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 March 31, 2002
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 March 31, 2002
- --------------------------------- -----------------------------------
Common stock $.20 par value 374,942,119 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
March 31, 2002 and December 31, 2001 2
Consolidated Condensed Statements of Income--
Three months ended March 31, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows--
Three months ended March 31, 2002 and 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(Amounts in millions)
2002 2001
=========================================================================== ========= =========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 95 $ 199
Receivables, net 941 687
Inventories 421 444
Prepaid expenses and other 151 153
--------- ---------
Total current assets 1,608 1,483
LONG-TERM RECEIVABLES, net 2,207 2,186
EQUITY INVESTMENTS 822 993
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation, depletion and amortization of $6,030
at March 31, 2002 and $5,705 at December 31, 2001 12,853 12,858
OTHER ASSETS 224 330
--------- ---------
$ 17,714 $ 17,850
=========================================================================== ========= =========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(Amounts in millions)
2002 2001
=========================================================================== ========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Notes payable $ -- $ 54
Accounts payable 736 720
Accrued liabilities 1,046 1,089
Domestic and foreign income taxes 55 27
--------- ---------
Total current liabilities 1,837 1,890
--------- ---------
LONG-TERM DEBT, net of unamortized discount 4,051 4,065
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,125 1,103
Obligation under natural gas delivery commitment 110 145
Other 2,327 2,326
--------- ---------
3,562 3,574
--------- ---------
MINORITY INTEREST 2,224 2,224
--------- ---------
OCCIDENTAL OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED NOTES OF
OCCIDENTAL 461 463
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, at par value 75 75
Additional paid-in capital 3,873 3,857
Retained earnings 1,719 1,788
Accumulated other comprehensive income (88) (86)
--------- ---------
5,579 5,634
--------- ---------
$ 17,714 $ 17,850
=========================================================================== ========= =========
The accompanying notes are an integral part of these financial statements.
3
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Amounts in millions, except per-share amounts)
Three Months Ended
March 31
-------------------------
2002 2001
=========================================================================== ========= =========
REVENUES
Net sales $ 2,525 $ 4,475
Interest, dividends and other income 25 81
Gains on disposition of assets, net -- 3
Loss from equity investments (35) (35)
--------- ---------
2,515 4,524
--------- ---------
COSTS AND OTHER DEDUCTIONS
Cost of sales 1,990 3,289
Selling, general and administrative and other operating expenses 154 198
Exploration expense 27 21
Environmental remediation -- 49
Minority interest 25 32
Interest and debt expense, net 74 116
--------- ---------
2,270 3,705
--------- ---------
Income before taxes 245 819
Provision for domestic and foreign income and other taxes 125 308
--------- ---------
Income before extraordinary item and effect of changes in accounting
principles 120 511
Extraordinary loss, net of tax -- (3)
Cumulative effect of changes in accounting principles, net of tax (95) (24)
--------- ---------
NET INCOME AND EARNINGS APPLICABLE TO COMMON STOCK $ 25 $ 484
========= =========
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary items and effect of changes in accounting
principles $ .32 $ 1.38
Extraordinary loss, net of tax -- (.01)
Cumulative effect of changes in accounting principles, net of tax (.25) (.06)
--------- ---------
Basic earnings per common share $ .07 $ 1.31
========= =========
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary items and effect of changes in accounting
principles $ .32 $ 1.37
Extraordinary loss, net of tax -- (.01)
Cumulative effect of changes in accounting principles, net of tax (.25) (.06)
--------- ---------
Diluted earnings per common share $ .07 $ 1.30
========= =========
DIVIDENDS PER COMMON SHARE $ .25 $ .25
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 374.5 370.2
DILUTIVE SHARES 376.6 371.0
=========================================================================== ========= =========
The accompanying notes are an integral part of these financial statements.
