Business Context and Reporting Period
Occidental Petroleum Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Operations consisted of oil and gas, chemical, and midstream and marketing segments. The 2014 comparative results reflect California Resources Corporation as discontinued operations following its November 2014 spin-off.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $3.116 billion | $4.904 billion | $9.674 billion | $15.005 billion |
| Income from continuing operations | $(2.606) billion | $998 million | $(2.641) billion | $3.296 billion |
| Net income attributable to common stock | $(2.609) billion | $1.208 billion | $(2.651) billion | $4.029 billion |
| Diluted EPS | $(3.42) | $1.55 | $(3.46) | $5.13 |
| Operating cash flow | Not separately provided | Not separately provided | $2.386 billion | $8.202 billion |
| Capital expenditures | Not separately provided | Not separately provided | $4.192 billion | $5.959 billion |
- Q3 net sales declined approximately 36%; nine-month sales declined approximately 36%. The filing attributes the decline primarily to sharply lower oil, NGL, and natural gas prices, partly offset by higher crude oil volumes.
- Q3 and nine-month net margins were approximately negative 83.8% and negative 27.4%, respectively, versus approximately 24.6% and 26.9% in the prior-year periods. The comparison is heavily affected by impairments.
- Q3 oil and gas segment loss was $3.128 billion, compared with $1.568 billion of earnings in Q3 2014. Chemical earnings increased to $272 million from $140 million, while midstream and marketing earnings fell to $24 million from $105 million.
- At September 30, 2015, cash and cash equivalents were $2.547 billion, restricted cash was $1.765 billion, and total current assets were $10.540 billion.
- Total debt was approximately $8.332 billion, consisting of $1.450 billion of current maturities and $6.882 billion of long-term debt. Estimated fair value of debt was $8.7 billion.
- Stockholders’ equity declined to $29.882 billion from $34.959 billion at December 31, 2014, primarily due to the year-to-date net loss, dividends, and treasury-stock purchases.
- The company paid $1.690 billion in dividends and repurchased $586 million of common stock during the first nine months.
Material Changes Versus the Prior Comparable Period
- Oil and gas prices declined substantially. Q3 worldwide realized oil price fell 49% to $47.78 per barrel, NGL price fell 62% to $14.68 per barrel, and domestic natural gas price fell 40% to $2.24 per MCF.
- Oil and gas production increased to 689,000 BOE per day in Q3 from 595,000 BOE per day, and nine-month production increased to 665,000 BOE per day from 582,000 BOE per day.
- Q3 included $3.397 billion of asset impairments and related items; nine-month impairments totaled $3.721 billion. Major charges included Williston operations, domestic gas properties, Iraq, Libya, South Texas Eagle Ford, and Yemen.
- Operating cash flow declined by $5.816 billion year over year, reflecting lower commodity prices, working-capital usage, and the absence of prior-year discontinued-operation cash flows.
- Occidental issued $1.5 billion of senior unsecured notes in June 2015, receiving approximately $1.48 billion of net proceeds. The notes comprise $750 million due 2025 at 3.50% and $750 million due 2045 at 4.625%.
- The company entered into an agreement to sell its Williston operations and classified related assets and liabilities as held for sale. The transaction was expected to close in November 2015.
- The California Resources investment declined to $186 million from $394 million, with a $208 million unrealized loss recorded in accumulated other comprehensive income. Management concluded the investment was not impaired at September 30, 2015.
Outlook, Commentary, Risks, and Unusual Items
- The filing provides no formal earnings, production, commodity-price, or capital-spending guidance.
- Management stated that lower commodity prices would result in negative price-related changes to year-end 2015 proved oil, NGL, and gas reserves because of shortened reserve economic lives.
- Liquidity consisted of $2.5 billion of unrestricted cash and $1.8 billion of restricted cash. Restricted cash from the California Resources spin-off could be used only for dividends, share repurchases, debt repayment, or a combination of those uses within the specified 18-month period.
- Occidental reported compliance with its financing covenants and substantial capacity for additional unsecured borrowings and distributions.
- Environmental reserves totaled $315 million across 148 sites, including $79 million classified as current. Management estimated reasonably possible additional environmental losses of up to $395 million.
- Key risks include commodity-price volatility, production and reserve uncertainty, geopolitical conditions in international operations, environmental liabilities, litigation, project execution, regulatory changes, tax matters, operational disruptions, and counterparty or derivative risk.
- Legal matters included resolution of an emissions matter for a $153,100 penalty and a settlement concerning nonemployee-director compensation practices. The filing states that other nonenvironmental legal reserves were not material.
- Disclosure controls and procedures were evaluated as effective as of September 30, 2015, with no material change in internal control over financial reporting.
Investor Verification Priorities
- Verify the completion, proceeds, and final accounting for the Williston asset sale and any related changes in production, reserves, and liquidity.
- Assess whether oil, NGL, and natural gas prices remained at levels that could lead to additional impairments or reserve reductions.
- Reconcile operating cash flow, capital spending, dividends, share repurchases, and debt maturities to determine free-cash-flow coverage.
- Review the restricted-cash use requirements and the required disposition or exchange of the retained California Resources shares by June 1, 2016.
- Monitor environmental reserves and the estimated up-to-$395 million range of reasonably possible additional losses.
- Evaluate debt refinancing needs, including $1.45 billion of current maturities due in 2016, and the effect of increased debt-market costs.