Summary
- Occidental's sale of its onshore Colobmbian assets makes sense in the current environment.
- Onshore Colombia is becoming a less attractive jurisdiction for upstream olil exploration and productio,.
- The sale of mature assets in riskier jurisdictions allows Occidental to reduce debt while dialing down the risks associated with its upstream portfolio.
Diversified international oil company Occidental Petroleum (OXY) has become something of a pariah among investors since its ill-fated $55 billion August 2019 acquisition of Anadarko Petroleum. The deal, which was aimed at boosting Occidental's exposure to the burgeoning U.S. shale energy patch, notably the prolific Permian shale, and endow it with the scale to compete against oil super majors like Chevron (NYSE:CVX) was one of the worst timed in history. A few months after the deal was completed oil prices crashed because of the impact of the COVID-19 pandemic on energy demand and a looming oil price war between Saudi Arabia and Russia. The acquisition left Occidental heavily leveraged with over $36 billion in debt costing over $1 billion annually to maintain.
Struggling to perform
For the second quarter 2020, Occidental reported a worrying $8.4 billion loss primarily caused by sharply weaker oil prices and $6.4 billion of impairment charges on its oil assets. That is compared to a $635 million profit a year earlier. Occidental is struggling to meet its financial obligations and reduce debt to manageable levels. Operating cashflow for the period fell sharply dropping almost 43% year over year to just under $1.7 billion. As a result, cash and cash equivalents was reduced by almost $2.4 billion at the end of the second quarter, reducing Occidental's cash pile to $1.2 billion compared to $1.75 billion at the end of the same period in 2019.
Poor timing of asset sales
Occidental's monster $36 billion of net long-term debt forced it to embark on an aggressive divestment strategy, which in the current difficult market awash with oil assets can only be described as a fire sale. Sharply weaker oil prices have forced many deeply indebted energy companies, to raise capital to ensure their survival, to flood the market with oil assets at bargain basement price making it a buyer's market.
Occidental is no different, it is expecting to realize around $2 billion of asset sales during 2020 so that it can whittle down its extremely high level of debt. During August 2020, the company stated it intended to sell $1.33 billion of assets in Wyoming, Colorado and Utah to Orion Mine Finance. Occidental's most recent divestment is its sale of all onshore oil acreage in Colombia to private equity firm The Carlyle Group for around $825 million (consisting of a $700 million base price and a further $125 million linked to performance targets). Occidental has had a presence in Colombia for around four decades maintaining a close partnership with national oil company Ecopetrol (EC). Occidental is selling its acreage in the Llanos, Middle Magdalena and Putumayo Basins, including the Caño Limon oil field which is Colombia's second largest oil field which have a combined output of around 33,000 barrels of oil equivalent daily.
