Occidental Petroleum Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an oil and gas, chemical and midstream and marketing company. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, lower commodity prices, post-Anadarko acquisition obligations and impairment charges.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $4.1 billion | $5.9 billion | $13.6 billion | $14.3 billion |
| Income (loss) from continuing operations | $(3.7) billion | $(737) million | $(12.4) billion | $529 million |
| Net loss attributable to common stockholders | $(3.8) billion | $(912) million | $(14.4) billion | $354 million income |
| Diluted loss per common share | $(4.16) | $(1.06) | $(14.26) | $0.47 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.6 billion total; $2.5 billion continuing operations | $5.4 billion total; $5.5 billion continuing operations |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $1.9 billion | $4.2 billion |
The reported Q3 continuing-operations loss was approximately 89% of net sales, and the nine-month loss was approximately 91% of net sales; these margins are not representative of underlying operating performance because they include substantial impairments and asset-sale losses.
- Balance sheet: Cash and cash equivalents were $1.9 billion at September 30, 2020, compared with $3.0 billion at December 31, 2019. Total cash, cash equivalents and restricted cash were $2.1 billion.
- Debt: Total debt and finance leases were $38.5 billion, including $2.6 billion of current maturities. Long-term debt, net, was $35.9 billion. Estimated debt fair value was $31.5 billion.
- Liquidity: Management reported approximately $5.0 billion of available borrowing capacity under the revolving credit facility as of the filing date. The company was in compliance with financing covenants.
- Equity: Stockholders’ equity declined to $19.9 billion from $34.2 billion at year-end 2019, primarily reflecting the nine-month net loss and other adjustments.
- Commodity exposure: Q3 worldwide realized oil price was $38.67 per barrel, down from $56.43; worldwide realized NGL price was $14.85 per barrel, compared with $15.02; worldwide realized natural gas price was $1.31 per Mcf, compared with $1.38.
Material changes versus the prior comparable period
- Q3 net sales decreased 30% year over year, primarily due to lower oil, NGL and natural gas prices, weaker marketing margins and lower chemical sales volumes.
- Nine-month net sales declined 4%, despite higher production volumes from the Anadarko acquisition, because of lower commodity prices, marketing margins and chemical prices and volumes.
- Oil and gas production from continuing operations increased to 1,228 thousand barrels of oil equivalent per day in Q3 from 1,114 thousand in the prior-year quarter, primarily from acquired assets. Capital reductions caused declines in certain Permian operations.
- Q3 operating results included a $2.7 billion other-than-temporary impairment of the Western Midstream Partners equity investment and approximately $795 million of asset-sale losses, principally related to mineral and surface acreage and Colombia assets.
- Nine-month results included approximately $7.0 billion of oil and gas asset impairments, a $1.2 billion impairment of WES goodwill, a $2.7 billion WES equity investment impairment, $302 million of Anadarko acquisition-related costs and a $577 million loss on interest-rate swaps.
- Interest and debt expense increased to $1.0 billion for the nine months from $632 million, reflecting debt issued or assumed in connection with the Anadarko acquisition.
- Operating cash flow from continuing operations fell to $2.5 billion from $5.5 billion, while capital spending was reduced by more than half.
- The quarterly common dividend was reduced to $0.01 per share from $0.79. Second- and third-quarter preferred dividends were paid in common stock, preserving approximately $400 million of liquidity; the fourth-quarter preferred dividend was elected to be paid in cash.
Outlook, management commentary and risks
- Management expects near-term oil prices to remain dependent on COVID-19 demand conditions, OPEC+ compliance and U.S. production levels. Oil and gas demand remained below pre-pandemic levels at the filing date.
- The 2020 capital budget was reduced to $2.4–$2.6 billion from $5.2–$5.4 billion, and operating and corporate cost reductions were expected to generate more than $1.0 billion of cash savings.
- Occidental sold mineral and fee surface acreage in October 2020 for approximately $1.0 billion of net cash proceeds. The proceeds were used to repay debt, including $1.0 billion of the Term Loan. A Colombia asset sale was also announced, with a stated sales price of approximately $700 million plus potential additional consideration.
- After reported tenders and repayments, management identified approximately $1.1 billion of 2021 debt maturities, $4.0 billion of 2022 maturities and $1.2 billion of 2023 maturities. The company also expects a possible approximately $1.0 billion October 2021 put of zero-coupon notes.
- Management expects cash on hand and revolver availability to cover debt maturities, operating expenditures and other obligations for the next 12 months, but cautioned that prolonged COVID-19 impacts could require additional liquidity, refinancing or further asset sales.
- Further prolonged deterioration in commodity prices could result in additional material non-cash impairments. Management also expects potentially significant negative price-related proved-reserve revisions at year-end 2020, and lower capital spending may reduce support for proved undeveloped reserves.
- Debt ratings at September 30, 2020 were below investment grade: BB+ from S&P, BB from Fitch and Ba2 from Moody’s. Downgrades could increase financing costs and collateral requirements.
- Environmental remediation liabilities totaled $1.1 billion across 174 sites. Occidental estimated reasonably possible additional environmental losses of up to $1.1 billion.
- Pending matters include arbitration relating to Ecuador proceeds, disputes arising from the Sanchez Energy bankruptcy, securities class actions concerning the Anadarko acquisition and related offerings, and an $881 million tax refund dispute with the IRS. Management stated that these matters were not expected to have a material adverse effect, although unfavorable outcomes could materially affect future periods.
Most important facts for investors to verify
- Whether oil and gas prices and production volumes are sufficient to generate sustainable free cash flow after interest, capital spending and preferred dividends.
- The timing, pricing and completion risk of planned asset divestitures and the amount of proceeds ultimately available for debt reduction.
- Actual 2021–2023 debt maturities after subsequent repayments, refinancing capacity and the company’s ability to maintain access to its revolving credit facility.
- Potential additional impairments of oil and gas assets, WES investments and other assets if commodity prices remain depressed.
- The effect of preferred dividend payments in cash or common stock, common warrants and other instruments on liquidity and per-share dilution.
- Reserve revisions, production declines from capital reductions and the impact of lower capital spending on proved undeveloped reserves.
- Progress and potential exposure related to environmental liabilities, litigation, tax matters and the transition away from LIBOR.