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EXHIBIT 13
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA Occidental Petroleum Corporation
Dollar amounts in millions, and Subsidiaries
except per-share amounts
For the years ended December 31, 1997 1996 1995 1994 1993
============================================== ========= ========= ========= ========= =========
RESULTS OF OPERATIONS(a)
Net sales and operating revenues $ 8,016 $ 7,987 $ 8,389 $ 7,128 $ 5,747
Income (loss) from continuing operations $ 217 $ 514 $ 358 $ (223) $ (194)
Net income (loss) $ (390) $ 668 $ 511 $ (36) $ 283
Preferred dividend requirements $ 88 $ 93 $ 93 $ 76 $ 39
Earnings (loss) applicable to common stock $ (478) $ 575 $ 418 $ (112) $ 244
Basic earnings (loss) per common share from
continuing operations $ .39 $ 1.30 $ .83 $ (.96) $ (.76)
Basic earnings (loss) per common share $ (1.43) $ 1.77 $ 1.31 $ (.36) $ .80
Diluted earnings (loss) per common share $ (1.43) $ 1.73 $ 1.31 $ (.36) $ .80
Earnings before special items(b) $ 691 $ 643 $ 603 $ 52 $ 33
FINANCIAL POSITION(a)
Total assets $ 15,282 $ 14,981 $ 15,342 $ 15,376 $ 14,395
Long-term debt, net $ 4,925 $ 4,511 $ 4,819 $ 5,816 $ 5,721
Capital lease liabilities, net $ 235 $ 237 $ 259 $ 291 $ 319
Stockholders' equity $ 4,286 $ 5,140 $ 4,630 $ 4,457 $ 3,958
Dividends per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
AVERAGE SHARES OUTSTANDING (thousands) 334,341 323,782 318,073 310,806 304,852
- ---------------------------------------------- --------- --------- --------- --------- ---------
(a) See Management's Discussion and Analysis and the Notes to Consolidated
Financial Statements for information regarding accounting changes, asset
acquisitions and dispositions, discontinued operations, and charges for
asset write-downs, litigation matters, environmental remediation and
other costs and other special items affecting comparability.
(b) Earnings before special items reflect adjustments to net income(loss) to
exclude the after-tax effect of certain infrequent transactions that may
affect comparability between years. See the Special Items table for the
specific nature of these items in 1997, 1996 and 1995. For the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, these special items
aggregated charges (benefits) of $1.081 billion, which includes the $750
million charge on the MidCon sale reported in discontinued operations,
($25) million, $92 million, $88 million and ($250) million,
respectively. Management believes the presentation of earnings before
special items provides a meaningful comparison of earnings between years
to the readers of the consolidated financial statements. Earnings before
special items is not considered to be an alternative to operating income
in accordance with generally accepted accounting principles.
MANAGEMENT'S DISCUSSION AND ANALYSIS
1997 BUSINESS ENVIRONMENT
OIL AND NATURAL GAS INDUSTRY During the year, worldwide crude oil supply
continued to rise and by year-end exceeded the growth in demand. Energy prices
remained strong through the first three quarters as global energy demand
continued to increase sharply. Prices for the benchmark grade West Texas
Intermediate (WTI) remained strong through most of the year. However, prices
began to weaken in December and by the end of the year had reached the lowest
point in two and one-half years.
Among the factors depressing the markets were intensifying economic
difficulties in key Southeast Asian countries, Japan and Korea. In addition, the
slow start to the winter heating season and generally mild weather throughout
the Northern Hemisphere suppressed demand for domestic heating oil and led to
rising inventories and weak fuel oil prices. Also, OPEC decided in late 1997 to
officially raise its production ceiling significantly for the first time in four
years, from 25.0 to 27.5 million barrels per day. Lastly, sizable, delayed
production started up in the North Sea.
Later in the year, the downward pressure on crude oil prices was reinforced
by a sharp sell-off of WTI contracts on the New York Mercantile Exchange (NYMEX)
futures market.
The U.S. natural gas market remained strong throughout 1997 despite the late
onset and mild weather of the 1997 - 1998 winter, but prices weakened at
year-end.
CHEMICAL INDUSTRY Overall chemical industry product demand and prices remained
strong domestically benefiting from strong end-use markets such as construction,
automotive and pulp and paper. International sales and demand were weakened by
economic troubles in the Far East and the strong U.S. dollar in the latter part
of 1997.
Chlorine demand remained strong and pricing for chlorine continued to improve
throughout most of 1997. Caustic soda prices continued to soften during the
first half of 1997 due to high customer inventory levels in certain important
sectors. Caustic soda pricing improved the second half of 1997 as demand
strengthened in key sectors. However, overall, caustic soda prices were lower in
1997 compared with 1996. Polyvinyl chloride (PVC) demand continued to grow from
1996 levels with continued price improvements realized during the first half of
the year. These price improvements eroded in the second half as industry
capacity increased and feedstock costs remained high, resulting in lower
margins.
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DISCONTINUED OPERATIONS Occidental completed the sale of all of the
issued and outstanding shares of common stock of MidCon Corp. (MidCon), its
natural gas transmission and marketing business, to K N Energy, Inc. (K N
Energy), on January 31, 1998.
Occidental sold the shares to K N Energy in return for a cash payment of $2.1
billion. After payment of the redemption price for the Cumulative MidCon-Indexed
Convertible Preferred Stock (CMIC Preferred Stock), taxes and certain other
expenses of the sale, the estimated net cash proceeds from the transaction were
approximately $1.7 billion. Additionally, in connection with the sale K N Energy
issued a fixed-rate interest bearing note secured by letters of credit, payable
January 4, 1999, to Occidental in the initial principal amount of $1.4 billion,
in exchange for a note previously issued to Occidental by the MidCon Corp. ESOP
Trust (the Trust). K N Energy also assumed responsibility for certain Texas
intrastate pipeline lease obligations of MidCon to an Occidental subsidiary with
a 29-year term and average lease rentals of approximately $30 million per year.
Concurrently with the closing of the sale, Occidental effected the redemption
of all 1,400,000 issued and outstanding shares of Occidental's CMIC Preferred
Stock, par value $1.00 per share, which were issued to and held by the Trust.
As a result of these transactions, in the fourth quarter of 1997 Occidental
classified MidCon and its subsidiaries as a discontinued operation and recorded
an estimated after-tax charge against earnings of approximately $750 million.
1997 INCOME SUMMARY Occidental reported a net loss of $390 million (a loss of
$1.43 per share) in 1997, on net sales and operating revenues of $8.0 billion.
The net loss included the $750 million charge discussed above and net charges of
$277 million for the write-down of various assets and additional environmental
and other reserves and a $75 million pretax charge to amend certain employment
agreements with two senior executives. Earnings before special items were $691
million in 1997 and $643 million in 1996.
The charges of $277 million include charges related to Occidental's intent,
announced in the fourth quarter of 1997, to sell nonstrategic oil and gas and
chemical assets, its decision to idle certain facilities and the impairment of
certain properties.
DIVISIONAL OPERATIONS The following discussion of Occidental's two operating
divisions and corporate items should be read in conjunction with Note 17 to the
Consolidated Financial Statements.
Divisional earnings exclude interest income, interest expense, unallocated
corporate expenses, extraordinary items and income from equity investments, but
include gains and losses from dispositions of divisional assets.
Foreign income and other taxes and certain state taxes are included in
divisional earnings on the basis of operating results. U.S. federal income taxes
are not allocated to divisions except for amounts in lieu thereof that represent
the tax effect of operating charges or credits resulting from purchase
accounting adjustments which arise due to the implementation in 1992 of
Statement of Financial Accounting Standards (SFAS) No. 109 -- "Accounting for
Income Taxes." Divisional earnings in 1997 benefited by $39 million from credits
allocated of $13 million and $26 million in oil and gas and chemical,
respectively. Divisional earnings in 1996 benefited by $41 million from credits
allocated of $15 million and $26 million in oil and gas and chemical,
respectively. Divisional earnings in 1995 benefited by $43 million from net
credits allocated of $16 million and $27 million in oil and gas and chemical,
respectively.
The following table sets forth the sales and earnings of each operating
division and corporate items:
DIVISIONAL OPERATIONS
In millions
For the years ended December 31, 1997 1996 1995
================================ ========= ========= =========
SALES
Oil and Gas $ 3,667 $ 3,680 $ 3,019
Chemical 4,349 4,307 5,370
--------- --------- ---------
$ 8,016 $ 7,987 $ 8,389
================================ ========= ========= =========
EARNINGS (LOSS)
Oil and Gas $ 401 $ 480 $ 45
Chemical 471 668 1,080
--------- --------- ---------
872 1,148 1,125
Unallocated corporate items
Interest expense, net (407) (454) (548)
Income taxes (60) (109) (162)
Other (188) (71) (57)
--------- --------- ---------
Income (loss) from
continuing operations 217 514 358
Discontinued operations, net (607) 184 153
Extraordinary gain (loss), net -- (30) --
--------- --------- ---------
Net income (loss) $ (390) $ 668 $ 511
================================ ========= ========= =========
OIL AND GAS
In millions, except as indicated 1997 1996 1995
================================ ========= ========= =========
DIVISIONAL SALES $ 3,667 $ 3,680 $ 3,019
DIVISIONAL EARNINGS $ 401 $ 480 $ 45
EARNINGS BEFORE SPECIAL
ITEMS(a) $ 657 $ 585 $ 249
AVERAGE SALES PRICES
CRUDE OIL PRICES (per barrel)
U.S $ 18.72 $ 18.98 $ 15.78
Other Western Hemisphere $ 11.88 $ 12.66 $ 10.28
Eastern Hemisphere $ 17.21 $ 17.66 $ 15.85
GAS PRICES
(per thousand cubic feet)
U.S $ 2.39 $ 2.11 $ 1.51
Eastern Hemisphere $ 2.40 $ 2.23 $ 2.07
EXPENSED EXPLORATION(b) $ 119 $ 120 $ 106
CAPITAL EXPENDITURES
Development $ 815 $ 540 $ 373
Exploration $ 178 $ 164 $ 130
Acquisitions and other $ 157 $ 58 $ 72
- -------------------------------- --------- --------- ---------
(a) Earnings before special items represents divisional earnings adjusted
for the effect of certain infrequent transactions that may affect
comparability between years. Earnings before special items is not
considered to be an alternative to operating income in accordance with
generally accepted accounting principles.
(b) Includes amounts previously shown in exploration capital expenditures.
Occidental explores for and produces oil and natural gas, domestically and
internationally. Occidental seeks long-term improvement in profitability and
cash flow through a combination of improved oper-
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ations in existing fields, enhanced oil recovery (EOR) projects, high-potential
exploration and complementary property acquisitions.
Earnings before special items in 1997 were $657 million, compared with
earnings before special items of $585 million in 1996. The increase primarily
reflected higher natural gas prices, partially offset by lower worldwide crude
oil prices.
The operating results of 1996, compared with 1995, reflected higher worldwide
crude oil prices, increased international oil production and higher domestic
natural gas prices, partially offset by higher exploration costs. The change in
sales for 1996, compared with 1995, largely reflected higher worldwide crude oil
production and prices and increased oil trading revenue. Approximately one-third
of oil and gas sales for 1997, 1996 and 1995 were attributable to oil trading
activity. The results are not significant. Occidental participates in oil
trading to remain aware of the complexities affecting price volatility and
supply/demand fundamentals in order to optimize its long-term global oil
marketing.
The 1997 results included pretax charges of $256 million for the write-down
of various assets and additional environmental and other reserves. For
additional information see Note 3 to the Consolidated Financial Statements.
The 1996 results included a $105 million charge for the write-down of
Occidental's investment in an oil and gas project in the Republic of Komi in the
former Soviet Union. The 1995 results included charges of $95 million related to
reorganization costs and $109 million for settlement of litigation. The
reorganization of the worldwide oil and gas operations in late 1995 allowed
Occidental to redeploy its resources, to reduce costs and to sharpen its focus
on improving performance.
