Occidental Petroleum Corporation — FY 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter data. Occidental operates through oil and gas, chemical, and midstream and marketing segments, with operations in the United States, Latin America, Oman, Qatar and the United Arab Emirates.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $10.090 billion | $12.480 billion | Down 19% |
| Income from continuing operations | $(1.002) billion | $(8.146) billion | Loss narrowed |
| Net loss attributable to common stock | $(574) million | $(7.829) billion | Loss narrowed |
| Diluted loss per share | $(0.75) | $(10.23) | Improved |
| Operating cash flow from continuing operations | $2.519 billion | $3.254 billion | Down 23% |
| Capital expenditures | $2.717 billion | $5.272 billion | Down 49% |
| Cash and cash equivalents | $2.233 billion | $3.201 billion | Down $968 million |
| Long-term debt, net | $9.819 billion | $6.855 billion | Up $2.964 billion |
| Dividends per common share | $3.02 | $2.97 | Increased |
Net loss attributable to common stock represented an approximately 5.7% net margin, while the continuing-operations loss represented an approximately 9.9% margin. The filing does not provide a single consolidated operating-margin measure.
Segment performance and operating indicators
- Oil and gas: Sales were $6.377 billion, down from $8.304 billion. Segment results were a $636 million loss versus an $8.060 billion loss in 2015. Average production declined to 630,000 BOE per day from 668,000 BOE, but production from ongoing operations increased to 602,000 BOE per day from 565,000 BOE.
- Chemical: Sales were $3.756 billion, down from $3.945 billion, while segment earnings increased to $571 million from $542 million. Results benefited from improved caustic soda and PVC market conditions, partly offset by lower PVC margins.
- Midstream and marketing: Sales were $684 million, down from $891 million. The segment recorded a $381 million loss, compared with a $1.194 billion loss in 2015, including a $160 million charge related to terminated crude oil supply contracts.
- Commodity prices: Average WTI declined to $43.32 per barrel from $48.80; Brent declined to $45.04 from $53.64; and NYMEX gas declined to $2.42 per Mcf from $2.75. Worldwide realized oil prices fell approximately 18%.
- Reserves: Proved reserves increased to 2.406 billion BOE from 2.200 billion BOE, driven primarily by improved recovery, technical and PSC-related revisions, and Permian Basin acquisitions.
Cash flow, liquidity and capital structure
- Net cash provided by operating activities was $3.383 billion, including $864 million from discontinued operations, principally related to the Ecuador settlement. Continuing-operations operating cash flow was $2.519 billion.
- Investing activities used $4.742 billion, including $2.717 billion of capital expenditures and approximately $2.0 billion for Permian Basin acquisitions.
- Financing activities provided $391 million. Occidental issued $4.203 billion of long-term debt and repaid $2.710 billion, while paying $2.309 billion of cash dividends.
- Occidental issued $2.75 billion of senior notes in April 2016 and $1.5 billion in November 2016. Principal debt outstanding was approximately $9.9 billion, with no principal maturities due in 2017 and approximately $8.0 billion due in 2022 and thereafter.
- The company had an undrawn $2.0 billion revolving credit facility expiring in 2019 and reported substantial covenant capacity for additional borrowings, dividends and share acquisitions.
- Management expected 2017 capital spending of approximately $3.0 billion to $3.6 billion and planned approximately $140 million of 2017 commitments for long-term projects under construction in the chemical and midstream segments.
Material changes and unusual items
- Asset impairment and related charges fell sharply to $825 million from $10.239 billion in 2015. The 2016 amount included a $541 million doubtful-account reserve, a $160 million crude supply-contract termination charge, a $78 million loss on the distribution of remaining California Resources stock, and charges related to Libya and Iraq exits.
- Occidental acquired approximately 35,000 net Permian Basin acres and additional producing properties and enhanced-oil-recovery infrastructure for approximately $2.0 billion.
- The company completed exits from non-core operations in Bahrain, Iraq, Libya and Yemen, sold Piceance Basin operations and South Texas Eagle Ford non-operated properties, and distributed its remaining California Resources shares.
- The OxyChem-Mexichem 1.2 billion pound-per-year Ingleside ethylene cracker remained on budget and schedule, with startup expected in early 2017. OxyChem also began a $145 million Geismar, Louisiana expansion expected to be completed in late 2017.
- Discontinued operations contributed $428 million in 2016, primarily from the Ecuador settlement; investors should distinguish this item from recurring continuing-operations performance.
Outlook, risks and contingencies
- Management’s strategy emphasizes dividend growth, disciplined high-return Permian and international development, long-term production growth of 5% to 8% annually, and maintaining a strong balance sheet.
- Results remain highly sensitive to commodity prices. Management estimated that a $1 per barrel change in oil prices affects annual pretax income by approximately $120 million; a $1 per barrel change in NGL prices affects it by approximately $30 million; and a $0.50 per Mcf change in domestic gas prices affects it by approximately $50 million.
- Key risks include prolonged low oil, gas or NGL prices, future impairments, reserve-estimation changes, development delays and cost overruns, political instability and contractual risks in foreign jurisdictions, environmental regulation, climate-related regulation, catastrophic events and cybersecurity incidents.
- Environmental remediation reserves totaled $870 million across 147 sites. Following the Maxus bankruptcy, Occidental stated that reasonably possible additional environmental losses could be up to $1.0 billion; the ultimate liability for certain Lower Passaic River and other indemnified sites remains uncertain.
- Total contractual obligations were $22.337 billion, including $9.907 billion of long-term debt, $8.938 billion of purchase obligations and $1.274 billion of operating leases.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2016.
Facts investors should verify
- Whether oil, gas and NGL prices support the planned $3.0 billion to $3.6 billion 2017 capital program while funding the dividend.
- Permian acquisition economics, production growth, reserve additions and the conversion of proved undeveloped reserves into production.
- Debt-service capacity, refinancing needs after 2021, and the effect of higher debt on dividend sustainability.
- Underlying recurring earnings excluding Ecuador settlement proceeds, asset sales, doubtful-account reserves and other unusual items.
- The final cost allocation and potential additional liability from Maxus-indemnified environmental sites, including the Lower Passaic River remediation.
- Progress and costs associated with the Ingleside ethylene cracker and Geismar expansion.