Occidental Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2009, filed November 2, 2009. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The filing compares results with the corresponding 2008 periods.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $4.1 billion | $7.1 billion | $10.9 billion | $20.2 billion |
| Income from continuing operations | $943 million | $2.3 billion | $2.0 billion | $6.5 billion |
| Net income attributable to common stock | $927 million | $2.3 billion | $2.0 billion | $6.4 billion |
| Diluted EPS | $1.14 | $2.77 | $2.43 | $7.77 |
| Net margin | 22.6% | 32.2% | 18.2% | 31.8% |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $3.8 billion | $8.1 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.6 billion | $3.1 billion |
| Cash and cash equivalents | $1.6 billion at September 30, 2009, versus $1.8 billion at December 31, 2008 |
At September 30, 2009, total assets were $42.2 billion, current liabilities were $5.1 billion, long-term debt was $2.6 billion, and total debt carrying value was approximately $2.8 billion. Available but unused committed bank credit was approximately $1.5 billion.
Worldwide oil and gas sales volumes increased approximately 7% year over year in the third quarter to 628 thousand barrels of oil equivalent per day. However, the worldwide realized oil price declined to $62.79 per barrel from $104.15, and the worldwide realized natural gas price declined to $2.53 per Mcf from $7.11.
Material changes versus the prior comparable period
- Third-quarter net sales decreased 42% and nine-month net sales decreased 46%, primarily because of lower oil, natural gas, chemical-product prices and weaker chemical volumes.
- Third-quarter net income attributable to common stock fell 59%; nine-month net income fell 69%. Diluted EPS declined 59% in the quarter and 69% year to date.
- Oil and gas segment earnings declined to $1.5 billion in the quarter and $3.1 billion year to date, versus $3.6 billion and $10.3 billion, respectively, in 2008. Higher production and lower operating costs only partly offset weaker commodity prices.
- Chemical segment earnings declined to $72 million in the quarter and $356 million year to date, reflecting economic weakness, lower volumes and weaker caustic soda and polyvinyl chloride margins.
- Midstream, marketing and other earnings increased to $77 million in the quarter, primarily from improved marketing results, but declined to $154 million year to date because of lower gas-processing margins.
- Operating cash flow declined 53% to $3.8 billion year to date. Cash used in investing activities decreased to $3.2 billion from $6.5 billion, while financing cash use decreased to $764 million from $2.2 billion.
- Cash declined by $169 million during the first nine months. The company paid $794 million in dividends, issued $750 million of senior notes for $740 million of net proceeds, and repaid $600 million of Dolphin Project debt.
Guidance, outlook, commentary and unusual items
- Management estimated 2009 capital spending at approximately $3.7 billion, with emphasis on maintaining returns above the cost of capital.
- Management stated that cash on hand and operating cash flow should be sufficient to fund operations, planned capital expenditures and dividends. Results remain highly dependent on oil and gas prices and production volumes.
- Nine-month results included after-tax charges of $26 million for severance, railcar leases and rig termination costs. Pre-tax charges included $40 million for severance and $15 million for railcar-related obligations.
- Occidental announced an agreement to acquire Phibro LLC from Citigroup for approximately net asset value, with closing anticipated by year-end 2009. Phibro is expected to join the midstream, marketing and other segment.
- Occidental reported a significant Kern County, California discovery; approximately 26,000 gross BOE per day was being produced from the discovery area at quarter-end, in which Occidental held an approximately 80% interest.
- Environmental remediation reserves totaled $401 million across 167 sites. Management estimated reasonably possible additional environmental losses of up to $390 million beyond recorded reserves.
- Derivative activity exposes the company to commodity-price and counterparty risks. Approximately $85 million of net after-tax derivative losses in accumulated other comprehensive income were expected to be reclassified into income during the following twelve months.
- Risks identified include commodity-price volatility, economic conditions, unsuccessful exploration, production interruptions, project delays, environmental liabilities, litigation, tax audits, political and regulatory developments, and failure to achieve expected production or cost improvements.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2009, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity prices and chemical-sector demand recovered sufficiently to support the company’s earnings and cash-flow outlook.
- Actual 2009 capital spending versus the approximately $3.7 billion estimate and the resulting effect on free cash flow.
- Debt maturities, interest costs and liquidity after the Dolphin repayment and the 2016 senior-note issuance.
- Production performance and development economics for the Kern County discovery, Bahrain Field DPSA and other international projects.
- Changes in the $401 million environmental reserve and the potential for additional losses of up to $390 million.
- Settlement or enforcement developments relating to Nicaragua litigation, tax audits and other contingencies.
- Closing terms and subsequent financial impact of the proposed Phibro acquisition.