CHEMICAL
In millions, except as indicated 1997 1996 1995
================================= ========= ========= =========
DIVISIONAL SALES $ 4,349 $ 4,307 $ 5,370
DIVISIONAL EARNINGS $ 471 $ 668 $ 1,080
EARNINGS BEFORE SPECIAL ITEMS(a) $ 618 $ 578 $ 1,040
KEY PRODUCT INDEXES
(1987 through 1990
average price = 1.0)
Chlorine 1.79 1.36 1.36
Caustic soda .77 1.16 1.28
PVC commodity resins .83 .80 1.02
KEY PRODUCT VOLUMES
Chlorine (thousands of tons) 3,201 3,254 3,170
Caustic soda (thousands of tons) 3,436 3,401 3,275
PVC commodity resins
(millions of pounds) 1,441 1,279 1,212
CAPITAL EXPENDITURES
Basic chemicals $ 156 $ 102 $ 121
Polymers and plastics 86 75 33
--------- --------- ---------
Chlorovinyls $ 242 $ 177 $ 154
Petrochemicals $ 40 $ 41 $ 43
Specialty businesses $ 106 $ 39 $ 30
Other $ 8 $ 5 $ 16
- --------------------------------- --------- --------- ---------
(a) Earnings before special items represents divisional earnings adjusted
for the effect of certain infrequent transactions that may affect
comparability between years. Earnings before special items is not
considered to be an alternative to operating income in accordance with
generally accepted accounting principles.
OxyChem's businesses are highly integrated, both vertically and horizontally.
Chemicals from the chlorovinyls business are used in the specialty business and
chlorine from chlorovinyls is combined with ethylene from petrochemicals to make
the raw material used for PVC. To better manage the company's interrelationships
and to further integrate and focus its chlor-alkali and plastic businesses,
OxyChem combined its basic chemicals and polymers and plastics groups into the
chlorovinyls unit, resulting in improved efficiencies and a stronger competitive
position.
Earnings before special items were $618 million in 1997, compared with $578
million in 1996. The increase reflected higher margins for a number of OxyChem's
key products, primarily chlorine, ethylene dichloride (EDC) and petrochemicals
resulting from higher sales prices and lower feedstock costs. The 1997 results
also benefited from OxyChem's ongoing commitment to controlling costs and
maintaining the reliable operations of its manufacturing facilities.
Additionally, the 1997 results also benefited from the impact of full-year
operations from specialty businesses acquired in 1996, offsetting lower than
expected results in other specialty product areas.
The 1997 earnings included pretax charges of $147 million related to
additional environmental matters and the write-down of various assets. Included
in the 1996 results was a $170 million pretax gain 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.
The 1995 results reflected a $40 million pretax gain related to the sale of a
PVC facility at Addis, Louisiana.
CORPORATE The increased costs in unallocated corporate other items in 1997,
compared with 1996, reflected lower equity earnings in 1997, which included
currency devaluations related to Thailand chemical joint ventures and a charge
to extinguish existing liabilities and open-ended financial commitments under
employment agreements with two senior executives.
The 1996 income tax amount included a benefit of approximately $100 million
primarily from a reduction in the deferred tax asset valuation allowance due to
the realization of benefits from operating loss and credit carryforwards in the
United States and Peru.
The increased costs in unallocated corporate other items in 1996, compared
with 1995, primarily reflected lower equity income from unconsolidated chemical
investments and costs associated with the initial establishment of an Employee
Stock Ownership Plan at MidCon.
SPECIAL ITEMS Special items are infrequent transactions that may affect
comparability between years. The special items included in the 1997, 1996 and
1995 results are detailed below. For further information, see Note 3 and Note 17
to the Consolidated Financial Statements and the discussion above.
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SPECIAL ITEMS
Benefit (Charge) In millions 1997 1996 1995
=============================== ========= ========= =========
OIL AND GAS
Write-down of various assets $ (140) $ (105) $ --
Environmental reserves (46) -- --
Litigation, reorganization
and other (70) -- (204)
- ------------------------------ --------- --------- ---------
CHEMICAL
Write-down of various assets (82) -- --
Environmental reserves (65) (75) --
Favorable litigation
settlements -- 170 --
Gain on sale of PVC facility -- -- 40
- ------------------------------ --------- --------- ---------
CORPORATE
Charge on MidCon sale(a) (750) -- --
Employment agreements (75) -- --
Tax reserve reversal -- 100 --
Extraordinary loss on debt
redemption(a) -- (30) --
- ------------------------------ --------- --------- ---------
(a) These amounts are shown after-tax.
CONSOLIDATED OPERATIONS--REVENUES
SELECTED REVENUE ITEMS
In millions 1997 1996 1995
============================== ========= ========= =========
Net sales and
operating revenues $ 8,016 $ 7,987 $ 8,389
Interest, dividends
and other income $ 88 $ 244 $ 105
Income from equity
investments $ 1 $ 70 $ 94
- ------------------------------ --------- --------- ---------
Net sales and operating revenues remained about the same in 1997, compared
with 1996, for both operating divisions. The decrease in sales in 1996, compared
with 1995, primarily reflected the absence of revenues from divested assets
partially offset by higher worldwide crude oil prices and production and
increased oil trading activity.
In 1996, interest, dividends and other income included the gain of $170
million related to favorable litigation settlements.
The decrease in income from equity investments in 1997, compared with 1996,
reflected lower income primarily from chemical investments and the effect of
currency devaluations in chemical joint ventures in Thailand. The decrease in
income from equity investments in 1996, compared with 1995, primarily reflected
lower earnings from certain chemical investments.
CONSOLIDATED OPERATIONS--EXPENSES
SELECTED EXPENSE ITEMS
In millions 1997 1996 1995
======================================== ========= ========= =========
Cost of sales $ 5,060 $ 5,060 $ 5,492
Selling, general and administrative
and other operating expenses $ 1,002 $ 933 $ 996
Environmental remediation $ 136 $ 100 $ 21
Interest and debt expense, net $ 434 $ 482 $ 579
- ---------------------------------------- --------- --------- ---------
Cost of sales was the same in 1997 compared with 1996. The decrease in cost
of sales from 1995 to 1996 reflected the absence of costs related to divested
assets partially offset by higher prices on oil traded and higher chemical
feedstock costs.
Selling, general and administrative and other operating expenses in 1997
reflected a portion of the asset write-downs and the charge to amend certain
employment agreements. Selling, general and administrative and other operating
expenses in 1995 reflected the charges for reorganization costs and litigation
settlements.
Environmental remediation included charges of $111 million in 1997 and $75
million in 1996, for additional environmental reserves related to various
existing sites.
The decrease in interest and debt expense from 1996 to 1997 and from 1995 to
1996 primarily reflected lower outstanding average debt levels and lower average
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
In millions 1997 1996 1995
========= ========= =========
NET CASH PROVIDED $ 1,397 $ 1,987 $ 1,501
Included in operating activities was net cash provided by operating
activities of discontinued operations of $266 million, $398 million and $139
million in 1997, 1996 and 1995, respectively.
The lower operating cash flow in 1997, compared with 1996, reflects lower
income from continuing operations, higher working capital usage and lower cash
flow from discontinued operations.
Operating assets and liabilities reflect generally higher working capital
usage and the absence of items that were of benefit in 1996 including the sale
of $100 million of accounts receivable and proceeds from litigation settlements.
The 1996 improvement in net cash provided by operating activities, compared
with 1995, reflected higher operating earnings in the oil and gas division,
proceeds from litigation settlements and proceeds from the sale of an additional
$100 million of receivables.
Net cash provided by operating activities in 1995 reflected the proceeds of
$100 million from an advance sale of crude oil, further discussed below.
Other noncash charges in 1997 mainly reflected the special charges taken in
the fourth quarter. See Special Items table above.
Other noncash charges of $298 million in 1996 primarily reflected the $105
million charge for the write-down of Occidental's investment in Komi and
additional environmental reserves. Other noncash charges of $209 million in 1995
primarily reflected the charges of $95 million for reorganization costs at the
oil and gas division. Each of the three years also included charges for employee
benefit plans and other items.
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INVESTING ACTIVITIES
In millions 1997 1996 1995
========= ========= =========
NET CASH USED $ (1,505) $ (979) $ (136)
Included in investing activities was net cash used by investing activities of
discontinued operations of $79 million, $223 million and $143 million in 1997,
1996 and 1995, respectively. The increase in net cash used in investing
activities in 1997, compared with 1996, primarily reflects the increase in
capital expenditures and lower proceeds from disposals of property, plant and
equipment.
Net cash used in investing activities included Occidental's capital
expenditure program as discussed below.
CAPITAL EXPENDITURES
In millions 1997 1996 1995
========================= ========= ========= =========
Oil and Gas $ 1,150 $ 762 $ 575
Chemical 396 262 243
Corporate and other 3 14 11
--------- --------- ---------
$ 1,549 $ 1,038 $ 829
========================= ========= ========= =========
The spending in the oil and gas business continues to be the major part of
Occidental's capital expenditure program, underscoring Occidental's commitment
to this core business. Significant capital was also spent on the chemical
business to maintain and upgrade Occidental's businesses and to provide for
expansion. In oil and gas most of the international increase was in Qatar. The
increase in chemicals reflected higher spending in the specialty business and in
chlorovinyls.
Capital expenditures for 1998 are estimated to be approximately $1.2 billion,
with about two-thirds allocated to oil and gas. The capital expenditure amount
does not include the acquisition, in 1998, of the U.S. government's 78 percent
interest in the Elk Hills Naval Petroleum Reserve (Elk Hills field) for $3.5
billion.
The 1997 proceeds from the sale of businesses included the proceeds from the
sale of a chlor-alkali chemical plant located in Tacoma, Washington for
approximately $102 million, which included $97 million in cash and the balance
in the buyer's convertible preferred stock. Also in 1997, Occidental purchased
28,000 shares of preferred stock of Leslie's Poolmart, Inc. (Leslie's), a
customer of OxyChem, for total consideration of $28 million, which consisted of
cash and the exchange of $10 million of Leslie's subordinated debentures held by
Occidental.
The 1996 proceeds from the sale of businesses and disposals of property,
plant and equipment included the sale of a subsidiary which engaged in onshore
drilling and servicing of oil and gas wells and the sale of Occidental's royalty
interest in the Congo.
The 1995 operating lease buyouts of $141 million included $71 million for the
Swift Creek chemical plant. This plant was part of the agricultural chemical
products business sold in the fourth quarter of 1995. The 1995 net proceeds from
the sale of businesses and disposal of property, plant and equipment reflected
the proceeds from the sale of Occidental's high-density polyethylene business
(HDPE), its agricultural chemicals business, its PVC facilities at Addis,
Louisiana and Burlington South, New Jersey, and a portion of Occidental's oil
and gas operation in Pakistan.
FINANCING ACTIVITIES
In millions 1997 1996 1995
========= ========= =========
NET CASH USED $ (37) $ (1,330) $ (961)
Included in financing activities was net cash provided by financing
activities of discontinued operations of $53 million and $12 million in 1997 and
1995, respectively, and net cash used of $88 million in 1996.
Cash used for financing activities in 1997 included $119 million used for the
common stock repurchase program. In October 1997, Occidental's board of
directors authorized the repurchase of up to 40 million shares of Occidental's
common stock. The repurchases will be made in the open market or in privately
negotiated transactions at the discretion of Occidental's management, depending
upon financial and market conditions or as otherwise provided by the Securities
and Exchange Commission and New York Stock Exchange rules and regulations. The
repurchase program will be initially funded with temporary financing. As of
December 31, 1997, 4.1 million shares have been repurchased. In 1997, net
proceeds from the issuance of long-term debt and other borrowings and payments
of capital lease liabilities totaled $400 million.
The increase in 1996 cash used for financing activities, compared with 1995,
reflected repayment of high-coupon debt using proceeds from asset sales that
occurred in 1996 and 1995 and cash flow from operations. In 1996, payments of
long-term debt and capital lease liabilities and net proceeds from borrowings
totaled $860 million.
In 1995, payments of long-term debt and capital lease liabilities and net
proceeds from borrowings totaled $602 million.
Occidental paid preferred and common stock dividends of $422 million in 1997,
$415 million in 1996 and $406 million in 1995.
Occidental has a centralized cash-management system that funds the working
capital and capital expenditure requirements of its various subsidiaries. There
are no provisions under existing debt agreements that significantly restrict the
ability to move funds among operating entities.
ANALYSIS OF FINANCIAL POSITION The changes in the following components of
Occidental's balance sheet are discussed below:
SELECTED BALANCE SHEET COMPONENTS
In millions 1997 1996
================================== ========= =========
Receivables from joint
ventures, partnerships and other $ 210 $ 131
Long-term debt, net $ 4,925 $ 4,511
Deferred credits and other
liabilities $ 4,201 $ 3,493
Stockholders' equity $ 4,286 $ 5,140
- ---------------------------------- --------- ---------
The increase in receivables from joint ventures, partnerships and other
primarily reflected receivables on insurance claims and receivables from certain
oil and gas joint venture partners.
