Occidental Forms $1.5 Billion Permian Basin JV With Ecopetrol

[Editor's note: This story was updated at 1:44 p.m. CDT Aug. 1, 2019.]

Occidental Petroleum Corp. is teaming up with Colombia’s Ecopetrol SA to develop assets in the Permian’ Midland Basin in a joint venture (JV) worth up to $1.5 billion.

Nearing completion of its takeover of rival Anadarko Petroleum Corp., Occidental said July 31 alongside its second-quarter results that it had entered into definitive agreements with Ecopetrol to form the JV.

“As we move toward closing the acquisition of Anadarko and combining our two companies into an innovative and sustainable energy leader, we remain well-positioned to drive profitable growth and return excess cash to our shareholders,” Occidental CEO Vicki Hollub said in a statement on July 31, adding that the Ecopetrol JV is a further example of the company’s commitment to “enhancing our value proposition.”

The JV covers 97,000 net acres of Occidental’s Midland Basin properties and will allow the company to accelerate its development of the Permian sub-basin, where it currently has minimal activity.

Occidental’s acreage is located in the heart of Midland Basin in West Texas, including all of the company’s holdings in Midland, Martin and Howard counties, according to analysts with Capital One Securities Inc. in an Aug. 1 research note.

As part of the partnership, Ecopetrol will purchase a 49% interest in Occidental’s current acreage Midland position for $750 million in cash at closing plus $750 million of carried capital. During the carry period, Ecopetrol will pay 75% of Occidental’s share of capex. Meanwhile, Occidental will operate the JV, owning the remaining 51% interest, and retain all existing production.

The Capital One analysts estimate the JV transaction works out to about $31,500 per acre. Even though this is above the firm’s $22,000 per acre valuation for Occidental’s roughly 200,000 Midland Basin acres, the analysts noted: “the JV acreage is likely better quality on average compared to [Occidental’s] entire [Midland Basin] position.”

Maynard Holt, CEO of Tudor, Pickering, Holt & Co. (TPH) which served as Occidental’s exclusive financial adviser on the JV transaction, called the deal “a true win-win” in an emailed statement on July 31.

“In this unique transaction between existing long-time partners in Colombia, Occidental will benefit from cash proceeds today as well as funding for accelerated development on a core Midland Basin position,” Holt said, adding that Ecopetrol will also benefit from lessons learned in the Permian.

“While Ecopetrol is able to gain exposure to the leading North American oil basin, with a great partner, and also advance their expertise in shale development,” he continued.

Michael Whitney, an analyst from Wood Mackenzie’s corporate research team, added that he sees ventures similar to Occidental’s partnership with Ecopetrol becoming more common as the Permian Basin matures.

“Strategies of this nature should become more commonplace in a world of stockpiled Permian inventory with drilling locations that wouldn’t otherwise fit into development plans for upwards of a decade,” Whitney said in an emailed statement on Aug. 1.

Shearman & Sterling LLP advised Ecopetrol in the deal. The companies are planning on closing the JV transaction around year-end.

Meanwhile, Occidental is expecting to close its combination with Anadarko Petroleum shortly after the Anadarko’s shareholder vote on Aug. 8, Hollub said during the company’s earnings call.

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Occidental has already reached an agreement with Total SA to sell Anadarko’s Africa assets to the French oil major for $8.8 billion. The company has also been rumored to be exploring the sale of Western Midstream Partners LP, the midstream MLP that Occidental is set to inherit from its takeover of Anadarko.

Hollub wouldn’t comment on the fate of Western Midstream during Occidental’s earnings call on Aug. 1. Though, she did add that Occidental has seen a lot of interest in the Anadarko assets.

“The reason we’re so confident about our asset divestitures is we have a lot of incoming calls about various things and so we’ll be able to high grade what we want to do over time,” she said.

Emily Patsy can be reached at epatsy@hartenergy.com.