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Business Context and Reporting Period

Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: Occidental operates primarily in the Oil and Gas and Chemical segments. The company reported a significant decline in earnings compared to the prior year, driven by lower commodity prices and accounting adjustments.

Key Financial Metrics (Six Months Ended June 30, 2002)

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by $2.65 billion (32%) year-over-year. This was primarily due to lower natural gas and chemical prices, reduced oil and gas trading revenues, and lower crude oil prices, partially offset by higher oil production volumes.
• Earnings Drop: Net income fell by $692 million. Earnings before special items decreased from $976 million in 2001 to $369 million in 2002.
• Accounting Impact: The adoption of SFAS No. 142 (Goodwill) resulted in a cumulative after-tax reduction in net income of $95 million due to goodwill impairment. Additionally, the redemption of Altura Energy minority interests reduced minority interest charges by $35 million compared to the prior year.
• Segment Performance:
  • Oil & Gas: Earnings dropped from $1.752 billion to $727 million due to lower gas prices and higher exploration expenses (including lease write-offs in the San Joaquin Valley), despite a 12% increase in production volumes.
  • Chemical: The segment reported a loss of $2 million compared to a $21 million loss in 2001, driven by lower sales prices for caustic soda and PVC.

Guidance, Outlook, and Risks

• Acquisitions and Dispositions:
  • Dolphin Project: Occidental signed an agreement to acquire a 24.5% interest in the Dolphin Project (Qatar-UAE gas pipeline) for $310 million plus historical costs. Production is scheduled to begin in late 2005.
  • Equistar/Lyondell: Agreements were signed to sell Occidental's share of Equistar Chemical to Lyondell and purchase a 21% equity interest in Lyondell. The transaction is expected to close in Q3 2002, with an anticipated after-tax gain.
• Outlook: Management expects third-quarter 2002 oil and gas production to remain at Q2 levels. The chemical business is anticipated to improve in Q3 due to strengthening prices. Capital spending for 2002 is projected at approximately $1.2 billion.
• Risks and Contingencies:
  • Commodity Prices: Results remain highly sensitive to fluctuations in crude oil and natural gas prices.
  • Environmental/Litigation: The company is involved in numerous lawsuits and environmental remediation proceedings (CERCLA). While reserves are accrued, ultimate liabilities are uncertain and could be material if resolved unfavorably.
  • Accounting Changes: Implementation of EITF 02-3 in Q3 2002 will require reclassification of energy trading contracts, reducing reported sales and costs by equal amounts without affecting net income.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current oil and gas price trends against the company's sensitivity disclosures ($1/barrel oil change = $28M quarterly impact; $0.25/MMBTU gas change = $13.5M quarterly impact).
• Equistar Transaction: Monitor the closing of the Equistar sale and Lyondell purchase in Q3 2002 to confirm the realization of the expected after-tax gain.
• Goodwill Impairment: Note that the $95 million charge related to SFAS 142 is a one-time cumulative effect; verify that no remaining goodwill exists on the balance sheet.
• Environmental Reserves: Review the adequacy of accrued reserves for the 53 sites where remediation costs are probable and estimable.
• Debt Maturity: Confirm the company's ability to fund the $1.2 billion capital program and mandatory debt repayments using operating cash flow and existing credit facilities ($2.1 billion available).