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Long-term debt, net of current maturities and unamortized discount, increased
primarily reflecting higher commercial paper borrowing. The table below presents
principal amounts by currency, including any sinking fund requirements, by year
of maturity for Occidental's long-term debt obligations, excluding unamortized
discount, at December 31, 1997:
DEBT CURRENCY DENOMINATIONS AND INTEREST RATES
In millions, except rates
U.S. U.S. Dutch Canadian
Dollar Dollar Guilder Dollar
Year of Fixed Variable Variable Variable Grand
Maturity Rate Rate Rate Rate Total
=========== ========= ========= ========= ========= =========
1999 $ 169 $ 96 $ -- $ -- $ 265
2000 180 104 104 38 426
2001 516 -- -- -- 516
2002 120 1,775 -- 6 1,901
2003 163 -- -- -- 163
Thereafter 1,679 115 -- -- 1,794
--------- --------- --------- --------- ---------
Total $ 2,827 $ 2,090 $ 104 $ 44 $ 5,065
========= ========= ========= ========= =========
Average
interest
rate 9.91% 5.95% 3.88% 4.76% 8.06%
=========== ========= ========= ========= ========= =========
The estimated fair value of Occidental's long-term debt at December 31, 1997
was $5.376 billion. Occidental has the option to call certain issues of
long-term debt prior to their maturity dates.
At December 31, 1997, Occidental had available approximately $1.5 billion of
committed credit lines which are utilized, as needed, for daily operating and
other purposes. Occidental also has a $3.2 billion committed line of credit
specifically to fund the purchase of the Elk Hills field subject to periodic
reduction based on proceeds from asset sales. These lines of credit are
primarily used to back up the issuance of commercial paper.
The increase in deferred credits and other liabilities primarily reflected
accruals associated with the sale of MidCon.
The decrease in stockholders' equity primarily reflected the net loss,
dividends declared, common stock repurchases and unfavorable foreign currency
translation adjustments, partially offset by the issuance of common stock to
various employee benefit plans.
ACQUISITIONS AND COMMITMENTS In October 1997, Occidental announced that it
signed an agreement with the U.S. Department of Energy to acquire the Elk Hills
field. The acquisition closed February 5, 1998 and the $3.5 billion purchase
price was funded using a portion of the proceeds from the divestiture of MidCon
together with the proceeds of commercial paper. The Elk Hills field is located
near Bakersfield, California.
Also, in the second quarter of 1997, Occidental acquired certain oil and gas
production and exploration assets from Suemaur Exploration for approximately $50
million. These assets were located onshore in south Texas adjacent to other
Occidental properties.
In August 1996, Occidental acquired three specialty chemical producers in
separate transactions for approximately $149 million through the issuance of
5,512,355 shares of Occidental common stock, with a value of approximately $130
million, and the balance paid in cash. The acquisitions included Laurel
Industries, Inc., North America's largest producer of antimony oxide at its
LaPorte, Texas facility; Natural Gas Odorizing, Inc., the leading U.S. producer
of mercaptan-based warning agents for use in natural gas and propane from its
single plant in Baytown, Texas; and a plant in Augusta, Georgia purchased from
Power Silicates Manufacturing, Inc., which produces sodium silicates for use in
soap and detergent formulating, paper manufacturing and silica-based catalysts.
These acquisitions have been accounted for by the purchase method. Accordingly,
the cost of each acquisition was allocated to the assets acquired, goodwill and
liabilities assumed based upon their estimated respective fair values.
In April 1996, Occidental completed its acquisition of a 64 percent equity
interest (on a fully-diluted basis) in INDSPEC for approximately $92 million
through the issuance of 3,346,421 shares of Occidental common stock, with a
value of approximately $87 million, and the balance paid in cash. INDSPEC is the
world's largest producer of resorcinol, which is used to manufacture rubber
tires, engineered wood products, agricultural chemicals and fire-retardant
plastic additives. Under the terms of the acquisition agreement, INDSPEC's
management and employees have retained voting control of INDSPEC.
In December 1995, Occidental entered into a transaction with Clark USA, Inc.
(Clark) under which Occidental agreed to deliver approximately 17.7 million
barrels of WTI-equivalent oil over a six-year period. In exchange, Occidental
received $100 million in cash and approximately 5.5 million shares of Clark
common stock. As a result of this transaction, Occidental owned approximately a
19 percent voting interest of Clark, accounted for on the cost method. A later
recapitalization resulted in Occidental receiving additional shares which raised
its economic ownership, but not its voting interest, to approximately 30
percent. Occidental has accounted for the consideration received in the
transaction as deferred revenue which is being amortized into revenue as
WTI-equivalent oil is produced and delivered during the term of the agreement.
At December 31, 1997, approximately 12.2 million barrels remain to be delivered.
Commitments at December 31, 1997 for major capital expenditures during 1998
and thereafter were approximately $437 million. Total capital expenditures for
1998 are estimated to be approximately $1.2 billion. These amounts do not
include the $3.5 billion acquisition of the Elk Hills field in 1998. Occidental
believes that, through internally generated funds and financing activity, it
will have sufficient funds to continue its current capital spending programs.
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HEDGING ACTIVITIES Occidental's market risk exposures relate primarily to
commodity prices, interest rates and foreign currency. Therefore, Occidental
periodically uses commodity futures contracts, options and swaps to hedge the
impact of oil and natural gas price fluctuations; uses interest rate swaps and
futures contracts to hedge interest rates on debt; and uses forward exchange
contracts to hedge the risk associated with fluctuations in foreign currency
exchange rates. Occidental does not engage in activities using complex or highly
leveraged instruments. Gains and losses on commodity futures contracts are
deferred until recognized as an adjustment to sales revenue or purchase costs
when the related transaction being hedged is finalized. Gains and losses on
foreign currency forward exchange contracts that hedge identifiable future
commitments are deferred until recognized when the related item being hedged is
settled. All other contracts are recognized in periodic income. In addition, the
oil and gas division engages in oil and gas trading activity, primarily through
the use of futures contracts. The results are not significant and are included
in periodic income.
At December 31, 1997, Occidental was a party to futures contracts, which
expire in 1998, related to the selling price of natural gas. The contracts cover
15.5 billion cubic feet of natural gas. The fair market value of the contracts
was approximately $6 million.
Interest rate swaps are entered into as part of Occidental's overall strategy
to maintain part of its debt on a floating-rate basis. Occidental has
outstanding interest rate swaps as of December 31, 1997 on fixed-rate debt for
notional amounts totaling $530 million, converting this fixed-rate debt to
floating-rate debt. The swap rate difference resulted in approximately $2
million, $1 million and $5 million of additional interest expense in 1997, 1996
and 1995, respectively, compared to what interest expense would have been had
the debt remained at fixed rates. The impact of the swaps on the weighted
average interest rates for all debt in 1997, 1996 and 1995 was not significant.
Occidental will continue its strategy of maintaining part of its debt on a
floating-rate basis.
The following table provides information on the interest rate swaps at
December 31, 1997:
INTEREST RATE SWAPS
In millions, except rates
Year of Maturity
----------------------------------- Fair
1998 1999 2000 Value(a)
========================= ========= ========= ========= =========
Interest rate swaps
Fixed to variable $ 330 $ 96 $ 104 $ (6)
Average receive rate(b) 5.20% 5.60% 5.75%
- ------------------------- --------- --------- --------- ---------
(a) Represents estimated settlement value.
(b) Current variable pay rate at December 31, 1997 is 5.81 percent.
In December 1997, Occidental entered into two fixed-rate interest rate locks
for a total notional amount of $400 million with a settlement date of March
1998. The interest rate locks were entered into to fix the interest rate on the
expected issuance of long-term debt in 1998 with maturities for up to 10 years.
The fixed reference rate is between 5.84 percent and 5.87 percent. At December
31, 1997, Occidental would be required to pay approximately $3 million to
terminate its interest rate lock agreement.
Many of Occidental's foreign oil and gas operations and foreign chemical
operations are located in countries whose currencies generally depreciate
against the U.S. dollar on a continuing basis. Generally, an effective currency
forward market does not exist for these countries; therefore, Occidental
attempts to manage its exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for
operating purposes. Additionally, almost all of Occidental's oil and gas foreign
entities have the U.S. dollar as the functional currency since the cash flows
are mainly denominated in U.S. dollars. The effect of exchange rate transactions
in foreign currencies is included in periodic income. Foreign currencies that
are in a net liability position are thus protected from the unfavorable effects
of devaluation. However, in certain foreign chemical equity basis joint ventures
where the local currency is the functional currency, Occidental has exposure on
joint-venture debt that is denominated in U.S. dollars. Most of Occidental's
1997 foreign exchange devaluation was related to its Thailand chemical joint
ventures. For entities that have a net foreign currency asset position,
Occidental maintains those positions at low levels so that the exposure to
currency devaluation is relatively insignificant.
At December 31, 1997, Occidental had one foreign currency forward exchange
contract that matures in 2000, hedging Canadian dollar denominated debt as shown
below:
FOREIGN CURRENCY RISK
In millions, except
contract rate
Notional Contract Fair
Amount Rate Value(a)
========================= ========= ========= ========
Canadian dollar forward
exchange contracts 38 1.4282 .40
- ------------------------- --------- --------- ---------
(a) Equivalent to the unrealized net gain(loss) on existing contracts.
TAXES Deferred tax liabilities were $723 million at December 31, 1997, net of
deferred tax assets of $1.3 billion. The current portion of the deferred tax
assets of $305 million is included in prepaid expenses and other. The net
deferred tax assets are expected to be realized through future operating income
and reversal of taxable temporary differences.
LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS Occidental and
certain of its subsidiaries have been named as defendants or as potentially
responsible parties (PRPs) in a substantial number of lawsuits, claims and
proceedings, including governmental proceedings under the Comprehensive
23
8
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. 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. See Note 10 to the Consolidated Financial
Statements.
ENVIRONMENTAL EXPENDITURES 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 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.
ENVIRONMENTAL REMEDIATION The laws which require or address environmental
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. 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 Superfund 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 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 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 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 involved
cannot be reasonably determined at this time.
As of December 31, 1997, 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 198 Superfund or comparable state sites. (This
number does not include those sites where Occidental has been successful in
resolving its involvement.) The 198 sites include 77 former Diamond Shamrock
Chemical sites 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 119 sites, Occidental has had no recent or significant communication
or activity with government agencies or other PRPs at 2 sites, has denied
involvement at 16 sites and has yet to determine involvement in 17 sites. With
respect to the remaining 84 of these sites, Occidental is in various stages of
evaluation. For 76 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 76 sites include 15 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 8 of the 84 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 in the Lawsuits, Claims, Commitments, Contingencies and
Related Matters section. For management's opinion on lawsuits and proceedings
and on other environmental loss contingencies, see the above noted section.
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ENVIRONMENTAL COSTS Occidental's costs, some of which may include estimates
relating to compliance with environmental laws and regulations, are shown below
for each division:
In millions 1997 1996 1995
========================= ========= ========= =========
OPERATING EXPENSES
Oil and Gas $ 33 $ 41 $ 41
Chemical 60 59 63
--------- --------- ---------
$ 93 $ 100 $ 104
========= ========= =========
REMEDIATION EXPENSES
Oil and Gas $ 46 $ -- $ 3
Chemical 90 100 18
--------- --------- ---------
$ 136 $ 100 $ 21
========= ========= =========
CAPITAL EXPENDITURES
Oil and Gas $ 85 $ 54 $ 43
Chemical 31 27 27
--------- --------- ---------
$ 116 $ 81 $ 70
========================= ========= ========= =========
Operating expenses are incurred on a continuous basis. Remediation expenses
relate to existing conditions caused by past operations and do not contribute to
current or future revenue generation. Capital expenditures relate to longer
lived improvements in facilities. Although total costs may vary in any one year,
over the long term, divisional operating and capital expenditures for
environmental compliance generally are expected to increase. As of December 31,
1997 and 1996, Occidental had environmental reserves of approximately $567
million and $562 million, respectively. The net increase reflects additional
provisions that were partially offset by payments for remediation programs and
settlement agreements.
