Occidental Petroleum Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016; filed August 3, 2016. The unaudited interim financial statements are presented under U.S. GAAP. Occidental operates through oil and gas, chemical, and midstream and marketing segments.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $2.531 billion | $3.469 billion | $4.654 billion | $6.558 billion |
| Income from continuing operations | $(136) million | $180 million | $(496) million | $(35) million |
| Net income (loss) | $(139) million | $176 million | $(61) million | $(42) million |
| Diluted EPS | $(0.18) | $0.23 | $(0.08) | $(0.05) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1.818 billion | $1.366 billion |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $1.247 billion | $3.065 billion |
- Six-month net sales declined approximately 29 percent, primarily because of lower realized commodity prices. Q2 net sales declined approximately 27 percent.
- Six-month operating cash flow included approximately $876 million from discontinued operations, principally related to the Ecuador settlement, as well as a $302 million federal income-tax refund. Continuing-operations operating cash flow was $942 million.
- Cash and cash equivalents were $3.751 billion at June 30, 2016, compared with $3.201 billion at December 31, 2015. Total current assets were $8.972 billion and current liabilities were $5.267 billion.
- Long-term debt, net, was $8.331 billion at June 30, 2016, compared with $6.855 billion at year-end 2015. Estimated debt fair value was $9.1 billion, versus carrying value of approximately $8.3 billion.
- Net cash used in investing activities was $1.334 billion. Financing activities provided $66 million after $1.149 billion of dividends paid.
- Dividends were $0.75 per common share in Q2 and $1.50 per share for the first six months, compared with $0.75 and $1.47, respectively, in the prior-year periods.
- Approximate implied net margin was negative 5.5 percent for Q2 2016 and negative 1.3 percent for the first six months, based on net income divided by net sales; the filing does not present a single consolidated operating-margin measure.
Material changes versus the prior comparable period
- Oil and gas segment results declined to a $117 million loss in Q2 and a $602 million loss for the first six months, compared with earnings of $355 million and $89 million, respectively, in 2015.
- Chemical segment earnings were $88 million in Q2 and $302 million for the six months, compared with $136 million and $275 million. Six-month 2016 results included an $88 million asset-sale gain; excluding that gain, performance was lower.
- Midstream and marketing shifted to losses of $58 million in Q2 and $153 million for the six months, compared with earnings of $87 million and $72 million, primarily because of unfavorable Permian-to-Gulf Coast differentials.
- Worldwide realized oil prices fell to $39.66 per barrel in Q2 and $34.46 for the six months, from $54.55 and $51.60, respectively. Worldwide realized NGL prices and domestic natural-gas prices also declined materially.
- Average daily production was 653,000 BOE in Q2 and 655,000 BOE for the six months. Production from ongoing operations increased to 609,000 BOE and 599,000 BOE, respectively, partly reflecting Al Hosn and Oman Block 62 production and the exit from non-core operations.
- Capital expenditures were reduced by approximately 59 percent year over year in the first six months, reflecting the commodity-price environment.
- Debt activity included a $2.75 billion senior-note offering in April, repayment of $700 million of notes due February 2016 and $750 million due June 2016, and early redemption of $1.25 billion of notes due February 2017.
Outlook, commentary, risks and unusual items
- Management stated that liquidity needs, including future dividends, are expected to be funded through cash on hand, operating cash flow, monetization of non-core assets or investments, and, if necessary, additional borrowings or other capital issuance. No specific earnings or production guidance was provided.
- Management emphasized that results remain highly dependent on oil, natural-gas and chemical prices, sales volumes and operating costs. Further commodity-price declines could cause additional impairments and reduce economically recoverable proved reserves.
- Occidental completed the sale of its Piceance Basin operations for $153 million, recognizing a $121 million pre-tax gain, and sold the Occidental Tower for approximately $85 million of net proceeds. It also distributed its remaining California Resources shares and recorded a $78 million loss.
- The Ecuador arbitration settlement generated a $681 million pre-tax gain in Q1 and approximately $876 million of operating cash flow from discontinued operations during the first six months.
- Environmental remediation reserves totaled $379 million for 145 sites, including $70 million classified as current. The filing estimates up to $370 million of reasonably possible additional losses for sites other than Maxus-indemnified sites.
- Maxus and affiliated companies filed for Chapter 11 bankruptcy in June 2016. Potential obligations associated with Maxus-indemnified sites, including the Passaic River cleanup, are not included in the disclosed additional-loss estimate because they cannot currently be reasonably estimated.
- Key risks include commodity-price volatility, reserve and production uncertainty, operational disruptions, environmental liabilities, litigation, regulatory and tax changes, geopolitical conditions, project execution, cyber attacks and counterparty or risk-management failures.
- Occidental reported compliance with financing covenants and substantial capacity for additional unsecured borrowings and distributions as of June 30, 2016. Disclosure controls and procedures were deemed effective.
Important facts for investors to verify
- Separate recurring operating cash flow from the nonrecurring Ecuador settlement and tax refund when assessing cash-generation capacity.
- Reconcile the increased debt balance and future interest expense with the company’s dividend policy and reduced capital-spending plan.
- Assess sensitivity to oil, NGL and natural-gas prices, including potential impairment and proved-reserve reductions.
- Review ongoing Maxus bankruptcy proceedings, Passaic River obligations and the environmental-reserve exposure beyond recorded liabilities.
- Evaluate whether increased ongoing production offsets lower realized prices and the decline in production from non-core operations.