Occidental Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an energy company operating through oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Net sales | $4.420 billion | $4.083 billion | $8.424 billion | $7.846 billion |
| Net income | $635 million | $848 million | $1.266 billion | $1.556 billion |
| Diluted EPS | $0.84 | $1.10 | $1.68 | $2.02 |
| Net margin | 14.4% | 20.8% | 15.0% | 19.8% |
| Operating cash flow | Not separately provided | Not separately provided | $2.961 billion | $2.765 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.470 billion | $2.319 billion |
- At June 30, 2019, cash and cash equivalents were $1.751 billion, down from $3.033 billion at December 31, 2018.
- Long-term debt, net, was $10.155 billion, with $116 million of current maturities. Estimated fair value of total debt was $10.7 billion.
- Total lease liabilities were $697 million following adoption of ASC 842; operating lease assets were $681 million.
- Total assets were $44.770 billion and stockholders’ equity was $21.347 billion at June 30, 2019.
- Six-month cash flow was used for capital expenditures of $2.470 billion, dividends of $1.178 billion, treasury-stock purchases of $237 million, and other financing uses. Cash decreased by $1.282 billion during the period.
Material changes versus the prior comparable period
- Second-quarter net sales increased 8%, while net income declined 25% and diluted EPS declined from $1.10 to $0.84. Six-month net sales increased 7%, while net income declined 19% and diluted EPS declined from $2.02 to $1.68.
- Profitability was pressured by lower realized crude oil, NGL, natural gas, and caustic soda prices, including second-quarter worldwide realized oil prices of $58.91 per barrel versus $63.12 and worldwide NGL prices of $18.00 per barrel versus $27.21.
- Oil and gas production increased to 741,000 barrels of oil equivalent per day in the second quarter from 639,000, primarily due to Permian Resources and Al Hosn growth. Oil and gas segment earnings nevertheless declined to $726 million from $780 million.
- Chemical segment earnings declined to $208 million from $317 million in the quarter and to $473 million from $615 million for the six months, primarily because of lower caustic soda prices.
- Midstream and marketing earnings increased to $331 million from $250 million in the quarter and to $610 million from $429 million for the six months, benefiting from improved crude oil spreads and higher marketing margins.
- Interest and debt expense increased, and the company recorded $107 million of Anadarko-related costs, consisting of $50 million of transaction costs and $57 million of amortized debt financing fees.
- Occidental adopted ASC 842 on January 1, 2019, recording $772 million of lease assets and liabilities at adoption without a material impact on net income, cash flow, or equity.
Guidance, outlook, commentary, risks, and unusual items
- Occidental expected Anadarko stockholder approval at a special meeting scheduled for August 8, 2019, with the acquisition expected to close promptly thereafter, subject to required conditions.
- The proposed Anadarko consideration was $59.00 in cash plus 0.2934 Occidental share per Anadarko share. Planned financing included up to $21.8 billion of bridge commitments, $8.8 billion of term-loan commitments, a $10 billion Berkshire Hathaway preferred-stock and warrant investment, and additional long-term debt.
- Occidental planned to sell Anadarko assets in Algeria, Ghana, Mozambique, and South Africa to Total for $8.8 billion, subject to closing and regulatory conditions. Management also referenced an intended $10 billion to $15 billion of asset divestitures within 24 months after the merger.
- Management stated that liquidity needs, including future dividends, were expected to be funded through cash on hand, operating cash flow, asset monetizations, borrowings, and other capital issuance. The company reported compliance with financing covenants and substantial additional borrowing capacity at June 30, 2019.
- International production was expected to decline in the third quarter because of unplanned maintenance in Qatar.
- In July 2019, Occidental entered into 2020 three-way collars covering 300,000 barrels per day, with a $74.09 ceiling, $55.00 purchased-put floor, and $45.00 sold-put floor. It also sold 2021 call options with a $74.09 ceiling.
- On July 31, 2019, Occidental agreed with Ecopetrol to form a Midland Basin joint venture. Ecopetrol was to pay $750 million in cash and provide $750 million of carried capital for a 49% interest; closing was expected in the fourth quarter of 2019.
- Environmental remediation reserves totaled $884 million across 146 sites. Management estimated reasonably possible additional environmental losses of up to $1.1 billion.
- Key risks include commodity-price volatility, execution and integration of Anadarko, substantial expected post-merger debt and preferred obligations, availability and cost of financing, completion of the Total transaction and other divestitures, environmental liabilities, litigation, regulatory approvals, production disruptions, and derivative counterparty and market risks.
- Other notable matters include an Andes arbitration claim relating to Occidental’s approximately $1.0 billion Ecuador arbitration recovery and a Delaware books-and-records action brought by purported stockholders.
Important facts for investors to verify
- Whether the Anadarko merger, Berkshire Hathaway investment, term-loan financing, bridge financing, and Total asset sale closed on the contemplated terms.
- The amount and structure of debt, preferred stock, warrants, and assumed Anadarko and Western Midstream debt following the merger.
- Actual post-merger liquidity, leverage, interest obligations, preferred dividends, capital spending, and dividend sustainability.
- Commodity prices, realized price differentials, production volumes, Qatar maintenance effects, and the performance of the 2020 and 2021 derivative positions.
- Progress and economics of the Ecopetrol Midland Basin joint venture and planned $10 billion to $15 billion of divestitures.
- Potential environmental remediation costs beyond the $884 million recorded reserve and the estimated $1.1 billion range of reasonably possible additional losses.