Occidental Petroleum Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2012, compared with the same period of 2011. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The company had 811.1 million common shares outstanding at March 31, 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $6.268 billion | $5.726 billion | +9% |
| Income from continuing operations | $1.560 billion | $1.405 billion | +11% |
| Net income | $1.559 billion | $1.549 billion | +1% |
| Diluted EPS | $1.92 | $1.90 | +1% |
| Operating cash flow | $2.765 billion | $2.222 billion | +24% |
| Capital expenditures | $2.412 billion | $1.325 billion | +82% |
| Cash and equivalents at period-end | $3.760 billion | $2.100 billion | Prior-year comparison |
- Net margin was approximately 24.9%, compared with 27.1% in Q1 2011; the comparison was affected by the $144 million after-tax gain from the Argentine operations sale in Q1 2011.
- Income before taxes increased to $2.597 billion from $2.362 billion. The worldwide effective tax rate declined to 42% from 43%.
- Long-term debt, net, was $5.873 billion versus $5.871 billion at December 31, 2011. Estimated fair value of debt was approximately $6.3 billion.
- Current assets were $11.987 billion and current liabilities were $8.098 billion, implying a current ratio of approximately 1.5x.
- Stockholders’ equity increased to $38.747 billion from $37.620 billion at December 31, 2011.
- Financing cash outflows were $371 million, including $374 million of dividends paid. Dividends per share increased to $0.54 from $0.46.
Material changes versus the prior comparable period
- Higher oil prices and increased domestic oil and gas volumes drove higher sales and continuing-operations income. Worldwide realized oil price increased to $107.98 per barrel from $92.14, while U.S. realized natural gas price declined to $2.84 per Mcf from $4.21.
- Total oil and gas production increased to 755,000 barrels of oil equivalent per day from 730,000. Domestic production increased, while Middle East/North Africa and Colombian volumes declined because of contract expiration, labor and maintenance disruptions, pipeline interruptions, and production-sharing effects.
- Oil and gas segment earnings were broadly unchanged at $2.504 billion versus $2.468 billion. Higher prices and domestic volumes were largely offset by higher operating costs and DD&A rates, lower international oil volumes, and lower domestic gas prices.
- Chemical segment earnings declined to $184 million from $219 million because of lower export volumes, higher raw-material costs, and weaker calcium chloride demand following mild winter weather.
- Midstream, marketing and other earnings increased to $131 million from $114 million, primarily from stronger pipeline and gas-processing results, partly offset by lower power margins.
- Interest and debt expense fell to $30 million from $215 million, primarily because Q1 2011 included a $163 million pre-tax early debt-extinguishment charge.
- Investing cash outflows increased to $2.415 billion from $1.741 billion, mainly because capital expenditures rose; Q1 2011 also included significant acquisition spending and proceeds from the Argentine disposition.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that 2012 capital-spending expectations had not changed significantly. Spending is focused on increasing oil and gas production and maintaining returns above the cost of capital; the program was expected to be reviewed around mid-year and adjusted as conditions dictate.
- Management reported approximately $3.8 billion of cash and $2.0 billion of available but unused committed bank credit and believed cash on hand and operating cash flow would fund operating needs, planned capital expenditures, dividends, and debt payments.
- Moody’s upgraded Occidental’s senior unsecured debt rating from A2 to A1 in April 2012.
- Results remain highly sensitive to commodity prices: a $1.00 per barrel change in oil prices affected quarterly pre-tax income by approximately $36 million; a $1.00 per barrel change in NGL prices affected it by approximately $8 million; and a $0.50 per million BTU change in domestic gas prices affected it by approximately $35 million.
- Environmental remediation reserves totaled $343 million across 160 sites. Management estimated reasonably possible additional environmental losses of up to $380 million beyond recorded reserves. Approximately half of the reserves was expected to be spent over the next four years, with the remainder over 10 or more years.
- Other legal and tax matters were not expected by management to have a material adverse effect. A New Mexico subsidiary received a penalty claim exceeding $100,000 related to alleged air-quality violations; management stated that resolution would not materially affect Occidental.
- Derivative activity increased with commodity markets. Net derivative fair value was a $240 million asset versus a $192 million asset at December 31, 2011, after counterparty netting and collateral.
- Key risks include commodity-price volatility, production and exploration risks, international political and insurgent activity, labor disruptions, project delays or cost overruns, environmental liabilities, litigation, regulatory and tax changes, operational interruptions, and counterparty or risk-management failures.
Important facts for investors to verify
- Whether higher oil prices and domestic production growth can offset lower domestic gas prices, international disruptions, and rising production and DD&A costs.
- Actual full-year capital spending and production outcomes relative to management’s stated program and mid-year review.
- Liquidity after capital expenditures, dividends, working-capital needs, and any future acquisitions or debt activity.
- The magnitude and timing of environmental expenditures and any losses beyond the $343 million recorded reserve.
- Exposure to commodity-price changes, derivative positions, counterparty credit risk, and trading activities.
- Future developments in tax audits, litigation, the New Mexico air-quality claim, and international operating conditions.