Occidental Petroleum Corporation: Q3 2011 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation is an integrated energy company operating through oil and gas, chemical, and midstream, marketing and other segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods. The filing was signed November 3, 2011.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $6.006 billion | $4.763 billion | $17.905 billion | $13.982 billion |
| Income from continuing operations | $1.775 billion | $1.225 billion | $4.999 billion | $3.435 billion |
| Net income attributable to common stock | $1.771 billion | $1.191 billion | $5.137 billion | $3.318 billion |
| Diluted EPS | $2.17 | $1.46 | $6.31 | $4.07 |
| Cash flow from operations | Not separately provided | Not separately provided | $8.638 billion | $6.744 billion |
- Q3 net income increased 49%; nine-month net income increased 55%. Diluted EPS increased 49% for the quarter and 55% for the nine-month period.
- Approximate net margin was 29.5% in Q3 2011 versus 25.0% in Q3 2010, and 28.7% for the first nine months versus 23.7% in the prior-year period.
- Worldwide oil and gas production was 739,000 barrels of oil equivalent per day in Q3 and 728,000 for the first nine months, compared with 711,000 and 708,000, respectively, in the comparable 2010 periods.
- Worldwide realized crude oil price increased to $97.24 per barrel in Q3 from $72.31; realized NGL price increased to $56.06 per barrel from $39.70. Worldwide realized natural gas price increased to $3.12 per Mcf from $2.85 in Q3, although U.S. natural gas pricing declined for the nine-month period.
- Oil and gas segment earnings increased to $2.612 billion in Q3 from $1.757 billion and to $7.704 billion for nine months from $5.485 billion.
- Chemical segment earnings increased to $245 million in Q3 from $189 million and to $717 million for nine months from $327 million.
- Midstream, marketing and other earnings declined to $77 million in Q3 from $163 million, primarily because of weaker trading results, but increased to $378 million for nine months from $270 million.
- Cash and cash equivalents were $4.039 billion at September 30, 2011, up from $2.578 billion at December 31, 2010. Total assets were $57.244 billion and stockholders’ equity was $36.479 billion.
- Long-term debt, net, was $5.870 billion versus $5.111 billion at year-end 2010. Estimated debt fair value was approximately $6.2 billion versus carrying value of $5.9 billion.
- Occidental had $2.0 billion of available, unused committed bank credit and no borrowings outstanding under its credit facilities at September 30, 2011.
- Capital expenditures were $4.969 billion and asset and business acquisition payments were $4.070 billion during the first nine months. Dividends paid were $1.060 billion, and dividends declared per share were $1.38 versus $1.09 in the prior-year period.
Material changes versus the prior comparable period
- Results benefited from higher crude oil and NGL prices, increased oil and gas volumes, improved chemical pricing and higher pipeline and power-generation income.
- Higher oil and gas operating costs, DD&A rates, chemical feedstock costs and lower trading margins partially offset the gains.
- Oil and gas cash production costs increased to $12.36 per BOE for the first nine months of 2011 from $10.19 per BOE for full-year 2010, primarily due to increased workover and maintenance activity.
- Domestic production rose following acquisitions in South Texas, the Williston Basin, California and other areas. Middle East/North Africa production declined because of Libya-related disruptions, production-sharing contract effects and other operating factors.
- Occidental sold its Argentine operations in February 2011 for approximately $2.6 billion of after-tax proceeds and recorded a $144 million after-tax gain. The Argentine business is presented as discontinued operations.
- The company issued $2.15 billion of senior unsecured notes in August 2011, receiving approximately $2.1 billion of net proceeds, and redeemed $1.368 billion of higher-coupon debt in March, recording a $163 million pre-tax extinguishment charge.
- Property, plant and equipment increased to $43.025 billion from $36.536 billion at year-end 2010, primarily reflecting capital spending and acquisitions.
Guidance, outlook, risks and unusual items
- Management estimated 2011 capital spending of approximately $7.0 billion and stated that cash on hand and operating cash flow were expected to fund operating needs, planned capital expenditures, dividends and debt payments.
- Management stated that returns would be targeted well above the company’s cost of capital; the filing does not provide formal production, earnings or commodity-price guidance.
- Libya exploration activity was halted because of political unrest and U.S. sanctions, resulting in a $35 million exploration write-off. Although certain restrictions were lifted in September, management expected operational and logistical problems to delay production ramp-up and was uncertain when Libyan production would be reported. Libyan producing properties had a $800 million net book value at September 30, 2011.
- Approximately 11,000 BOE per day of production came from Yemen’s Masila Field, whose working-interest concession expired in December 2011; the outcome of a requested extension was uncertain.
- Environmental remediation reserves totaled $355 million across 169 sites. Management estimated reasonably possible additional environmental losses of up to $380 million, with approximately half of existing reserves expected to be spent within four years.
- Key forward-looking risks include commodity-price volatility, production and development execution, unsuccessful exploration, political or insurgent activity, regulatory and tax changes, environmental liabilities, litigation, accidents, natural disasters and higher-than-expected costs.
- Derivative activities created exposure to commodity prices and counterparty risk. Net derivative fair value was $248 million of assets and $293 million of liabilities after netting and collateral. The filing reported approximately $237 million of net derivative losses in Q3 2011 from instruments not designated as hedges.
- Management concluded that disclosure controls were effective as of September 30, 2011, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether crude oil, NGL and natural gas prices and production volumes remain sufficient to support the company’s elevated earnings and cash flow.
- The pace and economics of production recovery in Libya and the status of the Yemen Masila Field concession.
- Execution and returns from approximately $7.0 billion of planned 2011 capital spending, domestic acquisitions and the Al Hosn Gas project.
- Debt levels, interest costs, refinancing requirements and the effect of the 2011 debt issuance and early debt redemption.
- Actual environmental remediation spending and whether additional losses approach the disclosed $380 million reasonably possible range.
- The sustainability of chemical margins and whether weaker midstream and marketing trading results persist.
- The effects of derivative positions, commodity-price sensitivity, counterparty exposure and future hedge settlements.