Occidental Petroleum Corporation — 2019 Form 10-K Summary
Business context and reporting period
Occidental Petroleum Corporation (NYSE: OXY) reported for the fiscal year ended December 31, 2019. The filing includes fourth-quarter information and reflects the acquisition of Anadarko Petroleum Corporation, completed August 8, 2019. Occidental operates through oil and gas, chemical, and marketing and midstream segments.
The Anadarko acquisition materially expanded Occidental’s U.S. oil and gas position, particularly in the Permian Basin, DJ Basin, Gulf of Mexico and Powder River Basin. WES was consolidated from the acquisition date through December 31, 2019, then converted to equity-method accounting following a loss of control.
Financial performance and key metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $20.393 billion | $17.824 billion |
| Income from continuing operations | $(507) million | $4.131 billion |
| Net loss attributable to common stockholders | $(985) million | $4.131 billion income |
| Diluted EPS | $(1.22) | $5.39 |
| Operating cash flow | $7.375 billion | $7.669 billion |
| Capital expenditures | $6.355 billion | $4.975 billion |
| Total assets | $109.330 billion | $43.854 billion |
| Long-term debt, net | $38.537 billion | $10.201 billion |
| Cash and cash equivalents | $3.032 billion | $3.033 billion |
- Annual net sales increased approximately 14%, primarily from acquired and higher domestic production volumes, partly offset by lower commodity prices and weaker chemical pricing.
- The reported net loss included significant acquisition, financing, impairment, tax and WES accounting items. Revenue-to-net-loss margin was approximately negative 4.8% on a consolidated basis and negative 2.6% for continuing operations.
- Oil and gas segment earnings were $2.352 billion, compared with $2.442 billion in 2018; chemical segment earnings were $799 million, compared with $1.159 billion; marketing and midstream earnings were $241 million, compared with $2.802 billion.
- Ongoing oil and gas production increased 51% to 996 thousand barrels of oil equivalent per day, primarily from Anadarko assets and higher legacy Permian Resources production.
- Worldwide realized oil prices declined 8% to $56.09 per barrel; NGL prices declined 35% to $17.06 per barrel; worldwide gas prices declined 10% to $1.45 per Mcf.
- Proved reserves increased to 3,827 MMBOE from 2,752 MMBOE, primarily from 1,311 MMBOE acquired with Anadarko. The increase was partly offset by 200 MMBOE of negative revisions, primarily related to prices, development plans and Permian reservoir performance.
Fourth-quarter performance
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Net sales | $6.282 billion | $4.762 billion |
| Income from continuing operations | $(1.036) billion | Not clearly provided in the quarterly table |
| Net loss attributable to common stockholders | $(1.339) billion | $706 million income |
| Diluted EPS | $(1.50) | $0.93 |
| Total segment earnings | $271 million | $1.043 billion |
Fourth-quarter results were adversely affected by the approximately $1 billion WES loss-of-control charge, acquisition-related costs, higher interest expense and other unusual items.
Liquidity, debt and capital allocation
- Occidental issued $13.0 billion of senior unsecured notes and borrowed $8.8 billion under term loans to fund part of the Anadarko acquisition. It also assumed approximately $11.9 billion of Anadarko debt.
- Approximately $7.0 billion of long-term debt was repaid during 2019, including most of the term loans, using asset-sale proceeds and available cash.
- Debt principal outstanding totaled approximately $37.4 billion at year-end, with $6.4 billion due in 2021, $4.7 billion in 2022, $1.2 billion in 2023 and $25.1 billion thereafter.
- Occidental had a $5.0 billion revolving credit facility and had not drawn on it at year-end. Management reported substantial covenant capacity for additional unsecured borrowings, dividends and share purchases.
- Cash flow was pressured by the acquisition and $6.355 billion of capital expenditures. Net cash used in investing activities was $29.027 billion, while financing activities provided $22.193 billion.
- The common dividend was $3.14 per share for 2019. The annualized dividend rate disclosed at filing was $3.16 per share.
Material changes versus the prior comparable period
- Anadarko was acquired for total consideration of approximately $35.704 billion, including $29.002 billion of cash and $6.679 billion of Occidental common stock.
- Assets increased from $43.854 billion to $109.330 billion and net long-term debt increased from $10.201 billion to $38.537 billion.
- Oil and gas production and sales volumes increased substantially, while realized commodity prices declined.
- Chemical earnings fell because of lower caustic soda and PVC pricing and weaker demand, partly offset by lower feedstock and energy costs.
- Marketing and midstream earnings declined sharply, reflecting lower Midland-to-Gulf Coast spreads, non-cash mark-to-market effects, asset sales and the $1 billion WES accounting charge.
- Occidental completed the sale of Mozambique LNG assets for approximately $4.2 billion in September 2019 and classified remaining Africa Assets as held for sale. The South Africa assets were sold in January 2020.
- Occidental entered into a Permian Basin joint venture with Ecopetrol, receiving $750 million in cash and up to $750 million of carried capital commitments, and recognized a $563 million gain.
Guidance, outlook, commentary and risks
- Management expected 2020 capital spending of approximately $5.3 billion, with about 40% allocated to Permian Resources development and approximately 8% to Permian EOR expansion.
- Long-term strategy targets production growth of up to 5%, continued dividend support, free-cash-flow growth, debt reduction and maintenance of investment-grade credit metrics.
- Management expected to fund liquidity needs through cash on hand, operating cash flow, monetization of non-core assets or investments and, if necessary, additional capital issuance.
- Occidental hedged a portion of expected 2020 oil production. At December 31, 2019, derivatives covered approximately 350 thousand barrels per day; 2020 collars covered 128.1 million barrels with a $55 purchased put and $45 sold put, based on Brent pricing.
- Principal risks include commodity-price volatility, high post-acquisition leverage, integration execution, asset-sale completion, reserve estimation, impairment risk, environmental liabilities, climate regulation, political and operational disruption, cyber risk and interest-rate exposure.
- The company had $20.7 billion of purchase obligations, $1.197 billion of environmental remediation liabilities and a reasonably possible additional environmental loss range of up to $1.1 billion.
- Anadarko’s Tronox tax matter could require repayment of approximately $925 million plus approximately $189 million of accrued interest if the IRS successfully disallows the deduction. The company had recorded a liability for this exposure.
- Occidental’s auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included environmental liabilities, proved reserves and valuation of Anadarko oil and gas properties.
Most important facts for investors to verify
- Whether Anadarko integration, expected synergies and planned divestitures progress sufficiently to reduce leverage.
- The timing and terms of debt maturities, refinancing needs and any changes to credit ratings or investment-grade status.
- Actual 2020 commodity prices, production volumes, hedge settlements and free cash flow relative to the $5.3 billion capital plan.
- The final outcome of the WES ownership reduction and its effect on equity-method earnings, distributions and cash generation.
- The resolution of the Tronox tax dispute, environmental matters and other acquired Anadarko contingencies.
- Whether proved reserve additions and future development spending support the reported reserve base, particularly in the Permian Basin.