Occidental Petroleum Corporation — Form 10-Q Summary
Reporting period: Quarterly period ended September 30, 2014; filed October 30, 2014. Financial statements are unaudited. Occidental operates through oil and gas, chemical, and midstream and marketing segments.
Financial Results and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $6.0 billion | $6.4 billion | $18.4 billion | $18.3 billion |
| Net income attributable to common stock | $1.21 billion | $1.58 billion | $4.03 billion | $4.26 billion |
| Diluted EPS | $1.55 | $1.96 | $5.13 | $5.28 |
| Net margin | 20.1% | 24.5% | 21.9% | 23.3% |
| Operating cash flow | Not separately provided | Not separately provided | $8.20 billion | $9.79 billion |
| Capital expenditures | Not separately provided | Not separately provided | $7.53 billion | $6.55 billion |
- Profitability: Third-quarter pre-tax income was $1.94 billion versus $2.52 billion in the prior-year quarter. The worldwide effective tax rate was 40% in both third-quarter periods and 40% for the first nine months of 2014 versus 39% in the prior-year period.
- Cash flow: Nine-month operating cash flow declined primarily because of higher income-tax payments associated with the Hugoton sale and weaker international oil volumes and realized oil prices. Investing cash use was $6.83 billion, including $7.53 billion of capital expenditures and $1.39 billion of proceeds from asset and equity investment sales.
- Liquidity and debt: Cash and cash equivalents were $2.90 billion at September 30, 2014, compared with $3.39 billion at December 31, 2013. Short-term borrowings were $1.60 billion, consisting of commercial paper issued for short-term cash needs. Long-term debt was $6.84 billion; total debt was approximately $8.44 billion. The company had no borrowings under its $2.0 billion revolving credit facility and reported compliance with financing covenants.
- Capital returns: Nine-month treasury-stock purchases were $2.08 billion and cash dividends were $1.65 billion. Dividends per common share increased to $0.72 in the third quarter from $0.64 in the prior-year quarter.
Material Changes Versus Prior Comparable Period
- Q3 net income decreased 24% and diluted EPS decreased 21%, primarily because of lower realized oil prices, lower international oil volumes, higher oil and gas operating and depreciation costs, and weaker midstream and marketing trading performance.
- Worldwide realized oil prices fell 9% year over year in Q3 to $94.68 per barrel. Domestic oil production increased, while international production declined because of field and port strikes in Libya and lower cost-recovery barrels in Iraq.
- Oil and gas segment earnings declined to $1.90 billion in Q3 from $2.36 billion and to $6.19 billion for the first nine months from $6.38 billion.
- Chemical segment earnings declined to $140 million in Q3 from $181 million, reflecting lower caustic soda prices and higher ethylene and natural-gas costs. Nine-month earnings were $409 million versus $615 million, including a $131 million prior-year gain on the Carbocloro investment sale.
- Midstream and marketing earnings declined to $125 million in Q3 from $212 million because of lower trading performance, but increased to $514 million for the first nine months from $475 million.
- Year-to-date results included a $532 million pretax gain, or $339 million after tax, from the sale of Hugoton Field operations, and a $471 million pretax, approximately $300 million after-tax, impairment of certain non-producing domestic oil and gas acreage.
- Production volumes increased modestly in Q3 to 755,000 barrels of oil equivalent per day, excluding Hugoton-related comparability effects as described in the filing, while nine-month production declined to 739,000 barrels of oil equivalent per day from 749,000.
Outlook, Transactions, Risks and Unusual Items
- California Resources Corporation spin-off: Occidental planned to distribute at least 80.1% of CRC to shareholders on November 30, 2014, with shareholders expected to receive 0.4 CRC shares per Occidental share. CRC issued $5.0 billion of senior notes and entered into $1.0 billion of term loans and a $2.0 billion revolving facility. Occidental received $4.95 billion of net proceeds from the note transaction and expected a further $1.25 billion CRC cash distribution concurrent with the spin-off. CRC results and cash flows were expected to be reclassified as discontinued operations upon completion.
- Commodity exposure: Management highlighted volatility and declining oil prices. For the first nine months, approximately 60% of oil production tracked Brent-like prices and 40% tracked WTI. At stated production levels, a $1.00-per-barrel change in global oil prices affected pretax income by approximately $29 million, while a $0.50-per-MCF change in domestic gas prices affected quarterly pretax earnings by approximately $15 million.
- Environmental matters: Reserves totaled $330 million across 153 sites. Management estimated reasonably possible additional environmental losses of up to $390 million. Approximately half of existing reserves was expected to be spent over the next three to four years, with the balance over the subsequent 10 or more years.
- Legal matters: Occidental entered into a proposed $190 million settlement with New Jersey concerning the former Diamond Shamrock Lister Avenue plant, subject to court approval, while pursuing indemnification from Maxus. Separate third-quarter notices involved potential penalties of $165,000 for a Texas pipeline incident and $200,000 asserted by Ventura County, California, regarding alleged releases.
- Derivatives: At September 30, net derivative assets were $59 million and net derivative liabilities were $118 million after counterparty netting and collateral. Outstanding net short positions increased to 24 million barrels of oil and 71 billion cubic feet of natural gas.
- No specific earnings, production, capital-spending, or commodity-price guidance was provided in the filing. Management stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, dividends, and debt payments.
Investor Verification Items
- Verify completion, final terms, tax treatment, debt allocation, and discontinued-operations accounting for the CRC spin-off.
- Assess sensitivity to oil, NGL, and natural-gas prices, including the effect of further international disruptions and declining oil prices.
- Reconcile recurring operating performance with the Hugoton gain and domestic acreage impairment, which materially affected nine-month results.
- Monitor liquidity after the $1.60 billion commercial-paper borrowing, stock repurchases, dividends, and planned CRC-related cash distributions.
- Review environmental reserves, the estimated $390 million range of additional possible losses, and the New Jersey/Passaic River proceedings.
- Confirm production growth, capital-spending returns, operating-cost trends, and the effect of higher depreciation and maintenance expenses.