FOREIGN INVESTMENTS Portions of Occidental's assets are located in countries
outside North America, some of which may be considered politically and
economically unstable. These assets and the related operations are subject to
the risk of actions by governmental authorities and insurgent groups. Occidental
attempts to conduct its financial affairs so as to protect against such risks
and would expect to receive compensation in the event of nationalization. At
December 31, 1997, the carrying value of Occidental's assets in countries
outside North America aggregated approximately $2.6 billion, or approximately 17
percent of Occidental's total assets at that date. Of such assets, approximately
$950 million was located in the Middle East, approximately $950 million was
located in Latin America, and substantially all of the remainder were located in
the Netherlands and the Far East.
1998 OUTLOOK
SUMMARY OF RECENT STRATEGIC DEVELOPMENTS In the fourth quarter of 1997 and in
early 1998, Occidental announced a series of strategic steps that are expected
to provide benefit in 1998 and future years.
DISPOSITION OF MIDCON In October 1997, Occidental announced it would sell its
natural gas pipeline business and focus its attention on its two core businesses
- -- oil and gas and chemicals. As discussed above the sale of MidCon was
completed on January 31, 1998 for net proceeds of $3.1 billion after certain
expenses.
ELK HILLS FIELD ACQUISITION Also in October, Occidental announced it had reached
agreement with the U.S. Department of Energy to purchase the Elk Hills field
also discussed above. The purchase was completed in February 1998. This field is
one of the 11 largest in the lower 48 states and significantly increases both
the size and quality of Occidental's domestic reserves. Occidental believes it
will be able to increase the field's recoverable reserves and add annual
production of oil and gas significantly through the application of improved
drilling and field management techniques. The acquisition was funded using a
portion of the proceeds from the divestiture of MidCon together with the
proceeds of commercial paper. The commercial paper will eventually be repaid
from the proceeds of sales of other nonstrategic assets and issuance of other
debt securities.
In February 1998, Occidental entered into a fifteen-year contract with Tosco
Corporation (Tosco) pursuant to which Tosco will take the majority of
Occidental's oil production from the Elk Hills field. Tosco, who recently
purchased Unocal's downstream assets in California, is the second largest
refiner in California and the nation's largest independent refiner.
SALES OF NONSTRATEGIC ASSETS Occidental also announced in October that it
planned to sell $1.6 billion of nonstrategic oil and gas and chemical assets.
The first major asset sale of this program was announced in February 1998 when
Occidental sold its Venezuela oilfield development for approximately $205
million in cash plus contingent payments of up to $90 million over six years
based on oil prices.
PREFERRED STOCK REDEMPTION PROGRAM In early 1998, Occidental stated it will
redeem all 15,106,444 outstanding shares of its $3.875 voting and non-voting
Cumulative Convertible Preferred Stock. If all the shares of the preferred stock
were converted into common stock, Occidental would issue approximately 33
million shares of common stock. Annual preferred dividends related to these
shares are approximately $58 million.
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COMMON STOCK REPURCHASE PROGRAM In October, Occidental began a program to
repurchase up to 40 million shares of its common stock for approximately $1
billion dollars. Since then, approximately 10 million shares have been
repurchased. The program is continuing and is expected to be completed in 1998.
NEW ENHANCED OIL RECOVERY PROJECT IN QATAR Occidental was awarded a contract in
late 1997 by the Emirate of Qatar to perform EOR in Qatar's Idd el Shargi South
Dome field (ISSD field). Ultimate gross recovery is expected to be approximately
300 million barrels from this field using EOR techniques similar to those being
successfully employed by Occidental on the Idd el Shargi North Dome field (ISND
field) pursuant to a contract awarded to Occidental in 1994. Because of the
proximity of the two fields, Occidental will operate the ISSD field as a
satellite of the ISND field.
OIL AND NATURAL GAS The petroleum industry is a highly competitive business
subject to significant volatility due to numerous external market forces. Oil
prices have continued to decline in the first quarter of 1998. Occidental is
unable to accurately predict the future trend of oil prices.
Crude oil and natural gas prices will continue to be affected by market
fundamentals such as weather, inventory levels, competing fuel prices, overall
demand and the availability of supply. While fundamentals are a decisive factor
affecting crude oil prices over the longer term, day-to-day prices may be more
volatile due to futures trading on the NYMEX and other exchanges.
Occidental completed the acquisition of Elk Hills in February 1998 and
expects to complete the sale of certain nonstrategic assets by the end of 1998.
With the completion of these transactions, Occidental will focus on growing its
core operations in the United States, Latin America and the Middle East. Outside
these core areas, Occidental will pursue selected growth opportunities through
focused exploration, EOR projects and high-return acquisitions. Improvements in
production at Elk Hills and successful development of the new Qatar field are
expected to be key to the near-term success of Occidental's oil and gas
business.
Occidental continues to look to exploration as a growth vehicle in the oil
and gas business. During 1998, Occidental expects to drill or participate in
over 30 exploratory wells, of which approximately 80 percent will be in the
international arena. The number of exploration wells in the United States is
expected to increase in future years as preliminary geological and geophysical
studies are completed in Elk Hills and the Gulf of Mexico.
EOR activities are expected to continue to provide a major impetus for growth
in 1998 and beyond. Occidental will continue to build on its successes in
applying engineering and technological skills to assist foreign governments in
maximizing production from their oil fields.
In addition, Occidental and its partners are moving ahead with plans to
develop large, long-lived natural gas reserves discovered in the Far East.
Through business partnerships with multinational and national oil companies,
work is proceeding to develop domestic gas markets in Bangladesh and the
Philippines and to enter liquid natural gas export markets from projects to be
completed in Malaysia and Indonesia.
CHEMICAL
CHLOROVINYLS In 1997, demand for chlorine and chlorine-related derivatives
continued to be strong. Caustic soda demand recovered during the second half of
1997, which led to price improvements.
A strong integrated position in the vinyls chain offers the strongest outlet
for chlorine production via EDC, vinyl chloride monomer (VCM) and PVC. Demand
for EDC, which is principally exported, remained strong through 1997, as did
chlorine consumption for VCM and other end uses. However, pressure resulting
from the Asian economic crisis could negatively affect pricing in the
chlorovinyls chain in 1998.
Due to strong demand, the chlorine and caustic soda industry operated
essentially at capacity in 1997. Some new capacity will become available in
1998, primarily in the United States and Asia Pacific.
Chlorine markets will continue to experience pressure from various
environmental groups and regulatory authorities seeking alternatives to, or
substitutes for, compounds containing chlorine. While there has been less demand
for chlorine in some market segments, such as pulp and paper, demand from the
PVC industry has more than offset those reductions. Occidental continues to
believe that the overall market for chlorine will remain strong, led by PVC
demand.
Overall, chlorine prices in 1997 were higher than average 1996 prices.
Chlorine prices are expected to soften in 1998, while caustic soda prices should
strengthen due to stronger demand for caustic soda in all key markets.
Demand in North America for PVC resin grew 4 percent in 1997 after a robust
1996 growth of 13 percent. This solid growth continues to be led primarily by
strong construction markets. North American export sales increased to 1.4
billion pounds and represents 10 percent of annual North American production.
PVC resin prices improved during the first half of 1997, but margins were
held in check by higher feedstock prices. Margins eroded in the second half due
to continued capacity additions in the global market, as well as weak export
markets in Southeast Asia that affected domestic margins. Operating rates are
expected to stabilize in 1998 and rise in 1999 as capacity additions slow. North
American demand is expected to remain solid with a growth rate of approximately
4 percent.
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OxyChem's 450-million-pound-per-year PVC expansion started up during the
fourth quarter of 1997 and is currently operating at planned rates for 1998. In
addition, a 700-million-pound-per-year VCM expansion, owned equally by OxyChem
and Marubeni Corporation and managed by OxyChem, came on stream as scheduled
during 1997. OxyChem's strategy of maximizing the benefits of the vertical
integration of its chlorovinyls business has provided the basis for a successful
marketing effort. The business is well positioned and has long-standing
relationships with key customers in major PVC markets including: pipe, vinyl
siding and building profiles, flooring, compounds and formulators.
OxyChem's international presence also provides a solid operational base for
strategic exports to Asian and Latin American markets. However, the global
market outlook currently is uncertain due to Asian economic problems.
PETROCHEMICALS The primary petrochemicals -- ethylene, propylene, butadiene and
benzene -- are precursors to a wide variety of consumer and industrial products
that include fibers, tires and plastics. Petrochemicals account for
approximately 20 percent of all world chemical trade, and changes in global
economic conditions have an immediate effect on the domestic petrochemical
industry. The cycles in the petrochemical business have been characterized by
periods of high profitability, as demonstrated in the late 1980s, followed by
large capacity increases and subsequent depressed margins as experienced in 1991
through 1993.
The petrochemicals business experienced increased profitability in 1997 as
feedstock costs moderated and unanticipated industry operating problems
occurred. The tighter supply/demand situation, coupled with continued growth in
most world economies, allowed producers to increase margins on most
petrochemical products.
OxyChem continued to operate its plants at capacity as ethylene demand was
sustained by strong performances in OxyChem's chlorovinyls and ethylene oxide
and derivative businesses.
Across the industry, demand for polyethylene and polyethylene terephthalate
(PET) resins led to record demand for ethylene. Propylene continued its growth,
primarily in new polypropylene applications such as carpets, automobiles and
high-performance fabrics. Propylene derivative capacity grew 4 percent in 1997
and demand grew at 5 percent. Overall, OxyChem expects a growth rate of
approximately 4 percent in ethylene and propylene for 1998.
The demand for ethylene glycol is expected to result in strong growth
globally in both the polyester fabrics and PET bottle resins markets in 1998.
These markets are expected to grow in excess of 6 percent annually as technology
improvements lead to expanding market share.
SPECIALTY BUSINESSES The Specialty Business Group was formed in 1995 to
emphasize OxyChem's leadership position in many smaller-volume chemical markets.
Specialty chemical products are less cyclical than commodity chemicals and
provide a more steady source of earnings.
The Specialty Business Group is funding research and development, in keeping
with its strategy of alignment with customer-driven new product requirements and
higher utilization of existing equipment. Capital spending increased
substantially in 1997 for plant expansion and revitalization of under-utilized
facilities. This investment was less costly than what would have been required
if new, stand-alone capacity had been installed.
Among these investments are several specialty chemical projects totaling $85
million under way at the Niagara Falls, New York chemicals complex, and
scheduled for completion by the end of 1998. An additional $42 million is
planned at the same location for new facilities to serve customers with chemical
intermediates for crop protection, pharmaceutical, coating and solvent
applications.
OxyChem is continuing an aggressive expansion and acquisition program and has
targeted the Specialty Business Group for substantial growth in the coming years
through volume expansion in existing products, development of new products, and
acquisitions of synergistic businesses and product lines.
Several additional investments were undertaken in 1997 to effect product-line
extensions and strengthen the business. Major capacity expansions at OxyChem's
two isocyanurate production facilities in 1997 increased capacity by 25 percent,
and an additional expansion is under way in 1998. Debottlenecking of the sodium
silicate plant acquired last year in Augusta, Georgia was successfully
completed, and an expansion is planned at the silicates facility in Mobile,
Alabama. OxyChem and Sumitomo Bakelite began production at a new glass-filled
phenolic molding compound facility in Fort Erie, Ontario.
Late in the year, OxyChem acquired the Thermoguard antimony oxide/sodium
antimonate and Pyronil brominated plasticizer product lines of flame retardants
from Elf Atochem North America, Inc.
SFAS NO. 128 In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 -- "Earnings per Share," which establishes standards for
computing and presenting earnings per share (EPS). The statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Occidental's adoption of SFAS No.
128, effective for the year ended December 31, 1997, did not have a material
impact on Occidental's earnings per share.
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STATEMENT OF POSITION NO. 96-1 In October 1996, the American Institute of
Certified Public Accountants issued Statement of Position No. 96-1 --
"Environmental Remediation Liabilities" (SOP 96-1), which provides authoritative
guidance on specific accounting issues that are present in the recognition,
measurement, display and disclosure of environmental remediation liabilities.
Occidental's implementation of SOP 96-1, effective January 1, 1997, did not have
a material impact on Occidental's financial position or results of operations.
SFAS NO. 125 In June 1996, the FASB issued SFAS No. 125 -- "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The statement provides consistent standards for distinguishing transfers of
financial assets that are sales, from transfers that are secured borrowings.
Occidental's implementation of SFAS No. 125, effective January 1, 1997, did not
have an impact on Occidental's financial position or results of operations.
