Prediction: This Will Be Occidental Petroleum’s Next Big Move

Occidental Petroleum (NYSE: OXY) is no stranger to making big moves. It agreed to buy CrownRock for $12 billion last year. Meanwhile, it outbid Chevron to buy Anadarko Petroleum for $55 billion in 2019.

Like the Anadarko deal before it, Occidental is using a lot of debt to fund its CrownRock purchase. That will likely lead to another big move by the oil giant. I predict it will sell its stake in master limited partnership (MLP) Western Midstream (NYSE: WES). Here’s why a sale would make sense, and who might buy its interest in the midstream company.

A sensible swap

Occidental Petroleum has been among the many participants in a wave of mergers sweeping across the oil sector over the past year. Exxon kicked off the current wave with its roughly $60 billion deal for Pioneer Natural Resources in early October. Chevron quickly followed that up by agreeing to buy Hess for $53 billion a few weeks later. Occidental followed those leaders with its agreement to buy CrownRock for $12 billion in December.

Whereas Exxon and Chevron agreed to all-stock deals, Occidental is primarily funding its CrownRock purchase with debt. It’s issuing $9.1 billion of new debt and assuming CrownRock’s $1.2 billion of debt to fund the deal, while only issuing about $1.7 billion of new stock. That debt-heavy financing strategy is risky, considering it took a similar approach to fund the Anadarko deal. That strategy backfired when crude prices crashed in early 2020, causing severe financial stress for Occidental.

Occidental plans to quickly pay down debt following the close of its CrownRock deal. It intends to reduce its debt principal by at least $4.5 billion within 12 months of closing the deal by using its free cash flow and the proceeds from a new $4.5 billion to $6 billion divestiture program.

While Occidental has many assets it could sell, monetizing its stake in Western Midstream would likely enable it to achieve its debt reduction target in one deal. The oil company owns a 49.9% interest in the MLP and 2% of its operating company, which it acquired when it bought Anadarko. With a market cap of $15.5 billion, Occidental’s interest is worth around $8 billion.

Selling its interest in Western Midstream would, in a sense, enable Occidental to trade its stake in that noncore asset for CrownRock, which will enhance its core position in the Permian Basin. While the company would lose the stable cash flow the MLP distributes to investors, it could quickly pay off a meaningful amount of debt.

Lots of potential buyers

The midstream sector has also undergone a lot of consolidation in the past year. Leading MLP Energy Transfer acquired fellow MLP Crestwood Equity Partners for $7.1 billion last year. It recently followed that deal up by agreeing to acquire WTG Midstream for nearly $3.3 billion. Meanwhile, Oneok merged with MLP Magellan Midstream Partners in a transformational $18.8 billion deal last year.

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Several other midstream companies have acquired smaller companies or assets over the past year. For example, Enterprise Products Partners bought out several joint ventures from Western Midstream for $400 million earlier this year.

Most midstream companies have the financial flexibility to make an acquisition if the right deal comes along. Western Midstream would be a great strategic fit for many companies in the sector. They could purchase Occidental’s stake (likely with a mix of cash and stock) and then buy out the rest of the company from public shareholders in the future.

Private equity infrastructure funds are another potential buyer pool. For example, leading infrastructure fund manager Brookfield Asset Management and its affiliate Brookfield Infrastructure could acquire Occidental’s stake in Western Midstream for cash. They could let the remaining interest in the company remain publicly traded or offer outside investors the same terms. An infrastructure fund would likely be able to close a deal faster and could pay all cash for Occidental’s stake, potentially giving this group an advantage over strategic buyers.

A sale makes so much sense

Occidental Petroleum will need to quickly sell assets after it closes its CrownRock deal to repay debt. I predict it will decide to sell its stake in Western Midstream. There should be lots of potential buyers, which could enable it to get a great price. A sale would quickly boost the company’s balance sheet by monetizing a noncore asset to fund a deal that enhances its core position.

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Matt DiLallo has positions in Brookfield Asset Management, Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, Chevron, Energy Transfer, and Enterprise Products Partners. The Motley Fool has positions in and recommends Brookfield Asset Management and Chevron. The Motley Fool recommends Brookfield Infrastructure Partners, Enterprise Products Partners, ONEOK, and Occidental Petroleum. The Motley Fool has a disclosure policy.

Prediction: This Will Be Occidental Petroleum’s Next Big Move was originally published by The Motley Fool

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