4
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Amounts in millions)
2002 2001
========================================================================================= ========= =========
CASH FLOW FROM OPERATING ACTIVITIES
Income before extraordinary items and effect of changes in accounting principles $ 120 $ 511
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets 261 245
Deferred income tax provision 28 40
Other non-cash charges to income 22 50
Gains on disposition of assets, net -- (3)
Loss from equity investments 35 35
Exploration expense 27 21
Changes in operating assets and liabilities (233) (36)
Other operating, net (52) (42)
--------- ---------
Net cash provided by operating activities 208 821
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (274) (238)
Purchase of businesses, net (5) --
Equity investments and other investing, net 79 (61)
--------- ---------
Net cash used by investing activities (200) (299)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 33
Repurchase of trust preferred securities (2) (2)
Purchases for natural gas delivery commitment (31) (29)
Payments on long-term debt, non-recourse debt and capital lease liabilities (3) (238)
Proceeds from issuance of common stock 6 6
Payments of notes payable, net -- (2)
Cash dividends paid (94) (92)
Other financing, net 12 4
--------- ---------
Net cash used by financing activities (112) (320)
--------- ---------
(Decrease) increase in cash and cash equivalents (104) 202
Cash and cash equivalents--beginning of period 199 97
--------- ---------
Cash and cash equivalents--end of period $ 95 $ 299
========================================================================================= ========= =========
The accompanying notes are an integral part of these financial statements.
5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
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 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, 2001 (2001 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 March 31, 2002, and the consolidated
statements of income and cash flows for the three months then ended. The
income and cash flows for the period ended March 31, 2002, are not
necessarily indicative of the income 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 2002 presentation.
Reference is made to Note 1 to the consolidated financial statements in the
2001 Form 10-K for a summary of significant accounting policies including
critical accounting policies.
2. Accounting Changes
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15,
2001. Occidental adopted this statement in the first quarter of 2002 and it
did not have a significant impact on the financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No.143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The provisions
of this statement are effective for financial statements issued for fiscal
years beginning after June 15, 2002. Occidental must implement SFAS No. 143
in the first quarter of 2003 and has not yet determined its impact on the
financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement
must be applied starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense
of approximately $6 million recorded in the income statement. Occidental
implemented SFAS No. 142 in the first quarter of 2002. The adoption of this
accounting standard resulted in a cumulative effect of changes in
accounting principles after-tax reduction in net income of approximately
$95 million due to the impairment of the goodwill. Occidental now has no
goodwill remaining on its books.
6
3. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Three Months Ended March 31, 2002 2001
==================================================== ========= =========
Net income $ 25 $ 484
Other comprehensive income items
Foreign currency translation adjustments -- (8)
Derivative mark-to-market adjustments (2) (27)
Unrealized gain on securities -- 2
--------- ---------
Other comprehensive income, net of tax (2) (33)
--------- ---------
Comprehensive income $ 23 $ 451
========= =========
4. Supplemental Cash Flow Information
During the three months ended March 31, 2002 and 2001, net cash payments
(refunds) for federal, foreign and state income taxes were approximately $3
million and $(25) million, respectively. Interest paid (net of interest
capitalized) totaled approximately $68 million and $125 million for the
three months ended March 31, 2002 and 2001, respectively.
5. 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):
Balance at March 31, 2002 December 31, 2001
========================= ================= =================
Raw materials $ 51 $ 62
Materials and supplies 126 123
Work in process 2 2
Finished goods 244 268
--------- ---------
423 455
LIFO adjustment (2) (11)
--------- ---------
Total $ 421 $ 444
========= =========
6. Derivative Activities
Occidental's market-risk exposures relate primarily to commodity prices,
and, to a lesser extent, interest rates and foreign currency exchange
rates. Occidental's results are sensitive mainly to fluctuations in crude
oil and natural gas prices. Occidental may periodically use different types
of derivative instruments to achieve the best prices for oil and gas, to
reduce its exposure to price volatility and thus mitigate fluctuations in
commodity-related cash flows. Usually, Occidental remains unhedged to
long-term oil and gas prices. Overall, Occidental's use of derivatives in
hedging activity remains at a relatively low level. Changes in a derivative
instrument's fair value must be recognized in earnings unless specific
hedge accounting criteria are met. Changes in the fair value of derivative
instruments that meet specific cash-flow hedge accounting criteria are
reported in other comprehensive income (OCI). The gains and losses on
cash-flow hedge transactions that are reported in OCI are reclassified to
earnings in the periods in which earnings are affected by the variability
7
of the cash flows of the hedged item. Gains and losses from derivatives
that qualify for fair-value hedge accounting are recorded in earnings along
with the change in fair value of the hedged item. The ineffective portions
of all hedges are recognized in current period earnings.
