Occidental Petroleum will be in a better position to invest in its core oil and gas business after divesting a chemicals unit and will be able to replace the lost cash flow from the division in about two and a half years, CEO Vicki Hollub told Reuters in an interview on Thursday.
After announcing earlier in the day that it would sell its OxyChem unit to Warren Buffett’s Berkshire Hathaway for $9.7 billion and use the funds to pay off debt, Occidental’s shares dropped more than 7% as some analysts noted that the division was expected to help drive future growth.
OxyChem had been expected to generate an incremental $350 million in free cash flow year-over-year from 2027, but eliminating the interest expense on some debt will save the company exactly the same amount, Hollub said.
“We end up over the next three years net cash positive, versus where we would be had we kept the chemicals business,” Hollub said.
On top of that, the company is working to drive down costs of its oil and gas production and in the first half of this year reduced capital spending by $2 billion on an annualized basis.
“When we are able to explain that, and when the investment community gets that, I think they will realize that this is a much better scenario for us. It enables us to focus on what we do best.”
OIL AND GAS ASSETS IN THE U.S. WILL HELP REPLACE CASH FLOW
Occidental’s assets in the Permian Basin – the top U.S. oilfield – and the Powder River Basin in Wyoming will help replace the lost cash flow from the divestiture. The company does not need to increase production and can achieve better margins by reducing costs and extracting more oil from wells with advanced methods, Hollub said.
The price being paid by Berkshire for OxyChem uses a higher earnings multiple than seen in sales of competing chemical companies, Hollub said. She added that Occidental solicited one other company to possibly purchase the unit, which did not show interest.
Scotiabank analyst Paul Cheng said in a research note on Thursday that the price tag seemed relatively low, as he had previously estimated the value of the chemicals business at $12 billion.
“We didn’t run a process,” Hollub said. “The reality of the situation is there aren’t very many companies that would be capable of doing a deal like this.”
On Thursday, Occidental said it would use $6.5 billion of the divestment proceeds towards paying debt and bringing the total principal debt below the $15-billion target set after it acquired CrownRock last year.
(Reporting by Sheila Dang in Houston; Editing by Nathan Crooks and Diane Craft)