Occidental Petroleum Corporation — 2Q18 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an integrated energy company operating through oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $4.083 billion | $3.060 billion | $7.846 billion | $6.017 billion |
| Net income | $848 million | $507 million | $1.556 billion | $624 million |
| Diluted EPS | $1.10 | $0.66 | $2.02 | $0.81 |
| Net margin | 20.8% | 16.6% | 19.8% | 10.4% |
| Operating cash flow | Not separately provided | Not separately provided | $2.765 billion | $2.354 billion |
- Pre-tax income was $1.072 billion in the second quarter and $2.056 billion for the first six months. The effective tax rate was 26% and 29%, respectively, compared with 36% and 37% in the prior-year periods.
- Segment earnings for the second quarter were $780 million in oil and gas, $317 million in chemicals, and $250 million in midstream and marketing. Six-month segment earnings were $1.530 billion, $615 million, and $429 million, respectively.
- Capital expenditures were $2.319 billion in the first six months, including approximately $2.1 billion for oil and gas. Investing cash use was $2.286 billion, while financing cash use was $789 million.
- Cash and cash equivalents were $1.362 billion at June 30, 2018, down from $1.672 billion at December 31, 2017. The company stated that liquidity needs are expected to be funded through cash, operating cash flow, asset monetizations, borrowings, and, if necessary, additional capital issuance.
- Long-term debt was $10.312 billion at June 30, 2018, compared with $9.328 billion at year-end 2017. The company issued $1.0 billion of 4.2% senior notes due 2048 and repaid $500 million of notes maturing in February 2018.
- Occidental had a new $3.0 billion five-year revolving credit facility and reported compliance with its financing covenants. The filing states that substantial capacity remained for additional unsecured borrowings, dividends, and stock acquisitions.
- Dividends were $0.77 per share in the second quarter and $1.54 per share for the first six months. Cash dividends paid were $1.185 billion in the first six months.
Material changes versus the prior comparable period
- Second-quarter net sales increased 33% and net income increased 67% year over year. Six-month net sales increased 30% and net income increased 149%.
- Results benefited from higher crude oil prices, higher domestic production, lower Permian Resources depreciation rates, improved crude oil marketing spreads, higher caustic soda prices, lower chemical input costs, and the Geismar plant startup.
- Worldwide realized crude oil prices increased to $63.12 per barrel in the second quarter from $46.55, while worldwide realized NGL prices increased to $27.21 per barrel from $18.90. Domestic realized natural gas prices declined to $1.49 per Mcf from $2.23.
- Average daily production increased to 639,000 barrels of oil equivalent in the second quarter from 601,000, primarily because Permian Resources production increased by more than 45%.
- The 2017 comparison included a $510 million pre-tax gain from the sale of South Texas operations and a $94 million non-cash fair-value gain on the Plains equity investment. No comparable items were recorded in 2018.
- Assets held for sale increased to $1.664 billion from $474 million, primarily reflecting non-core upstream and midstream assets. Accounts receivable and accounts payable also increased, largely due to higher oil prices, volumes, and third-party purchases.
- Occidental adopted ASC 606 revenue recognition using the modified retrospective method without a material impact on opening retained earnings or 2018 revenue. It also early adopted guidance permitting reclassification of stranded tax effects, transferring $58 million from accumulated other comprehensive income to retained earnings.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide quantitative full-year production, earnings, capital-spending, or commodity-price guidance.
- On August 8, 2018, Occidental announced the sale of non-core domestic midstream assets, including the Centurion pipeline and storage system, the Southeast New Mexico gathering system, and the Ingleside Crude Terminal. A substantial portion was classified as held for sale at June 30.
- In July 2018, Occidental acquired a Louisiana power and steam cogeneration facility for $443 million, payable in three installments during 2018.
- Environmental remediation reserves totaled $871 million across 148 sites. Management estimated reasonably possible additional environmental losses of up to $1.1 billion beyond recorded reserves.
- Environmental matters include the Diamond Alkali Superfund Site and other sites formerly indemnified by Maxus, which filed for bankruptcy. Occidental has pursued reimbursement claims against other potentially responsible parties.
- Other lawsuits and claims were not material to the balance sheet based on recorded reserves, but unfavorable outcomes could materially affect results or cash flows in a particular period. A separate arbitration claim by Andes Petroleum seeks 40% of Occidental’s Ecuador arbitration recovery; Occidental disputes the claim.
- Key forward-looking risks include oil and gas price volatility, production and reserve uncertainty, project execution, environmental liabilities, litigation, regulation, geopolitical events, operational disruptions, cyberattacks, tax changes, and the ability to complete planned acquisitions or dispositions.
- Commodity derivatives had a net crude oil short position of approximately 45 million barrels and a net natural gas short position of approximately 57 Bcf at June 30, 2018. The filing states that no material changes occurred in reported market-risk exposures.
Most important facts for investors to verify
- Whether higher oil prices and Permian production growth can offset lower domestic natural gas realizations and sustain operating cash flow.
- The cash-flow effect, timing, and final proceeds from the announced midstream asset sale and other planned asset monetizations.
- Capital-spending requirements and whether operating cash flow will continue to cover capital expenditures and the dividend.
- Debt levels, refinancing needs, interest costs, and continued compliance with financing covenants.
- The ultimate cost of environmental remediation, including potential losses beyond the $871 million reserve and the estimated $1.1 billion range of additional exposure.
- Execution and financing of the $443 million cogeneration facility acquisition and the company’s future development program.
- Exposure to commodity prices, derivative positions, international operations, tax matters, and the Andes arbitration claim.