For the three months ended March 31, 2002 and 2001, the results of
operations included a net gain of $9 million and $13 million, respectively,
related to derivative mark-to-market adjustments. Net interest expense was
reduced by $10.6 million for the three months ended March 31, 2002, to
reflect net gains from fair-value hedges. During the three months ended
March 31, 2002 and 2001, losses of $48 thousand and $6 million,
respectively, were reclassified from OCI to income resulting from the
expiration of cash-flow hedges. Net unrealized losses of $2 million and $6
million related to changes in current cash-flow hedges were recorded to OCI
during the three months ended March 31, 2002 and 2001, respectively. During
the next twelve months, Occidental expects that $1 million of net
derivative losses included in OCI, based on their valuation at March 31,
2002, will be reclassified into earnings. Hedge ineffectiveness did not
have a significant impact on earnings for the three months ended March 31,
2002 and 2001.
7. Lawsuits, Claims, Commitments, Contingencies and Related Matters
Occidental and certain of its subsidiaries have been named as defendants in
a substantial number of lawsuits, claims and proceedings. They have also
been named as potentially responsible parties in governmental proceedings
under the Comprehensive Environmental Response, Compensation and Liability
Act and similar 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 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.
8. Income Taxes
The provision for taxes based on income for the 2002 and 2001 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 taxes for the
three months ended March 31, 2001, includes an after-tax benefit of $45
million (pre-federal tax benefit of $70 million) related to settlement of a
state tax issue.
9. Investments
Investments in entities, other than oil and gas exploration and production
companies, in which Occidental has a voting stock interest of at least 20
percent, but not more than 50 percent, and certain partnerships are
8
accounted for on the equity method. At March 31, 2002, Occidental's equity
investments consisted of a 29.5 percent interest in Equistar and various
partnerships and joint ventures. The following table presents Occidental's
proportionate interest in the summarized financial information of its
equity method investments (in millions):
Three Months Ended March 31 2002 2001
=================================== ========= =========
Revenues $ 432 $ 662
Costs and expenses 467 697
--------- ---------
Net loss from continuing operations $ (35) $ (35)
========= =========
In January 2002, Occidental and Lyondell Chemical Company (Lyondell)
agreed, in principle, for Occidental to sell its share of Equistar to
Lyondell and to purchase an equity interest of approximately 21 percent in
Lyondell. These transactions are subject to the execution of definitive
documents and corporate and regulatory approvals. In connection with the
agreement in principle, Occidental wrote down its investment in the
Equistar partnership by $240 million, after tax, in December 2001. The
transactions are expected to close in the third quarter of 2002.
In January 2002, Equistar recorded a $1.1 billion cumulative effect of a
change in accounting principles to reflect the impairment of its entire
balance of goodwill. This write-down did not affect Occidental's investment
in Equistar as there is no significant difference between Occidental's
basis in the Equistar investment and the underlying equity in net assets of
Equistar subsequent to the write-down.
10. Industry Segments
The following table presents Occidental's interim industry segment
disclosures (in millions):
Oil and Gas Chemical Corporate Total
=============================================== =========== =========== =========== ===========
Quarter ended March 31, 2002
Net sales $ 1,937 $ 588 $ -- $ 2,525
=========== =========== =========== ===========
Pretax operating profit (loss) $ 390 $ (33)(c) $ (112)(a) $ 245
Income taxes (84) (2) (39)(b) (125)
Cumulative effect of changes in accounting
principles, net -- -- (95) (95)
----------- ----------- ----------- -----------
Net income (loss) $ 306 $ (35) $ (246) $ 25
=============================================== =========== =========== =========== ===========
Quarter ended March 31, 2001
Net sales $ 3,612 $ 863 $ -- $ 4,475
=========== =========== =========== ===========
Pretax operating profit (loss) $ 1,082 $ (77)(d) $ (186)(a),(e) $ 819
Income taxes (136) (2) (170)(b),(f) (308)
Extraordinary loss, net -- -- (3) (3)
Cumulative effect of changes in accounting
principles, net -- -- (24) (24)
----------- ----------- ----------- -----------
Net income (loss) $ 946 $ (79) $ (383) $ 484
=============================================== =========== =========== =========== ===========
(a) Includes unallocated net interest expense, administration expense and other
items.
(b) Includes unallocated income taxes.
(c) Includes a pre-tax charge of $14 million related to severance costs.
(d) Includes a pre-tax charge of $26 million related to severance and plant
shut-down costs.
(e) Includes a pre-tax charge of $49 million related to environmental
remediation costs and an insurance dividend of $6 million.
(f) Includes an after-tax benefit of $45 million (pre-federal tax benefit of
$70 million) related to settlement of a state tax issue.
