Analysts Like Oxy’s Plan to Buy Midcon

One of the major investment- rating firms waived a cautionary flag over the debt ratings of Occidental Petroleum on Thursday, but that was about the only cool reaction to Occidental’s agreement to purchase a big natural-gas pipeline company for about $3 billion.

Analysts endorsed the purchase of Midcon, the nation’s fourth-largest gas pipeline company, as a move that will stabilize earnings and better exploit Los Angeles-based Occidental’s big natural-gas reserves, all without incurring too much new debt.

“It gives them an opportunity to really leverage their natural gas,” said Dallas-based analyst Alan Edgar of Schneider, Bernet & Hickman. “And this doesn’t deteriorate their balance sheet. It doesn’t put them out of whack.”

While stock prices fell generally Thursday and the Dow Jones average of 30 industrial stocks was down nearly 9 points, Oxy’s shares closed unchanged at $31 as about 2.83 million shares were traded. Oxy was the day’s most active issue on the Big Board.

“The market accepted it pretty well,” Edgar said.

Moody’s Investors Service said the acquisition prompted it to put “under review for possible downgrade” the debt ratings of Occidental and its affiliate firms. Moody’s said the review will focus on the increased debt that the oil concern is taking on.

But Moody’s competitor, Standard & Poor’s, issued a notice affirming its current ratings of Occidental and said the new debt would only marginally increase the company’s total debt as a percentage of its total capitalization.

That percentage would rise somewhat to 63.8% from the current estimated 58.9%, Standard & Poor’s said. “However, the pipeline should enable Occidental to more easily market its natural gas production.”

The terms of the agreement call for Occidental to pay about $1.5 billion in cash and the rest in stock.

The cash portion would come from money on hand and from existing credit lines, President Ray Irani has said.

He wouldn’t say how much of the $1.5 billion would be borrowed. But the company has sharply reduced its debt over the past year and the sale of assets has contributed to working capital that stood at $1.4 billion on Sept. 30.

Occidental officials dismissed Moody’s cautionary notice as “not unusual in this kind of situation.” They wouldn’t say how much cash is on hand at the moment, but reiterated that the company won’t have to sell any assets to raise the money to buy Midcon.

Despite the assertion Wednesday of Occidental Chairman Armand Hammer that the new stock being issued for the acquisition won’t dilute the value of current shares, analysts said they expect some short-term erosion of Oxy’s stock price.

Oil analyst David Eisinger, of Duff & Phelps in Chicago, said he expects the per-share value to drop by 10% or 15% in the months after the deal is completed. But he said the virtues of the acquisition will then begin to be reflected in the stock price. Midcon “will throw off sufficient cash flow to pay down the new debt pretty quickly,” he added.

“I think they got good value for the money. It’s going to turn out to be a good deal for them,” Eisinger said.

Edgar said the deal will be “slightly dilutive” and that he is lowering his per-share earnings projection for 1986 to $4 from $4.50. He added that it didn’t take into consideration “the synergies of the purchase,” referring to the increased sales of natural gas that are expected to result.

Occidental has said the purpose of the deal is to get access to Midcon’s 30,000 miles of pipelines so that it can better market its 2.5 trillion cubic feet of natural gas reserves acquired when it bought Cities Service in 1982.

“With the synergistic benefits, earnings will be on the positive side,” Edgar commented.