Occidental Petroleum Corp. got closer this week to completing its multibillion-dollar divestiture goal, but some analysts are saying it’s not enough.
According to filings with the U.S. Securities and Exchange Commission (SEC) on Sept. 18, Occidental sold its remaining stake in Plains All American Pipeline LP for expected sale proceeds of roughly $650 million. The sale consisted of about 15 million shares of Plains and another 15 million shares of Plains’ general partner.
Occidental set a divestiture target of between $10 billion and $15 billion to help with the debt the company took on from its takeover of rival independent Anadarko Petroleum earlier this year. Moody’s Investors Service estimated that the assumption of Anadarko’s debt and additional borrowings to cover the offer would add almost $40 billion in debt to Occidental, according to a Reuters report in May.
Though, before even officially entering its merger agreement, Occidental had already secured an $8.8 billion sale of Anadarko’s African assets to French major Total SA as well as a $10 billion financing deal with Warren Buffett's Berkshire Hathaway Inc. The latter much to the chagrin of famed activist investor Carl Icahn, who owned a $1.6 billion stake in Occidental as of May 30.
The Plains stake sale, coupled with the pending sale of assets in Algeria, Ghana and Mozambique, brings Occidental’s total in-progress or completed divestitures since the Anadarko acquisition announcement to about $9.5 billion, according to a research note by Capital One Securities Inc. on Sept. 19.
“Add in the recently announced Midland JV that includes $750 million cash payment, and the total surpasses the low end of [Occidental’s] $10 billion to $15 billion divestiture goal,” wrote Capital One analysts.
The expected proceeds from the Plains stake sale are below the $800 million estimate made by analysts with Capital One. Although, the analysts also noted that the shortfall had no impact on the firm’s $55 target price for Occidental as the transaction represented less than 1% of the company’s enterprise value.
In another research note, analysts with Tudor, Pickering, Holt & Co. (TPH) noted that the Plains stake sale was a step in the right direction, but doesn’t move the needle on leverage for Occidental.
“The small scale of the sale compared a combined net debt plus preferred equity balance approaching about $50 billion doesn’t do much to move the needle, only lowering TPH estimated 2020 leverage from 3.5-times to 3.4-times including preferred equity,” the firm’s analysts wrote.
Going forward, TPH analysts said they’re looking for an exit from Western Gas Midstream Partners LP, which Occidental has reportedly been exploring. Not until then, do the analysts see Occidental making “real progress” toward improving the balance sheet via both cash proceeds and deconsolidation.
“Until the leverage overhang is addressed, we see no reason to step off the sidelines, despite an attractive 7.1% dividend yield, given our negative macro views on oil heading into 2020,” TPH analysts concluded.
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