SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 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 X 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 September 30, 1996 --------------------------- --------------------------------- Common stock $.20 par value 328,906,609 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES CONTENTS <TABLE> <CAPTION> PAGE <S> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets -- September 30, 1996 and December 31, 1995 2 Consolidated Condensed Statements of Operations -- Three and nine months ended September 30, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows -- Nine months ended September 30, 1996 and 1995 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 </TABLE> 1
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Amounts in millions) 1996 1995 ================================================================= ========= ========= <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents (Note 5) $ 135 $ 520 Receivables, net 938 891 Inventories (Note 6) 610 647 Prepaid expenses and other 328 461 --------- --------- Total current assets 2,011 2,519 LONG-TERM RECEIVABLES, net 140 158 EQUITY INVESTMENTS (Note 12) 1,029 927 PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation, depletion and amortization of $9,268 at September 30, 1996 and $8,837 at December 31, 1995 (Note 7) 13,794 13,867 OTHER ASSETS 360 344 --------- --------- $ 17,334 $ 17,815 ================================================================= ========= ========= The accompanying notes are an integral part of these financial statements. </TABLE> 2
<TABLE> <CAPTION> OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Amounts in millions) 1996 1995 ========================================================================= ========= ========= <S> <C> <C> LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of senior funded debt and capital lease liabilities $ 28 $ 522 Notes payable 67 16 Accounts payable 888 859 Accrued liabilities 1,052 1,168 Domestic and foreign income taxes 126 92 --------- --------- Total current liabilities 2,161 2,657 --------- --------- SENIOR FUNDED DEBT, net of current maturities and unamortized discount 4,570 4,819 --------- --------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred and other domestic and foreign income taxes 2,530 2,620 Other 3,004 3,089 --------- --------- 5,534 5,709 --------- --------- NONREDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY Nonredeemable preferred stock, stated at liquidation value 1,325 1,325 Common stock, at par value 66 64 Other stockholders' equity Additional paid-in capital 4,564 4,631 Retained earnings(deficit) (893) (1,402) Cumulative foreign currency translation adjustments 7 12 --------- --------- 5,069 4,630 --------- --------- $ 17,334 $ 17,815 ========================================================================= ========= ========= The accompanying notes are an integral part of these financial statements. </TABLE> 3
<TABLE> <CAPTION> OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Amounts in millions, except per-share amounts) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 1996 1995 1996 1995 ====================================================== ========= ========= ========= ========= <S> <C> <C> <C> <C> REVENUES Net sales and operating revenues Oil and gas operations $ 1,148 $ 779 $ 2,780 $ 2,240 Natural gas transmission operations 554 454 1,777 1,460 Chemical operations 1,084 1,325 3,210 4,253 Other -- (1) (2) (3) --------- --------- --------- --------- 2,786 2,557 7,765 7,950 Interest, dividends and other income 63 31 233 78 Gains on asset dispositions, net 1 (2) 5 44 Income from equity investments (Note 12) 21 29 64 87 --------- --------- --------- --------- 2,871 2,615 8,067 8,159 --------- --------- --------- --------- COSTS AND OTHER DEDUCTIONS Cost of sales 2,162 1,958 5,870 5,931 Selling, general and administrative and other operating expenses 322 241 779 837 Environmental remediation 6 5 94 16 Exploration expense 31 13 78 63 Interest and debt expense, net 115 147 375 436 --------- --------- --------- --------- 2,636 2,364 7,196 7,283 --------- --------- --------- --------- Income(loss) before taxes 235 251 871 876 Provision for domestic and foreign income and other taxes (Note 11) 41 112 332 372 --------- --------- --------- --------- Income before extraordinary gain(loss), net 194 139 539 504 Extraordinary gain(loss), net (Note 3) -- -- (30) -- --------- --------- --------- --------- NET INCOME(LOSS) 194 139 509 504 Preferred dividends (23) (24) (69) (70) --------- --------- --------- --------- EARNINGS(LOSS) APPLICABLE TO COMMON STOCK $ 171 $ 115 $ 440 $ 434 ========= ========= ========= ========= PRIMARY EARNINGS PER COMMON SHARE Income before extraordinary gain(loss), net $ .53 $ .36 $ 1.46 $ 1.37 Extraordinary gain(loss), net -- -- (.09) -- --------- --------- --------- --------- Primary earnings(loss) per common share $ .53 $ .36 $ 1.37 $ 1.37 ========= ========= ========= ========= FULLY DILUTED EARNINGS PER COMMON SHARE Income before extraordinary gain(loss), net $ .50 $ .36 $ 1.41 $ 1.33 Extraordinary gain(loss), net -- -- (.08) -- --------- --------- --------- --------- Fully diluted earnings(loss) per common share $ .50 $ .36 $ 1.33 $ 1.33 ========= ========= ========= ========= DIVIDENDS PER SHARE OF COMMON STOCK $ .25 $ .25 $ .75 $ .75 ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 325.3 318.6 322.4 318.0 ====================================================== ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. </TABLE> 4
