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Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: OPC operates primarily in two segments: Oil and Gas (exploration, production, and marketing) and Chemicals (manufacturing and marketing of chlorine, caustic soda, and PVC). The company also holds significant equity investments in unconsolidated entities.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($2,960) minus Total Current Liabilities ($2,724) for 2004.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $693 million (15%) year-over-year, driven by higher crude oil prices, increased oil production, and higher chemical sales volumes and prices.
• Profitability: Net income rose 53% to $1.068 billion. The Oil and Gas segment contributed $1.564 billion in net income, while the Chemical segment contributed $135 million.
• Balance Sheet Shifts:
  • Receivables: Increased by $841 million to $1,995 million, largely due to the temporary discontinuation of a receivables sale program ($360 million impact) and higher sales prices.
  • Debt Reduction: In January 2004, the company redeemed all outstanding 8.16% Trust Preferred Securities ($453 million), reducing current liabilities and long-term debt obligations.
  • Cash Position: Cash and cash equivalents decreased by $300 million to $383 million, primarily due to the redemption of trust preferred securities and increased investing activities.
• Segment Performance:
  • Oil & Gas: Average crude oil sales prices increased significantly (e.g., U.S. crude rose from $29.15 to $34.02 per barrel for the six-month period). Production volumes increased to 571,000 BOE/day.
  • Chemicals: Earnings improved due to higher PVC and chlorine prices/volumes, partially offset by lower caustic soda prices and higher energy costs.

Guidance, Outlook, and Risks

• Outlook: Management expects third-quarter 2004 oil and gas production to remain at approximately the same level as the second quarter. Exploration expense is expected to be about $45 million. The chemical market upturn is expected to continue, leading to moderate margin improvement.
• Liquidity: The company maintains approximately $1.5 billion in available committed bank credit. Management believes cash on hand and operating cash flows are sufficient to fund operations, capital expenditures, and dividends.
• Legal and Environmental Contingencies:
  • Environmental Reserves: Total reserves are $353 million. The reasonably possible loss range could be up to $400 million beyond the accrued amount.
  • Legal Proceedings: The company is involved in numerous lawsuits and environmental proceedings (CERCLA). While management does not expect a material adverse effect, unfavorable resolutions could impact financial position.
  • Guarantees: Outstanding guarantees total approximately $400 million, primarily related to equity investees' debt.
• Accounting Changes: A potential FASB Staff Position regarding the classification of oil and gas mineral rights as intangible assets could require reclassification of approximately $544 million of assets, though management believes this would have no material effect on results of operations.

Investor Verification Checklist

• Receivables Quality: Verify the impact of the discontinued receivables sale program on future cash flow timing and working capital requirements.
• Commodity Price Sensitivity: Assess exposure to fluctuations in crude oil and natural gas prices, which significantly drive the Oil and Gas segment's earnings.
• Environmental Liability Exposure: Review the $353 million in environmental reserves and the potential for additional liabilities up to $400 million beyond current accruals.
• Debt Structure: Confirm the status of the $1.5 billion revolving credit facility and the impact of the redeemed trust preferred securities on future interest costs.
• Equity Investments: Monitor the performance of unconsolidated entities (e.g., Lyondell, Elk Hills Power LLC), which contributed significantly to income and cash flow adjustments.