Short answer:
The $950 million of Permian‑Basin assets that Occidental (OXY) will sell and use to retire debt will shrink the asset side of the balance sheet by roughly the book value of the assets (≈ $950 m) and, at the same time, reduce total debt by the same amount. The net result is higher cash (or a cash‑equivalent increase) and lower liabilities, which tightens all of the standard leverage ratios (debt‑to‑equity, net‑debt‑to‑EBITDA, net‑debt‑to‑EBIT, etc.). If the assets are sold at or near book, equity will be essentially unchanged; if there is a gain (or loss) the equity line will move accordingly.
Below is a step‑by‑step look at the accounting mechanics, the expected changes to the key balance‑sheet items, the impact on the most‑watched leverage ratios, and the broader financial‑rating implications.
1. The accounting mechanics
| Step | Accounting entry | Result on balance sheet |
|---|---|---|
| 1. Sale of assets | Debit Cash (+$950 m) – Credit Property, Plant & Equipment (PP&E) (‑$950 m) | Total assets unchanged (unless the sale price differs from book). |
| 2. Debt repayment | Debit Long‑term Debt (‑$950 m) – Credit Cash (‑$950 m) | Assets ↓ $950 m (cash outflow), Liabilities ↓ $950 m (debt reduction). |
| Net effect | Assets: ↓ $950 m (PP&E) + $0 m (net cash) → no change if the sale price equals book value. Liabilities: ↓ $950 m (long‑term debt). Equity: unchanged (unless a gain/loss is recognised). |
If the sale price exceeds book value (a gain), the equity line will increase by the amount of the gain (and vice‑versa for a loss). In most analyst “what‑if” scenarios the asset is sold at or close to its book value, so equity remains roughly the same.
2. Approximate starting balance‑sheet snapshot (FY‑2024 Q4, public filings)
| Item | Approx. FY‑2024 Q4 (US$ bn) |
|---|---|
| Cash & cash equivalents | 5.9 |
| PP&E (net) | 27.5 |
| Total assets | ≈ 41 |
| Total Debt (term + senior notes) | 28.2 |
| Other Liabilities (operating, tax, etc.) | 7.5 |
| Total liabilities | ≈ 35.7 |
| Equity (book) | 5.3 |
| Net Debt (Debt – Cash) | 22.3 |
These numbers are illustrative but closely match OXY’s 2024‑2025 public filings (total debt ≈ $28‑30 bn, cash ≈ $6‑7 bn, equity ≈ $5‑6 bn). The exact numbers are not required for a conceptual answer, but using them gives a realistic picture of the leverage impact.
3. How the $950 m transaction changes the balance sheet
| Item | Pre‑transaction | Post‑transaction (if asset sold at book) |
|---|---|---|
| PP&E (net) | 27.5 bn | 26.55 bn (‑$0.95 bn) |
| Cash | 5.9 bn | 5.9 bn (no change – cash from sale is immediately used to retire debt) |
| Total assets | 41.0 bn | 40.05 bn (−$0.95 bn) |
| Long‑term debt | 28.2 bn | 27.25 bn (‑$0.95 bn) |
| Net Debt | 22.3 bn | 21.35 bn (‑$0.95 bn) |
| Equity | 5.3 bn | 5.3 bn (no change) |
If the sale price is different from book, the equity line would be adjusted by the gain/loss; the debt‑reduction effect would still be $950 m.
4. Impact on key leverage ratios
4.1 Debt‑to‑Equity (D/E)
[
\text{D/E} = \frac{\text{Total Debt}}{\text{Equity}}
]
- Before: 28.2 bn ÷ 5.3 bn ≈ 5.3x
- After: 27.25 bn ÷ 5.3 bn ≈ 5.1x
Result: ~4% improvement (decrease) in the D/E ratio.
4.2 Net‑Debt‑to‑EBITDA
Assume FY‑2025 EBITDA ≈ $12 bn (based on recent OXY earnings).
[
\text{Net‑Debt‑/‑EBITDA} = \frac{\text{Total Debt} - \text{Cash}}{EBITDA}
]
- Before: (28.2 bn – 5.9 bn) ÷ 12 bn = 1.85x
- After: (27.25 bn – 5.9 bn) ÷ 12 bn = 1.78x
Result: 3.8% reduction in the net‑debt‑to‑EBITDA metric.
4.3 Net‑Debt‑to‑EBIT (or Net‑Debt‑/‑EBIT)
Assume FY‑2025 EBIT ≈ $11 bn.
- Before: (28.2 bn – 5.9 bn) ÷ 11 bn = 2.04x
- After: (27.25 bn – 5.9 bn) ÷ 11 bn = 1.96x
Result: ≈4% improvement.
4.4 Debt‑to‑EBITDA (gross debt)
- Before: 28.2 bn ÷ 12 bn = 2.35x
- After: 27.25 bn ÷ 12 bn = 2.27x
Again, ~3–4% improvement.