<TABLE> <CAPTION> OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Amounts in millions) 1996 1995 ============================================================================== ========= ========= <S> <C> <C> CASH FLOW FROM OPERATING ACTIVITIES Net income(loss) $ 509 $ 504 Adjustments to reconcile income to net cash provided by operating activities Extraordinary (gain)loss, net 30 -- Depreciation, depletion and amortization of assets 687 708 Deferred income tax provision 7 54 Other noncash charges to income 271 167 Gains on asset dispositions, net (5) (44) Income from equity investments (64) (87) Exploration expense 78 63 Changes in operating assets and liabilities (110) (357) Other operating, net (153) (104) --------- --------- Net cash provided by operating activities 1,250 904 --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (780) (606) Proceeds from disposal of property, plant and equipment, net 213 171 Buyout of operating leases -- (141) Purchase of businesses (18) -- Sale of businesses, net 24 469 Other investing, net (46) 86 --------- --------- Net cash used by investing activities (607) (21) --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from senior funded debt 11 218 Net proceeds from commercial paper and revolving credit agreements 531 (528) Payments on senior funded debt and capital lease liabilities (1,340) (316) Proceeds from issuance of common stock 18 23 Proceeds(payments) of notes payable 51 (4) Cash dividends paid (309) (303) Other financing, net 10 16 --------- --------- Net cash used by financing activities (1,028) (894) --------- --------- Increase(decrease) in cash and cash equivalents (385) (11) Cash and cash equivalents--beginning of period 520 129 --------- --------- Cash and cash equivalents--end of period $ 135 $ 118 ============================================================================== ========= ========= The accompanying notes are an integral part of these financial statements. </TABLE> 5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS September 30, 1996 1. General The accompanying unaudited consolidated condensed financial statements have been prepared by Occidental Petroleum Corporation (Occidental) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with generally accepted accounting principles 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 incorporated by reference in Occidental's Annual Report on Form 10-K for the year ended December 31, 1995 (1995 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 present fairly Occidental's consolidated financial position as of September 30, 1996 and the consolidated results of operations for the three and nine months then ended and the consolidated cash flows for the nine months then ended. The results of operations and cash flows for the periods ended September 30, 1996 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 1996 presentation. Reference is made to Note 1 to the consolidated financial statements incorporated by reference in the 1995 Form 10-K for a summary of significant accounting policies. 2. Asset Acquisitions and Dispositions In April 1996, Occidental completed the acquisition of a 64 percent equity interest in INDSPEC Holding Corporation (INDSPEC) for approximately $87 million in common stock. Under the terms of the transaction, INDSPEC's management and employees retained voting control of INDSPEC. Also in April, Occidental completed the sale of its subsidiary which engages in on-shore drilling and servicing of oil and gas wells for approximately $32 million. In addition, certain assets of its international phosphate fertilizer trading operations were sold for notes receivable of approximately $20 million. In July, Occidental sold its royalty oil interests in the Congo for $215 million to the Republic of the Congo. None of these transactions resulted in a material gain or loss. In August 1996, Occidental acquired three specialty chemical operations-- Laurel Industries, Inc., Natural Gas Odorizing, Inc. and a plant from Power Silicates Manufacturing, Inc.--in three separate transactions for approximately $146 million, of which approximately $127 million was in Occidental common stock. 3. Extraordinary Gain(Loss) The 1996 nine month results included a net extraordinary loss of $30 million, which resulted from the early retirement of high-coupon debt. 6
