OCCIDENTAL PETROLEUM CORP quarterly report, Q3 FY2019

Occidental Petroleum Corporation — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2019. The filing is unaudited and reflects the August 8, 2019 acquisition of Anadarko Petroleum Corporation, including Western Midstream Partners, LP (WES), for the period from the merger date through quarter-end.

Business Context

Occidental operates through Oil and Gas, Chemical, Marketing and Other Midstream, and WES Midstream segments. The Anadarko merger substantially expanded Occidental’s production base, Permian Basin exposure, midstream operations, assets, debt, and noncontrolling interests.

Key Financial Metrics

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Net sales	$5.687 billion	$5.216 billion	$14.111 billion	$13.062 billion
Income from continuing operations	$(737) million	$1.869 billion	$529 million	$3.425 billion
Net income attributable to common stockholders	$(912) million	$1.869 billion	$354 million	$3.425 billion
Diluted EPS from continuing operations	$(1.06)	$2.44	$0.47	$4.45
Cash flow from operations	Not separately presented	Not separately presented	$5.366 billion	$5.169 billion

Q3 loss from continuing operations included $924 million of Anadarko merger-related costs, $65 million of amortized debt financing fees, $325 million of asset impairments and other items, and $33 million of losses on interest-rate swaps and warrants. The filing does not provide a clear consolidated operating margin; reported continuing-operations loss as a percentage of sales was approximately 13.0% in Q3 2019 versus income of approximately 35.8% in Q3 2018.

Cash Flow, Liquidity and Capital Structure

Cash, cash equivalents and restricted cash totaled $5.365 billion at September 30, 2019, including $4.840 billion of unrestricted cash and $454 million of restricted cash.
Operating cash flow from continuing operations was $5.439 billion for the first nine months, versus $5.169 billion in the prior-year period.
Capital expenditures were $4.184 billion, including $3.8 billion for Oil and Gas.
Investing cash outflow was $27.726 billion, primarily reflecting the cash portion of the Anadarko acquisition. Financing cash inflow was $24.692 billion.
Consolidated long-term debt, net, was $47.583 billion, comprising $39.946 billion of Occidental debt and $7.637 billion of WES debt, compared with $10.201 billion at December 31, 2018.
Occidental issued $13.0 billion of senior notes and borrowed $8.8 billion under term loans to finance the merger. It repaid $4.8 billion of term loans during September using proceeds from asset sales.
Occidental had a $5.0 billion revolving credit facility with no borrowings outstanding. WES had $3.0 billion outstanding under its term loan facility and $160 million under its revolving credit facility.
Total equity was $41.005 billion, including $9.762 billion of Series A preferred stock and $4.925 billion of noncontrolling interests.
Management stated that Occidental was in compliance with financing covenants and expected to fund liquidity needs through cash, operating cash flow, asset monetizations and, if necessary, additional capital issuance.

Material Changes Versus the Prior Comparable Period

Net sales increased 9% in Q3 and 8% for the nine-month period, primarily from higher crude oil volumes acquired with Anadarko and increased legacy Permian production.
Oil and Gas segment earnings declined to $221 million from $767 million in Q3 and to $1.431 billion from $2.297 billion for the nine months, as lower realized oil, NGL and gas prices more than offset higher volumes.
Chemical segment earnings declined to $207 million from $321 million in Q3 and to $680 million from $936 million for the nine months, mainly due to lower caustic soda prices and weaker vinyl margins.
Marketing and Other Midstream earnings declined sharply, partly because the 2018 period included a $902 million gain on asset sales. Excluding that gain, 2019 results were affected by lower marketing margins, NGL prices and pipeline income.
WES Midstream contributed $383 million of sales and $134 million of earnings from August 8 through September 30, 2019.
Average continuing-operations production increased to 1,116 MBOE per day in Q3 from 696 MBOE per day, primarily from Anadarko production and higher legacy Permian output.
Worldwide realized oil prices declined to $56.26 per barrel in Q3 from $62.67, while realized NGL prices declined to $14.96 per barrel from $29.55.

Merger, Outlook and Unusual Items

The Anadarko transaction was valued at $35.686 billion, consisting of $29.002 billion of cash and $6.684 billion of Occidental common stock.
Occidental issued 100,000 shares of Series A preferred stock for $10 billion, carrying an 8% dividend rate that increases to 9% after unpaid dividends accrue, together with a warrant to purchase 80 million common shares at $62.50 per share.
Occidental sold Anadarko’s Mozambique LNG assets to Total for $4.2 billion on September 27, 2019. Algeria, Ghana and South Africa assets remained held for sale, with the company expecting completion before June 2020. The broader Total transaction was valued at $8.8 billion, subject to adjustments and closing conditions.
Management expects merger integration, workforce reductions and related costs to continue through most of 2020. The company expects integration of internal controls and its ERP system to be completed during 2021.
Occidental and Ecopetrol agreed to form a Midland Basin joint venture. Ecopetrol is expected to contribute $750 million in cash and $750 million of carried capital for a 49% interest; closing was expected in the fourth quarter of 2019.
Occidental entered into 2020 three-way oil collars covering 109.8 million barrels, with a purchased put price of $55.00 per barrel and a sold put price of $45.00, and sold 2021 call options covering 109.5 million barrels with a $74.09 ceiling price.

Risks, Contingencies and Other Matters

The principal risks are commodity-price volatility, integration execution, substantial merger-related indebtedness, refinancing and debt-service requirements, asset-sale execution, production and reserve uncertainty, environmental liabilities, litigation, regulatory changes, operational disruptions and interest-rate exposure.
Environmental reserves totaled $1.054 billion across 185 sites. Management estimated reasonably possible additional environmental losses of up to $1.2 billion.
Occidental may be required to repay approximately $1.088 billion, plus approximately $171 million of accrued interest, if it does not prevail on the tax treatment of an $881 million tentative federal tax refund.
An arbitration claim by Andes Petroleum seeks 40% of amounts associated with Occidental’s Ecuador arbitration recovery; the merits hearing was scheduled for May 2020.
EPA draft settlements relating to Louisiana facilities proposed civil penalties of approximately $186,000 and $932,000; negotiations were ongoing.
Interest-rate swaps had a net liability of approximately $1.4 billion after posted collateral. A 25-basis-point decrease in implied LIBOR over the swap term could increase the liability by approximately $130 million.
Management stated that non-environmental legal reserves were not material, but unfavorable outcomes could materially affect a particular reporting period.

Investor Verification Checklist

Verify the pace and terms of remaining Total asset sales and other planned divestitures, including proceeds applied to debt reduction.
Reconcile reported debt, maturities, variable-rate exposure, preferred dividends and required term-loan repayments with current liquidity.
Assess whether Anadarko integration costs, workforce reductions and expected synergies are tracking management’s expectations.
Monitor realized commodity prices, production volumes, hedge settlements and the effect of collars and calls on future cash flow.
Review the final purchase-price allocation, goodwill and impairment testing as merger valuations are completed.
Evaluate environmental reserves, potential additional losses, tax refund contingencies and pending litigation.