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Business Context and Reporting Period

Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: Occidental operates primarily in the Oil and Gas and Chemical segments. The company reported strong performance in the first half of 2003, driven by higher commodity prices and production volumes.

Key Financial Metrics

Segment Performance (Six Months 2003):

• Oil and Gas: Net sales of $2,993 million; Net income of $1,364 million.
• Chemical: Net sales of $1,575 million; Net income of $78 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $1.2 billion (36%) compared to the prior year, primarily due to higher crude oil, natural gas, and chemical prices, alongside increased oil production volumes.
• Profitability: Net income more than doubled to $699 million. Basic earnings per share rose to $1.84 from $0.71.
• Cost Structure: Cost of sales increased by $450 million, driven by higher energy and raw material costs. Selling, general, and administrative expenses rose by $125 million due to higher production taxes and specific charges (severance and asset write-offs).
• Exploration: Exploration expense decreased by $29 million, largely due to a significant lease write-off in the San Joaquin Valley in 2002 that did not recur.
• Interest Expense: Net interest expense increased by $38 million for the six-month period, primarily reflecting a $61 million pre-tax charge for the early repayment of a senior note issue, partially offset by lower interest rates.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Production: Oil and gas production is expected to remain at approximately the same level in the third quarter of 2003 as the second quarter (approx. 544,000 BOE/day).
• Chemical Segment: Earnings for the third quarter of 2003 are expected to be between $30 million and $45 million, with no anticipated upturn in chemical markets.
• Capital Spending: The company expects to spend approximately $1.4 billion on its 2003 capital program (excluding lease buyouts), with 90% allocated to the oil and gas segment.
• Liquidity: Management expects sufficient cash from operations to fund needs, capital expenditures, dividends, and debt repayments. Unused committed bank credit totaled approximately $1.8 billion.

Accounting Changes & Unusual Items:

• Asset Retirement Obligations (SFAS 143): Adopted in Q1 2003, resulting in a $50 million after-tax cumulative effect charge and a $151 million increase in liabilities.
• Energy Trading (EITF 98-10): Rescission of this standard resulted in an $18 million after-tax cumulative effect charge.
• Variable Interest Entities (FIN 46): Consolidation of the OxyMar VCM joint venture increased assets by $166 million and liabilities by $72 million with no material effect on net income.

Risks and Contingencies:

• Environmental: Total environmental remediation reserves are $361 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.
• Guarantees: Notional amount of guarantees outstanding is approximately $540 million, primarily related to equity investees' debt.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current crude oil and natural gas prices against the reported averages ($29.15/bbl oil, $4.89/MCF gas for H1 2003) to assess future margin sustainability.
• Debt Repayment Impact: Confirm the $61 million pre-tax charge related to the early repayment of the 6.4% senior note and its impact on future interest expense.
• Environmental Exposure: Review the $361 million reserve and the potential $400 million additional exposure for environmental remediation.
• Accounting Adjustments: Note the $68 million cumulative effect of accounting changes (SFAS 143 and EITF 98-10) that reduced net income for the six-month period.
• Chemical Segment Outlook: Monitor the chemical market for the expected lack of upturn in Q3 2003, which constrains earnings growth in that segment.