Occidental Petroleum Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2009. The unaudited filing covers Occidental’s oil and gas, chemical, and midstream, marketing and other segments.
Financial Performance and Position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $3.687 billion | $7.116 billion | $6.760 billion | $13.136 billion |
| Net income attributable to common stock | $682 million | $2.297 billion | $1.050 billion | $4.143 billion |
| Diluted EPS | $0.84 | $2.78 | $1.29 | $5.00 |
| Net income margin | 18.5% | 32.3% | 15.5% | 31.5% |
| Operating cash flow | Not separately provided for the quarter | $2.201 billion | $5.031 billion |
- At June 30, 2009, cash and cash equivalents were $1.755 billion, compared with $1.777 billion at December 31, 2008.
- Total current assets were $6.658 billion and current liabilities were $5.411 billion. Total debt, including current maturities, was approximately $3.485 billion, compared with approximately $2.747 billion at year-end 2008.
- Available but unused committed bank credit totaled approximately $1.5 billion.
- Capital expenditures were $1.902 billion for the first six months, including $1.5 billion for oil and gas. Full-year 2009 capital spending was estimated at approximately $3.6 billion.
- Dividends paid during the first six months were $520 million; dividends declared were $0.33 per share in the second quarter and $0.65 per share year to date.
Material Changes Versus the Prior Comparable Period
- Second-quarter net sales declined 48% and six-month net sales declined 49%, primarily because of sharply lower oil and natural gas prices.
- Second-quarter net income attributable to common stock fell 70%, while six-month net income fell 75%. Diluted EPS declined from $2.78 to $0.84 in the quarter and from $5.00 to $1.29 year to date.
- Oil and gas segment earnings decreased to $1.083 billion in the quarter and $1.628 billion year to date, from $3.806 billion and $6.694 billion, respectively.
- Worldwide oil and liquids sales volumes increased to 496,000 barrels per day in the quarter from 455,000 barrels per day. Worldwide sales volumes on a BOE basis rose to 649,000 BOE per day from 588,000 BOE per day.
- Worldwide realized oil price declined to $52.97 per barrel in the quarter from $110.12; worldwide realized natural gas price declined to $2.34 per Mcf from $7.71.
- Chemical segment earnings declined to $115 million in the quarter from $144 million, reflecting weak housing, automotive, and durable-goods markets.
- Midstream, marketing and other earnings declined to $63 million from $161 million because of lower gas-processing, marketing, and power-generation margins.
- Operating cash flow decreased to $2.201 billion from $5.031 billion, primarily because of lower commodity prices and a $555 million use of working capital.
- Investing cash outflows declined to $2.442 billion from $4.210 billion, mainly because 2008 included larger acquisition and signing-bonus payments.
- Financing activities provided $219 million in 2009, compared with a $1.279 billion use in 2008. The 2009 amount included $740 million of net debt proceeds; 2008 included $860 million of share repurchases.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, and dividends.
- In May 2009, Occidental issued $750 million of 4.125% senior unsecured notes, receiving $740 million of net proceeds. The notes mature June 1, 2016.
- Management reported $40 million of pre-tax severance charges, $15 million of railcar lease charges related to a customer bankruptcy reorganization, and $8 million of rig termination costs during the first six months. After-tax charges for these items were approximately $26 million, $10 million, and $5 million, respectively.
- In July 2009, Dolphin refinanced current debt with longer-term debt; Occidental repaid approximately $600 million of its portion, which had been classified as current maturities at June 30.
- Occidental announced a Kern County, California discovery on July 22, 2009. The company was producing more than 18,000 gross BOE per day from the area and held approximately an 80% interest. Approximately two-thirds of the discovery was believed to be natural gas.
- Under a new Bahrain development and production sharing agreement, Occidental expected its net production share to reach approximately 28,000 BOE per day in 2010 and 56,000 BOE per day by 2015.
- Environmental remediation reserves totaled $407 million for 167 sites. Management estimated reasonably possible additional environmental losses of up to $400 million beyond recorded reserves.
- Outstanding derivatives had gross fair values of $929 million of assets and $1.167 billion of liabilities. Approximately $73 million of after-tax derivative losses in accumulated other comprehensive income were expected to be reclassified into income over the following 12 months.
- Key risks include commodity-price volatility, unsuccessful exploration, production interruptions, political and geopolitical risks, environmental liabilities, litigation, tax audits, regulatory changes, and execution risk on development projects.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2009, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of cash flow and dividends under lower oil and natural gas prices, including the filing’s sensitivity estimates of approximately $39 million of quarterly pre-tax impact per $1.00 change in oil prices and $20 million per $0.50 change in domestic natural gas prices.
- Review debt maturities, including the approximately $600 million Dolphin-related repayment and the 2016 senior notes issuance.
- Assess whether the $3.6 billion 2009 capital-spending estimate remained within operating cash flow and liquidity capacity.
- Evaluate the potential effect of environmental claims, the $407 million reserve, and up to $400 million of reasonably possible additional losses.
- Monitor the Kern County discovery and Bahrain development agreement against stated production expectations.
- Reconcile segment earnings declines with realized commodity prices, production growth, DD&A rates, and midstream and chemical margins.
- Review derivative exposures, collateral provisions, hedge losses, and the expected reclassification of accumulated losses into future earnings.