Occidental Petroleum Corporation — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing is a full-year Form 10-K, not a standalone fourth-quarter filing; fourth-quarter data are included in the unaudited quarterly table. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments.
Business Context and Reporting Period
- Oil and gas operations span the United States, Middle East/North Africa and Latin America. Chemical operations are conducted primarily through OxyChem, and midstream activities include gathering, processing, pipelines, storage, power generation, marketing and trading.
- Argentina was sold in February 2011 and is reported as discontinued operations for all periods.
- At December 31, 2011, Occidental employed approximately 11,300 people and had 3,176 million BOE of proved reserves, including 2,412 million BOE of proved developed reserves.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $23,939 million | $19,045 million | +26% |
| Income from continuing operations | $6,640 million | $4,569 million | +45% |
| Net income attributable to common stock | $6,771 million | $4,530 million | +49% |
| Diluted EPS | $8.32 | $5.56 | +50% |
| Cash provided by operating activities | $12,281 million | $9,566 million | +28% |
| Capital expenditures | $7,518 million | $3,940 million | +91% |
| Cash dividends paid | $1,436 million | $1,159 million | +24% |
- Worldwide effective tax rate was 39%, compared with 40% in 2010. Income tax expense was $4,201 million.
- Return on equity was 19.3% and return on capital employed was 17.2% in 2011.
- Oil and gas segment earnings were $10,241 million, up from $7,151 million, primarily due to higher oil and NGL prices and higher volumes. Production increased to 733,000 BOE per day from 711,000 BOE per day.
- Chemical segment earnings increased to $861 million from $438 million, reflecting stronger demand, export sales and margins.
- Midstream, marketing and other segment earnings declined to $448 million from $472 million because of lower marketing and trading income, partly offset by improved pipeline earnings.
- Worldwide realized oil price increased to $97.92 per barrel from $75.16; realized NGL price increased to $55.53 per barrel from $45.08. Worldwide realized gas price declined to $3.01 per Mcf from $3.11.
- Production costs increased to $12.84 per BOE from $10.19 per BOE. Management expected further activity-related cost increases in 2012, and DD&A was also expected to increase.
Liquidity, Capital Structure and Cash Flow
- Cash and cash equivalents were $3,781 million at year-end, compared with $2,578 million in 2010.
- Long-term debt, net, was $5,871 million, compared with $5,111 million. Total debt-to-capitalization was 13%.
- Occidental issued $2.15 billion of senior unsecured notes in August 2011 and redeemed $1.368 billion of higher-coupon notes in March 2011. The debt redemption generated a $163 million pretax charge.
- The company had an undrawn $2.0 billion revolving credit facility, including up to $1.0 billion available for letters of credit. Management stated that cash on hand and operating cash flow were sufficient for operating needs, planned capital expenditures, dividends and debt payments.
- Operating cash flow of $12.3 billion was exceeded by capital expenditures and other investing uses. Net cash used in investing activities was $9.9 billion, while financing activities used $1.2 billion.
- 2011 acquisitions and asset purchases included approximately $1.8 billion of South Texas properties, approximately $2.6 billion of other domestic oil and gas assets, and approximately $500 million of pre-acquisition development expenditures for the Al Hosn Gas Project.
- Management projected approximately $8.3 billion of 2012 capital spending, with 84% allocated to oil and gas, 11% to midstream and marketing, and 5% to chemicals.
Material Changes Versus the Prior Comparable Period
- Results benefited materially from higher oil and NGL prices, increased production and expanded chemical margins.
- Capital expenditures nearly doubled, driven primarily by development in Oman, Bahrain, California, the Permian Basin, South Texas and the Williston Basin.
- Property, plant and equipment, net, increased to $45,684 million from $36,536 million, reflecting capital spending and oil and gas acquisitions.
- Proved reserves increased modestly to 3,176 million BOE from 3,167 million BOE. Additions included 264 million BOE from improved recovery, 25 million BOE from extensions and discoveries, and 201 million BOE from purchases, offset by a 214 million BOE downward revision of prior estimates and 267 million BOE of production.
- Net income included a $144 million after-tax gain from the Argentine sale. The 2010 comparison included a $275 million pretax impairment charge, primarily for Rocky Mountain gas properties.
- Environmental remediation reserves declined to $360 million from $366 million, but the company identified up to $375 million of reasonably possible additional environmental losses beyond recorded reserves.
Guidance, Outlook, Risks and Unusual Items
- Management’s strategy emphasizes production growth from long-lived assets, capital returns above the cost of capital, dividend growth and balance-sheet discipline. Cash priorities are maintenance capital, dividends, growth capital, acquisitions and share repurchases.
- Management expected 2012 capital spending of approximately $8.3 billion and expected lower drilling activity for domestic gas wells in the Midcontinent and Other region.
- Chemical results were expected to depend on continued recovery in housing, construction and global economic activity. Basic chemical margins were expected to remain generally near 2011 levels, while vinyl margins could face pressure from higher North American ethylene utilization.
- Oil and gas results remain highly sensitive to commodity prices. The filing estimates that a $1 per barrel change in oil prices affects pretax income by approximately $150 million, a $1 per barrel change in NGL prices by approximately $30 million, and a $0.50 per Mcf change in domestic gas prices by approximately $125 million annually.
- Key risks include commodity-price volatility, reserve revisions, exploration and development execution, cost inflation, political instability and sanctions in foreign jurisdictions, environmental and climate regulation, catastrophic operating events, litigation, acquisitions and divestitures, and derivative and counterparty risks.
- Libya exploration costs of $35 million were written off after civil unrest and sanctions disrupted operations; production resumed after U.S. sanctions were lifted in September 2011.
- The Al Hosn Gas Project is expected to begin production in 2014. Occidental estimated approximately $3 billion of remaining capital through production commencement for its share.
- Contractual obligations totaled $16.9 billion, including $5.9 billion of long-term debt, $7.9 billion of purchase obligations and $1.0 billion of operating leases. Legal and tax matters outside environmental remediation were described as not material by management.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at December 31, 2011.
Most Important Facts for Investors to Verify
- Whether projected 2012 capital spending of $8.3 billion can be funded while maintaining dividend growth and the stated debt-to-capitalization target.
- Sensitivity of earnings and cash flow to oil, NGL and natural gas prices, including the effect of higher production costs and DD&A.
- Execution, timing, cost and production assumptions for Al Hosn, Oman, Bahrain, Iraq and domestic development programs.
- Quality and sustainability of reserve additions given the 214 million BOE downward revision of prior estimates and significant reliance on improved recovery and acquisitions.
- Potential changes in environmental reserves, climate-related regulation, foreign political conditions and tax audits.
- Underlying fourth-quarter performance excluding the $163 million debt extinguishment charge and the $144 million after-tax Argentine sale gain.