Introduction
Occidental Petroleum’s strategy to pay off debt associated with its acquisition of CrownRock is expected to alleviate its financial burden within a year of completing the deal, according to credit rating agencies. This stands in stark contrast to the company’s troubled takeover of Anadarko Petroleum in 2019. The proposed $12 billion acquisition has raised concerns among some Wall Street analysts who remain haunted by the Anadarko deal, which resulted in Occidental accumulating $40 billion in debt just months before an oil market price collapse.
Evaluating Occidental’s Repayment Plan
Credit rating firm, Fitch Ratings, believes that Occidental’s repayment target is credible and sees a reasonable path to accelerated debt reduction, noting some execution risk. The majority of the acquisition cost, roughly 80%, will be financed through additional debt. This move will elevate the company’s total debt to 1.7 times pre-tax earnings, up from the current 1.3 times, according to Jefferies investment firm. S&P Global also highlighted Occidental’s debt burden, which will reach approximately $28 billion at the close of the deal. However, this figure does not include the $8.5 billion in outstanding preferred shares, which some analysts consider as debt due to the 8% dividend payment to Berkshire Hathaway.
Occidental’s Debt Reduction Strategies
Vicki Hollub, the CEO of Occidental, expressed confidence in the company’s ability to eliminate approximately half of the principal amount of its new debt within a year. This will be achieved through a combination of asset sales, positive cash flow from operations, and a temporary halt on share buybacks. S&P Global also concurs that despite the additional $10.3 billion debt from the transaction, Occidental’s competitive position will benefit from the inclusion of CrownRock.
Long-Term Debt Reduction Goals
S&P Global believes that Occidental will likely meet its target of reducing debt to $15 billion by the end of 2026. This long-term objective is bolstered by the oil producer’s expectation to generate $1 billion in free cash flow within the first year after completing the acquisition. This cash flow will be derived from the daily production of 170,000 barrels of oil and gas obtained from CrownRock.
In summary, Occidental Petroleum’s plan to address its debts resulting from the CrownRock acquisition has gained support from credit rating agencies. The company aims to achieve accelerated debt reduction through a combination of strategies, including asset sales, operational cash flow, and a temporary suspension of share buybacks. While some analysts remain cautious due to the prior Anadarko deal’s repercussions, Occidental is confident that the acquisition will enhance its competitive position. S&P Global predicts the company will successfully reduce its debt to $15 billion by the end of 2026, with the expectation of significant free cash flow from CrownRock production.