OXY

Business Context and Reporting Period

Company: Occidental Petroleum Corporation (OPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: OPC operates in two primary segments: Oil and Gas and Chemicals. The quarter was defined by the completion of the merger with Vintage Petroleum, Inc. on January 30, 2006, significantly expanding assets in Argentina, the U.S., Yemen, and Bolivia.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($255M) plus Long-term debt ($3,273M) for 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $1.267 billion (38%) driven by higher worldwide crude oil, natural gas, and chemical prices, as well as increased production volumes.
• Profitability: Net income rose 45% to $1.229 billion. Oil and Gas segment earnings increased to $2.002 billion from $1.349 billion, while Chemical segment earnings grew to $248 million from $214 million.
• Balance Sheet Impact: Property, Plant, and Equipment increased by $4.6 billion primarily due to the Vintage acquisition. Receivables increased by $312 million due to higher sales prices and volumes.
• Cost Structure: Cost of sales increased by $457 million, reflecting higher production costs, volumes, and energy/raw material costs. Exploration expenses rose $24 million due to increased activity in the Middle East/North Africa.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Production: Q1 2006 worldwide production was 636,000 BOE per day. Management expects Q2 2006 production to reach approximately 650,000 BOE per day, reflecting a full quarter of Vintage production.
• Pricing Impact: Management anticipates a realized U.S. natural gas price of $5.83 per Mcf in Q2 2006 (down from $8.36 in Q1), which is expected to reduce quarterly segment income by approximately $120 million.
• Capital Spending: The company expects to spend approximately $3.0 billion on its 2006 capital spending program.
• Share Repurchases: In February 2006, the Board authorized a repurchase plan for an intermediate target of 30 million shares. During Q1, the company repurchased 2.2 million shares under this program.

Risks and Contingencies

• Ecuador Legislation: On April 25, 2006, the Government of Ecuador enacted legislation requiring foreign oil companies to pay at least 50% of revenue above a benchmark price. Management estimates this will reduce the discounted value of future net cash flows from Block 15 by approximately half, though no impairment is currently required. Block 15 represents ~7% of Q1 2006 worldwide production.
• Legal Proceedings: OxyChem faces lawsuits in Nicaragua alleging personal injury from pesticide exposure. A judgment of $97 million was entered in August 2005; management believes it is unenforceable in the U.S. as OxyChem has no assets in Nicaragua.
• Environmental Liabilities: Total environmental remediation reserves are $408 million. Management estimates a reasonably possible loss range of up to $415 million beyond the accrued amount.
• Investment Accounting Change: Occidental expects to lose significant influence over Lyondell Chemical Company in Q2 2006, shifting from equity-method accounting to cost-method accounting.

Investor Verification Checklist

• Vintage Integration: Verify the final purchase price allocation and the timeline for divesting assets held for sale ($1.5 billion classified as held for sale).
• Ecuador Block 15: Monitor the implementation of the new Ecuadorian fiscal legislation and any resulting legal actions or cash flow impacts.
• Nicaragua Litigation: Track the status of the Osorio Case and other Nicaraguan lawsuits to confirm the enforceability of judgments.
• Commodity Hedging: Review the impact of derivative mark-to-market adjustments, which included a $60 million after-tax loss in Q1 2006.
• Debt Covenants: Confirm compliance with debt covenants given the increased leverage from the Vintage acquisition ($585 million debt assumed).