SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-9210 _____________________
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
95-4035997
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
10889 Wilshire Boulevard
Los Angeles, California
90024
(Address of principal executive offices)
(Zip code)
(310) 208-8800
(Registrant's telephone number, including area code)
_____________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ü No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at June 30, 2005
Common Stock $.20 par value
399,798,823 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
Part I
Financial Information
Item 1.
Financial Statements
Consolidated Condensed Balance Sheets —
June 30, 2005 and December 31, 2004
2
Consolidated Condensed Statements of Operations —
Three and six months ended June 30, 2005 and 2004
4
Consolidated Condensed Statements of Cash Flows —
Six months ended June 30, 2005 and 2004
5
Notes to Consolidated Condensed Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
30
Part II
Other Information
Legal Proceedings
31
Submission of Matters to a Vote of Security-Holders
Item 6.
Exhibits
32
1
PART I FINANCIAL INFORMATION
Item1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(Amounts in millions)
2005
2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
630
1,199
Short-term investments
240
250
Receivables, net
2,859
2,235
Inventories
603
545
Prepaid expenses and other
178
202
Total current assets
4,510
4,431
LONG-TERM RECEIVABLES, net
302
239
INVESTMENTS IN UNCONSOLIDATED ENTITIES
1,869
1,727
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation, depletion and amortization of $9,390 at
June 30, 2005 and $8,626 at December 31, 2004
16,929
14,633
OTHER ASSETS
350
361
23,960
21,391
The accompanying notes are an integral part of these financial statements.
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities
333
459
Accounts payable
1,912
1,557
Accrued liabilities
1,282
1,144
Domestic and foreign income taxes
290
263
Total current liabilities
3,817
3,423
LONG-TERM DEBT, net of current maturities and unamortized discount
3,027
3,345
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes
1,146
1,248
Other
2,898
2,498
4,044
3,746
MINORITY INTEREST
366
327
STOCKHOLDERS' EQUITY
Common stock, at par value
80
79
Additional paid-in capital
4,762
4,652
Retained earnings
7,799
5,664
Accumulated other comprehensive income
65
155
12,706
10,550
3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Amounts in millions, except per-share amounts)
Three Months Ended
Six Months Ended
June 30
REVENUES
Net sales
3,518
2,724
6,821
5,281
Interest, dividends and other income
33
19
66
41
Gains on dispositions of assets, net
143
—
147
3,694
2,743
7,034
5,323
COSTS AND OTHER DEDUCTIONS
Cost of sales
1,628
1,438
3,160
2,818
Selling, general and administrative and other
operating expenses
324
238
600
463
Environmental remediation
10
Exploration expense
111
40
158
94
Interest and debt expense, net
61
62
136
133
2,134
1,778
4,073
3,508
Income before taxes and other items
1,560
965
2,961
1,815
Provision for domestic and foreign income and other taxes
44
384
645
747
Minority interest
23
50
36
Income from equity investments
(45
)
(26
(116
(41
Income from continuing operations
1,532
584
2,382
1,073
Discontinued operations, net
(3
(5
NET INCOME
1,536
581
1,068
BASIC EARNINGS PER COMMON SHARE
3.81
1.48
5.94
2.73
.01
(.01
Basic earnings per common share
3.82
2.72
DILUTED EARNINGS PER COMMON SHARE
3.77
1.46
5.86
2.69
Diluted earnings per common share
3.78
2.68
DIVIDENDS PER COMMON SHARE
0.31
0.275
0.62
0.55
BASIC SHARES
401.9
393.9
401.2
392.8
DILUTED SHARES
407.3
398.9
406.8
398.0
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
CASH FLOW FROM OPERATING ACTIVITIES
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets
700
648
Deferred income tax provision
Other noncash charges to income
305
176
Gains on disposition of assets, net
(147
(1
Dry hole and impairment expense
117
69
Changes in operating assets and liabilities
(752
(460
Other operating, net
(89
(76
Operating cash flow from continuing operations
2,359
1,468
Operating cash flow from discontinued operations
(6
Net cash provided by operating activities
2,353
1,457
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures
(1,054
(804
Purchase of businesses and other interests
(1,720
(177
Sales of businesses and disposal of property, plant and equipment, net
53
Purchase of short-term investments
(46
(125
Sale of short-term investments
56
105
Equity investments and other investing, net
355
(215
Net cash used by investing activities
(2,356
(1,212
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt
Payments of long-term debt and capital lease liabilities
(535
Redemption of trust preferred securities
(466
Proceeds from issuance of common stock
Cash dividends paid
(232
(208
Stock options exercised
64
110
(4
Net cash used by financing activities
(566
(565
Decrease in cash and cash equivalents
(569
(320
Cash and cash equivalents—beginning of period
573
Cash and cash equivalents—end of period
253
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2005
1. General
In these unaudited consolidated condensed financial statements, "Occidental" means Occidental Petroleum Corporation (OPC) and/or one or more entities where it owns a majority voting interest. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations, but resultant disclosures are in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K).
In the opinion of Occidental’s management, the accompanying consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly present Occidental’s consolidated financial position as of June 30, 2005, and the consolidated results of operations and cash flows for the three and six months then ended, as applicable. The results of operations and cash flows for the period ended June 30, 2005, are not necessarily indicative of the results of operations or cash flows to be expected for the full year.
Certain financial statements and notes for the prior year have been changed to conform to the 2005 presentation.
In 2005, Occidental reclassified its auction rate security investments from cash and cash equivalents to short-term investments on its consolidated balance sheets. These investments contain a short-term repricing feature. As a result, their carrying values approximate their fair values. There have been no realized gains or losses on these investments during 2005 or 2004. Prior period financial statements have been reclassified to conform to the current presentation. This reclassification resulted in no change to Occidental’s results of operations or cash flow from operations for any period.
Refer to Note 1 to the consolidated financial statements in the 2004 Form 10-K for a summary of significant accounting policies, including critical accounting policies.
2. Asset Acquisitions, Dispositions and Other Transactions
In June 2005, Occidental closed a transaction in the Permian Basin which, combined with other acquisitions of oil and gas property interests completed earlier in the year and dispositions of a portion of the acquired properties, resulted in the addition of approximately 25,000 barrels of oil equivalent (BOE) in daily production. The second quarter production amounts included only a portion of this volume increase, and the remainder will be added in the third quarter. The gross cash outlay to acquire the interests in this production was $1.4 billion, of which $1.1 billion was paid in the second quarter of 2005. This was partially offset by cash proceeds totaling $178 million from dispositions of a portion of the acquired properties, the largest of which occurred in July 2005. Occidental hedged a portion of its existing Permian Basin production in anticipation of these transactions. See Note 10 for further information.
In June 2005, Occidental completed the purchase of three chlor-alkali chemical manufacturing facilities from Vulcan Materials Company (Vulcan) for $214 million in cash, plus contingent payments based upon the future performance of these facilities and the assumption of certain liabilities. To obtain regulatory approval for this acquisition, Occidental divested itself of one of the facilities.
