SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2001
OR
For the transition period from ___________ to ___________
Commission file number 1-9210_____________________
OCCIDENTAL PETROLEUM CORPORATION
(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.
TABLE OF CONTENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETSMARCH 31, 2001 AND DECEMBER 31, 2000(Amounts in millions)
The accompanying notes are an integral part of these financial statements.
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OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONSFOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000(Amounts in millions, except per-share amounts)
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OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000(Amounts in millions)
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OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2001
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Occidental Petroleum Corporation (Occidental) reported net income for the first quarter of 2001 of $484 million, on net sales of $4.5 billion, compared with net income of $271 million, on net sales of $2.6 billion, for the same period of 2000. Basic earnings per common share were $1.31 for the first quarter of 2001, compared with earnings per share of $.74 for the same period of 2000.
Earnings before special items were $510 million for the first quarter of 2001, compared with earnings before special items of $264 million for the first quarter of 2000. See the Special Item table below for a description of special items. The increase in earnings before special items for the three months ended March 31, 2001, compared with the same period in 2000, reflected higher domestic gas prices and higher domestic crude oil production from acquisitions, partially offset by lower crude oil and chemical prices, higher exploration expense, lower chemical product demand and higher energy and feedstock costs.
The increase in net sales in the first quarter of 2001, compared with the same period in 2000, primarily reflected higher domestic gas prices, higher domestic crude oil production from acquisitions and higher oil and gas trading activities, partially offset by lower international oil production, lower chemical product demand and lower chemical prices.
Interest, dividends and other income for the three months ended March 31, 2001 included interest income on notes receivable from affiliates of the Altura partners of $33 million. The loss from equity investments for the three months ended March 31, 2001, compared with income from equity investments for the same period in 2000, was primarily the result of a 2001 loss from operations in the Equistar and OxyMar equity investments. The increase in cost of sales for the three months ended March 31, 2001, compared with the same period in 2000, primarily reflected the higher oil and gas trading activity, higher domestic oil production volumes and higher raw material costs, primarily energy-driven, in the chemical segment. The increase in selling, general and administrative and other operating costs for the three months ended March 31, 2001, compared to the same period in 2000, reflected severance charges for the chemical segment and higher oil and gas production taxes and other operating costs as a result of the acquisition of Altura. Minority interest includes distributions on the Trust Preferred Securities, the minority interest in the net income (loss) of subsidiaries and partnerships and, for the three months ended March 31, 2001, also included a preferred distribution to the Altura partners totaling $34 million. The provision for income taxes for the three months ended March 31, 2001 included a $45 million after-tax benefit ( $70 million pre-federal tax benefit) for the settlement of a state tax issue.
Although energy prices remain at historically high levels, increasing the costs of electricity and impacting Occidental’s chemical segment adversely, Occidental does not generally perceive that its business has been or will be impacted adversely by changing prices or inflation in other areas. Although Occidental expects its THUMS operations may be interrupted from time to time by the rolling curtailments of electricity supply predicted by California officials during the peak demand summer months, Occidental does not expect these interruptions to have a material effect on its operations. Occidental does not expect that interruptions in the electric grid will adversely impact its operations at Elk Hills because of the extensive electrical co-generation capabilities at the site.
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The following table sets forth the sales and earnings of each industry segment and corporate items (in millions):
The following table sets forth the special items for each operating segment, if applicable, and corporate:
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Oil and Gas Segment
Oil and gas earnings for the first quarter of 2001 were $946 million, compared with $394 million for the same period of 2000. The increase in earnings for the first quarter of 2001, compared to the first quarter of 2000, reflected the impact of higher domestic natural gas prices and higher domestic oil production volumes as a result of acquisitions completed in the second quarter of 2000, partially offset by lower crude oil prices and higher exploration expense.
The first quarter 2001 results also benefited by approximately $200 million from a California gas market price premium above NYMEX prices at Occidental’s Elk Hills operations. The California operations produced over 300 million cubic feet per day of natural gas in the first quarter and Occidental expects its second quarter California production to remain at or near that level. Most of Occidental’s California gas sales are based on the Southern California border price at the end of the prior month, with smaller amounts being sold into Northern California and spot markets, where prices are significantly lower than Southern California prices. Although the second quarter historically has the weakest gas prices, Occidental continues to expect to receive higher gas price realizations in the second quarter of 2001 than in 2000. The current California supply-demand imbalance that caused the pricing premium is expected to continue for the next two to three years.
Oil liftings in Colombia continued to be significantly limited by disruptions at the Caño Limón pipeline. Occidental expects to recover the reserves attributable to its contract, which amount to less than 3 percent of its proved worldwide oil and gas reserves.
