Occidental Petroleum Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018, compared with the three months ended March 31, 2017. The filing contains unaudited consolidated financial statements prepared under U.S. GAAP.
Business Context and Reporting Period
Occidental operates through three segments: oil and gas, chemical, and midstream and marketing. Results were strongly influenced by higher crude oil prices and volumes, improved caustic soda pricing, and stronger midstream marketing margins.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $3.763 billion | $2.957 billion | +27% |
| Income before taxes and other items | $984 million | $165 million | +496% |
| Net income | $708 million | $117 million | +505% |
| Diluted EPS | $0.92 | $0.15 | + $0.77 |
| Net margin | 18.8% | 4.0% | Improved |
| Worldwide effective tax rate | 32% | 40% | Lower |
| Cash flow from operations | $1.009 billion | $505 million | +100% |
| Capital expenditures | $1.032 billion | $722 million | +43% |
| Cash and cash equivalents | $1.606 billion | $1.494 billion | Period-end balance |
| Long-term debt, net | $10.309 billion | $9.328 billion | +11% year over year |
| Dividends per common share | $0.77 | $0.76 | +$0.01 |
Segment Performance
| Segment | Q1 2018 Earnings | Q1 2017 Earnings | Primary drivers |
|---|---|---|---|
| Oil and gas | $750 million | $220 million | Higher oil prices, increased production and lower DD&A rates |
| Chemical | $298 million | $170 million | Higher realized caustic soda prices and contributions from Ingleside and Geismar |
| Midstream and marketing | $179 million | $(47) million | Asset-sale gain, improved crude spreads, Ingleside export margins, and higher NGL and sulfur prices |
Average daily production increased to 609,000 barrels of oil equivalent from 584,000 barrels of oil equivalent. Worldwide realized oil prices rose to $61.04 per barrel from $49.04, while worldwide realized NGL prices rose to $25.35 per barrel from $21.59. Worldwide realized natural gas prices declined to $1.82 per MCF from $2.07.
Cash Flow, Liquidity and Debt
- Operating cash flow of $1.009 billion exceeded capital expenditures of $1.032 billion before dividends and other financing activity.
- Investing cash flow used $971 million, including $1.032 billion of capital expenditures, $177 million for asset and business purchases, and $275 million of net asset-sale proceeds.
- Financing cash flow used $104 million, including $592 million of dividends and repayment of $500 million of 1.50% senior notes due February 2018, partially offset by $978 million of net long-term debt proceeds.
- In March 2018, Occidental issued $1.0 billion of 4.20% senior notes due 2048 and received approximately $985 million of net proceeds.
- In January 2018, Occidental entered into a new five-year, $3.0 billion revolving credit facility. The filing states that the company was in compliance with all financing covenants and had substantial additional borrowing capacity at March 31, 2018.
Material Changes and Unusual Items
- Occidental divested non-core midstream assets for approximately $150 million, recording a pre-tax gain of approximately $40 million. The financial statements report a $33 million net gain on asset sales.
- Approximately $100 million of non-core proved Permian acreage was classified as held for sale at March 31, 2018.
- Asset impairment charges were $30 million in Q1 2018, compared with $13 million in Q1 2017, relating to held-for-sale Permian acreage and facilities.
- Trade receivables increased to $5.184 billion from $4.145 billion at December 31, 2017, primarily because of higher prices and export volumes through the Ingleside crude terminal.
- Occidental adopted ASC 606 using the modified retrospective method. The filing states that adoption had no material impact on opening retained earnings or first-quarter revenue timing and amount.
- The company early adopted guidance permitting reclassification of stranded tax effects, moving $58 million from accumulated other comprehensive income to retained earnings.
- Occidental expects to adopt the revised lease accounting standard beginning January 1, 2019. The filing states that reported assets and liabilities will increase, but the quantitative impact had not yet been determined.
Outlook, Risks and Contingencies
No specific quantitative earnings, production or capital-spending guidance is provided in the filing. Management expects to fund liquidity needs, including future dividends, through cash on hand, operating cash flow, monetization of non-core assets or investments, future borrowings and, if necessary, other capital issuance.
- Results and cash flow remain highly sensitive to oil, natural gas and NGL prices, production volumes, operating costs, demand, transportation availability and commodity spreads.
- Environmental reserves totaled $865 million across 149 sites. Management estimated reasonably possible additional environmental losses of up to $1.1 billion beyond recorded reserves.
- Maxus Energy’s bankruptcy may affect recoveries related to indemnified environmental sites, including the Lower Passaic River remediation matters. Occidental’s ultimate share of liability remains subject to design plans and allocation among potentially responsible parties.
- Andes Petroleum Ecuador Ltd. is pursuing arbitration claiming a 40% share of settlement payments received by Occidental in connection with Ecuador’s 2006 expropriation of Block 15. Occidental intends to defend the claim.
- Other lawsuits, tax matters and indemnity claims were not considered by management likely to have a material adverse effect after recorded accruals, but outcomes cannot be predicted.
- Other disclosed risks include regulatory changes, project delays, reserve uncertainty, operational disruptions, weather and natural disasters, cyberattacks, political conditions, litigation and changes in tax rates.
Facts Investors Should Verify
- Whether higher Q1 profitability is sustainable at changing oil, gas, NGL and chemical prices.
- The production growth, capital efficiency and returns from Permian Resources drilling.
- The company’s leverage, refinancing needs and borrowing capacity following the 2048 senior-notes issuance.
- Progress and proceeds from the planned disposition of non-core Permian acreage and other assets.
- The ultimate cost and recoveries associated with environmental remediation, particularly the Maxus-related sites and the potential $1.1 billion of additional losses.
- The effect of the 2019 lease accounting adoption and any later changes to Tax Cuts and Jobs Act estimates.
- Exposure to derivative, counterparty and commodity-price risk; the filing reports no material change in market-risk disclosures during the quarter.