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| OXY > SEC Filings for OXY > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
Consolidated Results of Operations
Occidental (which means Occidental Petroleum Corporation (OPC) and/or one or more entities in which it owns a majority voting interest) reported net income of $368 million for the first three months of 2009 on net sales of $3.1 billion, compared with net income of $1.8 billion, on net sales of $6.0 billion for the same period of 2008. Diluted earnings per common share (EPS) attributable to common stock were $0.45 and $2.22 for the first three months of 2009 and 2008, respectively.
Net income for the three months ended March 31, 2009, compared to the same period of 2008, reflected lower crude oil and natural gas prices, higher depreciation, depletion and amortization (DD&A) rates, lower natural gas liquids (NGL) realized prices in the gas processing business and negative mark-to-market adjustments in crude oil marketing.
Net income for the three months ended March 31, 2009, included after-tax charges of $21 million for severance, $10 million for railcar leases and $5 million for rig termination costs.
Unless indicated otherwise, net income and EPS refer to net income attributable to common stock.
Selected Income Statement Items
The decrease in net sales for the three months ended March 31, 2009, compared with the same period of 2008, reflected lower crude oil and natural gas prices and lower volumes in chlorine, caustic soda and polyvinyl chloride, partially offset by increased oil and gas volumes and higher caustic soda prices.
The decrease in cost of sales for the three months ended March 31, 2009, compared with the same period of 2008, is due to lower workover and utilities costs, partially offset by higher DD&A rates in the oil and gas segment, and lower volumes in chlorine, caustic soda and polyvinyl chloride in the chemical segment.
The decrease in provision for domestic and foreign income taxes for the three months ended March 31, 2009, compared with the same period of 2008, was due to lower income before taxes and a reduced effective tax rate which reflects tax benefits resulting from the relinquishment of international exploration contracts during the first quarter of 2009.
Selected Analysis of Financial Position
See "Liquidity and Capital Resources" for discussion about the change in cash and cash equivalents. The decrease in trade receivables, net was due to lower oil and natural gas prices during the first quarter of 2009, compared to the fourth quarter of 2008. The increase in property, plant and equipment was due to capital expenditures, partially offset by DD&A.
The increase in current maturities of long-term debt and notes payable and the corresponding decrease to long-term debt, net are due to the maturities of the 4.25 percent medium-term senior notes in the first quarter of 2010. The decrease in accounts payable and accrued liabilities reflected lower crude oil prices and volumes in the marketing and trading operations and the 2009 payments related to higher capital spending and operating expenses during the fourth quarter of 2008, which were accrued at year-end, partially offset by mark-to-market adjustments in crude oil marketing. The increase in stockholders' equity reflects net income for the first quarter of 2009, partially offset by dividend payments.
Segment Operations
Occidental conducts its continuing operations through three segments: (1) oil and gas, (2) chemical and (3) midstream, marketing and other (midstream and marketing). The oil and gas segment explores for, develops, produces and markets crude oil, NGLs, condensate and natural gas. The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals. The midstream and marketing segment gathers, treats, processes, transports, stores, trades and markets crude oil, natural gas, NGLs, condensate and carbon dioxide (CO2) and generates and markets power.
Segment earnings generally exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from the segments' equity investments. Seasonality is not a primary driver of changes in Occidental's consolidated quarterly earnings during the year.
The following table sets forth the sales and earnings of each operating segment and corporate items for the three months ended March 31, 2009 and 2008 (in millions):
2009 2008
Net Sales (a)
Oil and Gas $ 2,137 $ 4,518
Chemical 792 1,267
Midstream, Marketing and Other 228 405
Eliminations (84 ) (170 )
$ 3,073 $ 6,020
Segment Earnings (b)
Oil and Gas (c) $ 545 $ 2,888
Chemical 169 179
Midstream, Marketing and Other 14 123
728 3,190
Unallocated Corporate Items
Interest expense, net (b) (20 ) -
Income taxes (241 ) (1,294 )
Other (expense) income (b) (96 ) (77 )
Income from continuing operations, net (c) 371 1,819
Discontinued operations, net (b) (3 ) 27
Net income (c) $ 368 $ 1,846
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(a) Intersegment sales are generally made at prices approximately equal to those
that the selling entity is able to obtain in third-party transactions.
