OCCIDENTAL PETROLEUM CORP quarterly report, Q2 FY2015

Occidental Petroleum Corporation — Form 10-Q Summary

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Occidental operates through oil and gas, chemical, and midstream and marketing segments. The 2014 comparative results include California Resources Corporation as discontinued operations following its November 2014 spin-off.

Financial performance and liquidity

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Net sales	$3.469 billion	$5.133 billion	$6.558 billion	$10.101 billion
Net income attributable to common stock	$176 million	$1.431 billion	$(42) million	$2.821 billion
Diluted EPS	$0.23	$1.82	$(0.05)	$3.58
Operating cash flow	Not separately provided	Not separately provided	$1.366 billion	$5.564 billion
Capital expenditures	Not separately provided	Not separately provided	$3.065 billion	$3.924 billion

Approximate net margins were 5.1% in Q2 2015 versus 27.9% in Q2 2014, and negative 0.6% for the first six months of 2015 versus 27.9% in the prior-year period. The company paid dividends of $1.113 billion and repurchased $536 million of common stock during the first six months.

Cash and cash equivalents were $2.756 billion at June 30, 2015, compared with $3.789 billion at December 31, 2014.
Restricted cash was $2.382 billion, down from $4.019 billion. Its use was limited primarily to dividends, debt repayment, and share repurchases under the tax-free spin-off requirements.
Total debt carrying value was approximately $8.330 billion, including $1.450 billion of current maturities and $6.880 billion of long-term debt. Estimated fair value was $8.6 billion.
Current debt maturities included $700 million of 2.5% senior notes due February 2016 and $750 million of 4.125% senior notes due June 2016.
In June 2015, Occidental issued $1.5 billion of senior notes, consisting of $750 million due 2025 at 3.50% and $750 million due 2045 at 4.625%, generating approximately $1.48 billion of net proceeds.
Net cash used in investing activities was $3.889 billion. Oil and gas capital expenditures represented approximately $2.7 billion of total capital spending.
Management stated that the company was in compliance with financing covenants and had substantial capacity for additional unsecured borrowings and distributions.

Material changes versus the prior comparable period

Second-quarter net sales declined 32% and six-month sales declined 35%, primarily because of materially lower realized oil, NGL, and natural gas prices.
Oil and gas segment earnings fell to $355 million in Q2 from $1.767 billion and to $89 million for the six months from $3.486 billion.
Production increased to 658,000 barrels of oil equivalent per day in Q2 from 580,000, and to 652,000 barrels of oil equivalent per day for the six months from 576,000, partially offsetting lower prices.
Worldwide realized oil prices decreased 45% in Q2 to $54.55 per barrel and 48% for the six months to $51.60 per barrel. Domestic realized natural gas prices fell 50% in Q2 to $2.09 per thousand cubic feet.
Chemical segment earnings increased modestly to $136 million in Q2 and $275 million for the six months, supported by lower ethylene and energy costs.
Midstream and marketing earnings declined to $87 million in Q2 from $208 million and to $72 million for the six months from $370 million, reflecting weaker NGL results, lower pipeline sales, reduced Plains GP Holdings ownership, the winding down of Phibro trading, and power-generation outages.
Six-month results included approximately $324 million of asset impairments and related items, including charges associated with South Texas Eagle Ford properties, Yemen investments, and a CO₂ derivative contract. The 2014 comparison included a $471 million impairment charge.
The six-month effective tax rate was 113%, versus 41% in 2014, primarily because of a domestic oil and gas loss combined with foreign taxable income subject to higher statutory rates.

Guidance, outlook, management commentary, risks, and unusual items

The filing does not provide specific quantitative earnings, production, capital-spending, or commodity-price guidance. Management noted that future results and cash flows are highly dependent on realized oil and gas prices, production volumes, and operating costs.

Management expects environmental compliance costs to rise over time and reported reserves of $316 million across 147 remediation sites. Reasonably possible additional environmental losses could be up to $395 million.
Occidental paid $190 million during the first half of 2015 under a New Jersey environmental settlement and is pursuing recovery from Maxus Energy Corporation. The settlement does not resolve potential costs related to the EPA’s proposed Passaic River cleanup plan.
Key disclosed risks include commodity-price volatility, production and exploration risks, project delays, cost overruns, regulatory and tax changes, environmental liabilities, litigation, operational disruptions, cyberattacks, political instability, and counterparty or risk-management failures.
Derivative positions at June 30, 2015 included a net long oil position of 76 million barrels, a net short natural gas position of 33 billion cubic feet, and a net long carbon dioxide position of 612 billion cubic feet. Net derivative assets were $35 million and net derivative liabilities were $165 million.
Occidental held approximately 71.5 million California Resources shares recorded as a $432 million available-for-sale investment; the investment generated a $112 million after-tax unrealized loss in other comprehensive income during Q2.
Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting.

Important facts for investors to verify

Whether sustained low commodity prices could further reduce operating cash flow, asset values, and oil and gas segment profitability.
The timing and funding sources for the $1.450 billion of debt maturities due in 2016.
Whether restricted cash was fully used within the permitted period and for permitted purposes.
The ultimate cost and recovery prospects related to the New Jersey settlement, Passaic River cleanup exposure, and other environmental matters.
Production performance and capital efficiency, particularly in Permian Resources, the Al Hosn Gas Project, and other international operations.
The value and liquidity impact of Occidental’s California Resources equity investment.
Whether midstream and marketing earnings recover after trading wind-downs, lower NGL prices, pipeline weakness, and facility outages.