Business Context and Reporting Period
Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: OPC operates primarily in the Oil and Gas and Chemical segments. The period was characterized by significant asset dispositions, including the sale of Russian and Pakistan interests, and a strategic swap of assets with BP p.l.c.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 2007 | Six Months Ended June 30, 2006 |
|---|---|---|
| Net Sales | $8,426 | $8,735 |
| Net Income | $2,624 | $2,091 |
| Diluted EPS | $3.11 | $2.42 |
| Operating Cash Flow | $2,948 | $3,100 |
| Capital Expenditures | ($1,630) | ($1,230) |
| Cash and Equivalents (End of Period) | $1,505 | $1,356 |
| Long-Term Debt | $1,717 | $2,619 |
| Current Ratio | 1.33x | 1.31x |
Note: Current Ratio calculated as Total Current Assets ($6,840) / Total Current Liabilities ($5,149).
Material Changes vs. Prior Period
- Profitability: Net income increased 25% to $2.6 billion, driven largely by significant gains from asset dispositions and litigation settlements, despite lower commodity prices and higher operating costs.
- Revenue: Net sales decreased 3.6% to $8.4 billion due to lower crude oil, natural gas, and chemical prices, partially offset by higher production volumes.
- Debt Reduction: Long-term debt decreased by $902 million ($2.6B to $1.7B) following cash tender offers and the redemption of Vintage Petroleum senior notes.
- Discontinued Operations: The company recorded a net gain of $310 million from discontinued operations in 2007 (vs. a $138 million loss in 2006), primarily due to the sale of Pakistan operations and the swap of Horn Mountain assets to BP.
- Segment Performance:
- Oil & Gas: Earnings were $3.69 billion, boosted by a $412 million gain on the sale of the Russian Vanyoganneft joint venture.
- Chemical: Earnings declined to $295 million (from $501 million) due to lower margins on chloro-vinyl products.
Guidance, Outlook, and Risks
- Capital Spending: Management expects to spend approximately $3.4 to $3.5 billion on capital expenditures for the full year 2007.
- Liquidity: The company maintains approximately $1.5 billion in cash and $1.5 billion in available committed bank credit. Management believes cash on hand and operations will fund needs, dividends, and potential acquisitions.
- Dividends: In July 2007, the Board increased the quarterly dividend to $0.25 per share (from $0.22).
- Share Repurchases: The company repurchased 11.2 million shares in the first six months of 2007. Repurchases are funded solely from available cash from operations.
- Risks and Contingencies:
- Legal: Significant litigation exists in Nicaragua regarding pesticide exposure; management believes judgments are unenforceable in the U.S. but notes potential liability.
- Environmental: Total environmental remediation reserves are $447 million, with a reasonably possible additional loss range of up to $410 million.
- Market: Results are highly dependent on global commodity pricing fluctuations and exploration risks.
Investor Verification Checklist
- Asset Disposition Gains: Verify the sustainability of earnings given the $412 million gain from the Russian joint venture sale and $181 million gain from Lyondell stock sales.
- Discontinued Operations: Confirm the classification and future cash flow implications of the Horn Mountain and Pakistan asset swaps/sales.
- Environmental Liabilities: Review the $447 million reserve and the potential $410 million additional exposure for environmental remediation.
- Debt Structure: Assess the impact of the $172 million pre-tax charge for debt repurchases on future interest expense and leverage ratios.
- Commodity Sensitivity: Monitor the impact of realized oil prices ($55.38/BOE for six months 2007) versus market benchmarks on future margins.