Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1997, for Occidental Petroleum Corporation (Occidental). The company operates primarily in three divisions: Oil and Gas, Natural Gas Transmission, and Chemicals. As of June 30, 1997, there were 331,265,678 shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 1997 | Six Months Ended June 30, 1996 |
|---|---|---|
| Net Sales and Operating Revenues | $5,478 | $4,979 |
| Net Income | $337 | $315 |
| Earnings Applicable to Common Stock | $291 | $269 |
| Primary EPS (Diluted) | $0.88 ($0.84) | $0.84 ($0.82) |
| Operating Cash Flow | $568 | $746 |
| Capital Expenditures | ($686) | ($508) |
| Long-Term Debt (net) | $4,743 | $4,511 |
| Cash and Cash Equivalents | $331 | $279 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by approximately 10% ($499 million) compared to the prior year, driven by higher revenues across all three operating divisions.
- Profitability: Net income rose 7% to $337 million. However, second-quarter net income declined to $158 million from $181 million in the prior year due to lower oil and gas prices and reduced gas sales margins, partially offset by the absence of a $130 million litigation settlement recorded in 1996.
- Environmental Costs: Environmental remediation expense dropped significantly to $17 million from $88 million in the prior year. The 1996 figure included a $75 million charge for additional reserves.
- Cash Flow: Operating cash flow decreased by $178 million to $568 million, primarily due to changes in working capital (lower inventory drawdowns and accounts payable) and the non-cash litigation settlement in 1996.
- Investing Activity: Capital expenditures increased by $178 million to $686 million, reflecting higher spending in oil and gas operations, particularly in Qatar and the U.S.
Guidance, Outlook, and Risks
- Liquidity Outlook: Management expects cash from operations and asset sales to be adequate for operating requirements, capital spending, and dividends. The company maintains approximately $1.6 billion in unused committed bank credit lines.
- Market Risks: Oil and gas prices are sensitive to complex factors outside the company's control. Similarly, chemical product prices are commodity-based and volatile. Management states it cannot accurately forecast future price trends.
- Legal and Environmental Contingencies:
- Environmental: Occidental is involved in 227 Superfund or comparable state sites. While reserves have been accrued for 87 sites where costs are estimable, the ultimate liability for others cannot be determined. Management believes reserves are sufficient to prevent material adverse effects.
- Legal Proceedings: The company is cooperating with an SEC investigation regarding an internal inquiry. Additionally, a settlement of $9.5 million was paid in July 1997 to resolve a tortious interference verdict against a subsidiary.
- Unusual Items: The 1996 results included a $30 million extraordinary loss from debt retirement and a $130 million litigation settlement (Love Canal), which are not present in the 1997 period.
Investor Verification Checklist
- Verify the sustainability of oil and gas price trends, as Q2 1997 earnings were negatively impacted by price declines.
- Review the status of the ongoing SEC investigation and potential outcomes.
- Assess the adequacy of environmental reserves given the company's involvement in 227 Superfund sites.
- Monitor the impact of increased capital expenditures ($686 million YTD) on future cash flow and debt levels.
- Confirm the details of the $102 million sale of the Tacoma chlor-alkali plant and its impact on future chemical division capacity.