Occidental Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an integrated energy and chemicals company operating through oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $5.962 billion | $5.768 billion | $11.834 billion | $12.036 billion |
| Income from continuing operations | $1.327 billion | $1.332 billion | $2.686 billion | $2.892 billion |
| Net income | $1.322 billion | $1.328 billion | $2.677 billion | $2.887 billion |
| Diluted EPS | $1.64 | $1.64 | $3.32 | $3.55 |
| Dividends per share | $0.64 | $0.54 | $1.28 | $1.08 |
| Net margin | 22.2% | 23.0% | 22.6% | 24.0% |
- Net cash provided by operating activities was $6.225 billion for the first six months, compared with $5.958 billion in 2012.
- Capital expenditures were $4.280 billion, compared with $5.125 billion in 2012; approximately $3.4 billion was directed to oil and gas.
- Net cash used in investing activities was $4.299 billion. Financing activities used $449 million, primarily reflecting $517 million of dividends paid.
- Cash and cash equivalents increased to $3.069 billion at June 30, 2013, from $1.592 billion at December 31, 2012.
- Long-term debt was $7.026 billion and current maturities were $600 million. Total debt carrying value was approximately $7.6 billion; estimated fair value was approximately $7.8 billion.
- Occidental had an undrawn $2.0 billion credit facility expiring in 2016 and stated that cash on hand and operating cash flow should fund operations, planned capital expenditures, dividends, and debt payments.
- Total assets were $67.422 billion and total stockholders’ equity was $41.850 billion at June 30, 2013.
Material changes versus the prior comparable period
- Second-quarter net sales increased 3%, but net income decreased slightly and net margin declined. Six-month sales declined 2%, while net income declined 7% and diluted EPS declined from $3.55 to $3.32.
- Oil and gas segment earnings increased to $2.100 billion in the second quarter from $2.043 billion, but declined to $4.020 billion for six months from $4.547 billion. Second-quarter production increased to 772,000 BOE per day from 766,000 BOE per day.
- Worldwide oil and NGL prices were lower for the six-month period, while domestic natural gas prices improved. Oil and gas production costs declined to $13.66 per BOE for the first six months, compared with $14.99 per BOE for full-year 2012.
- Chemical segment earnings before the disposition gain declined to $144 million in the second quarter and $303 million for six months, compared with $194 million and $378 million, respectively, in 2012. Weak export markets and higher energy and feedstock costs were cited.
- Midstream and marketing earnings declined to $48 million in the second quarter from $77 million, but increased to $263 million for six months from $208 million.
- Operating cash flow increased despite lower net income, principally because of higher noncash depreciation, depletion and amortization and collection of an approximately $0.4 billion tax receivable.
Guidance, outlook, risks, and unusual items
- Management expected 2013 capital spending to be generally in line with its previous estimate of $9.6 billion, while noting that capital-efficiency initiatives could result in lower spending.
- In May 2013, Occidental sold its Carbocloro investment for approximately $270 million of net proceeds and recorded a $131 million pretax gain, or an $85 million after-tax gain.
- Occidental recorded a $55 million pretax charge, or a $34 million after-tax charge, related to former Executive Chairman Ray Irani’s employment and post-employment benefits and the termination of certain employees and consulting arrangements.
- Environmental remediation reserves totaled $327 million across 161 sites. Management estimated reasonably possible additional environmental losses of up to $375 million and expects most spending to occur over several years.
- Other litigation reserves were not material, and management believed reasonably possible losses beyond recorded reserves would not materially affect consolidated financial position or results of operations.
- Key risks include commodity-price volatility, production and project execution, higher costs, economic conditions, political and insurgent activity, environmental and litigation liabilities, regulatory and tax changes, weather, facility disruptions, cyber attacks, and failures of risk management.
- Derivative positions generated net losses recognized in sales of $75 million in the second quarter and $16 million for the first six months. The company stated that a substantial portion of outstanding positions was supported by production or purchase contracts.
- Disclosure controls and procedures were evaluated as effective as of June 30, 2013, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commodity prices, particularly worldwide oil and NGL prices, sustain the decline reflected in first-half results and how this affects cash flow and capital returns.
- Progress against the approximately $9.6 billion 2013 capital-spending plan and the effect of capital-efficiency initiatives on production growth.
- The sustainability of lower oil and gas production costs and the impact of higher DD&A rates.
- Exposure to international production disruptions, including maintenance requirements and insurgent activity in Colombia.
- The future performance of the chemical segment amid weak export demand and elevated energy and feedstock costs.
- Environmental reserves, potential additional losses of up to $375 million, and developments in tax audits or litigation.
- Liquidity after capital expenditures, dividends, and any future acquisitions or debt-market activity.