Occidental Petroleum Corporation — 1Q 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparison with the three months ended March 31, 2015. The 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 | 1Q 2016 | 1Q 2015 | Change |
|---|---|---|---|
| Net sales | $2.123 billion | $3.089 billion | Down 31% |
| Loss from continuing operations | $360 million | $215 million | Loss increased |
| Net income (loss) | $78 million | $(218) million | Improved due to discontinued operations |
| Diluted EPS | $0.10 | $(0.28) | Improved |
| Continuing-operations diluted EPS | $(0.47) | $(0.28) | Worsened |
| Operating cash flow | $689 million | $561 million | Up 23% |
| Operating cash flow from continuing operations | $139 million | $566 million | Down 75% |
| Capital expenditures | $646 million | $1.675 billion | Down 61% |
| Cash and cash equivalents at period-end | $3.176 billion | $2.153 billion | Prior-period comparison |
Continuing-operations loss margin was approximately 17.0% of sales, compared with approximately 7.0% in the prior-year quarter. Net income benefited from $438 million of discontinued operations, principally the Ecuador arbitration settlement.
At March 31, 2016, total assets were $42.018 billion and stockholders’ equity was $23.789 billion. Current liabilities were $6.826 billion. Current maturities of long-term debt were $2.000 billion and long-term debt was $5.608 billion, for total debt of approximately $7.608 billion. Estimated debt fair value was $7.9 billion. The company reported compliance with financing covenants and substantial capacity for additional unsecured borrowings and dividends.
Material changes versus the prior comparable period
- Lower oil, NGL, natural gas, and chemical prices drove the 31% decline in sales and increased the continuing-operations loss.
- Worldwide realized oil price fell 39% to $29.42 per barrel; worldwide realized NGL price fell 40% to $10.86 per barrel; worldwide realized natural gas price fell 25% to $1.25 per Mcf.
- Oil and gas segment loss increased to $485 million from $266 million, despite higher ongoing production of 590,000 BOE per day versus 531,000 BOE per day.
- Chemical segment earnings increased to $214 million from $139 million, including an $88 million gain on asset sales; underlying results were pressured by lower prices and weak calcium chloride demand.
- Midstream and marketing loss increased to $95 million from $15 million, primarily due to unfavorable Permian-to-Gulf Coast differentials.
- Asset impairments declined to $78 million from $324 million. The 2016 charge primarily related to the California Resources stock distribution, while 2015 included oil and gas and other impairments.
- Depreciation, depletion and amortization increased to $1.102 billion from $1.029 billion, reflecting higher oil and gas sales volumes.
- Operating cash flow from continuing operations fell sharply, but total operating cash flow increased because discontinued operations contributed $550 million, including proceeds related to the Ecuador settlement.
- Occidental sold its Piceance Basin operations for $153 million, recording a $121 million pretax gain, and sold the Occidental Tower for approximately $85 million of net proceeds.
- The company distributed its remaining California Resources shares and recorded a $78 million loss to reduce the investment to fair value.
Liquidity, debt, outlook, risks and unusual items
Management reduced capital spending in response to the low commodity-price environment. First-quarter investing cash use was $637 million, compared with $2.206 billion in the prior-year quarter. Financing cash use was $77 million and included $700 million of debt repayment and $574 million of dividends paid. The company had approximately $3.2 billion of cash at quarter-end.
After quarter-end, Occidental issued $2.75 billion of senior notes, receiving approximately $2.72 billion of net proceeds. The notes bear interest at 2.6%, 3.4%, and 4.4%, with maturities in 2022, 2026, and 2046. Proceeds were intended in part to retire $750 million of notes maturing in June 2016 and redeem $1.25 billion of notes maturing in the first quarter of 2017.
Management stated that results remain highly sensitive to oil, NGL, and natural gas prices. Continued low prices could cause additional impairments, reduce economically recoverable reserves, and result in some proved reserves no longer qualifying as proved. Other stated risks include production and exploration performance, project execution, political conditions, environmental liabilities, litigation, regulation, taxes, operational disruptions, cyberattacks, and counterparty or risk-management failures.
Environmental remediation reserves totaled $384 million across 149 sites. Management estimated reasonably possible additional environmental losses of up to $370 million. Other legal and tax matters were not expected to have a material adverse effect, although the filing notes that tax audits and environmental proceedings remain ongoing.
The filing provides no formal production, earnings, or commodity-price guidance. It cautions that quarterly results and cash flows are not necessarily indicative of full-year results.
On April 29, 2016, Vicki A. Hollub became President and Chief Executive Officer, succeeding Stephen I. Chazen. Disclosure controls and procedures were determined to be effective as of March 31, 2016.
Key facts for investors to verify
- Whether commodity prices and realized price differentials improve sufficiently to restore positive cash flow from continuing operations.
- The sustainability of the $0.75 quarterly dividend given the continuing-operations loss and dependence on cash on hand, asset sales, and financing.
- Execution of the April 2016 debt issuance and planned retirement or redemption of near-term maturities.
- The extent of future impairments or reserve revisions if oil and gas prices remain near early-2016 levels.
- The recurring earnings profile of the chemical segment after excluding the $88 million asset-sale gain.
- The ultimate cash timing and collectability of the approximately $1.0 billion Ecuador arbitration award.
- Potential environmental remediation costs beyond the $384 million reserve, including the disclosed possible additional losses of up to $370 million.
- Whether higher production volumes translate into improved margins despite continued low realized prices.