(b) Refer to "Significant Items Affecting Earnings," "Oil and Gas Segment,"
"Chemical Segment," "Midstream, Marketing and Other Segment" and "Corporate"
discussions that follow.
(c) Represents amounts attributable to common stock shown after deducting
noncontrolling interest amounts of $9 million and $29 million for the three
months ended March 31, 2009 and 2008, respectively.
Significant Items Affecting Earnings
The following table sets forth, for the three months ended March 31, 2009 and 2008, the effects of significant transactions and events affecting Occidental's earnings that vary widely and unpredictably in nature, timing and amount (in millions):
2009 2008
Oil and Gas
Rig terminations $ (8 ) -
Total Oil and Gas $ (8 ) $ -
Chemical
No significant items affecting earnings $ - $ -
Total Chemical $ - $ -
Midstream, Marketing and Other
No significant items affecting earnings $ - $ -
Total Midstream, Marketing and Other $ - $ -
Corporate
Severance accrual $ (32 ) $ -
Railcar leases (15 ) -
Tax effect of pre-tax adjustments 19 -
Discontinued operations, net* (3 ) 27
Total Corporate $ (31 ) $ 27
Total $ (39 ) $ 27
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* Amounts shown after tax.
Worldwide Effective Tax Rate
The following table sets forth the calculation of the worldwide effective tax
rate for income from continuing operations for the three months ended March 31,
2009 and 2008 (in millions):
2009 2008
Oil and Gas earnings (a)(b) $ 545 $ 2,888
Chemical earnings 169 179
Midstream, Marketing and Other earnings 14 123
Unallocated corporate items (116 ) (77 )
Pre-tax income (b) 612 3,113
Income tax expense
Federal and state 12 606
Foreign (a) 229 688
Total 241 1,294
Income from continuing operations (b) $ 371 $ 1,819
Worldwide effective tax rate 39% 42%
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(a) Oil and gas pre-tax income and income tax expense include income taxes owed
by Occidental but paid by governmental entities on its behalf of $202
million and $488 million for the three months ended March 31, 2009 and 2008,
respectively.
(b) Represents amounts after deducting noncontrolling interest amounts of $9
million and $29 million for the three months ended March 31, 2009 and 2008,
respectively.
Oil and Gas Segment
The following tables set forth the sales volumes and production of oil, NGLs and natural gas per day for the three months ended March 31, 2009 and 2008. The difference between the sales volumes and production per day are generally due to the timing of shipments at Occidental's international locations where product is loaded onto tankers. Sales at these locations are not recognized until title passes, which generally occurs when a tanker is loaded.
Sales Volumes per Day 2009 2008 Oil and Liquids (MBBL) United States 276 261 Middle East/North Africa 138 130 Latin America 92 79 Natural Gas (MMCF) United States 620 580 Middle East 229 223 Latin America 48 43 Barrels of Oil Equivalent (MBOE) per day (a) Consolidated subsidiaries 656 611 Other interests (2 ) (4 ) Worldwide sales volumes 654 607 Production per Day 2009 2008 Oil and Liquids (MBBL) United States 276 261 Middle East/North Africa 142 135 Latin America 87 78 Natural Gas (MMCF) United States 620 580 Middle East 229 223 Latin America 48 43 Barrels of Oil Equivalent (MBOE) per day (a) Consolidated subsidiaries 655 615 Other interests (3 ) (4 ) Worldwide production 652 611 |
Average Sales Prices 2009 2008 Crude Oil ($/BBL) United States $ 37.66 $ 90.21 Middle East/North Africa $ 41.55 $ 93.37 Latin America $ 39.59 $ 67.26 Total consolidated subsidiaries $ 39.16 $ 86.70 Other interests $ 57.95 $ 95.46 Worldwide $ 39.29 $ 86.75 Natural Gas ($/MCF) United States $ 3.54 $ 8.15 Latin America $ 3.50 $ 3.80 Worldwide $ 2.90 $ 6.05 |
(a) Natural gas volumes have been converted to BOE based on energy content of 6,000 cubic feet (one thousand cubic feet is referred to as a "Mcf") of gas to one barrel of oil.
