Business Context and Reporting Period
Occidental Petroleum Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company operates through oil and gas, chemical, and midstream and marketing segments. The filing was signed October 30, 2013, and reported 806.1 million common shares outstanding at September 30, 2013.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $6.449 billion | $5.965 billion | $18.283 billion | $18.001 billion |
| Net income | $1.583 billion | $1.375 billion | $4.260 billion | $4.262 billion |
| Diluted EPS | $1.96 | $1.69 | $5.28 | $5.25 |
| Income from continuing operations | $1.588 billion | $1.379 billion | $4.274 billion | $4.271 billion |
| Net margin | Approximately 24.5% | Approximately 23.1% | Approximately 23.3% | Approximately 23.7% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $9.786 billion | $8.499 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $6.551 billion | $7.716 billion |
| Dividends per common share | $0.64 | $0.54 | $1.92 | $1.62 |
At September 30, 2013, cash and cash equivalents were $3.771 billion, total debt was approximately $7.561 billion, and net debt was approximately $3.790 billion. The company had $2.0 billion of undrawn capacity under a credit facility expiring in 2016. Total assets were $69.437 billion and stockholders’ equity was $42.968 billion. Current assets of $11.938 billion exceeded current liabilities of $8.842 billion.
Material Changes Versus Prior Comparable Period
- Third-quarter net income increased 15% and diluted EPS increased 16%, primarily due to higher domestic realized oil and natural gas prices, lower oil and gas operating costs, and higher domestic liquids volumes.
- Nine-month net income was essentially unchanged, while diluted EPS increased modestly because of a lower weighted-average share count.
- Nine-month operating cash flow increased $1.287 billion, aided by favorable working-capital changes, including collection of an expected $380 million tax refund, and higher noncash DD&A.
- Net cash used in investing activities declined to $6.620 billion from $8.871 billion, reflecting lower capital expenditures and lower acquisition spending, partly offset by proceeds from the Carbocloro sale.
- Oil and gas segment earnings rose to $2.363 billion in the third quarter from $2.026 billion, but declined to $6.383 billion for the nine months from $6.573 billion. Domestic production increased, while Middle East/North Africa production and prices were lower.
- Chemical segment earnings increased in the third quarter to $181 million from $162 million, but nine-month earnings excluding the Carbocloro gain declined to $484 million from $540 million because of higher energy and feedstock costs.
- Midstream and marketing earnings increased to $212 million in the quarter and $475 million for the nine months, driven by improved marketing, trading, pipeline, gas processing, and power-generation results.
- Worldwide oil and gas production was 767,000 barrels of oil equivalent per day in both third-quarter periods and increased to 767,000 barrels of oil equivalent per day for the nine months from 762,000.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2013 capital spending of approximately $9.0 billion, about $600 million below prior estimates, reflecting drilling efficiencies, deferred facilities and midstream spending, and lower Iraq spending.
- Management stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, dividends, and debt payments.
- In October 2013, after the reporting date, the company sold part of its interest in the general partner of Plains All-American Pipeline for approximately $1.4 billion and recorded an approximately $1.0 billion pretax gain.
- Also in October 2013, the board authorized pursuing a sale of a minority interest in Middle East/North Africa operations and strategic alternatives for selected assets, including interests in the Williston Basin, Hugoton Field, Piceance Basin, and other Rocky Mountain assets.
- The nine-month results included an $85 million after-tax gain from the Carbocloro disposition and a $34 million after-tax charge related to former executive, employee, and consulting-termination costs.
- Environmental remediation reserves were $334 million across 160 sites. Management estimated reasonably possible additional environmental losses of up to $375 million.
- Commodity-price exposure remains significant. Management estimated that a $1.00 per barrel change in global oil prices affects quarterly pretax income by approximately $38 million, a $1.00 per barrel change in NGL prices by approximately $8 million, and a $0.50 per Mcf change in domestic gas prices by approximately $30 million.
- Principal risks include commodity-price volatility, production and development performance, cost inflation, geopolitical conditions, environmental liabilities, litigation, regulatory changes, taxes, facility disruptions, cyberattacks, and execution of acquisitions or dispositions.
- The California Air Resources Board asserted a July 2013 claim concerning reporting and emissions from four pieces of equipment at a Long Beach facility; the subsidiary was evaluating the claim.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2013, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile the planned $9.0 billion 2013 capital program with actual spending and assess its effect on production growth and free cash flow.
- Monitor the subsequent Plains All-American Pipeline transaction, including proceeds, the approximately $1.0 billion pretax gain, and use of proceeds.
- Evaluate the proposed Middle East/North Africa minority-interest sale and strategic alternatives for selected domestic assets, including timing, valuation, and execution risk.
- Assess sensitivity to oil, NGL, and natural gas prices and the impact of declining Middle East/North Africa volumes and higher DD&A rates.
- Review environmental reserves, the estimated $375 million additional-loss range, and developments in the Long Beach emissions claim and other legal proceedings.
- Verify the sustainability of dividends and share repurchases against operating cash flow, capital requirements, and debt maturities.