Occidental Petroleum Corporation — Q3 2010 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2010. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The company filed the report on November 4, 2010; 812.6 million common shares were outstanding at September 30, 2010.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $4.896 billion | $4.104 billion | $14.428 billion | $10.864 billion |
| Net income attributable to common stock | $1.191 billion | $927 million | $3.318 billion | $1.977 billion |
| Diluted EPS | $1.46 | $1.14 | $4.07 | $2.43 |
| Net margin | 24.3% | 22.6% | 23.0% | 18.2% |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $6.607 billion | $3.843 billion |
- Income before taxes and other items was $1.965 billion in Q3 and $5.546 billion for the first nine months. The worldwide effective tax rate was 41% in both periods in 2010, compared with 37% and 39% in the comparable 2009 periods.
- At September 30, 2010, cash and cash equivalents were $2.109 billion, compared with $1.230 billion at December 31, 2009. Unused committed bank credit totaled approximately $1.5 billion.
- Long-term debt was $2.512 billion, compared with $2.557 billion at December 31, 2009; current maturities declined to zero from $239 million. Estimated fair value of total debt was approximately $2.9 billion versus carrying value of $2.5 billion.
- Total assets were $47.503 billion and total equity was $31.844 billion at September 30, 2010.
- Capital expenditures were $2.816 billion and payments for asset and business purchases were $1.892 billion during the first nine months. Management estimated full-year 2010 capital spending at approximately $4.4 billion.
- Cash dividends paid were $848 million during the first nine months; dividends per common share were $0.38 in Q3 and $1.09 year to date.
Material changes versus the prior comparable periods
- Q3 net sales increased 19% and net income attributable to common stock increased 28%; nine-month sales increased 33% and net income increased 68%.
- Results benefited from higher crude oil and natural gas prices and volumes, improved chemical margins and volumes, and stronger trading, marketing, and pipeline results.
- Worldwide realized crude oil price increased to $70.71 per barrel in Q3 from $62.79; domestic natural gas realized price increased to $4.20 per Mcf from $3.04.
- Oil and gas production increased to 751,000 BOE per day in Q3 from 710,000 BOE per day, primarily due to Bahrain and higher Mukhaizna production. Nine-month production increased to 751,000 BOE per day from 717,000 BOE per day.
- Oil and gas segment earnings increased to $1.745 billion in Q3 from $1.464 billion and to $5.417 billion for nine months from $3.092 billion.
- Chemical segment earnings increased to $189 million in Q3 from $72 million but declined to $327 million for nine months from $356 million. Midstream, marketing and other earnings increased to $163 million in Q3 from $77 million and to $270 million for nine months from $154 million.
- Higher operating costs included the full expensing of injected carbon dioxide costs beginning in 2010, higher field support and maintenance costs, higher chemical energy and feedstock costs, and higher depreciation, depletion and amortization.
- Prior-year nine-month results included after-tax charges of $41 million for severance, railcar leases, and rig termination costs.
Outlook, risks, contingencies, and unusual items
- Management stated that cash on hand and operating cash flow should be sufficient for operating needs, planned capital expenditures, dividends, and debt payments. The filing does not provide formal earnings guidance.
- Occidental agreed to acquire approximately $2.1 billion of producing properties, primarily in the Permian and Midcontinent regions, signed a technical service contract for Iraq’s Zubair Field, and obtained a ten-year extension of Argentine hydrocarbon concessions.
- Environmental remediation reserves totaled $368 million across 169 sites, including $82 million classified as current. Management estimated reasonably possible additional environmental loss of up to $375 million.
- Management stated that outstanding lawsuits, claims, tax audits, and other contingencies were not expected to have a material adverse effect after reserves, while acknowledging that unfavorable resolutions substantially exceeding reserves could be material.
- Key risks include commodity-price volatility, production and exploration execution, cost inflation, acquisitions and development delays, environmental regulation, litigation, political and security conditions, operational disruptions, derivatives and trading risks, taxes, and regulatory changes.
- Cash-flow hedges covered approximately 2% of crude oil production; approximately $72 million of net after-tax derivative losses in accumulated other comprehensive income were expected to be reclassified into income over the following twelve months.
- Phibro trading operations were subject to limits on notional trade value, value at risk, and credit exposure. Management concluded the unit was not reasonably likely to have a material adverse effect.
- Disclosure controls and procedures were reported effective as of September 30, 2010, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the sustainability of earnings and cash flow at lower oil and natural gas prices; management estimated a quarterly pretax sensitivity of approximately $39 million per $1 change in oil price and $27 million per $0.50 change in domestic natural gas prices.
- Track execution, funding, and returns on the approximately $2.1 billion of 2010 acquisitions and the $4.4 billion full-year capital-spending plan.
- Review environmental reserves, potential additional exposure of up to $375 million, and the timing of expected remediation expenditures.
- Assess the effect of higher production costs, carbon dioxide accounting, DD&A rates, and the 41% effective tax rate on future margins.
- Monitor derivative positions, collateral requirements, trading limits, and the planned recognition of accumulated hedge losses.
- Review pending shareholder litigation, tax examinations, and other contingencies for developments beyond the company’s recorded reserves.