Oil and gas segment earnings for the three months ended March 31, 2009, were $545 million compared with $2.9 billion for the same period of 2008. The decrease in oil and gas segment earnings for the three months ended March 31, 2009, compared to the same period of 2008, reflected lower crude oil and natural gas prices and higher DD&A rates.
In the first quarter of 2009, the average West Texas Intermediate (WTI) price was $43.08 per barrel and the average New York Mercantile Exchange (NYMEX) price for natural gas was $5.08 per million British Thermal Units (BTUs), compared to $97.90 per barrel and $7.94 per million BTUs, respectively, for the first quarter of 2008. Occidental's realized oil price for the first quarter of 2009 was $39.29 per barrel compared to $86.75 per barrel for the first quarter of 2008. Based on the current levels of production and prices, if domestic natural gas prices vary by $0.50 per million BTUs, it would have an estimated effect on quarterly pre-tax income of approximately $20 million, while a $1.00 per-barrel change in oil prices would have a quarterly pre-tax impact of approximately $36 million. If production levels change, the sensitivity of Occidental's results to oil and gas prices also would change.
The increase in production for the three months ended March 31, 2009, compared to the same period of 2008, includes 22,000 BOE per day from domestic operations, 15,000 BOE per day from Oman and 10,000 BOE per day from Argentina. About half of the domestic volume increase was attributable to 2008 acquisitions.
Oil and gas cash production costs, including taxes other than on income, declined from $14.75 per BOE for the total year 2008 to $12.19 per BOE for the first quarter of 2009. This decline is due to lower production taxes, lower workover, maintenance and utilities costs and the effect of higher production sharing volumes.
In April 2009, Occidental and its partner signed a Development and Production Sharing Agreement (DPSA) with the National Oil and Gas Authority of Bahrain, which is subject to the approval of Bahrain's Parliament, for further development of the Bahrain Field. Under this agreement, a Joint Operating Company will be formed to serve as operator for the project under the DPSA. Occidental's net share of production is expected to be approximately 28,000 barrels of oil equivalent per day (BOEPD) in 2010 growing to 56,000 BOEPD within five years.
Chemical Segment
Chemical segment earnings for the three months ended March 31, 2009, were $169 million compared with $179 million for the same period of 2008. The first quarter of 2009 results reflect higher caustic soda margins, offset by lower volumes in chlorine, caustic soda and polyvinyl chloride.
Midstream, Marketing and Other Segment
Midstream and marketing segment earnings for the three months ended March 31, 2009, were $14 million, compared with $123 million for the same period of 2008. The decline in earnings was due to significantly lower NGL realized prices in the gas processing business and negative mark-to-market adjustments in crude oil marketing.
Corporate
During the three months ended March 31, 2009, Occidental recorded pre-tax charges of $32 million for severance and $15 million related to railcar sub-leases to a subsidiary of Lyondell Chemical Company (Lyondell), which are being amended as a result of negotiations in connection with the recently filed bankruptcy reorganization of Lyondell and certain of its affiliates and subsidiaries.
Liquidity and Capital Resources
At March 31, 2009, Occidental had approximately $1.1 billion in cash on hand. Available but unused lines of committed bank credit totaled approximately $1.5 billion at March 31, 2009. Income and cash flows are largely dependent on oil and gas prices, which have fallen steeply since mid-2008, and sales volumes. Occidental believes that cash on hand and cash generated from operations will be sufficient to fund its operating needs, planned capital expenditures and dividends. Dolphin Energy is in the process of refinancing its current debt to longer-term debt, which it may complete as early as the second quarter of 2009. In connection with this activity, Occidental agreed it will repay its portion of the Dolphin Energy debt, which is proportionally consolidated on its balance sheet and is approximately $600 million as of March 31, 2009. Occidental may refinance this amount during 2009 by accessing its existing credit facilities or other sources.
