Occidental Petroleum's $55 billion takeover of Anadarko Petroleum in 2019 proved to be a challenging megadeal for CEO Vicki Hollub. The acquisition significantly increased Occidental's debt, quadrupling it to over $40 billion, at a time when investors were advocating for reduced spending and higher dividends. The timing of the deal was particularly unfortunate, as oil prices collapsed in early 2020 due to a price war between Saudi Arabia and Russia, compounded by the global pandemic.
In response to its deteriorating financial position, Occidental implemented emergency measures. These included substantial cuts to capital expenditure and a reduction in the dividend on its common shares, marking the first such cut since 1991. The company's original promise at the time of the deal was to realize the full potential of the transaction while maintaining a strong balance sheet, an investment-grade credit rating, and its current dividend, a promise that could not be kept.
The repercussions extended to legal challenges, with Occidental being sued by investors. These lawsuits, including a proposed securities class action, alleged that the company concealed its vulnerability to plunging oil prices after incurring $40 billion in debt. Investors claimed the company should have disclosed how the quadrupled debt would leave it "precariously exposed" and undermine its ability to boost shale oil production and its common stock dividend. As of the time of the lawsuits, Occidental's market value had plummeted to $13 billion from approximately $44 billion at the merger's close.
Occidental had also implemented a complex oil hedge to protect its dividend during the Anadarko acquisition. This hedge allowed the company to sell oil at a minimum of $55 per barrel in 2020, with a floor of $45, but capped its selling price at $74.09. This meant Occidental would lose out on revenue if oil prices rose above the cap. Critics noted the absence of similar downside protection for 2021, calling it a "naked hedge."
To manage its debt, Occidental planned to sell off parts of Anadarko's assets. The success of the acquisition was heavily dependent on how quickly Occidental could divest these assets and optimize the ones it retained, particularly prime U.S. shale holdings.
