Business Context and Reporting Period
Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2001
Business Overview: Occidental operates primarily in two segments: Oil and Gas and Chemicals. The company is a major producer of crude oil and natural gas, with significant operations in the United States (including California and Texas), Latin America, and the Eastern Hemisphere. The Chemical segment produces chlorine, caustic soda, ethylene dichloride, and PVC resins.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2001 | Q1 2000 |
|---|---|---|
| Net Sales | $4,475 | $2,574 |
| Net Income | $484 | $271 |
| Diluted EPS | $1.30 | $0.74 |
| Operating Cash Flow | $821 | $348 |
| Capital Expenditures | $(238) | $(122) |
| Cash and Equivalents (End of Period) | $299 | $128 |
| Total Debt (Current + Long-Term + Non-Recourse) | $5,246 | $5,443 |
| Working Capital | $(478) | $(673) |
Note: Working capital is negative due to the nature of the industry and significant current liabilities including taxes and payables.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 74% to $4.475 billion, driven by higher domestic natural gas prices, increased oil production from the Altura Energy acquisition, and higher trading volumes.
- Profitability: Net income rose 79% to $484 million. Earnings before special items were $510 million compared to $264 million in Q1 2000.
- Segment Performance:
- Oil & Gas: Earnings surged to $946 million (from $394 million) due to a California gas market price premium and higher production volumes.
- Chemicals: Reported a loss of $79 million (compared to $143 million income in 2000) due to lower sales prices/volumes for chlorine and PVC, and higher energy/feedstock costs.
- Accounting Changes: Adoption of SFAS No. 133 (Derivatives) resulted in a $24 million after-tax reduction in net income recorded as a cumulative effect of a change in accounting principles. Adoption of EITF 00-10 reclassified $66 million of shipping costs from revenue deductions to cost of sales for the prior year comparison.
Guidance, Outlook, and Risks
- Outlook: Management expects to generate sufficient cash to fund operations, capital expenditures ($1.1 billion planned for 2001), dividends, and debt repayments. Total debt is expected to be reduced by an additional $1.0 billion by year-end 2001.
- Market Conditions: While energy prices remain high, the Chemical segment faces worsening market conditions due to economic slowdowns. Improvements depend on general economic recovery.
- Operational Risks:
- California Electricity: Potential rolling curtailments may interrupt THUMS operations, though Elk Hills operations are expected to be resilient due to co-generation capabilities.
- Colombia: Oil liftings remain limited by disruptions at the Caño Limón pipeline.
- Legal and Environmental: The company faces substantial lawsuits and environmental remediation proceedings (CERCLA). While reserves are accrued for probable costs, ultimate liabilities are uncertain. Management believes it is unlikely these matters will have a material adverse effect after considering reserves.
- Derivatives: $12 million of net derivative losses currently in Other Comprehensive Income (OCI) are expected to be reclassified into earnings over the next 12 months.
Investor Verification Checklist
- California Gas Premium: Verify the sustainability of the ~$200 million benefit from California gas price premiums and the duration of the supply-demand imbalance.
- Chemical Segment Turnaround: Monitor the recovery of chlorine and PVC prices and volumes against rising energy costs.
- Debt Reduction Plan: Confirm the execution of the planned $1.0 billion debt reduction for the remainder of 2001.
- Environmental Liabilities: Review updates on the 125 Superfund/comparable sites, specifically the 8 sites where liability ranges cannot yet be determined.
- Derivative Impact: Track the reclassification of the $12 million derivative loss from OCI to earnings over the coming year.