Occidental Petroleum Corporation: Q3 2012 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an integrated energy company operating through oil and gas, chemical, and midstream, marketing and other segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, compared primarily with the corresponding 2011 periods. The company reported 810.2 million common shares outstanding at September 30, 2012.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $6.0 billion | $6.0 billion | $18.0 billion | $17.9 billion |
| Income from continuing operations | $1.379 billion | $1.775 billion | $4.271 billion | $4.999 billion |
| Net income | $1.375 billion | $1.771 billion | $4.262 billion | $5.137 billion |
| Diluted EPS | $1.69 | $2.17 | $5.25 | $6.31 |
| Dividends per share | $0.54 | $0.46 | $1.62 | $1.38 |
| Net margin | 22.9% | 29.1% | 23.6% | 28.4% |
- Net cash provided by operating activities was $8.499 billion for the first nine months, compared with $8.638 billion in 2011. Operating cash flow from continuing operations was $8.529 billion.
- Capital expenditures were $7.716 billion, including $6.3 billion for oil and gas. Investing cash usage totaled $8.871 billion, including $1.164 billion for asset and business purchases.
- Cash and cash equivalents were $3.760 billion at September 30, 2012, versus $3.781 billion at December 31, 2011. The company also reported $2.0 billion of available, unused committed bank credit.
- Long-term debt, net, increased to $7.622 billion from $5.871 billion at year-end 2011, primarily following the June issuance of $1.75 billion of senior unsecured notes. The estimated fair value of debt was approximately $8.3 billion.
- Total assets increased to $65.625 billion from $60.044 billion, while stockholders’ equity increased to $40.474 billion from $37.620 billion.
- Worldwide effective tax rates were 38% for the quarter and 40% for the first nine months, compared with 38% and 39%, respectively, in the prior-year periods.
Material changes versus the prior comparable periods
- Third-quarter net income declined 22% and nine-month net income declined 17% year over year, despite largely stable quarterly sales and slightly higher nine-month sales.
- Oil and gas segment earnings declined to $2.026 billion from $2.612 billion in the quarter and to $6.573 billion from $7.704 billion for the nine months. Lower NGL and natural gas prices, higher operating costs, higher depreciation, depletion and amortization, and higher exploration expense were the primary adverse factors.
- Production increased to 766,000 barrels of oil equivalent per day in the quarter from 739,000 and to 762,000 for the first nine months from 728,000. Domestic production increased nearly 10% for the nine-month period.
- Worldwide realized oil prices were $96.62 per barrel in the quarter, compared with $97.24 in 2011; realized NGL prices fell 27% to $40.65 per barrel, and realized domestic natural gas prices fell 41% to $2.48 per thousand cubic feet.
- Chemical segment earnings decreased to $162 million from $245 million in the quarter and to $540 million from $717 million for the nine months, reflecting lower product prices, export volumes, and unfavorable economic conditions in Europe and Asia, partly offset by lower energy and feedstock costs.
- Midstream, marketing and other earnings increased to $156 million from $77 million in the quarter due to stronger marketing and trading margins, but declined slightly to $364 million from $378 million for the nine months.
- Capital spending increased substantially from $4.969 billion in the first nine months of 2011 to $7.716 billion in 2012. Purchases of assets and businesses decreased from $4.070 billion to $1.164 billion; the prior-year period included significant acquisitions and proceeds from the Argentine operations sale.
- The 2011 nine-month results included a $144 million after-tax gain from the sale of Argentine operations, whereas 2012 included a $9 million loss from discontinued operations.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that fourth-quarter 2012 capital spending would decrease from the third-quarter level and would focus on projects expected to generate returns well above the cost of capital under prevailing oil and gas prices and cost conditions.
- Management believes cash on hand and operating cash flow will be sufficient to fund operations, planned capital expenditures, dividends, and debt payments.
- Results remain highly sensitive to commodity prices. At current production levels, a $1.00 per barrel change in oil prices affects quarterly pretax income by approximately $36 million; a $1.00 change in NGL prices affects it by approximately $8 million; and a $0.50 per million British thermal units change in domestic gas prices affects it by approximately $35 million.
- On October 5, 2012, an ICSID tribunal ordered Ecuador to pay Occidental $1.77 billion plus interest for terminating its Block 15 concession. Ecuador applied for annulment, and the financial statement impact will be recognized upon final resolution. Andes Petroleum is entitled to 40% of any net recovery under a 2000 farmout agreement.
- Environmental remediation reserves totaled $329 million across 159 sites, including $79 million classified as current. Occidental estimated reasonably possible additional environmental losses of up to $385 million.
- Other lawsuit and tax audit exposures were described as not material to the consolidated financial position or results of operations based on management’s current assessment. Environmental, regulatory, litigation, commodity-price, operational, geopolitical, tax, project-execution, and cyber risks remain relevant.
- Commodity derivatives had net fair-value assets of $157 million and net fair-value liabilities of $141 million at September 30, 2012. The company reported net gains from derivatives not designated as hedges of $78 million in the quarter and $42 million for the nine months.
- Occidental issued $1.25 billion of 2.70% senior notes due 2023 and $500 million of 1.50% senior notes due 2018 in June 2012, receiving net proceeds of approximately $1.74 billion.
- The company repurchased 2.49 million shares during the first nine months at an average price of $83.83, including 583,072 shares during the third quarter. Approximately 22.3 million shares remained authorized for repurchase at September 30, 2012.
Most important facts for investors to verify
- Whether lower NGL and natural gas prices and higher oil and gas costs persist, and their effect on cash flow and earnings.
- Whether increased domestic production and the planned reduction in fourth-quarter capital spending deliver targeted returns.
- The final resolution, timing, and net economic recovery of the Ecuador arbitration award, including Andes Petroleum’s 40% entitlement.
- The company’s ability to fund its substantial capital program, dividends, share repurchases, and increased debt obligations while maintaining liquidity.
- Changes in environmental remediation costs, the potential additional loss exposure of up to $385 million, and developments in other legal or tax proceedings.
- The filing’s disclosure that internal and disclosure controls were effective as of September 30, 2012, and that no material change in internal control over financial reporting occurred during the quarter.