Business Context and Reporting Period
Occidental Petroleum Corporation is an integrated energy company with oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, with comparisons to the same periods in 2015. The company had 764.2 million common shares outstanding at September 30, 2016.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $2.648 billion | $3.116 billion | $7.302 billion | $9.674 billion |
| Loss from continuing operations | $238 million | $2.606 billion | $734 million | $2.641 billion |
| Net loss | $241 million | $2.609 billion | $302 million | $2.651 billion |
| Diluted loss per share | $0.32 | $3.42 | $0.40 | $3.46 |
| Operating cash flow | Not separately provided | Not separately provided | $2.468 billion | $2.386 billion |
| Capital expenditures | Not separately provided | Not separately provided | $1.845 billion | $4.192 billion |
- Q3 net loss margin was approximately 9.1% of sales; the nine-month net loss margin was approximately 4.1%.
- Cash and cash equivalents were $3.180 billion at September 30, 2016, compared with $3.201 billion at December 31, 2015. Total current assets were $8.711 billion versus current liabilities of $5.688 billion.
- Long-term debt, net, was $8.333 billion at September 30, 2016, compared with $6.855 billion at year-end 2015. Estimated fair value of total debt was approximately $9.1 billion.
- Stockholders’ equity declined to $22.296 billion from $24.350 billion at December 31, 2015, primarily reflecting losses and dividends.
- Dividends per common share were $0.76 in Q3 and $2.26 for the first nine months, compared with $0.75 and $2.22, respectively, in 2015.
- Operating cash flow included $870 million from discontinued operations, principally related to the Ecuador settlement. Continuing-operations operating cash flow was $1.598 billion.
- Net cash used in investing activities was $1.976 billion. Net cash used in financing activities was $513 million.
Material Changes Versus Prior Comparable Period
- Sales declined 15% in Q3 and 25% for the first nine months, mainly because of lower oil prices and lower oil and gas sales volumes.
- Losses improved substantially from 2015 because prior-year results included $3.4 billion of Q3 and $3.7 billion of nine-month asset impairment and related charges. 2016 included $221 million and $299 million, respectively.
- Worldwide realized oil prices fell to $41.49 per barrel in Q3 2016 from $47.78 and to $36.70 for the first nine months from $50.33.
- Total production declined to 605,000 barrels of oil equivalent per day in Q3 from 689,000, while ongoing-operations production increased to 605,000 from 578,000 after excluding sold, exited, and exiting operations.
- Oil and gas reported a Q3 segment loss of $51 million and a nine-month loss of $653 million. Chemical earnings fell to $117 million and $419 million, respectively. Midstream and marketing reported losses of $180 million and $333 million, compared with profits in the prior-year periods.
- Capital expenditures were reduced by approximately 56% for the first nine months, reflecting the commodity-price environment and capital-efficiency measures.
- Long-term debt increased following a $2.75 billion senior-note issuance in April 2016, partially offset by repayment and redemption of earlier maturities.
Guidance, Outlook, Risks, and Unusual Items
- No specific formal earnings or production guidance is provided in the filing. Management expects liquidity needs, including dividends, to be funded through cash on hand, operating cash flow, asset or investment monetizations, and future borrowings or other capital issuance.
- In October 2016, after quarter-end, Occidental acquired Permian Basin acreage, producing properties, CO2 floods, and related infrastructure for approximately $2.0 billion, funded with existing cash. The transaction materially reduced post-quarter-end cash liquidity.
- 2016 unusual items included a $112 million Libya impairment, a $160 million charge for terminated crude oil supply agreements, a $121 million gain on the Piceance Basin sale, a $59 million gain on South Texas Eagle Ford properties, and a $681 million pre-tax Ecuador-related gain recorded in discontinued operations.
- Environmental remediation reserves totaled $420 million across 150 sites. Reasonably possible additional losses for other estimable environmental matters could reach $415 million, excluding certain Maxus-indemnified sites for which losses cannot currently be estimated.
- Maxus, which had indemnified Occidental for certain environmental liabilities, filed for bankruptcy. Occidental entered into an EPA agreement to design a Lower Passaic River cleanup plan with estimated total design costs of $165 million and has accrued its estimated allocable share. Broader remediation obligations have not been fully reserved because they are not reasonably estimable.
- Principal business risks include crude oil, natural gas, NGL, chemical and marketing-price volatility; production and reserve risks; geopolitical conditions; environmental liabilities; litigation; regulatory changes; project execution; operational disruptions; and potential further impairments if commodity prices decline.
- Management stated that the company was in compliance with financing covenants and had substantial capacity for additional unsecured borrowings, dividends, and acquisitions as of September 30, 2016.
- Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify post-quarter-end cash, debt, and liquidity after the approximately $2.0 billion Permian acquisition.
- Assess whether commodity prices and production volumes support dividends and planned capital spending.
- Separate recurring operating performance from impairment charges, asset-sale gains, Ecuador proceeds, tax refunds, and other unusual items.
- Review the sensitivity of oil and gas assets, reserves, and future earnings to sustained low commodity prices.
- Monitor Maxus-related environmental claims, the Lower Passaic River cleanup, and the potential for additional remediation costs beyond recorded reserves.
- Evaluate the increase in debt and interest expense following the 2016 senior-note issuance and refinancing activity.