Investors are expecting to hear Occidental Petroleum’s alternate debt-reduction plan after its anticipated $3.6 billion partner in the $12 billion CrownRock LP acquisition declined to buy a 30% stake on Aug. 1.

“I think investors definitely want to have a path towards deleveraging, so it will certainly be topical,” said TD Cowen managing director David Deckelbaum, who covers Oxy. The company’s second-quarter earnings call is scheduled for noon Central, Aug. 8.

Oxy reported to the Securities & Exchange Commission (SEC) in an Aug. 1 8-K filing that Colombia-based Ecopetrol “decided not to acquire any interest in the CrownRock assets.”

Oxy did not issue a press statement on the matter. Publicly traded Ecopetrol is 85.5% owned by the Colombian government.

News that Ecopetrol had bowed out of previous talks came shortly before Oxy announced it had closed the CrownRock deal, bringing in 94,000 net Midland Basin acres and 170,000 boe/d.

On Aug. 2, Oxy issued a press release that it was withdrawing its tender offer for CrownRock’s $376 million of 5% senior notes due 2029.

Both Fitch Ratings and Moody’s Ratings stated in their most recent reviews of credit ratings on Oxy that key assumptions included the E&P divesting $4.5 billion to $6 billion of assets to reduce its debt level to $15 billion, post-closing on CrownRock.

Each specifically expected Ecopetrol to buy 30% of the deal for $3.6 billion.

Oxy didn’t respond to Hart Energy for comment by press time.

CrownRock deal metrics

Fitch reported, pre-closing, that Oxy’s $12 billion bid on CrownRock represented deal metrics of $128,000 per net acre and $79,000 per flowing boe/d “versus recent Permian transaction medians in the $53,000/net acre and $44,000/flowing boe/d range.”

Deckelbaum told Hart Energy that “investors will be keen to hear an explicit sales targets from management as upstream divestiture candidates appear limited" on the Oxy earnings call.

Oxy signed a deal to sell its Barilla Draw property in the Delaware Basin on July 29 to Permian Resources for $818 million.

In total, it has divested or has deals to divest $970 million of property, Deckelbaum calculated.

“With the recent Barilla Draw sale to [Permian Resources], there is another $3.5 billion or so to go,” he told Hart Energy. 

A pass by Ecopetrol, which has a joint venture in the Midland Basin with Oxy and first right of refusal on participating in anything Oxy buys there, “wasn’t necessarily anticipated as highly likely by the market,” he added.

“Still, Oxy doesn’t necessarily need to sell assets as they can still organically de-lever as long as pricing exceeds $55/bbl after dividends. Sales will be valuation-dependent.”

Oxy has a broad portfolio of assets that can be used to generate proceeds. However, Oxy faces a macro-environment that may be deteriorating, including most recently with a plunge in Wall Street values in the past few days as well as recessionary fears.

‘Uh oh’

“Uh oh,” a commenter, Invest5life, posted on SeekingAlpha in response to an article about Ecopetrol withdrawing.

Oxy’s debt at first-quarter-end was $18 billion, noted the article’s author, Carl Surran.

But declining the 30% nonop CrownRock stake was a “sound decision by Ecopetrol,” posted KSMX.

“I am hoping they will focus on existing production improvements, efficiencies, adding shareholder value [and] special dividends rather than major new purchases.”

Jodihn wrote, “Wonder if they try and get the [Ecopetrol-Oxy joint venture to buy the] deal or are just done. Will be interesting to see where this goes and what they will sell now.”

Invest5life posted, “Game over. Too much debt.” But Rock Chalk replied, “How's the short selling going? I see you're still ‘liking’ your own comments.”

Warren Buffett’s $10B

The JV with Ecopetrol in the Midland Basin was minted in the summer of 2019, while Oxy was in the midst of buying Anadarko Petroleum in a bidding contest with Chevron that Oxy topped off by bringing in Warren Buffett for $10 billion.

The JV involves 97,000 net acres. Ecopetrol paid $750 million in cash and 75% of capex to total $750 million for a 49% nonop interest.

On July 19, Ecopetrol reported on a potential deal involving Crownrock, saying that “the percentage of the assets and the price that Ecopetrol would pay are under analysis and assessment by Ecopetrol.”

It reported Aug. 1 that its board met on July 31 and, “after analysis and evaluation, … decided not to acquire any percentage of the assets of CrownRock LP that are being purchased by [Oxy].”

