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Occidental's $12 billion CrownRock deal an 'aggressive move' amid Big Oil's Permian consolidation

Occidental Petroleum's (OXY) announcement that it will buy privately held oil and gas producer CrownRock for $12 billion marks the latest move in a consolidation trend that is sweeping across the Permian Basin.

CrownRock owns 94,000 net acres in the Permian Basin of West Texas. The acquisition will add to Occidental’s production by about 170 thousand barrels of oil equivalent per day.

Occidental's stock rose about 1% on Monday on the news.

The Permian Basin, known for lower extraction costs, has become a hotspot for takeovers in recent months as the oil majors gobble up production assets.

In October Chevron (CVX) said it would acquire Hess in a $53 billion deal. The agreement followed Exxon Mobil's (XOM) announcement to buy Pioneer Natural Resources for $60 billion.

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“People are definitely going to run out of inventory over the next several years,” Pioneer's CEO Scott Sheffield predicted during the company's earnings call on Aug. 2. That “should lead to extreme consolidation.”

Occidental faces one key risk in the CrownRock acquisition: It will need to issue more than $9 billion in debt in order to finance the deal.

“The CrownRock assets are generally perceived to be of high quality, but investors are likely to question the merits of adding leverage to the Occidental balance sheet at this point in the cycle,” Peter McNally, global head of sector analysts at Third Bridge Group, said in a note.

“Mergers and acquisitions continue to be a big part of the story in US energy, but the two other recent mega transactions were done without increasing financial leverage,” he added.

Occidental CEO Vicki Hollub speaks at the panel dicscussion during the Abu Dhabi International Petroleum Exhibition and Conference held at ADNEC Exhibition Center on October 2, 2023. (Photo by Ryan LIM / AFP) (Photo by RYAN LIM/AFP via Getty Images)
Occidental CEO Vicki Hollub speaks at the panel dicscussion during the Abu Dhabi International Petroleum Exhibition and Conference held at ADNEC Exhibition Center on Oct. 2, 2023. (RYAN LIM/AFP via Getty Images) (RYAN LIM via Getty Images)

“It's an aggressive move but OXY is getting good assets, and should reduce its break-even cost,” Stewart Glickman, energy equity analyst at CFRA Research, told Yahoo Finance.

“The risk is that it is adding about $10B in debt. Unless crude oil collapses (which I do not expect to happen), OXY should get the time it needs to sell off noncore assets and reduce debt again,” he added.

This is the largest takeover by Occidental since its purchase of Anadarko in 2019, backed by a $10 billion commitment from Warren Buffett's Berkshire Hathaway.

Berkshire Hathaway is the largest stakeholder in Occidental. During an interview with CNBC on Monday, Occidental Petroleum CEO Vicki Hollub said the CrownRock deal did not require Buffett's help.

Occidental also announced it will boost its dividend per share by $0.04 to $0.22. The stock is down about 6% year to date. Last year the stock rose a whopping 117%, making it the best-performing S&P 500 company of 2022.

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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