Occidental Petroleum Corporation — 2012 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The unaudited filing covers Occidental’s oil and gas, chemical, and midstream, marketing and other segments.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $5.768 billion | $6.173 billion | $12.036 billion | $11.899 billion |
| Income from continuing operations | $1.332 billion | $1.819 billion | $2.892 billion | $3.224 billion |
| Net income | $1.328 billion | $1.817 billion | $2.887 billion | $3.366 billion |
| Diluted EPS | $1.64 | $2.23 | $3.55 | $4.13 |
| Dividends per share | $0.54 | $0.46 | $1.08 | $0.92 |
- Net income margin was approximately 23.0% in Q2 2012 versus 29.4% in Q2 2011; the six-month margin was approximately 24.0% versus 28.3%.
- Worldwide effective tax rates were 40% for Q2 and 41% for the six-month period, compared with 38% and 40%, respectively, in the prior-year periods.
- Six-month operating cash flow increased to $5.958 billion from $5.564 billion, despite lower net income, primarily because of higher noncash depreciation, depletion and amortization and deferred tax charges.
- Six-month capital expenditures were $5.125 billion, including $4.2 billion for oil and gas. Investing cash usage was $6.162 billion.
- Cash and cash equivalents were $4.410 billion at June 30, 2012, up from $3.781 billion at December 31, 2011. Management also reported $2.0 billion of available unused committed bank credit.
- Long-term debt increased to $7.620 billion from $5.871 billion. Total assets were $64.283 billion and stockholders’ equity was $39.550 billion at quarter-end.
- Net cash provided by financing activities was $833 million, including $1.736 billion of long-term debt proceeds, $813 million of dividends, and $152 million of treasury-stock purchases.
Material changes versus prior comparable periods
- Q2 net income declined 27% and diluted EPS declined 26%, while net sales declined 7%. Six-month net income declined 14% and diluted EPS declined 14%, although six-month sales increased 1%.
- Oil and gas segment earnings declined to $2.043 billion from $2.624 billion in Q2 and to $4.547 billion from $5.092 billion for six months. Higher production volumes were more than offset by lower oil, NGL and natural-gas prices, higher operating costs, and higher DD&A rates.
- Q2 production increased to 766,000 BOE per day from 715,000 BOE per day; sales volumes increased to 759,000 BOE per day from 705,000 BOE per day.
- Worldwide realized oil price fell to $99.34 per barrel from $103.12; worldwide NGL price fell to $42.06 from $57.67; and U.S. realized natural-gas price fell to $2.09 per MCF from $4.27.
- Chemical segment earnings declined to $194 million from $253 million in Q2 and to $378 million from $472 million for six months, reflecting weaker export volumes and prices, partly offset by lower feedstock costs.
- Midstream, marketing and other earnings declined to $77 million from $187 million in Q2 and to $208 million from $301 million for six months, primarily because of lower marketing, trading and gas-processing margins.
- The six-month 2011 comparison benefited from a $144 million after-tax gain on the sale of Argentine operations. The 2012 period had only a $5 million loss from discontinued operations.
Guidance, outlook, risks and unusual items
- Management expected approximately $9.2 billion of capital spending for full-year 2012, focused on increasing oil and gas production and including approximately 13% for the Al Hosn Shah gas project.
- Management stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, dividends and debt payments.
- In June 2012, Occidental issued $1.75 billion of senior unsecured notes: $1.25 billion at 2.70% due 2023 and $500 million at 1.50% due 2018. Net proceeds were approximately $1.74 billion. Moody’s upgraded the senior unsecured debt rating from A2 to A1 in April 2012.
- Results remain highly sensitive to commodity prices. Management estimated quarterly pretax sensitivity of approximately $38 million for a $1.00-per-barrel change in oil prices, $8 million for a $1.00-per-barrel change in NGL prices, and $35 million for a $0.50-per-MMBtu change in domestic natural-gas prices.
- Environmental remediation reserves totaled $336 million across 164 sites. Occidental estimated reasonably possible additional environmental losses of up to $370 million beyond recorded reserves.
- The filing identifies risks from commodity-price volatility, project delays or cost overruns, unsuccessful exploration, geopolitical conditions, environmental liabilities, litigation, accidents, regulatory changes, tax changes, natural disasters, and production disruptions.
- Derivative fair values were net assets of $232 million and net liabilities of $248 million at June 30, 2012 after counterparty netting and collateral. The filing states that the expected reclassification of derivative losses from accumulated other comprehensive income over the next 12 months was insignificant.
- Management concluded that disclosure controls were effective as of June 30, 2012 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the planned $9.2 billion capital program remains economically attractive under lower oil, NGL and natural-gas prices.
- Production growth, realized commodity prices, operating costs, and DD&A rates in subsequent quarters.
- Debt growth and interest costs following the $1.75 billion note issuance, together with liquidity and covenant capacity.
- The resolution and timing of the $336 million environmental reserve obligations and potential additional losses of up to $370 million.
- Performance of the chemical and midstream businesses, particularly export demand and marketing, trading and gas-processing margins.
- Exposure to derivative, counterparty, geopolitical, tax, litigation, and environmental risks described in the filing and the 2011 Form 10-K.