OCCIDENTAL PETROLEUM CORP quarterly report, Q2 FY2010

Occidental Petroleum Corporation: 2010 Q2 Form 10-Q Summary

Business Context and Reporting Period

Unaudited quarterly report for the three and six months ended June 30, 2010, filed August 5, 2010. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The company had 812.2 million common shares outstanding at June 30, 2010.

Key Financial Metrics

Metric	Q2 2010	Q2 2009	Six Months 2010	Six Months 2009
Net sales	$4.761 billion	$3.687 billion	$9.532 billion	$6.760 billion
Net income attributable to common stock	$1.063 billion	$682 million	$2.127 billion	$1.050 billion
Diluted EPS	$1.31	$0.84	$2.61	$1.29
Net margin	22.3%	18.5%	22.3%	15.5%
Operating cash flow	Not separately provided	Not separately provided	$4.277 billion	$2.201 billion
Capital expenditures	Not separately provided	Not separately provided	$1.716 billion	$1.902 billion

Pre-tax income was $1.822 billion in Q2 and $3.581 billion for the first six months. The worldwide effective tax rate was 43% in Q2 and 42% year-to-date, versus 40% in both comparable 2009 periods.
Cash and cash equivalents increased to $2.322 billion from $1.230 billion at December 31, 2009. Available but unused committed bank credit was approximately $1.5 billion.
Long-term debt was $2.511 billion, with $12 million of current maturities. Estimated fair value of total debt was approximately $2.9 billion versus carrying value of approximately $2.5 billion.
Total assets were $46.259 billion and total equity was $30.912 billion at June 30, 2010.
Dividends were $0.38 per share in Q2 and $0.71 per share for the first six months, compared with $0.33 and $0.65, respectively, in 2009.

Material Changes Versus the Prior Comparable Period

Q2 net sales increased approximately 29% and net income attributable to common stock increased approximately 56%. Six-month sales increased approximately 41% and net income approximately 103%.
Results benefited primarily from higher worldwide crude oil and natural gas prices and higher production and sales volumes. Q2 worldwide realized crude oil price increased to $72.13 per barrel from $52.97; worldwide natural gas price increased to $2.90 per Mcf from $2.34.
Oil and gas production increased to 743,000 BOE per day in Q2 from 717,000 BOE per day. Oil and gas segment earnings increased to $1.853 billion from $1.083 billion.
Chemical segment earnings declined to $108 million in Q2 from $115 million and to $138 million year-to-date from $284 million, primarily due to caustic soda margin erosion and higher raw-material costs.
Midstream, marketing and other earnings declined to $13 million in Q2 from $63 million, reflecting a $104 million Phibro trading loss, partly offset by stronger marketing, gas processing and pipeline margins. Six-month segment earnings nevertheless increased to $107 million from $77 million.
Higher earnings were partly offset by higher income taxes, DD&A rates, oil and gas operating expenses, raw-material costs and the 2010 policy of fully expensing injected CO₂ costs.
Six-month operating cash flow nearly doubled, while capital expenditures declined by approximately $186 million. Financing cash flow changed from a $219 million source in 2009 to an $836 million use in 2010, primarily because 2010 included $299 million of debt repayments and no new long-term debt issuance.

Guidance, Outlook, Risks and Unusual Items

Management estimated 2010 capital spending of approximately $4.5 billion and stated that cash on hand and operating cash flow should fund operating needs, planned capital expenditures, dividends and debt payments.
Management reported substantial capacity under financing covenants for additional unsecured borrowings, cash dividends and share acquisitions.
Occidental signed a technical service contract to develop Iraq’s Zubair Field, acquired approximately $460 million of domestic oil and gas properties, and obtained a ten-year extension of hydrocarbon concessions in Argentina.
Environmental remediation reserves totaled $378 million across 169 sites. Management expects to spend approximately half over the next four years and the balance over the following ten or more years. Reasonably possible additional environmental losses could reach $375 million.
Derivative activity includes hedges covering approximately 2% of crude oil production, natural gas swaps and trading positions. Approximately $75 million of net after-tax derivative losses in accumulated other comprehensive income were expected to be reclassified into income over the following twelve months.
Material sensitivities disclosed by management include an estimated quarterly pre-tax impact of approximately $37 million for a $1-per-barrel change in oil prices and approximately $30 million for a $0.50-per-MMBtu change in domestic natural gas prices.
Key risks include commodity-price volatility, production and exploration risk, cost inflation, environmental and litigation liabilities, political and operational disruptions, regulatory and tax changes, unsuccessful development projects, and trading or risk-management failures.
OxyChem faced Nicaraguan DBCP litigation involving judgments of approximately $900 million against four defendants; management considered the claims without merit, and a U.S. court refused enforcement against OxyChem.
Two shareholder derivative or direct actions filed in 2010 alleged misleading proxy disclosures, excessive compensation and fiduciary-duty violations. Management considered both cases without merit.
Disclosure controls and procedures were effective as of June 30, 2010, with no material change in internal control over financial reporting.

Investor Verification Points

Verify the sustainability of earnings and cash flow given the significant sensitivity to crude oil and natural gas prices.
Reconcile the $4.5 billion full-year capital-spending estimate with first-half spending and expected funding sources.
Assess chemical-segment recovery prospects, particularly caustic soda pricing and ethylene costs.
Review Phibro trading exposures, limits, valuation practices and the potential for further mark-to-market losses.
Evaluate environmental reserves, the possible additional $375 million loss exposure and the timing of remediation payments.
Monitor Iraq, Argentina and other international operations for political, contractual, production and security risks.
Review pending litigation, tax examinations and derivative losses expected to be reclassified from accumulated other comprehensive income.