This is how the Wall Street mergers and acquisition and private equity games often work. Load up a company with debt, the proceeds from which are “upstreamed” to the company’s owners. The debt often sinks the company, but the owners have already extracted their profits. Sometimes the debt doesn’t sink the company, and the owners flip it back out to the public equity market. From Wolf Richter, at wolfstreet.com:
Occidental Petroleum made a sweet deal on November 30, a masterpiece of Wall Street engineering. And just about every investor that touched is now getting their hands burned off.
That day, Oxy spun off California Resources. It held Oxy’s oil-and-gas exploration-and-production assets in California. It’s the state’s largest natural gas producer and its largest oil-and-gas acreage holder with operations in the basins of Los Angeles, San Joaquin, Ventura, and Sacramento.
Oxy was the big player in the miraculous scam of the Monterey Shale formation in California, which had been hyped for years as the largest reserves of oil in the US. Any studies that showed that this oil wasn’t recoverable with todays’ technologies due to the geological mess underground in earthquake land were shunted aside.
The EIA finally conceded that point in May 2014 and slashed the delusional estimates of the reserves by 96%. California isn’t exactly the easiest place for fracking in the US. When the EIA finally acknowledged reality, Oxy was the biggest loser.
Six months later, after the dust had sort of settled, Oxy exited in a grand manner by spinning off 80.5% of its California dream to Oxy shareholders. Shares started “regular way” trading under the ticker CRC on December 1, 2014.
Energy spinoffs were hot in 2013 and 2014. Hedge funds clamored for them. They’d buy a big stake in the parent company and push the board to do a spinoff that entailed loading the spinoff up with debt to fund a fat special dividend back to the parent. The scheme was supposed to temporarily jack up the price of the parent company’s stock. “Unlocking value,” it’s called.
Wall Street made sure that there were enough unwitting or yield-desperate buyers for the debt. Hedge funds got their way, made their money, and the lucky ones bailed out. Then came reality.
To continue reading: Occidental Petroleum “Unlocks Value”
