Occidental Petroleum has agreed to divest its chemical division, OxyChem, to Warren Buffett’s Berkshire Hathaway for $9.7 billion. This strategic move represents the largest asset sale by Occidental to date, aimed at significantly reducing its substantial debt burden accrued from a series of high-value acquisitions over recent years. The transaction underscores a broader strategic recalibration for Occidental, signaling a renewed focus on its core oil and gas operations.
The sale, however, has generated mixed reactions in the market. While it addresses Occidental’s pressing need for debt reduction, some analysts have raised concerns regarding its impact on future free cash flow growth. Roth MKM analysts pointed out that OxyChem was anticipated to be a significant contributor to the company’s expansion initiatives. Furthermore, Scotiabank analyst Paul Cheng suggested that the agreed-upon sale price might undervalue the division, estimating its worth closer to $12 billion.
Strategic Realignment and Debt Reduction
Occidental Petroleum’s decision to offload OxyChem is a direct response to its considerable debt, which stood at $23.34 billion at the end of June. The company has been actively pursuing divestitures to manage this financial pressure. This latest transaction is expected to yield $6.5 billion specifically for debt reduction, bringing Occidental’s principal debt below its target of $15 billion established after the acquisition of CrownRock. The proceeds from this sale will enable Occidental to streamline its balance sheet and enhance financial flexibility.
Berkshire Hathaway’s Expanding Portfolio
For Berkshire Hathaway, the acquisition of OxyChem marks its most substantial purchase since the $11.6 billion takeover of Alleghany Corporation in 2022. This move will broaden Berkshire’s chemical interests beyond its existing holdings, such as Lubrizol. Berkshire Hathaway is already a significant stakeholder in Occidental Petroleum, having initiated its investment in February 2022. The close relationship between the two entities was previously highlighted when Warren Buffett provided Occidental CEO Vicki Hollub with a $10 billion investment in 2019, facilitating the successful bid for Anadarko Petroleum.
OxyChem’s Contribution and Occidental’s Future Focus
OxyChem manufactures essential chemicals utilized in various applications, including swimming pool treatment and the production of vinyl products for water supply piping and medical supplies. In the first two quarters of the current year, the division generated a combined revenue of $2.42 billion. The sale of OxyChem is anticipated to conclude in the fourth quarter. This divestment reinforces Occidental’s strategic pivot towards its oil and gas segment, which accounted for 75% of its total earnings last year. CEO Vicki Hollub stated that the sale will allow Occidental to leverage “20-plus years of low-cost resource runway” within its primary energy business.
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