In the second quarter of 2005, Occidental redeemed $75 million of 4.1% senior medium-term notes. This resulted in an after-tax charge of $1 million.
In the first quarter of 2005, Occidental redeemed all of its 7.65-percent senior notes which reduced current maturities of long-term debt by approximately $459 million. This resulted in an after-tax charge of $6 million.
3. Accounting Changes
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board Opinion (APB) No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.” This Statement requires retrospective application to prior periods' financial statements of a change in accounting principle. It applies both to voluntary changes and to changes required by an accounting pronouncement if the pronouncement does not include specific transition provisions. APB 20 previously required that most voluntary changes in accounting principles be recognized by recording the cumulative effect of a change in accounting principle. SFAS 154 is effective for fiscal years beginning after December 15, 2005. Occidental plans to adopt this statement on January 1, 2006 and it is not expected to have a material effect on the financial statements upon adoption.
In April 2005, the FASB issued FASB Staff Position No. (FSP) FAS 19-1, “Accounting for Suspended Well Costs.” FSP FAS 19-1 provides new accounting guidance that specifies when successful efforts companies can capitalize exploratory well costs. The guidance also requires new disclosures related to these costs. FSP FAS 19-1 is effective in the first reporting period beginning after April 4, 2005 and should be applied prospectively to existing and new exploratory well costs. Occidental plans to adopt this statement effective July 1, 2005 and it is not expected to have a material effect on the financial statements upon adoption.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47 specifies the accounting treatment for conditional asset retirement obligations under the provisions of Statement of Accounting Standard (SFAS) No. 143. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Occidental plans to adopt this statement effective December 31, 2005. Occidental is currently assessing the effect of FIN 47 on its financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R) "Share-Based Payments." SFAS No. 123R requires that the cost from all share-based payment transactions, including stock options, be recognized in the financial statements at fair value. Occidental currently uses the provisions of APB No. 25 to account for its share-based payments. Public companies are required to adopt the provisions of SFAS No. 123R by the beginning of the first fiscal year ending after June 15, 2005. As permitted by the standard, Occidental will early adopt the provisions of SFAS 123R in the third quarter of 2005. Since most of Occidental’s existing stock-based compensation is already recorded on the income statement, Occidental decided to early adopt SFAS 123R, so that the remaining awards are accounted for in a similar manner. The cumulative effect of adopting this statement is expected to have an insignificant effect on the financial statements. The effect on earnings, subsequent to adoption, will depend on Occidental’s future stock price and the amount of stock-based compensation that is awarded to employees in the future.
7
4. Comprehensive Income
The following table presents Occidental’s comprehensive income items (in millions):
Periods Ended June 30
Three Months
Six Months
Net income
Other comprehensive income items
Foreign currency translation adjustments
(12
(10
Derivative mark-to-market adjustments (a)
(81
(265
Minimum pension liability adjustments
Unrealized gains on securities
85
39
188
68
Other comprehensive income, net of tax
(90
59
Comprehensive income
1,539
620
2,292
1,127
(a) See Note 10 for further information.
5.
Supplemental Cash Flow Information
During the six months ended June 30, 2005 and 2004, net cash payments for federal, foreign and state income taxes were approximately $715 million and $404 million, respectively. Interest paid (net of interest capitalized of $7 million and $2 million, respectively) totaled approximately $125 million and $104 million for the six months ended June 30, 2005 and 2004, respectively.
6.
A portion of inventories is valued under the LIFO method. The valuation of LIFO inventory for interim periods is based on Occidental's estimates of year-end inventory levels and costs. Inventories consist of the following (in millions):
Balance at
December 31, 2004
Raw materials
Materials and supplies
189
157
Finished goods
402
380
657
599
LIFO reserve
(54
Total
8
7.
Asset Retirement Obligations
The following table summarizes the activity of the asset retirement obligations of which $6 million and $4 million is included in accrued liabilities in 2005 and 2004, respectively, and the remaining balance in both years is included in deferred credits and other liabilities – other (in millions):
Six Months Ended June 30
Beginning balance
206
167
Liabilities incurred in the period
9
Liabilities settled in the period
Acquisitions and other
20
Accretion expense
Revisions to estimated cash flows
(2
Ending balance
233
204
8.
Environmental Liabilities and Expenditures
Occidental’s operations in the United States are subject to stringent federal, state and local laws and regulations relating to improving or maintaining environmental quality. Foreign operations also are subject to environmental-protection laws. The laws that require or address environmental remediation may apply to past waste disposal practices and releases. In many cases, the laws apply regardless of fault, the legality of the original activities or current ownership or control of sites. OPC or certain of its subsidiaries are currently participating in environmental assessments and cleanups under these laws at sites subject to the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), comparable state sites and other domestic and foreign remediation sites, including Occidental facilities and previously owned sites.
The following table presents Occidental’s environmental remediation reserves at June 30, 2005, which are included in accrued liabilities ($76 million) and deferred credits and other liabilities – other ($340 million). The reserves are grouped by three categories of environmental remediation sites as follows ($ amounts in millions):
# of Sites
Reserve
CERCLA & Equivalent Sites
124
$ 228
Active Facilities
18
112
Closed or Sold Facilities
76
183
$ 416
In determining the environmental remediation reserves and the reasonably possible range of loss, Occidental refers to currently available information, including relevant past experience, available technology, regulations in effect, the timing of remediation and cost-sharing arrangements. Occidental expects it may continue to incur additional liabilities beyond those recorded for environmental remediation at these and other sites. The range of reasonably possible loss for existing environmental remediation matters could be up to $385 million beyond the amount accrued.
The following table shows additional detail regarding reserves for CERCLA or CERCLA-equivalent sites in which OPC or certain of its subsidiaries were involved at June 30, 2005 ($ amounts in millions):
Description
Minimal/No Exposure (a)
102
$ 7
Reserves between $1-10 MM
15
Reserves over $10 MM
160
(a)
Includes 27 sites for which Maxus Energy Corporation has retained the liability and indemnified Occidental, 7 sites where Occidental has denied liability without challenge, 54 sites where Occidental’s reserves are less than $50,000 each, and 14 sites where reserves are between $50,000 and $1 million each.
Refer to Note 8 to the consolidated financial statements in the 2004 Form 10-K for additional information regarding Occidental’s environmental expenditures.
9.
Lawsuits, Claims, Commitments, Contingencies and Related Matters
OPC and certain of its subsidiaries have been named in a substantial number of lawsuits, claims and other legal proceedings. These actions 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 and 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 and civil penalties; 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 believes it is probable a liability has been incurred and the amount of loss can be reasonably estimated.
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. Disputes arise during the course of such audits as to facts and matters of law. In May 2005, Occidental entered into a closing agreement with the Internal Revenue Service (IRS) resolving certain foreign tax credit issues as part of the IRS audit of tax years 1997-2000. The closing agreement was completed after an extensive IRS review of various complex tax issues and negotiations between Occidental and the IRS. As a result of the closing agreement, Occidental recorded a tax benefit of about $619 million for the reversal of tax reserves that were previously established for those foreign tax credit issues. This resolution did not have a significant current cash effect. Taxable years prior to 1998 are closed for U.S. federal income tax purposes. Taxable years 1998 through 2003 continue to be open for audit by the IRS. Occidental believes that it is reasonably possible that additional issues for taxable years 1998 to 2000 could be concluded during 2005 with a favorable effect on the statement of operations, and that such resolutions, if they occur, would not be material to its financial position.
