Business Context and Reporting Period
Company: Occidental Petroleum Corporation (OCCIDENTAL PETROLEUM CORP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Operations: The company operates through two primary segments: Oil and Gas (exploration, development, production, and marketing of crude oil and natural gas) and Chemicals (manufacture and marketing of basic chemicals, vinyls, and performance chemicals via OxyChem). Major assets include the Permian Basin and Elk Hills in the U.S., and significant international operations in Qatar, Oman, Yemen, Libya, and Latin America.
Key Financial Metrics
| Metric ($ millions) | 2006 | 2005 |
|---|---|---|
| Net Sales | $17,661 | $14,597 |
| Net Income | $4,182 | $5,281 |
| Income from Continuing Operations | $4,435 | $5,040 |
| Operating Cash Flow | $6,353 | $5,337 |
| Capital Expenditures | $(3,005) | $(2,324) |
| Total Assets | $32,355 | $26,108 |
| Long-Term Debt (net) | $2,619 | $2,873 |
| Stockholders' Equity | $19,184 | $15,032 |
| Debt-to-Capitalization Ratio | 13% | 17% |
Segment Performance:
- Oil and Gas: Sales of $12.7 billion; Earnings of $7.2 billion.
- Chemical: Sales of $4.8 billion; Earnings of $0.9 billion.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 21% to $17.7 billion, driven primarily by higher crude oil prices (average realized price of $56.57/bbl vs. $49.18/bbl in 2005) and increased production volumes.
- Net Income Decline: Despite higher revenues, Net Income decreased 21% to $4.2 billion. This was largely due to a $296 million after-tax charge related to discontinued operations in Ecuador (seizure of Block 15 assets) and higher operating costs.
- Acquisitions: Completed the acquisition of Vintage Petroleum (adding assets in Argentina, California, and Yemen) and assets from Plains Exploration & Production. These contributed significantly to production growth.
- Discontinued Operations: Classified Ecuador Block 15 operations as discontinued following asset seizure by the Ecuadorian government, resulting in a significant write-off.
- Debt Reduction: Total debt-to-capitalization ratio improved to 13% from 17% in 2005, aided by strong cash flows and debt repurchases.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Management aims to maintain financial discipline and a strong balance sheet while focusing on large, long-lived oil and gas assets.
- Capital spending for 2007 is estimated at $3.3 to $3.4 billion, focused on exploration and development in Oman, Argentina, Libya, Qatar, and the Permian Basin.
- Chemical segment strategy focuses on being a low-cost producer to maximize cash flow rather than aggressive growth.
Key Risks and Contingencies:
- Commodity Price Volatility: Results are highly sensitive to fluctuations in crude oil and natural gas prices. A $1/bbl change in oil prices impacts pre-tax income by approximately $150 million annually.
- Political and Legal Risks: Significant exposure in foreign jurisdictions (e.g., Ecuador, Libya, Yemen). The Ecuador asset seizure remains a major contingency with ongoing arbitration.
- Environmental Liabilities: Total environmental remediation reserves were $412 million. The range of reasonably possible loss could be up to $430 million beyond accrued amounts.
- Legal Proceedings: Facing lawsuits in Nicaragua regarding pesticide exposure (judgments entered but deemed unenforceable by management) and various environmental claims.
Investor Verification Checklist
- Ecuador Arbitration: Verify the status of the arbitration claim against the Government of Ecuador regarding the seizure of Block 15 assets and the potential for recovery of the $296 million charge.
- Reserve Revisions: Review the impact of oil price fluctuations on proved reserves, particularly for Production Sharing Contracts (PSCs) where reserve volumes decrease as prices rise.
- Environmental Reserves: Assess the adequacy of the $412 million environmental reserve given the "reasonably possible" loss range of an additional $430 million.
- Debt Maturities: Confirm the company's ability to manage debt maturities, noting $171 million due in 2007 and $695 million due in 2009, against projected cash flows.
- Chemical Margins: Monitor chemical segment margins against feedstock costs (ethylene, natural gas) and global economic demand, as margins are sensitive to these inputs.