Occidental Petroleum Corporation: Q1 2019 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an integrated energy company with oil and gas, chemical, and midstream and marketing segments. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company reported 747.9 million common shares outstanding at March 31, 2019.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $4.004 billion | $3.763 billion |
| Income before taxes and other items | $783 million | $984 million |
| Net income | $631 million | $708 million |
| Diluted EPS | $0.84 | $0.92 |
| Net margin | Approximately 15.8% | Approximately 18.8% |
| Cash flow from operations | $948 million | $1.009 billion |
| Capital expenditures | $1.259 billion | $1.032 billion |
| Cash and cash equivalents | $1.752 billion | $1.606 billion at March 31, 2018 |
At March 31, 2019, total assets were $44.380 billion, long-term debt was $10.203 billion, current debt maturities were $116 million, and stockholders’ equity was $21.236 billion. Cash declined from $3.033 billion at December 31, 2018, primarily because operating cash flow and financing proceeds did not cover capital expenditures, dividends, and share repurchases.
Financing cash outflows were $814 million, including $591 million of dividends and $237 million of treasury-stock purchases. The company stated that it was in compliance with financing covenants and had substantial capacity for additional unsecured borrowings and other permitted transactions.
Material changes versus the prior comparable period
- Net sales increased 6% to $4.004 billion, but net income declined 11% and diluted EPS declined from $0.92 to $0.84.
- Oil and gas segment earnings fell to $484 million from $750 million, mainly because of lower realized crude oil, NGL, and natural gas prices. The decline was partly offset by higher production and lower DD&A rates.
- Average daily production increased to 719,000 BOE from 609,000 BOE, driven primarily by Permian Resources and Al Hosn.
- Worldwide realized crude oil prices declined to $52.62 per barrel from $61.04; realized NGL prices declined to $18.14 per barrel from $25.35; and domestic natural gas prices declined to $1.36 per MCF from $2.06.
- Chemical segment earnings decreased to $265 million from $298 million, primarily due to lower caustic soda prices. A third-party tank farm fire temporarily curtailed certain Deer Park operations, although all OxyChem facilities had resumed safe operations.
- Midstream and marketing earnings increased to $279 million from $179 million, primarily due to improved crude oil spreads and higher marketing margins.
- Capital expenditures increased 22% to $1.259 billion, including approximately $1.2 billion for oil and gas activities.
- On January 1, 2019, Occidental adopted ASC 842. The adoption added approximately $772 million of lease assets and lease liabilities at adoption, with no material impact on net income, cash flows, or equity.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that liquidity needs, including future dividends, are expected to be funded through cash on hand, operating cash flow, asset or investment monetizations, future borrowings, and potentially other capital issuance. The filing does not provide specific earnings, production, capital spending, or commodity-price guidance.
After quarter-end, Occidental pursued a proposed acquisition of Anadarko Petroleum Corporation. The proposal contemplated substantial cash and stock consideration, up to $21.8 billion of financing commitments, a $10 billion contingent investment by Berkshire Hathaway, and a proposed $8.8 billion sale of specified Anadarko assets to Total. Completion, financing, regulatory approvals, stockholder approvals, integration, expected synergies, and the ultimate terms were uncertain as of the filing date. The transaction could materially increase leverage and preferred-dividend obligations.
Key operating risks include commodity-price volatility, production and reserve uncertainty, higher costs, transportation and pipeline constraints, operational disruptions, regulatory and tax changes, environmental liabilities, litigation, credit-market conditions, cybersecurity, and the ability to generate sufficient cash to fund operations and repay debt.
Environmental remediation reserves totaled $875 million across 146 sites, including $120 million classified as current. Management estimated that reasonably possible additional environmental losses could reach up to $1.1 billion beyond recorded reserves. A separate dispute involving Andes Petroleum seeks a claimed 40% share of approximately $1.0 billion previously received from Ecuador; the merits hearing was scheduled for May 2020. Management believed outstanding matters would not have a material adverse effect on the consolidated balance sheet, although unfavorable outcomes could materially affect results or cash flows in a particular period.
Investor verification points
- Verify the sustainability of production growth against lower realized oil, NGL, and domestic gas prices.
- Assess free-cash-flow coverage after the $1.259 billion of quarterly capital expenditures, $591 million of dividends, and planned or completed share repurchases.
- Review debt capacity, financing commitments, and the potential leverage and preferred-stock obligations associated with the Anadarko proposal.
- Evaluate environmental reserves, the potential $1.1 billion of additional losses, and the status of Maxus-related and Passaic River remediation matters.
- Monitor midstream marketing margins and derivative positions, including the reported crude oil derivative exposure and mark-to-market effects.
- Confirm the effect of ASC 842 lease recognition on future liabilities, cash commitments, and operating flexibility.
- Review subsequent filings for the outcome of the Anadarko, Berkshire, and Total transactions, since these developments occurred after March 31, 2019.