Occidental Petroleum Corporation — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results; it is not a standalone quarterly filing. Occidental operates through oil and gas, chemical, and midstream, marketing and other segments.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $24.172 billion | $23.939 billion | +1% |
| Income from continuing operations | $4.635 billion | $6.640 billion | -30% |
| Net income attributable to common stock | $4.598 billion | $6.771 billion | -32% |
| Basic EPS | $5.67 | $8.32 | -32% |
| Operating cash flow | $11.312 billion | $12.281 billion | -8% |
| Capital expenditures | $10.226 billion | $7.518 billion | +36% |
| Cash and equivalents | $1.592 billion | $3.781 billion | -58% |
| Long-term debt, net | $7.023 billion | $5.871 billion | +20% |
| Total debt-to-capitalization | 16% | Not clearly provided | — |
| Stockholders’ equity | $40.048 billion | $37.620 billion | +6% |
Net income margin was approximately 19.0% of sales, versus approximately 28.3% in 2011. Income from continuing operations represented approximately 19.2% of sales. The worldwide effective tax rate was 40%, compared with 39% in 2011.
- Oil and gas: Segment sales were $18.906 billion and earnings were $7.095 billion, including $1.7 billion of pretax impairment and related charges. Production increased 5% to 766,000 BOE per day; sales volumes increased 5% to 764,000 BOE per day.
- Chemical: Segment sales were $4.580 billion and earnings were $720 million, down from $861 million. Lower margins, weaker overseas economic conditions, competitive activity, and weather-related effects weighed on results.
- Midstream and marketing: Segment sales were $1.399 billion and earnings were $439 million, broadly comparable with 2011. Improved marketing and trading performance offset lower gas-processing margins.
- Reserves: Proved reserves increased to 3.296 billion BOE from 3.176 billion BOE. Additions of 400 million BOE included 257 million from improved recovery and 232 million from extensions and discoveries, partly offset by 183 million of negative revisions, primarily involving domestic natural gas.
Cash flow, liquidity and capital allocation
- Operating cash flow of $11.312 billion was more than offset by $12.655 billion of cash used in continuing-operations investing activities, including capital expenditures and asset acquisitions.
- Occidental ended the year with $1.592 billion of cash and an undrawn $2.0 billion revolving credit facility expiring in 2016; up to $1.0 billion was available for letters of credit.
- In June 2012, Occidental issued $1.75 billion of senior unsecured notes: $1.25 billion at 2.70% due 2023 and $500 million at 1.50% due 2018. Net proceeds were approximately $1.74 billion.
- Debt principal outstanding was approximately $7.654 billion before discounts, with $600 million due in 2013, $1.45 billion in 2016, $1.25 billion in 2017, and $4.354 billion thereafter.
- Cash dividends paid were $2.128 billion, including an accelerated fourth-quarter dividend payment. The 2012 dividend was $2.16 per share; a quarterly dividend of $0.64 per share was declared in February 2013.
- Share repurchases totaled 7.2 million shares under the announced program at an average cost of $77.98 per share; total treasury-stock purchases were approximately $583 million in cash flow reporting.
Material changes versus the prior comparable period
- Profitability declined substantially despite slightly higher sales, primarily because of the $1.7 billion domestic gas impairment, lower natural gas and NGL prices, higher DD&A, increased maintenance and field-support costs, and weaker chemical margins.
- Domestic natural gas prices declined 35% and worldwide NGL prices declined 19%; average realized worldwide oil prices increased approximately 2%.
- Capital spending increased by $2.708 billion, driven mainly by oil and gas development and the Al Hosn gas project. Property, plant and equipment, net, increased to $52.064 billion from $45.684 billion.
- Cash declined by $2.189 billion during the year as investment spending, dividends, and share repurchases exceeded operating cash flow and debt proceeds.
- Fourth-quarter 2012 income from continuing operations was $364 million, or $0.45 diluted EPS, compared with $1.641 billion, or $2.02 diluted EPS, in the fourth quarter of 2011. Fourth-quarter oil and gas earnings included the $1.7 billion pretax impairment.
Guidance, outlook, risks and unusual items
- Management expected 2013 capital spending of approximately $9.6 billion, down from 2012, with about 75% directed to oil and gas, 11% to Al Hosn, 9% to domestic midstream and marketing, and the remainder to chemicals.
- Management targeted a 15% reduction in drilling costs; by year-end 2012 and early 2013, it believed approximately half of the targeted savings had been achieved. It expected to grow oil production while reducing capital spending.
- Al Hosn was expected to begin operations in 2014, and the BridgeTex crude pipeline was expected to begin service in mid-2014. OxyChem expected its Tennessee chlor-alkali plant to begin operating in the fourth quarter of 2013.
- Commodity prices remain the principal earnings risk. A $1 per barrel change in oil prices was estimated to affect pretax annual income by approximately $150 million; a $0.50 per Mcf change in domestic gas prices by approximately $115 million.
- Other significant risks include reserve revisions, project execution and cost overruns, political instability and contractual risks in foreign operations, environmental and climate regulation, catastrophic events, cyber attacks, chemical-market cyclicality, and acquisition or divestiture execution.
- Environmental remediation reserves were $344 million at 161 sites, with reasonably possible additional losses of up to $375 million. Environmental compliance capital expenditures for 2013 were estimated at approximately $130 million.
- Occidental disclosed a $1.77 billion ICSID award against Ecuador, plus interest, relating to termination of its Block 15 concession. Ecuador sought annulment, and the financial statement effect was to be recognized upon final resolution. Andes Petroleum was entitled to 40% of any net recovery.
- A Louisiana environmental settlement was reached in principle and a New Mexico penalty claim remained under evaluation; management expected the financial impact of both matters to be insignificant.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at December 31, 2012.
Investor verification points
- Reconcile reported earnings with and without the $1.7 billion gas impairment and assess the sustainability of production costs, DD&A, and reserve estimates.
- Verify the 2013 capital-spending plan, expected drilling-cost savings, oil-production growth, and funding requirements against actual subsequent results.
- Review exposure to oil, natural gas, NGL, chemical-product, and feedstock prices, including the limited extent of production hedging.
- Assess debt maturities, purchase obligations of $8.723 billion, total contractual obligations of $19.555 billion, and liquidity after dividends and repurchases.
- Monitor Al Hosn, BridgeTex, and the Tennessee chlor-alkali project for schedule, cost, commissioning, and return-on-capital performance.
- Evaluate reserve revisions and the $4.8 billion of capitalized unproved properties, particularly those exposed to sustained low natural gas prices.
- Follow the Ecuador arbitration, environmental reserves and possible additional losses, foreign political risks, and regulatory or climate-related developments.
- Review the filing’s detailed segment disclosures and subsequent filings for changes after December 31, 2012; this filing does not provide a separate 2012 fourth-quarter balance sheet.