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Business Context and Reporting Period

Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: Occidental operates primarily in two segments: Oil and Gas (exploration, production, and trading) and Chemicals (manufacturing of chlorine, caustic, and derivatives). The company also holds significant equity investments, including a 29.5% interest in Equistar.

Key Financial Metrics

Note: Working Capital is calculated as Total Current Assets minus Total Current Liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 44% to $8.32 billion, driven primarily by higher natural gas prices (U.S. average rose from $2.63/MCF to $9.30/MCF) and increased oil and gas trading revenues. Domestic crude oil production also increased due to acquisitions.
• Profitability: Net income rose 15% to $957 million. However, this includes a $24 million cumulative effect of accounting changes and a $3 million extraordinary loss. "Earnings before special items" increased significantly from $607 million to $976 million.
• Segment Performance:
  • Oil & Gas: Earnings surged to $1.752 billion (vs. $951 million in 2000) due to high gas prices, partially offset by lower international production (Colombia pipeline outage) and lower crude prices.
  • Chemicals: Reported a loss of $21 million (vs. $177 million profit in 2000) due to lower sales prices for PVC, EDC, and chlorine, and higher energy costs.
• Cash Flow: Operating cash flow improved by $387 million to $1.3 billion. Investing cash outflows decreased significantly compared to 2000, which included a $3.6 billion acquisition of Altura.
• Debt Reduction: Total debt decreased by $478 million during the first six months of 2001.

Guidance, Outlook, and Risks

• Outlook: Management expects to generate sufficient cash in 2001 and 2002 to fund operations, capital expenditures (projected at $1.3 billion for 2001), dividends, and debt repayments. They anticipate a softening of California natural gas prices in Q3 2001.
• Subsequent Events:
  • Sold interest in Tangguh LNG project (Indonesia) for $480 million (closed July 10, 2001).
  • Announced sale of residual Texas pipeline interest to Kinder Morgan for $360 million (expected to close Q3 2001).
  • These sales are expected to generate a net after-tax gain of ~$125 million and ~$750 million in proceeds for debt reduction.
• Accounting Changes: Implemented SFAS No. 133 (Derivatives) effective Jan 1, 2001, resulting in a $24 million after-tax reduction in net income recorded as a cumulative effect of change in accounting principles. Also adopted EITF 00-10 regarding shipping costs.
• Risks and Contingencies:
  • Environmental: Involved in 125 Superfund or comparable state sites. While reserves are accrued for probable costs, ultimate liabilities are uncertain.
  • Legal: Subject to various lawsuits and tax audits. Management believes reserves are adequate and a material adverse effect is unlikely.
  • Market: Exposure to global commodity price fluctuations, particularly oil, gas, and chemical prices.

Investor Verification Checklist

• Gas Price Sustainability: Verify the duration of the high California natural gas price differential ($8.00/MCF premium) which drove Q2 earnings, as management expects a narrowing to $2.50/MCF in Q3.
• Chemical Segment Turnaround: Monitor the chemical segment's ability to recover from losses driven by weak demand and low prices for PVC and chlorine.
• Debt Reduction Execution: Confirm the closing of the Tangguh and Texas pipeline sales and the subsequent application of proceeds toward debt reduction.
• Colombia Production: Track the status of the Cano Limon pipeline outage and the potential of the Gibraltar-1 wildcat well to offset production losses.
• Environmental Reserves: Review future updates on the 125 environmental sites to ensure accrued reserves remain sufficient against potential cost increases.