4. Supplemental Cash Flow Information Cash payments during the nine months ended September 30, 1996 and 1995 included federal, foreign and state income taxes of approximately $186 million and $221 million, respectively. Interest paid (net of interest capitalized) totaled approximately $383 million and $450 million for the nine month periods ended September 30, 1996 and 1995, respectively. 5. Cash and Cash Equivalents Cash equivalents consist of highly liquid money-market mutual funds and bank deposits with maturities of three months or less when purchased. Cash equivalents totaled $190 million and $620 million at September 30, 1996 and December 31, 1995, respectively. The reduction in cash equivalents reflected the use of cash for the redemption of the 11.75% Senior Debentures in March 1996. A cash-management system is utilized to minimize the cash balances required for operations and to invest the surplus cash in liquid short-term money- market instruments and/or to pay down short-term borrowings. This can result in the balance of short-term money-market instruments temporarily exceeding cash and cash equivalents. 6. Inventories A portion of inventories is valued under the LIFO method. The valuation of LIFO inventory for interim periods is based on management's estimates of year-end inventory levels and costs. Inventories consist of the following (in millions): <TABLE> <CAPTION> Balance at September 30, 1996 December 31, 1995 ======================= ================== ================= <S> <C> <C> Raw materials $ 113 $ 116 Materials and supplies 185 180 Work in progress 18 17 Finished goods 342 363 --------- --------- 658 676 LIFO reserve (48) (29) --------- --------- Total $ 610 $ 647 ========= ========= </TABLE> 7. Property, Plant and Equipment Reference is made to the consolidated financial statements and Note 1 thereto incorporated by reference in the 1995 Form 10-K for a description of investments in property, plant and equipment. 8. Retirement Plans and Postretirement Benefits Reference is made to Note 14 to the consolidated financial statements incorporated by reference in the 1995 Form 10-K for a description of the retirement plans and postretirement benefits of Occidental and its subsidiaries. 7
9. Lawsuits, Claims and Related Matters Occidental and certain of its subsidiaries have been named in a substantial number of governmental proceedings as defendants or potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and corresponding state acts. These proceedings seek funding, remediation and, in some cases, compensation for alleged property damage, punitive damages and civil penalties, aggregating substantial amounts. 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. Occidental has accrued reserves at the most likely cost to be incurred in those proceedings where it is probable that Occidental will incur remediation costs which can be reasonably estimated. As to those proceedings, for which Occidental does not have sufficient information to determine a range of liability, Occidental does have sufficient information on which to base the opinion below. It is impossible at this time to determine the ultimate legal liabilities that may arise from various lawsuits, claims and proceedings, including environmental proceedings described above, pending against Occidental and its subsidiaries, some of which involve substantial amounts. However, in management's opinion, after taking into account reserves, none of such pending lawsuits, claims and proceedings should have a material adverse effect upon Occidental's consolidated financial position or results of operations in any given year. 10. Other Commitments and Contingencies Occidental has certain other commitments under contracts, guarantees and joint ventures, as well as certain other contingent liabilities. Additionally, Occidental has agreed to participate in the development of certain natural gas reserves and construction of a liquefied natural gas plant in Malaysia; however, Occidental has not yet entered into any material development or construction contracts. Reference is made to Note 11 to the consolidated financial statements incorporated by reference in the 1995 Form 10-K for information concerning Occidental's long-term purchase obligations for certain products and services. In management's opinion, none of such commitments and contingencies discussed above should have a material adverse effect upon Occidental's consolidated financial position or results of operations in any given year. 11. Income Taxes The provision for taxes based on income for the 1996 and 1995 interim periods was computed in accordance with Interpretation No. 18 of APB Opinion No. 28 on reporting taxes for interim periods and was based on projections of total year pretax income. The provision for federal income tax in 1996 is benefited by approximately $100 million from a reduction in the deferred tax asset valuation allowance due to the increase in likelihood regarding the realization of specific deferred tax assets. At December 31, 1995, Occidental had, for U.S. federal income tax return purposes, a capital loss carryforward of approximately $21 million, a business tax credit carryforward of $20 million and an alternative minimum tax credit carryforward of $270 million available to reduce future income taxes. To the extent not used, the capital loss carryforward expires in 2000 and the business tax credit expires in 8