SFAS NO. 123 In October 1995, the FASB issued SFAS No. 123 -- "Accounting for
Stock-Based Compensation." This statement defines, among other things, a
fair-value based method of accounting for options under an employee stock option
plan. However, it also allows an entity to continue to account for such items
using Accounting Principles Board (APB) Opinion No. 25 -- "Accounting for Stock
Issued to Employees," under which no compensation expense is recognized.
Occidental elected this option, which alternatively requires pro forma
disclosures of net income and earnings per share, as if compensation expense had
been recognized. As permitted by SFAS No. 123, Occidental will continue to use
the accounting prescribed by APB Opinion No. 25. Effective for the year ended
December 31, 1996, the required pro forma disclosures have been made as
indicated above at Note 12 to the Consolidated Financial Statements.
SFAS NO. 121 In March 1995, the FASB issued SFAS No. 121 -- "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The statement requires a review of long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If it is determined that an impairment loss has occurred
based on expected future cash flows, then a loss will be recognized in the
income statement using a fair-value based model. Occidental's adoption of SFAS
No. 121, effective January 1, 1996, did not have a material impact on
Occidental's financial position or results of operations.
YEAR 2000 COMPLIANCE Occidental has completed a preliminary assessment of its
information systems to determine what modifications, if any, are necessary for
proper functioning of these systems in the year 2000. Costs related to
maintenance or modification of these systems will be expensed as incurred.
Occidental does not anticipate the related costs will be significant.
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA Portions
of the Annual Report, including the Letter to Stockholders, Oil and Gas and
Chemical divisional discussions and Management's Discussion and Analysis, are
forward-looking and involve risks and uncertainties that could significantly
affect expected results. 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;
the supply/demand considerations for Occidental's products; any general economic
recession domestically or internationally; regulatory uncertainties; and not
successfully completing any development of new fields, expansion, capital
expenditure, efficiency improvement, acquisition or disposition.
REPORT OF MANAGEMENT The management of Occidental Petroleum Corporation is
responsible for the integrity of the financial data reported by Occidental and
its subsidiaries. Fulfilling this responsibility requires the preparation and
presentation of consolidated financial statements in accordance with generally
accepted accounting principles. Management uses internal accounting controls,
corporate-wide policies and procedures and judgment so that such statements
reflect fairly the consolidated financial position, results of operations and
cash flows of Occidental.
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CONSOLIDATED STATEMENTS OF OPERATIONS Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
For the years ended December 31, 1997 1996 1995
========================================================== ========= ========= =========
REVENUES
Net sales and operating revenues
Oil and gas operations $ 3,667 $ 3,680 $ 3,019
Chemical operations 4,349 4,307 5,370
--------- --------- ---------
8,016 7,987 8,389
Interest, dividends and other income 88 244 105
Gains on disposition of assets, net (Note 4) (4) 11 45
Income from equity investments (Note 15) 1 70 94
--------- --------- ---------
8,101 8,312 8,633
--------- --------- ---------
COSTS AND OTHER DEDUCTIONS
Cost of sales 5,060 5,060 5,492
Selling, general and administrative and other
operating expenses 1,002 933 996
Depreciation, depletion and amortization of assets 822 761 768
Environmental remediation 136 100 21
Exploration expense 119 120 106
Interest and debt expense, net 434 482 579
--------- --------- ---------
7,573 7,456 7,962
--------- --------- ---------
INCOME(LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 528 856 671
Provision for domestic and foreign income and other
taxes (Note 11) 311 342 313
--------- --------- ---------
INCOME(LOSS) FROM CONTINUING OPERATIONS 217 514 358
Discontinued operations, net (Note 4) (607) 184 153
Extraordinary gain(loss), net (Note 5) -- (30) --
--------- --------- ---------
NET INCOME(LOSS) $ (390) $ 668 $ 511
========= ========= =========
EARNINGS(LOSS) APPLICABLE TO COMMON STOCK $ (478) $ 575 $ 418
========= ========= =========
BASIC EARNINGS PER COMMON SHARE
Income(loss) from continuing operations $ .39 $ 1.30 $ .83
Discontinued operations, net (1.82) .56 .48
Extraordinary gain(loss), net -- (.09) --
--------- --------- ---------
BASIC EARNINGS(LOSS) PER COMMON SHARE (Note 13) $ (1.43) $ 1.77 $ 1.31
========= ========= =========
DILUTED EARNINGS(LOSS) PER COMMON SHARE (Note 13) $ (1.43) $ 1.73 $ 1.31
========================================================== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS
In millions, except share amounts
Assets at December 31, 1997 1996
========================================================================== ========= =========
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 113 $ 258
Trade receivables, net of reserves of $24 in both 1997 and 1996 603 626
Receivables from joint ventures, partnerships and other 210 131
Inventories (Notes 1 and 6) 604 582
Prepaid expenses and other (Note 11) 386 313
--------- ---------
TOTAL CURRENT ASSETS 1,916 1,910
--------- ---------
LONG-TERM RECEIVABLES, NET 153 153
--------- ---------
EQUITY INVESTMENTS (Notes 1 and 15) 921 985
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST (Notes 1, 4 and 9)
Oil and gas operations 9,039 8,554
Chemical operations 6,077 5,893
Corporate and other 1,441 1,439
--------- ---------
16,557 15,886
Accumulated depreciation, depletion and amortization (7,967) (7,690)
--------- ---------
8,590 8,196
OTHER ASSETS (Note 1) 470 416
--------- ---------
NET ASSETS OF DISCONTINUED OPERATIONS (Note 4) 3,232 3,321
--------- ---------
$ 15,282 $ 14,981
========================================================================== ========= =========
The accompanying notes are an integral part of these financial statements.
30
15
Occidental Petroleum Corporation
and Subsidiaries
Liabilities and Equity at December 31, 1997 1996
========================================================================== ========= =========
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities
(Notes 7 and 9) $ 6 $ 27
Notes payable (Note 1) 35 20
Accounts payable 717 617
Accrued liabilities (Note 1) 957 970
Dividends payable 106 107
Domestic and foreign income taxes (Note 11) 49 96
--------- ---------
TOTAL CURRENT LIABILITIES 1,870 1,837
--------- ---------
LONG-TERM DEBT, NET OF CURRENT MATURITIES AND UNAMORTIZED DISCOUNT (Note 7) 4,925 4,511
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes (Note 11) 1,028 839
Other (Notes 1, 8, 9 and 14) 3,173 2,654
--------- ---------
4,201 3,493
--------- ---------
CONTINGENT LIABILITIES AND COMMITMENTS (Notes 7, 9 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 4, 7, 12 and 19)
Nonredeemable preferred stock, $1.00 par value; authorized 50 million
shares; outstanding shares: 1997--22,491,478 and 1996--26,493,209;
stated at liquidation value of $50 per share 1,125 1,325
ESOP preferred stock, $1.00 par value; authorized and outstanding shares:
1997 and 1996 -- 1,400,000 1,400 1,400
Unearned ESOP shares (1,348) (1,394)
Common stock, $.20 par value; authorized 500 million shares; outstanding
shares: 1997--341,126,546 and 1996--329,227,688 68 66
Additional paid-in capital 4,149 4,463
Retained earnings(deficit) (1,094) (726)
Cumulative foreign currency translation adjustments (14) 6
--------- ---------
4,286 5,140
--------- ---------
$ 15,282 $ 14,981
========================================================================== ========= =========
The accompanying notes are an integral part of these financial statements.
31
16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Occidental Petroleum Corporation
In millions and Subsidiaries
Cumulative
Non- Additional Retained Foreign
redeemable ESOP Unearned Common Paid-in Earnings Currency
Preferred Preferred ESOP Stock Capital (Deficit) Translation
Stock Stock Shares (Notes 4 (Notes 7 (Notes 7, Adjustments
(Note 12) (Note 12) (Note 12) and 12) and 12) 12 and 14) (Note 1)
============================ ========= ========= ========= ========= ========= ========= =========
BALANCE, DECEMBER 31, 1994 $ 1,325 $ -- $ -- $ 63 $ 5,004 $ (1,929) $ (6)
Net income -- -- -- -- -- 511 --
Dividends on common stock -- -- -- -- (318) -- --
Dividends on preferred
stock -- -- -- -- (93) -- --
Issuance of common stock -- -- -- 1 28 -- --
Pension liability
adjustment -- -- -- -- -- 16 --
Exercises of options and
other, net -- -- -- -- 10 -- 18
- ---------------------------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 $ 1,325 $ -- $ -- $ 64 $ 4,631 $ (1,402) $ 12
Net income -- -- -- -- -- 668 --
Dividends on common stock -- -- -- -- (325) -- --
Dividends on preferred
stock -- -- -- -- (93) -- --
Issuance of common stock -- -- -- 2 240 -- --
Issuance of preferred
stock -- 1,400 (1,394) -- (6) -- --
Pension liability
adjustment -- -- -- -- -- 8 --
Exercises of options and
other, net -- -- -- -- 16 -- (6)
- ---------------------------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 1,325 $ 1,400 $ (1,394) $ 66 $ 4,463 $ (726) $ 6
Net income(loss) -- -- -- -- -- (390) --
Dividends on common stock -- -- -- -- (335) -- --
Dividends on preferred
stock -- -- -- -- (88) -- --
Issuance of common stock -- -- -- -- 23 -- --
Release of ESOP shares -- -- 46 -- (29) -- --
Repurchase and retirement
of common stock -- -- -- (1) (118) -- --
Preferred stock
conversions (200) -- -- 3 197 -- --
Pension liability
adjustment -- -- -- -- -- 17 --
Exercises of options and
other, net -- -- -- -- 36 5 (20)
- ---------------------------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 $ 1,125 $ 1,400 $ (1,348) $ 68 $ 4,149 $ (1,094) $ (14)
============================ ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
32
17
CONSOLIDATED STATEMENTS OF CASH FLOWS Occidental Petroleum Corporation
In millions and Subsidiaries
For the years ended December 31, 1997 1996 1995
================================================================================= ========= ========= =========
CASH FLOW FROM OPERATING ACTIVITIES
Income(loss) from continuing operations, after extraordinary gain(loss), net $ 217 $ 484 $ 358
Adjustments to reconcile income to net cash provided by operating activities:
Extraordinary (gain)loss, net -- 30 --
Depreciation, depletion and amortization of assets 822 761 768
Amortization of debt discount and deferred financing costs 11 7 32
Deferred income tax provision (9) (3) 70
Other noncash charges (credits) to income 426 298 209
Gains on disposition of assets, net 4 (11) (45)
Income from equity investments (1) (70) (94)
Exploration expense 119 120 106
Changes in operating assets and liabilities:
Decrease(increase) in accounts and notes receivable (125) 201 117
Decrease(increase) in inventories (20) (32) (85)
Increase in prepaid expenses and other assets (75) (6) (33)
Increase(decrease) in accounts payable and accrued liabilities 13 (65) (34)
Increase(decrease) in current domestic and foreign income taxes (66) 39 44
Other operating, net (185) (164) (51)
--------- --------- ---------
1,131 1,589 1,362
Operating cash flow from discontinued operations 266 398 139
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,397 1,987 1,501
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (1,549) (1,038) (829)
Proceeds from disposal of property, plant and equipment, net (Note 4) 25 229 178
Buyout of operating leases (21) -- (141)
Purchase of businesses, net (22) (18) (7)
Sale of businesses, net (Note 4) 95 31 756
Equity investments, net 46 40 50
--------- --------- ---------
(1,426) (756) 7
Investing cash flow from discontinued operations (79) (223) (143)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (1,505) (979) (136)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 107 65 322
Net proceeds from commercial paper and revolving credit agreements 667 645 (528)
Payments of long-term debt and capital lease liabilities (374) (1,570) (396)
Proceeds from issuance of common stock 21 25 28
Repurchase of common stock (119) -- --
Proceeds (payments) of notes payable, net 17 (1) (5)
Cash dividends paid (422) (415) (406)
Other financing, net 13 9 12
--------- --------- ---------
(90) (1,242) (973)
Financing cash flow from discontinued operations 53 (88) 12
--------- --------- ---------
NET CASH USED BY FINANCING ACTIVITIES (37) (1,330) (961)
--------- --------- ---------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (145) (322) 404
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 258 580 176
--------- --------- ---------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 113 $ 258 $ 580
================================================================================= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
33
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NATURE OF OPERATIONS Occidental is a multinational organization whose principal
lines of business are oil and gas exploration and production and chemicals.
Internationally, Occidental has oil and gas production in 11 countries and
exploration projects in 19 countries. Additionally, Occidental has oil and gas
exploration and production in the United States, including the Gulf of Mexico.