The increase in revenues for the first quarter of 2001, compared to the first quarter of 2000, reflected higher domestic natural gas prices, higher domestic oil production from acquisitions and higher oil and gas trading activity, partially offset by lower crude oil prices. Approximately 55 percent and 45 percent of oil and gas net sales were attributable to oil and gas trading activities in the first quarter of 2001 and 2000, respectively. The results of oil and gas trading activity were not significant.
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Chemical Segment
Chemical results for the first quarter of 2001 were a loss of $79 million, compared with income of $143 million for the same period of 2000. The chemical segment had a loss before special items of $53 million for the first quarter of 2001. See Special Item table for a description of special items. The decrease in results before special items reflected higher energy and feedstock costs, lower sales prices and volumes for chlorine and ethylene dichloride (EDC), lower sales prices for polyvinyl chloride (PVC) and vinyl chloride monomer (VCM) and lower results from equity investments, partially offset by higher prices for caustic soda. The decrease in revenues from the first quarter of 2001, compared to the first quarter of 2000, reflected lower sales prices and volumes for chlorine and EDC and lower sales prices for PVC and VCM) partially offset by higher prices for caustic soda.
With the slowdown in the economy, the chemical segment experienced a worsening of market conditions beginning in July 2000 and continuing through January 2001. This was followed by improvements in February and March 2001, due mainly to lower natural gas prices. Meaningful improvements in the results of the chemical business will depend largely on any improvements in general economic conditions.
Corporate and Other
Segment earnings include credits in lieu of U.S. federal income taxes. In the first quarter of 2001 and 2000, segment earnings benefited by $5 million from credits allocated. This included credits of $1 million and $4 million at oil and gas and chemical, respectively, in the first quarter of 2001 and 2000.
Occidental and certain of its subsidiaries have been named as defendants or as potentially responsible parties in a substantial number of lawsuits, claims and proceedings, including governmental proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and corresponding state acts. These governmental 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.
During the course of its operations, Occidental is subject to audit by taxing authorities for varying periods in various tax jurisdictions. Occidental has certain other commitments under contracts, guarantees and joint ventures, and certain other contingent liabilities.
It is impossible at this time to determine the ultimate liabilities that Occidental and its subsidiaries may incur resulting from the foregoing lawsuits, claims and proceedings, audits, commitments, contingencies and related matters. Several of these matters may involve substantial amounts, and if these were to be ultimately resolved
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unfavorably to the full amount of their maximum potential exposure, an event not currently anticipated, it is possible that such event could have a material adverse effect upon Occidental’s consolidated financial position or results of operations. However, in management’s opinion, after taking into account reserves, it is unlikely that any of the foregoing matters will have a material adverse effect upon Occidental’s consolidated financial position or results of operations.
Financial Condition, Liquidity and Capital Resources
Occidental’s net cash provided by operating activities was $821 million for the first quarter of 2001, compared with $348 million for the same period of 2000. The increase in the 2001 amount is primarily attributed to higher net income.
Occidental’s net cash used by investing activities was $299 million for the first quarter of 2001, compared with $487 million for the same period of 2000. The 2000 amount included a $375 million deposit for the Altura Energy Ltd. acquisition.
Occidental’s net cash used by financing activities was $320 million in the first quarter of 2001, compared with net cash provided of $53 million for the same period of 2000. The 2001 amount includes debt payments of approximately $238 million. The 2000 amount includes net proceeds from commercial paper and revolving credit agreements of approximately $156 million.
Occidental expects to generate sufficient cash from operations in 2001 to fund its operating needs, capital expenditure requirements, dividend payments and debt repayments. Occidental currently expects to spend $1.1 billion on its capital spending program in 2001. Available but unused lines of committed bank credit totaled approximately $2.1 billion at March 31, 2001 and December 31, 2000. In the first quarter of 2001, Occidental reduced total debt by $233 million. In addition, Occidental expects to reduce total debt by $1.0 billion by the end of 2001, thereby strengthening its balance sheet and decreasing interest expense.
Derivative Activities
Effective January 1, 2001, Occidental implemented SFAS No. 133, “Accounting for Derivative Instruments and Hedging,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” These statements establish accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities and require an entity to recognize all derivatives in the statement of financial position and measure those instruments at fair value, and classify them as either assets or liabilities on the condensed consolidated balance sheet. Changes in the derivative instruments’ fair value must be recognized in earnings unless specific hedge accounting criteria are met. Occidental’s initial adoption of SFAS No. 133 resulted in (i) a first quarter after-tax reduction in net income of $24 million recorded as a cumulative effect of a change in accounting principles and (ii) an after-tax reduction in other comprehensive income (OCI) of approximately $27 million.
Occidental uses commodity futures contracts, options and swaps to hedge the impact of oil and natural gas price fluctuations and to engage in trading activities. Occidental also uses forward rate locks and interest rate swaps to hedge changes in interest rates. Gains and losses from derivatives that qualify for cash flow hedge accounting are deferred until recognized as an adjustment to earnings when the hedged transaction is finalized. For cash flow hedges, the portion of the change in the value of the derivative that is not offset by an equal change in the value of the underlying transaction is referred to as hedge ineffectiveness and is recorded in earnings. Gains or losses on derivatives that do not qualify for hedge accounting are recognized in earnings. At March 31, 2001, Occidental had no derivatives that qualified as fair value hedges.
