Occidental Petroleum Corporation — FY 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 10-K; fourth-quarter data is included in the unaudited quarterly schedule. Occidental operates through oil and gas, chemical, and midstream and marketing segments, with major oil and gas assets in the Permian Basin, Oman, the UAE, Qatar, and Colombia.
Business Context and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $17.824 billion | $12.508 billion | Up 43% |
| Net income attributable to common stock | $4.131 billion | $1.311 billion | Up 215% |
| Diluted EPS | $5.39 | $1.70 | Up $3.69 |
| Operating cash flow | $7.669 billion | $4.861 billion | Up $2.808 billion |
| Capital expenditures | $4.975 billion | $3.599 billion | Up $1.376 billion |
| Cash and cash equivalents | $3.033 billion | $1.672 billion | Up $1.361 billion |
| Long-term debt, net | $10.201 billion | $9.328 billion | Up $873 million |
| Total assets | $43.854 billion | $42.026 billion | Up $1.828 billion |
| Stockholders’ equity | $21.330 billion | $20.572 billion | Up $758 million |
Net sales included $15.560 billion of revenue from customers and $2.264 billion of other revenue, primarily net marketing revenue and chemical exchange contracts. The reported net income benefited materially from a $907 million pretax gain on the sale of non-core midstream assets.
Segment Performance and Margins
- Oil and gas: Segment sales were $10.441 billion and segment earnings were $2.442 billion, compared with $1.111 billion in 2017. Ongoing production increased to 658,000 BOE per day from 594,000 BOE per day, driven primarily by a 52% increase in Permian Resources production to 214,000 BOE per day. Average worldwide realized oil prices rose to $60.64 per barrel from $48.93.
- Chemical: Segment sales were $4.657 billion and earnings were $1.159 billion, compared with $822 million in 2017. Results benefited from stronger caustic soda pricing, improved vinyl margins, lower ethylene costs, and full-year contributions from the Ingleside ethylene cracker and Geismar expansion.
- Midstream and marketing: Segment sales were $3.656 billion and earnings were $2.802 billion, compared with $85 million in 2017. Results included the $907 million gain from asset divestitures and otherwise improved through higher marketing margins, wider Midland-to-Gulf-Coast spreads, higher NGL prices, and higher Al Hosn Gas sulfur prices.
Consolidated pretax income was $5.608 billion, compared with $1.328 billion in 2017. The worldwide effective tax rate was 26%, compared with 1% in 2017, which benefited from the 2017 remeasurement of deferred tax liabilities following U.S. tax reform. Excluding impairments, asset sales, and other nonrecurring items, management estimated the 2018 effective tax rate at approximately 25%.
Cash Flow, Capital Allocation, Debt and Liquidity
- Operating cash flow of $7.669 billion exceeded capital expenditures of $4.975 billion, producing approximately $2.7 billion of operating cash flow after capital expenditures before dividends and other financing uses.
- Capital expenditures were concentrated in oil and gas, including $4.413 billion for the segment, $271 million for chemicals, and $216 million for midstream and marketing. Approximately $3.5 billion was invested in the Permian Basin.
- Occidental paid $2.374 billion in dividends and repurchased $1.248 billion of treasury stock during 2018. The annual dividend was $3.10 per share; the stated current annualized rate was $3.12 per share.
- The company issued $1.0 billion of 4.2% senior notes due 2048 and repaid $500 million of notes due in February 2018. Total debt principal was approximately $10.407 billion, including $116 million due in 2019.
- Occidental entered into a new $3.0 billion revolving credit facility maturing in January 2023 and had no borrowings outstanding under it at year-end. Management reported substantial covenant capacity for additional unsecured borrowings, dividends, and share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings increased substantially because of higher oil prices, higher domestic oil volumes, stronger chemical margins, and improved midstream marketing spreads.
- Ongoing oil and gas production increased approximately 11% year over year, while Permian Resources production increased 52%.
- Capital spending increased approximately 38%, primarily to accelerate Permian Basin development.
- Cash increased by $1.361 billion despite higher capital spending, dividends, and repurchases, aided by stronger operating cash flow and asset-sale proceeds.
- Long-term debt increased following the 2048 note issuance, while current maturities declined to $116 million from $500 million.
- Proved reserves increased to 2.752 billion BOE from 2.598 billion BOE. Additions included 294 million BOE from improved recovery, 54 million BOE from purchases, and 301 million BOE from the development program; production reduced reserves by 240 million BOE.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $4.5 billion of 2019 capital spending. The company planned to allocate approximately 56% of the 2019 capital budget to Permian Resources and approximately 12% to Permian EOR.
- Occidental’s long-term strategy targets production growth of 5% to 8% or more annually. Management stated that its short-term plan was designed to sustain the dividend at $40 WTI and support 5% to 8% production growth at $50 WTI.
- Management expected moderate improvement in 2019 chemical demand and generally stable margins, subject to housing, construction, automotive and durable-goods activity, feedstock costs, energy prices, and export conditions.
- Commodity-price sensitivity is significant: a $1 per barrel change in oil prices was estimated to affect annual pretax income by approximately $130 million; a $1 per barrel NGL change by approximately $45 million; and a $0.50 per Mcf domestic gas change by approximately $35 million.
- Occidental recorded $416 million of impairment and related charges for Qatar ISND and ISSD proved properties and inventory following the late-2018 oil-price decline. It also recorded approximately $100 million of midstream charges, primarily related to crude inventory and line-fill lower-of-cost-or-market adjustments.
- Environmental remediation reserves totaled $882 million across 145 sites, with reasonably possible additional losses estimated at up to $1.1 billion. The company expected to spend approximately $157 million on environmental compliance capital expenditures in 2019.
- Contractual obligations totaled $24.674 billion, including $10.407 billion of debt, $10.831 billion of purchase obligations, and $704 million of operating leases. Approximately $2.428 billion was due in 2019.
- Key risks include volatile oil, NGL, natural gas and chemical prices; development and exploration execution; reserve estimation; international political instability; environmental and climate-related regulation and litigation; catastrophic operational events; cybersecurity; transportation constraints; and potential future impairment charges.
- Beginning January 1, 2019, new lease accounting rules were expected to increase reported assets and liabilities by approximately $0.8 billion to $1.0 billion.
Most Important Facts for Investors to Verify
- How much of 2018 earnings and cash flow was recurring versus attributable to the $907 million midstream divestiture gain and other unusual items.
- Whether Permian production growth and the planned $4.5 billion 2019 capital program generate targeted returns at lower oil prices.
- The company’s leverage, debt maturities, refinancing needs, and capacity to maintain dividends and repurchases through a commodity-price downturn.
- The sustainability of chemical margins and midstream marketing spreads after 2018’s favorable pricing environment.
- Potential additional impairments in Qatar and Oman if oil prices or production expectations weaken.
- The ultimate cost of environmental remediation, including liabilities associated with Maxus-indemnified sites and the Lower Passaic River matters.
- Actual implementation effects of the 2019 lease standard and the realization of deferred tax assets and tax-credit carryforwards.