Occidental Petroleum has decided to sell its chemical division, Oxychem, to Warren Buffett’s Berkshire Hathaway for a whopping $9.7 billion.
Interestingly, shares of U.S. oil and gas producers dropped over 6% during morning trading. According to analysts from Roth MKM, the sale of Oxychem might hinder free cash flow growth in the coming years, as the division was expected to play a big role in increasing revenues. Scotiabank’s Paul Cheng also mentioned that the sale price seems a bit low, having earlier valued the division at around $12 billion.
Warren Buffett is set to step down as CEO of Berkshire Hathaway by the end of this year.
Oxychem makes chemicals for things like swimming pool treatment and vinyl products used in plumbing and medical supplies, racking up $2.42 billion in revenue in the first half of this year.
If finalized, this will be Berkshire’s largest acquisition since the $11.6 billion purchase of Alleghany Corporation, an insurance company, last year. It expands Berkshire’s chemical sector beyond Lubrizol. Berkshire has been Occidental’s biggest shareholder, starting to build its stake in February 2022, around the time of the Ukraine invasion.
This sale underscores the tight-knit relationship between the two companies. Back in 2019, during a meeting with Buffett, Occidental’s CEO, Vicki Hollub, secured $10 billion in investment, allowing the firm to beat Chevron in acquiring some of Texas’ most lucrative shale land. But after buying Anadarko Petroleum for $55 billion, Occidental found itself in deep debt, a situation aggravated by last year’s $12 billion buyout of Crown Rock, a U.S. shale oil producer.
To tackle its staggering debt, which stood at $23.34 billion by the end of June, Occidental has been steadily offloading assets in recent times. They’ve disclosed an additional $950 million in sales since August, with $370 million already completed, using the funds to chip away at $3 billion of debt annually. Just recently, Occidental indicated that it plans to channel its $6.5 billion from the sale to continue reducing its debt, aiming to get below the $15 billion target set after the CrownRock deal.
The forthcoming deal, expected to finalize in the fourth quarter, signals that Occidental is pivoting back to its oil and gas roots, which comprised 75% of its total revenue last year. CEO Hollub mentioned that selling Oxychem allows Occidental to “unlock more than 20 years of low-cost resource runways” focusing on oil and gas.
