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Occidental's Asset Cuts After CrownRock's $12 Billion Deal
12/13/2023
- Acquisition Cost: Occidental buys CrownRock LP for $12 billion.
- Expanded Acreage: Gains over 94,000 net acres in the Permian Basin.
- Production Boost: Adds about 170,000 boe/d of production in 2024.
- Cash Flow Increase: Expects $1 billion cash flow in the first year.
- Debt Reduction: Aims to pay down $4.5 billion in debt within a year.
Occidental Petroleum is expanding its reach in the Midland Basin and targeting deeper drilling in the Barnett area through its significant $12 billion purchase of CrownRock LP.
CrownRock, a collaboration between CrownQuest Operating LLC and Lime Rock Partners, is recognized for its prime land holdings in the Permian Basin. This acquisition brings over 94,000 net acres and 1,700 undeveloped drilling spots in the Midland Basin to Occidental's portfolio.
Additionally, the deal is set to increase unconventional production by about 170,000 barrels of oil equivalent per day (boe/d) in 2024. Vicki Hollub, Occidental's President and CEO, highlighted the vast potential of CrownRock's undeveloped lands in a recent analyst call, noting that 80% of these assets are in largely untouched areas.
A key benefit of this transaction is the substantial boost in cash flow it's expected to bring, including an anticipated $1 billion in the first year, assuming oil prices stay around $70 per barrel. This increased cash flow will not only help Occidental reduce its debt by at least $4.5 billion within a year but also supports their plan to raise their quarterly dividend by over 22% to $0.22 per share starting February 2024.
Focus to Midland: Occidental's New Strategy
Occidental Petroleum, before its recent CrownRock purchase, mainly focused on the Delaware Basin area within the Permian Basin for its drilling operations. Richard Jackson, a senior executive at Occidental, shared that about 80% of their cost-effective drilling sites were in Delaware. Now, with the CrownRock acquisition, the company's operations will be more evenly split:
“We now would have 60% Delaware Basin and 40% Midland Basin, balancing this Tier 1 inventory. Also, the Midland Basin production would move from 9% to nearly 30% of our total Permian unconventional production, based on 2023 estimated and combined totals.”
- Richard Jackson
This acquisition is part of a larger trend in the Permian Basin, where there's a rush for mergers and acquisitions due to the limited availability of high-quality drilling sites. In October, Exxon Mobil announced a big plan to acquire Pioneer Natural Resources, focusing on the Midland Basin. Other companies, like Civitas Resources and Matador Resources, are also expanding in the area.
The price Occidental paid for CrownRock is similar to high prices seen from 2017 to 2019. This reflects a trend where the cost of acquiring drilling sites in the Permian Basin is going up. In 2019, Occidental made a similar large purchase of Anadarko Petroleum. The price per acre for CrownRock is close to what they paid for Anadarko.
In October, Exxon Mobil Corp. decided to buy Pioneer Natural Resources for $60 billion, focusing on the Midland Basin.
Similar expansion is seen with other companies like Civitas Resources and Matador Resources in both the Midland and Delaware basins. This is happening because there aren't many top-quality drilling places left in the Permian Basin, a key oil area in the U.S. Due to this, the prices for land and drilling sites are going up. Occidental paid more than $50,000 for each acre when it bought CrownRock.
Drilling Strategies
- Occidental's acquisition of CrownRock brings valuable, low-cost drilling sites into its portfolio, offering more potential from deeper underground targets.
- They plan to enhance the performance of deep Barnett wells within the CrownRock property.
- Early efforts in developing Barnett sites show promising results for Occidental, with new wells performing 34% better than the average in the area, according to Jackson.
- Occidental is also exploring other deep areas like the Strawn, Woodford, and Devonian formations in the CrownRock asset.
- The company sees promising potential in deeper zones of CrownRock, especially in the Barnett formation. This was highlighted in an Occidental investor presentation.
- Additionally, Occidental is considering Enhanced Oil Recovery (EOR) methods, such as CO2 injection, at CrownRock. They have already been running a CO2 EOR pilot project in the Midland Basin for several years.
“Occidental is able to pay more than others for CrownRock, assuming oil prices remain stable and drive material free cash flow accretion in the near term. “
- Truist Securities
Occidental also plans to sell some assets to fund this purchase. Alongside the CrownRock deal, they aim to sell $4.5 to $6 billion worth of assets that are less competitive.
CEO Hollub stated that these sales will only involve their U.S. assets. She emphasized that just because they are selling an asset doesn't mean it's of low quality. It might simply not align with Occidental's current development strategy or financial needs, but could still be valuable for others.
CFO Sunil Mathew expressed confidence in reaching these asset sale targets, which will help in reducing the company's debt.
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Occidental, CrownRock Merger Under Regulatory Review: 2024 Update
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CrownRock's 94,000+ net acres acquisition complements Occidental's Midland Basin operations, valued at $12.0 billion. This expansion enhances Occidental's Midland Basin-scale and upgrades its Permian Basin portfolio with ready-to-develop, low-cost assets. The deal is set to add around 170 thousand barrels of oil equivalent per day in 2024, with high-margin, sustainable production.
Baker Hughes Confirms a Third Weekly Decline in US Oil and Gas Rigs
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In a recent announcement, energy services firm Baker Hughes stated that U.S. energy companies have decreased the number of operating oil and gas rigs for the third successive week. This development marks the first such consistent reduction since early September. As of October 6, the count for oil and gas rigs, considered a precursor to future production levels, has seen a decline by four, positioning it at 619. This is the lowest figure recorded since February of the preceding year. The overall rig count has decreased by 143 or 19% when compared to last year's statistics.
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The United States government has announced a significant investment of $7.3 billion from the 2022 Inflation Reduction Act (IRA) to support clean energy initiatives led by rural electric cooperatives. These projects aim to reduce energy costs, enhance reliability, and promote sustainability for rural communities, where energy costs tend to be higher than in urban areas. This investment marks a substantial effort toward decarbonizing rural America while supporting job creation and infrastructure improvements.
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The U.S. oil and natural gas rig count experienced a slight decline, falling by four to a total of 633 rigs for the week ending August 21. Despite this modest drop, industry analysts have noted a surprising resilience in both oil supply and natural gas prices as the year progresses, suggesting that the market may be more robust than previously anticipated.
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Investors remain strongly bearish on petroleum prices, even as confidence grows that the U.S. Federal Reserve will cut interest rates to boost consumer and business spending. Last week, fund managers returned to selling oil futures and options, as the brief rally from the previous week quickly lost steam and negative sentiment took hold once again. Hedge funds and other money managers offloaded 48 million barrels across the six major futures and options contracts in the week ending August 20. This marks the sixth time in seven weeks that funds have been sellers, reducing their positions by a staggering 346 million barrels since early July, based on data from exchanges and regulators.