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Business Context and Reporting Period

Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 1998
Business Overview: Occidental operates in oil and gas exploration/production and chemical manufacturing. The period was defined by a major asset redeployment program, including the acquisition of the Elk Hills Naval Petroleum Reserve and the divestiture of the MidCon natural gas business and petrochemical assets into a joint venture (Equistar).

Key Financial Metrics (Six Months Ended June 30, 1998)

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 20% to $3.24 billion, driven by lower worldwide crude oil prices, reduced oil trading revenues, and lower chemical product prices/volumes. The absence of petrochemical revenues (transferred to Equistar) also contributed.
• Profitability Increase: Despite lower sales, Net Income rose 8% to $363 million. This was primarily due to $395 million in net pretax gains from the sale of nonstrategic oil and gas properties ($290 million recognized in Q2) and $38 million from the finalization of the MidCon sale.
• Cash Flow Volatility: Operating cash flow swung from a $568 million inflow in 1997 to a $260 million outflow in 1998. This was caused by lower commodity prices and a $250 million receivable repurchase related to the MidCon sale. Investing outflows increased significantly due to the $3.5 billion Elk Hills acquisition, partially offset by $3.2 billion in proceeds from asset sales.
• Debt Levels: Long-term debt increased by approximately $683 million to fund the Elk Hills acquisition and working capital needs.

Guidance, Outlook, and Risks

• Management Commentary: Management expects cash generated from operations and asset sales to be adequate for operating requirements, capital spending, and dividends for the full year 1998. They maintain substantial borrowing capacity ($1.1 billion in unused committed credit).
• Share Repurchase: The company repurchased 26.3 million shares for $744 million in the first half of 1998. The program targets up to 40 million shares total, expected to be completed before year-end.
• Subsequent Events: In July 1998, Occidental sold Occidental Netherlands interests (expected $145 million gain) and agreed to exchange interests in the Philippines/Malaysia for Shell's interests in Yemen/Colombia.
• Risks and Contingencies:
  • Commodity Prices: Earnings are highly sensitive to crude oil and chemical commodity prices, which are volatile and outside management's control.
  • Environmental Liabilities: Occidental is involved in 175 Superfund or comparable state sites. While reserves are accrued for probable costs, ultimate liabilities are uncertain and could be material if resolved unfavorably.
  • Legal Proceedings: Subject to various lawsuits and tax audits; management believes reserves are adequate but acknowledges potential for material adverse effects in extreme scenarios.

Investor Verification Checklist

• Asset Sale Gains: Verify the sustainability of earnings, as $395 million of the $628 million pretax income from continuing operations was derived from one-time asset sales.
• Operating Cash Flow: Investigate the negative operating cash flow of $260 million and its impact on liquidity, noting it was exacerbated by the MidCon receivable repurchase.
• Debt Servicing: Review the increased debt load ($5.6 billion long-term) and interest expense ($276 million) in the context of lower commodity prices.
• Environmental Reserves: Assess the adequacy of accrued reserves for the 68 sites where remediation is probable, given the retroactive nature of environmental laws.
• Equistar Joint Venture: Confirm the accounting treatment and future cash flow implications of the 29.5% interest in Equistar Chemicals, LP.