OxyChem Sale Frees Billions For Occidental Petroleum To Boost Upstream Projects

Core Viewpoint - Occidental Petroleum is strategically repositioning its portfolio by selling its OxyChem segment to Berkshire Hathaway for $9.7 billion, aiming to reduce debt and focus on high-return upstream projects [1][8]. Group 1: Transaction Details - The sale of OxyChem is expected to close by year-end and will provide approximately $8 billion in after-tax proceeds [4]. - Occidental plans to allocate $6.5 billion of the proceeds to debt reduction, which is projected to save around $350 million annually in interest [4]. - The remaining $1.5 billion will be used to strengthen the balance sheet and support opportunistic share repurchases [4]. Group 2: Rationale Behind Divestment - Management indicated that chemical margins may remain low due to increased global export capacity, particularly from China, with OxyChem now contributing less than 10% to earnings, down from about 20% in 2015 [3]. - In contrast, Occidental's oil and gas production has more than doubled during the same period [3]. Group 3: Future Investment Focus - Capital freed from the OxyChem sale will be directed towards high-return upstream projects, including water floods in the Gulf of America and enhanced oil recovery initiatives [5]. - Sustaining capital expenditures previously assigned to OxyChem, estimated at $350–$400 million annually, will now be redirected to Permian activity [5]. - Enhanced oil recovery projects are expected to yield internal rates of return of 25–35%, which will help maintain U.S. oil supply plateau rates [5]. Group 4: Operational Efficiencies - Occidental reported a 20% reduction in Delaware Basin drilling times and a 13% decrease in overall well costs year-over-year [6]. - The focus on secondary benches such as the Avalon Shale and Barnett intervals is anticipated to extend inventory and optimize production [6]. Group 5: Financial Outlook - The company acknowledged potential trade-offs from the sale, including $1.7 billion in tax leakage and retained environmental liabilities, but considers these manageable given the improving balance sheet [7]. - Analysts maintain a Neutral rating on Occidental with a price target of $50 by December 2026, reflecting above-average leverage and modest returns compared to peers [7].