Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2000, for Occidental Petroleum Corporation. The company operates primarily in two segments: Oil and Gas operations and Chemical operations. The reporting period includes significant strategic transactions, most notably the acquisition of Altura Energy Ltd. (Permian assets) and the sale of a 29.2% stake in Canadian Occidental Petroleum Ltd. (CanOxy).
Key Financial Metrics
| Metric (Six Months Ended June 30, 2000) | Amount (in millions) |
|---|---|
| Net Sales | $5,636 |
| Net Income | $835 |
| Earnings Per Share (Basic) | $2.27 |
| Operating Cash Flow | $922 |
| Capital Expenditures | $333 |
| Total Debt (excluding non-recourse) | $6.6 billion (as of April 2000) |
| Cash and Cash Equivalents | $97 |
Segment Performance (Six Months 2000):
- Oil and Gas: Net sales of $3,649 million; Net income of $951 million.
- Chemical: Net sales of $1,987 million; Net income of $177 million.
Material Changes vs. Prior Period
Compared to the six months ended June 30, 1999, the company reported a dramatic turnaround from a net loss of $61 million to a net income of $835 million. Key drivers include:
- Revenue Growth: Net sales increased from $2,991 million in 1999 to $5,636 million in 2000, driven by higher crude oil, natural gas, and chemical prices, as well as increased production volumes from acquisitions.
- Asset Sales: A pre-tax gain of approximately $493 million was recorded from the sale of the CanOxy investment.
- Acquisitions: The acquisition of Altura Energy Ltd. (valued at ~$3.6 billion) significantly increased proved reserves to approximately 2.2 billion barrels of oil equivalent and production capacity.
- Special Items: Results included a $120 million pre-tax charge to exit several chemical intermediate businesses and a $29 million after-tax charge related to the write-down of Peru properties (recorded in 1999 but impacting comparability).
Outlook, Risks, and Management Commentary
Guidance and Outlook:
- Debt Reduction: Management projects a reduction of total debt by $2.0 billion by the end of 2000, utilizing internal cash flow and further asset sales.
- Capital Spending: Total 2000 capital spending is expected to be approximately $1.0 billion ($800 million for Oil and Gas, $200 million for Chemical).
- Future Gains: Agreements with Apache Corporation regarding Gulf of Mexico assets are expected to close in August 2000, generating a pre-tax gain of approximately $65 million in the third quarter.
- Chemical Market: Management expects a moderate decrease in demand for PVC in the second half of 2000, which may temper demand for chlorine and tighten caustic soda markets.
Risks and Contingencies:
- Legal and Environmental: The company is involved in numerous lawsuits and environmental proceedings (CERCLA). While reserves have been accrued for probable costs, unfavorable resolutions could have a material adverse effect.
- Commodity Prices: Oil and gas earnings are sensitive to global commodity pricing fluctuations outside the company's control.
- Regulatory Approvals: The proposed partnership with Olin Corporation is subject to regulatory approval.
Investor Verification Checklist
- Altura Acquisition Financing: Verify the structure of the $2.4 billion non-recourse debt and the $2.0 billion loan to sellers, and confirm the impact on future cash distributions.
- Debt Reduction Progress: Monitor the company's ability to meet the $2.0 billion debt reduction target by year-end 2000.
- CanOxy Proceeds Utilization: Confirm that the ~$700 million in after-tax proceeds from CanOxy and Peru sales were fully applied to the Altura and THUMS acquisitions as stated.
- Chemical Segment Charges: Assess the long-term impact of the $120 million charge to exit chemical intermediate businesses on future operating margins.
- Environmental Reserves: Review the adequacy of accrued reserves for the 54 sites where remediation is probable, given the potential for retroactive liability.