Occidental Petroleum Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. The interim financial statements are unaudited and should be read with the company’s 2009 Form 10-K.
Business context and reporting period
Occidental operates through oil and gas, chemical, and midstream, marketing and other segments. The quarter included operations of the Phibro trading unit, acquired December 31, 2009, and a technical service contract to develop Iraq’s Zubair Field. Occidental also acquired domestic oil and gas properties for approximately $245 million.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $4.771 billion | $3.073 billion | +55% |
| Income before taxes and other items | $1.759 billion | $579 million | +204% |
| Income from continuing operations | $1.095 billion | $380 million | +188% |
| Net income attributable to common stock | $1.064 billion | $368 million | +189% |
| Diluted EPS | $1.31 | $0.45 | +$0.86 |
| Net margin | 22.3% | 12.0% | +10.3 pts |
| Operating cash flow | $2.210 billion | $780 million | +$1.430 billion |
| Capital expenditures | $848 million | $1.071 billion | -21% |
| Cash and cash equivalents at period end | $1.895 billion | $1.126 billion | +68% |
At March 31, 2010, total assets were $45.531 billion, total equity was $30.037 billion, current liabilities were $6.440 billion, and long-term debt was $2.511 billion. Including current maturities, reported debt was approximately $2.594 billion. The estimated fair value of debt was approximately $2.9 billion.
Occidental had approximately $1.5 billion of available, unused committed bank credit. Management stated that cash on hand and operating cash flow should fund operating needs, planned capital expenditures, dividends, and debt payments. The company paid $269 million of dividends and $227 million of long-term debt during the quarter.
Material changes versus the prior comparable period
- Results benefited primarily from higher worldwide crude oil and U.S. natural gas prices and higher oil and gas volumes.
- Oil and gas segment earnings increased to $1.819 billion from $545 million. Production increased to 743,000 BOE per day from 711,000 BOE per day.
- Worldwide realized crude oil price increased to $71.88 per barrel from $39.29; U.S. realized natural gas price increased to $5.62 per Mcf from $3.54.
- Chemical segment earnings declined to $30 million from $169 million due to continued domestic-market weakness and margin erosion.
- Midstream, marketing and other earnings increased to $94 million from $14 million, reflecting improved gas-processing and trading margins and higher Dolphin pipeline income.
- Operating cash flow increased substantially due to stronger commodity prices and an approximately $600 million favorable working-capital impact relative to the prior-year quarter.
- Interest and debt expense increased to $38 million from $27 million, while the worldwide effective tax rate increased to 41% from 39%.
- Q1 2009 included after-tax charges related to severance, railcar leases, and rig termination costs; no comparable significant operating charges were reported in Q1 2010.
Guidance, outlook, risks, contingencies, and unusual items
- Management estimated 2010 capital spending of approximately $4.5 billion, focused on maintaining returns above the cost of capital.
- Results remain highly sensitive to commodity prices. Management estimated that a $1.00 per barrel change in oil prices would affect quarterly pretax income by approximately $36 million, while a $0.50 per MMBtu change in domestic natural gas prices would affect quarterly pretax income by approximately $31 million, based on current production levels.
- Oil and gas cash production costs increased to $10.05 per BOE from $9.37 per BOE for full-year 2009, primarily because Occidental began expensing 100% of CO2 costs and incurred higher field-support and maintenance costs.
- Environmental remediation reserves totaled $393 million across 167 sites. Management estimated reasonably possible additional environmental loss of up to $375 million and expects to spend approximately half of existing reserves over the next four years.
- OxyChem faces Nicaragua-related DBCP litigation involving judgments of approximately $900 million against four defendants, including OxyChem. A U.S. federal court refused to enforce one judgment; plaintiffs appealed. Management considers the claims without merit.
- Tax years 2009 and 2010 were under IRS review, and certain foreign and state tax years remained open to examination.
- Commodity derivatives exposed the company to market and counterparty risks. Approximately $96 million of net after-tax derivative losses in accumulated other comprehensive income were expected to be reclassified into income over the following twelve months.
- Management concluded that disclosure controls were effective as of March 31, 2010, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether crude oil and natural gas prices and production volumes can sustain the unusually strong year-over-year earnings and cash-flow improvement.
- Progress against the approximately $4.5 billion 2010 capital-spending plan and its funding from operating cash flow.
- The chemical segment’s recovery prospects given continued market weakness and margin compression.
- Actual environmental spending and any changes to the $393 million reserve or the estimated $375 million additional-loss range.
- Developments in the Nicaragua DBCP litigation, tax examinations, and other legal contingencies.
- The effect of derivative settlements, commodity-price volatility, and the expected reclassification of derivative losses from accumulated other comprehensive income.
- Execution and financial exposure associated with the Zubair Field contract, domestic acquisitions, and the Phibro trading business.