Business Context and Reporting Period
Company: Occidental Petroleum Corporation (Oxy)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Occidental operates two primary segments: Oil and Gas (exploration, development, production, and marketing) and Chemicals (manufacturing and marketing of basic chemicals, vinyls, and performance chemicals). The company focuses on large, long-lived oil and gas assets in the U.S., Middle East, and Latin America, while harvesting cash from its chemical business to strengthen the balance sheet.
Key Financial Metrics
| Metric (in millions, except per share) | 2002 | 2001 | 2000 |
|---|---|---|---|
| Net Sales | $7,338 | $8,102 | $8,504 |
| Net Income | $989 | $1,154 | $1,570 |
| Core Earnings (Non-GAAP) | $999 | $1,246 | $1,349 |
| Diluted EPS | $2.61 | $3.09 | $4.26 |
| Operating Cash Flow | $2,100 | $2,566 | $2,348 |
| Capital Expenditures | $(1,236) | $(1,308) | $(892) |
| Total Assets | $16,548 | $17,850 | $19,414 |
| Long-Term Debt (net) | $3,997 | $4,065 | $5,185 |
| Debt-to-Capitalization Ratio | 43% | 46% | 57% |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 9.4% to $7.3 billion, driven by lower natural gas prices and volumes, and lower chemical prices/volumes, partially offset by higher crude oil prices and production.
- Profitability: Net income fell 14% to $989 million. Oil and Gas segment earnings dropped to $1.7 billion (from $2.8 billion) due to lower gas prices, while Chemical segment earnings improved to a profit of $275 million (from a loss of $399 million) due to higher chlorine and PVC prices.
- Strategic Transactions:
- Equistar/Lyondell: Sold 29.5% interest in Equistar Chemicals and acquired a 21% interest in Lyondell Chemical Company, recording a $164 million after-tax gain.
- Dolphin Project: Acquired a 24.5% interest in the Dolphin natural gas project (UAE/Qatar) for $342 million.
- Asset Sales: Sold chrome and calendering operations (classified as discontinued operations) and redeemed Altura partnership interests.
- Balance Sheet: Total debt-to-capitalization ratio improved to 43% from 46% in 2001, reflecting a continued strategy of debt reduction.
Guidance, Outlook, and Risks
- 2003 Outlook:
- Oil & Gas: Management anticipates continued volatility in crude oil prices due to geopolitical unrest in Venezuela and the Middle East. Natural gas supply remains uncertain with steep production decline rates expected.
- Chemicals: Demand for chlorine and caustic soda is forecast to increase. PVC demand is expected to grow 4-5%. Energy costs are expected to rise, limiting margin growth.
- Capital Spending: Estimated at $1.3 billion for 2003, with $1.2 billion allocated to Oil and Gas (prioritizing Qatar, Elk Hills, and Permian Basin).
- Accounting Changes & Contingencies:
- FIN No. 46: Expected to consolidate OxyMar and LaPorte VCM plant lease in Q3 2003, potentially increasing assets by $132 million and liabilities by $154 million with a one-time charge.
- Environmental: Total environmental reserves are $393 million. The range of reasonably possible loss could be up to $400 million beyond accrued amounts. Significant compliance costs are expected for the Houston-Galveston area State Implementation Plan ($70-$120 million).
- Legal: Ongoing litigation regarding the Centre County Kepone Superfund Site was settled for $886,000. An international arbitration proceeding was initiated against the Ecuadorian Government regarding VAT refunds.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current WTI crude and NYMEX natural gas prices against the 2002 averages ($26.08/bbl and $2.50-$3.57/Mcf) to assess near-term earnings impact.
- Environmental Reserve Adequacy: Review the $393 million environmental reserve against the disclosed "reasonably possible" range of up to $400 million additional loss.
- Accounting Consolidation Impact: Monitor Q3 2003 financials for the impact of FIN No. 46 consolidation of OxyMar and the LaPorte lease, including the expected $22 million after-tax charge.
- Debt Maturity Profile: Confirm refinancing plans for the $450 million 6.4% senior notes subject to remarketing in April 2003.
- Production Replacement: Verify the 140% reserve replacement rate achieved in 2002 is sustainable given the high capital costs of new projects like Dolphin.