In a significant move to bolster its financial position, Occidental Petroleum announced on Thursday its decision to divest its chemicals division, OxyChem, to Berkshire Hathaway for $9.7 billion. This transaction is part of Occidental’s broader strategy to reduce its substantial debt following a series of costly acquisitions over the past few years. Despite the ambitious nature of the divestment, shares of Occidental Petroleum experienced a dip of over 6% in morning trading.
Roth MKM analysts expressed concern that the sale may impact the company’s free cash flow growth in the near future, as OxyChem was expected to play a pivotal role in expansion efforts. Scotiabank analyst Paul Cheng echoed this sentiment, suggesting the transaction price appeared lower than he had anticipated, previously valuing the division at $12 billion.
OxyChem specializes in producing chemicals utilized for various applications, including pool treatment and materials for medical supply piping. In the first half of this year, the division generated $2.42 billion in revenue. If the acquisition proceeds as planned, it would represent Berkshire Hathaway’s largest purchase since its $11.6 billion acquisition of insurance company Alleghany Corporation last year, notably expanding its chemicals portfolio beyond its existing Lubrizol business.
Berkshire Hathaway has had a longstanding relationship with Occidental, becoming its largest shareholder after starting to accumulate shares in February 2022, coinciding with the onset of the Russian invasion of Ukraine. This partnership dates back to a pivotal 2019 meeting where Berkshire’s Chairman, Warren Buffett, facilitated a $10 billion investment that enabled Occidental to successfully bid for Anadarko Petroleum, outpacing competitor Chevron to secure valuable shale oilfields in Texas. However, the $55 billion acquisition of Anadarko has left Occidental burdened with significant debt, a situation that grew more complicated following its $12 billion acquisition of CrownRock last year.
As of June, Occidental’s debt stood at approximately $23.34 billion, prompting the company to pursue strategic asset divestitures to stabilize its balance sheet. In August, Occidental reported $950 million in additional divestitures since the beginning of the second quarter, including $370 million already finalized, alongside $3 billion in debt repayments this year.
Occidental intends to allocate $6.5 billion of the proceeds from the sale to further reduce its debt, helping to reestablish a financial target of keeping total principal debt below $15 billion post-CrownRock acquisition. The company’s CEO, Vicki Hollub, stated that the sale of OxyChem would free up resources to tap into more than 20 years of low-cost opportunities in the oil and gas sector, which comprised 75% of its total earnings last year.
This strategic divestiture marks a crucial step for Occidental as it seeks to realign its focus on its core oil and gas operations in an increasingly volatile market. If finalized, the deal is expected to close in the fourth quarter, highlighting the ongoing collaboration between Occidental and Berkshire Hathaway amidst a backdrop of significant market fluctuations.
