With CrownRock Deal, Occidental Wades Back into Deeper Debt

Occidental Petroleum’s $12 billion acquisition of CrownRock LP pours a lot of red into the company’s ledger, although analysts expressed confidence that Occidental, with a long track record of dealmaking and disposing of large debts, was on solid footing.

Occidental’s deal will see it take out $9.1 billion in new debt and assume CrownRock’s $1.2 billion in debt. The company plans to divest between $4.5 billion and $6 billion of assets that do not fit the company’s development plans to help pay the tab.

“It’s a considerable amount of debt they’re taking on,” said Mike Bock, founder and managing director of Petrie Partners. “Oxy has a reputation for these bold moves and some people are skeptical of their ability to perform, but they’ve always performed in the end.”

Bock pointed to Occidental’s 1998 purchase of a large stake in Elk Hills in California for what was then considered a sizable and risky amount of $3.65 billion. It turned out to be another step in Occidental’s ascendancy to greater size and scale.

Fitch Ratings said that, cumulatively, since the close of the Anadarko acquisition, Occidental has retired more than $26 billion in debt. In a Dec. 12 commentary, Fitch also noted Occidental’s debt and interest expense are higher than peers given the impact of the preferred stock owned by Berkshire Hathaway.

A Dec. 11 report by UBS Securities noted a more recent Occidental success: paying off a massive chunk of debt from its acquisition of Anadarko Petroleum. “Oxy did have an active divestiture program after the 2019 Anadarko transaction, but was able to limit the sales due to improving crude oil prices,” UBS said.

UBS expects some of the assets Occidental temporarily put up for sale in 2019 to be among those Occidental will look to sell to pay off the new CrownRock debt.

In its commentary, Fitch placed CrownRock on Rating Watch Positive and noted that Occidental’s Dec. 11 purchase of the Midland Basin E&P is “relatively expensive for Oxy.” The rating action commentary also stated that “Fitch believes the repayment plan has some execution risk, but is credible with reasonable line of sight for accelerated debt repayment over the next several quarters.”

“Fitch views the proposed acquisition positively for CrownRock, as the company will benefit from Oxy’s support as an investment-grade issuer through strong strategic and operational ties,” the credit ratings agency said.

Fitch’s rating action commentary stated that risk lies in the possibility of a significant drop in oil prices because Occidental does not hedge. Kevin MacCurdy, a director at Pickering Energy Partners, noted that divesting assets to pay off debt increases exposure to commodity prices.

Occidental CFO Sunil Mathew said in a Dec. 11 call with analysts that Occidental’s hedging is in the diversity of its portfolio, including its chemicals business, and its ability to efficiently ramp production up or down. He noted that gas prices in Occidental’s Middle East assets are specified by contract.

“We believe our diverse portfolio actually helps in mitigating some of the commodity price risk, so that’s the reason we don’t look at hedging,” Mathew said on the call. He and other company leaders on the call noted CrownRock’s free cash flow will significantly assist in paying off debt.

MacCurdy said Occidental has strong fundamentals to make the deal’s financing work, but commodity prices will weigh heavily in the plan paying off.

“It will be the stock to own if you’re bullish on oil prices,” he said.

Bock noted that the deal ratchets up Occidental’s leverage. Jefferies analysts said Occidental’s leverage is expected to rise to 1.7x EBITDA from 1.3x. Fitch reported Occidental’s leverage at 1.5x.

Pickering’s estimate was higher.

“They’re more leveraged than many of their peers, and this will add to that,” he said. “They’re just under two times net debt to EBITDA, pre the acquisition, and proforma the acquisition, they’ll be 2.2 times roughly … That’s more leverage than most.”

It’s significant, but Bock ticked off three strengths for Occidental: free cash flow from company assets; success with previous divestitures; and backing from “the best equity sponsor on the planet,” Warren Buffett.