fetch over $1 billion for the oil company. It's part of the company's plans to maintain a strong financial position following its pending acquisition of CrownRock.

The proposed sale would enable Occidental Petroleum to jump-start its asset sale program. It plans to sell up to $6 billion of assets to help pay off some of the debt it will take on to acquire CrownRock. Starting early could help the company avoid repeating the situation it found itself in after acquiring Anadarko Petroleum. It nearly drowned in the debt it incurred to buy Anadarko because oil prices crashed right after it closed that massive deal.

Starting the sales process

Reuters recently reported that Occidental Petroleum is working with a financial advisor to seek buyers for its assets in the Barilla Draw region of Texas. The position is part of the prolific Permian Basin. The assets cover 27,500 net acres and produce 24,400 barrels of oil equivalent per day (BOE/d).

Occidental is hoping to tap into strong buyer interest for assets in the region. A sale could fetch more than $1 billion.

This potential sale would probably be the first of many for the oil company. It announced last year that it intends to sell $4.5 billion-$6 billion in assets to help repay debt following its acquisition of CrownRock. It aims to reduce its debt principle by at least $4.5 billion within 12 months of closing that deal through asset sales and free cash flow to maintain its investment-grade credit rating.

In addition to its assets in Barilla Draw, Occidental Petroleum could sell down its stake in master limited partnership Western Midstream Partners (WES 1.44%). The company owns nearly half of the midstream company's outstanding units, putting their value at over $6 billion. It initially acquired that stake when it bought Anadarko. That MLP has caught the attention of billionaire Bill Gross, who thinks it's an attractive investment opportunity.

A plan to get ahead of the situation

Occidental Petroleum had $18.5 billion of debt on its balance sheet at the end of last year, along with $1.4 billion in cash. The company's debt balance will balloon once it closes its $12 billion deal for CrownRock. It plans to issue $9.1 billion of new debt and assume CrownRock's $1.2 billion of existing debt. That would push the oil company's debt to nearly $29 billion. That's almost double its long-term target of less than $15 billion.

The company's decision to use debt to fund this deal is eerily similar to the financing plan for its 2019 acquisition of Anadarko Petroleum. It paid $57 billion for its rival, including $38 billion of equity. In addition to assuming Anadarko's debt, Occidental paid $59 per share in cash (more than 75% of the $76 per share deal value). The company tapped Warren Buffett's Berkshire Hathaway for a $10 billion preferred stock investment to help fund some of the deal's cash component. It also planned to sell $10 billion-$15 billion in assets within two years of closing the deal, $8.8 billion of which it had secured through an agreement with TotalEnergies for Anadarko's assets in Africa.

Unfortunately, that strategy didn't work as well as planned. Occidental wasn't able to close all its planned asset sales with TotalEnergies because of regulatory issues. Meanwhile, oil prices collapsed in early 2020, affecting its ability to sell other assets. These issues nearly pushed Occidental to the brink of bankruptcy.

Given its past missteps, it's good to see the company getting an early start on its asset sale plan. Ideally, it will capitalize on the currently strong market environment to sell assets so that it doesn't run the risk of being a forced seller if there's another unexpected downturn.

A wise move

Occidental Petroleum appears to be close to selling some of its non-core assets in the Permian Basin for over $1 billion. That would enable the oil company to get a head start on its plan to sell assets to quickly pay down the debt it will take on to acquire CrownRock. Given the company's history, investors should keep a close eye on its progress in selling assets. If deals start falling through, its stock might take a big hit.