OXY

Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OXY)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: Occidental operates in two primary segments: Oil and Gas (exploration, production, and marketing of crude oil and natural gas) and Chemicals (manufacturing of basic chemicals, vinyls, and performance chemicals). The company's strategy focuses on shifting assets to long-lived oil and gas reserves, maintaining financial discipline, and harvesting cash from the chemical segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales increased 3% to $13.985 billion, driven by higher natural gas prices and increased oil and gas trading volumes, partially offset by lower crude oil and chemical prices.
• Profitability: Net income declined 26% to $1.154 billion. The decrease was primarily due to a $412 million pre-tax write-down of the Equistar investment, a $272 million after-tax loss on the sale of a pipeline-owning entity, and lower chemical segment earnings.
• Segment Performance:
  • Oil & Gas: Earnings increased to $2.845 billion (from $2.417 billion) due to higher natural gas prices and production volumes, despite lower oil prices.
  • Chemicals: The segment reported a loss of $394 million (compared to $169 million income in 2000) due to weak demand, lower product prices, and the Equistar write-down.
• Balance Sheet: Total debt decreased significantly to $4.89 billion (from $6.36 billion in 2000) as the company used operating cash flow and asset sale proceeds to retire debt, including the extinguishment of Altura non-recourse debt.

Guidance, Outlook, and Risks

• 2002 Outlook:
  • Oil & Gas: Management expects significantly lower average gas price realizations in 2002 due to high inventory levels and lower demand. Oil prices are expected to remain volatile.
  • Chemicals: Industry operating rates in chlor-alkali/vinyls are expected to recover gradually. PVC growth is projected to average only 2.6% due to weak consumer confidence.
• Strategic Transactions: Occidental agreed in principle to sell its 29.5% interest in Equistar Chemicals, LP to Lyondell Chemical Company and purchase a ~21% equity interest in Lyondell. This transaction is expected to close in Q2 2002.
• Capital Expenditures: The 2002 capital spending budget is estimated at $1.1 billion, with approximately $1 billion allocated to oil and gas operations (prioritizing Qatar, Elk Hills, and the Permian Basin).
• Risks and Contingencies:
  • Commodity Prices: Results are highly sensitive to fluctuations in crude oil and natural gas prices.
  • Environmental: The company faces potential liabilities for environmental remediation at 126 sites. A $109 million charge was recorded in 2001 for remediation expenses.
  • Foreign Operations: Operations in Colombia were disrupted by terrorist attacks on pipelines. Ecuador tax authorities announced non-reimbursement of VAT payments, leading to legal action.

Investor Verification Checklist

• Equistar Transaction: Verify the final terms and closing date of the Equistar sale to Lyondell and the impact on future earnings.
• Commodity Price Sensitivity: Assess the impact of sustained low oil and gas prices on 2002 cash flow and debt service capabilities.
• Environmental Reserves: Review the adequacy of the $454 million environmental reserve and potential for additional remediation costs.
• Debt Maturity Profile: Confirm the refinancing of $199 million in debt maturing in 2002 and the status of the $2.1 billion committed credit lines.
• Chemical Segment Turnaround: Monitor the recovery of operating rates and pricing in the chlor-alkali and vinyls markets.