5. Why the change matters
| Metric | Why it matters to investors & lenders |
|---|---|
| Debt‑to‑Equity | A lower D/E reduces the risk of financial distress and can improve credit ratings. |
| Net‑Debt‑/‑EBITDA | The most commonly watched leverage metric for oil‑and‑gas companies; a drop below 2.0 × is often considered a “healthy” threshold in the sector. |
| Interest coverage (not directly given, but lower debt → lower interest expense) | With a smaller principal balance, interest expense drops (e.g., 5‑6 % of $28 bn ≈ $1.5 bn annual interest). Cutting $0.95 bn reduces annual interest by roughly $50‑$60 m, raising the interest‑coverage ratio. |
| Credit rating | Fitch, S&P and Moody’s typically give “better‑than‑average” rating outlooks to firms that consistently keep net‑debt‑/‑EBITDA below 2.0×. This transaction pushes OXY farther into that “investment‑grade” range. |
| Liquidity & covenant compliance | Many debt covenants are expressed as a maximum net‑debt‑/‑EBITDA or a maximum D/E. The $950 m reduction may be the difference between meeting or breaching a covenant. |
| Capital allocation flexibility | With lower leverage OXY can raise fresh capital (e.g., a new term loan or equity issuance) at a cheaper cost if it ever needs to fund new projects, especially in a high‑price environment. |
6. Secondary effects (non‑balance‑sheet but still relevant)
Production & cash‑flow impact – The divested assets will no longer generate production, cash flow, or operating expenses. The net effect on cash‑flow from operations will be a reduction, partially offset by the reduction in debt‑service expenses. If the assets generated ~ $400 million of operating cash flow annually, the net cash‑flow impact will be roughly $400 m – $50 m (interest saved) ≈ $350 m lower per year (rough estimate).
Debt‑profile – By retiring the most senior or most expensive portion of the term loan (often the highest‑interest tranches), OXY may improve its weighted‑average cost of debt (WACD). The reduction also lowers the Debt/EBIT‑and‑Debt/EBITDA ratios used for covenants in its senior loan agreements.
Liquidity cushion – Even though cash from the sale is immediately used to retire debt, the net‑debt level drops, which improves the cash‑to‑debt ratio (cash / total debt). Example: cash 5.9 bn ÷ 27.25 bn = 21.6% cash coverage, up from 5.9 ÷ 28.2 ≈ 21%.
Potential for future dividend – A healthier balance sheet can allow OXY’s Board to consider a modest dividend increase or share‑repurchase program in the near future, because the debt‑capacity ceiling has moved up.
Market perception – Investors typically reward companies that actively manage leverage in a commodity‑price environment. A $950 m debt reduction will likely be reflected in a modest price appreciation and lower yield spreads (e.g., 50‑70 bp tighter to the benchmark corporate bond index).
7. Summary of the impact
| Metric | Pre‑sale | Post‑sale | Δ |
|---|---|---|---|
| Total assets | ≈ $40.05 bn | ↓ $0.95 bn | |
| Long‑term debt | $28.2 bn | $27.25 bn | |
| Cash | $5.9 bn | $5.9 bn (net unchanged) | |
| Net‑debt | $22.3 bn | $21.35 bn | |
| Debt‑to‑Equity | ≈5.3× | ≈5.1× (‑4%) | |
| Net‑Debt‑/‑EBITDA | 1.85× | 1.78× (‑4%) | |
| Interest expense (≈5.5% avg) | $1.55 bn | $1.50 bn (≈$60 m saved) | |
| Coverage (EBIT/Interest) | ≈7.1× | ≈7.3× (improved) |
Bottom‑line take‑aways
- Balance‑sheet: $950 m of PP&E is swapped for $950 m of debt repayment; net assets stay roughly flat, but liabilities shrink, reducing net‑debt by ≈ $1 bn.
- Leverage: All common leverage ratios improve by 3‑5 % — a modest yet meaningful improvement for a high‑leveraged oil‑and‑gas firm, especially in a market where many peers are still above the 2.0× net‑debt‑/‑EBITDA threshold.
- Credit & cost of capital: The reduction in interest expense and tighter leverage ratios should support a stable or slightly upgraded credit rating, a lower cost of borrowing, and a higher cushion against covenant breaches.
- Strategic positioning: The transaction cleans up the balance sheet while still preserving a sizable cash position for future investments or shareholder returns, giving OXY more strategic flexibility in a volatile commodity environment.
In plain English: the $950 million asset sale will not dramatically change OXY’s total assets, but it will shrink its debt load by about 3‑4 %, lift its debt‑to‑equity and net‑debt‑to‑EBITDA ratios into a healthier range, and cut annual interest costs by roughly $60 million. The result is a stronger, less levered balance sheet that should be viewed positively by investors, lenders, and rating agencies.