On the 8th of August 2019 a major oil company completed an acquisition that could well be looked back on as the worst oil deal of the decade. Since that day, the company’s stock price has crashed 85 percent and hit its lowest level since 2001.
The deal, of course, was Occidental Petroleum’s acquisition of Anadarko Petroleum.
This megadeal, valued at $55 billion, pitted two of the world’s most famous investors against each other. Warren Buffet, who backed the deal with a $10 billion pledge, found himself in disagreement with billionaire activist investor Carl Icahn who attempted to stop the merger from going ahead.
It is now clear that Buffett got this one badly wrong in what is turning out to be his worst mistake since merging Heinz with Kraft Foods in 2015. Icahn has since written an open letter to Occidental shareholders suggesting that the company’s top management only moved ahead on the acquisition as a defensive manoeuvre to stop a potential takeover of Oxy itself. He claimed that the CEO and some board members had “gambled the Company to further their own agendas – all at the expense of stockholders.”
So far this year, the coronavirus outbreak and the breakdown of the OPEC+ alliance have sent oil prices crashing, making the merger of Anadarko and Occidental an even more worrying prospect for shareholders. The last thing that oil companies need in this low oil price environment is large amounts of debt, and that is exactly what OXY has been left with. The company sold billions in bonds to fund the acquisition, and the value of those bonds have now crashed.
As of Tuesday, it seems that CEO Vicki Hollub runs Occidental Petroleum in name only. The company was forced to cut its dividend by more than 80 percent, something that she had promised to defend. Warren Buffett’s $10 billion investment is now almost equivalent to Occidental’s market capitalization, which means he accounts for almost half of its equity value. Related: The Oil Price War Has Only Just Begun
So how did it all go so wrong for Occidental CEO Vicki Hollub? Is there any way back for this once great oil giant? And should shareholders hold on?
In answer to the first question, we will have to wait and see. If Carl Icahn’s accusations are correct then it would mean a determination to protect her job blinded her to the dangers of the deal.
As for the second question, it seems that Occidental Petroleum’s best path back may well come in the form of a takeover – possibly from Chevron, the company that it outbid for the original Anadarko deal.
Finally, when it comes to where shareholders should put their money… well there are probably better places than an indebted oil major with an apparent power struggle taking place in the board room.
By Editorial Department for Oilprice.com
More Top Reads From Oilprice.com:
- Coronavirus vs Oil War: Which Is Worse For Markets?
- Big Oil Prepares To Suffer In 2020
- U.S. Shale Collapse Will Lead To Higher Oil Prices
He is now in a very strong position within a company that must be a takeover target. He's in a position to actually buy them out himself.