Occidental also is one of the world's largest chemical producers, with interests
in chlorovinyls (basic chemicals and polymers and plastics), specialty chemicals
and petrochemicals.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Occidental Petroleum Corporation, all subsidiaries where the Company
has majority ownership of voting stock and Occidental's proportionate interests
in oil and gas exploration and production ventures (Occidental). All material
intercompany accounts and transactions have been eliminated. Investments in less
than majority-owned enterprises, including a joint-interest pipeline, but
excluding oil and gas exploration and production ventures, are accounted for on
the equity method (see Note 15).
The consolidated financial statements have been restated to reflect the
natural gas transmission and marketing business as a discontinued operation as
further discussed in Note 4. Unless indicated otherwise, all financial
information in the Notes to Consolidated Financial Statements excludes
discontinued operations.
In addition, certain financial statements, notes and supplementary data for
prior years have been changed to conform to the 1997 presentation.
RISKS AND UNCERTAINTIES The process of preparing consolidated financial
statements in conformity with generally accepted accounting principles requires
the use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the consolidated financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts,
generally not by material amounts. Management believes that these estimates and
assumptions provide a reasonable basis for the fair presentation of Occidental's
financial position and results of operations.
Included in the accompanying balance sheet is net property, plant and
equipment at a carrying value of $8.59 billion as of December 31, 1997. These
carrying values are based on Occidental's plans and intentions to continue to
operate, maintain and, where it is economically desirable, to expand its
businesses. If future economic conditions result in changes in management's
plans or intentions, the carrying values of the affected assets will be reviewed
again and any appropriate adjustments made.
Included in the accompanying consolidated balance sheet are deferred tax
assets of $1.3 billion as of December 31, 1997, the noncurrent portion of which
is netted against deferred income tax liabilities. Realization of these assets
is dependent upon Occidental generating sufficient future taxable income.
Occidental expects to realize the recorded deferred tax assets through future
operating income and reversal of taxable temporary differences.
The accompanying consolidated balance sheet includes assets of approximately
$2.6 billion as of December 31, 1997 relating to Occidental's operations in
countries outside North America. Some of these countries may be considered
politically and economically unstable. These assets and the related operations
are subject to the risk of actions by governmental authorities and insurgent
groups. Occidental attempts to conduct its financial affairs so as to protect
against such risks and would expect to receive compensation in the event of
nationalization.
Since Occidental's major products are commodities, significant changes in the
prices of oil and gas and chemical products could have a significant impact on
Occidental's results of operations for any particular year.
FOREIGN CURRENCY TRANSLATION The functional currency applicable to Occidental's
foreign oil and gas operations, except for operations in the Dutch sector of the
North Sea, is the U.S. dollar since cash flows are denominated principally in
U.S. dollars. Chemical operations in Latin America, which historically have been
subject to high inflation rates, use the U.S. dollar as the functional currency.
The effect of exchange-rate changes on transactions denominated in nonfunctional
currencies generated a gain of approximately $7 million in 1997, a loss of
approximately $3 million in 1996 and a gain of approximately $1 million in 1995.
The currency devaluation in Thailand and the strength of the U.S. dollar
relative to other currencies negatively impacted the cumulative foreign currency
translation adjustment and income from equity investments in 1997.
CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid money-market
mutual funds and bank deposits with initial maturities of three months or less.
Cash equivalents totaled approximately $50 million and $205 million at December
31, 1997 and 1996, respectively.
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TRADE RECEIVABLES In 1992, Occidental entered into an agreement to sell, under a
revolving sale program, an undivided percentage ownership interest in a
designated pool of domestic trade receivables, with limited recourse. Under this
program, Occidental serves as the collection agent with respect to the
receivables sold. An interest in new receivables is sold as collections are made
from customers. As of December 31, 1997, Occidental had received cash proceeds
totaling $600 million, all of which was received prior to 1997. After MidCon is
removed from the program the balance of Occidental's receivables program will be
$350 million. Fees and expenses under this program are included in Selling,
general and administrative and other operating expenses. During the years ended
December 31, 1997, 1996 and 1995, the cost of this program amounted to
approximately 5.9 percent, 5.8 percent and 6.3 percent, respectively, of the
weighted average amount of proceeds received.
INVENTORIES Product and raw material inventories, except certain domestic
chemicals, are stated at cost determined on the first-in, first-out (FIFO) and
average-cost methods and did not exceed market value. The remaining product and
raw material inventories are stated at cost using the last-in, first-out (LIFO)
method and also did not exceed market value. Inventories of materials and
supplies are valued at cost or less (see Note 6).
PROPERTY, PLANT AND EQUIPMENT Property additions and major renewals and
improvements are capitalized at cost. Interest costs incurred in connection with
major capital expenditures are capitalized and amortized over the lives of the
related assets (see Note 17). Depreciation and depletion of oil and gas
producing properties is determined principally by the unit-of-production method
and is based on estimated recoverable reserves. The unit-of-production method of
depreciation, based on estimated total productive life, also is used for certain
chemical plant and equipment. Depreciation of other plant and equipment has been
provided primarily using the straight-line method.
Oil and gas properties are accounted for using the successful-efforts method.
Costs of acquiring nonproducing acreage, costs of drilling successful
exploration wells and development costs are capitalized. Producing and
nonproducing properties are evaluated periodically and, if conditions warrant,
an impairment reserve is provided. Annually, a determination is made whether it
is probable that significant impairment of the carrying cost for individual
fields or groups of fields has occurred, considering a number of factors,
including profitability, political risk and Occidental's estimate of future oil
and gas prices. If impairment is believed probable, a further analysis is
performed using Occidental's estimate of future oil and gas prices to determine
any impairment to be recorded for specific properties. Annual lease rentals and
exploration costs, including geologic and geophysical costs and exploratory
dry-hole costs, are expensed as incurred.
At December 31, 1997 corporate property, plant and equipment and accumulated
depreciation, depletion and amortization included $1.2 billion and $353 million,
respectively, for an intrastate pipeline owned by Occidental.
OTHER ASSETS Other assets include tangible and intangible assets, certain of
which are amortized over the estimated periods to be benefited.
NOTES PAYABLE Notes payable at December 31, 1997 and 1996 consisted of
short-term notes due to financial institutions and other corporations. The
weighted average interest rate on short-term borrowings outstanding as of
December 31, 1997 and 1996 was 10.2 percent and 5.4 percent, respectively.
ACCRUED LIABILITIES -- CURRENT Accrued liabilities include the following (in
millions):
Balance at December 31, 1997 1996
================================================= ========= =========
Accrued payroll, commissions and related expenses $ 116 $ 158
Accrued interest expense $ 90 $ 93
- ------------------------------------------------- --------- ---------
ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations
are expensed or capitalized as appropriate. Reserves for estimated costs that
relate to existing conditions caused by past operations and that do not
contribute to current or future revenue generation are recorded when
environmental remedial efforts are probable and the costs can be reasonably
estimated. 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.
The environmental reserves are based on management's estimate of the most likely
cost to be incurred and are reviewed periodically and adjusted as additional or
new information becomes available. Probable recoveries or reimbursements are
recorded as an asset. The environmental reserves are included in accrued
liabilities and other noncurrent liabilities and amounted to $117 million and
$450 million, respectively, at December 31, 1997 and $137 million and $425
million, respectively, at December 31, 1996.
Environmental reserves are discounted only when the aggregate amount of the
estimated costs for a specific site and the timing of cash payments are reliably
determinable. As of December 31, 1997 and 1996, reserves that were recorded on a
discounted basis were not material.
35
20
DISMANTLEMENT, RESTORATION AND RECLAMATION COSTS The estimated future
abandonment costs of oil and gas properties and removal costs for offshore
production platforms, net of salvage value, are accrued over their operating
lives. Such costs are calculated at unit-of-production rates based upon
estimated proved recoverable reserves and are taken into account in determining
depreciation, depletion and amortization. For all other operations, appropriate
reserves are provided when a decision is made to dispose of a property, since
Occidental makes capital renewal expenditures on a continual basis while an
asset is in operation. Reserves for dismantlement, restoration and reclamation
costs are included in accrued liabilities and other noncurrent liabilities and
amounted to $11 million and $202 million, respectively, at December 31, 1997 and
$9 million and $215 million, respectively, at December 31, 1996.
HEDGING ACTIVITIES Occidental periodically uses commodity futures contracts,
options and swaps to hedge the impact of oil and natural gas price fluctuations
and uses forward exchange contracts to hedge the risk associated with
fluctuations in foreign currency exchange rates. Gains and losses on commodity
futures contracts are deferred until recognized as an adjustment to sales
revenue or purchase costs when the related transaction being hedged is
finalized. Gains and losses on foreign currency forward exchange contracts that
hedge identifiable future commitments are deferred until recognized when the
related item being hedged is settled. All other contracts are recognized in
periodic income. The cash flows from such contracts are included in operating
activities in the consolidated statements of cash flows.
Interest rate swaps and futures are entered into, from time to time, on
specific debt as part of Occidental's overall strategy to maintain part of its
debt on a floating-rate basis and to fix interest rates on anticipated future
debt issuances.
SUPPLEMENTAL CASH FLOW INFORMATION Excluding MidCon, cash payments during the
years 1997, 1996 and 1995 included federal, foreign and state income taxes of
approximately $182 million, $216 million and $148 million, respectively.
Interest paid (net of interest capitalized) totaled approximately $404 million,
$486 million and $544 million for the years 1997, 1996 and 1995, respectively.
See Note 4 for detail of noncash investing and financing activities regarding
certain acquisitions.
Note 2 FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
COMMODITY FUTURES AND FORWARD CONTRACTS Occidental's oil and gas segment has,
from time to time, engaged in some form of commodity derivative activity,
generally limited to hedging arrangements. The oil and gas division engages in
oil and gas trading activity primarily through the use of futures contracts. The
results are not significant and are included in periodic income.
FORWARD EXCHANGE AND INTEREST RATE CONTRACTS Occidental is engaged in both oil
and gas and chemical activities internationally. International oil and gas
transactions are mainly denominated in U.S. dollars; consequently, foreign
currency exposure is not deemed material. Many of Occidental's foreign oil and
gas operations and foreign chemical operations are located in countries whose
currencies generally depreciate against the U.S. dollar on a continuing basis.
An effective currency forward market does not exist for these countries;
therefore, Occidental attempts to manage its exposure primarily by balancing
monetary assets and liabilities and maintaining cash positions only at levels
necessary for operating purposes. Additionally, almost all of Occidental's oil
and gas foreign entities have the U.S. dollar as the functional currency since
the cash flows are mainly denominated in U.S. dollars. The effect of exchange
rate transactions in foreign currencies is included in periodic income. Foreign
currencies which are in a net liability position are thus protected from the
unfavorable effects of devaluation. For entities that have a net foreign
currency asset position, Occidental maintains those positions at low levels so
that the exposure to currency devaluation is relatively insignificant. At
December 31, 1997, Occidental had one foreign currency forward purchase exchange
contract totaling $38 million which hedged foreign currency denominated debt.
This contract matures in 2000.
From time to time, Occidental enters into interest rate swaps and futures
contracts to hedge interest rates on debt. In November 1993, Occidental entered
into interest rate swaps on newly issued fixed-rate debt for notional amounts
totaling $530 million. This converted fixed-rate debt into variable-rate debt,
based on the London Interbank Offered Rate (LIBOR), with interest rates ranging
from 6.41 percent to 6.64 percent at December 31, 1997. These agreements mature
at various dates from 1998 through 2000. Notional amounts do not represent cash
flow. Credit risk exposure, which is not material, is limited to the net
interest differentials. The swap rate difference resulted in approximately $2
million, $1 million and $5 million of additional interest expense in 1997, 1996
and 1995, respectively, compared to what interest expense would have been had
the debt remained at fixed rates. The impact of the swaps on the weighted
average interest rates for all debt in 1997, 1996 and 1995 was not significant.
In December 1997, Occidental entered into two fixed-rate interest rate locks
for a total notional amount of $400 million with a settlement date of March
1998. The interest rate locks were entered into to fix the interest rate on the
expected issuance of long-term debt in 1998. The fixed reference rate is between
5.84 percent and 5.87 percent. The interest rate locks are accounted for under
hedge accounting.
