Occidental Petroleum Corporation — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter data. Occidental operates through oil and gas, chemical, and midstream and marketing segments.
Business context and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $24.455 billion | $24.172 billion | Up 1% |
| Income from continuing operations | $5.922 billion | $4.635 billion | Up 28% |
| Net income attributable to common stock | $5.903 billion | $4.598 billion | Up 28% |
| Diluted EPS | $7.32 | $5.67 | Up 29% |
| Operating cash flow | $12.927 billion | $11.312 billion | Up 14% |
| Capital expenditures | $9.037 billion | $10.226 billion | Down 12% |
| Cash and equivalents | $3.393 billion | $1.592 billion | Up $1.801 billion |
| Long-term debt, net | $6.939 billion | $7.023 billion | Down $84 million |
| Stockholders’ equity | $43.372 billion | $40.048 billion | Up 8% |
Net income margin was approximately 24.1%, compared with approximately 19.0% in 2012. The continuing-operations margin was approximately 24.2% versus 19.2% in 2012. The worldwide effective tax rate was 39%, compared with 40% in 2012.
- Oil and gas segment sales were $19.132 billion and earnings were $7.894 billion, including a $607 million pretax impairment of domestic non-producing acreage.
- Chemical segment sales were $4.673 billion and earnings were $743 million, including a $131 million pretax gain on the sale of the Carbocloro investment. Excluding that gain, earnings declined to $612 million.
- Midstream and marketing sales were $1.538 billion and earnings were $1.573 billion, including a $1.030 billion pretax gain on the sale of part of the Plains Pipeline investment. Excluding the gain and other items, earnings were $543 million.
- Oil and gas production averaged 763,000 BOE per day, compared with 766,000 BOE per day in 2012. Domestic oil and NGL production increased, while international production declined.
- Year-end proved reserves increased to 3.483 billion BOE from 3.296 billion BOE. Reserve additions totaled 470 million BOE, primarily from improved recovery and development activity.
- Worldwide average realized oil price was $99.84 per barrel, broadly flat with 2012. Domestic natural gas realization increased to $3.37 per Mcf from $2.62, while worldwide NGL realization declined to $41.03 per barrel from $45.18.
- Full-cycle cash margin increased to $34.16 per BOE from $21.28 per BOE.
Cash flow, liquidity, debt and capital allocation
- Operating cash flow of $12.927 billion exceeded capital expenditures by approximately $3.890 billion before other investing, financing and shareholder-return activities.
- Occidental held $3.393 billion of cash and had an undrawn $2.0 billion revolving credit facility expiring in 2016; up to $1.0 billion was available for letters of credit.
- Debt-to-capitalization declined from 16% at year-end 2012 to 14% at year-end 2013. Approximately $7.0 billion of debt principal remained outstanding, with no principal due in 2014 or 2015 and $1.5 billion due in 2016.
- Occidental paid $1.553 billion of dividends and repurchased more than $0.9 billion of stock during 2013. Quarterly dividends were $0.64 per share, or $2.56 for the year. In February 2014, the board declared a $0.72 quarterly dividend and increased the repurchase authorization by 30 million shares.
- Net capital spending was approximately $8.8 billion after partner contributions. Management expected 2014 net capital spending of approximately $10.2 billion, with about 80% allocated to oil and gas.
Material changes versus the prior comparable period
- Profit and operating cash flow improved substantially, supported by higher domestic oil and gas prices, higher domestic liquids volumes, lower domestic operating costs, working-capital changes and a tax refund.
- Oil and gas earnings before impairment charges were approximately $8.5 billion, slightly below 2012, as domestic improvement was more than offset by lower international earnings and volumes.
- Domestic oil and gas production increased, but total production was essentially flat because of lower international production, including disruptions in Libya and lower production under certain production-sharing arrangements.
- Oil and gas production costs declined to $13.76 per BOE from $14.99, reflecting operational-efficiency initiatives. Domestic production costs declined to $14.43 per BOE from $17.43.
- Capital expenditures declined by $1.189 billion, primarily because of lower oil and gas spending and reduced Al Hosn-related midstream spending.
- Debt declined by $690 million on a gross basis, including repayment of $600 million of notes and repurchases of approximately $90 million of other senior notes.
- The earnings comparison was affected by significant unusual items: 2013 gains of $1.030 billion from Plains Pipeline and $131 million from Carbocloro, offset by the $607 million acreage impairment and a $55 million employee and consulting-related charge. In 2012, Occidental recorded approximately $1.7 billion of impairment charges.
Guidance, outlook, risks and unusual items
- Management’s strategic review authorized pursuing a minority interest sale in Middle East/North Africa operations, alternatives for selected Midcontinent assets, additional Plains Pipeline monetization, and separation of California assets into an independent publicly traded company. Final board approval for the California separation remained a forward-looking condition.
- Occidental entered into an agreement in February 2014 to sell its Hugoton operations for approximately $1.4 billion, with closing expected in the second quarter of 2014 and a gain anticipated.
- Growth priorities included higher oil production in California and the Permian Basin, continued development in Oman and Qatar, and initial Al Hosn gas project production expected in the fourth quarter of 2014.
- The Tennessee chlor-alkali plant was expected to begin operating in early 2014. Occidental and Mexichem also formed a 50/50 ethylene-cracker venture, with startup expected in 2017.
- Key risks include volatile oil, natural gas, NGL and chemical prices; higher feedstock and energy costs; development delays and cost overruns; reserve-estimation uncertainty; political instability and disruptions in international operations; regulatory and environmental liabilities; greenhouse-gas regulation; catastrophic events; cyberattacks; and competition for reserves and services.
- Environmental remediation reserves were $330 million at 157 sites, with reasonably possible additional losses estimated at up to $380 million. Environmental compliance capital expenditures were expected to be approximately $130 million in 2014.
- Total contractual obligations were $20.028 billion, including $6.964 billion of debt, $1.166 billion of operating leases and $10.024 billion of purchase obligations. Major fixed and determinable capital commitments were approximately $2.1 billion.
- Management and KPMG LLP reported effective internal control over financial reporting and unqualified audit opinions on the financial statements and internal controls.
Most important facts for an investor to verify
- Whether the strategic review, California separation, Hugoton sale and planned Middle East/North Africa monetization were completed on the disclosed terms.
- Whether 2014 capital spending and Al Hosn startup proceeded as planned and generated the expected production and cash flow.
- The sustainability of earnings excluding the $1.161 billion of 2013 pretax gains from Plains Pipeline and Carbocloro and the effect of the $607 million impairment.
- Exposure to commodity-price changes: management estimated annual pretax sensitivity of approximately $150 million for a $1-per-barrel oil-price change, $30 million for a $1-per-barrel NGL-price change and $100 million for a $0.50-per-Mcf domestic gas-price change.
- Reserve conversion, production trends and the economic viability of the $3.6 billion of capitalized unproved properties, particularly Al Hosn-related proved undeveloped reserves.
- Environmental, political, tax and litigation contingencies, including the $330 million remediation reserve and up to $380 million of reasonably possible additional environmental losses.