Occidental Petroleum Corporation: Q1 2014 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an integrated energy and chemicals company operating through oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the quarter ended March 31, 2014, with comparisons to the quarter ended March 31, 2013 and the December 31, 2013 balance sheet.
Financial performance and position
- Net sales: $6.088 billion, up from $5.872 billion.
- Net income attributable to common stock: $1.390 billion, compared with $1.355 billion.
- Diluted EPS: $1.75, compared with $1.68.
- Income from continuing operations: $1.389 billion, compared with $1.359 billion.
- Operating margin: Income before taxes and other items was $2.254 billion, or approximately 37.0% of total revenues, compared with approximately 35.7% in the prior-year quarter.
- Worldwide effective tax rate: 40%, compared with 38%; the 2013 rate benefited from relinquishment of an international exploration block.
- Operating cash flow: $2.697 billion, compared with $2.712 billion; operating cash flow from continuing operations was $2.704 billion.
- Capital expenditures: $2.269 billion, up from $2.070 billion, including approximately $1.8 billion for oil and gas and $0.4 billion for midstream and marketing.
- Free cash flow before financing and other investing items: approximately $428 million, calculated as operating cash flow less capital expenditures.
- Cash and cash equivalents: $2.332 billion at March 31, 2014, down from $3.393 billion at year-end 2013.
- Debt: $6.877 billion of long-term debt, net, compared with $6.939 billion at December 31, 2013. The estimated fair value of debt was approximately $7.1 billion.
- Liquidity: Occidental had a $2.0 billion undrawn bank credit facility expiring in 2016 and stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, dividends, and debt payments.
- Dividends and repurchases: Dividends per common share increased to $0.72 from $0.64. The company repurchased 10.525 million shares for $946 million during the quarter.
Material changes versus the prior comparable period
- Oil and gas earnings increased to $2.104 billion from $1.920 billion, driven by higher domestic oil, NGL, and natural gas prices and higher worldwide oil volumes. These benefits were partly offset by lower international oil prices, higher domestic operating costs, and higher depreciation, depletion and amortization rates.
- Chemical earnings declined to $136 million from $159 million, primarily because of lower caustic soda prices amid additional industry chlor-alkali capacity.
- Midstream and marketing earnings declined to $170 million from $215 million, reflecting weaker marketing and trading performance and the timing of mark-to-market adjustments.
- Total oil and gas production declined to 745,000 barrels of oil equivalent per day from 763,000. Domestic oil production increased by 10,000 barrels per day, while Middle East and North Africa production declined primarily because of strikes, insurgent activity, and production-sharing contract adjustments.
- Domestic realized prices improved: oil increased to $95.94 per barrel from $91.57, NGLs to $46.69 from $40.59, and natural gas to $4.57 per thousand cubic feet from $3.08.
- Financing cash flow changed from $31 million provided in the prior-year quarter to $1.385 billion used, mainly due to share repurchases, debt retirements, and dividend payments.
- Assets and liabilities related to the Hugoton Field were classified as held for sale, contributing $825 million of assets and $95 million of liabilities at March 31, 2014.
Guidance, outlook, risks, contingencies, and unusual items
- Occidental agreed to sell its Hugoton Field operations for $1.4 billion. The transaction closed in April 2014 for approximately $1.3 billion of pre-tax proceeds after purchase price adjustments; the company expected to recognize a gain in the second quarter of 2014.
- The board authorized efforts to separate Occidental’s California assets into an independent, separately traded public company. The company also decided to retain its Williston Basin interests.
- BridgeTex Pipeline construction was continuing and was expected to begin service in the third quarter of 2014. Occidental owns 50% and consolidates the variable-interest entity.
- Environmental remediation reserves totaled $322 million across 156 sites. Management estimated reasonably possible additional environmental losses of up to $395 million beyond recorded reserves.
- Management stated that other litigation, tax matters, and indemnity exposures were not expected to have a material adverse effect, although tax years remain subject to examination in multiple jurisdictions.
- Results remain highly sensitive to commodity prices. Management estimated that a $1.00 per barrel change in global oil prices affects quarterly pre-tax income by approximately $38 million, a $1.00 per barrel change in NGL prices by approximately $7 million, and a $0.50 per thousand cubic feet change in domestic gas prices by approximately $20 million.
- Key disclosed risks include commodity-price volatility, production and exploration risk, project execution, cost inflation, regulatory and tax changes, environmental liabilities, litigation, geopolitical events, labor disruption, weather and natural disasters, cyberattacks, facility damage, and failures in risk management.
- No segment reported a significant unusual earnings item during the quarter; discontinued operations contributed $3 million after tax, compared with a $4 million loss in the prior-year quarter.
Important facts for investors to verify
- Verify completion terms, purchase price adjustments, and the second-quarter gain from the Hugoton Field sale.
- Monitor progress, approvals, costs, and timing for the proposed separation of the California assets.
- Assess commodity prices, production volumes, international operating conditions, and the company’s disclosed earnings sensitivities.
- Reconcile capital spending with operating cash flow, cash balances, dividends, and ongoing share repurchases.
- Review environmental reserves and the potential for up to $395 million of additional losses.
- Confirm whether the undrawn $2.0 billion credit facility and substantial debt covenant capacity remain available.
- Track chemical pricing and margins, midstream and marketing trading results, and the expected BridgeTex service commencement.