Business Context and Reporting Period
Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2008
Business Overview: OPC operates through three segments: Oil and Gas, Chemical, and Midstream, Marketing, and Other. The company explores for, develops, and produces crude oil and natural gas; manufactures chemicals; and engages in midstream activities including the Dolphin Project pipeline.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Sales | $6,020 | $4,015 |
| Net Income | $1,846 | $1,212 |
| Diluted EPS | $2.23 | $1.43 |
| Operating Cash Flow | $2,687 | $1,622 |
| Capital Expenditures | $(868) | $(780) |
| Cash and Cash Equivalents (End of Period) | $1,495 | $1,292 |
| Total Debt (Current + Long-Term) | $1,805 | $1,788 |
| Effective Tax Rate | 42% | 37% |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased $2.0 billion (50%) driven by higher worldwide oil and gas prices and production volumes, as well as higher chemical prices.
- Profitability: Net income rose $634 million (52%). Oil and Gas segment earnings increased to $2.9 billion from $1.9 billion due to price increases and an 8% production increase (partially from the Dolphin Project start-up).
- One-Time Items in 2007: Q1 2007 results included a $412 million gain from the sale of a Russian joint venture and $109 million in litigation settlements, which were absent in Q1 2008. Conversely, Q1 2007 included a $172 million pre-tax interest charge for debt purchases and a $47 million plant closure charge.
- Acquisitions: In February 2008, OPC acquired a 50% interest in Permian Basin and Colorado oil and gas properties from Plains Exploration & Production Company for approximately $1.5 billion in cash.
- Share Repurchases: The company repurchased 6.3 million shares for $436 million in Q1 2008, compared to 321 million in Q1 2007.
Guidance, Outlook, and Risks
- Capital Spending: Management expects to spend approximately $4.0 billion on its 2008 capital spending program.
- Liquidity: The company maintains approximately $1.5 billion in cash and $1.5 billion in unused committed bank credit lines. Management believes cash on hand and operating cash flows will fund operations, capex, dividends, and acquisitions.
- Segment Realignment: Effective Q1 2008, operating segments were realigned to report Midstream, Marketing, and Other activities on a stand-alone basis. Prior periods were revised retrospectively.
- Legal and Environmental Risks:
- Nicaragua Litigation: OCC faces lawsuits in Nicaragua alleging personal injury from pesticide exposure. Judgments totaling ~$897 million have been entered, but management believes they are unenforceable in the U.S. and the claims lack merit.
- Environmental Reserves: Total environmental remediation reserves are $451 million. Management estimates a reasonably possible loss range of up to $440 million beyond accrued amounts.
- Market Risk: Results are highly sensitive to global commodity pricing fluctuations. A $1.00/barrel change in oil prices impacts quarterly pre-tax earnings by approximately $39 million.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and gas price trends against the realized prices of $86.75/barrel (oil) and $6.05/MCF (gas) reported for Q1 2008.
- Acquisition Integration: Monitor the integration and production impact of the $1.5 billion Plains Exploration & Production Company acquisition.
- Legal Contingencies: Track the status of the Nicaragua litigation and any potential enforcement actions in U.S. courts.
- Environmental Exposure: Review updates on the $451 million environmental reserve and the potential for additional liabilities up to $440 million.
- Capital Allocation: Confirm adherence to the $4.0 billion 2008 capital spending plan and the sustainability of the share repurchase program funded by operating cash flow.