varying amounts during the years 2000 and 2001. The alternative minimum tax credit carryforward does not expire. Occidental is subject to audit by taxing authorities for varying periods in various tax jurisdictions. Management believes that any required adjustments to Occidental's tax liabilities will not have a material adverse impact on Occidental's financial position or results of operations in any given year. 12. Investments Investments in companies in which Occidental has a voting stock interest of at least 20 percent, but not more than 50 percent, and certain partnerships are accounted for on the equity method. At September 30, 1996, Occidental's equity investments consisted primarily of joint-interest pipelines, including a pipeline in the Dutch sector of the North Sea, a 30 percent investment in the common shares of Canadian Occidental Petroleum Ltd. and various chemical partnerships. The following table presents Occidental's proportionate interest in the summarized financial information of its equity method investments (in millions): <TABLE> <CAPTION> Periods Ended September 30 ------------------------------------------------ Three Months Nine Months ---------------------- ---------------------- 1996 1995 1996 1995 ========= ========= ========= ========= <S> <C> <C> <C> <C> Revenues $ 214 $ 202 $ 634 $ 606 Costs and expenses 193 173 570 519 --------- --------- --------- --------- Net income $ 21 $ 29 $ 64 $ 87 ========= ========= ========= ========= </TABLE> 13. Summarized Financial Information of Wholly Owned Subsidiary Occidental has guaranteed the payments of principal of, and interest on, certain publicly traded debt securities of its subsidiary, OXY USA Inc. (OXY USA). The following tables present summarized financial information for OXY USA (in millions): <TABLE> <CAPTION> Periods Ended September 30 ------------------------------------------------ Three Months Nine Months ---------------------- ---------------------- 1996 1995 1996 1995 ========= ========= ========= ========= <S> <C> <C> <C> <C> Revenues $ 254 $ 175 $ 732 $ 537 Costs and expenses 230 194 658 552 --------- --------- --------- --------- Net income $ 24 $ (19) $ 74 $ (15) ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> Balance at September 30, 1996 December 31, 1995 =============================== ================== ================= <S> <C> <C> Current assets $ 123 $ 206 Intercompany receivable $ 428 $ 323 Noncurrent assets $ 2,018 $ 2,057 Current liabilities $ 221 $ 244 Interest bearing note to parent $ 105 $ 121 Noncurrent liabilities $ 1,232 $ 1,283 Stockholders' equity $ 1,011 $ 938 ------------------------------- ------------------ ----------------- </TABLE> 9
14. Subsequent Events On November 4, 1996, Occidental redeemed all of the outstanding $150 million principal amount of its Floating Rate Senior Notes which were due November 4, 1999 at a redemption price of 100% of the principal amount, and the notes were replaced with lower-cost debt. 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Occidental's net income for the first nine months of 1996 totaled $509 million, on net sales and operating revenues of $7.8 billion, compared with net income of $504 million, on net sales and operating revenues of $8.0 billion, for the same period of 1995. Occidental's net income for the third quarter of 1996 was $194 million, on net sales and operating revenues of $2.8 billion, compared with $139 million, on net sales and operating revenues of $2.6 billion, for the same period of 1995. Primary earnings per common share were $1.37 for the first nine months of 1996, compared with $1.37 for the same period of 1995. Primary earnings per common share were $.53 for the third quarter of 1996, compared with $.36 for the same period of 1995. The decrease in net sales and operating revenues for the nine months of 1996, compared with the same period of 1995, reflected the impact of reduced chemical prices, primarily for petrochemicals and PVC resins, partially offset by higher worldwide crude oil prices, higher domestic natural gas prices and higher crude oil trading revenues. Interest, dividends and other income for the