Business Context and Reporting Period
Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: OPC operates primarily in the Oil and Gas and Chemical segments. The reporting period includes significant asset dispositions, including the sale of a Russian joint venture interest and exploration properties in West Africa, as well as transactions with BP p.l.c. that resulted in the classification of Horn Mountain and Pakistan operations as discontinued.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Net Sales | $4,841 million | $13,267 million | $13,137 million |
| Net Income | $1,324 million | $3,948 million | $3,261 million |
| Diluted EPS | $1.58 | $4.69 | $3.78 |
| Operating Cash Flow | N/A | $4,324 million | $4,808 million |
| Capital Expenditures | N/A | $2,510 million | $1,977 million |
| Cash and Equivalents | $1,455 million (Sep 30, 2007) | N/A | N/A |
| Long-Term Debt | $1,748 million (Sep 30, 2007) | N/A | $2,619 million (Dec 31, 2006) |
Segment Performance (Nine Months 2007):
- Oil and Gas: Net sales of $9,597 million; Pretax operating profit of $5,719 million.
- Chemical: Net sales of $3,530 million; Pretax operating profit of $507 million.
Material Changes vs. Prior Period
Revenue and Profit: Net income for the nine months ended September 30, 2007, increased to $3.948 billion from $3.261 billion in the prior year period. This increase was driven by higher oil and gas production volumes, gains on asset dispositions, and litigation settlements, partially offset by lower chemical margins and higher operating costs.
Asset Dispositions and Gains:
- Recorded an after-tax gain of $412 million from the sale of a Russian joint venture interest.
- Recorded an after-tax gain of $226 million from transactions with BP (Horn Mountain and Pakistan operations).
- Recorded an after-tax gain of $208 million from the sale of Lyondell Chemical Company stock.
- Recorded a pre-tax gain of $103 million from the sale of West Africa exploration properties.
Debt Reduction: Long-term debt decreased by approximately $871 million compared to December 31, 2006, due to cash tender offers and the redemption of Vintage senior notes. This resulted in a pre-tax interest expense charge of $167 million.
Chemical Segment: Earnings declined due to lower margins on polyvinyl chloride resins.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capital Allocation:
- Management expects to spend approximately $3.5 billion on the 2007 capital spending program.
- Share repurchases continue, with $910 million spent in the first nine months of 2007 to repurchase 17.4 million shares.
- Quarterly dividend increased to $0.25 per share in July 2007.
- Management believes cash on hand and operating cash flow are sufficient to fund operations, capital expenditures, and dividends.
Risks and Contingencies:
- Nicaragua Litigation: OCC faces lawsuits alleging personal injury from pesticide exposure. Judgments totaling approximately $897 million have been entered against defendants, but OCC believes these are unenforceable in the U.S. and has appealed.
- Environmental Liabilities: Total reserves are $436 million. Management estimates a reasonably possible loss range of up to $400 million beyond accrued amounts.
- Market Risk: Results are dependent on global commodity pricing fluctuations (oil and gas) and production risks.
Unusual Items: The financial results include significant one-time gains from asset sales and litigation settlements, as well as a $167 million pre-tax charge for debt repurchases. Discontinued operations contributed $318 million to net income for the nine-month period.
Investor Verification Checklist
- Asset Sale Proceeds: Verify the realization of cash proceeds from the Russian joint venture sale ($485 million) and Lyondell stock sale ($672 million).
- Debt Covenant Compliance: Confirm the company's capacity for additional borrowing ($52 billion) and dividend payments ($20 billion) under the most restrictive covenants.
- Environmental Exposure: Review the $436 million environmental reserve and the potential for an additional $400 million in losses.
- Nicaragua Case Status: Monitor the enforcement actions in Florida regarding the Nicaraguan judgments and the company's jurisdictional defenses.
- Chemical Margins: Assess the sustainability of the Chemical segment's earnings given the noted decline in polyvinyl chloride resin margins.
- Capital Expenditure Execution: Track the $3.5 billion 2007 capital spending plan against actual cash outflows.