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Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2007
Business Overview: OPC operates primarily in the Oil and Gas and Chemical segments. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales decreased $288 million (6.5%) primarily due to lower crude oil, natural gas, and chemical prices, partially offset by higher crude oil production volumes.
• Profitability: Net income remained relatively flat despite lower commodity prices, driven by significant non-operating gains. Oil and Gas segment earnings increased to $2.07 billion from $1.91 billion, while Chemical segment earnings declined to $137 million from $250 million due to lower margins on caustic soda and PVC.
• Unusual Items:
  • Gains: Recorded a $412 million after-tax gain from the sale of its 50% interest in the Russian Vanyoganneft joint venture and a $109 million after-tax gain from litigation settlements.
  • Charges: Incurred a $172 million pre-tax interest charge for the repurchase of $659 million in debt principal and a $47 million pre-tax provision for a plant closure.
• Debt Reduction: Long-term debt decreased by $928 million due to debt repurchases via a cash tender offer and the reclassification of Vintage Petroleum notes to current liabilities.
• Cash Flow: Operating cash flow decreased $400 million, attributed to lower realized oil and gas prices. Investing cash outflows decreased significantly compared to 2006, which included a $1.3 billion acquisition payment.

Guidance, Outlook, and Risks

• Capital Spending: Management expects to spend approximately $3.3 to $3.4 billion on its 2007 capital spending program.
• Liquidity: The company maintains approximately $1.5 billion in available but unused committed bank credit lines. Management believes cash on hand and operating cash flows are sufficient to fund operations, capital expenditures, dividends, and potential acquisitions.
• Subsequent Events:
  • Announced an asset swap with BP plc involving the purchase of BP's west Texas pipeline system and the sale of Occidental's Pakistan oil and gas interests.
  • Announced an exchange of Permian Basin interests for Horn Mountain interests with BP, involving a net cash payment of approximately $100 million.
  • Redeemed all $276 million of outstanding Vintage Petroleum senior notes in May 2007.
• Risks and Contingencies:
  • Legal: Facing lawsuits in Nicaragua alleging personal injury from pesticide exposure; management believes claims are without merit and judgments are unenforceable in the U.S.
  • Environmental: Total environmental remediation reserves are $452 million. Management estimates a reasonably possible loss range of up to $405 million beyond accrued amounts.
  • Market Risk: Results are highly dependent on global commodity pricing fluctuations and exploration risks.

Investor Verification Checklist

• Non-Recurring Gains: Verify the sustainability of earnings by excluding the $521 million in after-tax gains from asset sales and litigation settlements.
• Debt Repurchase Impact: Assess the long-term benefit of the $172 million pre-tax charge incurred to retire $659 million in debt principal.
• Commodity Price Sensitivity: Monitor the impact of realized oil prices ($51.78/bbl in Q1 2007 vs. $55.38/bbl in Q1 2006) on future cash flows.
• Environmental Exposure: Review the $405 million potential additional liability for environmental remediation beyond current reserves.
• Share Repurchases: Note the repurchase of approximately 7 million shares in Q1 2007 at an average price of $45.89, reducing outstanding shares.