Occidental Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation operates through oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods.
Key financial metrics
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Net sales | $3.0 billion | $2.6 billion | $9.0 billion | $7.3 billion |
| Net income (loss) | $190 million | $(241) million | $814 million | $(302) million |
| Diluted EPS | $0.25 | $(0.32) | $1.06 | $(0.40) |
| Income from continuing operations margin | 6.3% | (9.0%) | 9.0% | (10.1%) |
| Operating cash flow | Not separately reported | Not separately reported | $3.6 billion | $2.5 billion |
Third-quarter segment results were oil and gas $220 million, chemical $200 million, and midstream and marketing $4 million. Nine-month segment results were $1.067 billion, $600 million, and $76 million, respectively. The nine-month results include a $94 million non-cash fair-value gain on the Plains equity investment.
At September 30, 2017, cash and cash equivalents were $1.806 billion, compared with $2.233 billion at December 31, 2016. Current assets were $7.045 billion and current liabilities were $6.362 billion. Debt consisted of $500 million of current maturities and $9.326 billion of long-term debt, for total carrying debt of approximately $9.8 billion. Estimated fair value of debt was $10.3 billion. Management stated that the company was in compliance with financing covenants and had substantial capacity for additional unsecured borrowings.
Nine-month capital expenditures were $2.439 billion, including approximately $2.0 billion for oil and gas. Net cash used in investing activities was $2.261 billion, while net cash used in financing activities was $1.741 billion, primarily reflecting $1.754 billion of dividends paid. Dividends were $0.77 per share in the third quarter and $2.29 per share for the nine-month period.
Material changes versus the prior comparable period
- Net income improved from a third-quarter 2016 loss of $241 million to third-quarter 2017 income of $190 million; nine-month results improved from a $302 million loss to $814 million of income.
- Higher oil and NGL prices, higher chemical pricing, lower impairment charges, lower DD&A rates, and asset-sale gains supported the improvement.
- Worldwide realized oil prices rose to $46.19 per barrel in the third quarter from $41.49, while realized NGL prices rose to $20.73 per barrel from $14.99. Domestic realized natural gas prices declined to $2.15 per Mcf from $2.30.
- Average oil and gas production declined to 600,000 BOE per day from 605,000 BOE per day; excluding sold or exited operations, ongoing production increased to 600,000 BOE per day from 579,000 BOE per day.
- Occidental completed the sale of South Texas operations for approximately $0.5 billion of net proceeds and a pre-tax gain of approximately $0.5 billion. It also sold non-strategic Midland Basin acreage for approximately $0.6 billion and an $81 million pre-tax gain.
- The company purchased additional interests and assumed operatorship in Seminole-San Andres Unit CO2 enhanced oil recovery properties for approximately $0.6 billion and made other Permian-related acquisitions.
- Hurricane Harvey reduced third-quarter chemical and midstream and marketing earnings by approximately $60 million and $10 million, respectively, and reduced Permian Resources production by approximately 1,000 BOE per day.
- Cash from operations increased substantially, but cash declined by $427 million during the first nine months because investing and financing uses exceeded operating inflows.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a clear quantitative earnings, production, or capital-spending outlook. Management expects liquidity needs, including dividends, to be funded through cash on hand, operating cash flow, monetization of non-core assets or investments, and, if necessary, additional borrowings or capital issuance.
- Results remain highly sensitive to oil, NGL, natural gas, and chemical prices, production volumes, operating costs, and supply-demand conditions.
- Environmental remediation reserves totaled $863 million for 148 sites, including $131 million current and $732 million noncurrent. Occidental estimated reasonably possible additional environmental losses of up to $1.1 billion beyond recorded reserves.
- Maxus Energy’s bankruptcy reduced the certainty of indemnity recoveries for certain environmental liabilities. Occidental is pursuing claims against YPF, Repsol, and other parties through a court-approved trust.
- Other legal and tax matters were not expected by management to have a material adverse effect, and reserves for non-environmental lawsuits were not material.
- Commodity-price declines could reduce cash flow, impair oil and gas properties, lower economically recoverable reserves, and affect production levels.
- Other identified risks include project execution, reserve and production uncertainty, regulatory changes, litigation, environmental obligations, weather and natural disasters, facility disruptions, cyberattacks, political conditions, and tax-rate changes.
- Occidental plans to adopt the new revenue recognition standard using the modified retrospective method on January 1, 2018; it did not expect a material earnings impact based on work completed through September 30, 2017. Lease accounting changes will be adopted beginning January 1, 2019 and are expected to increase reported assets and liabilities, although the quantitative effect was not yet determined.
Important facts for investors to verify
- Whether earnings improvement is sustainable without the $598 million of nine-month asset-sale gains and the $94 million Plains investment fair-value gain.
- Commodity-price assumptions, production trends, and the effect of ongoing divestitures and Permian acquisitions on future volumes.
- Cash-flow coverage of the dividend after capital expenditures, acquisitions, debt maturities, and environmental spending.
- The February 2018 maturity of $500 million of senior notes and the company’s refinancing or repayment plans.
- The ultimate cost and timing of the $863 million environmental reserve, potential additional losses of up to $1.1 billion, and any recovery from Maxus-related indemnitors.
- The financial impact of Hurricane Harvey and other operational disruptions on subsequent periods.
- The eventual balance-sheet impact of the 2019 lease-accounting adoption and the final effects of revenue-recognition implementation.