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Occidental's deal for CrownRock is no Anadarko redux, say ratings firms

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Occidental's deal for CrownRock is no Anadarko redux, say ratings firms
Reuters
Sabrina Valle
December 13, 2023

By Sabrina Valle

HOUSTON (Reuters) - Occidental Petroleum's plan to pay off debt from its acquisition of CrownRock should result in a reduced financial burden within a year of closing, credit rating firms said, a contrast to its traumatic takeover of Anadarko Petroleum in 2019.

The proposed $12 billion acquisition of CrownRock got a thumbs down by some Wall Street analysts haunted by the 2019 Anadarko deal that saddled Occidental in $40 billion debt months ahead of an oil market price collapse.

But Occidental's second big, debt-financed deal in four years has more manageable risks, the credit firms said. Fitch Ratings and Moody's Investors Service reaffirmed Occidental's investment grade credit ratings this week. S&P Global Ratings also confirmed its previous non investment grade.

The impact "will be modest within a year of closing," said Moody's Vice President James Wilkins. Occidental's repayment target "is credible, with reasonable line of sight for accelerated debt repayment," despite some execution risk, wrote Fitch Ratings.

More than 80% of the deal price will be funded by additional debt, which will push the company's total to 1.7 times pre-tax earnings, from 1.3 times currently, Jefferies investment firm said.

The borrowings brings the oil firm's debt load close to $28 billion as of the close of the deal, S&P said. That figure excludes about $8.5 billion in outstanding preferred shares that pay an 8% dividend to Berkshire Hathaway, which some analysts count as debt.

Occidental CEO Vicki Hollub said the oil company could extinguish about half of the new debt's principal within a year through a combination of asset sales, free cash from operations and a temporary freeze on share buybacks.

"Despite the $10.3 billion of debt Occidental will take on as part of the transaction, we believe its competitive position will benefit from the addition of CrownRock," said S&P Global rating analysts led by Carin Dehne-Kiley.

S&P Global says Occidental will likely be able to achieve the goal to reduce debt to $15 billion by the end of 2026.

The oil producer expects to receive $1 billion of free cash flow in a year after closing from the 170,000 barrels per day of oil and gas obtained from CrownRock production.

Since the deal announcement, Occidental shares have risen about 1% to $57.22.

Fitch expects notes that a sustained drop in prices would be a key risk for repayment given its lack of oil hedging.

(Reporting by Sabrina Valle; Editing by Stephen Coates)

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