nine months of 1996 includes $170 million received for a litigation settlement related to Love Canal. Income from equity investments decreased for the third quarter of 1996, compared with the similar period of 1995. The decrease in 1996 primarily reflected lower equity earnings from chemical investments. The following table sets forth the sales and earnings of each operating division and corporate items (in millions): <TABLE> <CAPTION> Periods Ended September 30 ------------------------------------------------ Three Months Nine Months ---------------------- ---------------------- 1996 1995 1996 1995 ========= ========= ========= ========= <S> <C> <C> <C> <C> DIVISIONAL NET SALES Oil and gas $ 1,148 $ 779 $ 2,780 $ 2,240 Natural gas transmission 554 454 1,777 1,460 Chemical 1,084 1,325 3,210 4,253 Other -- (1) (2) (3) --------- --------- --------- --------- NET SALES $ 2,786 $ 2,557 $ 7,765 $ 7,950 ========= ========= ========= ========= DIVISIONAL EARNINGS Oil and gas $ 20 $ 46 $ 325 $ 76 Natural gas transmission 49 54 221 191 Chemical 228 252 558 913 --------- --------- --------- --------- 297 352 1,104 1,180 UNALLOCATED CORPORATE ITEMS Interest expense, net (107) (133) (349) (410) Income taxes, administration and other 4 (80) (216) (266) --------- --------- --------- --------- INCOME BEFORE EXTRAORDINARY GAIN(LOSS), NET 194 139 539 504 Extraordinary gain(loss), net -- -- (30) -- --------- --------- --------- --------- NET INCOME $ 194 $ 139 $ 509 $ 504 ========= ========= ========= ========= </TABLE> 11
Selling, general and administrative and other operating expenses were $779 million for the first nine months of 1996, compared with $837 million for the same period of 1995. Environmental remediation was $94 million for the first nine months of 1996 which included a second quarter charge of $75 million for additional environmental reserves, compared with $16 million for the same period of 1995. The 1996 amount included a third quarter charge of $105 million for the write-down in an oil and gas project in the Republic of Komi. The 1995 amount included a second quarter charge of $109 million for settlement of litigation. The provision for income taxes was $332 million for the first nine months of 1996, compared with $372 million for the same period of 1995 and $41 million for the third quarter of 1996, compared with $112 million for the third quarter of 1995. Both periods of 1996 benefited by approximately $100 million for a reduction in the deferred tax asset valuation allowance. This was partially offset by a slightly higher effective tax rate for 1996. Oil and gas earnings before special items for the first nine months of 1996 were $430 million, compared with $185 million for the same period of 1995. Oil and gas earnings before special items for the third quarter of 1996 were $125 million, compared with $46 million for the third quarter of 1995. The third quarter 1996 results, after inclusion of the $105 million write-down as previously discussed, were $20 million. The 1995 first nine months results included a charge of $109 million for settlement of litigation. The increase in third quarter earnings in 1996, compared with 1995, reflected higher worldwide crude oil prices and higher domestic natural gas prices partially offset by higher exploration expense. Oil and gas prices are sensitive to complex factors, which are outside the control of Occidental. Accordingly, Occidental is unable to predict with certainty the direction, magnitude or impact of future trends in sales prices for oil and gas. Natural gas transmission earnings for the first nine months of 1996 were $221 million, compared with $191 million for the same period of 1995. Natural gas transmission earnings for the third quarter of 1996 were $49 million, compared with $54 million for the same period of 1995. The decline in earnings for the third quarter of 1996, compared with the same period of 1995, resulted primarily from lower transport margins, partially offset by higher liquid processing margins and lower costs related to the reorganization in late 1995. Chemical earnings before special items for the first nine months of 1996 were $468 million, compared with $873 million for the same period of 1995. The 1996 results, after inclusion of $170 million related to favorable litigation settlements and a charge of $75 million for additional environmental reserves relating to various existing sites, and the related state tax effects, were $558 million. The 1995 results, after inclusion of a $40 million pretax gain related to the sale of assets, were $913 million. Chemical earnings before special items for the third quarter of 1996 were $190 million, compared with $252 million for the third quarter of 1995. The 1996 third quarter results were $228 million after inclusion of $40 million related to a favorable litigation settlement and the related