The deal comes amid a new wave of shale consolidation underpinned by Exxon Mobil's (XOM.N) $60-billion proposed deal for Pioneer Natural Resources (PXD.N) and Chevron's (CVX.N) $53-billion agreement for Hess (HES.N) in October.
Big producers are using the post-pandemic profit boom to prepare for a future with lower oil prices, as they look to gain scale in basins they already operate to cut costs.
"We found CrownRock to be a strategic fit," said Chief Executive Vicki Hollub. "Where we are looking at oil prices being long term, that it would help us in (oil) downturns."
If approved, the CrownRock takeover would make Occidental a bigger player in the U.S. shale than Chevron and Hess combined. The deal is expected to close in the first quarter of 2024 and would boost Occidental's Permian production by 170,000 barrels of oil and gas per day in the Midland, to 750,000 boed.
Occidental's total production was 1.2 million boed at Sept. 30.
The deal will also add immediate cash flow for investors, Hollub said, or about $1 billion considering WTI oil at $70 per barrel. Occidental said almost half of CrownRock's 1,700 undeveloped locations could generate profits with WTI at $40 per barrel.
"This acquisition adds scale that will be important to us for the Midland basin and will enable us to do cost over time," Hollub said.
U.S. oil is trading at about $71 per barrel, encouraging higher output as members of the Organization of Petroleum Exporting Countries pare oil quotas.
Occidental's shares rose 0.8% to $56.90.
But not all analysts approved the deal, as Occidental just recently recovered from the widely criticized, debt-laden purchase of Anadarko Petroleum in 2019.
"We are pretty negative on this deal," said Sankey Research analyst Paul Sankey. "You're adding a load of debt, when arguable you should be paying with shares."
CrownRock would significantly expand Occidental's leverage, increase reliance on future asset sales and put buybacks on hold just as after the Anadarko acquisition, said Piper Sandler investment bank.
Occidental said it will finance the purchase with $9.1 billion of new debt, the assumption of CrownRock's $1.2 billion of existing debt. It will issue $1.7 billion in common stock.
Hollub said the company plans to reduce its debt by about $15 billion and by at least $4.5 billion in the next 12 months from asset sales and cash flow.
Occidental had about $18.6 billion in long-term debt as of Sept. 30, and the deal would increase its debt to nearly $28 billion.
The deal puts the onus on shareholders to pay off the debt, but fixes the return for doing so, said Cole Smead, CEO of Smead Capital Management, who owns about 5.9 million shares in its U.S. portfolio.
"An all equity deal, in comparison, makes it tougher to buy back stock later," he said.
North America may end up with only ten oil and gas after the current consolidation wave with Occidental being one of them, said Smead.
Hollub said in a CNBC interview that Warren Buffett's Berkshire Hathaway (BRKa.N), which had helped finance the Anadarko purchase, was not involved in the CrownRock deal.
Occidental said it will raise its quarterly dividend by 4 cents, to 22 cents a share, and expects to retain its investment-grade credit ratings.
Reuters first reported in September that CrownRock was preparing to explore a sale that could give it an enterprise value of well over $10 billion.