Occidental's cash flow from operations for the three months ended March 31, 2009 was about $1.3 billion, before cash used for working capital of $478 million. The working capital cash use was the result of payments for higher capital spending and other operating expenses accrued for the quarter ended December 31, 2008. Including the cash used for working capital, Occidental's cash provided by operating activities was $780 million for the first three months of 2009, compared with $2.7 billion for the same period of 2008. The most important sources of the decrease in generating cash flow in 2009, compared to 2008, were lower oil and natural gas prices. In the first three months of 2009, compared to the same period in 2008, Occidental's average realized oil price was lower by 55 percent and Occidental's average realized natural gas price decreased 57 percent in the U.S., where approximately 69 percent of Occidental's natural gas was produced.
The decrease in NGL prices in 2009, compared to 2008, resulted in lower gas processing margins in the midstream and marketing segment. The overall impact of the chemical and midstream marketing segments' margins on cash flow was less significant than the decreases in oil and gas prices because the chemical and midstream and marketing segments' earnings and cash flows are significantly smaller than those for the oil and gas segment.
Occidental's net cash used by investing activities was $1.2 billion for the first three months of 2009, compared with $2.5 billion for the same period of 2008. The 2008 amount included cash payments for the acquisitions of oil and gas interests from Plains Exploration & Production Company for $1.5 billion. Capital expenditures for the first three months of 2009 were $1.1 billion, including $911 million for oil and gas. Capital expenditures for the first three months of 2008 were $833 million, including $719 million for oil and gas.
Occidental's net cash used by financing activities was $264 million in the first three months of 2009, compared with $646 million for the same period of 2008. The 2009 amount included dividend payments of $260 million. The 2008 net cash used for financing activities included $436 million of cash paid for repurchases of Occidental's common stock and $207 million of dividend payments. The weighted-average basic shares outstanding for the three months of 2009 and as of March 31, 2009 totaled 811.8 million, and the weighted-average diluted shares outstanding totaled 814.4 million.
At March 31, 2009, under the most restrictive covenants of existing financing agreements, Occidental's capacity for additional unsecured borrowing was approximately $65.8 billion, and the capacity for the payment of cash dividends and other distributions on, and for acquisitions of, Occidental's capital stock was approximately $25.3 billion, assuming that such dividends, distributions and acquisitions were made without incurring additional borrowing.
Occidental's capital spending estimate for 2009 is approximately $3.5 billion and will focus on the goal of keeping Occidental's returns well above its cost of capital given current oil and gas prices and the cost environment. Capital spending for the first quarter of 2009 was $1.1 billion. Occidental's capital run rate in the first quarter of 2009 is greater than the $3.5 billion total year level and will decline throughout the year. Occidental has accumulated a sizeable inventory of projects, of which a substantial portion can be delayed until industry costs are aligned with product prices. Occidental will continue to fully fund much of its Middle East operations, the exploration programs in California, Utah and Argentina, and the midstream and marketing and CO2 programs, which it believes have higher return and growth potential.
Environmental Liabilities and Expenditures
Occidental's operations are subject to stringent federal, state, local and foreign laws and regulations relating to improving or maintaining environmental quality. Occidental's environmental compliance costs have generally increased over time and could continue to rise in the future. Occidental factors environmental expenditures for its operations into its business planning process as an integral part of producing quality products responsive to market demand.
The laws that require or address environmental remediation, including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar federal, state, local and foreign laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites. OPC or certain of its subsidiaries participate in or actively monitor a range of remedial activities and government or private proceedings under these laws with respect to alleged past practices at operating, closed and third-party sites. Remedial activities may include one or more of the following: investigation involving sampling, modeling, risk assessment or monitoring; cleanup measures involving removal, treatment or disposal; or operation and maintenance of remedial systems. The environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs.
As of March 31, 2009, Occidental participated in or monitored remedial activities or proceedings at 164 sites. The following table presents Occidental's environmental remediation reserves as of March 31, 2009, the current portion of which is included in accrued liabilities ($68 million) and the remainder in deferred credits and other liabilities - other ($351 million). The reserves are grouped in the following four categories of environmental remediation sites: (1) sites listed or proposed for listing by the U.S. Environmental Protection Agency on the CERCLA National Priorities List (CERCLA NPL); (2) other third-party sites; (3) Occidental-operated sites; and (4) Occidental's closed or non-operated sites.
