Occidental Petroleum’s $12 Billion Acquisition of CrownRock: What You Need to Know

Occidental Petroleum recently made a significant announcement, revealing its plan to acquire the Midland-based oil and gas producer, CrownRock L.P. The deal, valued at approximately $12 billion, will involve a combination of cash, stock, and the assumption of debt. In this article, we will delve into the details of this acquisition and its potential implications for Occidental Petroleum and its investors.

The Purchase Agreement

Occidental has entered into a purchase agreement to acquire CrownRock L.P., a joint venture of CrownQuest Operating LLC and Lime Rock Partners. This strategic move underscores Occidental’s commitment to expanding its portfolio and strengthening its position in the oil and gas industry.

The transaction will involve the payment of cash and stock, with Occidental taking on CrownRock’s existing debt. This comprehensive deal is set to reshape Occidental’s assets and market presence significantly.

Financing the Acquisition

To finance the acquisition of CrownRock, Occidental plans to undertake several financial measures. These include:

1. New Debt: Occidental intends to incur $9.1 billion in new debt. This debt issuance will play a crucial role in funding the purchase.
2. Common Equity: The company will issue approximately $1.7 billion worth of common equity. This equity issuance is a strategic move to secure the necessary capital for the acquisition.
3. Assumption of Debt: Occidental will also assume CrownRock’s existing debt, which amounts to $1.2 billion.

These financial maneuvers will facilitate the acquisition while ensuring Occidental’s financial stability.

Closing and Regulatory Approvals

The transaction is expected to close in the first quarter of 2024, subject to customary closing conditions and regulatory approvals. Occidental will need to navigate the regulatory landscape to secure the necessary clearances for the acquisition.

Strategic Fit and Immediate Benefits

Occidental President and Chief Executive Officer, Vicki Hollub, emphasized the strategic fit of the acquisition. She highlighted the addition of CrownRock’s assets to Occidental’s portfolio as a significant enhancement. This acquisition will enable Occidental to build scale in the Midland Basin, strengthening its competitive position in the industry.

Hollub also emphasized the immediate benefits, citing the potential for free cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More accretion. Combining CrownRock’s high-performing team with Occidental’s operations is expected to drive operational and financial excellence for years to come.

BofA’s Perspective

Bank of America (BofA) acknowledged Occidental Petroleum as the victor in a competitive process to acquire CrownRock. While BofA recognizes the strategic fit as solid, it noted that at Occidental’s base case scenario of flat $70 WTI (West Texas Intermediate) oil prices, the deal appears to involve a “full valuation.”

Despite this observation, BofA maintained its rating for Occidental as “Buy” and kept the price target unchanged at $82. The firm’s assessment underscores Occidental’s capacity to transfer value from debt to equityIn the world of corporate finance, one of the fundamental metrics that analysts and investors use to evaluate a company's financial health and stability is the Debt to Equity (D/E)... More, a key aspect of the investment case.

Warren Buffett’s Investment

Warren Buffett, the influential figure behind Berkshire Hathaway, has shown confidence in Occidental Petroleum’s future prospects. He recently acquired 10,482,162 shares of Occidental Petroleum stock at an average price of $56.16 per share, totaling a transaction amount of $588,674,025. Buffett’s investment reflects optimism about Occidental’s strategic moves and its potential for growth.

Bottom-line: Occidental Petroleum’s acquisition of CrownRock is a significant development in the oil and gas industry. It demonstrates Occidental’s commitment to expanding its portfolio and creating value for its shareholders. While the deal’s financial implications and regulatory hurdles are yet to be fully realized, it represents a strategic move that could reshape Occidental’s position in the market. Warren Buffett’s investment further underscores the confidence in Occidental’s prospects, adding a layer of optimism to this transformative acquisition.