Business Context and Reporting Period
Company: Occidental Petroleum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: Occidental operates primarily in two segments: Oil and Gas operations and Chemical operations. The company is engaged in the exploration, production, and trading of oil and gas, as well as the manufacture and sale of chemical products including chlorine, caustic soda, and PVC resins.
Key Financial Metrics (Six Months Ended June 30, 1999)
| Metric | Amount (in millions) |
|---|---|
| Net Sales | $2,991 |
| Net Income (Loss) | $(61) |
| Income from Continuing Operations | $(45) |
| Operating Cash Flow | $179 |
| Capital Expenditures | $(263) |
| Cash and Cash Equivalents (Ending) | $267 |
| Total Debt (Current + Long-Term) | $5,342 |
| Basic EPS (Loss) | $(0.20) |
Material Changes vs. Prior Comparable Period
- Profitability Decline: The company reported a net loss of $61 million for the six months ended June 30, 1999, compared to net income of $363 million in the same period of 1998. This represents a significant reversal in earnings.
- Revenue Decrease: Net sales decreased to $2,991 million from $3,243 million in 1998. The decline was driven by the absence of revenues from petrochemical assets contributed to the Equistar partnership in 1998 and lower prices for chlorine and caustic soda.
- Segment Performance:
- Oil and Gas: Earnings dropped to $228 million from $612 million. The 1998 figure included $395 million in pretax gains from the sale of nonstrategic assets, which were absent in 1999. However, earnings before special items actually increased due to higher crude oil prices.
- Chemical: Earnings fell to $38 million from $218 million, primarily due to lower commodity prices for chlorine and caustic soda.
- Cash Flow Improvement: Operating cash flow turned positive at $179 million, compared to a net cash use of $16 million in 1998. This improvement was aided by lower working capital usage and the absence of discontinued operations cash outflows seen in 1998.
- Investing Activities: Net cash provided by investing activities was $1.1 billion in 1999, a stark contrast to the $860 million used in 1998. The 1999 inflow was largely due to the collection of a $1.4 billion note receivable related to a prior asset sale.
Guidance, Outlook, and Material Events
- Accounting Changes: The 1999 results included a $13 million after-tax charge for the cumulative effect of adopting SOP 98-5 (start-up costs) and a $3 million extraordinary loss from the early redemption of senior debentures. Conversely, the adoption of EITF 98-10 provided a $2 million benefit.
- Strategic Transactions:
- Geon Partnership: Formed two partnerships with The Geon Company in April 1999, including a 76% interest in a PVC resin partnership.
- Unocal Swap: Agreed to swap oil and gas interests in Yemen and Bangladesh with Unocal International Corporation, expected to close in Q3 1999 with no significant earnings impact.
- INDSPEC Acquisition: Completed the acquisition of 100% ownership of INDSPEC Holding Corporation in Q3 1999 via stock issuance.
- Capital Resources: The company expects sufficient cash for 1999 operating needs, capital expenditures (budgeted at $500 million), and debt repayments. Available committed bank credit lines totaled approximately $2.1 billion.
- Legal and Environmental: Occidental faces substantial litigation, including a $970 million judgment against Chevron (pending Supreme Court review) and numerous environmental remediation proceedings. Management believes reserves are adequate and a material adverse effect is unlikely.
- Year 2000 Compliance: Remediation efforts are estimated at 90% complete with total costs estimated at $40 million. Contingency plans are 60% complete.
Investor Verification Checklist
- Asset Sale Gains: Verify the impact of the $395 million gain in 1998 from asset sales to understand the true operational decline in the Oil and Gas segment.
- Commodity Price Sensitivity: Assess exposure to fluctuating prices of crude oil, chlorine, and caustic soda, which heavily influence segment margins.
- Debt Structure: Review the $5.3 billion total debt load and the recent issuance of $792 million in senior notes and $508 million in trust preferred securities.
- Legal Contingencies: Monitor the status of the Chevron judgment appeal and the potential liability exposure from 155 identified Superfund sites.
- Equity Investments: Evaluate the performance of the 29.5% interest in Equistar Chemicals, LP, which is a significant equity method investment.