Occidental Petroleum Corporation — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2020. Occidental operates through oil and gas, chemical, and midstream and marketing segments. Results include assets acquired in the August 2019 Anadarko acquisition and reflect the COVID-19 pandemic, lower energy demand, volatile commodity prices, and related cost and capital reductions.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Net sales | $2.9 billion | $9.5 billion |
| Income (loss) from continuing operations | $(6.7) billion | $(8.7) billion |
| Net income (loss) | $(8.1) billion | $(10.1) billion |
| Net loss attributable to common stockholders | $(8.4) billion | $(10.6) billion |
| Diluted loss per common share | $(9.12) | $(11.68) |
| Operating cash flow | Not separately provided for the quarter | $1.7 billion, including discontinued operations |
| Capital expenditures | Not separately provided for the quarter | $1.7 billion |
Second-quarter loss from continuing operations represented a substantially negative operating margin, driven primarily by $6.4 billion of continuing-operations asset impairments. Six-month continuing-operations loss also included the effects of a $1.2 billion WES goodwill impairment, a $665 million loss on interest-rate swaps, and Anadarko acquisition-related costs.
- Cash and cash equivalents were $1.0 billion at June 30, 2020; total cash, cash equivalents, and restricted cash were $1.2 billion.
- Total debt and finance leases were $38.5 billion, including $2.5 billion of current maturities. Long-term debt, net, was $36.0 billion.
- Stockholders’ equity declined to $23.3 billion from $34.2 billion at December 31, 2019, primarily due to six-month net losses and dividends.
- Net cash used in investing activities was $2.1 billion and net cash used in financing activities was $2.0 billion for the first six months.
- Worldwide average oil sales volumes from continuing operations increased to 1,416 MBOED in the second quarter from 692 MBOED in the prior-year quarter, primarily from the Anadarko acquisition. Worldwide realized oil prices fell to $23.17 per barrel from $58.91.
Material changes versus the prior comparable periods
- Second-quarter net sales declined 34% year over year to $2.9 billion, while six-month net sales increased 13% to $9.5 billion because acquired production more than offset lower commodity prices.
- Occidental moved from $635 million of second-quarter continuing-operations income in 2019 to a $6.7 billion loss in 2020. Six-month continuing-operations income changed from $1.3 billion to an $8.7 billion loss.
- Oil and gas segment results changed from $726 million of earnings to a $7.7 billion loss in the second quarter, primarily because of impairments and lower realized prices.
- Chemical segment earnings declined to $108 million from $208 million in the second quarter and to $294 million from $473 million for the six-month period, reflecting lower caustic soda prices and volumes.
- Midstream and marketing changed from $331 million of second-quarter earnings to a $7 million loss and from $610 million of six-month earnings to a $1.3 billion loss. The six-month loss included WES-related impairments and other charges.
- Second-quarter oil and gas impairments totaled approximately $6.4 billion in continuing operations. Including Ghana discontinued operations, total second-quarter pre-tax oil and gas impairments were approximately $8.6 billion.
- The common dividend was reduced to $0.01 per share from $0.79 per share effective July 2020. Series A preferred dividends for the first and second quarters were paid in common stock rather than cash, preserving approximately $400 million of liquidity.
- Occidental changed its Algeria assets from held-for-sale/discontinued operations to continuing operations after the planned sale was abandoned and recorded a $931 million impairment. Ghana remained held for sale and generated a $1.4 billion after-tax discontinued-operations impairment.
Guidance, outlook, risks, contingencies, and unusual items
- Management reduced the 2020 capital budget to $2.4 billion–$2.6 billion from $5.2 billion–$5.4 billion and expects more than $1.0 billion of cash savings from operating and corporate cost reductions.
- Remaining 2020 capital expenditures were expected to be $700 million–$900 million, with lower production volumes expected during the second half of the year.
- In July 2020, Occidental issued $2.0 billion of senior notes due 2025, 2027, and 2030 and used the proceeds to repurchase approximately $2.0 billion of debt maturities due primarily in 2021. After the tender offers, management reported approximately $4.4 billion of 2021 maturities and $4.7 billion of 2022 maturities.
- Occidental reported approximately $5.0 billion of available revolving-credit capacity and expected cash on hand and available credit to cover obligations for the next 12 months. Management cautioned that prolonged COVID-19 effects or lower oil prices could require additional liquidity or refinancing.
- Credit ratings were non-investment grade as of June 30, 2020: BB+ from S&P, BB from Fitch, and Ba2 from Moody’s. Further downgrades could increase financing costs and collateral requirements.
- Further prolonged deterioration in commodity prices could cause additional material non-cash impairments. The carrying value of Occidental’s WES equity investment was $4.9 billion and remained subject to potential impairment if WES’s unit price stayed materially below its 2019 year-end level.
- Occidental had approximately $1.5 billion of interest-rate swaps with a net liability of approximately $1.6 billion after collateral. The company also faced uncertainty from the expected discontinuation of LIBOR after 2021.
- Environmental remediation liabilities totaled $1.16 billion at 177 sites, with reasonably possible additional losses of up to $1.1 billion. Other legal reserves were not material, but pending matters include the Andes arbitration claim, Sanchez bankruptcy-related contract issues, and consolidated securities class actions related to the Anadarko acquisition and related offerings.
- Occidental had recorded no tax benefit for an $881 million tentative refund disputed by the IRS and was pursuing the matter in U.S. Tax Court. It had received approximately $170 million of CARES Act-related tax refunds and expected an additional $25 million.
Most important facts for investors to verify
- Whether oil and gas prices, production volumes, and demand recover sufficiently to support cash flow and avoid additional impairments.
- The company’s ability to fund approximately $4.4 billion of reported 2021 maturities and $4.7 billion of 2022 maturities through free cash flow, asset sales, refinancing, or revolver capacity.
- Execution of the 2020 capital and operating-cost reductions and the effect of reduced capital spending on production and proved reserves.
- The value and impairment outlook for the $4.9 billion WES equity investment.
- Progress and proceeds from planned asset divestitures, including the marketing of Ghana assets.
- Potential cash requirements from environmental liabilities, litigation, tax disputes, derivative collateral, and preferred-stock dividends.
- Subsequent-period effects of the July 2020 debt issuance, tender offers, common-stock warrant distribution, and preferred-dividend share issuance.