Occidental Petroleum Corporation — FY2009 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2009, filed February 25, 2010. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The filing also provides unaudited fourth-quarter data.
Key financial metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net sales | $15.403 billion | $24.217 billion |
| Income from continuing operations attributable to common stock | $2.927 billion | $6.839 billion |
| Net income attributable to common stock | $2.915 billion | $6.857 billion |
| Diluted EPS | $3.58 | $8.34 |
| Cash provided by operating activities | $5.813 billion | $10.652 billion |
| Capital expenditures | $3.581 billion | $4.664 billion |
| Cash dividends paid | $1.063 billion | $940 million |
| Cash and cash equivalents at year-end | $1.230 billion | $1.777 billion |
| Total assets | $44.229 billion | $41.537 billion |
| Long-term debt, net | $2.557 billion | $2.049 billion |
| Stockholders’ equity | $29.159 billion | $27.325 billion |
Net margin attributable to common stock was approximately 18.9%, compared with 28.3% in 2008. Return on equity was 10.3% and return on capital employed was 9.6%. Year-end total debt-to-capitalization was 9%.
Fourth-quarter 2009 net sales were $4.539 billion and net income attributable to common stock was $938 million, compared with $4.021 billion and $443 million, respectively, in the fourth quarter of 2008. Fourth-quarter oil and gas segment earnings included a $170 million pretax impairment charge related to Argentine producing properties.
Segment performance and material changes
- Oil and gas: Segment sales were $11.598 billion and earnings were $4.735 billion, down from $18.187 billion and $10.651 billion in 2008. Lower prices were partly offset by higher production, lower operating costs, and lower production and ad valorem taxes. Sales volumes increased to 645 thousand BOE per day from 601 thousand BOE per day.
- Chemical: Segment sales were $3.225 billion and earnings were $389 million, down from $5.112 billion and $669 million. Lower chlorine, caustic soda, PVC and VCM prices and volumes reflected the global economic slowdown, partly offset by lower feedstock and energy costs.
- Midstream, marketing and other: Segment sales were $1.016 billion and earnings were $235 million, down from $1.598 billion and $520 million. Lower marketing income and gas-processing margins more than offset improved pipeline transportation earnings.
- Commodity environment: Average WTI was $61.80 per barrel in 2009 versus $99.65 in 2008. Occidental’s worldwide average realized oil price declined to $55.97 per barrel from $88.26, while worldwide average realized gas price declined to $2.79 per Mcf from $6.10.
- Reserves: Year-end proved reserves increased to 3.225 billion BOE from 2.977 billion BOE. Additions totaled 483 million BOE, including 173 million BOE from improved recovery, 92 million BOE from extensions and discoveries, and 160 million BOE from purchases.
Cash flow, debt and liquidity
Operating cash flow declined 45% year over year, primarily because of lower oil and natural gas prices and weaker chemical and midstream margins. Investing cash use was $5.327 billion, including $3.581 billion of capital expenditures and approximately $1.7 billion of acquisition-related payments. Financing cash use was $1.033 billion.
Occidental issued $750 million of 4.125% senior unsecured notes due 2016, receiving $740 million of net proceeds, and repaid $600 million of debt associated with Dolphin Energy. It had approximately $1.5 billion of unused committed bank credit, did not draw on the facility during 2009, and reported substantial covenant capacity. Contractual obligations totaled $9.631 billion, including $2.808 billion of long-term debt, $3.830 billion of purchase obligations and $1.132 billion of operating leases.
Guidance, outlook, risks and unusual items
- Management expected approximately $4.3 billion of 2010 capital expenditures, focused on oil and gas. California and Iraq were each expected to receive approximately one-quarter of the increase, with additional spending directed to Bahrain and Midcontinent Gas.
- Management expected slight improvement in chemical demand in 2010, but margins were expected to be similar to 2009. Pipeline transportation and power generation were expected to remain relatively stable, while gas processing and trading results could remain volatile.
- Occidental began expensing 100% of injected CO2 costs in 2010, compared with capitalizing approximately 50% in 2009; $69 million was capitalized in 2009.
- Occidental acquired Phibro LLC on December 31, 2009, for approximately $370 million and increased its interest in the General Partner of Plains All-American Pipeline to approximately 22%. Phibro is expected to increase trading volatility.
- Environmental remediation reserves were $403 million across 168 sites, with reasonably possible additional losses estimated at up to $375 million. Occidental also disclosed significant international political, contractual, tax, environmental, commodity-price and reserve-estimation risks.
- OxyChem faced Nicaraguan DBCP claims involving judgments totaling approximately $900 million against four defendants, including OxyChem. Management stated the claims lacked merit and did not expect the judgments to be enforceable in the United States.
- Net fair value of derivatives was a liability of approximately $339 million for marketing and trading contracts. Oil and gas sensitivity was estimated at approximately $143 million of annual pretax income for each $1 per barrel change in oil prices and $96 million for each $0.50 per Mcf change in domestic gas prices.
Investor verification checklist
- Verify the sustainability of earnings and cash flow at commodity prices below 2008 levels.
- Review the $4.3 billion 2010 capital-spending plan, particularly Iraq, Bahrain, California and Midcontinent Gas execution.
- Assess reserve quality, production-sharing-contract economics, Argentina concession extensions and the impairment risk associated with unproved properties.
- Reconcile debt maturities, contractual obligations, environmental reserves and potential additional environmental losses with available liquidity.
- Evaluate Phibro’s effect on trading volatility, derivatives exposure and risk controls.
- Review the DBCP litigation, tax audits, foreign political risks and other contingencies for developments after the filing date.
- Note that KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded that disclosure controls and internal controls were effective as of December 31, 2009.