OCCIDENTAL PETROLEUM CORP quarterly report, Q2 FY2017

Occidental Petroleum Corporation — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2017; filed August 2, 2017. Financial statements are unaudited and prepared under U.S. GAAP. Occidental operates through oil and gas, chemical, and midstream and marketing segments.

Financial Performance and Position

Metric	Q2 2017	Q2 2016	Six Months 2017	Six Months 2016
Net sales	$3.06 billion	$2.53 billion	$6.02 billion	$4.65 billion
Income from continuing operations	$507 million	$(136) million	$624 million	$(496) million
Net income (loss)	$507 million	$(139) million	$624 million	$(61) million
Diluted EPS	$0.66	$(0.18)	$0.81	$(0.08)
Operating cash flow	Not separately provided	Not separately provided	$2.51 billion	$1.82 billion

Approximate net margins were 16.6% for Q2 2017 and 10.4% for the first six months of 2017, based on reported net income and net sales.
Pre-tax income was $605 million in Q2 and $770 million for the first six months. Income tax provisions were $285 million and $363 million, respectively; the worldwide effective tax rates were 36% and 37%.
Segment results for Q2 were oil and gas $627 million, chemical $230 million, and midstream and marketing $119 million. Six-month results were $847 million, $400 million, and $72 million, respectively.
Cash and cash equivalents were $2.22 billion at June 30, 2017, compared with $2.23 billion at December 31, 2016. Total current assets were $8.08 billion versus current liabilities of $6.39 billion.
Debt consisted of $500 million of current maturities and $9.32 billion of long-term debt, for approximately $9.82 billion of carrying value. The $500 million current balance primarily reflects 1.5% senior notes due February 2018.
Capital expenditures were $1.49 billion in the first half, including approximately $1.2 billion for oil and gas. Investing cash outflow was $1.36 billion.
Financing cash outflow was $1.16 billion, primarily reflecting $1.17 billion of cash dividends. Dividends were $0.76 per share in Q2 and $1.52 per share year to date.

Material Changes Versus Prior Comparable Period

Q2 net sales increased approximately 21%; six-month sales increased approximately 29%, primarily from higher realized oil, natural gas, and chemical prices.
Results benefited from a $510 million pre-tax gain on the sale of South Texas operations and a $94 million non-cash fair-value gain on the Plains equity investment. These items materially affected comparability and are not necessarily recurring.
Oil and gas segment earnings improved from a $117 million loss to $627 million of income in Q2. Excluding the asset-sale gain, improvement was driven principally by higher commodity prices and lower DD&A rates.
Chemical segment earnings increased to $230 million from $88 million in Q2, reflecting higher caustic soda prices, improved volumes and vinyls margins, and Ingleside ethylene cracker equity income, partly offset by higher energy costs.
Midstream and marketing earnings increased to $119 million from a $58 million loss, supported by improved Midland-to-Gulf Coast marketing spreads, higher Ingleside Crude Terminal volumes, and the Plains investment gain.
Total production declined to 601,000 barrels of oil equivalent per day from 653,000, largely because of asset sales and previously exited operations. Production from ongoing operations increased to 594,000 barrels of oil equivalent per day from 581,000.
Operating cash flow rose to $2.51 billion from $1.82 billion, benefiting from improved commodity prices and a $749 million federal tax refund. The prior-year period benefited from an $882 million Ecuador settlement and a $302 million tax refund.
Capital spending increased from $1.25 billion to $1.49 billion, primarily because of higher Permian Basin drilling activity.

Outlook, Risks, Contingencies, and Unusual Items

The filing does not provide a specific earnings, production, capital-spending, or commodity-price guidance range. Management expects liquidity needs, including dividends, to be funded through cash, operating cash flow, asset or investment monetizations, and potentially future borrowings or other capital issuance.
Management stated that liquidity is highly dependent on realized oil and gas prices, sales volumes, and operating costs. Commodity-price declines could reduce earnings, impair oil and gas properties, and lower economically recoverable reserves.
Occidental entered agreements to sell non-strategic Andrews and Martin Counties acreage for approximately $0.6 billion and acquire additional Permian CO2 enhanced oil recovery interests and operatorship for approximately $0.6 billion. Both transactions closed in the third quarter of 2017 and remained subject to customary adjustments.
Environmental remediation reserves totaled $873 million for 147 sites, including $131 million current and $742 million noncurrent. Management estimated reasonably possible additional environmental losses of up to $1.1 billion.
Maxus Energy, which had indemnified Occidental for certain environmental sites, filed for bankruptcy. Occidental is pursuing claims against related parties, while its ultimate share of cleanup liabilities remains subject to allocation and final remediation plans.
Occidental reported compliance with financing covenants and substantial capacity for additional unsecured borrowing, dividends, and share-related acquisitions.
The company identified risks including commodity-price volatility, production and exploration performance, project execution, regulatory and tax changes, environmental liabilities, litigation, operational disruptions, cyberattacks, weather, political conditions, and changes in demand or costs.
Occidental plans to adopt the revenue recognition standard effective January 1, 2018, using the modified retrospective method and did not anticipate a material earnings impact based on work completed through June 30, 2017. Lease accounting changes are expected to increase reported assets and liabilities upon adoption beginning January 1, 2019; the quantitative impact was not yet determined.
Disclosure controls and procedures were effective as of June 30, 2017, with no material change in internal control over financial reporting.

Investor Verification Points

Separate recurring operating performance from the $510 million South Texas asset-sale gain and $94 million Plains investment fair-value gain.
Reconcile production declines from divestitures with growth in ongoing Permian and other continuing operations.
Assess sensitivity of cash flow, leverage, reserves, and impairments to oil, natural gas, NGL, and chemical prices.
Review the $873 million environmental reserve and potential additional losses of up to $1.1 billion, including the Maxus-related indemnity dispute.
Confirm funding capacity for the $500 million debt maturity due in February 2018 and continued dividend payments.
Evaluate the effect and closing adjustments of the Permian CO2 EOR acquisition and Texas acreage disposition completed after quarter-end.
Monitor future impacts of revenue recognition and lease accounting adoption, as final quantitative effects were not provided in this filing.