Occidental has guarantees outstanding at June 30, 2005 which encompass performance bonds, letters of credit, indemnities, commitments and other forms of guarantees provided by Occidental to third parties, mainly to provide assurance that Occidental and/or its subsidiaries and affiliates will meet their various obligations (guarantees). At June 30, 2005, the notional amount of these guarantees was approximately $500 million. Of this amount, approximately $400 million relates to Occidental’s guarantee of equity investees’ debt and other commitments. The remaining $100 million relates to various indemnities and guarantees provided to third parties. The amount recorded on the consolidated balance sheet for these guarantees was immaterial.
It is impossible at this time to determine the ultimate liabilities that OPC and its subsidiaries may incur resulting from any lawsuits, claims and proceedings, audits, commitments, contingencies and related matters. If these matters were to be ultimately resolved unfavorably at amounts substantially exceeding Occidental’s reserves, an outcome not currently anticipated, 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.
10.
Derivative Activities
In the second quarter of 2005, Occidental terminated all of its interest rate swaps that were accounted for as fair value hedges. These hedges had effectively converted approximately $1.2 billion of fixed-rate debt to variable-rate debt. The fair value of the swaps at termination resulted in a gain of approximately $20 million which will be amortized into income over the remaining life of the previously-hedged debt.
During the first quarter of 2005, Occidental entered into a series of fixed price swaps and costless collar agreements that qualify as cash-flow hedges for the sale of its crude oil production. These hedges, which begin in July 2005 and continue to the end of 2011, will hedge less than 4% of Occidental’s current crude oil production. The June 30, 2005 accumulated other comprehensive income account includes derivative mark-to-market after-tax losses of $249 million from changes in these cash flow hedges.
11.
Income Taxes
The provision for taxes based on income for the 2005 and 2004 interim periods was computed in accordance with Interpretation No. 18 of APB No. 28 on reporting taxes for interim periods and was based on projections of total year pre-tax income.
The tax provision for the three and six months ended June 30, 2005, includes a $619 million tax benefit related to the resolution of certain IRS tax issues. See Note 9 for further information. The tax provision for the six months ended June 30, 2005 includes a net $10 million charge related to a state income tax issue and the tax provision for the six months ended June 30, 2004 includes a $20 million credit related to a first quarter 2004 settlement of an issue with the IRS.
11
12.
Stock-Based Compensation
Occidental accounts for its stock incentive plans (Plans) using the intrinsic value method under APB No. 25 and related interpretations. Had compensation expense for those Plans been determined in accordance with SFAS No. 123, “Accounting for Stock Based Compensation”, Occidental’s pro-forma net income and earnings per share would have been as follows (in $ millions, except per share amounts):
Add: Stock-based compensation included in net income, net of tax, under APB No. 25
38
73
17
Deduct : Stock-based compensation, net of tax, determined under SFAS No. 123 fair value method
(56
(94
Pro-forma net income
1,518
577
2,361
1,059
Earnings Per Share:
Basic – as reported
Basic – pro forma
5.89
2.70
Diluted – as reported
Diluted – pro forma
3.73
1.45
5.80
2.66
Effective as of June 20, 2005, the holders of substantially all of Occidental’s unvested performance stock awards agreed to the amendment of such awards to provide cash settlement for award payouts in excess of 100% of the target. This modification does not change the amount of expense that Occidental records for its performance stock awards under APB No. 25, except that the cash settled portion of the performance stock award was reclassified from additional paid-in capital to other liabilities on the balance sheet.
12
13.
Retirement Plans and Postretirement Benefits
Occidental has various defined contribution and defined benefit retirement plans for its salaried, domestic union and nonunion hourly, and certain foreign national employees.
The following tables set forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and postretirement benefit plans (in millions):
Three Months Ended June 30,
Net Periodic Benefit Cost
Pension Benefit
Postretirement Benefit
Service cost
$ 4
$ 2
$ 3
Interest cost
Expected return on plan assets
(9
Recognized actuarial loss
$ 1
$ 14
$ 5
$ 13
Six Months Ended June 30,
(16
$ 28
$ 11
$ 25
On December 8, 2003, President Bush signed into law a bill that expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. Regulations governing the Medical Prescription drug benefit and other key elements of the Medicare Modernization Act were released by the Department of Health and Human Services Centers for Medicare and Medicaid Services on January 21, 2005. Occidental is reviewing its retiree health care plans in light of these final regulations, which may change Occidental’s obligations under the plans. At this time, Occidental is unable to determine the impact of the new Medicare provisions. The retiree medical obligations and costs reported do not reflect the impact of this legislation in accordance with FSP No. FAS 106-2. Occidental intends to adopt the accounting requirements of this standard and adjust its retiree medical obligations and costs by the end of 2005.
Occidental funded approximately $2 million in cash to its domestic defined benefit pension plans for the six months ended June 30, 2005 and it does not expect to contribute any further amount in 2005.
Refer to Note 13 to the consolidated financial statements in the 2004 Form 10-K for additional information regarding Occidental’s retirement plans and postretirement benefits.
14.
Investments in Unconsolidated Entities
In May 2005, Occidental sold 11 million shares of Lyondell Chemical Company (Lyondell) for gross proceeds of approximately $300 million. This sale resulted in a second quarter 2005 pre-tax gain of $140 million. Occidental has no current plans to divest itself of its remaining Lyondell shares. However, Occidental regularly reviews and analyzes its investments and other operations in order to determine how its stockholders’ interests are best served. Occidental still owns 30.3 million of Lyondell shares and warrants to purchase an additional 5 million shares of Lyondell stock. Occidental continues to account for this investment on the equity method since it has the ability to exercise significant influence over Lyondell.
13
In May 2005, Dolphin Energy Limited signed a gas sales agreement with Dubai Supply Authority (DUSUP) to deliver future supplies of Dolphin gas from Qatar to a power plant in Jebel Ali. The agreement provides for the supply of up to 700 million standard cubic feet of gas per day for a period of 25 years.
In April 2005, Valero Energy Corp. (Valero) and Premcor Inc. (Premcor) announced that the companies have executed a merger agreement for Valero to acquire Premcor in an $8 billion transaction. Under the terms of the agreement, Premcor shareholders will have the right to receive 0.99 shares of Valero common stock or $72.76 in cash for each share of Premcor common stock, or they can receive a combination of both, subject to proration so that 50 percent of the total Premcor shares are acquired for cash. At June 30, 2005, Occidental owned over 9 million shares of Premcor.
15.