state tax effects. The decline in third quarter 1996 earnings resulted primarily from decreased profit margins in petrochemicals, PVC resins and caustic soda, partially reduced by improvements in profits from specialty chemicals. Most of Occidental's chemical products are commodity in nature, the prices of which are sensitive to a number of complex factors. Occidental is unable to accurately forecast the trend of sales prices for its commodity chemical products. However, PVC and certain petrochemical prices recently have increased slightly. Divisional earnings include credits in lieu of U.S. federal income taxes. In the first nine months of 1996, divisional earnings benefited by $67 million from credits allocated. This included credits of $11 million, $36 million and $20 million at oil and gas, natural gas transmission and chemical, respectively. Of the total amount for the first nine months of 1996, $22 million was recorded in the third quarter of 1996 as a benefit to divisional earnings, of which $3 million, $12 million and $7 million was recorded at oil and gas, natural gas transmission and chemical, respectively. In the first nine months of 1995, divisional earnings benefited by $68 million. The comparable amounts allocated to the divisions were credits of $12 million, $36 million and $20 million at oil and gas, natural gas transmission and chemical, respectively. Of the total amount for the nine months of 1995, $22 million was recorded in the third quarter of 1995 as a benefit to divisional earnings, of 12
which $4 million, $12 million and $6 million was recorded at oil and gas, natural gas transmission and chemical, respectively. Interest expense for the first nine months of 1996 was $349 million, compared with $410 million for the same period of 1995. Interest expense for the third quarter of 1996 was $107 million, compared with $133 million for the third quarter of 1995. The decline in interest expense is primarily attributable to lower average interest rates and lower average debt levels resulting primarily from redemptions of high-coupon debt. Occidental and certain of its subsidiaries are parties to various lawsuits, environmental and other proceedings and claims, some of which involve substantial amounts. See Note 9 to the consolidated condensed financial statements. Occidental also has commitments under contracts, guarantees and joint ventures and certain other contingent liabilities. See Note 10 to the consolidated condensed financial statements. In management's opinion, after taking into account reserves, none of these matters should have a material adverse effect upon Occidental's consolidated financial position or results of operations in any given year. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Occidental's net cash provided by operating activities was $1,250 million for the first nine months of 1996, compared with $904 million for the same period of 1995. The 1996 noncash charges included $105 million for the write-down in an oil and gas project in the Republic of Komi and $75 million for additional environmental reserves, partially offset by a $39 million favorable litigation settlement. The 1996 and 1995 noncash charges also included employee benefit plans expense and various other charges. Occidental's net cash used by investing activities was $607 million for the first nine months of 1996, compared with $21 million for the same period of 1995. Capital expenditures were $780 million in 1996, including $510 million in oil and gas, $102 million in natural gas transmission and $154 million in chemical. Capital expenditures were $606 million in 1995, including $374 million in oil and gas, $93 million in natural gas transmission and $132 million in chemical. The increase in 1996 from 1995 reflected higher spending in oil and gas, primarily in Peru and Qatar. Net proceeds from the sale of businesses and disposals of property, plant and equipment for the first nine months of 1996 totaled $237 million, which primarily reflected the proceeds from the sale of Occidental's royalty interest in the Congo and an on-shore drilling and well servicing subsidiary. Net proceeds from the sale of businesses and disposals of property, plant and equipment for the first nine months of 1995 totaled $640 million, which primarily reflected the proceeds from the sale of Occidental's high density polyethylene business (HDPE), its PVC facility at Addis, Louisiana and the sale of a portion of Occidental's oil and gas operation in Pakistan. Financing activities used net cash of $1,028 million in the first nine months of 1996, compared with $894 million for the same period of 1995. The 1996 amount reflected net cash used of $747 million to reduce short-term and long-term debt, net of proceeds from borrowings, primarily for the redemptions of the 11.75% Senior Debentures and the 9.625% Senior Notes, and the