Occidental Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2011, filed August 4, 2011. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The company had 812.8 million common shares outstanding at June 30, 2011.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $6.173 billion | $4.603 billion | $11.899 billion | $9.219 billion |
| Net income attributable to common stock | $1.817 billion | $1.063 billion | $3.366 billion | $2.127 billion |
| Diluted EPS | $2.23 | $1.31 | $4.13 | $2.61 |
| Income from continuing operations | $1.819 billion | $1.089 billion | $3.224 billion | $2.210 billion |
| Operating cash flow | Not separately provided | Not separately provided | $5.564 billion | $4.321 billion |
| Dividends per share | $0.46 | $0.38 | $0.92 | $0.71 |
Net income margin was approximately 29.4% in Q2 2011 versus 23.1% in Q2 2010, and approximately 28.3% for the first six months versus 23.1% in the prior-year period. The worldwide effective tax rate was 38% for Q2 and 40% for the first six months, compared with 43% and 42%, respectively, in 2010.
At June 30, 2011, cash and cash equivalents were $1.994 billion, total current assets were $9.943 billion, and total current liabilities were $8.093 billion. Short-term borrowings were $500 million and long-term debt, net, was $3.749 billion, for total reported debt of approximately $4.249 billion. Available but unused committed bank credit was approximately $1.0 billion.
Material changes versus the prior comparable period
- Q2 net sales increased 34%, and six-month sales increased 29%, primarily from higher oil and NGL prices, stronger chemical volumes and margins, and improved marketing results.
- Q2 net income increased 71%; six-month net income increased 58%. Diluted EPS rose from $1.31 to $2.23 in Q2 and from $2.61 to $4.13 for the six-month period.
- Oil and gas segment earnings increased to $2.624 billion in Q2 from $1.867 billion and to $5.092 billion for six months from $3.728 billion. Worldwide realized crude oil prices rose to $103.12 per barrel in Q2 from $74.39.
- Chemical segment earnings increased to $253 million in Q2 from $108 million and to $472 million for six months from $138 million, reflecting stronger demand and margins.
- Midstream, marketing and other earnings increased to $187 million in Q2 from $13 million and to $301 million for six months from $107 million.
- Oil and gas production increased to 715,000 BOE per day in Q2 from 701,000 BOE per day and to 723,000 BOE per day for six months from 701,000 BOE per day, primarily due to new domestic acquisitions.
- Operating cash flow rose 29% to $5.564 billion. Investing cash use increased to $4.291 billion from $2.408 billion, while financing cash use increased to $1.857 billion from $836 million.
- Property, plant and equipment increased to $41.795 billion from $36.536 billion at December 31, 2010, reflecting approximately $3.0 billion of capital expenditures and $4.1 billion of acquisitions, partially offset by depreciation, depletion and amortization.
Outlook, management commentary, risks and unusual items
- Management estimated 2011 capital spending of approximately $6.8 billion and stated that cash on hand and operating cash flow should fund operating needs, planned capital expenditures, dividends and debt payments.
- Management highlighted dependence on crude oil, NGL and natural gas prices and production volumes. A $1 change in crude oil and NGL prices was estimated to affect quarterly pretax income by approximately $37 million and $7 million, respectively; a $0.50 change in domestic natural gas prices was estimated to affect pretax income by approximately $34 million.
- Occidental acquired domestic oil and gas properties for approximately $3.4 billion and acquired a 40% participating interest in the $10 billion Al Hosn high-sulfur gas project in Abu Dhabi. Its expected share of the project cost is approximately $4 billion.
- The Argentine operations were sold in February 2011 for approximately $2.6 billion of after-tax proceeds, generating a $225 million pretax gain and a $144 million after-tax gain included in discontinued operations.
- The company redeemed $1.368 billion of senior notes in March 2011 and recorded a $163 million pretax early-extinguishment charge. A $500 million short-term borrowing outstanding at June 30 was repaid in July 2011.
- Occidental ceased exploration activity in Libya, wrote off approximately $35 million of exploration costs, and stated that it would not report Libyan production until permitted. Libyan producing properties had a June 30 net book value of $847 million.
- Environmental remediation reserves totaled $363 million across 168 sites. Management estimated reasonably possible additional environmental losses of up to $375 million; approximately half of existing reserves is expected to be spent within four years.
- Outstanding litigation and tax matters were described as not expected to have a material adverse effect, although the ultimate timing and amount of some losses cannot be reliably determined.
- Principal forward-looking risks include commodity-price volatility, production and exploration risks, project delays or cost overruns, political instability and sanctions, environmental liabilities, litigation, regulatory changes, tax changes, operational disruptions and failures of risk management.
- Disclosure controls and procedures were considered effective as of June 30, 2011, with no reported material change in internal control over financial reporting.
Investor verification priorities
- Verify the sustainability of earnings growth driven by oil prices, chemical margins, marketing results and trading gains.
- Reconcile the $6.8 billion capital-spending estimate with acquisition commitments, Al Hosn funding and expected operating cash flow.
- Assess exposure to Libya, including the $847 million carrying value, sanctions and potential production or impairment consequences.
- Review debt maturities, refinancing requirements, covenant capacity and the effect of the early debt redemption on future interest expense.
- Evaluate environmental reserves and the stated potential for up to $375 million of additional environmental losses.
- Monitor production-sharing contract sensitivity to commodity prices, since higher prices can reduce reported production volumes.
- Review derivative positions, including approximately $53 million of after-tax losses in accumulated other comprehensive income expected to be reclassified into income during the following twelve months.