OXY

Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OXY)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Operations: Occidental operates through three primary segments: Oil and Gas (exploration, development, production, and marketing of crude oil, natural gas, and NGLs); Chemical (OxyChem, manufacturing basic chemicals, vinyls, and performance chemicals); and Midstream, Marketing and Other (gathering, processing, transporting, and trading of energy products). The company reported a realignment of operating segments effective January 1, 2008, to better focus on midstream and marketing infrastructure.

Key Financial Metrics

Segment Earnings (Pre-tax): Oil and Gas ($10,651M), Chemical ($669M), Midstream/Marketing ($520M).
Debt-to-Capitalization: 9% at year-end 2008 (down from 27% in 2004).
Proved Reserves: 2,978 million BOE (Barrels of Oil Equivalent) at year-end 2008.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 29% to $24.2 billion, driven by a 36% increase in global realized crude oil prices and a 5% increase in oil and gas sales volumes (notably from the Dolphin Project).
• Profitability: Net income rose 27% to $6.9 billion. Oil and gas segment earnings increased to $10.7 billion, offset by higher operating expenses, production taxes, and depreciation, depletion, and amortization (DD&A).
• Impairments: The 2008 results included a $599 million pre-tax charge for asset impairments (undeveloped acreage in Argentina and Yemen, and domestic producing properties) and a $58 million charge for rig contract terminations.
• Chemical Segment: Earnings increased to $669 million due to higher caustic soda margins, partially offset by lower PVC volumes and a $90 million plant closure/impairment charge.
• Balance Sheet: Total assets grew to $41.5 billion due to capital expenditures and acquisitions (Plains assets, Joslyn interest). Cash and cash equivalents decreased slightly to $1.8 billion.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Management aims to maintain financial discipline, investing only in projects generating returns above the cost of capital.
• Capital spending for 2009 is estimated at approximately $3.5 billion, focusing on Middle East operations, exploration in California/Utah/Argentina, and midstream/CO2 programs.
• The company expects to use excess cash flow for dividends, stock repurchases, and acquisitions.

Risks and Contingencies:

• Commodity Price Volatility: Results are highly sensitive to oil and gas prices. WTI prices peaked at $145.31 in July 2008 but dropped to $44.60 by year-end. A continued global economic downturn could depress prices further.
• Geopolitical Risk: Operations in Libya, Yemen, and other foreign jurisdictions face risks of political instability, armed conflict, and regulatory changes.
• Environmental Liabilities: Total environmental reserves were $439 million. The company estimates a reasonably possible additional loss of up to $400 million beyond recorded reserves.
• Legal Proceedings: Includes lawsuits in Nicaragua regarding DBCP (judgments of ~$900 million entered, but management believes they are unenforceable in the U.S.).

Investor Verification Checklist

• Reserve Revisions: Verify the impact of the $127 million BOE negative price-related reserve revision and the $18 million BOE negative technical revision on future DD&A rates.
• Impairment Details: Review the specific valuation assumptions used for the $599 million asset impairment charge in Argentina, Yemen, and the U.S.
• Debt Maturities: Confirm the schedule of debt repayments, specifically the $691 million due in 2009 (including Dolphin Energy loans and senior notes).
• Environmental Exposure: Assess the potential for the "reasonably possible" additional loss of up to $400 million to materialize given regulatory changes.
• Capital Allocation: Monitor the execution of the $3.5 billion 2009 capital budget against actual cash flows, given the volatility in oil prices.