Business Context and Reporting Period
Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Reporting Status: Large Accelerated Filer; Unaudited Financial Statements
Occidental Petroleum operates in two primary segments: Oil and Gas, and Chemical. The reporting period reflects significant corporate activity, including the January 2006 merger with Vintage Petroleum, Inc., the September 2006 acquisition of assets from Plains Exploration and Production Co., and the May 2006 seizure of Block 15 assets in Ecuador by the Ecuadorian government, which were classified as discontinued operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2006)
| Metric | 2006 (9 Months) | 2005 (9 Months) |
|---|---|---|
| Net Sales | $13,517 million | $10,415 million |
| Net Income | $3,254 million | $4,129 million |
| Diluted EPS | $3.77 | $5.06 |
| Operating Cash Flow | $4,808 million | $3,763 million |
| Capital Expenditures | $1,992 million | $1,583 million |
| Cash & Equivalents (End of Period) | $1,214 million | $1,410 million |
| Long-Term Debt | $2,847 million | $2,873 million |
Segment Performance (9 Months 2006):
- Oil and Gas: Net Sales $9,624 million; Pretax Operating Profit $5,740 million.
- Chemical: Net Sales $3,779 million; Pretax Operating Profit $745 million.
Material Changes vs. Prior Period
Revenue and Profit: Net sales increased by $3.1 billion (30%) compared to the prior year, driven by higher worldwide crude oil and chemical prices, increased production volumes, and the inclusion of Vintage Petroleum assets. However, Net Income decreased by $875 million (21%) primarily due to a $260 million net after-tax loss in discontinued operations (Ecuador Block 15 write-off) and the absence of significant one-time gains recorded in 2005, such as the $726 million gain from the Valero/Premcor transaction and $619 million tax benefit from IRS settlements.
Cash Flow: Operating cash flow increased by $1.0 billion to $4.8 billion, fueled by higher realized oil prices (up 21%) and production volumes (up 15%). Investing cash outflows increased to $3.6 billion due to the Vintage acquisition ($1.3 billion cash portion) and the Plains acquisition ($859 million).
Balance Sheet: Property, Plant, and Equipment increased by $6.3 billion due to acquisitions. Cash and cash equivalents decreased by $974 million, reflecting significant capital expenditures, acquisitions, and $1.3 billion in share repurchases.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Core Earnings: Management highlights "Core Earnings" of $3.5 billion ($4.07 diluted EPS) for the nine months, excluding significant non-recurring items. This represents an increase from $2.6 billion ($3.20 diluted EPS) in the prior year.
- Capital Spending: Occidental expects to spend approximately $3.0 billion on its 2006 capital spending program.
- Production: Worldwide production increased to 596 MBOE per day (9 months 2006) from 519 MBOE per day (9 months 2005). OPEC's announced production cuts (effective Nov 1, 2006) may impact future production.
Unusual Items & Contingencies:
- Ecuador Seizure: Ecuador terminated Occidental's contract and seized Block 15 assets. Occidental recorded a $306 million after-tax charge in Q2 2006 and has filed an arbitration claim seeking redress.
- Discontinued Operations: Includes the write-off of Ecuador assets and income from Vintage assets held for sale.
- Legal Proceedings: Ongoing litigation in Nicaragua regarding pesticide exposure (approx. 2,600 plaintiffs); management believes claims are without merit and judgments unenforceable in the U.S.
- Environmental: Total environmental remediation reserves are $398 million, with a reasonably possible loss range up to $415 million beyond accrued amounts.
Share Repurchases: The company repurchased 26.7 million shares for $1.3 billion in the first nine months of 2006. The Board increased the authorized repurchase program to 40 million shares in July 2006.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the final resolution and potential recovery value of the Ecuador Block 15 arbitration claim, which resulted in a significant write-off.
- Acquisition Integration: Monitor the integration and cash flow contribution of the Vintage Petroleum and Plains Exploration assets, particularly the divestiture of non-core Vintage assets.
- Commodity Price Sensitivity: Assess exposure to fluctuations in crude oil and natural gas prices, which drive the majority of earnings and cash flow.
- Environmental Liabilities: Review the $398 million environmental reserve and the potential for additional liabilities up to $415 million beyond current accruals.
- Capital Allocation: Track the execution of the $3.0 billion capital spending plan and the continuation of the share repurchase program funded by operating cash flow.