OXY

Business Context and Reporting Period

Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: Occidental operates primarily in two segments: Oil and Gas and Chemicals. The company is engaged in the exploration, production, and refining of oil and natural gas, as well as the manufacture and sale of chemical products. The reporting period reflects significant strategic shifts, including the sale of its Equistar interest and the acquisition of a stake in the Dolphin Project.

Key Financial Metrics

Note: Net sales and cost of sales for 2002 and comparative periods were reduced by approximately $2.2 billion and $4.8 billion respectively due to the adoption of EITF 02-3, which requires net reporting of energy trading contracts. This change did not affect net income or cash flow.

Material Changes vs. Prior Period

• Revenue Decline: Net sales for the nine months ended September 30, 2002, decreased by $1.36 billion (20%) compared to the prior year. This was primarily driven by lower worldwide crude oil, natural gas, and chemical prices, as well as lower volumes in natural gas and chemicals.
• Profitability Drop: Net income for the nine-month period fell by $734 million (52%) to $667 million. The decline is attributed to lower commodity prices and significant one-time charges, partially offset by gains from asset sales.
• Segment Performance:
  • Oil & Gas: Earnings dropped from $2.68 billion to $1.22 billion due to lower prices, despite an 8% increase in production volumes.
  • Chemicals: Earnings improved significantly from $14 million to $217 million, driven by higher prices for PVC and EDC and a $164 million after-tax gain from the sale of the Equistar investment.
• Balance Sheet Shifts: Long-term receivables decreased by $1.9 billion due to the redemption of Altura partnership interests. Minority interest dropped from $2.2 billion to $260 million following the same transaction.

Guidance, Outlook, and Management Commentary

• Strategic Transactions:
  • Equistar/Lyondell: Occidental sold its 29.5% interest in Equistar to Lyondell Chemical Company and acquired a 21% interest in Lyondell. This was done to reduce exposure to petrochemical volatility while maintaining economic upside. A $164 million after-tax gain was recorded in Q3 2002.
  • Dolphin Project: Occidental signed an agreement to acquire a 24.5% interest in the Dolphin Project (Qatar-UAE gas pipeline) for $310 million. Construction is expected to begin in 2003 with production starting in 2006.
• Production Outlook: Management expects 2003 production to increase to an average of 525,000 barrels of oil equivalent (BOE) per day, driven by the startup of the Horn Mountain field in the Gulf of Mexico and the Eden Yuturi field in Ecuador.
• Capital Spending: The company expects to spend approximately $1.2 billion on capital expenditures in 2002, with about $1.1 billion allocated to oil and gas (excluding the Dolphin project purchase price).
• Liquidity: Occidental expects sufficient cash from operations and credit facilities to fund operations, capital expenditures, dividends, and debt repayments. Available committed bank credit lines totaled approximately $2.1 billion.
• Accounting Changes: The company recorded a $95 million after-tax charge for the cumulative effect of changes in accounting principles (SFAS 142) related to goodwill impairment in the chemical segment. Additionally, EITF 02-3 was adopted, changing the presentation of energy trading revenues to a net basis.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current crude oil and natural gas prices against the reported average sales prices ($22.81/bbl for oil and $2.74/Mcf for gas in the first nine months of 2002) to assess future margin pressure.
• Equistar Transaction Impact: Confirm the long-term value of the 21% Lyondell stake relative to the $164 million gain recognized and the reduction in petrochemical volatility exposure.
• Goodwill Impairment: Review the $95 million charge related to SFAS 142 and confirm that no remaining goodwill exists on the balance sheet, eliminating future amortization but requiring annual impairment testing.
• Environmental Liabilities: Assess the adequacy of reserves for the 53 Superfund sites where remediation is probable, noting that ultimate costs for other sites cannot be reasonably determined.
• Debt Refinancing: Monitor the $450 million in notes due in 2013 that are subject to remarketing in 2003, as current market levels are below the specified yield, creating refinancing risk.