Occidental Petroleum Corporation: Q1 2017 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation reported unaudited consolidated results for the three months ended March 31, 2017. Operations comprised oil and gas, chemical, and midstream and marketing segments. The company had 764.6 million common shares outstanding at March 31, 2017.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $2.957 billion | $2.123 billion |
| Income from continuing operations | $117 million | $(360) million |
| Net income | $117 million | $78 million |
| Diluted EPS | $0.15 | $0.10 |
| Net margin | Approximately 4.0% | Approximately 3.7% |
| Cash flow from operating activities | $652 million | $689 million |
| Capital expenditures | $722 million | $646 million |
| Cash and cash equivalents at period end | $1.494 billion | $3.176 billion |
| Total debt carrying value | $9.8 billion | $9.8 billion |
| Dividends per common share | $0.76 | $0.75 |
Net cash used in investing activities was $819 million, while net cash used in financing activities was $572 million, resulting in a $739 million decline in cash during the quarter. Current maturities of long-term debt were $500 million, reflecting the reclassification of 1.5-percent senior notes due in February 2018. Management stated that the company was in compliance with financing covenants and had substantial capacity for additional unsecured borrowings and other financing activities.
Material changes versus the prior comparable period
- Net sales increased 39%, primarily because of higher oil, caustic soda, vinyl chloride, and polyvinyl chloride prices.
- Net income increased from $78 million to $117 million. Q1 2016 included $438 million of after-tax discontinued operations income, while Q1 2017 had no discontinued operations income.
- Income from continuing operations improved from a $360 million loss to $117 million of income, driven mainly by higher realized commodity prices and lower asset-related charges.
- Oil and gas segment results improved to $220 million of earnings from a $485 million loss. Worldwide realized oil prices increased to $49.04 per barrel from $29.42, while total production declined to 584,000 barrels of oil equivalent per day from 657,000.
- Chemical segment earnings declined to $170 million from $214 million, although the prior-year period included $88 million of asset-sale gains. Excluding that gain, 2017 results improved on stronger caustic soda prices and volumes.
- Midstream and marketing losses narrowed to $47 million from $95 million, reflecting improved marketing margins, higher NGL prices, and increased transportation income.
- Operating cash flow from continuing operations increased to $652 million from $139 million, but total operating cash flow declined modestly because Q1 2016 included $550 million from discontinued operations related to the Ecuador settlement.
- Capital expenditures increased to $722 million, including approximately $600 million for oil and gas activities.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide specific numerical earnings or production guidance in the filing. It expects liquidity needs, including future dividends, to be funded through cash on hand, operating cash flow, monetization of non-core assets or investments, future borrowings, and potentially other capital issuance.
In February 2017, Occidental agreed to sell its South Texas operations for approximately $0.6 billion. The transaction closed in April 2017, after the reporting date, and the related assets and liabilities were classified as held for sale at March 31, 2017.
OxyChem and Mexichem began operating an ethylene cracker in Ingleside, Texas, in February 2017. The project was completed on schedule and on budget, has annual capacity of 1.2 billion pounds, and is supported by a 20-year supply agreement.
Environmental remediation reserves totaled $867 million across 147 sites. The company estimated that reasonably possible additional environmental losses could range up to $1.1 billion. Maxus Energy Corporation, which had indemnified Occidental for certain environmental sites, was in Chapter 11 bankruptcy, increasing uncertainty regarding recovery of indemnified costs.
Key risks include commodity-price volatility, production and reserve uncertainty, operating interruptions, higher costs, environmental liabilities, litigation, regulatory changes, tax matters, cyberattacks, adverse political conditions, and delays or failures in projects, acquisitions, or dispositions. The filing states that other reasonably possible non-environmental losses in excess of recorded reserves were not expected to be material.
Important facts for investors to verify
- Whether the South Texas divestiture closed on the disclosed terms and how subsequent price adjustments affected proceeds.
- The sustainability of improved oil and gas earnings if commodity prices decline or production remains below prior-year levels.
- Capital-spending requirements and whether operating cash flow covers capital expenditures and dividends over a full year.
- Refinancing or repayment plans for the $500 million of debt maturing in February 2018.
- The ultimate cost and timing of environmental remediation, including potential exposure related to Maxus and the Lower Passaic River.
- The effects of the new revenue-recognition and lease-accounting standards, which were still under evaluation.
- Management’s effective-tax-rate assumptions, particularly the 40% worldwide effective tax rate reported for continuing operations in Q1 2017.