Industry Segments
As of January 1, 2005, Occidental revised its reporting of segment earnings to show segment earnings before income taxes. All domestic and foreign income tax expense is now reflected in the “Corporate and Other” column. This change has been retrospectively applied to prior period results. The following table presents Occidental’s interim industry segment and corporate disclosures (in millions):
Oil and Gas
Chemical
Corporate and Other
Six Months Ended June 30, 2005
4,572
2,189
60
Pretax operating profit (loss)
2,674
439
(86
Income taxes
(645
(b)
Net income (loss)
(731
(c)
Six Months Ended June 30, 2004
3,476
1,745
1,895
148
(223
1,820
(747
Discontinued operations, net of tax
(975
(d)
Includes unallocated net interest expense, administration expense and other items.
Includes all foreign and domestic income taxes. The 2005 amount includes a $619 million tax benefit related to the resolution of certain tax issues with the IRS and a net $10 million charge related to a state income tax issue. The 2004 amount includes a $20 million tax credit related to a settlement of an IRS issue.
Includes a pre-tax gain on sale of Lyondell stock of $140 million ($89 million net of tax)
Includes a trust preferred securities redemption pre-tax charge of $11 million ($7 million net of tax).
16.
Subsequent Events
In July 2005, Occidental received a Royal Decree issued by the Sultanate of Oman formally approving the contract to develop the Mukhaizna oil field, one of the largest oilfields in Oman. Under the terms of the new production sharing contract, Occidental will be the operator of the field and hold a 45-percent working interest.
In July 2005, Occidental gave notice that it will redeem, out of existing cash on hand, three debt issues with a total notional amount of $333 million, most of which is due in 2007. These debt issues are classified as current liabilities on the June 30, 2005 balance sheet.
14
Occidental suspended all activities in Libya in 1986 as a result of economic sanctions imposed by the U.S. government. During the imposition of sanctions, Occidental derived no economic benefit from its Libyan interests and had no Libyan assets on its balance sheet. In 2004, the U.S. government lifted all of the principal economic sanctions against Libya. However, Libya continues to be designated as a country supporting international terrorism under section 6(j) of the U.S. Export Administration Act and, as such, continues to be subject to certain limited sanctions.
On June 28, 2005, Occidental reached agreement with the National Oil Corporation of Libya (NOC), subject to final Libyan governmental approval, to resume its participation in the operation of the assets that Occidental left in 1986. On July 25, 2005, Occidental was advised by the NOC that the Libyan authorities approved the terms and conditions of the re-entry agreement. The agreement allows Occidental to return to its Libyan operations on generally the same terms in effect when activities were suspended. Those assets consist of 3 producing contracts in the Sirte Basin and four exploration blocks. Net production to Occidental under the contracts is initially expected to be in the range of 12,000 to 15,000 barrels of oil per day. The agreement requires Occidental to pay to NOC approximately $133 million in re-entry bonuses and capital adjustment and work-in-progress payments and $10 million per year while Occidental continues to operate in Libya as reimbursements for past development costs associated with the historical assets. In addition, Occidental has committed to spend $90 million over the next five years in the four exploration blocks. Currently, Occidental’s rights in the producing fields extend through early 2009 and early 2010.
Separately, in January 2005, Occidental participated in the EPSA IV exploration bid round in Libya. Occidental was the successful bidder on nine of the 15 areas available. Occidental will operate five onshore areas and will have a 90-percent exploration working interest. In addition, Occidental will have a 35-percent exploration working interest in four offshore areas. The offshore areas will be operated by Woodside Petroleum Ltd. Occidental paid approximately $90 million in exploration lease bonuses as successful bidder and committed to spend an additional $125 million over the next 5 years.
On July 21, 2005, the Federal Energy Regulatory Commission (FERC) announced the approval of Occidental’s plan to construct a $450 million liquefied natural gas terminal and a related 26-mile-long pipeline near Corpus Christi, Texas. The terminal, if built, is expected to be able to deliver 1 billion cubic feet of natural gas to consumers, will be adjacent to and integrated with Occidental’s existing Ingleside chemical and power facilities.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations
Occidental (as defined in Note 1 to the consolidated condensed financial statements) reported net income for the first six months of 2005 of $2.4 billion, on net sales of $6.8 billion, compared with net income of $1.1 billion, on net sales of $5.3 billion, for the same period of 2004. Basic earnings per common share were $5.94 for the first six months of 2005, compared with basic earnings per share of $2.72 for the same period of 2004. Occidental reported net income for the second quarter of 2005 of $1.5 billion, on net sales of $3.5 billion, compared with net income of $581 million, on net sales of $2.7 billion, for the same period of 2004. Basic earnings per common share were $3.82 for the second quarter of 2005, compared with basic earnings per share of $1.48 for the same period of 2004.
Net income for the first six months and the second quarter of 2005 included a $619 million tax benefit resulting from an IRS settlement, a $140 million pre-tax gain on sale of 11 million shares of Lyondell stock and a $26 million pre-tax expense related to a contract settlement. Net income for the first six months of 2005 included a $10 million pre-tax interest charge to redeem outstanding 7.65-percent senior notes and a net $10 million charge related to a state income tax issue. Net income for the first six months of 2004 included a pre-tax charge of $11 million for the redemption of all of the outstanding 8.16-percent Trust Preferred Redeemable Securities (trust preferred securities) and a $20 million credit from settlement of a tax issue. Net income for the second quarter of 2005, compared to the same period in 2004, reflected higher oil and gas prices and higher chemical margins resulting from higher chemical prices, partially offset by lower oil production, higher oil and gas production and exploration costs, higher DD&A expense and higher energy and raw material costs.
Selected Income Statement Items
The increase in net sales of $794 million and $1.5 billion for the three and six months ended June 30, 2005, compared with the same periods in 2004, reflected higher crude oil, natural gas and chemical prices. For the three and six months ended June 30, 2005, the gains on disposition of assets, net account included a pre-tax gain of $140 million on the sale of 11 million shares of Lyondell stock.
The increase in cost of sales of $190 million and $342 million for the three and six months ended June 30, 2005, respectively, compared with the same periods in 2004, reflected higher oil and gas production costs, higher DD&A expense and higher energy and chemicals raw material costs. The increase of $86 million and $137 million in selling, general and administrative and other operating expenses for the three and six months ended June 30, 2005, compared to the same periods in 2004, reflected increases in share-based compensation expense and various corporate costs, higher operating costs and a $26 million contract settlement. The increase in exploration expense of $71 million and $64 million for the three and six months ended June 30, 2005, respectively, compared with the same periods in 2004, reflected a $66 million pre-tax unproved property impairment as a result of an unsuccessful deep gas well at Elk Hills. The provision for income taxes for the three and six months ended June 30, 2005, includes a $619 million tax benefit related to the resolution of certain IRS tax issues. The provision for income taxes for the six months ended June 30, 2005 includes a net $10 million charge related to a state income tax issue and the provision for income taxes for the six months ended June 30, 2004 includes a $20 million credit related to a first quarter 2004 settlement of an issue with the IRS. The increase in income from equity investments of $19 million and $75 million for the three and six months ended June 30, 2005, respectively, compared with the same periods in 2004, was primarily attributable to improved results from the Lyondell equity investment.
