Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1998 for Occidental Petroleum Corporation. The company operates primarily in two segments: Oil and Gas and Chemicals. The quarter was defined by significant corporate restructuring, including the sale of its MidCon natural gas transmission business (classified as discontinued operations) and the acquisition of the U.S. government's interest in the Elk Hills Naval Petroleum Reserve.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Net Sales | $1,700 million | $1,917 million |
| Net Income | $177 million | $179 million |
| Earnings Per Share (Diluted) | $0.49 | $0.46 |
| Operating Cash Flow (Continuing Ops) | $52 million | $125 million |
| Capital Expenditures | $280 million | $262 million |
| Long-Term Debt (Net) | $5,931 million | $4,925 million |
| Cash and Equivalents | $255 million | $303 million |
Note: Q1 1998 Net Income includes $38 million from discontinued operations and $105 million in gains from asset dispositions. Earnings before these special items were $89 million.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by approximately 11% to $1.7 billion, driven by lower worldwide crude oil and natural gas prices and reduced volumes/prices in the chemical segment.
- Segment Performance:
- Oil & Gas: Earnings dropped to $232 million (from $247 million) due to lower commodity prices, partially offset by increased production and $105 million in gains from asset sales.
- Chemicals: Earnings improved significantly to $158 million (from $92 million) due to lower feedstock costs and higher caustic soda margins, despite lower prices for ethylene and propylene.
- Balance Sheet Shifts: Long-term debt increased by roughly $1 billion to fund the Elk Hills acquisition. Current assets rose significantly due to a $1.4 billion note receivable from the MidCon sale.
- Cash Flow: Operating cash flow from continuing operations fell to $52 million from $125 million. Investing activities consumed $1.6 billion, primarily for the Elk Hills purchase, partially offset by proceeds from asset sales.
Outlook, Risks, and Unusual Items
- Major Transactions:
- Elk Hills Acquisition: Acquired 78% interest in the Elk Hills Field for ~$3.5 billion in February 1998.
- MidCon Sale: Completed sale of MidCon for ~$1.7 billion cash and a $1.4 billion note receivable.
- Equistar Joint Venture: Agreed to contribute petrochemical businesses to Equistar Chemicals, LP for a 29.5% interest and $420 million cash (expected to close May 1998).
- Capital Allocation: The company repurchased 11.5 million shares of common stock for $324 million during the quarter. It expects to repurchase up to 40 million shares total by year-end 1998.
- Risks and Contingencies:
- Environmental: Occidental is involved in 182 Superfund or comparable state sites. While reserves are accrued for probable costs, management notes that unfavorable resolution of maximum potential exposures could have a material adverse effect.
- Commodity Prices: Earnings remain highly sensitive to volatile oil, gas, and chemical commodity prices.
- Liquidity: Management expects cash from operations and asset sales to be adequate for 1998 requirements. Unused committed bank credit lines totaled approximately $1.3 billion as of March 31, 1998.
Investor Verification Checklist
- Verify the sustainability of Chemical segment margins given the reliance on lower feedstock costs and volatile commodity resin prices.
- Confirm the integration timeline and cost synergies for the newly acquired Elk Hills Field.
- Monitor the closing of the Equistar Chemicals joint venture and the impact on future chemical revenue recognition.
- Review the status of environmental remediation reserves, specifically regarding the 79 sites currently under evaluation.
- Track the execution of the remaining common stock repurchase program (targeting 40 million shares total).