Occidental/CrownRock: shale deal risks tempting fate again

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The last time Occidental Petroleum made a big acquisition, it ended up teetering on the brink of bankruptcy. The $55bn purchase of Anadarko Petroleum in 2019 saddled the company with huge debts just as the global pandemic crushed oil prices. Its woes attracted activist investor Carl Icahn. Occidental had to turn to Warren Buffett for a costly lifeline.

It survived and recovered strongly after Russia’s full-scale invasion of Ukraine sent global energy prices soaring. Last year was Oxy’s most profitable year ever. It used the cash to slash debt levels by more than a third. 

Having cheated grim fate once, investors must wonder if Oxy is tempting it again by making an albeit smaller acquisition. It is buying CrownRock, a privately held shale driller in the Permian basin oil and gasfield for $12bn, including debt.

Oxy is already one of biggest producers there. But the pressure is on to scale up further. Operating costs are rising and energy prices have retreated from their 2022 highs. ExxonMobil agreed in October to buy Pioneer Natural Resources at an enterprise value of $64bn. Days later, Chevron struck a deal to purchase Hess at an EV of $60bn.

Both of deals are all-share transactions. This allows Exxon and Chevron to eschew pricey debt. That will not be the case for Oxy. Its offer consists of $9.1bn cash and $1.7bn of new shares. It will also be assuming $1.2bn of CrownRock’s debt. 

Oxy plans to fund the purchase with $10bn worth of debt, which will be partly repaid via proceeds from asset sales. Oxy said “no cost synergies [are] assumed”. 

The deal will add about 170,000 barrels of oil equivalent a day to production in 2024, along with about 1,700 undeveloped locations. Brent crude is currently sitting at $76 a barrel. Oxy says it can break even with oil at $40 a barrel.

Without cost cuts this is a slightly pricey deal. CrownRock’s remaining, prized Permian locations would be worth more than $4mn each, a tenth above Citi’s expectations. Oxy’s motivation, one suspects, is the fear of missing out.