Berkshire Hathaway to buy Occidental Petroleum's chemicals arm for $9.7B
News Summary
Occidental Petroleum announced it will sell its chemicals arm, OxyChem, to Warren Buffett's Berkshire Hathaway for $9.7 billion. This marks Occidental's largest divestment yet, aimed at slashing debt accumulated from years of costly acquisitions. However, shares of the U.S. oil and gas producer fell more than 6% in morning trading following the announcement. Roth MKM analysts noted that the sale of OxyChem could weigh on free cash flow growth in coming years, as the unit was expected to contribute significantly to expansion. Scotiabank analyst Paul Cheng suggested the transaction price seemed low, having previously estimated the division's value at $12 billion. OxyChem produces chemicals used for treating swimming pools and vinyl products for water supply piping and medical supplies, generating a combined revenue of $2.42 billion in the first two quarters of this year. If the deal closes, it would be Berkshire's biggest purchase since its $11.6 billion buyout of insurance firm Alleghany Corporation in 2022, and would expand its chemical portfolio beyond Lubrizol.
Background
Occidental Petroleum incurred substantial debt following its $55 billion acquisition of Anadarko Petroleum in 2019 and the $12 billion acquisition of CrownRock last year. By the end of June this year, its debt burden stood at $23.34 billion. To reduce this massive debt, Occidental has been steadily divesting assets in recent years, including $950 million of additional divestitures disclosed in August (with $370 million already closed), and it repaid $3 billion of debt year-to-date. Berkshire Hathaway has been accumulating a stake in Occidental since February 2022, around the time of Russia's invasion of Ukraine, and is currently its largest shareholder. Earlier, in 2019, Occidental CEO Vicki Hollub secured a $10 billion investment from Buffett, which allowed her to outbid Chevron for Anadarko. The current sale's proceeds, specifically $6.5 billion, will be used for debt reduction, aiming to bring principal debt below the $15 billion target set after the CrownRock deal, and further enable Occidental to refocus on its core oil and gas business, which generated 75% of its total earnings last year.
In-Depth AI Insights
What are the deeper strategic motivations behind Berkshire Hathaway's acquisition of OxyChem? - Berkshire's move might not solely be based on OxyChem's intrinsic value but could be a strategic step to deepen its relationship with Occidental Petroleum. As Occidental's largest shareholder, acquiring a non-core asset allows Berkshire to solidify its influence over Occidental's capital structure and strategic direction, while avoiding direct equity accumulation that could attract significant market attention. - OxyChem, as a mature chemical manufacturer, offers stable cash flows and a relatively defensive business profile. This aligns with Berkshire's investment philosophy, which favors businesses with durable competitive advantages and predictable earnings. Given current global economic uncertainties, such assets become increasingly attractive. - This acquisition also expands Berkshire's industrial chemical portfolio, potentially creating synergies with existing assets like Lubrizol, contributing to the diversification and stability of its industrial segment. Does Occidental's sale of OxyChem truly resolve its debt issues, and what are the implications for its future growth? - On the surface, the $9.7 billion sale proceeds (with $6.5 billion allocated to debt reduction) will bring Occidental's principal debt below its $15 billion target, undoubtedly easing immediate financial pressure. - However, the negative market reaction, evidenced by the share price drop, suggests investors may perceive the sale price as low (analyst estimated $12 billion) and OxyChem's stable cash flow contribution as crucial for future free cash flow growth. Selling this asset might sacrifice long-term profitability and growth potential for short-term debt reduction. - This divestment reinforces Occidental's strategy to