Ecopetrol’s Nicolás Azcuénaga Ramírez, vice president of strategies, told investors on May 9 in an earnings call that it was looking not only at a deal “with Oxy, but also with other opportunities that could come up in that [Permian Basin] area and in other areas.”

Ecopetrol did not respond to a Hart Energy request Aug. 5 for additional details on passing on the CrownRock deal.

Ecopetrol’s debt rating

Fitch Ratings had confirmed its BB+ rating on Ecopetrol’s debt and had a “stable outlook.” By Fitch’s scale, the rating is considered at the high end of “speculative” and nearly “good credit quality.”

In its report in May, Fitch added that “the potential acquisition of assets in the Permian Basin [from Oxy] is not expected to significantly affect the company's credit profile.”

Moody’s downgraded Ecopetrol in May to Ba1 that is “speculative” on the Moody’s scale with “substantial credit risk.” It added that an upgrade was unlikely for at least the next 12 to 18 months unless strengthening its financial metrics.

“A ratings downgrade could occur if there is a deterioration in Ecopetrol's operating performance, including … increasing liquidity risk or debt leverage from the current levels,” Moody’s reported.

Oxy’s debt rating

Both Fitch Ratings and Moody’s Ratings assessments factored in the 30% sale to Ecopetrol as part of their recent Oxy ratings reviews.

Fitch wrote on July 19, when assigning BBB- or “good credit quality” to Oxy’s proposed senior unsecured notes offering, that the CrownRock bid “is expensive.”

Occidental paid $128,000 per net acre and $79,000 per flowing boe/d “versus recent Permian transaction medians in the $53,000/net acre and $44,000/flowing boe/d range,” Fitch calculated.

The ratings agency added that a key assumption was that Oxy reported “Ecopetrol intends to exercise a contractual right to acquire a 30% working interest in CrownRock for approximately $3.6 billion, prior to adjustments.”

The ratings service’s next level lower than BBB- is BB “speculative” that carries “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.”

But, it added, “business or financial flexibility exists that supports the servicing of financial commitments” still at the BB level.

At more than 80% debt-financed, the CrownRock acquisition “temporarily reverses the headroom Oxy built over the past few years by adding over $10 billion in debt,” Fitch reported.

At first-quarter-end, Oxy’s cash on hand was $1.272 billion. It also had an unused $4.15-billion bank line of credit.

Meanwhile, Moody’s reported on July 19, when giving Oxy a Baa3, that the “potential sale to Ecopetrol of a 30% interest in the CrownRock assets for $3.6 billion could provide for repayment of debt in the near-term.

“This swift follow-on deleveraging supports the Baa3 senior unsecured rating and the maintenance of Baa quality financial policies,” it stated.

“Until debt is reduced, the higher debt level will leave Oxy with limited financial flexibility at the Baa3 rating.”

Tender withdrawn

Oxy announced a tender offer on July 19 on CrownRock’s $376 million of 5% senior notes due 2029. Tender was expected by Aug. 1 for the early-bird premium; otherwise, by Aug. 16.

The morning of Aug. 2, after the Ecopetrol news, it withdrew the offer.

Oxy reported in its first-quarter earnings call May 8, when describing its plan to sell $4.5 billion to $6 billion of assets within 18 months after closing on CrownRock, that there was interest.

“The high-quality assets within our portfolio have garnered much interest and our teams have commenced the early stages of the divestiture process,” CFO Sunil Mathew said.

The proceeds are to reduce Oxy’s debt to $15 billion “or below,” he added.

Before Ecopetrol passed on participating, Deckelbaum wrote on July 29, all “eyes on Ecopetrol.”

At least $4.5 billion of Oxy’s debt-reduction target “would be fully achieved if Ecopetrol takes a stake,” he wrote.

Oxy had just announced the $818-million sale to Permian Resources. The price implied “a fair valuation,” Deckelbaum wrote, for 27,500 net acres and 15,000 boe/d, along with $1.5 million per future well location, “assuming 200 locations.”

Permian Resources reported that the deal’s more than 200 potential locations are operated, gross, two-mile and with high net revenue interest.

The deal and other Oxy divestments “to date have now reached $970 million,” Deckelbaum reported.

As for Ecopetrol’s JV with Oxy in the Midland Basin, the arrangement gives Ecopetrol first dibs—the “option to acquire up to a 49% interest” in any Oxy deal in the Midland Basin, he added.

All of CrownRock’s property was in the Midland Basin.

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