9
11. Subsequent Event
On May 8, 2002, Occidental announced that it had been selected by the
United Arab Emirates' (UAE) Offsets Group as the successful bidder for a
24.5 percent interest in the Dolphin Project and Dolphin Energy Limited
(DEL), a partnership that includes the Offsets Group (51 percent interest)
and TotalFinaElf (24.5 percent interest). Occidental and the Offsets Group
expect to complete a definitive agreement by June 1. The DEL partners will
collaborate on the $3.5 billion Dolphin Project which consists of two
parts: (1) a development and production sharing agreement with Qatar to
develop and produce natural gas and condensate in Qatar's North Field and
(2) the rights for DEL to build, own and operate a 260-mile-long, 48-inch
export pipeline to transport 2 billion cubic feet per day of dry natural
gas from Qatar to markets in the UAE for a period of 25 years. The project
is expected to add incremental production of about 125 million cubic feet
of gas and 9,000 barrels of liquids, net to Oxy, which is approximately
30,000 barrels of oil equivalent (BOE) per day. The project also is
expected to add approximately 900 billion cubic feet of gas, which is
equivalent to 150 million BOE, to Occidental's proved reserves.
Construction on the upstream production and processing facilities and the
pipeline is expected to begin in 2003. Production is scheduled to begin in
late 2005. The partners anticipate securing project financing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Occidental Petroleum Corporation (Occidental) reported net income for the first
quarter of 2002 of $25 million, on net sales of $2.5 billion, compared with net
income of $484 million, on net sales of $4.5 billion, for the same period of
2001. Basic earnings per common share were $0.07 for the first quarter of 2002,
compared with earnings per share of $1.31 for the same period of 2001.
Earnings before special items were $129 million for the first quarter of 2002,
compared with earnings before special items of $510 million for the first
quarter of 2001. See the Special Item table below for a description of special
items. The decrease of $381 million in earnings before special items for the
three months ended March 31, 2002, compared with the same period in 2001,
reflected lower worldwide crude oil, natural gas and chemical prices and higher
Equistar petrochemical joint venture losses, partially offset by higher crude
oil volumes and lower energy and feedstock costs.
The decrease of $2.0 billion in net sales in the first quarter of 2002, compared
with the same period in 2001, primarily reflected lower worldwide crude oil,
natural gas and chemical prices and lower oil and gas trading revenues partially
offset by higher crude oil volumes. The lower oil and gas trading revenues
mainly resulted from lower oil and gas prices partially offset by higher gas
volumes. Interest, dividends and other income for the three months ended March
31, 2002 included interest income on notes receivable from affiliates of the
Altura partners of $14 million compared to $33 million for the same period in
2001.
The decrease of $1.3 billion in cost of sales for the three months ended March
31, 2002, compared with the same period in 2001, primarily reflected lower oil
and gas trading activity as discussed above and lower energy and feedstock
costs. The decrease of $44 million in selling, general and administrative and
other operating costs for the three months ended March 31, 2002, compared to the
same period in 2001, primarily reflected smaller 2002 severance charges,
compared with 2001 severance and plant shut-down costs, for the chemical segment
and lower oil and gas production taxes. The decrease of $42 million in interest
and debt expense, net for the three months ended March 31, 2002, compared to the
same period in 2001, primarily reflected lower outstanding debt and lower
interest rates. 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.
10
SEGMENT OPERATIONS
The following table sets forth the sales and earnings of each industry segment
and corporate items (in millions):
Three Months Ended
March 31
-------------------------
2002 2001
========================================================================= ========= =========
SEGMENT NET SALES
Oil and gas $ 1,937 $ 3,612
Chemical 588 863
--------- ---------
NET SALES $ 2,525 $ 4,475
========= =========
SEGMENT EARNINGS (LOSS)
Oil and gas $ 306 $ 946
Chemical (35) (79)
--------- ---------
271 867
UNALLOCATED CORPORATE ITEMS
Interest expense, net (56) (76)
Income taxes (43) (175)
Trust preferred distributions and other (11) (16)
Other (41) (89)
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS AND EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES 120 511
Extraordinary loss, net -- (3)
Cumulative effect of changes in accounting principles, net (95) (24)
--------- ---------
NET INCOME $ 25 $ 484
========================================================================= ========= =========
SPECIAL ITEMS
The following table sets forth the special items for each operating segment, if
applicable, and corporate:
Three Months Ended
March 31
Benefit (Charge) -------------------------
(in millions) 2002 2001
================================================================= ========= =========
CHEMICAL
Severance, plant shutdown and plant writedown costs $ (14) $ (26)
- ----------------------------------------------------------------- --------- ---------
CORPORATE
Settlement of state tax issue $ -- $ 70
Environmental remediation -- (49)
Insurance dividend -- 6
Changes in accounting principles, net * (95) (24)
Extraordinary loss on debt redemption, net * -- (3)
Tax effect of pre-tax adjustments 5 --
================================================================= ========= =========
* These amounts are shown after-tax.
