HOUSTON: Occidental Petroleum on Monday (Dec 11) agreed to buy closely-held US shale oil producer CrownRock in a cash-and-stock deal valued at US$12 billion (RM56.12 billion) including debt, expanding its presence in the largest US shale oilfield.
The deal comes amid a new wave of shale consolidation underpinned by ExxonMobil’s US$60 billion proposed deal for Pioneer Natural Resources and Chevron’s US$53 billion agreement for Hess in October.
Big producers are using the post-pandemic profit boom to prepare for a future with lower oil prices, as they look to gain scale in basins they already operate to cut costs.
“We found CrownRock to be a strategic fit,” said chief executive Vicki Hollub. “Where we are looking at oil prices being long term, that it would help us in (oil) downturns.”
If approved, the CrownRock takeover would make Occidental a bigger player in the US shale than Chevron and Hess combined. The deal is expected to close in the first quarter of 2024 and would boost Occidental’s Permian production by 170,000 barrels of oil and gas per day in the Midland, to 750,000 boed.
Occidental’s total production was 1.2 million boed at Sept. 30.
The deal will also add immediate cash flow for investors, Hollub said, or about US$1 billion considering West Texas Intermediate (WTI) oil at US$70 per barrel. Occidental said almost half of CrownRock's 1,700 undeveloped locations could generate profits with WTI at US$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.
US oil is trading at about US$71 per barrel, encouraging higher output as members of the Organization of Petroleum Exporting Countries pare oil quotas.
Occidental’s shares rose 0.8% to US$56.90.
But not all analysts approved the deal, as Occidental just recently recovered from the widely criticised, debt-laden purchase of Anadarko Petroleum in 2019.
“We are pretty negative on this deal,” said Sankey Research analyst Paul Sankey. “You’re adding a load of debt, when arguable you should be paying with shares.”
CrownRock would significantly expand Occidental’s leverage, increase reliance on future asset sales and put buybacks on hold just as after the Anadarko acquisition, said Piper Sandler investment bank.
Occidental said it will finance the purchase with US$9.1 billion of new debt, the assumption of CrownRock’s US$1.2 billion of existing debt. It will issue US$1.7 billion in common stock.
Hollub said the company plans to reduce its debt by about US$15 billion and by at least US$4.5 billion in the next 12 months from asset sales and cash flow.
Occidental had about US$18.6 billion in long-term debt as of Sept 30, and the deal would increase its debt to nearly US$28 billion.
The deal puts the onus on shareholders to pay off the debt, but fixes the return for doing so, said Cole Smead, CEO of Smead Capital Management, who owns about 5.9 million shares in its US portfolio.
“An all equity deal, in comparison, makes it tougher to buy back stock later,” he said.
North America may end up with only ten oil and gas after the current consolidation wave with Occidental being one of them, said Smead.
Hollub said in a CNBC interview that Warren Buffett’s Berkshire Hathaway, which had helped finance the Anadarko purchase, was not involved in the CrownRock deal.
Occidental said it will raise its quarterly dividend by 4 cents, to 22 cents a share, and expects to retain its investment-grade credit ratings.
Reuters first reported in September that CrownRock was preparing to explore a sale that could give it an enterprise value of well over US$10 billion. – Reuters
