Business Context and Reporting Period
Company: Occidental Petroleum Corporation (OCCIDENTAL PETROLEUM CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: Occidental operates primarily in two segments: Oil and Gas and Chemicals. The company is engaged in the exploration, production, and marketing of crude oil and natural gas, as well as the manufacture and sale of chemical products. As of September 30, 2005, there were 401,998,664 shares of common stock outstanding.
Key Financial Metrics
Amounts in millions, except per share data.
| Metric | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2004 |
|---|---|---|---|
| Net Sales | $4,057 | $10,878 | $8,286 |
| Net Income | $1,747 | $4,129 | $1,826 |
| Diluted EPS | $4.25 | $10.11 | $4.57 |
| Operating Cash Flow | N/A | $3,763 | $2,711 |
| Capital Expenditures | N/A | $(1,661) | $(1,270) |
| Total Debt (Current + Long-Term) | $2,917 | $2,917 | $3,804 |
| Cash & Short-Term Investments | $1,716 | $1,716 | $1,449 |
Segment Performance (Nine Months 2005):
- Oil and Gas: Net Sales $7,389 million; Pretax Operating Profit $4,434 million.
- Chemical: Net Sales $3,379 million; Pretax Operating Profit $442 million.
Material Changes vs. Prior Period
Revenue and Profit Growth: Net income for the nine months ended September 30, 2005, increased to $4.1 billion from $1.8 billion in the same period of 2004. This 126% increase was driven primarily by higher crude oil and natural gas prices, higher chemical margins, and significant gains on asset dispositions.
Key Drivers of Change:
- Asset Dispositions: A $726 million pre-tax gain resulted from Valero Energy Corp.'s acquisition of Premcor, Inc., and the subsequent sale of 89% of the Valero shares received. Additionally, a $140 million pre-tax gain was recorded from the sale of Lyondell Chemical Company stock.
- Tax Benefits: The nine-month period included a $619 million tax benefit from an IRS settlement regarding foreign tax credits and a $335 million benefit from the reversal of tax reserves due to the lapsing of statutes of limitations.
- Cost Increases: Cost of sales increased due to higher production costs, depletion, depreciation, and amortization (DD&A), and higher energy/raw material costs. Selling, general, and administrative expenses rose due to $159 million in charges for chemical plant write-offs and write-downs.
- Debt Reduction: Total debt decreased significantly from $3.8 billion (Dec 31, 2004) to $2.9 billion (Sep 30, 2005) due to the redemption of various senior notes and trust preferred securities.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Oil and Gas Production: Management expects fourth-quarter 2005 production to average between 580,000 and 590,000 barrels of oil equivalent (BOE) per day, subject to price-driven adjustments in production-sharing contracts and lingering weather impacts in the Gulf of Mexico.
- Chemical Earnings: Fourth-quarter 2005 chemical segment earnings are expected to range from $90 million to $120 million.
- Capital Spending: The company expects to spend approximately $2.4 billion on its 2005 capital spending program.
Material Transactions and Risks:
- Vintage Petroleum Acquisition: In October 2005, Occidental agreed to acquire Vintage Petroleum, Inc., for approximately $3.5 billion (cash and stock). The transaction is expected to close in Q1 2006. Occidental plans to fund this and a $9 million share repurchase program using existing cash and short-term investments.
- Libya Re-entry: Occidental resumed operations in Libya in July 2005 after a 19-year suspension, paying re-entry bonuses and committing to future exploration spending.
- Legal and Environmental: The company faces ongoing litigation, including a $97 million judgment in Nicaragua (which management believes is unenforceable in the U.S.) and environmental remediation liabilities with a reasonably possible loss range up to $455 million beyond accrued reserves.
- Market Risk: Results are highly sensitive to fluctuations in global commodity prices (oil and gas) and chemical prices. The company utilizes derivative instruments to hedge a portion of its production and debt obligations.
Investor Verification Checklist
- Non-GAAP "Core Earnings": Verify the reconciliation of reported earnings to "core earnings," which excludes significant one-time items like the Premcor/Valero gain ($726M) and tax benefits ($954M total), to assess underlying operational performance.
- Vintage Acquisition Financing: Confirm the company's ability to fund the $3.5 billion Vintage acquisition and the associated stock repurchase program without compromising its credit rating or liquidity, given the reliance on cash on hand and Q4 generation.
- Chemical Segment Volatility: Review the impact of the $159 million charge for chemical plant write-offs/write-downs on the segment's reported profitability versus its core earnings of $606 million for the nine-month period.
- Production Sharing Contracts: Monitor how rising oil prices affect production volumes in Oman, Qatar, Yemen, and Long Beach, as higher prices can reduce Occidental's share of production under these contracts.
- Environmental Liabilities: Assess the adequacy of the $402 million environmental reserve against the disclosed "reasonably possible" loss range of an additional $455 million.