Business Context and Reporting Period
Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Occidental operates primarily in two segments: Oil and Gas (exploration, production, and refining) and Chemicals (production of chlorine, caustic soda, and PVC). The company also holds significant equity investments, including Lyondell Chemical Company.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2003):
- Net Sales: $6,956 million (vs. $5,353 million in 2002).
- Net Income: $1,145 million (vs. $667 million in 2002).
- Basic Earnings Per Share (EPS): $2.99 (vs. $1.77 in 2002).
- Income from Continuing Operations: $1,213 million.
Cash Flow (Nine Months Ended Sept 30, 2003):
- Operating Cash Flow: $2,262 million (vs. $1,530 million in 2002).
- Investing Cash Flow: $(1,454) million (vs. $(898) million in 2002).
- Financing Cash Flow: $(425) million (vs. $(532) million in 2002).
- Cash and Cash Equivalents (Ending): $529 million (vs. $146 million at Dec 31, 2002).
Balance Sheet Highlights (Sept 30, 2003):
- Total Assets: $17,706 million.
- Total Liabilities: $11,158 million (including $4,051 million long-term debt).
- Stockholders' Equity: $7,495 million.
- Capital Expenditures (YTD): $1,151 million.
Material Changes vs. Prior Period
Revenue Growth: Net sales increased by $1.6 billion (30%) year-over-year, driven primarily by higher worldwide crude oil and natural gas prices, higher crude oil volumes, and increased chemical prices.
Profitability: Net income increased by $478 million (72%). The Oil and Gas segment earnings rose to $2.024 billion from $1.217 billion. The Chemical segment earnings were $139 million compared to $217 million in 2002; however, 2002 results included a significant one-time gain from the sale of the Equistar equity investment.
Costs: Cost of sales increased by $607 million due to higher energy/raw material costs and increased depreciation, depletion, and amortization (DD&A). Exploration expenses decreased by $21 million due to lower seismic and geological costs.
Accounting Changes: The adoption of SFAS No. 143 (Asset Retirement Obligations) resulted in a cumulative after-tax charge of $50 million. The adoption of SFAS No. 150 reclassified mandatorily redeemable trust preferred securities as liabilities, moving related payments from minority interest to interest expense.
Guidance, Outlook, and Risks
Outlook:
- Oil and Gas: Management expects fourth-quarter 2003 production to increase modestly due to the Eden-Yuturi field and the new Ecuador pipeline.
- Chemicals: Fourth-quarter 2003 earnings are expected to range between $45 million and $55 million, reflecting typical seasonal weakness.
- Liquidity: The company expects sufficient cash from operations to fund needs, capital expenditures, dividends, and debt repayments. Unused committed bank credit lines totaled approximately $1.8 billion.
Risks and Contingencies:
- Environmental: Total environmental remediation reserves are $343 million. The range of reasonably possible loss could be up to $400 million beyond accrued amounts.
- Legal: The company faces numerous lawsuits and claims. Management does not expect a material adverse effect based on current reserves, though outcomes are uncertain.
- Commodity Prices: Results are sensitive to fluctuations in crude oil and natural gas prices. A $1.00 per barrel change in oil prices impacts quarterly earnings by approximately $30 million (pre-tax).
- Debt: The company expects to redeem $454 million in trust preferred securities in January 2004.
Investor Verification Checklist
- Core Earnings vs. Reported: Verify the impact of non-recurring items (e.g., Equistar sale in 2002, debt repayment charges in 2003) on year-over-year comparisons.
- Asset Retirement Obligations: Review the $151 million liability recorded under SFAS No. 143 and its impact on future cash flows for plugging and abandonment.
- Environmental Exposure: Assess the $400 million potential additional loss range for environmental remediation beyond current reserves.
- Debt Structure: Confirm the classification of trust preferred securities as liabilities and the upcoming $454 million redemption in 2004.
- Equity Investments: Monitor the 22% stake in Lyondell Chemical Company and the consolidation of the OxyMar joint venture under FIN 46.