Occidental Petroleum is the name of the company. ( OXY 0.23% ) Just completed the significant acquisition of CrownRock, a fellow oil company, for $12 billion. which will greatly improve Its location in the productive Permian Basin will also enhance its yearly free cash flow by approximately $1 billion through the acquisition. .
However, the oil stock The company accumulated a significant amount of debt to finalize the transaction (it raised $9.1 billion in new debt and also took over $1.2 billion of CrownRock’s current debt). As a result, the company’s immediate priority is to rapidly reduce its debt. It has recently made progress towards this objective by divesting a portion of its stake in. A type of investment structure known as a master limited partnership (MLP). Partnership of Midstream operations in the western region ( WES 0.03% ) That action must be made. should not be surprising This may not be the final occasion it utilizes this valuable source.
Slow advancement in its strategy
Within the first year of finalizing the CrownRock agreement, Occidental intends to use its higher cash reserves and income from selling assets to pay off a minimum of $4.5 billion in debt. The company’s goal is to generate between $4.5 billion and $6 billion through asset sales in the future to further reduce its debt.
The company has made some headway on that plan, as it has recently approved the sale of certain non-essential assets in the Delaware Basin. Permian Resources refers to the oil and gas reserves located in the Permian Basin region. The company generated $818 million from selling one set of assets, and an additional $152 million from selling other non-essential assets. In total, these sales will provide the company with $970 million to settle its debts.
Occidental was in the process of finalizing a bigger agreement. It had reached an agreement to sell 30% of its ownership in CrownRock to its business partner in the Permian region. Ecopetrol The agreement could have generated $3.6 billion, allowing it to reach the minimum target range much earlier than anticipated. Nonetheless, Ecopetrol chose not to participate in the deal.
While the sale did not go through as planned, Occidental has been successful in reducing its debt overall. Earlier this year, the company managed to pay off $400 million in debt. Additionally, it aims to make $1.9 billion in debt repayments by the end of this month, primarily using its surplus cash flow. The upcoming Permian Resources transaction will provide an additional $800 million to further reduce its debt, with the goal of completing this process by the end of the third quarter. This would bring its total debt reduction to $3.1 billion, leaving around $1.4 billion remaining. away away from its short-term goal.
Cutting a small amount from the top.
Following the collapse of the Ecopetrol agreement, Occidental Petroleum is changing course by divesting a portion of its ownership in Western Midstream. Occidental, as the primary shareholder of Western Midstream Partners, had previously held a 49.8% share in the MLP. Moreover, the company also had a 2% stake in Western Midstream Operating, which is responsible for the operational assets. Occidental’s involvement in Western Midstream began when it acquired Anadarko Petroleum in 2019, a move that led to the formation of the midstream enterprise to aid Anadarko’s activities.
The oil company has gained advantages from its partnership with Western Midstream. over the years The MLP has contributed to Occidental’s expansion by constructing more infrastructure to accommodate the increasing production levels of the company. Furthermore, the MLP has provided the oil company with a consistent supply. flow of money coming in Western Midstream has raised its basic distribution by 52% this year, consequently raising its current yield to approximately 9.5%. This increase in cash distributions has contributed to the company’s profitability.
Occidental is currently utilizing the MLP to generate extra funds. It has just initiated a secondary offering to trade 19 million units. This sale has resulted in more than $658 million in total earnings. This move will bring the company nearer to reaching its goal of reducing debt in the short term.
The company has the option to keep selling. down If Occidental needs more money to repay its debt, it may consider reducing its ownership in Western Midstream. Earlier this year, Occidental had explored selling its entire stake in the company. It is possible that Occidental could sell the rest of its shares to another midstream company or a private equity fund. Another option could be for Occidental to conduct more secondary offerings to raise funds to further reduce its debt.
Almost there
Occidental Petroleum took on significant debt to acquire CrownRock, a move that is worrisome due to the unpredictable nature of the oil industry, as seen in their past acquisition of Anadarko. To address this, the company intends to reduce a substantial portion of their debt by divesting assets. on its way Making strides towards reaching its objectives, the company has divested some non-essential assets as well as a stake in its MLP. This progress is helping to reduce a potential risk that could have negatively impacted its stock value in case of a sudden drop in oil prices.
