Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, for Occidental Petroleum Corporation. The company operates primarily in two segments: Oil and Gas and Chemical. The filing includes unaudited consolidated financial statements and management's discussion and analysis (MD&A) for the three and nine months ended September 30, 2001, compared to the same periods in 2000.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2001):
- Net Sales: $11.605 billion (up from $9.632 billion in 2000).
- Net Income: $1.401 billion (up from $1.237 billion in 2000).
- Basic Earnings Per Share (EPS): $3.77 (up from $3.36 in 2000).
- Income Before Taxes: $2.145 billion.
- Provision for Income Taxes: $717 million.
Cash Flow (Nine Months Ended Sept 30, 2001):
- Net Cash Provided by Operating Activities: $2.264 billion.
- Net Cash Used by Investing Activities: $239 million.
- Net Cash Used by Financing Activities: $1.553 billion.
- Capital Expenditures: $965 million.
Liquidity and Debt:
- Cash and Cash Equivalents: $569 million (up from $97 million at Dec 31, 2000).
- Total Debt (Current + Long-Term + Non-Recourse): Approximately $4.2 billion ($252M current + $3,255M long-term + $700M non-recourse).
- Debt Reduction: Total debt reduced by over $1.3 billion during the first nine months of 2001.
- Available Credit: Approximately $1.91 billion in unused committed bank credit lines.
Material Changes Versus Prior Period
Revenue Drivers: The increase in net sales for the nine months of 2001 was primarily driven by higher natural gas prices and increased oil and gas trading volumes. This offset lower worldwide crude oil and chemical prices.
Profitability Drivers: Net income increased despite lower oil and chemical prices due to significant gains from asset dispositions and a favorable tax settlement. Specifically:
- Asset Sales: A $399 million after-tax gain from the sale of the Tangguh LNG project interest in Indonesia and a $272 million after-tax loss from the sale of a Texas pipeline entity.
- Segment Performance: Oil and Gas earnings rose to $2.679 billion (nine months) from $1.647 billion in 2000, largely due to the Tangguh gain and higher gas prices. Chemical earnings dropped significantly to $19 million from $224 million due to lower product prices (PVC, EDC, Chlorine) and a loss from the Equistar equity investment.
- Accounting Changes: A $24 million after-tax reduction in net income was recorded as a cumulative effect of adopting SFAS No. 133 (Derivatives).
Guidance, Outlook, and Risks
Capital Expenditure Outlook: Occidental expects to spend approximately $1.4 billion on capital expenditures for the full year 2001 (including ~$100 million for chemicals) and anticipates spending about $1.1 billion in 2002.
Liquidity Outlook: Management expects to generate sufficient cash from operations to fund operating needs, capital expenditures, dividends, and debt repayments for 2001 and 2002. The company plans to continue using free cash flow to pay down debt.
Market Risks:
- Commodity Prices: Earnings are sensitive to oil and gas prices. A $1.00 swing in NYMEX gas prices impacts quarterly earnings by ~$62 million; a $1.00 change in oil prices impacts earnings by ~$28 million.
- California Gas Premium: The loss of the California natural gas premium in Q4 is expected to reduce segment earnings by $70 million compared to Q3.
- Chemical Demand: Fundamental weakness in chemical demand continues with no signs of early recovery; the petrochemical industry is operating near a cash break-even basis.
Contingencies: The company faces substantial environmental liabilities and litigation (126 Superfund/comparable sites identified). While reserves are accrued, unfavorable resolution of these matters could have a material adverse effect on financial position.
Investor Verification Checklist
- Asset Sale Proceeds: Verify the timing and tax treatment of the $399 million Tangguh LNG gain and the $272 million pipeline loss to understand their impact on recurring earnings.
- Chemical Segment Viability: Assess the sustainability of the Chemical segment's low earnings ($19M for nine months) given the stated "fundamental weakness" in demand.
- Debt Reduction Strategy: Confirm the trajectory of the $1.3 billion debt reduction and the company's ability to maintain liquidity amidst lower oil prices.
- Environmental Reserves: Review the adequacy of accrued reserves for the 43 sites where remediation is probable, given the potential for retroactive liability.
- Derivative Accounting: Monitor the impact of SFAS No. 133 adoption on future earnings volatility regarding commodity hedging.