OXY

Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OXY)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Operations: The company operates through two primary segments: Oil and Gas (exploration, development, production, and marketing of crude oil, natural gas, and NGLs) and Chemicals (manufacturing of basic chemicals, vinyls, and performance chemicals via OxyChem). Major assets include the Permian Basin, Elk Hills (California), and international operations in the Middle East/North Africa (Qatar, Oman, Libya, Yemen) and Latin America (Argentina, Colombia).

Key Financial Metrics (2007)

Note: The filing text does not provide a specific 2006 debt-to-capitalization ratio, only the 2007 ratio of 7% compared to 36% in 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 9.4% to $18.8 billion, driven by higher crude oil prices (average realized price of $64.77/bbl vs. $57.81/bbl in 2006) and increased production volumes, including the start-up of the Dolphin Project in Qatar/UAE.
• Profitability: Net income rose 28.8% to $5.4 billion. Oil and Gas segment earnings increased to $8.3 billion (from $6.9 billion), while Chemical segment earnings declined to $601 million (from $906 million) due to lower PVC margins caused by high feedstock costs and a softening U.S. housing market.
• Discontinued Operations: Significant gains were recognized from the sale of the Russian joint venture ($412 million after-tax gain) and the exchange/sale of Horn Mountain and Pakistan interests to BP ($230 million after-tax gain).
• Balance Sheet: Long-term debt decreased by approximately $878 million due to debt repurchases and redemptions. Stockholders' equity increased by $3.6 billion, reflecting net income and a two-for-one stock split in 2006.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates 2008 capital spending at $3.8 to $3.9 billion, primarily allocated to oil and gas exploration and development in Colombia, Argentina, and California.
• Outlook:
  • Oil & Gas: Production is expected to grow, particularly from the Dolphin Project (targeting 55,000 BOE/day in 2008) and enhanced recovery projects in the Permian Basin and Argentina.
  • Chemicals: Margins are expected to remain similar to 2007 levels but could weaken in the second half of 2008 due to new capacity additions and weak housing demand.
• Risks and Contingencies:
  • Commodity Prices: Results are highly sensitive to volatile oil, gas, and chemical prices.
  • Legal Proceedings: Significant litigation includes judgments in Nicaragua (Osorio and Rios cases) totaling approximately $897 million; management believes these are unenforceable in the U.S. and has no assets in Nicaragua.
  • Environmental: Total environmental remediation reserves were $457 million. Management estimates a reasonably possible loss range of up to $400 million beyond accrued amounts.
  • Geopolitical: Operations in countries like Libya, Yemen, and Argentina face risks of political instability and contract renegotiation.

Investor Verification Checklist

• Reserve Revisions: Verify the impact of negative reserve revisions (-95 million BOE in 2007) on future depreciation, depletion, and amortization (DD&A) rates.
• Discontinued Operations: Confirm the classification and tax treatment of gains from the Russian JV sale and BP asset exchanges, which significantly boosted 2007 earnings.
• Chemical Margins: Monitor the spread between PVC prices and ethylene feedstock costs, as this drove the decline in Chemical segment earnings.
• Debt Reduction: Validate the sustainability of the reduced debt load (7% debt-to-capitalization) and the company's ability to fund the $3.8B+ 2008 capex plan without new borrowing.
• Legal Exposure: Assess the status of the Nicaragua litigation enforcement actions in U.S. courts and the potential for environmental reserve increases.