Occidental to Sell Half of Big New Find : Royal Dutch-Shell Will Pay $1 Billion for Colombian Stake
Occidental Petroleum agreed Wednesday to sell half of its interest in a huge oil field in eastern Colombia to Royal Dutch-Shell Group for $1 billion cash.
The sale surprised most analysts, who said there was no indication that Occidental was considering such a move. But analysts said the sale was clearly beneficial to both companies, as Occidental receives a giant cash infusion and Royal Dutch-Shell gets valuable crude oil reserves for about $5 a barrel.
Occidental did not say why it decided to sell. But analysts speculated that the Los Angeles-based oil company would use a good portion of the proceeds to reduce its debt or buy back preferred stock. “They certainly chose their most salable asset,” said Alan Edgar, an oil industry analyst with Schneider, Bernet & Hickman in Dallas.
Royal Dutch-Shell agreed to pay Occidental $750 million when the deal closes July 1. It also agreed to pay another $200 million when production reaches certain levels that weren’t disclosed. In addition, Royal Dutch-Shell will pay about $50 million to cover about half of Occidental’s exploration and production costs between Jan. 1 and July 1.
Each Firm to Own 20%
The agreement was reached Wednesday in Bogota after meetings with Colombian President Belisario Betancur. Occidental had developed the region in partnership with Colombia’s national oil company, Ecopetrol. Occidental’s share of the Colombian project was 40%, after royalties to the Colombian government. The agreement with Royal Dutch-Shell gives Occidental and Royal Dutch-Shell each a 20% share.
Occidental Chairman Armand Hammer called the deal a “confirmation of the value of our discovery,” which the company has estimated at 1 billion barrels in the Cano Limon field alone.
Wall Street reacted favorably to the announcement Wednesday. Occidental’s stock closed at $33.625, up $2.75 a share, as nearly 1.1 million shares traded on the New York Stock Exchange.
Andrew Gray III, an oil analyst with Pershing & Co. in New York, said that until Wednesday the stock market hadn’t given Occidental enough credit for its Colombian discovery, though Occidental had projected that its Colombian oil would contribute between $1.50 and $2 per share to earnings next year. The Royal Dutch-Shell deal is worth about $10 a share.
‘Crude Has Hit Bottom’
Analysts speculated that the size of Royal Dutch-Shell’s investment indicated that the Colombian reserves might be larger than 1 billion barrels.
Analysts also viewed the purchase as a sign that the price of crude oil, which has slid steadily downward since last October, may have hit bottom.
“The fact that Royal Dutch is willing to spend $1 billion in a foreign country for reserves that won’t come on stream for almost a year and (about which) there’s some uncertainty, says they must think that crude has hit bottom,” Edgar said.
Analysts said they had expected Occidental to sell some additional assets this year. The company had made debt reduction a priority and has reduced its senior debt by about $2 billion since 1982, partly through asset sales. The Colombian sale, however, came as a surprise.
At the company’s annual meeting in Santa Monica two weeks ago, the Colombian discoveries were hailed by Hammer as a “major contribution to Occidental earnings in 1986 and in years to come.” In a speech to shareholders, he emphasized that Occidental had “only one partner, the state oil company” and that Occidental’s share was “a full 50% after a 20% royalty.”