11
OIL AND GAS SEGMENT
Three Months Ended
March 31
-------------------------
Summary of Operating Statistics 2002 2001
================================================================= ========= =========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 233 207
Latin America 44 34
Eastern Hemisphere 141 123
NATURAL GAS (MMCF)
United States 591 632
Eastern Hemisphere 50 49
BARRELS OF OIL EQUIVALENT - THOUSANDS (MBOE) 525 478
- ----------------------------------------------------------------- --------- ---------
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States $ 18.83 $ 24.32
Latin America $ 18.22 $ 22.69
Eastern Hemisphere $ 18.47 $ 22.04
NATURAL GAS ($/MCF)
United States $ 2.38 $ 10.01
Eastern Hemisphere $ 2.51 $ 2.20
================================================================= ========= =========
Oil and gas earnings for the first quarter of 2002 were $306 million, compared
with $946 million for the same period of 2001. The decrease of $640 million in
earnings for the first quarter of 2002, compared to the first quarter of 2001,
reflected the impact of lower prices for worldwide crude oil and natural gas,
partially offset by higher crude oil volumes.
The decrease of $1.7 billion in net sales in the first quarter of 2002, compared
with the same period in 2001, primarily reflected lower worldwide crude oil and
natural gas prices and lower oil and gas trading revenues partially offset by
higher crude oil volumes. The lower oil and gas trading revenues mainly resulted
from lower oil and gas prices partially offset by higher gas volumes.
Approximately 52 percent and 55 percent of oil and gas net sales were
attributable to oil and gas trading activities in the first quarter of 2002 and
2001, respectively. The results of oil and gas trading activity were profitable
but were not significant in either period.
Occidental's sensitivity to changes in oil and gas prices is similar to prior
quarters. The average West Texas Intermediate price in the first quarter was
$21.64 per barrel and Occidental's average price realization for natural gas was
$2.38 per thousand cubic feet. A swing of 25-cents per million BTU's in New York
Mercantile Exchange gas prices impacts quarterly oil and gas segment earnings by
$13.5 million while a $1.00 per barrel change in oil prices has a quarterly
impact of $28 million. Occidental expects second quarter 2002 production to be
approximately 495,000 barrels of oil equivalent (BOE) per day.
12
CHEMICAL SEGMENT
Three Months Ended
March 31
-------------------------
Summary of Operating Statistics 2002 2001
================================================================= ========= =========
MAJOR PRODUCT VOLUMES (M TONS)
Chlorine 701 705
Caustic 574 669
Ethylene Dichloride 152 222
PVC Resins 1,042 1,063
MAJOR PRODUCT PRICE INDEX (BASE 1987-1990 = 1.0)
Chlorine 0.50 0.92
Caustic 0.95 1.31
Ethylene Dichloride 0.61 0.81
PVC Resins 0.54 0.72
================================================================= ========= =========
Chemical results for the first quarter of 2002 were a loss of $35 million,
compared with a loss of $79 million for the same period of 2001. The chemical
segment had a loss before special items of $21 million for the first quarter of
2002 compared with a loss before special items of $53 million for the first
quarter of 2001. See Special Items table for a description of special items. The
improvement of $32 million in the results before special items reflected lower
energy and feedstock costs, partially offset by lower caustic soda, chlorine and
polyvinyl chloride (PVC) prices and higher Equistar petrochemical joint venture
losses.
The decrease of $275 million in net sales in the first quarter of 2002, compared
with the same period in 2001, primarily reflected lower chlorine, caustic soda
and PVC prices.
Occidental's core chemical operations had earnings before special items of $15
million for the first quarter of 2002, but these results were more than offset
by a loss of $36 million from the Equistar petrochemical joint venture.