Selected Analysis of Financial Position
The increase in receivables, net, of $624 million at June 30, 2005, compared with December 31, 2004, was primarily due to higher sales prices. The increase in property, plant and equipment of $2.3 billion at June 30, 2005, compared with December 31, 2004, was due to the Permian Basin oil and gas transactions, the acquisition of chlor-alkali chemical manufacturing facilities from Vulcan and continued capital investment in oil and gas and chemical assets. The increase in accounts payable of $355 million at June 30, 2005, compared with December 31, 2004, was due to higher payable balances in the oil and gas marketing and trading operations. The increase in deferred credits and other liabilities – other of $400 million was primarily due to increases in derivative non-current liabilities related to crude oil production hedges and accruals related to the Vulcan plant and Permian Basin acquisitions partially offset by the reduction in liabilities related to the IRS settlement.
Segment Operations
As of January 1, 2005, Occidental revised its reporting of segment earnings to show segment earnings before income taxes. All domestic and foreign income tax expense is now reflected in the income taxes line under Unallocated Corporate Items. This reporting change has been retrospectively applied to prior period results. The following table sets forth the sales and earnings of each industry segment and unallocated corporate items (in millions):
Segment Net Sales
Oil and gas (a)
1,783
1,128
911
37
Net Sales
Segment Earnings
Oil and gas
1,325
980
225
92
1,550
1,072
3,113
2,043
Unallocated Corporate Items
Interest expense, net (b)
(47
(60
(108
(128
Income taxes (a,c)
(44
(384
Other (d)
22
(95
Income from Continuing Operations
Net Income
Revenues and income tax expense include taxes owed by Occidental but paid by governmental entities on its behalf. Oil and gas pre-tax income includes the following revenue amounts by period (in millions): second quarter 2005 - $226, second quarter 2004 - $117, first six months 2005 - $413, first six months 2004 - $233.
The second quarter 2005 includes a $1 million pre-tax interest charge to redeem all the outstanding 4.1-percent medium term notes and the six months 2005 also includes a $10 million charge to redeem all the outstanding 7.65-percent senior notes. The six months 2004 includes an $11 million pre-tax interest charge to redeem all the outstanding 8.16-percent Trust Preferred Redeemable Securities.
The second quarter 2005 includes a $619 million tax benefit resulting from the resolution of certain tax issues with the IRS. The six months 2005 also includes a net $10 million charge related to a state income tax issue. The six months 2004 includes a $20 million credit related to a first quarter settlement of an issue with the IRS.
The second quarter 2005 includes a $140 million pre-tax gain from the sale of 11 million shares of Lyondell Chemical Company, which represented approximately 27 percent of Occidental’s investment.
Significant Items Affecting Earnings
Occidental’s results of operations often include the effects of significant transactions and events affecting earnings that vary widely and unpredictably in nature, timing and amount. Therefore, management uses a measure called “core earnings”, which excludes those items. This non-GAAP measure is not meant to disassociate those items from management’s performance, but rather is meant to provide useful information to investors interested in comparing Occidental’s earnings performance between periods. Reported earnings are considered representative of management’s performance over the long term. Core earnings is not considered to be an alternative to operating income in accordance with generally accepted accounting principles.
The following table sets forth the core earnings and significant items affecting earnings for each operating segment and corporate for the three months ended June 30, 2005 and 2004:
Three Months Ended June 30
(in millions, except per-share amounts)
EPS
TOTAL REPORTED EARNINGS
Less: Contract settlement
Segment Core Earnings
1,351
No significant items affecting earnings
Total Segment Core Earnings
1,576
Corporate
Results *
(14
(491
Less:
Gain on sale of Lyondell shares
140
Settlement of federal tax issue
619
Debt repurchase expense
Tax effect of pre-tax adjustments
(51
Corporate results
(725
(488
Total Core Earnings
851
2.12
1.49
* Includes interest expense, income taxes, general and administrative and other expense, and certain non-core items.
The following table sets forth the core earnings and significant items affecting earnings for each operating segment and corporate for the six months ended June 30, 2005 and 2004:
2,700
3,139
(11
State tax issue charge, net
Trust preferred securities redemption charge
(1,422
(983
1,717
4.28
1,060
Worldwide Effective Tax Rate
The following table sets forth the calculation of the worldwide effective tax rate for reported income and core earnings:
(in millions)
REPORTED INCOME
Corporate and other
26
(104
Pre-tax income
968
Income tax expense (benefit)
Federal and State
(256
214
93
407
Foreign (a)
300
170
552
340
Worldwide effective tax rate
3%
40%
21%
41%
CORE INCOME
(113
(212
1,463
2,924
1,831
Income tax expense
312
655
431
612
1,207
771
42%
Occidental’s three and six months ended June 30, 2005 worldwide effective tax rate was 3% and 21%, respectively. The three and six months ended June 30, 2005 worldwide tax rate reflected a $619 million tax benefit related to the resolution of certain tax issues with the IRS. The recorded tax benefit was the result of a closing agreement with the IRS, which resolved certain foreign tax credit issues as part of the IRS audit of tax years 1997 - 2000.
Oil and Gas Segment
Summary of Operating Statistics
Net Production Per Day:
Crude Oil and Natural Gas Liquids (MBL)
United States
245
260
259
Latin America
75
86
82
Middle East
90
95
Other Eastern Hemisphere
Natural Gas (MMCF)
548
513
538
520
58
72
74
Barrels of Oil Equivalent (MBOE) Per Day
Consolidated subsidiaries
530
547
533
544
Other interests
25
27
Worldwide production
555
574
560
571
Average Sales Price:
Crude Oil ($/BBL)
46.72
35.44
45.47
34.02
42.09
30.60
40.99
29.83
48.72
34.51
45.18
32.18
46.84
32.26
42.76
30.79
Total consolidated subsidiaries
46.19
34.05
44.41
32.62
34.99
21.46
31.60
20.67
Total Worldwide
45.41
33.12
43.53
31.77
Natural Gas ($/MCF)
6.18
4.90
6.07
4.95
0.96
0.97
2.28
2.47
2.25
2.35
5.26
4.26
5.15
4.40
0.13
0.14
5.16
5.02
Oil and gas segment and core earnings for the six months ended June 30, 2005 were $2.7 billion, compared with $1.9 billion for the same period of 2004. For the three months ended June 30, 2005, oil and gas segment earnings were $1.33 billion and core earnings were $1.35 billion, compared with $1.0 billion of segment and core earnings for the same period of 2004. The increase in earnings for the three and six months ended June 30, 2005, compared with the same periods in 2004, primarily reflected higher crude oil and natural gas prices partially offset by lower oil production, higher operating expenses and higher exploration expense.
The increase in net sales of $570 million and $1.1 billion for the three and six months ended June 30, 2005, compared with the same periods in 2004, primarily reflected higher crude oil and natural gas prices partially offset by lower crude oil production.
