Occidental Petroleum Corporation: 2021 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The unaudited filing covers Occidental’s oil and gas, chemical, and midstream and marketing segments. Prior-period results include significant impairment and restructuring items associated with the COVID-19 downturn and WES investment.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $6.792 billion | $4.108 billion | $18.043 billion | $13.649 billion |
| Income from continuing operations | $830 million | $(3.655) billion | $1.229 billion | $(12.384) billion |
| Net income attributable to common stockholders | $628 million | $(3.778) billion | $185 million | $(14.363) billion |
| Diluted EPS from continuing operations | $0.65 | $(4.16) | $0.65 | $(14.26) |
| Operating cash flow | Not separately provided | Not separately provided | $7.342 billion total; $7.022 billion continuing operations | $2.551 billion total; $2.475 billion continuing operations |
Net sales increased 65% year over year in the third quarter and 32% for the first nine months. Continuing-operations net income margins were approximately 12.2% in Q3 2021 and 6.8% for the first nine months, compared with negative margins in the comparable 2020 periods. Results benefited primarily from higher oil, NGL, natural gas, and chemical prices, higher midstream marketing margins, and the absence of major 2020 impairments.
- Segment results: Q3 oil and gas income was $1.467 billion versus a $1.072 billion loss; chemical income was $407 million versus $178 million; and midstream and marketing income was $20 million versus a $2.791 billion loss. Nine-month segment income was $2.036 billion, $970 million, and $272 million, respectively.
- Commodity prices and volumes: Q3 worldwide realized oil price was $68.74 per barrel versus $38.51; realized NGL price was $34.01 per Boe versus $14.85; and realized natural gas price was $2.89 per Mcf versus $1.31. Continuing-operations production declined to 1,158 Mboe/d from 1,192 Mboe/d.
- Cash flow and capital spending: Operating cash flow from continuing operations was $7.022 billion. Capital expenditures were approximately $1.933 billion, substantially in oil and gas. Net cash used in investing activities was $1.202 billion and net cash used in financing activities was $6.040 billion.
- Liquidity: September 30 cash and cash equivalents were $2.059 billion, with $220 million of current restricted cash. Total cash, cash equivalents, and restricted cash were $2.294 billion.
- Debt: Total debt and finance leases were $31.695 billion, including $30.915 billion of long-term debt, compared with $36.185 billion at year-end 2020. Face-value borrowings declined by $4.3 billion in Q3 and $4.5 billion year to date. The company had $5.0 billion of committed revolving credit capacity and up to $400 million under its receivables securitization facility.
- Equity and dividends: Stockholders’ equity was $18.873 billion versus $18.573 billion at December 31, 2020. Common and preferred dividends paid during the first nine months totaled $630 million.
Material changes versus the prior comparable period
- Occidental returned to profitability as commodity prices and demand recovered from 2020 pandemic conditions.
- The nine-month 2020 results included approximately $7.0 billion of oil and gas impairments, a $2.7 billion WES other-than-temporary impairment, a $1.2 billion WES goodwill impairment, and other material charges. Comparable 2021 impairment charges were $173 million.
- Q3 2021 included $88 million of debt tender premium and related losses and $26 million of interest-rate-swap mark-to-market losses. Nine-month results included $150 million of net interest-rate-swap gains and a $102 million gain from the sale of WES units.
- Net cash used in financing increased substantially because of $4.6 billion of debt repayments and $815 million paid to settle interest-rate swaps before their mandatory termination dates.
- Occidental completed or announced additional divestitures, including approximately $475 million of net proceeds from Permian assets and $280 million from DJ Basin assets. The Ghana asset sale closed in October 2021 for $750 million, with net proceeds of $555 million after closing adjustments and a separate $170 million tax-claim settlement.
Guidance, outlook, risks, and unusual items
- Management’s 2021 priorities were to sustain production near the 2020 fourth-quarter rate, operate within an annualized $2.9 billion capital budget, preserve 2020 cost savings, and use excess cash flow and divestiture proceeds to reduce debt and other obligations.
- Management stated that cash on hand and available revolving-credit capacity were expected to cover near-term debt maturities, operating expenditures, and other obligations for the next 12 months. The company was in compliance with financing covenants.
- Near-term results remain highly dependent on oil, NGL, natural gas, chemical-product prices, Midland-to-Gulf-Coast spreads, demand, OPEC and non-OPEC actions, and COVID-19 developments.
- Near-term debt maturities were approximately $728 million in 2022 and $465 million in 2023. Zero Coupon notes could require approximately $1.1 billion of repayment if put to the company in October 2022.
- Remaining interest-rate swaps had a notional value of $725 million and a fair value of approximately $410 million, net of collateral, with mandatory termination dates in 2022 and 2023. Derivative values and settlement requirements may fluctuate materially.
- Occidental recorded a $403 million after-tax loss contingency in discontinued operations related to former Ecuador operations. An Andes arbitration award was approximately $391 million plus interest, and the company filed a motion to vacate the award.
- Environmental remediation liabilities totaled $1.123 billion across 165 sites. The company estimated reasonably possible additional environmental losses of up to $1.1 billion beyond recorded liabilities.
- An Anadarko-related tax dispute involves a potential repayment of approximately $1.0 billion plus approximately $300 million of accrued interest if the company does not prevail; the liability is recorded.
- Debt ratings were non-investment grade: Ba2 from Moody’s and BB from Fitch and Standard & Poor’s. A downgrade could raise funding costs and increase collateral requirements.
- The filing states that no material changes occurred in the risk factors from the 2020 Form 10-K. Management concluded that disclosure controls and procedures were effective as of September 30, 2021.
Investor verification points
- Verify subsequent-period oil, NGL, gas, and chemical pricing, production volumes, and the sensitivity of cash flow to commodity-price changes.
- Confirm application of Ghana sale proceeds and subsequent debt repayments, including the 2022 Zero Coupon note put and other maturities.
- Monitor derivative settlements, collateral requirements, and the effect of interest-rate and commodity-price movements on earnings and liquidity.
- Track resolution of the Ecuador/Andes arbitration, the Sanchez bankruptcy settlement, and the Anadarko tax dispute.
- Reconcile environmental reserves and potential additional losses, including developments involving the Lower Passaic River and Maxus-related sites.
- Assess whether the company can sustain its stated capital budget, production targets, dividends, and debt-reduction plan under weaker commodity prices or renewed COVID-19 disruptions.