Occidental Petroleum Corporation — FY2017 Form 10-K
Business context and reporting period
Occidental Petroleum Corporation reported for the fiscal year ended December 31, 2017, with fourth-quarter results included. The company operates through three segments: oil and gas, chemicals (OxyChem), and midstream and marketing. Its principal oil and gas regions are the Permian Basin, Oman, Qatar, the United Arab Emirates and Colombia.
Financial performance and key metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $12.508 billion | $10.090 billion |
| Income from continuing operations | $1.311 billion | $(1.002) billion |
| Net income attributable to common stock | $1.311 billion | $(574) million |
| Diluted EPS | $1.70 | $(0.75) |
| Operating cash flow from continuing operations | $4.996 billion | $2.519 billion |
| Capital expenditures | $3.599 billion | $2.717 billion |
| Cash and cash equivalents | $1.672 billion | $2.233 billion |
| Long-term debt, net | $9.328 billion | $9.819 billion |
| Total assets | $42.026 billion | $43.109 billion |
Net income margin was approximately 10.5%, compared with a loss in 2016. Operating cash flow exceeded capital expenditures by approximately $1.4 billion. Cash dividends paid were $2.346 billion, and dividends declared totaled $3.06 per common share for the year.
Fourth-quarter net sales were $3.492 billion, net income attributable to common stock was $497 million, and diluted EPS was $0.65. Fourth-quarter results included a $55 million pre-tax gain on a Permian acreage sale and $397 million of impairment and related charges on non-core Permian acreage; midstream results also included $120 million of charges related to idled facilities.
Segment results and operating indicators
- Oil and gas: Segment earnings were $1.111 billion, versus a $636 million loss in 2016. Results benefited from higher realized prices and production from ongoing operations, but included $655 million of asset-sale gains and $401 million of impairment and related charges. Ongoing production increased 3% to 594,000 BOE per day; Permian Resources production increased 14% to 141,000 BOE per day.
- Chemical: Segment earnings increased to $822 million from $571 million, supported by higher caustic soda pricing, improved vinyls margins, higher volumes and income from the Ingleside ethylene cracker joint venture.
- Midstream and marketing: Segment earnings were $85 million, compared with a $381 million loss in 2016. Improvement reflected stronger marketing margins, higher NGL prices, higher throughput and a full year of Ingleside Crude Terminal operations. Results included a $94 million non-cash fair-value gain on the Plains Pipeline investment and $120 million of impairment charges.
Year-end proved reserves increased 8% to 2.598 billion BOE from 2.406 billion BOE. Proved undeveloped reserves increased to 670 million BOE from 550 million BOE.
Material changes versus the prior comparable period
- Sales rose approximately 24%, primarily because worldwide realized oil prices increased 26% and NGL prices increased materially.
- The company returned to profitability from a 2016 loss, aided by higher commodity prices, improved operating performance and lower impairment charges.
- Operating cash flow nearly doubled, while capital spending increased $882 million, principally for Permian Basin development.
- Occidental completed the sale of its South Texas operations for approximately $500 million of proceeds and a $500 million pre-tax gain, sold additional non-core Permian acreage, and acquired additional interests and operatorship in Seminole-San Andres CO2-EOR properties for approximately $600 million.
- OxyChem’s 1.2-billion-pound-per-year Ingleside ethylene cracker began commercial operations in the first quarter of 2017; the Geismar expansion began producing 4CPe in December.
- Tax Reform produced a one-time, non-cash benefit of $583 million from remeasurement of deferred tax liabilities. The reported worldwide effective tax rate was 1%; excluding impairments, tax-rate changes and other nonrecurring items, management estimated an effective rate of 37%.
Guidance, outlook, commentary and risks
Management expects 2018 capital spending of approximately $3.9 billion, with a substantial portion directed to Permian Resources and Permian EOR. Its short-term plan is designed to maintain production and sustain the dividend at $40 WTI; at $50 WTI, management expects additional capital to support 5% to 8% production growth and dividend growth. Management also expects 2018 oil prices to exceed the 2017 average.
- Expansion of the Ingleside Crude Terminal is expected to increase capacity to approximately 750,000 barrels per day and storage to 6.8 million barrels by the end of 2019; VLCC capability was expected by the fourth quarter of 2018.
- Key risks include oil, NGL and natural gas price volatility; chemical feedstock and product-margin volatility; operational disruptions; reserve-estimation uncertainty; exploration and development execution; political instability and contract risks in international operations; environmental liabilities; climate-related regulation; cybersecurity; litigation; and possible future asset impairments.
- Environmental remediation reserves totaled $865 million across 148 sites, with reasonably possible additional losses estimated at up to $1.1 billion. The company expects approximately $137 million of environmental compliance capital expenditures in 2018.
- Total contractual obligations were $21.162 billion, including $9.907 billion of debt, $8.095 billion of purchase obligations and $1.068 billion of operating leases. A $500 million senior-note maturity was due in 2018.
- In January 2018, Occidental replaced its undrawn $2.0 billion revolving facility with a new five-year, $3.0 billion facility maturing in 2023.
Important facts for investors to verify
- Reconcile reported earnings to recurring operating performance, particularly the $655 million of asset-sale gains, $545 million of impairment and related charges, the $583 million Tax Reform benefit and the $94 million Plains investment gain.
- Assess whether Permian production growth and the $3.9 billion 2018 capital program can be funded at the stated $40 to $50 WTI thresholds while sustaining dividend growth.
- Review debt maturities, purchase obligations and liquidity after the 2018 revolving-credit replacement.
- Evaluate reserve growth assumptions, especially the 670 million BOE of proved undeveloped reserves and the planned $8 billion of related Permian development costs over five years.
- Monitor environmental exposure, including the Maxus bankruptcy-related sites, the $865 million recorded remediation reserve and the potential for up to $1.1 billion of additional losses.
- Confirm the effect of Tax Reform as provisional amounts are updated and further guidance is issued.