The decrease in daily production of 19,000 barrels of oil equivalent (BOE) and 11,000 BOE for the three and six months ended June 30, 2005, compared with the same periods in 2004, was due to several factors. As discussed in the 2004 Form 10-K, price changes impact Occidental’s share of volumes
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reported from its production-sharing contracts in Qatar, Oman, Yemen and Long Beach. These price changes adversely impacted second quarter daily 2005 production by 15,000 BOE compared to the same period in 2004. In addition, production was lower due to Horn Mountain scheduled maintenance, completion of which was delayed by adverse weather conditions in the Gulf of Mexico. Production was also impacted by lower production from Occidental’s non-operated assets in Pakistan, Russia and Yemen.
The average West Texas Intermediate price in the second quarter of 2005 was $53.17 per barrel and the average New York Mercantile Exchange (NYMEX) natural gas price for the second quarter of 2005 was $6.46 per million BTU’s. Occidental’s realized oil price for the second quarter 2005 was $45.41 per barrel, compared to $33.12 for the second quarter 2004. For the first six months of 2005, Occidental’s realized price was $43.53 per barrel compared to last year’s realized price of $31.77. Occidental’s realized oil price increased $3.70 per barrel in the second quarter 2005, compared to the first quarter 2005, while WTI prices increased by $3.33 per barrel in the same period. A change of 10 cents per million BTU’s in NYMEX gas prices has a quarterly impact on oil and gas segment earnings of $5 million while a $1.00 per barrel change in oil prices has a quarterly impact of $34 million, in each case before the effect of income taxes.
Average worldwide production costs for the first six months of 2005 were $8.18 per BOE compared to the average 2004 production cost of $6.95 per BOE. Production costs increased due to higher production-related taxes and higher utility costs resulting from higher oil and gas prices.
Occidental expects third quarter 2005 oil and gas production to be approximately 570,000 BOE per day. However, production could vary due to price-driven adjustments in the volumes under production-sharing contracts in Oman, Qatar, Yemen and Long Beach and weather conditions in the Gulf of Mexico, which impact the Horn Mountain operations.
In June 2005, Occidental closed a transaction in the Permian Basin which, combined with other acquisitions of oil and gas property interests completed earlier in the year and dispositions of a portion of the acquired properties, resulted in the addition of approximately 25,000 barrels of oil equivalent (BOE) in daily production. The second quarter production amounts included only a portion of this volume increase, and the remainder will be added in the third quarter. The gross cash outlay to acquire the interests in this production was $1.4 billion, of which $1.1 billion was paid in the second quarter of 2005. This was partially offset by cash proceeds totaling $178 million from dispositions of a portion of the acquired properties, the largest of which occurred in July 2005. Occidental hedged a portion of its existing Permian Basin production ranging from 12,000 to 16,000 barrels of oil per day through 2011 in anticipation of these transactions.
On June 28, 2005, Occidental reached agreement with the National Oil Corporation of Libya (NOC), subject to final Libyan governmental approval, to resume its participation in the operation of the assets that Occidental left in 1986. On July 25, 2005, Occidental was advised by the National Oil Corporation that the Libyan authorities approved the terms and conditions of the re-entry agreement. The agreement allows Occidental to return to its Libyan operations on generally the same terms in effect when activities were suspended. Those assets consist of 3 producing contracts in the Sirte Basin and four exploration blocks. Net production to Occidental under the contracts is initially expected to be in the range of 12,000 to 15,000 barrels of oil per day. The agreement requires Occidental to pay to NOC approximately $133 million in re-entry bonuses and capital adjustment and work-in-progress payments and $10 million per
year while Occidental continues to operate in Libya as reimbursements for past development costs associated with the historical assets. In addition, Occidental has committed to spend $90 million over the next five years in the four exploration blocks. Currently, Occidental’s rights in the producing fields extend through early 2009 and early 2010.
Chemical Segment
Major Product Volumes (Thousands of Tons, except PVC Resins)
Chlorine (a)
746
740
1,451
1,446
Caustic Soda
768
819
1,482
1,551
Ethylene Dichloride
175
100
222
PVC Resins (millions of pounds)
985
1,090
2,010
2,161
Major Product Price Index (Base 1987 through 1990
average price = 1.0)
Chlorine
2.65
2.00
2.60
1.80
1.67
0.61
1.59
0.66
1.56
1.51
1.65
1.40
PVC Resins (b)
1.24
1.06
1.27
1.00
Product volumes include those manufactured and consumed internally.
Product volumes produced at former PolyOne facilities, now part of Occidental, are excluded from the product price indexes.
Chemical segment and core earnings for the six months ended June 30, 2005 were $439 million, compared with $148 million for the same period of 2004. Chemical segment and core earnings for the three months ended June 30, 2005 were $225 million, compared with $92 million for the same period of 2004. The increase in earnings for the three and six months ended June 30, 2005, compared with the same periods in 2004, primarily reflected higher margins due to higher sales prices for caustic soda, polyvinyl chloride resins (PVC), vinyl chloride monomer (VCM) and chlorine partially offset by higher energy and feedstock costs.
The increase in net sales of $217 million and $444 million for the three and six months ended June 30, 2005, respectively, compared with the same periods in 2004, primarily reflected higher sales prices for caustic soda, PVC, VCM and chlorine partially offset by lower sales volume for VCM and PVC.
Occidental expects third quarter 2005 earnings to be similar to second quarter 2005. Occidental expects a small reduction in product demand which may be offset by the benefit of the acquisition of the Vulcan chlor-alkali facilities discussed below.
In June 2005, Occidental completed the purchase of three chlor-alkali chemical manufacturing facilities from Vulcan Materials Company (Vulcan) for $214 million in cash, plus contingent payments based upon the future performance of these facilities and the assumption of certain liabilities. To obtain regulatory approval for this acquisition Occidental divested itself of one of the facilities.
The three and six months ended June 30, 2005, unallocated corporate items – income taxes account includes a $619 million tax benefit related to the resolution of certain IRS tax issues. The unallocated corporate items – income taxes for the six months ended June 30, 2005 includes a net $10 million charge related to a state income tax issue and for the six months ended June 30, 2004 includes a $20 million credit related to a first quarter 2004 settlement of an issue with the IRS.
In April 2005, Valero Energy Corp. (Valero) and Premcor Inc. (Premcor) announced that the companies have executed a merger agreement for Valero to acquire Premcor in an $8 billion transaction. Under the terms of the agreement, Premcor shareholders will have the right to receive 0.99 shares of Valero common stock or $72.76 in cash for each share of Premcor common stock, or they can receive a combination of both, subject to proration so that 50 percent of the total Premcor shares are acquired for cash. At June 30, 2005, Occidental owned over 9 million shares of Premcor. If this agreement closes as discussed above, Occidental expects to record a significant gain from the transaction.
Liquidity and Capital Resources
Occidental’s net cash provided by operating activities was $2.4 billion for the first six months of 2005, compared with $1.5 billion for the same period of 2004. The significant increase in operating cash flow in 2005, compared to 2004, resulted from several factors. The most important drivers were the significantly higher oil and natural gas prices and, to a much lesser extent, higher chemical prices. In the first six months of 2005, compared to the same period in 2004, Occidental's realized oil price was higher by 37 percent and Occidental’s realized natural gas price increased 23 percent in the U.S., where approximately 80 percent of Occidental’s natural gas was produced.
