Occidental Petroleum (OXY +1.16%) made a big splash last year, agreeing to buy CrownRock for $12 billion. It's primarily paying cash for the oil and gas producer, which is a concern. The oil company nearly went under in 2020 after buying Anadarko Petroleum in a cash-heavy deal the prior year.
The oil company is taking steps to ensure it doesn't repeat its past mistakes by selling assets before closing its CrownRock transaction. That should take some of the pressure off its balance sheet and reduce the risk of running into financial trouble again should oil prices unexpectedly slump.
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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 Basin-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 path it took to fund its 2019 Anadarko deal, which nearly caused the company to go bankrupt when crude oil prices crashed in 2020.
The oil company's acquisition funding strategy differs materially from its rivals' approach in the current consolidation wave washing over the oil patch. ExxonMobil, Chevron, and ConocoPhillips have all agreed to acquire smaller competitors over the past year. However, each one is making an all-stock deal, which preserves their balance sheet strength.
Occidental is taking a different approach. It plans to fund part of its deal through capital recycling by selling non-core assets to repay a portion of the debt it will incur to acquire CrownRock. The oil company plans to repay 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 asset sale proceeds. Occidental has targeted to sell $4.5 billion to $6 billion of assets within 18 months of closing the deal to repay debt.
Getting out ahead of the situation
Given what happened last time, Occidental Petroleum has already started working on selling assets to achieve its debt reduction plan. It recently agreed to sell 27,500 acres in the Barilla Draw Field in the Texas Delaware Basin to Permian Resources for $818 million. In addition, it separately sold 2,000 net acres in the New Mexico Delaware Basin to undisclosed buyers for $152 million. Those assets produce about 15,000 barrels of oil equivalent per day. The combined sales total of $970 million is a little more than 20% of the low end of its asset sales target.
Occidental is working on additional transactions to accelerate its ability to reach its debt reduction target. For example, it's in talks to sell a stake in CrownRock to Ecopetrol, the largest oil company in Colombia. According to a report by Reuters, Ecopetrol could buy up to a 30% interest in CrownRock for as much as $3.6 billion. A deal with Ecopetrol at that valuation would enable Occidental to quickly achieve the low end of its asset sales target.
The company has other non-core assets it could sell. For example, Reuters reported earlier this year that Occidental was exploring selling its interest in MLP Western Midstream Partners. It owns a 50% interest in the pipeline operator, which has a current market value of over $15 billion. Occidental could sell its entire stake to another midstream 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
Occidental has taken a more aggressive approach than its peers in financing acquisitions by using more cash than stock. While that strategy backfired in the past, Occidental is looking to get ahead of any potential trouble this time by working to sell assets to repay debt as quickly as possible. It has already made some progress and has more options underway. Its quick work reducing debt following the deal will help ensure it doesn't run into financial troubles down the road.
