Some mergers end up being great. Some mergers end up being atrocious. If there has been one awful acquisition that hindsight will likely prove should be the poster child of atrocious mergers it would be the $38 billion Occidental Petroleum Corporation (NYSE: OXY) acquisition of Anadarko Petroleum Corporation. Occidental had no idea what was coming down the pipe in oil and gas in 2019 when it made this merger, but what rapidly turned into a bad situation is looking even worse.

After Occidental beat out Chevron Corporation (NYSE: CVX) for Anadarko, the company took very expensive preferred financing from Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-B) to the tune of $10 billion with an 8% coupon. The open market would have almost certainly been at cheaper interest payments, but getting the “Warren Buffett stamp of approval” is often alluring for companies.

This has created the need for Occidental to pay Berkshire Hathaway $200 million every quarter. In a SEC filing on Wednesday it was shown that Occidental opted to pay Berkshire Hathaway in shares of common stock rather than in cash. Had the stock risen from the nearly $60.00 at the time the deal closed in 2019 that might be impressive and dilution that looks cheap. In this case, Occidental’s stock was not even at $15.00 the prior day. In short, what was a $46 billion market cap last year is now down at close to $13 billion.

The move is designed to preserve cash after Occidental has already cut its dividend payouts by more than 85% to conserve cash along with other capital spending cuts. The coronavirus outbreak was already destroying oil demand, and then the Saudi-Russia price/share war further added pressure to the price of oil. Oil was above $60.00 per barrel of West Texas Intermediate crude in January, but it was down barely above $20.00 this week.

Berkshire Hathaway’s stake was 18.933 million shares, or 2.11% of the outstanding common shares, as of the end of 2019. The SEC filing for this planned share sale was 17,274,130 common shares of Occidental based on the prior $14.87 share price for proceeds of $256.8 million. The prospectus supplement noted that the registration does not mean that Berkshire Hathaway affiliates will offer or sell any of the shares. That said, Buffett’s stake could grow much larger if Occidental chooses to keep diluting just to pay Berkshire Hathaway.

To make maters worse for Occidental, the company carries about $40 billion in debt at the present time. The company had planned to sell about $15 billion in assets to raise cash and pay down debt at the time of the merger, but if the price of oil has fallen by two-thirds since the start of this year it is definitely going to create depressed valuations for any sales. And on that front, any would-be buyer is likely now pinching their pennies to conserve cash while they are hemorrhaging cash along with everyone else.

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Occidental has been under fire before it chose to make the payment to Berkshire Hathaway in stock. Carl Icahn has been pressuring the company, former CEO Stephen Chazen has been brought back in as Chairman, and its head of business development and its chief financial officer have been ousted from the company.

When companies begin paying their debts off with common stock, it can create a spiral that becomes very difficult to escape. It is also a situation where the overall debt covenants and terms of the preferred shares will need to be reviewed to see just how long that is allowed.

In some ways, moves of this sort may feel a bit like a Monopoly game player being forced to mortgage Boardwalk and Park Place just to pay hotel rent on Mediterranean Avenue and Baltic Avenue. It’s a very slippery slope. Then again, Occidental probably gets to look forward to receiving birthday cards on the anniversary of the date that Anadarko’s move to go with Occidental created a $1 billion deal breakup fee.

Shares of Occidental Petroleum closed down 8.6% at $13.61 on Wednesday, with a 52-week range of $9.00 to $64.60.

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