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Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: OPC operates through three segments: Oil and Gas (exploration, development, production), Chemical (manufacturing of basic chemicals, vinyls), and Midstream, Marketing and Other (gathering, processing, transporting, and marketing of hydrocarbons and CO2). The company reported a significant increase in profitability driven by higher commodity prices and production volumes.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $4.7 billion (56%) year-over-year, primarily due to higher crude oil and natural gas prices and increased production volumes. Realized oil prices rose 77% and natural gas prices 35% in the U.S.
• Profitability: Net income increased by $1.5 billion (58%). Oil and Gas segment earnings surged to $6.7 billion from $3.5 billion.
• One-Time Items in 2007: The 2007 period included significant non-recurring gains that are absent in 2008, including a $412 million after-tax gain from the sale of a Russian joint venture, a $284 million pre-tax gain from the sale of Lyondell Chemical stock, and $116 million from the sale of Pakistan operations.
• Cost Structure: Cost of sales increased by $887 million due to higher depreciation, depletion, and amortization (DD&A) rates and operating costs. Exploration expenses decreased by $63 million.
• Balance Sheet: Receivables increased by $1.9 billion reflecting higher commodity prices. Property, Plant, and Equipment increased by $3.2 billion due to capital expenditures and acquisitions.

Guidance, Outlook, and Risks

• Capital Spending: Management expects to spend approximately $4.7 billion on its 2008 capital spending program. This includes $1.1 billion for a new West Texas gas processing plant and pipeline, and a $1.9 billion portion of a $5 billion investment in Libya over five years.
• Major Transactions:
  • Libya: Signed 30-year agreements with the Libyan National Oil Company (NOC). Occidental paid a $450 million signature bonus in June 2008, with $150 million due annually for the next two years.
  • Acquisitions: Purchased a 50% interest in Permian Basin and Colorado properties from Plains Exploration & Production for $1.5 billion. Acquired a 15% interest in the Joslyn Oil Sands Project for $500 million.
• Liquidity: The company maintains $1.5 billion in cash and $1.5 billion in available committed bank credit. Long-term debt ratings were upgraded to "A" by S&P and DBRS.
• Risks and Contingencies:
  • Legal: Facing lawsuits in Nicaragua alleging personal injury from pesticide exposure; judgments of $97 million and $800 million were entered but are under appeal. Management believes these are unenforceable in the U.S.
  • Environmental: Total environmental remediation reserves are $472 million. Management estimates a reasonably possible additional loss of up to $415 million beyond accrued amounts.
  • Market Risk: Results are highly dependent on global commodity pricing fluctuations and production volumes.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify the impact of current oil and gas prices on future cash flows, given the 77% price increase in 2008.
• Libya Investment: Confirm the schedule and funding requirements for the $1.9 billion capital commitment and $750 million signature bonus in Libya.
• Legal Exposure: Monitor the status of the Nicaraguan litigation and the enforceability of the judgments against Occidental.
• Environmental Reserves: Assess the adequacy of the $472 million reserve against the disclosed $415 million range of reasonably possible additional losses.
• Capital Allocation: Review the execution of the $4.7 billion 2008 capital program, specifically the $1.5 billion Plains acquisition and the $1.1 billion West Texas project.