What tax implications or capital gains considerations arise from the asset sales?

Tax and capital‑gain considerations for Occidental’s (OXY) Permian‑Basin asset sales

Below is a detailed overview of the principal tax issues that can arise when a publicly‑traded company like Occidental sells oil‑and‑gas assets and uses the cash to pay down debt. The points are framed for a corporate‑level perspective (i.e., the company’s tax return) and for the downstream impact on shareholders and the market.

1. Nature of the assets being sold

Take‑away: Most of the $950 million proceeds will be treated as capital‑gain income, but a portion—especially for depreciated equipment—could be recaptured as ordinary income.

2. Determining the gain: basis vs. sale price

1. Historical acquisition cost (tax basis) – The company must have a documented cost basis for each asset, including any capital improvements made while the asset was held.
   
2. Allocated purchase price – In a multi‑asset transaction, the total purchase price is allocated among the individual assets (often using a “allocation of purchase price” method based on fair‑market values).
   
3. Gain = Sale price – Tax basis –
   
   • Long‑term capital gain (if the asset was held > 1 year) is taxed at the corporate capital‑gain rate (currently the same as the ordinary corporate rate, 21% federally).
     
   • Short‑term capital gain (held ≤ 1 year) is taxed at the ordinary corporate rate (21%).
     

Practical tip: Occidental will need to run a detailed “basis reconciliation” for each of the four agreements to separate long‑term from short‑term gains and to identify any recapture.

3. Depreciation recapture (Section 1245/1250)

• Section 1245 property – Most equipment, pipelines, and processing plants fall under §1245. When sold, the portion of gain attributable to accelerated depreciation (e.g., MACRS) is recharacterized as ordinary income and taxed at the 21% corporate rate, not at the lower capital‑gain rate.
  
• Section 1250 property – Real‑property (land, buildings) may trigger §1250 recapture, which is generally taxed at 25% (the “unrecaptured Section 1250 gain” rate) for corporate taxpayers.
  

Take‑away: Expect a “recapture bump” on the equipment portion of the sale—this can add a few percentage points to the effective tax rate on that slice of the proceeds.

4. State and local tax implications

• Texas (where the Permian Basin sits) – Texas imposes a franchise tax on gross receipts (generally 0.75% for most corporations) but does not have a corporate income tax. However, the state still taxes gross‑receipts‑based franchise tax on the sale of assets.
  
• Other jurisdictions – If any of the assets are located in states with a corporate income tax (e.g., New Mexico, Colorado), the gain will be subject to those state rates as well.
  

Result: The overall effective tax rate on the gain will be federal 21% + any applicable state franchise or income tax (often 4‑6% in the relevant states).

5. Interaction with debt‑reduction strategy

1. Interest‑expense deduction – By using the $950 M to pay down debt, Occidental will reduce future interest expense. The interest expense is fully deductible, lowering taxable income in subsequent years.
   
2. Tax‑shield effect – The present value of the expected interest‑expense reduction can be quantified as a tax shield:
   

[
\text{Tax shield} = \text{Interest saved} \times \text{Corporate tax rate}
]

For example, if the $950 M reduces an average 5‑year‑old $5 bn term loan at 4.5% interest, the annual interest saved is ≈ $22.5 M. At a 21% tax rate, the annual tax shield is ≈ $4.7 M, or about $23 M over 5 years.

1. Timing of deduction – The interest‑expense deduction is recognized in the year the debt is retired (or amortized if the debt is prepaid). This can offset a portion of the capital‑gain tax in the same year, reducing the net cash‑tax outlay.
   

Bottom line: The debt‑reduction plan partially mitigates the tax cost of the asset sales, but the net cash‑tax impact will still be positive (i.e., cash outflow for taxes) in the year of the sale.

6. Potential shareholder‑level considerations

Practical tip for investors: Look for any forward‑looking statements from management about whether the $950 M will be retained, used for a dividend, or for share‑repurchases, as each path has distinct tax consequences for shareholders.

7. Planning tools and best‑practice steps for Occidental

1. Run a “gain‑allocation model” for each of the four agreements:

   • Separate long‑ vs. short‑ term capital gains.
     
   • Identify depreciation‑recapture amounts.
     
   • Allocate the $950 M purchase price among land, mineral rights, equipment, and working‑interest assets.
     

2. Engage state‑tax experts to quantify franchise‑tax exposure in Texas and any other states where the assets sit.

3. Model the net‑after‑tax cash flow:

   • Gross proceeds $950 M
     
   • – Federal corporate tax (21% × capital gain)
     
   • – State franchise/income tax (≈ 5% avg.)
     
   • – Depreciation recapture (ordinary‑income tax)
     
   • = Net cash available for debt reduction
     

4. Quantify the tax‑shield from debt reduction and incorporate it into the cash‑flow model to present a “net cash‑tax impact” to the board and investors.

5. Disclose the tax assumptions in the SEC filing (Form 8‑K) accompanying the asset‑sale agreements, as investors will scrutinize the effective tax rate and the expected impact on earnings per share (EPS).

8. Bottom‑line summary

Key take‑away: The $950 M asset sales will generate a significant capital‑gain tax bill at the corporate level, amplified by depreciation recapture on equipment. However, the planned debt reduction creates a valuable future tax shield that will partially offset the cash‑tax outlay. Proper allocation of the purchase price, accurate basis tracking, and coordination with state‑tax specialists are essential to minimize the net tax cost and to communicate the after‑tax cash‑flow benefits to investors.