Number Reserve Balance
of Sites (in millions)
CERCLA NPL sites 40 $ 59
Other third-party sites 74 111
Occidental-operated sites 19 121
Occidental's closed or non-operated sites 31 128
Total 164 $ 419
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As of March 31, 2009, Occidental's environmental reserves exceeded $10 million at 13 of the 164 sites described above, and 113 of the sites had reserves from $0 to $1 million. Occidental expects to expend funds
corresponding to about half of the current environmental reserves over the next four years and the balance over the subsequent ten or more years. Occidental believes its range of reasonably possible additional loss beyond those liabilities recorded for environmental remediation at the sites described above could be up to $400 million. The status of Occidental's involvement with these sites and related significant assumptions have not changed materially since December 31, 2008.
Refer to the "Environmental Liabilities and Expenditures" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Occidental's Annual Report on Form 10-K for the year ended December 31, 2008 for additional information regarding Occidental's environmental expenditures.
Lawsuits, Claims, Commitments, Contingencies and Related Matters
OPC or certain of its subsidiaries are named, in the normal course of business, in lawsuits, claims and other legal proceedings that seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. OPC or certain of its subsidiaries also have been named in proceedings under CERCLA and similar federal, state, local and foreign environmental laws. These environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties and injunctive relief; however, Occidental is usually one of many companies in these proceedings and has to date been successful in sharing response costs with other financially sound companies. With respect to all such lawsuits, claims and proceedings, including environmental proceedings, Occidental accrues reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated.
Lawsuits have been filed in Nicaragua against OxyChem and other companies that once manufactured or used a pesticide, dibromochloropropane (DBCP). These lawsuits claim damages of several billion dollars for alleged personal injuries. In the opinion of management, the claims against OxyChem are without merit because, among other things, the DBCP it manufactured was never sold or used in Nicaragua. In order to preserve its jurisdictional defense, OxyChem elected not to make a substantive appearance in these cases. Nicaraguan courts have entered judgments of approximately $900 million against four defendants, including OxyChem. Under Nicaraguan law, the judgments would be shared equally among the defendants. The plaintiffs attempted to enforce one judgment in Miami. In January 2009, the federal district court in Miami granted summary judgment in favor of OxyChem and refused to enforce the judgment. OxyChem has no assets in Nicaragua and, in the opinion of management, no such Nicaraguan judgment would be enforceable in the United States.
During the course of its operations, Occidental is subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions. While the audits for taxable years through 2007 have concluded for U.S. federal income tax purposes, the 2008 taxable year is currently under audit by the U.S. Internal Revenue Service pursuant to its compliance assurance program. Foreign government tax authorities are in various stages of auditing Occidental, and income taxes for taxable years from 2000 through 2008 remain subject to examination in certain jurisdictions. During the course of such audits, disputes have arisen and other disputes may arise as to facts and matters of law.
Occidental has indemnified various parties against specified liabilities that those parties might incur in the future in connection with purchases and other transactions that they have entered into with Occidental. These indemnities usually are contingent upon the other party incurring liabilities that reach specified thresholds. As of March 31, 2009, Occidental is not aware of circumstances that it believes would reasonably be expected to lead to future indemnity claims against it in connection with these transactions that would result in payments materially in excess of reserves.
The ultimate amount of losses and the timing of any such losses that OPC and its subsidiaries may incur resulting from currently outstanding lawsuits, claims and proceedings, audits, commitments, contingencies and related matters cannot be determined reliably at this time. If these matters were ultimately resolved unfavorably at amounts substantially exceeding Occidental's reserves, an outcome not currently expected, it is possible that such outcome could have a material adverse effect upon Occidental's consolidated financial position or results of operations. However, after taking into account reserves, management does not expect the ultimate resolution of
any of these matters to have a material adverse effect upon Occidental's consolidated financial position or results of operations.
Accounting Changes
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF 03-6-1. This FSP concluded that instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing basic earnings per share (EPS) under the two-class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, with prior period retrospective . . .
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