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Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OCCIDENTAL PETROLEUM CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Occidental operates through three primary segments: Oil and Gas (exploration, development, production, and marketing), Chemicals (manufacturing and marketing of basic chemicals, vinyls, and performance chemicals), and Midstream, Marketing and Other (gathering, processing, transporting, and trading of energy products).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 49% year-over-year, driven primarily by significantly lower crude oil and natural gas prices. Realized oil prices dropped from $86.75 per barrel in Q1 2008 to $39.29 per barrel in Q1 2009.
• Profitability: Net income attributable to common stock fell 80% to $368 million. The Oil and Gas segment earnings dropped from $2.9 billion to $545 million.
• Cash Flow: Operating cash flow decreased 71% to $780 million due to lower commodity prices and a $478 million use of cash for working capital (payments for expenses accrued in Q4 2008).
• Capital Spending: Capital expenditures increased to $1.1 billion in Q1 2009 compared to $833 million in Q1 2008, though the company noted a run rate higher than the full-year 2009 estimate of $3.5 billion.
• Balance Sheet: Cash and cash equivalents decreased by $651 million during the quarter. Total assets declined slightly from $41.5 billion to $40.6 billion.

Guidance, Outlook, and Risks

• Capital Spending Outlook: Management estimates 2009 capital spending at approximately $3.5 billion. The company plans to delay a substantial portion of its project inventory until industry costs align with product prices, while continuing to fund Middle East operations, exploration in California/Utah/Argentina, and midstream programs.
• Liquidity: Occidental holds $1.1 billion in cash and has $1.5 billion in available committed bank credit. Management believes current resources are sufficient to fund operations, capital expenditures, and dividends.
• Debt Refinancing: The company is refinancing debt related to Dolphin Energy (approx. $600 million) and may access credit facilities or other sources during 2009.
• Legal and Environmental Risks:
  • Nicaragua Litigation: OxyChem faces judgments of approx. $900 million in Nicaragua regarding DBCP pesticide claims. Management believes these are without merit and unenforceable in the U.S., citing a recent federal court victory.
  • Environmental Reserves: Total environmental remediation reserves are $419 million across 164 sites. Management estimates reasonably possible additional losses could be up to $400 million beyond recorded reserves.
• Unusual Items: Q1 2009 included after-tax charges of $21 million for severance, $10 million for railcar leases (related to Lyondell bankruptcy negotiations), and $5 million for rig termination costs.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify the impact of current oil and gas prices on future cash flows, given the 55% drop in realized oil prices and 57% drop in U.S. natural gas prices compared to 2008.
• Capital Discipline: Monitor the execution of the $3.5 billion 2009 capital spending plan and the ability to delay projects as commodity prices fluctuate.
• Working Capital Reversal: Confirm the timing of working capital recovery, as Q1 2009 included a significant cash outflow for expenses accrued in the prior year.
• Legal Exposure: Track the status of the Nicaragua DBCP litigation and any potential enforcement actions despite the U.S. court ruling.
• Debt Maturities: Review the refinancing status of the Dolphin Energy debt and the 4.25% medium-term senior notes maturing in 2010.