Occidental is the ninth-largest energy company in the US, with a market capitalisation of $49.7 billion.
Occidental Petroleum, a US-based hydrocarbon explorer and petrochemical manufacturer, has announced that it would purchase the closely-held shale oil producer CrownRock LP for $12 billion in a cash-and-stock deal.
This deal would expand Occidental’s foothold in the largest US shale oilfield. The acquisition of the Midland energy producer will also include taking over the outstanding debts as well.
The deal is happening at a time when large corporations are acquiring smaller ones to consolidate production capacity. Recently, Exxon Mobil proposed a deal to buy Pioneer Natural Resources for $60 billion and Chevron’s agreement for the acquisition of Hess for $53 billion.
The CrownRock takeover by Occidental will make it a bigger corporation than the Chevron and Hess deal. This deal is expected to possibly close by the end of June 2024. It will enhance Occidental’s Permian basin production capacity of oil and gas by 170,000 barrels per day to 750,000 bpd.
Vicki Hollub, Chief Executive Officer and President of Occidental, said that they believe that buying CrownRock’s assets will be the kind of strengthened diversification of assets that Occidental has ever witnessed. CrownRock was a strategically sound opportunity for them to consolidate production capacity in the Midland basin and reap benefits for their shareholders with improved cash flow, also resulting in increased dividend payouts.
CrownRock is a private producer in the Permian basin besides Endeavor Resources. It is headed by Texas billionaire Timothy Dunn and backed by the Houston-based private equity firm Lime Rock Partners.
Occidental is the ninth-largest energy company in the US, with a market capitalisation of $49.7 billion. Warren Buffet’s Berkshire Hathaway has a 26% stake in the company. The stock was running at a 10% loss YTD but was up 1% after the acquisition news broke out.
Berkshire was not involved in the deal-making process, but Occidental did consult Buffet about how the company aligns with their corporate vision.
Occidental’s last major acquisition of Anadarko Petroleum for $55 billion back in 2019 had already loaded the company with debt up to the neck. As of 30th September, Occidental has long-term debts worth $18.6 billion.
Occidental plans to reduce its debt by $15 billion and an additional $4.5 billion in the next 12 months from future cash flow, as well as divest some of its domestic assets that are not of much significant value to the company.
They will finance the deal with a new debt of $9.1 billion for acquiring CrownRock’s $1.2 billion current obligations and issuing $1.7 billion in common stock.
Peter McNally, energy analyst at Third Bride, said that CrownRock’s assets are of a higher grade, but investors are unhappy with the acquiring process, which involves loading up more debt onto Occidental’s balance sheet at a time when it is looking at reduction.
CEO Hollub said that the debt scenario in the next two to three years is based upon what it would have been without this acquisition, as their accounting procedure uses a mix of cash flow and divestitures to analyse. He added that the company would increase the quarterly dividend by 4 cents up to 22 cents a share and maintain a healthy investment-grade credit rating.
CrownRock’s acquisition is the third major deal in the global energy industry in the past two months. The CEO mentioned that Exxon’s purchase of Pioneer did not influence their acquisition of CrownRock. The acquisition is aimed at boosting Occidental’s balance sheets by providing it with future increased cash flow on a diluted share basis. Occidental factors in that it would generate upwards of a billion in the first year after the acquisition, based on the set price of WTI crude oil at $70 per barrel.