payment of dividends of $309 million. In 1995, repayments of debt, net of proceeds from borrowings, resulted in net cash used of $630 million to reduce long-term debt. Additionally, dividend payments were $303 million. For 1996, Occidental expects that cash generated from operations and asset sales will be more than adequate to meet its operating requirements, capital spending and dividend payments. Excess cash generated is expected to be applied to debt and liability reduction. Occidental also has substantial borrowing capacity to meet unanticipated cash requirements. At September 30, 1996, Occidental's working capital was a negative $150 million, compared with a negative $138 million at December 31, 1995. Available but unused lines of committed bank credit totaled approximately $2.0 billion at September 30, 1996, compared with $2.6 billion at December 31, 1995. 13
Receivables at September 30, 1996 include the accrual for litigation settlements previously mentioned. Equity investments at September 30, 1996 include the interest in INDSPEC Holding Corporation (INDSPEC) as discussed below. Current maturities of senior funded debt and capital lease liabilities decreased primarily as a result of the redemption of the 11.75% Senior Debentures in March 1996. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, Occidental will not recognize compensation expense for stock-based compensation arrangements, but rather will disclose in the notes to the financial statements the impact on annual net income and earnings per share as if the fair value based compensation cost had been recognized commencing in 1996. In April 1996, Occidental completed the sale of its subsidiary which engages in on-shore drilling and servicing of oil and gas wells for approximately $32 million. In addition, certain assets of its international phosphate fertilizer trading operation were sold for notes receivable of approximately $20 million. Also in April, Occidental completed the acquisition of a 64 percent equity interest in INDSPEC for approximately $87 million in common stock. Under the terms of the transaction, INDSPEC's management and employees retained voting control of INDSPEC. None of these transactions resulted in a material gain or loss. In August 1996, Occidental acquired three specialty chemical operations--Laurel Industries, Inc., Natural Gas Odorizing, Inc. and a plant from Power Silicates Manufacturing, Inc.--in three separate transactions for approximately $146 million, of which approximately $127 million was in Occidental common stock. On November 4, 1996, Occidental redeemed all of the outstanding $150 million principal amount of its Floating Rate Senior Notes which were due November 4, 1999 at a redemption price of 100% of the principal amount, and the notes were replaced with lower-cost debt. ENVIRONMENTAL MATTERS Occidental's operations in the United States are subject to increasingly stringent federal, state and local laws and regulations relating to improving or maintaining the quality of the environment. Foreign operations also are subject to varied environmental protection laws. Costs associated with environmental compliance have increased over time and are expected to continue to rise in the future. The laws which require or address remediation apply retroactively to previous waste disposal practices. And, in many cases, the laws apply regardless of fault, legality of the original activities or ownership or control of sites. Occidental is currently participating in environmental assessments and cleanups under these laws at federal Superfund sites, comparable state sites and other remediation sites, including Occidental facilities and previously owned sites. Occidental does not consider the number of Superfund and comparable state sites at which it has been notified that it has been identified as being involved as a relevant measure of exposure. Although the liability of a potentially responsible party (PRP), and in many cases its equivalent under state law, is joint and several, Occidental is usually one of many companies cited as a PRP at these sites and has, to date, been successful in sharing cleanup costs with other financially sound companies. As of September 30, 1996, Occidental had been notified by the Environmental Protection Agency (EPA) or equivalent state agencies or otherwise had become aware that it had been identified as being involved at 291 Superfund or comparable state sites. (This number does not include 65 sites where Occidental has been successful in resolving its involvement.) The 291 sites include 80 former Diamond Shamrock Chemical sites 14