Occidental expects the chlorovinyls and chloralkali businesses to recover
gradually in 2002, led by PVC. PVC demand and price increases are being driven
by improved economic conditions and re-stocking of inventories that has also led
to a surge in demand for the key intermediates: ethylene dichloride (EDC) and
vinyl chloride monomer (VCM). Margins for PVC, EDC and VCM have increased and
are expected to continue to improve. Due to seasonal factors, the first quarter
is generally the weakest quarter in the chemical industry and is typically
followed by a stronger second quarter due to a seasonal upturn in demand. Since
the Lyondell-Equistar transactions are expected to close in the third quarter of
2002, the depressed state of the petrochemicals business will continue to
negatively affect Occidental's results during the second quarter. See
"Acquisitions, Dispositions and Other Transactions" section below for a
discussion of these transactions.
CORPORATE AND OTHER
Segment earnings include credits in lieu of U.S. federal income taxes. In the
first quarters of both 2002 and 2001, segment earnings benefited by $5 million
from credits allocated: $1 million to oil and gas and $4 million to chemical.
Occidental and certain of its subsidiaries have been named as defendants in a
substantial number of lawsuits, claims and proceedings. They have also been
named as potentially responsible parties in 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
13
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 any 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 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 $208 million for the
first quarter of 2002, compared with $821 million for the same period of 2001.
The decrease of $613 million in the 2002 amount is primarily attributed to lower
earnings before special items and increased working capital usage compared with
the first quarter of the prior year.
Occidental's net cash used by investing activities was $200 million for the
first quarter of 2002, compared with $299 million for the same period of 2001.
The 2002 amount includes the receipt of partial repayments of amounts that were
advanced to equity affiliates in 2001. Capital expenditures for the first
quarter of 2002 were $274 million, including $15 million in chemical. Capital
expenditures for the first quarter of 2001 were $238 million, including $18
million in chemical.
Occidental's net cash used by financing activities was $112 million in the first
quarter of 2002, compared with $320 million for the same period of 2001. The
2001 amount includes debt payments of approximately $238 million.
On May 8, 2002, Occidental announced that it had been selected by the United
Arab Emirates' (UAE) Offsets Group as the successful bidder for a 24.5 percent
interest in the Dolphin Project and Dolphin Energy Limited (DEL), a partnership
that includes the Offsets Group (51 percent interest) and TotalFinaElf (24.5
percent interest). Occidental and the Offsets Group expect to complete a
definitive agreement by June 1. The DEL partners will collaborate on the $3.5
billion Dolphin Project which consists of two parts: (1) a development and
production sharing agreement with Qatar to develop and produce natural gas and
condensate in Qatar's North Field and (2) the rights for DEL to build, own and
operate a 260-mile-long, 48-inch export pipeline to transport 2 billion cubic
feet per day of dry natural gas from Qatar to markets in the UAE for a period of
25 years. The project is expected to add incremental production of about 125
million cubic feet of gas and 9,000 barrels of liquids, net to Oxy, which is
approximately 30,000 BOE per day. The project also is expected to add
approximately 900 billion cubic feet of gas, which is equivalent to 150 million
BOE, to Occidental's proved reserves. Construction on the upstream production
and processing facilities and the pipeline is expected to begin in 2003.
Production is scheduled to begin in late 2005. The partners anticipate securing
project financing.
Available but unused lines of committed bank credit totaled approximately $2.0
billion at March 31, 2002 and approximately $2.1 billion at December 31, 2001.
Occidental currently expects to spend $1.1 billion on its capital spending
program in 2002, exclusive of capital required for the Dolphin projects
described above. Occidental expects to have sufficient cash in 2002 from
operations, and from proceeds from existing credit facilities, as necessary, to
fund its operating needs, capital expenditure requirements (including the
Dolphin projects described above), dividend payments and mandatory debt
repayments.
14
ACQUISITIONS, DISPOSITIONS AND OTHER TRANSACTIONS
In January 2002, Occidental and Lyondell Chemical Company (Lyondell) agreed, in
principle, for Occidental to sell its share of Equistar to Lyondell and to
purchase an equity interest of approximately 21 percent in Lyondell. These
transactions are subject to the execution of definitive documents and corporate
and regulatory approvals. In connection with the agreement in principle,
Occidental wrote down its investment in the Equistar partnership by $240
million, after tax, in December 2001. The transactions are expected to close in
the third quarter of 2002.
DERIVATIVE ACTIVITIES
Occidental's market-risk exposures relate primarily to commodity prices, and, to
a lesser extent, interest rates and foreign currency exchange rates.
