Occidental Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation reported unaudited results for the three and six months ended June 30, 2014. Operations comprised oil and gas, chemicals, and midstream and marketing. The company filed the report on August 5, 2014, with 779.6 million common shares outstanding at June 30, 2014.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $6.275 billion | $5.962 billion | $12.363 billion | $11.834 billion |
| Net income attributable to common stock | $1.431 billion | $1.322 billion | $2.821 billion | $2.677 billion |
| Diluted EPS | $1.82 | $1.64 | $3.58 | $3.32 |
| Operating cash flow | Not separately provided | Not separately provided | $5.564 billion | $6.225 billion |
| Capital expenditures | Not separately provided | Not separately provided | $4.927 billion | $4.280 billion |
| Dividends per common share | $0.72 | $0.64 | $1.44 | $1.28 |
Net income margin was approximately 22.8% in both the second quarter and first six months of 2014, compared with approximately 22.2% and 22.6%, respectively, in the comparable 2013 periods. Income from continuing operations was $1.435 billion in the second quarter and $2.824 billion for the first six months.
- Cash and cash equivalents were $2.391 billion at June 30, 2014, down from $3.393 billion at December 31, 2013.
- Long-term debt, net, was $6.835 billion, compared with $6.939 billion at year-end 2013. Estimated fair value of debt was approximately $7.2 billion.
- Occidental had a $2.0 billion revolving credit facility expiring in 2016, with no borrowings outstanding.
- Net cash used in investing activities was $4.088 billion, including $1.371 billion of proceeds from asset and equity-investment sales.
- Net cash used in financing activities was $2.478 billion, including $1.576 billion of treasury-stock purchases and $1.084 billion of dividends paid.
Material changes versus the prior comparable period
- Second-quarter net sales increased 5%, while net income attributable to common stock increased 8% and diluted EPS increased 11%.
- Six-month net sales increased 4%, net income attributable to common stock increased 5%, and diluted EPS increased 8%.
- Oil and gas earnings increased to $2.182 billion from $2.100 billion in the second quarter and to $4.286 billion from $4.020 billion for the six months.
- Midstream and marketing earnings increased materially to $219 million from $48 million in the second quarter and to $389 million from $263 million for the six months, primarily due to improved marketing and trading performance.
- Chemical earnings declined to $133 million from $275 million in the second quarter and to $269 million from $434 million for the six months. Excluding the $131 million 2013 Carbocloro sale gain, 2013 chemical earnings were $144 million and $303 million, respectively.
- Higher domestic realized prices and domestic oil volumes benefited results, while lower Middle East and North Africa volumes and higher operating costs were unfavorable.
- Operating cash flow declined 11% for the first six months, largely because of approximately $0.5 billion of higher tax payments and a $0.4 billion tax receivable collected in 2013.
- Capital expenditures increased approximately 15% for the first six months, with $3.9 billion allocated to oil and gas and $0.9 billion to midstream and marketing.
Guidance, outlook, risks and unusual items
- Management stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, dividends and debt payments. No specific earnings or production guidance was provided.
- Occidental expected to complete the tax-free spin-off of its California oil and gas business, California Resources Corporation, in the fourth quarter of 2014, subject to conditions including final Board approval.
- The Hugoton Field sale closed in April 2014 for $1.3 billion of pre-tax proceeds and produced a $535 million pre-tax gain, or $341 million after tax.
- The company recorded a $471 million pre-tax, approximately $300 million after-tax impairment charge for certain non-producing domestic oil and gas acreage.
- Production excluding Hugoton averaged 736,000 BOE per day in the second quarter, down from 753,000 BOE per day in 2013. International production was affected by insurgent activity in Colombia, strikes in Libya and lower cost-recovery barrels in Iraq.
- Commodity-price sensitivity was estimated at approximately $37 million of quarterly pre-tax income for a $1.00 per barrel change in global oil prices, $7 million for a $1.00 per barrel change in NGL prices, and $25 million for a $0.50 per Mcf change in domestic gas prices.
- Environmental remediation reserves totaled $324 million across 154 sites. Management estimated reasonably possible additional environmental losses of up to $385 million.
- Other legal and tax matters were not expected to have a material adverse effect, although tax audits and environmental proceedings remained ongoing. Newly reported environmental penalties and settlements were expected to have an insignificant combined financial impact.
- Key forward-looking risks included commodity-price volatility, production interruptions, geopolitical events, higher costs, regulatory changes, environmental liabilities, litigation, execution of capital projects and any delay or adverse development affecting the California Resources Corporation spin-off.
Important facts for investors to verify
- Whether the California Resources Corporation spin-off was completed as planned and on what terms.
- The sustainability of earnings excluding the $341 million after-tax Hugoton gain and approximately $300 million after-tax impairment charge.
- Progression of domestic versus international production, particularly developments in Colombia, Libya and Iraq.
- Cash generation relative to the company’s elevated capital-spending program, dividends and share repurchases.
- Future chemical-sector margins, especially caustic soda pricing, vinyl margins and natural-gas costs.
- Commodity-price exposure and the effect of changes in oil, NGL and natural-gas prices on quarterly earnings.
- Potential changes in environmental remediation obligations beyond the $324 million recorded reserve and up to $385 million of reasonably possible additional losses.