OXY

Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: OPC operates primarily in two segments: Oil and Gas and Chemicals. The company is an accelerated filer with 391,187,719 shares of common stock outstanding as of March 31, 2004.

Key Financial Metrics

Note: Current ratio calculated as Total Current Assets ($2,472) divided by Total Current Liabilities ($2,517).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $209 million (8.8%) driven by higher crude oil volumes and prices, higher natural gas prices, and increased chemical volumes and prices.
• Profitability: Net income rose 50% to $487 million. This was aided by a $20 million tax settlement credit and the absence of the $61 million debt repayment charge incurred in Q1 2003.
• Segment Performance:
  • Oil & Gas: Earnings increased to $750 million from $727 million due to higher commodity prices and volumes, partially offset by higher exploration expenses and depletion costs.
  • Chemicals: Earnings rose to $50 million from $35 million, driven by higher margins and volumes in vinyls.
• Debt Reduction: In January 2004, the company redeemed all outstanding 8.16% Trust Preferred Securities ($453 million), resulting in a $11 million pre-tax charge but significantly reducing current liabilities.
• Cash Flow: Operating cash flow increased by $291 million to $965 million, primarily due to higher income and lower working capital usage.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Production: Q2 2004 oil and gas production is expected to be approximately the same as Q1 2004.
• Exploration: Q2 2004 exploration expense is projected to be about $40 million.
• Chemical Earnings: Q2 2004 chemical earnings are expected to be between $60 million and $70 million, assuming continued economic strengthening.
• Liquidity: Management believes cash on hand and operating cash flow are sufficient to fund operations, capital expenditures, and dividends. Unused committed bank credit lines totaled approximately $1.5 billion.

Risks and Contingencies

• Environmental Liabilities: Total environmental remediation reserves are $363 million. The reasonably possible loss range could be up to $400 million beyond the accrued amount.
• Legal Proceedings: The company faces numerous lawsuits, including seven recent cases in Nicaragua regarding DBCP pesticide exposure. Management believes these claims are without merit and judgments would likely be unenforceable in the U.S.
• Accounting Changes: Potential reclassification of contract-based mineral rights ($471 million) from property, plant, and equipment to intangible assets if EITF guidance changes, though this is not expected to materially affect results of operations.
• Market Risk: Results are sensitive to global commodity pricing fluctuations, particularly crude oil and natural gas prices.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current crude oil and natural gas prices against the Q1 2004 averages ($35.15/bbl WTI; $5.84/MMBTU NYMEX) to assess future margin impacts.
• Environmental Exposure: Review the $363 million reserve and the potential $400 million additional exposure for environmental remediation.
• Debt Structure: Confirm the impact of the $453 million trust preferred securities redemption on future interest obligations and liquidity.
• Legal Status: Monitor the status of the Nicaraguan DBCP lawsuits and any developments in the 119 CERCLA sites.
• Capital Allocation: Track the $711 million net cash used in investing activities, specifically the $208 million loan to Elk Hills Power LLC and the $143 million Permian Basin pipeline acquisition.