Occidental's results are sensitive mainly to fluctuations in crude oil and
natural gas prices. Occidental may periodically use different types of
derivative instruments to achieve the best prices for oil and gas, to reduce its
exposure to price volatility and thus mitigate fluctuations in commodity-related
cash flows. Usually, Occidental remains unhedged to long-term oil and gas
prices. Overall, Occidental's use of derivatives in hedging activity remains at
a relatively low level. Changes in a derivative instrument's fair value must be
recognized in earnings unless specific hedge accounting criteria are met.
Changes in the fair value of derivative instruments that meet specific cash-flow
hedge accounting criteria are reported in other comprehensive income (OCI). The
gains and losses on cash-flow hedge transactions that are reported in OCI are
reclassified to earnings in the periods in which earnings are affected by the
variability of the cash flows of the hedged item. Gains and losses from
derivatives that qualify for fair-value hedge accounting are recorded in
earnings along with the change in fair value of the hedged item. The ineffective
portions of all hedges are recognized in current period earnings.
For the three months ended March 31, 2002 and 2001, the results of operations
included a net gain of $9 million and $13 million, respectively, related to
derivative mark-to-market adjustments. Net interest expense was reduced by $10.6
million for the three months ended March 31, 2002, to reflect net gains from
fair-value hedges. During the three months ended March 31, 2002 and 2001, losses
of $48 thousand and $6 million, respectively, were reclassified from OCI to
income resulting from the expiration of cash-flow hedges. Net unrealized losses
of $2 million and $6 million related to changes in current cash-flow hedges were
recorded to OCI during the three months ended March 31, 2002 and 2001,
respectively. During the next twelve months, Occidental expects that $1 million
of net derivative losses included in OCI, based on their valuation at March 31,
2002, will be reclassified into earnings. Hedge ineffectiveness did not have a
significant impact on earnings for the three months ended March 31, 2002 and
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. Environmental
expenditures related to current operations are factored into the overall
business planning process. These expenditures are mainly considered an integral
part of production in manufacturing quality products responsive to market
demand.
The laws that require or address environmental remediation may apply
retroactively to previous waste disposal practices. Also, 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 CERCLA sites, comparable
state sites and other remediation sites, including Occidental facilities and
previously owned sites. Also, Occidental and certain of its subsidiaries have
been involved in a substantial number of governmental and private proceedings
involving historical practices at various sites including, in some instances,
having been named as defendants and/or as PRPs under the federal CERCLA law.
These proceedings seek funding and/or remediation and, in some cases,
compensation for alleged personal injury or property damage, punitive damages
and civil penalties, aggregating substantial amounts.
Occidental does not consider the number of CERCLA and similar 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
15
responsible party (PRP) 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, 2002, Occidental had been notified by the EPA or equivalent
state agencies or otherwise had become aware that it had been identified as
being involved at 126 CERCLA or comparable state sites. (This number does not
include those sites where Occidental has been successful in resolving its
involvement.) The 126 sites include 34 former Diamond Shamrock Chemical sites as
to which Maxus Energy Corporation has retained all liability. Of the remaining
92 sites, Occidental has denied involvement at 9 sites and has yet to determine
involvement in 20 sites. With respect to the remaining 63 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 9 of the 63 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 "Consolidated Results of Operations -
Corporate and Other."
ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
provisions of this statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. Occidental adopted this
statement in the first quarter of 2002 and it did not have a significant impact
on the financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No.143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after June
15, 2002. Occidental must implement SFAS No. 143 in the first quarter of 2003
and has not yet determined its impact on the financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement must
be applied starting with fiscal years beginning after December 15, 2001. At
December 31, 2001, the balance sheet included approximately $108 million of
goodwill and intangible assets with annual amortization expense of approximately
$6 million recorded in the income statement. Occidental implemented SFAS No. 142
in the first quarter of 2002. The adoption of this accounting standard resulted
in a cumulative effect of changes in accounting principles after-tax reduction
in net income of approximately $95 million due to the impairment of the
goodwill. Occidental now has no goodwill remaining on its books.
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
16
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 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, 2002, 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 2001 Annual Report on Form 10-K.
