Occidental’s CEO Is Rolling the Dice With CrownRock Deal

Occidental already has the most leveraged balance sheet among its peers, a legacy of its $55 billion purchase of Anadarko Petroleum in 2019. Its debt will initially rise to about $28 billion after the deal is due to close in early 2024. This could make the company vulnerable to a sharp drop in oil prices, but means shareholders stand to gain significantly if prices rise.

Occidental’s largely debt-financed deal for Anadarko deal almost sunk the company, whose stock fell to about $10 in 2020 from $60 in the spring of 2019 as oil prices plunged during the pandemic. Occidental has spent much of the past three years cutting its debt, but now its leverage is set to rise again. 

“This shows the optimism that Vicki and the folks at Occidental exude right now about the future of the oil and gas business,” said Cole Smead, co-manager of the Smead Value fund, which holds the stock.

Occidental had no immediate comment.

“The deal is effectively an expensive high-grading move financed with 90/10 debt/equity,” wrote TD Cowen analyst David Deckelbaum, in a client note. High-grading refers to an improvement in the quality of Occidental’s asset base. The deal, he noted, would add $1 billion of annual free cash flow. 

Oil prices have come under pressure in recent months with West Texas Intermediate crude down to about $70 a barrel from more than $90 in September. Natural-gas prices are down more than 50% this year and now trade at around $2.30 per million British thermal units due to increased supply and warm December weather in much of the country.

Wall Street hasn’t been thrilled with the prospect for the Occidental transaction. Since rumors recently surfaced about the deal, Occidental stock has fallen about 5% and trades near a 52-week low. 

The shares were up 1.1% to $57.08 in early trading on Monday. The stock, down about 10% this year, has trailed behind the Energy Select Sector SPDR exchange-traded fund, which is off about 3.5%.

Occidental said Monday in conjunction with the deal that it will boost its quarterly dividend to 22 cents from four cents, which will result in a yield of about 1.5%. The company had one of the lower dividends among its peers.

Occidental ended the third quarter with about $20 billion of debt, equal to that of Chevron, which is about five times larger by market value. Both Exxon and Chevron have less net debt than Occidental. 

Now Occidental will issue $9.1 billion of debt, assume $1.2 billion of the privately held Crownrock’s debt, and issue $1.7 billion of equity in the deal. 

By contrast, Exxon’s proposed deal for
Pioneer Natural Resources
and Chevron’s planned deal for Hess are all-stock transactions. Exxon and Chevron could have easily financed those deals, worth $50 billion to $60 billion each, with debt.

Occidental said in a news release Monday that it plans to shed $4.5 billion to $6 billion in assets in a divestiture program within 12 months and reduce debt by at least $4.5 billion. It expects to maintain its investment-grade credit ratings.

Occidental said the deal will strengthen its position in the Permian basin where it already is a leading energy producer and deliver $1 billion of free cash flow in the first year, assuming WTI oil prices at $70 a barrel.

In a presentation, Occidental said its debt will initially rise to $28 billion—with the deal set to close in the first quarter of 2024—and then decline due to asset sales and the use of free cash flow to repay borrowings. 

Occidental’s stock buybacks will be on hold until the company’s debt falls below $15 billion, which could take two years based on the company’s financial projections. The company is assuming it will pay 6.4% for the new debt. 

One issue is whether
Berkshire Hathaway
will resume its purchases of Occidental stock now that the deal has been announced. Berkshire’s last purchase occurred in late October at a price of around $63 a share. Buffett has liked to add to Occidental at a price under $60 a share.

Buffett may have felt that he couldn’t buy any Berkshire stock while the negotiations were ongoing. Berkshire had no immediate comment.

Berkshire Hathaway helped Occidental finance the Anadarko deal with $10 billion of 8% preferred stock. 

But Berkshire, which now is Occidental’s largest holder with a roughly 25% stake, isn’t providing financing for the Crownrock deal. Occidental didn’t need any help from Berkshire, and Hollub may recall that she was criticized by Carl Icahn and others in 2019 for giving sweet terms to Berkshire.

“We found CrownRock to be a strategic fit, giving us the opportunity to build scale in the Midland Basin and positioning us to drive value creation for our shareholders with immediate free cash flow accretion,” Hollub said in a press release.

It all amounts to a financial bet on strength in energy markets. Investors will have to hope this deal works out better than the Anadarko transaction.

Write to Andrew Bary at andrew.bary@barrons.com