Occidental CEO: Chemical divestiture to improve core oil and gas business
CEO Vicki Hollub said in an interview with the Associated Press on Thursday that Occidental Petroleum would be better positioned to invest in the core oil and natural gas business following the divestiture of a chemical unit. The company will also be able replace the cash flow lost from the division within two and a quarter years.
Occidental shares fell more than 7% after Occidental announced earlier that day that they would sell their OxyChem division to Warren Buffett’s Berkshire Hathaway unit for $9.7billion and use the money to pay down debt. Some analysts pointed out that the division is expected to drive future growth.
Hollub stated that OxyChem was expected to generate $350 million more in free cash flow each year from 2027. However, eliminating interest expenses on certain debts will save the company the exact same amount.
Hollub stated that "we will be net cash positive over the next 3 years, as opposed to where we would have been had we retained the chemicals business."
The company also aims to reduce the costs of oil and gas production. In the first half this year, it reduced its capital expenditure by $2 billion annually.
When we can explain this, and the investment community understands that, I believe they will realize that it is a better scenario for us. We can focus on our strengths.
OIL AND GAS ASSETS WILL REPLACE CASH FLOW
Occidental’s assets in Wyoming’s Powder River Basin and the Permian Basin, the largest U.S. oilfield, will replace the cash flow lost from the divestiture. Hollub stated that the company doesn't need to increase its production, but can instead achieve higher margins by cutting costs and using advanced methods to extract more oil from existing wells.
Hollub stated that the price Berkshire is paying for OxyChem is based on a higher multiple of earnings than what's seen in the sales of other chemical companies. Hollub said that Occidental had approached another company about the possibility of purchasing the unit but it did not express interest.
In a research note published by Scotiabank on Thursday, analyst Paul Cheng stated that the price seemed low as he previously estimated the value at $12 billion.
"We didn't run a process," Hollub said. The reality is that there aren't many companies who would be able to do a deal of this magnitude.
Occidental announced on Thursday that it would use the proceeds of its divestment to pay off debt and bring the total principal amount below the target set at the time it acquired CrownRock in 2017.
(source: Reuters)