17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
This item incorporates by reference the information regarding legal proceedings
in Note 7 to the consolidated condensed financial statements in Part I of this
Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Occidental's 2002 Annual Meeting of Stockholders (the Annual Meeting) was held
on May 3, 2002. 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 ten nominees proposed by the Board of Directors were elected as
directors by the following votes:
Name For Withheld
------------------------ ------------------------ ------------------------
Ronald W. Burkle 316,758,300 2,988,695
John S. Chalsty 316,673,018 3,073,977
Edward P. Djerejian 316,697,000 3,049,995
John E. Feick 316,798,872 2,948,123
Dr. Ray R. Irani 316,361,697 3,385,298
Dr. Dale R. Laurance 316,704,684 3,042,311
Irvin W. Maloney 316,540,662 3,206,333
Rodolfo Segovia 316,777,282 2,969,713
Aziz D. Syriani 316,712,093 3,034,902
Rosemary Tomich 316,571,657 3,175,338
2. A Stockholder proposal requesting the board to adopt a stockholder
vote policy on poison pills was approved. The proposal received
197,345,692 votes for, 73,881,838 votes against and 5,613,970
abstentions.
3. A stockholder proposal to have Occidental prepare and distribute a
report on greenhouse gas emissions was defeated. The proposal received
49,455,987 votes for, 212,098,495 votes against and 15,287,020
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Split Dollar Life Insurance Agreement, dated January 24,
2002, by and between Occidental and Donald P. de Brier.
10.2 Amendment No. 1 to Occidental Petroleum Corporation Senior
Executive Survivor Benefit Plan, dated February 28, 2002.
11 Statement regarding the computation of earnings per share
for the three months ended March 31, 2002 and 2001.
12 Statement regarding the computation of total enterprise
ratios of earnings to fixed charges for the three months
ended March 31, 2002 and 2001 and the five years ended
December 31, 2001.
18
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated January 8, 2002 (date of
earliest event reported), filed on January 8, 2002, for the
purpose of reporting, under Item 9, a presentation by Dr.
Ray R. Irani, Chief Executive Officer.
2. Current Report on Form 8-K dated January 31, 2002 (date of
earliest event reported), filed on February 4, 2002, for the
purpose of reporting, under Item 5, an agreement in
principle to sell Occidental's partnership interest in
Equistar Chemicals, LP, and Occidental's results of
operations for the fourth quarter and fiscal year ended
December 31, 2001, and under Item 9, speeches and
supplemental investor information relating to Occidental's
fourth quarter 2001 earnings announcement.
3. Current Report on Form 8-K dated March 6, 2002 (date of
earliest event reported), filed on March 7, 2002, for the
purpose of reporting, under Item 5, the commencement of
Occidental's program offering from time to time up to
$1,000,000,000 aggregate initial offering price of its
Medium-Term Senior Notes, Series C, and its Medium-Term
Subordinated Notes, Series A, and under Item 7, the filing
of certain exhibits related to such program.
4. Current Report on Form 8-K dated March 22, 2002 (date of
earliest event reported), filed on March 22, 2002, for the
purpose of reporting, under Item 4, a change in Occidental's
certifying public accountant, and under Item 7, the filing
of certain exhibits related thereto.
From March 31, 2002 to the date hereof, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated April 10, 2002 (date of
earliest event reported), filed on April 10, 2002, for the
purpose of reporting, under Item 9, a presentation by Dr.
Ray R. Irani, Chief Executive Officer, at the Howard Weil
Energy Conference.
2. Current Report on Form 8-K dated April 25, 2002 (date of
earliest event reported), filed on April 25, 2002, for the
purpose of reporting, under Item 5, Occidental's results of
operations for the first quarter ended March 31, 2002, and
under Item 9, speeches and supplemental investor information
relating to Occidental's first quarter 2002 earnings
announcement.
3. Current Report on Form 8-K dated May 3, 2002 (date of
earliest event reported), filed on May 3, 2002, for the
purpose of reporting, under Item 9, a speech made by Dr. Ray
R. Irani, Chief Executive Officer, at Occidental's 2002
Annual Meeting of Stockholders.
19
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: May 10, 2002 S. P. Dominick, Jr.
--------------------------------------------------
S. P. Dominick, Jr., Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
20
EXHIBIT INDEX
EXHIBITS
10.1 Split Dollar Life Insurance Agreement, dated January 24, 2002, by and
between Occidental and Donald P. de Brier.
10.2 Amendment No. 1 to Occidental Petroleum Corporation Senior Executive
Survivor Benefit Plan, dated February 28, 2002.
11 Statement regarding the computation of earnings per share for the
three months ended March 31, 2002 and 2001.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the three months ended March 31, 2002
and 2001 and the five years ended December 31, 2001.