For the three months ended March 31, 2001, the results of operations included a net gain of $13 million related to derivative mark-to-market adjustments. During the three months ended March 31, 2001, a $6 million loss was reclassified from OCI to income resulting from the expiration of cash flow hedges. A net unrealized loss of $6 million related to changes in current cash flow hedges was recorded to OCI during the three months ended March 31,
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2001. During the next twelve months, Occidental expects that $12 million of net derivative losses included in OCI, based on their valuation at March 31, 2001, will be reclassified into earnings. Hedge ineffectiveness did not have a significant impact on earnings for the three months ended March 31, 2001.
Environmental Matters
Occidental’s operations in the United States are subject to 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 may continue to rise in the future.
The laws that require or address environmental remediation may 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, to be a relevant measure of exposure. Although the liability of a potentially responsible party (PRP), and in many cases its equivalent under state law, may be 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. Also, many of these sites are still under investigation by the Environmental Protection Agency (“EPA”) or the equivalent state agencies. Prior to actual cleanup, the parties involved assess site conditions and responsibility and determine the appropriate remedy. The majority of remediation costs are incurred after the parties obtain EPA or other equivalent state agency approval to proceed. The ultimate future cost of remediation of certain of the sites for which Occidental has been notified that it has been identified as being involved cannot reasonably be determined at this time.
As of March 31, 2001, 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 125 Superfund or comparable state sites. (This number does not include those sites where Occidental has been successful in resolving its involvement). The 125 sites include 34 former Diamond Shamrock Chemical sites as to which Maxus Energy Corporation has retained all liability. Of the remaining 91 sites, Occidental has denied involvement at 9 sites and has yet to determine involvement in 20 sites. With respect to the remaining 62 of these sites, Occidental is in various stages of evaluation, and the extent of liability retained by Maxus Energy Corporation is disputed at 2 of these sites. For 54 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 54 sites include 11 sites as to which present information indicates that it is probable that Occidental’s aggregate exposure is insignificant. 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 8 of the 62 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.”
Accounting Changes
In the fourth quarter of 2000, Occidental adopted the provisions of EITF Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”, which establishes accounting and reporting standards for the treatment of shipping and handling costs. Among its provisions, EITF Issue No. 00-10 requires that transportation costs that had been accounted for as deductions from revenues should now be recorded as an expense. The implementation of EITF Issue No. 00-10 had no effect on net income. All prior year balances have been adjusted to reflect this accounting change. Transportation costs in the amount of $66 million have been removed as deductions from revenues and included in cost of sales for the three months ended March 31, 2000.
See “Derivative Activities” for accounting change related to derivatives.
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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: 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 domestically or internationally; regulatory uncertainties; and not successfully completing, or any material delay of, any development of new fields, expansion, capital expenditure, efficiency improvement, acquisition or disposition. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “believes” or “expect”, that convey the uncertainty of future events or outcomes. Occidental undertakes no 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the three months ended March 31, 2001, there were no material changes in the information required to be provided under Item 305 of Regulation S-X included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations (Incorporating Item 7A) — Derivative Activities” in Occidental’s 2000 Annual Report on Form 10-K.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
General
There is incorporated by reference herein the information regarding legal proceedings in Note 12 to the consolidated condensed financial statements in Part I hereof.
In connection with the class action brought by David Croucher and others, as previously reported in Note 9 to the Consolidated Financial Statements in Occidental’s 2000 Annual Report on Form 10-K, the court approved the settlement on March 15, 2001. The time for appeal has expired and Occidental has paid the amounts due.
In April 1998, a civil action was filed on behalf of the U.S. Environmental Protection Agency against OxyChem relating to the Centre County Kepone Superfund Site at State College, Pennsylvania. The lawsuit seeks approximately $12 million in penalties and governmental response costs, a declaratory judgment that OxyChem is a liable party under CERCLA, and an order requiring OxyChem to carry out the remedy that is being performed by the site owner. In October 1998, the U.S. District Court for the Middle District of Pennsylvania granted OxyChem’s motion to dismiss the United States’ case. In December 1999, the United States Court of Appeals for the Third Circuit reversed the dismissal and remanded the case to the District Court. The court has stayed all proceedings so the parties can attempt to finalize a resolution to this matter.
Item 4. Submission of Matters to a Vote of Security-Holders
Occidental’s 2001 Annual Meeting of Stockholders (the Annual Meeting) was held on April 20, 2001. 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:
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Item 6. Exhibits and Reports on Form 8-K
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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.
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EXHIBIT INDEX