Occidental Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Occidental Petroleum Corporation is an integrated energy company operating through oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. The company reported 755.0 million common shares outstanding at September 30, 2018.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $5.216 billion | $2.999 billion | $13.062 billion | $9.016 billion |
| Net income | $1.869 billion | $190 million | $3.425 billion | $814 million |
| Diluted EPS | $2.44 | $0.25 | $4.45 | $1.06 |
| Operating cash flow | Not separately provided | Not separately provided | $5.169 billion | $3.440 billion |
| Capital expenditures | Not separately provided | Not separately provided | $3.638 billion | $2.439 billion |
- Approximate net margin was 35.8% in Q3 2018 versus 6.3% in Q3 2017, and 26.2% for the first nine months versus 9.0% in the prior-year period. Results included significant divestiture gains.
- Cash and cash equivalents were $2.954 billion at September 30, 2018, compared with $1.672 billion at December 31, 2017.
- Total current assets were $11.112 billion and current liabilities were $8.372 billion, implying approximately $2.740 billion of working capital.
- Long-term debt was $10.198 billion, with $116 million of current maturities. Estimated debt fair value was approximately $10.4 billion.
- Total assets were $44.957 billion and total stockholders’ equity was $21.493 billion at September 30, 2018.
- Dividends paid during the first nine months were $1.780 billion; dividends declared were $2.32 per share, compared with $2.29 per share in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Net sales increased 74% in Q3 and 45% for the first nine months, driven primarily by higher crude oil prices, increased domestic crude oil volumes, stronger midstream marketing margins, and higher realized caustic soda prices.
- Net income increased substantially, aided by a $902 million pretax gain on the sale of non-core domestic midstream assets. The transaction generated approximately $2.4 billion of cash at closing and included the Centurion pipeline and storage system, Southeast New Mexico gathering assets, and the Ingleside Crude Terminal.
- Oil and gas segment earnings increased to $767 million in Q3 and $2.297 billion for the first nine months, compared with $220 million and $1.067 billion, respectively. Production increased to 681,000 BOE per day in Q3 from 600,000 BOE per day, primarily due to Permian Resources growth.
- Chemical segment earnings increased to $321 million in Q3 and $936 million for the first nine months, reflecting higher caustic soda prices, improved chlorovinyl demand, the Geismar plant startup, and lower ethylene and energy costs.
- Midstream and marketing earnings increased to $1.698 billion in Q3 and $2.127 billion for the first nine months, primarily because of the $902 million divestiture gain and wider crude oil price spreads.
- Worldwide realized oil prices increased to $62.67 per barrel in Q3 from $46.19, while worldwide realized NGL prices increased to $29.55 per barrel from $20.73. Domestic realized natural gas prices declined to $1.58 per MCF from $2.15.
- Capital expenditures rose to $3.638 billion, including $3.2 billion for oil and gas, from $2.439 billion in the prior-year period.
- Occidental issued $1.0 billion of 4.2% senior notes due 2048 and repaid $500 million of 1.5% senior notes due February 2018. It also entered into a new five-year, $3.0 billion revolving credit facility.
- The company repurchased $908 million of treasury stock during the first nine months, including 12.1 million shares under the announced repurchase program.
Outlook, Commentary, Risks and Unusual Items
- Management expects liquidity needs, including dividends, to be funded through cash on hand, operating cash flow, monetization of non-core assets or investments, borrowings, and potentially other capital issuance. No specific earnings, production, or cash flow guidance is provided in the filing.
- Management expects future crude oil price spreads to narrow as additional Permian Basin pipelines come online, following unusually wide spreads in the third quarter caused by increased production and limited takeaway capacity.
- Occidental recognized $196 million of pretax impairment charges related to Qatar Petroleum’s planned takeover of operatorship and ownership of the Idd El-Shargi North Dome field after contract expiration in October 2019. Additional nine-month impairments totaled $42 million for non-core Permian acreage and a gas-processing investment.
- The company recognized a $178 million decrease in its postretirement benefit obligation from a plan design change, with $139 million recorded in other comprehensive income after tax.
- Environmental remediation reserves totaled $876 million across 146 sites. Management estimated that reasonably possible additional environmental losses could reach $1.1 billion beyond recorded reserves.
- Occidental secured approximately $2 billion of additional long-term pipeline and terminal capacity commitments extending over the next ten years.
- Material risks include commodity-price volatility, production and reserve uncertainty, cost inflation, project and acquisition execution, environmental liabilities, litigation, regulatory and tax changes, geopolitical conditions, operational disruptions, cyberattacks, and adverse weather or natural events.
- Occidental stated that it was in compliance with financing covenants and had substantial borrowing capacity at September 30, 2018. Disclosure controls and procedures were concluded to be effective.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $902 million midstream divestiture gain and the $196 million Qatar impairment.
- Assess the sustainability of earnings and cash flow under lower oil prices and narrower Permian price spreads.
- Review Permian production growth, capital spending requirements, takeaway capacity, and realized-price differentials.
- Reconcile debt increases, the new revolving credit facility, debt maturities, interest expense, and covenant capacity.
- Evaluate environmental reserves, the potential for up to $1.1 billion of additional environmental losses, and the ongoing Maxus-related matters.
- Monitor the effect of the 2019 lease-accounting adoption, which the filing states will increase reported assets and liabilities but whose quantitative impact was still under evaluation.