as to which Maxus Energy Corporation has retained all liability, and 2 sites at which the extent of such retained liability is disputed. Of the remaining 209 sites, Occidental has had no communication or activity with government agencies or other PRPs in three years at 38 sites, has denied involvement at 33 sites and has yet to determine involvement in 24 sites. With respect to the remaining 114 of these sites, Occidental is in various stages of evaluation. For 104 of these sites, where environmental remediation efforts are probable and the costs can be reasonably estimated, Occidental has accrued reserves at the most likely cost to be incurred. The 104 sites include 37 sites as to which present information indicates that it is probable that Occidental's aggregate exposure is immaterial. In determining the reserves, Occidental uses the most current information available, including similar past experiences, available technology, regulations in effect, the timing of remediation and cost-sharing arrangements. For the remaining 10 of the 114 sites being evaluated, Occidental does not have sufficient information to determine a range of liability, but Occidental does have sufficient information on which to base the opinion expressed above under the caption "Results of Operations." 15
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS GENERAL There is incorporated by reference herein the information regarding legal proceedings in Item 3 of Part I of Occidental's 1995 Annual Report on Form 10-K, Item 1 of Part II of Occidental's Quarterly Report on Form 10-Q for the quarterly period ended March 31 and June 30, 1996 and Note 10 to the consolidated condensed financial statements in Part I hereof. ENVIRONMENTAL PROCEEDINGS On September 30, 1996, the Environmental Protection Agency filed an administrative Complaint against Natural Gas Odorizing, Inc., which was recently acquired by Occidental, alleging failure to file during 1994 an Inventory Update Report under the Toxic Substance Control Act regarding its facility in Baytown, Texas and proposing a "civil" penalty of $136,000. A settlement conference has been tentatively scheduled. On October 1, 1996, the West Virginia Division of Environmental Protection filed a civil action in the Circuit Court, Kanawha County, West Virginia against Occidental Chemical Corporation (OCC) alleging numerous violations of hazardous waste management regulations at its Belle Plant from October 1994 to September 1995. The Complaint seeks civil penalties of $25,000 per day and injunctive relief requiring correction of the alleged violations. OCC will contest the allegations and proposed civil penalties. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Agreement, dated September 9, 1996, between Occidental and David R. Martin 10.2 Occidental Petroleum Corporation 1988 Deferred Compensation Plan (as amended and restated effective as of January 1, 1996) 11 Statement regarding the computation of earnings per share for the three and nine months ended September 30, 1996 and 1995 12 Statement regarding the computation of total enterprise ratios of earnings to fixed charges for the nine months ended September 30, 1996 and 1995 and the five years ended December 31, 1995 27 Financial data schedule for the nine month period ended September 30, 1996 (included only in the copy of this report filed electronically with the Securities and Exchange Commission) (b) Reports on Form 8-K During the quarter ended September 30, 1996, Occidental filed the following Current Reports on Form 8-K: 16
1. Current Report on Form 8-K dated July 22, 1996 (date of earliest event reported), filed on July 23, 1996, for the purpose of reporting, under Item 5, Occidental's results of operations for the quarter ended June 30, 1996 From September 30, 1996 to the date hereof, Occidental filed the following Current Report on Form 8-K: 1. Current Report on Form 8-K dated October 17, 1996 (date of earliest event reported), filed on October 18, 1996, for the purpose of reporting, under Item 5, Occidental's results of operations for the quarter ended September 30, 1996 17
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. OCCIDENTAL PETROLEUM CORPORATION DATE: November 13, 1996 S. P. Dominick, Jr. -------------------------------------------------- S. P. Dominick, Jr., Vice President and Controller (Chief Accounting and Duly Authorized Officer) 18
EXHIBIT INDEX EXHIBITS - -------- 10.1 Agreement, dated September 9, 1996, between Occidental and David R. Martin 10.2 Occidental Petroleum Corporation 1988 Deferred Compensation Plan (as amended and restated effective as of January 1, 1996) 11 Statement regarding the computation of earnings per share for the three and nine months ended September 30, 1996 and 1995 12 Statement regarding the computation of total enterprise ratios of earnings to fixed charges for the nine months ended September 30, 1996 and 1995 and the five years ended December 31, 1995 27 Financial data schedule for the nine month period ended September 30, 1996 (included only in the copy of this report filed electronically with the Securities and Exchange Commission)