Occidental Petroleum(NYSE: OXY) recently closed its $12 billion acquisition of CrownRock. The deal will significantly enhance its position in the Permian Basin and free cash flow. However, it also loaded the company with debt. The company borrowed $9.1 billion to close the deal and assumed $1.2 billion of CrownRock's existing debt.
The oil company plans to significantly reduce its debt in the coming years to ease the potential pressure on its balance sheet. It's already 85% of the way toward its initial target, putting it well ahead of schedule.
Lightning quick progress on its plan
Occidental Petroleum set a target of reducing its debt principal by at least $4.5 billion within 12 months of closing its CrownRock acquisition, which occurred on Aug. 1. The company planned to achieve that goal through a combination of excess free cash flow and the proceeds from asset sales. Occidental expects CrownRock to boost its free cash flow by $1 billion annually at $70 oil (crude oil is currently around $75) and aims to sell $4.5 billion to $6 billion of assets in the future.
The oil company recently provided an update on its progress with this plan. It has already achieved $3 billion in principal debt reduction by the third quarter. It has accomplished that through a combination of free cash flow and asset sales. The company most recently agreed to sell 19.5 million units of Western Midstream Partners, which raised $700 million in cash. That brought its asset sale total to $1.7 billion. That number includes its pending $818 million Barilla Draw sale to Permian Resources, which it expects will close by the end of the current quarter.
Occidental plans to apply the proceeds of its Barilla Draw sale to debt reduction. That would bring its year-to-date total to $3.8 billion, or 85% of its $4.5 billion commitment. With the CrownRock deal closing only a few weeks ago, the company is well ahead of schedule. It got ahead of the situation by building cash and marketing assets while it worked to close the transaction, which it unveiled in December.
Not resting on its laurels
Occidental plans to continue working toward completing its initial debt reduction target. The company intends to sell additional assets and use excess free cash flow to reduce debt.
The oil company has initially relied on its strong free cash flow to reduce debt. Roughly $2.1 billion of the $3.8 billion of debt reduction has come from excess free cash flow. That's without the benefit of the incremental free cash flow it expects CrownRock to produce. The company has opted to use its excess free cash flow to repay debt rather than repurchase shares. It could continue to favor debt reduction over share repurchases in the near term, at least until it achieves its initial target.
Occidental also plans to continue selling assets. It has achieved only about 40% of the low end of its $4.5 billion-$6 billion asset sale target range. The company was working on a large deal that would have achieved its target, which recently fell through. It had agreed to sell a 30% stake in CrownRock to a current joint-venture partner for $3.6 billion. However, that company opted not to move forward with the transaction. That led Occidental to pivot and launch a secondary offering to sell some of its units in Western Midstream to raise additional cash for debt reduction.
Occidental could continue to monetize its position in that master limited partnership to achieve its asset sales target, including potentially selling its entire stake to another midstream company or a private equity fund. It could also sell other non-core assets, like lower-quality land in the Permian Basin and elsewhere in the United States. It also has international operations it could consider selling.
Off to a great start
Occidental Petroleum took on a lot of debt to acquire CrownRock, which was a concern, given the volatility of oil prices. However, the company is easing those worries by making quick work of its debt reduction target. It's already 85% of the way to its initial goal, even with minimal progress on its asset sales target. With its business generating lots of cash, and more on the way now that it closed its accretive CrownRock deal, along with plenty of additional assets it could sell, the company should have no problem hitting its goal. There's now a lot less risk that an unexpected decline in oil prices would have a major impact on the company's strategy.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
