Occidental stock up on news of $12bn CrownRock acquisition

Occidental Petroleum stock rises on news of $12 billion Permian Basin energy producer CrownRock

On Monday, Occidental Petroleum announced its intent to acquire privately held CrownRock, a Permian basin-focused energy producer, in a cash-and-stock deal valued at $12 billion, which would expand its footprint in the largest U.S. oilfield.

Energy acquisitions have been hot this year, with large oil producers looking to expand their assets. Exxon Mobil announced in October that it would be acquiring Pioneer Natural Resources for a whopping $64.5 billion, while another industry giant, Chevron, said in October that it agreed to buy Hess Corp. for $53 billion in the second oil megadeal of the year.

Occidental CEO Vicki Hollub commented on the deal:

“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.”

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Shale oil: CrownRock deal puts Occidental ahead of Chevron and Hess combined in U.S. shale

Subject to approval, the acquisition of CrownRock would position Occidental as a bigger player in U.S. shale than Chevron and Hess combined. The deal is expected to close in Q1 2024 and is projected to amplify Occidental's Permian production by 170,000 barrels of oil and gas daily in the Midland area, reaching 750,000 barrels of oil equivalent per day (boed).

As of September 30, Occidental's overall production stood at 1.2 million boed.

Apart from bolstering Permian output, the deal is expected to provide immediate cash flow for investors, amounting to approximately $1 billion based on WTI oil at $70 per barrel. Occidental highlighted that almost half of CrownRock's 1,700 undeveloped locations could yield profits even with WTI at $40 per barrel.

"This acquisition adds scale that will be important to us for the Midland basin and will enable us to do cost over time," Hollub said.

With U.S. West Texas Intermediate (WTI) oil currently priced around $71 per barrel, there is a push for increased output, especially as members of the Organization of Petroleum Exporting Countries (OPEC) trim oil production heading into the new year.

Occidental's shares advanced on the news, showing a 0.88% increase on the day and reaching $56.98.

CrownRock acquisition: Occidental plans to finance takeover with $9.1bn in new debt

Occidental, based in Houston, plans to finance the acquisition of privately-held CrownRock with $9.1 billion in new debt, approximately $1.7 billion in common equity issuance, and the assumption of CrownRock's existing $1.2 billion debt.

Occidental's largely debt-funded acquisition of Anadarko Petroleum in 2019 nearly led to the company's downfall. The company's stock plummeted from $60 in the spring of 2019 to around $10 in 2020 as oil prices collapsed during the pandemic. Over the past three years, Occidental focused on reducing its debt burden, but now it faces the prospect of increased leverage once again.

As of September 30, Occidental held about $18.60 billion in debt. The company aims to reduce its debt principal by at least $4.5 billion in the next 12 months, anticipating proceeds of $4.5 billion to $6 billion from new asset sales.

In a CNBC interview on Monday, Occidental's CEO Vicki Hollub said Warren Buffett's Berkshire Hathaway, which assisted in financing the Anadarko purchase, is not involved in the CrownRock deal.

Barron’s correspondent Andrew Bary wrote:

“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.”

Occidental also announced a 22% increase in its quarterly dividend to 22 cents.

Occidental debt: Some analysts negative on CrownRock deal due to added leverage

Third Bridge analyst Peter McNally told Reuters that markets may have a mixed reaction to the deal due to the increased debt burden for Occidental:

"The CrownRock assets are generally perceived to be of high quality, but investors are likely to question the merits of adding leverage to the Occidental balance sheet at this point in the cycle.”

Sankey Research analyst Paul Sankey was negative on the acquisition, telling Reuters:

“We are pretty negative on this deal. You're adding a load of debt, when arguably you should be paying with shares.”

Cole Smead, CEO of Smead Capital Management, which owns about 5.9 million shares of Occidental in its U.S. portfolio told Barron’s the deal "shows the optimism that Vicki and the folks at OXY exude right now about the future of the oil and gas business and the prices they are getting to take advantage of that.”

Occidental Petroleum shares had a consensus Moderate Buy rating, according to 14 analysts surveyed by TipRanks offering 12-month price targets on OXY stock. The average price target was $71.31 (a potential 25% upside from the stock’s current price), with a high forecast of $82.00 and a low forecast of $60.00.

At the time of writing on Monday, Occidental Petroleum shares were trading at $57.06, up over 1% on the day. The front-month contract for WTI crude futures held at around $71.50, rising close to 0.25%.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.