Occidental Petroleum Corporation: Q1 2013 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation operates through oil and gas, chemical, and midstream and marketing segments. This unaudited report covers the three months ended March 31, 2013, with comparisons to the three months ended March 31, 2012. The company had 805.6 million common shares outstanding at March 31, 2013.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $5.872 billion | $6.268 billion | Down 6% |
| Income before taxes and other items | $2.107 billion | $2.597 billion | Down 19% |
| Income from continuing operations | $1.359 billion | $1.560 billion | Down 13% |
| Net income | $1.355 billion | $1.559 billion | Down 13% |
| Diluted EPS | $1.68 | $1.92 | Down 13% |
| Operating cash flow | $2.712 billion | $2.765 billion | Down 2% |
| Capital expenditures | $2.070 billion | $2.412 billion | Down 14% |
Net income margin was approximately 23.1%, compared with 24.9% in Q1 2012. Income from continuing operations had a similar margin of approximately 23.1%. The company reported $2.203 billion of pretax segment and corporate operating earnings, implying a pretax operating margin of approximately 37.5% on net sales.
- Cash and cash equivalents increased to $2.140 billion from $1.592 billion at December 31, 2012.
- Total debt was approximately $7.624 billion, consisting of $600 million of current maturities and $7.024 billion of long-term debt. Estimated fair value of debt was approximately $8.2 billion.
- Occidental had a $2.0 billion undrawn credit facility expiring in 2016.
- Net cash provided by financing activities was $31 million, compared with $371 million of net cash used in Q1 2012. The prior-year period included $374 million of dividend payments; Q1 2013 did not include dividend payments because the fourth-quarter 2012 dividend was paid earlier.
- Dividends per common share increased to $0.64 from $0.54.
- Oil and gas production increased to 763,000 barrels of oil equivalent per day from 755,000; sales volumes increased slightly to 746,000 barrels of oil equivalent per day from 745,000.
Material changes versus the prior comparable period
- Lower oil and NGL prices and lower Middle East/North Africa volumes reduced oil and gas earnings to $1.920 billion from $2.504 billion. Higher DD&A rates also pressured results.
- Worldwide realized oil prices fell to $98.07 per barrel from $107.98, while realized NGL prices fell to $40.27 per barrel from $52.51. Domestic natural gas prices improved to $3.08 per Mcf from $2.84.
- Higher domestic production and lower domestic operating costs partially offset commodity-price pressure. Average oil and gas cash production costs declined to $13.93 per barrel of oil equivalent from $14.99 for full-year 2012.
- Chemical earnings declined to $159 million from $184 million because of weaker chlorinated-organics demand and pricing and higher natural gas costs, partly offset by higher caustic soda exports.
- Midstream and marketing earnings increased to $215 million from $131 million, mainly because of improved marketing and trading performance.
- Capital expenditures decreased to $2.070 billion, including $1.7 billion for oil and gas, from $2.412 billion, including $2.0 billion for oil and gas.
- The worldwide effective tax rate declined to 38% from 42%, including a benefit from relinquishment of an international exploration block.
- Property, plant and equipment increased to $52.981 billion from $52.064 billion at year-end 2012, primarily reflecting capital spending net of DD&A.
Guidance, outlook, risks and unusual items
- Management maintained its 2013 capital-spending estimate of $9.6 billion, focused on increasing oil production and maintaining returns above the cost of capital.
- Management expects cash on hand and operating cash flow to fund operating requirements, planned capital expenditures, dividends and debt payments. Actual results remain highly dependent on commodity prices and sales volumes.
- Occidental agreed to sell its interest in a Brazilian chemical joint venture. The investment had a book value of approximately $110 million, and the expected second-quarter 2013 sale price was approximately $275 million.
- Environmental remediation reserves totaled $332 million across 162 sites. Management expects to spend approximately half over the next three to four years and the remainder over the following 10 or more years. Reasonably possible additional environmental losses could be as high as $390 million.
- Other litigation reserves were not material, and management stated that other reasonably possible losses beyond recorded reserves were not expected to be material. Tax years remain subject to examination in various jurisdictions, including IRS review of federal refund claims for 2008 and 2009.
- Key disclosed risks include commodity-price volatility, production and exploration risks, project delays, cost inflation, regulatory and tax changes, environmental liabilities, litigation, geopolitical conditions, operational disruptions, weather and natural disasters, cyber attacks, and risk-management failures.
- The company held short derivative positions of approximately 17 million barrels of oil and 161 billion cubic feet of natural gas at March 31, 2013. Subsequent to quarter-end, it entered into purchase contracts for a substantial portion of these positions.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $9.6 billion 2013 capital-spending plan remains unchanged and is funded by operating cash flow.
- Sensitivity to commodity prices: management estimated quarterly pretax sensitivity of approximately $37 million per $1.00 per barrel change in oil prices, $7 million per $1.00 per barrel change in NGL prices, and $30 million per $0.50 per Mcf change in domestic gas prices.
- Progress and final economics of the Brazilian chemical joint-venture disposition expected in Q2 2013.
- Trends in Middle East/North Africa production, planned maintenance impacts, domestic volume growth, and DD&A rates.
- Environmental remediation spending, reserve adequacy, and potential additional losses of up to $390 million.
- Realized oil, NGL and natural gas prices, derivative exposures, and counterparty or collateral requirements.
- Future dividend timing and the company’s ability to maintain distributions while executing its capital program.