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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, 2006
Business Overview: OPC operates in two primary segments: Oil and Gas and Chemical. The period was significantly impacted by the January 2006 acquisition of Vintage Petroleum, Inc. and the May 2006 seizure of its Block 15 oil operations in Ecuador by the Ecuadorian government, which were classified as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 37% year-over-year for the six-month period, driven by higher worldwide crude oil and natural gas prices, increased production volumes (including from the Vintage acquisition), and higher chemical volumes.
• Net Income Decline: Despite higher revenues, reported net income decreased 12% year-over-year. This was primarily due to a $269 million after-tax loss in discontinued operations (Ecuador Block 15 write-off) and the absence of a $619 million one-time tax benefit recorded in 2005 from an IRS settlement.
• Core Earnings Improvement: Management reported "core earnings" (excluding significant non-recurring items) of $2.355 billion for the six months ended June 30, 2006, compared to $1.612 billion in the prior year, representing a 46% increase.
• Balance Sheet: Property, plant, and equipment increased by $5.2 billion due to the Vintage acquisition. Cash and cash equivalents decreased by $832 million during the period due to significant investing and financing activities.

Guidance, Outlook, and Risks

• Acquisitions: On August 7, 2006, OPC announced an agreement to acquire oil and gas assets from Plains Exploration & Production Company for $865 million in cash, expected to close in October 2006.
• Dividends and Buybacks: The Board increased the quarterly dividend to $0.44 per share (pre-split) and authorized a 2-for-1 stock split. The share repurchase program was increased to 20 million pre-split shares; $970 million was spent on buybacks in the first six months of 2006.
• Capital Spending: OPC expects to spend approximately $3.0 billion on its 2006 capital spending program.
• Legal and Political Risks:
  • Ecuador: The government seized Block 15 assets. OPC filed an arbitration claim seeking redress for illegal confiscation. The outcome is uncertain and could take over a year.
  • Nicaragua: OxyChem faces lawsuits alleging personal injury from pesticide exposure. Management believes claims are without merit and judgments would be unenforceable in the U.S.
  • Environmental: Total environmental remediation reserves are $412 million, with a reasonably possible loss range of up to an additional $415 million.
• Accounting Changes: OPC is assessing the impact of FASB Interpretation No. 48 (Accounting for Uncertainty in Income Taxes), effective for fiscal years beginning after December 15, 2006.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the magnitude of the $306 million after-tax charge related to the Ecuador Block 15 seizure and its classification as discontinued operations.
• Vintage Integration: Confirm the final purchase price allocation for the Vintage Petroleum acquisition and the status of assets held for sale ($325 million).
• Core Earnings Definition: Review the reconciliation of GAAP net income to "core earnings" to understand the exclusions (e.g., tax benefits, asset sales, discontinued ops).
• Liquidity Position: Assess the impact of the $865 million Plains acquisition and $970 million share buyback on the $1.356 billion cash balance.
• Commodity Price Sensitivity: Note that a $1.00 per-barrel change in oil prices has a quarterly pre-tax impact of approximately $38 million on earnings.