Increases in the costs of producing oil and gas, such as utilities, production taxes, purchased goods and services, particularly materials and oil field services, partially offset oil and gas sales price increases, but such cost increases had a much lower effect on cash flow than the realized price increases. Other cost elements, such as labor costs and overheads, are not significant drivers of cash flow because they vary within a narrow range over the short-to-intermediate term.
Increases in sales prices realized for Occidental's major chemical product lines for the first six months of 2005, compared to the same period of 2004, ranged from 18 to 141 percent. Chemical prices increased in the first six months of 2005 at a higher rate than the energy-driven increase in feedstock and power costs, thereby improving margins and cash flow. Chemical price changes had a less significant effect on cash flow because chemical segment earnings and cash flow are significantly smaller than those for the oil and gas segment and because of increases in energy price-driven feedstock and electric power costs, which are major elements of manufacturing cost for the chemical segment's products.
Occidental’s net cash used by investing activities was $2.4 billion for the first six months of 2005, compared with net cash used of $1.2 billion for the same period of 2004. The 2005 amount includes the cash payments for the Permian Basin transactions and the acquisition of the Vulcan chlor-alkali manufacturing facilities which were partially offset by the cash proceeds from the sale of Lyondell shares. The 2004 amount includes a $208 million advance to the Elk Hills Power LLC (EHP) equity investment which EHP used to repay a portion of its debt. The 2004 amount also includes the purchase of a pipeline and gathering system in Texas.
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Capital expenditures for the first six months of 2005 were $1.1 billion, including $988 million for oil and gas and $62 million for chemical. Capital expenditures for the first six months of 2004 were $804 million, including $744 million for oil and gas and $56 million for chemical.
Financing activities used net cash of $566 million in the first six months of 2005, compared with cash used of $565 million for the same period of 2004. The 2005 amount includes net debt payments of approximately $430 million. The 2004 amount includes the total cash paid of $466 million to redeem the trust preferred securities in January 2004.
In the first quarter of 2005, Occidental filed a shelf registration statement for up to $1.5 billion of various securities. No securities have been issued under this shelf.
Available but unused lines of committed bank credit totaled approximately $1.5 billion at June 30, 2005 and cash and cash equivalents and short-term investments totaled $870 million on the June 30, 2005 balance sheet.
At June 30, 2005, under the most restrictive covenants of certain financing agreements, Occidental’s capacity for additional unsecured borrowing was approximately $28.7 billion, and the capacity for the payment of cash dividends and other distributions on, and for acquisitions of, Occidental’s capital stock was approximately $10.7 billion, assuming that such dividends, distributions and acquisitions were made without incurring additional borrowing.
Occidental currently expects to spend approximately $2.3 billion on its 2005 capital spending program. Although its income and cash flows are largely dependent on oil and gas prices and production, Occidental believes that cash on hand, short-term investments and cash generated from operations will be sufficient to fund its operating needs, capital expenditure requirements, dividend payments and potential acquisitions.
In July 2005, Occidental gave notice that it will redeem, out of existing cash on hand, three debt issues with a total notional amount of $333 million, most of which is due in 2007. These debt issues are classified as current liabilities on the June 30, 2005 balance sheet and are expected to more than offset the planned increase in project-financed debt for the Dolphin Project.
The following table presents Occidental’s environmental remediation reserves at June 30, 2005, which are grouped by three categories of environmental remediation sites as follows ($ amounts in millions):
Refer to the “Environmental Expenditures” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2004 Form 10-K for additional information regarding Occidental’s environmental expenditures.
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. Disputes arise during the course of such audits as to facts and matters of law. In May 2005, Occidental entered into a closing agreement with the IRS resolving certain foreign tax credit issues as part of the IRS audit of tax years 1997-2000. The closing agreement was completed after an extensive IRS review of various complex tax issues and negotiations between Occidental and the IRS. As a result of the closing agreement, Occidental recorded a tax benefit of about $619 million for the reversal of tax reserves that were previously established for those foreign tax credit issues. This resolution did not have a significant current cash effect. Taxable years prior to 1998 are closed for U.S. federal income tax purposes. Taxable years 1998 through 2003 continue to be open for audit by the IRS. Occidental believes that it is reasonably possible that additional issues for taxable
years 1998 to 2000 could be concluded during 2005 with a favorable effect on the statement of operations, and that such resolutions, if they occur, would not be material to its financial position.
Accounting Changes
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.” This Statement requires retrospective application to prior periods' financial statements of a change in accounting principle. It applies both to voluntary changes and to changes required by an accounting pronouncement if the pronouncement does not include specific transition provisions. APB 20 previously required that most voluntary changes in accounting principles be recognized by recording the cumulative effect of a change in accounting principle. SFAS 154 is effective for fiscal years beginning after December 15, 2005. Occidental plans to adopt this statement on January 1, 2006 and it is not expected to have a material effect on the financial statements upon adoption.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R) "Share-Based Payments." SFAS No. 123R requires that the cost from all share-based payment transactions, including stock options, be recognized in the financial statements at fair value. Occidental currently uses the provisions of APB No. 25 to account for its share-based payments. Public companies are required to adopt the provisions of SFAS No. 123R by the beginning of the first fiscal year ending after June 15, 2005. As permitted by the standard, Occidental will early adopt the provisions of SFAS 123R in the third quarter of 2005. Since most of Occidental’s existing stock-based compensation is already recorded in the income statement, Occidental decided to early adopt SFAS 123R, so that the remaining awards are accounted for
in a similar manner. The cumulative effect of adopting this statement is expected to have an insignificant effect on the financial statements. The effect on earnings, subsequent to adoption, will depend on Occidental’s future stock price and the amount of stock-based compensation that is awarded to employees in the future.
Safe Harbor Statement Regarding Outlook and Forward-Looking Information
Portions of this report contain forward-looking statements and involve risks and uncertainties that could significantly affect expected results of operations, liquidity, cash flows and business prospects. Factors that could cause results to differ materially include, but are not limited to: exploration risks such as drilling unsuccessful wells, global commodity pricing fluctuations; competitive pricing pressures; higher-than-expected costs, including feedstocks; crude oil and natural gas prices; chemical prices; potential liability for remedial actions under existing or future environmental regulations and litigation; potential liability resulting from pending or future litigation; general domestic and international political conditions; potential disruption or interruption of Occidental’s production or manufacturing facilities due to accidents, political events or insurgent activity; potential failure to achieve expected production from existing and future oil and gas development projects; the supply/demand considerations for Occidental’s products; any general economic recession or slowdown domestically or internationally; regulatory uncertainties; and not successfully completing, or any material delay of, any development of new fields, expansion, capital expenditure, efficiency-improvement project, acquisition or disposition. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “will”, “anticipate”, “plan”, “intend”, “believe”, “expect” or similar expressions that convey the uncertainty of future events or outcomes. Occidental expressly disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed might not occur.
