Occidental Petroleum Corporation: FY2010 Form 10-K Summary
Business Context and Reporting Period
Occidental Petroleum Corporation reported for the fiscal year ended December 31, 2010; the filing was signed February 24, 2011. Operations comprised oil and gas, chemicals (OxyChem), and midstream, marketing and other activities. Argentine operations were classified as held for sale and were reported as discontinued operations.
Financial Performance and Position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $19.045 billion | $14.814 billion | +29% |
| Income from continuing operations attributable to common stock | $4.569 billion | $3.151 billion | +45% |
| Net income attributable to common stock | $4.530 billion | $2.915 billion | +55% |
| Diluted EPS | $5.56 | $3.58 | +55% |
| Cash provided by operating activities | $9.349 billion | $5.807 billion | +61% |
| Capital expenditures | $3.940 billion | $3.245 billion | +21% |
| Cash used by investing activities | $9.078 billion | $5.327 billion | Higher outflow |
| Cash and cash equivalents | $2.578 billion | $1.224 billion | +111% |
| Long-term debt, net | $5.111 billion | $2.557 billion | +100% |
| Stockholders’ equity | $32.484 billion | $29.159 billion | +11% |
Reported net income margin was approximately 24% of sales, compared with approximately 20% in 2009. The worldwide effective tax rate remained 40%. Return on equity was 14.7% and return on capital employed was 13.2%.
- Oil and gas: segment sales were $14.276 billion and segment earnings were $7.151 billion, compared with $5.097 billion of earnings in 2009. Continuing-operations sales volumes increased to 705,000 BOE per day from 678,000 BOE per day. Worldwide realized crude oil prices increased to $75.16 per barrel from $57.31, while worldwide realized gas prices increased to $3.11 per Mcf from $2.83.
- Chemicals: sales were $4.016 billion and earnings were $438 million, versus $389 million of earnings in 2009. Improved global demand and stronger exports supported results; vinyls exports increased 125%.
- Midstream, marketing and other: sales were $1.471 billion and earnings were $472 million, versus $235 million in 2009, reflecting stronger marketing, trading, gas-processing and pipeline margins.
Material Changes Versus the Prior Comparable Period
- Higher oil and domestic natural gas prices, increased production, and new production from Bahrain and Oman drove the improvement in oil and gas earnings and operating cash flow.
- Production costs increased to $10.19 per BOE from $8.95, partly because Occidental began expensing 100% of injected CO2 costs in 2010.
- Occidental recorded a fourth-quarter pre-tax impairment charge of $275 million, primarily for Rocky Mountain gas properties deemed uneconomic at prevailing natural gas prices.
- Acquisitions included approximately $2.8 billion of domestic oil and gas interests, $1.4 billion of North Dakota properties, approximately $430 million of additional Plains Pipeline interests, and approximately $175 million for the remaining interest in Elk Hills Power.
- Occidental issued $2.6 billion of senior unsecured notes in December 2010, increasing long-term debt. The year-end debt-to-capitalization ratio was 14%.
- Argentine operations were sold to a Sinopec subsidiary for approximately $2.6 billion of after-tax proceeds; the transaction closed in February 2011.
- Quarterly fourth-quarter 2010 net income attributable to common stock was $1.212 billion, or $1.49 diluted EPS, compared with $938 million and $1.15 in fourth-quarter 2009. Fourth-quarter 2010 included the $275 million impairment and an $80 million tax benefit from foreign tax credit carryforwards.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $6.1 billion of 2011 capital spending, excluding the Shah Field development project, compared with $3.9 billion in 2010. Spending was expected to focus on oil and gas growth, particularly in the Middle East/North Africa, California, the Permian Basin, and Midcontinent and other interests.
- Management expected 2011 chemical performance to benefit from stronger basic-chemical demand, favorable North American feedstock economics, continued exports and modest domestic demand improvement.
- Occidental reached an agreement-in-principle for a 40% participating interest in Abu Dhabi’s Shah Field project. Production was not expected before 2014, and project capital expenditures were estimated at approximately $10 billion in total, with Occidental’s share proportional to ownership.
- Cash on hand, operating cash flow and proceeds from pending divestitures were expected to fund acquisitions, capital expenditures, dividends and debt payments. The company had approximately $1.5 billion of unused committed bank facilities and had not drawn on them during 2010.
- Key risks include volatile oil, gas and chemical prices; production and reserve-estimation risk; foreign political instability, armed conflict and contract risk; environmental and climate-related regulation; exploration failures and project cost overruns; catastrophic operating events; litigation; and acquisition or divestiture execution risk.
- Environmental remediation reserves were $366 million at 170 sites, with reasonably possible additional losses estimated at up to $385 million. The company expected approximately $125 million of environmental-compliance capital expenditures in 2011.
- Total contractual obligations were $13.712 billion, including $5.122 billion of long-term debt, $5.516 billion of purchase obligations and $1.056 billion of operating leases.
- Derivative positions included hedges covering approximately 2% of crude oil production, natural-gas swaps through March 2012, and substantial third-party marketing and trading contracts. Management stated that trading value-at-risk and credit exposure were not material to the company as a whole.
- 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.
Most Important Facts for Investors to Verify
- Whether the reported earnings and cash-flow improvement is sustainable at lower oil and gas prices; management estimated that a $1 per barrel oil-price change would affect annual pre-tax income by approximately $164 million, while a $0.50 per Mcf gas-price change would affect it by approximately $144 million.
- Completion and proceeds of the Argentine divestiture, and whether replacement acquisitions offset the divested production and reserves.
- Execution, funding and expected returns for the planned 2011 capital program and the Shah Field project.
- Debt maturities, the planned redemption of $1.368 billion of senior notes in 2011, and the resulting refinancing or interest expense impact.
- Reserve quality and replacement: year-end proved reserves were 3.363 billion BOE, up from 3.230 billion BOE, but approximately 75% were proved developed and significant additions came from improved recovery and acquisitions.
- Potential changes in environmental reserves, tax audits, litigation, foreign operations and commodity-derivative exposures.