Summary

• Occidental Petroleum announced the sale of its Colombian assets at a direct cheap multiple to Carlyle Group.
• This represents a near total move out of Colombia after decades working in the region, helping the country shift to oil exporter status.
• This transaction, among others, is an example of how a bad balance sheet can force companies to sell great assets for pennies on the dollar.

In continued asset sale news, Occidental Petroleum (OXY) has announced that it sold its onshore holdings in Colombia to the Carlyle Group (CG). Receiving $700mm upfront with the potential for another $125mm payout if certain commodity price and production targets are met, investors would be forgiven if they thought this was a great deal. After all, critics have long hammered the company on liquidity concerns, primarily revolving around its upcoming refinancing maturity wall. Tie this sale into the news that Warren Buffett would see his preferreds paid for with cash instead of with stock, and investors would be forgiven if they thought the future outlook appeared wonderful.

Selling Wonderful Assets For Dirt Cheap

Unfortunately, that is not the case. To understand, recall that these Colombian assets revolve around working interests in the La Cira-Infantas and Teca areas and the massive Llanos Norte Basin. Within the latter, Occidental operates Caño Limón, a large oilfield that was actually an Occidental Petroleum discovery in the 1980s. Before this and other major discoveries, Colombia was a net oil importer; Occidental helped fundamentally change the Colombian economy. Thus, the company has been a major player in Colombia for decades, has great working relationships with state-controlled oil companies, and has been integral in helping develop these assets, including recently by bringing enhanced oil recovery techniques developed in the United States to these onshore assets. Production in La Cira Infantas – the oldest producing region in Colombia – has been boosted significantly because of American technology.

This has generated a lot of cash for Occidental. In 2019, Occidental net share of production from Colombia was 33 kboepd or more than 12mm barrels of energy equivalent annually – this is no small potatoes asset. Most Colombian oil producers benchmark off of Brent crude, realizing a pricing discount due to the grade of the oil and the cost to bring it to market. While actual results will vary depending on differentials, oil mix, and oil prices throughout the year, current estimates are that the Colombia onshore assets would have generated between $225 and $275mm in operating cash flow for Occidental Petroleum after field expenses.

These are long-lived, legacy assets with very little ongoing maintenance capital requirements. What Occidental Petroleum has done is sell high value assets with low ongoing capital requirements for pocket change: between 3.0x and 3.5x EBITDAX. This is such a low price, so much so that it is not accretive to improving leverage and hurts rather than harms cash flow available to shareholders. Remember that Occidental Petroleum currently trades at more than 8x EV/EBITDAX on a consolidated basis, well above E&P peers even when accounting for the higher value within the chemicals business. While stock price targets vary on Wall Street, analysts have nearly universally hammered this deal as a terrible one.

Takeaways

The Colombian asset sale is a signal of how desperate the management team is to resolve the maturity wall issues. While the proceeds raised from Carlyle mentioned here will be added to a massive coffer of cash raised via the previously-announced Trona divestiture and the undrawn Revolver, there are still billions left to raise. Occidental continues to market its Oman assets and likely is still trying to sell Ghana assets after its sale to Total (TOT) fell apart because of regulatory pressure. How desperate will those sale prices be in a buyer’s market for oil assets?

Further, these sales of international assets continue to transition Occidental Petroleum to more of a North American focused firm. That is all well and good and could be directionally the correct move, but international oil and gas firms (Apache (APA), Exxon Mobil (XOM), Hess Corporation (HES), others) basically universally trade at significantly higher valuations from the market. Conventional fields tend to attract better multiples due to capital intensity and depth of reserves.

Over time, as this transaction continues, Occidental is going to get compared more to the United States focused, unconventional production peers like EOG Resources (EOG).

Why pay more for a company like Occidental Petroleum, inclusive of all of its problems onshore like in the DJ Basin, when firms like EOG Resources or pure play Permian firms with similar breakevens trade for far lower multiples alongside lower leverage? It does not make sense, and investors can and should expect pricing action to continue to be punishing.

Source: SeekingAlpha, 2 Oct 2020

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