Occidental's Acquisition of CrownRock - A Promising Investment Opportunity?

Occidental Petroleum Corporation (OXY) has announced its plans to acquire CrownRock, a privately-held oil and gas company, in a cash and stock deal worth approximately $12 billion. The acquisition is expected to close in the first quarter of 2024.

The acquisition will strengthen Occidental's U.S. onshore portfolio with CrownRock's premier Permian Basin assets. CrownRock's well-positioned assets in the Midland Basin will expand Occidental's scale in the region, further diversifying the company's portfolio. The addition of approximately 170 Mboed of high-margin, lower-decline unconventional production in 2024 will support Occidental's growth strategy and increase its overall production levels.

The acquisition of CrownRock is expected to generate immediate free cash flow accretion for OXY shareholders. According to the CEO, the transaction will result in 25% or higher free cash flow accretion for shareholders. The addition of CrownRock's high-grade inventory and development-ready assets will increase Occidental's low-breakeven inventory, enhancing the company's profitability. 

To finance the acquisition, Occidental plans to incur $9.1 billion of new debt, issue approximately $1.7 billion of common equity, and assume CrownRock's $1.2 billion of existing debt. The company expects to reduce its debt principal by at least $4.5 billion within 12 months, with increased cash flow and proceeds from a new $4.5-$6.0 billion divestiture program. This financial maneuvering will help Occidental maintain its investment-grade credit ratings. 

As part of its commitment to shareholder return priorities, Occidental announced a 22% increase in its quarterly dividend per share, raising it from $0.18 to $0.22. The increased dividend will begin with the February 2024 declaration, benefiting shareholders from the start. 

The acquisition of CrownRock will add CrownRock's experienced operating team to Occidental's capabilities. The team has a strong track record of running safe, efficient, and highly productive assets. 

Occidental's CEO has noted that the company is breakeven at $40/bbl. With the acquisition of CrownRock, Occidental's Permian unconventional sub-$40 breakeven inventory will increase by 33%. This means that at lower oil prices, Occidental will still be able to generate positive cash flow, further strengthening the company's financial position. 

Large cap energy companies have been on a buying spree in the Permian basin. OXY itself was viewed as a potential acquisition target before the rumored buyer, Chevron (CVX), pivoted to buy Hess (HES). ExxonMobil (XOM) purchased Pioneer natural Resources (PXD). There will be some questions around OXY given its poor track record with the Anadarko Petroleum purchase in 2019. However, the presence of Berkshire (BRK.B) as a major shareholder of OXY will ease some of the worries.

Shares of OXY are holding the $56 level and are up approximately $0.32 following the news. This sets up as a key support level for the stock. This is good as investors can understand the risk. If we see weak economic data and shares slide below the support level, then investors will want to step away. Investors can enter OXY and place a stop at $53, minimizing their risk if the trade goes against them due to economic conditions. 

Occidental's acquisition of CrownRock presents an exciting opportunity for investors seeking growth in the oil and gas sector. The immediate free cash flow accretion, strengthened U.S. onshore portfolio, and operational synergies make this acquisition a promising investment opportunity. Furthermore, the company"s commitment to shareholder return priorities, as evidenced by the 22% dividend increase, shows management's confidence in the company's prospects. 

As the acquisition is expected to close in the first quarter of 2024, potential investors should closely monitor Occidental's progress and financial performance leading up to the transaction's completion. The successful integration of CrownRock's assets and the realization of anticipated synergies will be crucial in determining the long-term success of this investment.