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Making Western Midstream independent may ease Occidental's path to divestment

Enabling Western Midstream Partners LP to operate as an independent midstream company could make it easier for independent driller Occidental Petroleum Corp. to find a buyer for the master limited partnership, industry analysts said.

After reportedly pushing back a plan to off-load an interest in Western Midstream until 2020 because of the partnership's declining stock price, Occidental announced Jan. 6 that it will cut its interest in the company to below 50% during the year and expand the rights of Western Midstream investors to remove and replace Occidental as the general partner.

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While Occidental intends to continue its operational relationship with Western Midstream, CBRE Clarion Securities portfolio manager and MLP expert Hinds Howard said he expects the producer to work toward monetizing its stake in the partnership with the help of private capital.

"This may help [Western Midstream] eventually find a buyer, because a big question for any buyer would be how does [Occidental] treat the partnerships if it's not an affiliate," Howard said in an email. "A potential buyer now has a clear look at what being independent looks like, and after seeing how that works for some period of time, a buyer might be more comfortable with taking a run at [Western Midstream]."

Oil and gas analysts at SunTrust Robinson Humphrey and RBC Capital Markets agreed in Jan. 6 notes to clients that the deal helps "set the stage for a likely" and "more methodical" sale, while Credit Suisse's Spiro Dounis said the move gives Occidental more time to deconsolidate without having to completely hand Western Midstream over to a third party.

"It does remove the overhang of an outright general partnership sale or a larger [limited partnership] sell-down in order for [Occidental] to deconsolidate," Dounis said in an interview. "This seems like the most eloquent path to deconsolidation that is not disruptive to [Western Midstream]."

For Occidental, whose equity value sharply declined after acquiring Anadarko Petroleum Corp. for $57 billion Aug. 8, 2019, Mizuho analyst Paul Sankey wrote in a Jan. 6 note to clients that "these are all steps in the right direction for a stock that was the biggest underperformer in our [exploration and production] coverage in 2019."

The oil and gas driller has been under the gun by investors and analysts to reduce its leverage after taking on additional debt to complete the merger. Investment bank Tudor Pickering Holt & Co. said in an Oct. 8, 2019, note to clients that "the road to recovery for [Occidental] will likely be a long one, as the company has placed its balance sheet in a precarious situation."

Occidental's strategic initiatives received mild praise from investors, who rewarded the driller with a 2.5% stock price bump, while Western Midstream saw its shares rise 3.3% in morning trading Jan. 6.