OXY

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2002, for Occidental Petroleum Corporation. The company operates primarily in two segments: Oil and Gas, and Chemical. The filing includes unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by $1.95 billion (44%) primarily due to lower worldwide crude oil, natural gas, and chemical prices, as well as reduced oil and gas trading revenues.
• Profitability Drop: Net income fell by $459 million. Earnings before special items decreased by $381 million, driven by lower commodity prices and higher losses from the Equistar petrochemical joint venture.
• Accounting Change Impact: The adoption of SFAS No. 142 (Goodwill and Other Intangible Assets) resulted in a cumulative after-tax reduction in net income of $95 million due to the impairment of goodwill. Occidental now has no goodwill remaining on its books.
• Segment Performance:
  • Oil and Gas: Earnings dropped from $946 million to $306 million. Average crude oil prices fell from ~$24/bbl to ~$18/bbl, and natural gas prices dropped significantly in the U.S. (from $10.01/MCF to $2.38/MCF).
  • Chemical: Losses narrowed from $79 million to $35 million, aided by lower energy costs, though offset by lower product prices and Equistar losses.
• Cash Flow: Operating cash flow decreased by $613 million due to lower earnings and increased working capital usage.

Guidance, Outlook, and Risks

• Production Outlook: Management expects second-quarter 2002 production to be approximately 495,000 barrels of oil equivalent (BOE) per day.
• Capital Spending: The company expects to spend $1.1 billion on its capital program in 2002, excluding capital required for the Dolphin Project.
• Major Transaction (Dolphin Project): On May 8, 2002, Occidental was selected as the successful bidder for a 24.5% interest in the $3.5 billion Dolphin Project in Qatar/UAE. This is expected to add 30,000 BOE per day to production and 150 million BOE to proved reserves. Production is scheduled to begin in late 2005.
• Equistar/Lyondell Deal: Occidental agreed in principle to sell its Equistar interest to Lyondell and purchase a 21% stake in Lyondell. The deal is expected to close in Q3 2002. The depressed petrochemical market is expected to continue negatively affecting results until the transaction closes.
• Risks and Contingencies:
  • Commodity Prices: Results remain highly sensitive to fluctuations in crude oil and natural gas prices.
  • Environmental/Litigation: The company is involved in numerous lawsuits and environmental proceedings (CERCLA sites). While reserves are accrued, ultimate liabilities are uncertain and could be material if resolved unfavorably.
  • Accounting Standards: Implementation of SFAS No. 143 (Asset Retirement Obligations) is required in Q1 2003; the impact has not yet been determined.

Investor Verification Checklist

• Verify the impact of the $95 million goodwill impairment on future earnings and the elimination of goodwill amortization.
• Monitor the closing status of the Equistar/Lyondell transaction and its effect on the Chemical segment's loss profile.
• Assess the sensitivity of Q2 and full-year results to fluctuating oil and gas prices, given the significant price drops in Q1.
• Review the progress and financing status of the Dolphin Project, a major future growth driver.
• Track updates on environmental remediation costs and litigation outcomes, as these represent significant contingent liabilities.