28
In the second quarter of 2005, Occidental terminated all of its interest rate swaps that were accounted for as fair value hedges. These hedges had effectively converted approximately $1.2 billion of fixed-rate debt to variable-rate debt. The fair value of the swaps at termination resulted in a gain of approximately $20 million which will be amortized into income over the remaining life of the previously hedged debt. The table below provides information about Occidental’s long-term debt obligations at June 30, 2005, that are sensitive to changes in interest rates in a tabular presentation. The debt amounts represent principal payments by maturity date.
Year ofMaturity
U.S. DollarFixed-RateDebt
U.S. Dollar Variable Rate Debt
Grand Total (a)
2006
46
2007
2008
405
2009
276
169
445
2010
287
Thereafter
1,540
115
1,655
TOTAL
2,729
284
3,013
Average
interest rate
7.35%
3.01%
6.94%
Fair Value
3,296
3,580
Excludes $5 million of unamortized debt discounts and $19 million of net unamortized gains related to the settled interest rate swaps.
During the first quarter of 2005, Occidental entered into a series of fixed price swaps and costless collar agreements that qualify as cash-flow hedges for the sale of its crude oil production. These hedges, which begin in July 2005 and continue to the end of 2011, will hedge less than 4% of Occidental’s current crude oil production. The following table provides information about these cash-flow hedges in a tabular presentation.
Fair Value Liability
(Volumes in MBL/day)
2005(a)
2011
Crude Oil Fixed
Price Swaps
Daily Volume
$ 142
Average Price
$45.61
$41.61
$40.04
Crude OilCostless Collars
249
Average Floor
$44.00
$41.33
$40.43
$34.07
$33.15
$33.00
$32.92
Average Cap
$49.75
$48.05
$45.21
$47.47
$47.41
$46.35
$46.27
$ 391
(a) Hedges for 2005 are in place only from July 2005 to December 2005.
For the six months ended June 30, 2005, there were no other material changes in the information required to be provided under Item 305 of Regulation S-K included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations (Incorporating Item 7A) – Derivative Activities and Market Risk” in Occidental’s 2004 Annual Report on Form 10-K.
Occidental's Chief Executive Officer and Chief Financial Officer supervised and participated in Occidental's evaluation of its disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in Occidental's periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon that evaluation, Occidental's Chief Executive Officer and Chief Financial Officer concluded that Occidental's disclosure controls and procedures are effective.
There has been no change in Occidental’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, Occidental’s internal control over financial reporting.
PART II OTHER INFORMATION
General
This item incorporates by reference the information regarding lawsuits, claims, commitments, contingencies and related matters in Note 9 to the consolidated condensed financial statements in Part I of this Form 10-Q.
Occidental’s 2005 Annual Meeting of Stockholders (the Annual Meeting) was held on May 6, 2005. The following actions were taken at the Annual Meeting, for which proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended:
1.
The twelve nominees proposed by the Board of Directors were elected as directors by the following votes:
NOMINEE
VOTES FOR
WITHHELD
Spencer Abraham
339,662,244
3,724,701
Ronald W. Burkle
338,230,487
5,156,458
John S. Chalsty
337,342,621
6,044,324
Edward P. Djerejian
339,777,715
3,609,230
R. Chad Dreier
338,279,742
5,107,203
John E. Feick
339,893,765
3,493,180
Ray R. Irani
333,245,388
10,141,557
Irvin W. Maloney
333,717,536
9,669,409
Rodolfo Segovia
335,614,521
7,772,424
Aziz D. Syriani
331,466,922
11,920,023
Rosemary Tomich
333,400,376
9,986,569
Walter L. Weisman
339,768,663
3,618,282
2.
The ratification of the selection of KPMG as independent auditors was approved. The proposal received: 340,108,728 votes for, 896,480 votes against, and 2,381,737 abstentions.
3.
The Occidental Petroleum Corporation 2005 Long-Term Incentive Plan was approved. The proposal received: 244,700,900 votes for, 51,469,600 votes against, 6,583,016 abstentions and 40,633,429 broker non-votes.
4.
A stockholder proposal requesting stockholder statements opposing board sponsored proposals was not approved. The proposal received: 5,807,618 votes for, 289,716,637 votes against, 7,229,261 abstentions and 40,633,429 broker non-votes.
A stockholder proposal requesting a vote regarding future golden parachutes was approved. The proposal received: 201,644,398 votes for, 94,505,818 votes against, 6,602,300 abstentions and 40,634,429 broker non-votes. The matter was referred to the Corporate Governance, Nominating and Social Responsibility Committee of the Board of Directors which is working on a clarification of Occidental’s golden parachute policy to make it more responsive to this stockholder proposal. The Committee anticipates that it will submit a revised policy for consideration by the full Board of Directors later this year.
10.1
Amended And Restated Performance-Based Stock Award Terms And Conditions under Occidental Petroleum Corporation 2001 Incentive Compensation Plan for January 1, 2002 Grant (Effective June 20, 2005) (Corporate).
10.2
Amended And Restated Performance-Based Stock Award Terms And Conditions under Occidental Petroleum Corporation 2001 Incentive Compensation Plan for January 1, 2002 Grant (Effective June 20, 2005) (Oil and Gas).
10.3
Amended And Restated Performance-Based Stock Award Terms And Conditions under Occidental Petroleum Corporation 2001 Incentive Compensation Plan for January 1, 2002 Grant (Effective June 20, 2005) (Chemicals).
10.4
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2003 Grant (Effective June 20, 2005) (Corporate).
10.5
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2003 Grant (Effective June 20, 2005) (Chemicals).
10.6
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2004 Grant (Effective June 20, 2005) (Corporate).
10.7
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2004 Grant (Effective June 20, 2005) (Chemicals).
10.8
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2004 Grant (Effective June 20, 2005) (Oil and Gas).
10.9
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2005 Grant (Effective June 20, 2005) (Corporate).
10.10
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2005 Grant (Effective June 20, 2005) (Chemicals).
10.11
Amended And Restated Performance-Based Stock Award Terms And Conditions For January 1, 2005 Grant (Effective June 20, 2005) (Oil and Gas).
10.12
Terms and Conditions of Stock Appreciation Rights Award under Occidental Petroleum Corporation 2005 Long-Term Incentive Plan.
10.13
Terms and Conditions of Restricted Share Unit Award under Occidental Petroleum Corporation 2005 Long-Term Incentive Plan.
10.14
Terms and Conditions of Restricted Share Unit Award (mandatory deferred issuance of shares) under Occidental Petroleum Corporation 2005 Long-Term Incentive Plan.
Statement regarding the computation of earnings per share for the three and six months ended June 30, 2005 and 2004.
Statement regarding the computation of total enterprise ratios of earnings to fixed charges for the six months ended June 30, 2005 and 2004 and the five years ended December 31, 2004.
31.1
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certifications of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE:
August 2, 2005
/s/ Jim A. Leonard
_________________________________________
Jim A. Leonard, Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
34
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