Occidental Petroleum Corporation: Q2 2021 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation reported unaudited results for the three and six months ended June 30, 2021. Operations comprise oil and gas, chemical, and midstream and marketing segments. Results remained highly sensitive to crude oil, NGL, natural gas, chemical product prices, transportation spreads and commodity derivatives.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Net sales | $6.0 billion | $11.3 billion |
| Income from continuing operations | $100 million | $399 million |
| Net income (loss) | $103 million | $(43) million |
| Net loss attributable to common stockholders | $(97) million | $(443) million |
| Loss per common share | $(0.10) | $(0.47) |
| Operating cash flow | Not separately provided | $4.2 billion, including discontinued operations |
| Capital expenditures | Not separately provided | $1.3 billion |
Continuing-operations profit margins were approximately 1.7% for the quarter and 3.5% for the six-month period, based on reported net sales. Operating cash flow from continuing operations was $4.1 billion for the six months, compared with $1.7 billion in the prior-year period.
- Cash and cash equivalents were $4.6 billion at June 30, 2021, with $180 million of current restricted cash.
- Total debt and finance leases were approximately $36.0 billion; long-term debt, net, was $35.4 billion.
- Current maturities of long-term debt were $651 million, and total current liabilities were $9.6 billion.
- The company had $5.0 billion of committed revolving-credit capacity and up to $400 million under its receivables securitization facility.
- Worldwide realized oil prices increased to $64.18 per barrel in the second quarter from $23.14 in the prior-year quarter. Continuing-operations production declined to 1,199 Mboe/d from 1,386 Mboe/d.
Material changes versus the prior comparable period
- Second-quarter net sales increased 104% to $6.0 billion from $2.9 billion; six-month sales increased 18% to $11.3 billion from $9.5 billion.
- Continuing operations improved from a $6.7 billion loss in the second quarter of 2020 to $100 million of income in 2021, and from an $8.7 billion loss to $399 million of income for the six-month period.
- The prior-year period included approximately $6.4 billion of second-quarter oil and gas impairments, while 2021 included $21 million of second-quarter and $156 million of six-month impairments.
- Oil and gas segment income was $631 million in the quarter and $569 million year to date, versus losses of $7.7 billion and $7.5 billion, respectively, in 2020.
- Chemical segment income increased to $312 million in the quarter and $563 million year to date, driven by improved product pricing, partly offset by higher ethylene and energy costs.
- Midstream and marketing reported a $30 million quarterly loss but $252 million of six-month income, compared with a $1.3 billion six-month loss in 2020. Results included material derivative mark-to-market effects.
- Production volumes declined because of reduced capital investment, particularly in the Permian and DJ Basins. Management expects lower depreciation, depletion and amortization rates in the second half of 2021 following positive reserve revisions.
- Occidental sold DJ Basin non-operated assets for approximately $280 million in March and agreed to sell certain Permian assets for approximately $475 million, with the latter transaction closing July 29, 2021.
Guidance, outlook, risks and unusual items
- For 2021, management prioritized sustaining production near the fourth-quarter 2020 rate, operating with an annualized capital budget of approximately $2.9 billion, maintaining 2020 cost savings and using excess cash flow and divestiture proceeds to reduce debt.
- In July 2021, Occidental used approximately $3.1 billion of cash to repurchase senior notes maturing from 2022 through 2026. Face-value debt subsequently declined to approximately $32.0 billion. A premium of approximately $90 million was expected to be expensed in the third quarter.
- Remaining near-term debt maturities were approximately $224 million in 2021, $1.8 billion in 2022 and $465 million in 2023. Zero Coupon senior notes could be put to the company in October 2021 for approximately $1.0 billion if fully exercised.
- Management expected cash on hand and available credit facilities to cover near-term debt maturities, operating expenditures and other obligations for the next 12 months. Debt ratings remained non-investment grade: Ba2 from Moody’s, BB from Fitch and BB- from Standard & Poor’s.
- Interest-rate swaps with $750 million of notional value and approximately $800 million of fair value were scheduled for mandatory termination in September 2021. Settlement requirements will fluctuate with interest rates.
- Ghana assets remained classified as discontinued operations and held for sale. A $403 million after-tax loss contingency related to former Ecuador operations was recorded in the first quarter of 2021.
- Occidental carried environmental remediation liabilities of $1.1 billion across 166 sites and estimated reasonably possible additional environmental losses of up to $1.1 billion.
- An Ecuador arbitration award against a subsidiary was approximately $391 million plus interest; the subsidiary filed a motion to vacate the award. A separate Anadarko-related bankruptcy matter was expected to receive a final ruling by the end of the third quarter of 2021.
- COVID-19 developments, OPEC+ production decisions, commodity-price volatility, lower production, derivative valuations, non-investment-grade financing costs, environmental obligations, litigation and the ability to execute asset sales and debt reduction remained principal risks.
Facts an investor should verify
- Whether higher commodity prices and the planned $2.9 billion capital program can stabilize production and sustain operating cash flow.
- The effect of the July 2021 debt tender, the October 2021 Zero Coupon put option and interest-rate swap settlements on liquidity and leverage.
- Actual proceeds and closing adjustments from asset divestitures, including the Permian transaction.
- The outcome and cash impact of the Ecuador arbitration, Anadarko-related bankruptcy proceedings and the $881 million tax refund dispute, including potential repayment of approximately $935 million plus accrued interest.
- Exposure to Brent call-option settlements, natural gas collars and other derivative mark-to-market volatility.
- Progress on the Ghana divestiture and the ultimate cost of environmental remediation and other contingencies.