Occidental Petroleum announced the sale of its chemical division, OxyChem, to Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) for $9.7 billion. This significant move is part of Occidental’s strategy to address its debt burden from previous acquisitions. Berkshire Hathaway’s acquisition extends the conglomerate’s chemical interests, which formerly included Lubrizol. The divestment emphasizes the strategic relationship between Occidental and Berkshire, building on a history of high-stakes collaborations between the two companies.
Earlier transactions and financing deals indicate the ongoing relationship between Occidental and Berkshire, characterized by certain pivotal investments. Notably, in 2019, Buffett provided a $10 billion investment to Occidental, enabling the acquisition of Anadarko Petroleum. This move aligned with Occidental’s strategy, enhancing its shale oilfield holdings in Texas. The current sale is a continuation of their history of substantial financial partnerships.
Will Sale Impact Occidental’s Financial Growth?
Occidental’s decision to divest OxyChem, which provided significant revenue, could influence its free cash flow in the short term. Roth MKM analysts expressed concerns about potential challenges to cash flow growth. Moreover, the divestment’s valuation, deemed lower than expected by analysts like Paul Cheng from Scotiabank, sparked debate about the transaction’s financial wisdom. Despite these concerns, Occidental plans to use $6.5 billion from the proceeds to reduce its debt, aligning with its commitment to improve its financial standing.
How Does This Affect Occidental’s Business Focus?
Occidental’s sale marks its intention to concentrate on its core oil and gas operations. The OxyChem deal symbolizes a strategic refocus, with oil and gas accounting for a substantial portion of Occidental’s earnings last year. This alignment is expected to streamline its operations and fuel future growth in its primary business sectors.
Exploring the details of the transaction, it emerges that Berkshire’s purchase of OxyChem represents its largest chemical acquisition post the Lubrizol addition. If the deal progresses as scheduled for a fourth-quarter closure, Berkshire will bolster its chemical segment significantly. This follows its continued interest in Occidental since 2022 when it began acquiring a stake as geopolitical tensions heightened with the onset of the Russia-Ukraine conflict.
Occidental Petroleum’s CEO, Vicki Hollub, commented on the strategic move.
“The sale allows us to unlock 20-plus years of low-cost resource runway.”
This statement showcases the company’s renewed focus on leveraging its core assets. The reallocation of resources is part of its ongoing strategy to fortify its primary business model while addressing financial challenges.
On the surface, the sale to Berkshire Hathaway appears financially strategic for Occidental. However, its lower-than-anticipated price did prompt skepticism among financial analysts. Despite this, Occidental is poised to meet its debt reduction goals, a significant step given the financial strain from its prior acquisitions. Additionally, Berkshire Hathaway’s ongoing investment in Occidental exemplifies confidence in the company’s long-term strategy and prospects.
Occidental continues its strategic shift by divesting non-core assets to enhance operational efficiency. Focusing on oil and gas could yield stable, long-term growth. Despite mixed reactions on the deal’s valuation, the move is aligned with Occidental’s debt reduction goals, essential for its financial health. Investors and analysts will keenly observe how the freed-up capital impacts its oil and gas ventures, given the company’s historical fluctuations in strategic direction.