36
21
FAIR VALUE OF FINANCIAL INSTRUMENTS Occidental values financial instruments as
required by Statement of Financial Accounting Standards (SFAS) No. 107. The
carrying amounts of cash and cash equivalents and short-term notes payable
approximate fair value because of the short maturity of those instruments.
Occidental estimates the fair value of its long-term debt based on the quoted
market prices for the same or similar issues or on the yields offered to
Occidental for debt of similar rating and similar remaining maturities. The
estimated fair value of Occidental's long-term debt at December 31, 1997 and
1996 was $5.376 billion and $4.968 billion, respectively, compared with a
carrying value of $4.925 billion and $4.511 billion, respectively. The fair
value of interest rate swaps and futures is the amount at which they could be
settled, based on estimates obtained from dealers. Based on these estimates at
December 31, 1997 and 1996, Occidental would be required to pay approximately $9
million and $10 million, respectively, to terminate its interest rate swap and
futures agreements. Occidental will continue its strategy of maintaining part of
its debt on a floating-rate basis.
The carrying value of other on-balance sheet financial instruments
approximates fair value and the cost, if any, to terminate off-balance sheet
financial instruments is not significant.
Note 3 1997 SPECIAL CHARGES
- --------------------------------------------------------------------------------
In the fourth quarter of 1997, Occidental announced its intent to sell
nonstrategic oil and gas and chemical assets. Also, a decision was made to idle
certain facilities. In connection with these decisions, and the impairment of
certain properties, certain oil and gas and chemical assets were written down.
The related charges for these write-downs amounting to $222 million are included
in cost of sales and selling, general and administrative and other operating
expenses in the accompanying Consolidated Statement of Operations. The asset
write-downs included the Austin Chalk oil and gas property for $88 million and
the Garden Banks oil and gas property for $44 million. The operating results
from these properties were not significant.
The total fourth quarter charges were $478 million which included the
write-downs mentioned above as well as additional environmental and other
reserves and a charge to amend certain employment agreements with two senior
executives.
Note 4 BUSINESS COMBINATIONS, ASSET ACQUISITIONS AND DISPOSITIONS, AND
DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
Occidental completed the sale of all of the issued and outstanding shares of
common stock of MidCon, its natural gas transmission and marketing business, to
K N Energy, Inc. (K N Energy), on January 31, 1998.
Occidental sold the shares to K N Energy in return for a cash payment of $2.1
billion. After payment of the redemption price for the Cumulative MidCon-Indexed
Convertible Preferred Stock (CMIC Preferred Stock), taxes and certain other
expenses of the sale, the estimated net cash proceeds from the transaction were
approximately $1.7 billion. Additionally, in connection with the sale K N Energy
issued a fixed-rate interest bearing note secured by letters of credit, payable
January 4, 1999, to Occidental in the initial principal amount of $1.4 billion,
in exchange for a note previously issued to Occidental by the MidCon Corp. ESOP
Trust (the Trust). K N Energy also assumed responsibility for certain Texas
intrastate pipeline lease obligations of MidCon to an Occidental subsidiary with
a 29-year term and average lease rentals of approximately $30 million per year.
Concurrently with the closing of the sale, Occidental effected the redemption
of all 1,400,000 issued and outstanding shares of Occidental's CMIC Preferred
Stock, par value $1.00 per share, which were issued to and held by the Trust.
As a result of these transactions, in the fourth quarter of 1997 Occidental
classified MidCon and its subsidiaries as a discontinued operation and recorded
an estimated after-tax charge against earnings of approximately $750 million.
The $607 million net loss in 1997 from discontinued operations included the
charge on the sale and $143 million in net income from the operation for the
year.
As of December 31, 1997 and 1996, the operating assets and liabilities of
MidCon have been reclassified as net assets of discontinued operations on the
balance sheet. The balance at December 31, 1997 consisted of current assets of
$428 million; net property, plant and equipment of $5.536 billion; other assets
of $64 million; current liabilities of $442 million and long-term liabilities of
$2.354 billion.
In 1997, Occidental sold a chlor-alkali chemical plant located in Tacoma,
Washington for approximately $102 million, which included $97 million in cash
and the balance in the buyer's convertible preferred stock. Also in 1997,
Occidental purchased 28,000 shares of preferred stock of Leslie's Poolmart, Inc.
(Leslie's), a customer of OxyChem, for total consideration of $28 million, which
consisted of cash and the exchange of $10 million of Leslie's subordinated
debentures held by Occidental.
In addition, in the second quarter of 1997, Occidental acquired certain oil
and gas production and exploration assets from Suemaur Exploration for
approximately $50 million. These assets were located onshore in south Texas
adjacent to other Occidental properties.
37
22
In August 1996, Occidental acquired three specialty chemical producers in
separate transactions for approximately $149 million through the issuance of
5,512,355 shares of Occidental common stock, with a value of approximately $130
million, and the balance paid in cash. The acquisitions included Laurel
Industries, Inc., North America's largest producer of antimony oxide at its
LaPorte, Texas facility; Natural Gas Odorizing, Inc., the leading U.S. producer
of mercaptan-based warning agents for use in natural gas and propane from its
single plant in Baytown, Texas; and a plant in Augusta, Georgia purchased from
Power Silicates Manufacturing, Inc., which produces sodium silicates for use in
soap and detergent formulating, paper manufacturing and silica-based catalysts.
These acquisitions have been accounted for by the purchase method. Accordingly,
the cost of each acquisition was allocated to the assets acquired, goodwill and
liabilities assumed based upon their estimated respective fair values.
In April 1996, Occidental completed its acquisition of a 64 percent equity
interest (on a fully-diluted basis) in INDSPEC Chemical Corporation (INDSPEC)
for approximately $92 million through the issuance of 3,346,421 shares of
Occidental common stock, with a value of approximately $87 million, and the
balance paid in cash. INDSPEC is the world's largest producer of resorcinol
which is used to manufacture rubber tires, engineered wood products,
agricultural chemicals and fire-retardant plastic additives. Under the terms of
the agreement, INDSPEC's management and employees have retained voting control
of INDSPEC.
In April 1996, Occidental completed the sale of its subsidiary which engaged
in onshore drilling and servicing of oil and gas wells for approximately $32
million. Also in April 1996, certain assets of an international phosphate
fertilizer trading operation were sold for approximately $20 million in
interest-bearing notes. In July 1996, Occidental sold its royalty interest in
the Congo for $215 million to the Republic of the Congo.
In October 1995, Occidental sold its agricultural chemicals business. During
May 1995, Occidental sold its high-density polyethylene business. Occidental
also sold its polyvinyl chloride (PVC) facilities at Addis, Louisiana and
Burlington South, New Jersey. In addition, Occidental sold certain Canadian oil
and gas assets, which were acquired as part of the purchase of Placid Oil
Company (Placid) in December 1994, and a portion of the oil and gas operation in
Pakistan. The combined cash proceeds from these asset dispositions were in
excess of $900 million.
During the second quarter of 1995, Occidental and Canadian Occidental
Petroleum Ltd. (CanadianOxy) formed partnerships into which they contributed
primarily sodium chlorate manufacturing facilities. Occidental retained a direct
interest of less than 20 percent in these partnerships accounted for on the
equity method.
Note 5 EXTRAORDINARY GAIN(LOSS) AND ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
The 1996 results included a net extraordinary loss of $30 million, which
resulted from the early extinguishment of all the then outstanding $955 million
principal amount of the 11.75% Senior Debentures.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 -- "Earnings per Share," which establishes standards for computing and
presenting earnings per share (EPS). The statement requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Occidental's adoption of SFAS No. 128, effective for
the year ended December 31, 1997, did not have a material impact on Occidental's
earnings per share.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1 -- "Environmental Remediation Liabilities"
(SOP 96-1), which provides authoritative guidance on specific accounting issues
that are present in the recognition, measurement, display and disclosure of
environmental remediation liabilities. Occidental's implementation of SOP 96-1,
effective January 1, 1997, did not have a material impact on Occidental's
financial position or results of operations.
Note 6 INVENTORIES
- --------------------------------------------------------------------------------
Inventories of approximately $243 million and $215 million were valued under
the LIFO method at December 31, 1997 and 1996, respectively. Inventories
consisted of the following (in millions):
Balance at December 31, 1997 1996
================================================ ========= =========
Raw materials $ 102 $ 135
Materials and supplies 189 173
Work in process 22 17
Finished goods 342 304
--------- ---------
655 629
LIFO reserve (51) (47)
--------- ---------
TOTAL $ 604 $ 582
================================================ ========= =========
38
23
Note 7 LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following (in millions):
Balance at December 31, 1997 1996
========================================================================================= ========= =========
OCCIDENTAL PETROLEUM CORPORATION
11.125% senior debentures due 2019, callable June 1, 1999 at 105.563 $ 144 $ 144
10.125% senior debentures due 2009 276 276
9.25% senior debentures due 2019, putable August 1, 2004 at par 300 300
10.125% senior notes due 2001 330 330
9.375% to 9.75% medium-term notes due 1998 through 2001 34 99
8.5% medium-term notes due 2004, callable September 15, 1999 at par 250 250
11.125% senior notes due 2010 150 150
8.5% senior notes due 2001 150 150
8.75% medium-term notes due 2023 100 100
5.76% to 11% medium-term notes due 1998 through 2008 965 1,180
10.42% senior notes due 2003, callable December 1, 1998 at par 50 50
5.969% to 7.353% commercial paper 1,079 567
6.03% to 6.5% revolving credits 235 80
7.3% to 8.8% retail medium-term notes due 1998 through 2004, callable at various dates 97 139
--------- ---------
4,160 3,815
--------- ---------
OXY USA INC.
7% debentures due 2011, callable anytime at par 274 274
7.2% unsecured notes due 2020 (Note 16) 7 7
6.625% debentures due 1998 through 1999, callable anytime at par (Note 16) 55 55
6.125% debentures due 1997 (Note 16) -- 15
5.7% to 7.8% unsecured notes due 1998 through 2007 53 56
--------- ---------
389 407
--------- ---------
OTHER SUBSIDIARY DEBT
3.65% to 8.5% unsecured notes due 1998 through 2030 513 432
6% secured notes due 1998 through 2007 8 10
--------- ---------
521 442
--------- ---------
5,070 4,664
Less:
Unamortized discount, net (140) (148)
Current maturities (5) (5)
========= =========
TOTAL $ 4,925 $ 4,511
========================================================================================= ========= =========
At December 31, 1997, $1.85 billion of notes due in 1998 were classified as
non-current since it is management's intention to refinance this amount on a
long-term basis, initially utilizing available lines of bank credit with
maturities extending to 2002.
At December 31, 1997, minimum principal payments on long-term debt, including
sinking fund requirements, subsequent to December 31, 1998 aggregated $5.065
billion, of which $265 million is due in 1999, $426 million in 2000, $516
million in 2001, $1.901 billion in 2002, $163 million in 2003 and $1.794 billion
thereafter. Unamortized discount is generally being amortized to interest
expense on the effective interest method over the lives of the related issues.
At December 31, 1997, under the most restrictive covenants of certain
financing agreements, the capacity for the payment of cash dividends and other
distributions on, and for acquisitions of, Occidental's capital stock was
approximately $1.5 billion, assuming that such dividends, distributions and
acquisitions were made without incurring additional borrowings.
At December 31, 1997, Occidental had available lines of committed bank credit
of approximately $1.5 billion. Occidental also has a $3.2 billion committed line
of credit specifically to fund the purchase of the Elk Hills Naval Petroleum
Reserve (Elk Hills field) subject to periodic reduction based on proceeds from
asset sales. Bank fees on these committed lines of credit ranged from 0.04
percent to 0.1875 percent.
39
24
Note 8 ADVANCE SALE OF CRUDE OIL
- --------------------------------------------------------------------------------
In December 1995, Occidental entered into a transaction with Clark USA, Inc.
(Clark) under which Occidental agreed to deliver approximately 17.7 million
barrels of West Texas Intermediate (WTI)-equivalent oil over a six-year period.
In exchange, Occidental received $100 million in cash and approximately 5.5
million shares of Clark common stock. As a result of this transaction,
Occidental owned approximately a 19 percent voting interest of Clark, accounted
for on the cost method. A later recapitalization resulted in Occidental
receiving additional shares which raised its economic ownership, but not its
voting interest, to approximately 30 percent. Occidental has accounted for the
consideration received in the transaction as deferred revenue, which is being
amortized into revenue as WTI-equivalent oil is produced and delivered during
the term of the agreement. Reserves dedicated to the transaction are excluded
from the estimate of proved oil and gas reserves (see Supplemental Oil and Gas
Information). At December 31, 1997, 12.2 million barrels remain to be delivered.
