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Business Context and Reporting Period

Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: Occidental operates primarily in two segments: Oil and Gas and Chemicals. The company reported a significant improvement in financial performance compared to the prior year, driven by higher commodity prices.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($24M) plus Long-term debt ($3,998M) for 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $848 million (56%) primarily due to higher worldwide crude oil, natural gas, and chemical prices.
• Profitability Surge: Net income increased by $300 million. Oil and Gas segment earnings rose to $727 million from $306 million, while the Chemical segment turned a $31 million loss into a $35 million profit.
• Cash Flow: Operating cash flow increased by $485 million, driven by higher income from continuing operations.
• Debt Reduction: The company made net debt payments of approximately $184 million during the quarter.

Guidance, Outlook, and Unusual Items

Unusual Items and Accounting Changes

• Debt Repayment Charge: Net income included a pre-tax charge of $61 million ($40 million after-tax) for the early repayment of a $450 million senior note issue.
• Accounting Changes: A cumulative effect of changes in accounting principles resulted in a $68 million after-tax charge. This included the adoption of SFAS No. 143 (Asset Retirement Obligations), which added a $50 million after-tax charge, and the rescission of EITF Issue No. 98-10 regarding energy trading contracts ($18 million after-tax charge).
• Core Earnings: Management reported "Core Earnings" of $433 million ($1.14 per share), excluding the debt repayment charge and accounting changes to provide a clearer view of operational performance.

Outlook and Guidance

• Production: Second quarter 2003 production is expected to be approximately 535,000 barrels of oil equivalent (BOE) per day.
• Chemical Earnings: Second quarter chemical segment earnings are projected between $40 million and $70 million, contingent on energy prices not spiking as they did in Q1.
• Capital Spending: The company expects to spend $1.3 billion on its capital spending program in 2003.
• Liquidity: Management expects sufficient cash from operations to fund needs, capital expenditures, dividends, and debt repayments. Unused committed bank credit lines totaled approximately $1.8 billion.

Risks and Contingencies

• Environmental: Total environmental remediation reserves are $368 million. The range of reasonably possible loss could be up to $400 million beyond the accrued amount.
• Legal: The company is subject to various lawsuits and tax audits (IRS audits for years 1996-2000 are ongoing). Management does not currently anticipate a material adverse effect from these matters.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current crude oil and natural gas prices against the Q1 averages ($33.85/bbl WTI and $4.75/MMBtu NYMEX) to assess future earnings volatility.
• Debt Maturity Profile: Review the specific terms of the remaining long-term debt ($3.998 billion) and the impact of the recent $450 million note repayment on future interest expenses.
• Environmental Liability Exposure: Assess the potential for the $400 million "reasonably possible" environmental loss to materialize, given the 183 active or closed remediation sites.
• Accounting Adjustments: Confirm the long-term impact of the new Asset Retirement Obligation (SFAS 143) accounting on future depreciation and accretion expenses.
• Chemical Segment Margins: Monitor energy and raw material costs, as the Chemical segment's profitability is highly sensitive to these inputs.