Occidental Petroleum (OXY 7.11%) unveiled a very bold move at the end of 2023. The oil producer agreed to buy CrownRock for $12 billion to bulk up its position in the oil-rich Permian Basin. A notable aspect of the deal was Occidental's funding strategy, which relied heavily on debt (it issued $9.1 billion of new debt while also assuming $1.2 billion of CrownRock's existing debt). That approach differed from the all-stock deals favored by its bigger rivals.
To keep the pressure off its balance sheet, Occidental pledged to pay off $4.5 billion of debt within 12 months of closing the deal, which occurred in August. The oil company worked quickly and achieved its target seven months ahead of schedule. That will save it a lot of money in interest, allowing it to return more cash to shareholders through a higher dividend.
NYSE: OXY
Key Data Points
Fast-tracking phase one
On the fourth-quarter conference call, CEO Vicki Hollub dove into the factors enabling Occidental Petroleum to reduce debt rapidly. She stated, "Through a combination of asset sales and organic cash flow, we achieved our near-term debt repayment target of $4.5 billion seven months ahead of schedule."
She highlighted that the company "generated $4.9 billion of free cash flow, enabling [it] to pay approximately $800 million of common dividends and to increase the quarterly dividend by more than 22%." Last year, the company also sold its Barilla Draw assets, a portion of its stake in master limited partnership (MLP) Western Midstream Partners, and some other non-core assets for $1.7 billion.
Occidental Petroleum's progress on its debt reduction strategy is paying immediate dividends for investors. On the call, Hollub stated, "The savings from the reduced interest payments will be allocated to the dividend as this week, our Board of Directors authorized a 9% increase in our common dividend. We recognize the need to balance reducing debt and financial risk today while preserving tomorrow's development opportunities and associated cash flow."
As Hollub notes, Occidental Petroleum is trying to strike a balance. It wants to continue strengthening its balance sheet while investing in growing its business and returning money to shareholders. Repaying its debt will accomplish all three goals because it can reallocate the interest rate savings toward increasing the dividend, freeing up other cash to continue repaying debt, and growing its operations.
Already making progress on the next stage
The $4.5 billion debt reduction was only the beginning. Occidental's medium-term balance sheet deleveraging target is to get its debt below $15 billion. It still has a long way to go, considering its long-term net debt was $25 billion at the end of last year. Reducing debt would strengthen its balance sheet and cut its interest expenses, freeing up additional cash flow for debt reduction and shareholder returns.
Occidental has already started working toward its medium-term debt target. The company recently announced it reached agreements to sell $1.2 billion of non-core assets. Occidental plans to apply those proceeds to its remaining 2025 debt maturities. Those asset sales are a continuation of the $4.5 billion-$6 billion of divestitures the company targeted when it announced the CrownRock deal. It's now more than halfway toward that goal.
Occidental also intends to continue to use its excess free cash after paying dividends to reduce debt. The company plans to build cash this year to repay debt as it matures in 2026 and beyond.
Achieving its medium-term debt reduction target will give Occidental more flexibility to return additional cash to shareholders beyond a growing dividend. It aims to do that by resuming its share repurchase program and redeeming the preferred equity investment Berkshire Hathaway made in the company in 2019 to help fund the Anadarko Petroleum acquisition.
Steadily making progress
Occidental Petroleum has rapidly reduced debt following its CrownRock acquisition, driven by strong free cash flows and solid initial progress on its asset sale plan. This has paid immediate dividends for shareholders in the form of a 9% payment increase funded by interest expense savings.
The company has also started making progress on the second phase of its deleveraging plan, which will position it to return more cash in the future. This combination of falling debt and rising cash returns should help create a lot of future value for shareholders, making Occidental a compelling investment opportunity.