Note 9 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The present value of net minimum lease payments, net of the current portion,
totaled $235 million and $237 million at December 31, 1997 and 1996,
respectively. These amounts are included in Other liabilities.
Operating and capital lease agreements frequently include renewal and/or
purchase options and require Occidental to pay for utilities, taxes, insurance
and maintenance expense.
At December 31, 1997, future net minimum lease payments for capital and
operating leases (excluding oil and gas and other mineral leases) were the
following (in millions):
CAPITAL OPERATING
=================================================================== ========= =========
1998 $ 17 $ 85
1999 17 61
2000 212 54
2001 3 53
2002 1 34
Thereafter 43 234
--------- ---------
TOTAL MINIMUM LEASE PAYMENTS 293 $ 521
=========
Less:
Executory costs (4)
Imputed interest (52)
Current portion (2)
---------
PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS, NET OF CURRENT PORTION $ 235
=================================================================== =========
Rental expense for operating leases, net of sublease rental income, was $113
million in 1997, $114 million in 1996 and $127 million in 1995.
Included in the 1997 and 1996 property, plant and equipment accounts were
$410 million and $429 million, respectively, of property leased under capital
leases and $156 million and $144 million, respectively, of related accumulated
amortization.
Note 10 LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
- --------------------------------------------------------------------------------
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.
At December 31, 1997, commitments for major capital expenditures during 1998
and thereafter were approximately $437 million.
40
25
Occidental has entered into agreements providing for future payments to
secure terminal and pipeline capacity, drilling services, electrical power,
steam and certain chemical raw materials. At December 31, 1997, the net present
value of the fixed and determinable portion of the obligations under these
agreements aggregated $93 million, which was payable as follows (in millions):
1998 -- $14, 1999 -- $12, 2000 -- $10, 2001 -- $9, 2002 -- $9 and 2003 through
2014 -- $39. Payments under these agreements, including any variable component,
were $16 million in 1997, $18 million in 1996 and $22 million in 1995.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Additionally,
Occidental agreed to participate in the development of certain natural gas
reserves and construction of a liquefied natural gas plant in Malaysia.
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.
Note 11 DOMESTIC AND FOREIGN INCOME AND OTHER TAXES
- --------------------------------------------------------------------------------
The domestic and foreign components of income (loss) from continuing
operations before domestic and foreign income and other taxes were as follows
(in millions):
For the years ended December 31, Domestic Foreign Total
================================ ========= ========= =========
1997 $ (184) $ 712 $ 528
========= ========= =========
1996 $ 254 $ 602 $ 856
========= ========= =========
1995 $ 183 $ 488 $ 671
================================ ========= ========= =========
The provisions (credits) for domestic and foreign income and other taxes
consisted of the following (in millions):
For the years U.S. State
ended December 31, Federal and Local Foreign Total
====================== ========= ========= ========= =========
1997
Current $ 52 $ 28 $ 240 $ 320
Deferred (12) (23) 26 (9)
--------- --------- --------- ---------
$ 40 $ 5 $ 266 $ 311
====================== ========= ========= ========= =========
1996
Current $ 67 $ 21 $ 257 $ 345
Deferred (6) 2 1 (3)
--------- --------- --------- ---------
$ 61 $ 23 $ 258 $ 342
====================== ========= ========= ========= =========
1995
Current $ 21 $ 47 $ 175 $ 243
Deferred 95 (17) (8) 70
--------- --------- --------- ---------
$ 116 $ 30 $ 167 $ 313
====================== ========= ========= ========= =========
41
26
The following is a reconciliation, stated as a percentage of pretax income,
of the U.S. statutory federal income tax rate to Occidental's effective tax rate
on income (loss) from continuing operations:
For the years ended December 31, 1997 1996 1995
============================================================ ========= ========= =========
U.S. federal statutory tax rate 35% 35% 35%
Operations outside the United States(a) 22 16 15
State taxes, net of federal benefit 1 2 7
State tax benefit from operating loss carryforwards -- -- (4)
Reserves not previously benefited -- -- (7)
Nondeductible depreciation and other expenses 2 2 1
Reduction in deferred tax asset valuation allowance -- (12) --
Other (1) (3) --
--------- --------- ---------
Tax rate provided by Occidental 59% 40% 47%
============================================================ ========= ========= =========
(a) Included in these figures is the impact of not providing U.S. taxes on
the unremitted earnings of certain foreign subsidiaries. The effect of
this is to reduce the U.S. federal tax rate by approximately 13 percent
in 1997, 6 percent in 1996 and 5 percent in 1995.
The tax effects of temporary differences and carryforwards resulting in
deferred income taxes at December 31, 1997 and 1996 were as follows (in
millions):
1997 1996
---------------------- ----------------------
DEFERRED DEFERRED
DEFERRED TAX DEFERRED TAX
TAX LIABIL- TAX LIABIL-
Items resulting in temporary differences and carryforwards ASSETS ITIES ASSETS ITIES
========================================================== ========= ========= ========= =========
Property, plant and equipment differences $ 172 $ 1,542 $ 197 $ 1,650
Discontinued operations -- loss accruals and sale 147 165 160 --
Equity investments and partnerships -- 118 -- 153
Environmental reserves 255 -- 224 --
Postretirement benefit accruals 154 -- 153 --
State income taxes 74 -- 84 --
Tax credit carryforwards 165 -- 200 --
All other 425 208 445 189
--------- --------- --------- ---------
Subtotal 1,392 2,033 1,463 1,992
Valuation allowance (82) -- (85) --
--------- --------- --------- ---------
Total deferred taxes $ 1,310 $ 2,033 $ 1,378 $ 1,992
========================================================== ========= ========= ========= =========
Included in total deferred tax assets was a current portion aggregating $305
million and $225 million as of December 31, 1997 and 1996, respectively, that
was reported in Prepaid expenses and other.
A deferred tax liability of approximately $80 million at December 31, 1997
has not been recognized for temporary differences related to Occidental's
investment in certain foreign subsidiaries primarily as a result of unremitted
earnings of consolidated subsidiaries, as it is Occidental's intention,
generally, to reinvest such earnings permanently.
The pension liability adjustments recorded directly to retained earnings were
net of an income tax charge of $10 million in 1997, $6 million in 1996 and $9
million in 1995.
The foreign currency translation adjustment credited directly to retained
earnings was net of an income tax benefit of $6 million in 1997 and $2 million
in 1996 and an income tax charge of $10 million in 1995.
The charge to additional paid-in capital relative to the MidCon ESOP in 1997
was net of an income tax benefit of $15 million.
42
27
The extraordinary loss that resulted from the early extinguishment of
high-coupon debt was reduced by an income tax benefit of $16 million in 1996.
Discontinued operations included income tax charges of $240 million in 1997,
$112 million in 1996 and $89 million in 1995.
At December 31, 1997, Occidental had, for U.S. federal income tax return
purposes, an alternative minimum tax credit carryforward of $165 million
available to reduce future income taxes. The alternative minimum tax credit
carryforward does not expire.
Note 12 NONREDEEMABLE PREFERRED STOCK, ESOP PREFERRED STOCK AND COMMON STOCK
- --------------------------------------------------------------------------------
The following is an analysis of nonredeemable preferred stock and common
stock (shares in thousands):
Non-
redeemable
Preferred Common
Stock Stock
============================================ ========= =========
BALANCE, DECEMBER 31, 1994 26,495 316,853
Issued -- 1,523
Options exercised and other, net -- 335
- -------------------------------------------- --------- ---------
BALANCE, DECEMBER 31, 1995 26,495 318,711
Issued -- 10,145
Options exercised and other, net (2) 372
- -------------------------------------------- --------- ---------
BALANCE, DECEMBER 31, 1996 26,493 329,228
Issued -- 1,079
Preferred stock conversions (4,002) 14,276
Repurchase program -- (4,148)
Options exercised and other, net -- 692
- -------------------------------------------- --------- ---------
BALANCE, DECEMBER 31, 1997 22,491 341,127
============================================ ========= =========
NONREDEEMABLE PREFERRED STOCK Occidental has authorized 50,000,000 shares of
preferred stock with a par value of $1.00 per share. In February 1994,
Occidental issued 11,388,340 shares of $3.00 cumulative CXY-indexed convertible
preferred stock in a public offering for net proceeds of approximately $557
million. The shares are convertible into Occidental common stock in accordance
with a conversion formula that is indexed to the market price of the common
shares of CanadianOxy. The shares of CXY-indexed convertible preferred stock are
redeemable on or after January 1, 1999, in whole or in part, at the option of
Occidental, at a redemption price of $51.50 per share declining ratably to
$50.00 per share on or after January 1, 2004, in each case plus accumulated and
unpaid dividends to the redemption date. In 1997, 4,001,691 shares of
CXY-indexed convertible preferred stock were converted by the holders into
14,275,974 shares of Occidental's common stock. As of December 31, 1997, the
aggregate number of shares of Occidental common stock issuable upon conversion
of all of the remaining outstanding shares of the CXY-indexed convertible
preferred stock was 19,954,361, based on the conversion ratio then in effect of
2.702.
In February 1993, Occidental issued 11,500,000 shares of $3.875 cumulative
convertible preferred stock. In December 1994, Occidental issued 3,606,484
shares of $3.875 cumulative convertible voting preferred stock in connection
with the Placid acquisition. The shares of both series are redeemable on or
after February 18, 1998, in whole or in part, at the option of Occidental, at a
redemption price of $51.9375 per share declining ratably to $50.00 per share on
or after February 18, 2003, in each case plus accumulated and unpaid dividends
to the redemption date. Each series of $3.875 preferred stock is convertible at
the option of the holder into common stock of Occidental at a conversion price
of $22.76 per share, subject to adjustment in certain events. See Note 19 for a
discussion of subsequent events.
43
28
ESOP PREFERRED STOCK In November 1996, Occidental established the MidCon Corp.
Employee Stock Ownership Plan (MidCon ESOP) for the benefit of employees of
MidCon. Pursuant to the MidCon ESOP, Occidental issued 1,400,000 shares of its
CMIC Preferred Stock to the MidCon Corp. ESOP Trust. The CMIC Preferred Stock
was convertible into Occidental common stock based on the value of MidCon. The
MidCon ESOP paid for the CMIC Preferred Stock with a $1.4 billion 30-year
promissory note (ESOP Note), with interest at 7.9 percent per annum, guaranteed
by MidCon. Generally, the shares held by the MidCon ESOP were released and
allocated to participant accounts based on the proportion of the payment on the
note for the respective period compared to the total remaining payments due on
the note. Dividends on the CMIC Preferred Stock were payable at an annual rate
of $21 per share, when and as declared by Occidental's Board of Directors. As a
result of the sale of MidCon the CMIC Preferred Stock was redeemed. The effects
of the MidCon ESOP are included in discontinued operations.
COMMON STOCK REPURCHASE PROGRAM In October 1997, the Occidental board of
directors authorized the repurchase of up to 40 million shares of Occidental's
common stock. The repurchases will be made in the open market or in privately
negotiated transactions at the discretion of Occidental's management, depending
upon financial and market conditions or as otherwise provided by the Securities
and Exchange Commission and New York Stock Exchange rules and regulations. As of
December 31, 1997, 4.1 million shares were repurchased and retired for a total
cost of $119 million.
STOCK INCENTIVE PLANS
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS Options to purchase common stock of
Occidental have been granted to officers and employees under stock option plans
adopted in 1987 and 1995. During 1997, options for 1,362,022 shares became
exercisable, and options for 4,004,510 shares were exercisable at December 31,
1997 at a weighted-average exercise price of $22.25. Generally, these options
vest over three years with a maximum term of ten years and one month. At
December 31, 1997, options with stock appreciation rights (SAR) for 811,000
shares were outstanding, all of which options were exercisable.
The following is a summary of stock option transactions during 1997, 1996 and
1995 (shares in thousands):
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
=================== ========= ========= ========= ========= ========= =========
BEGINNING BALANCE 5,952 $ 22.637 5,481 $ 22.263 5,098 $ 22.121
Granted or issued 1,789 $ 25.058 1,335 $ 24.375 1,127 $ 23.125
Exercised (845) $ 22.219 (483) $ 21.276 (431) $ 19.230
Canceled or expired (127) $ 25.582 (381) $ 24.958 (313) $ 27.222
--------- --------- ---------
ENDING BALANCE 6,769 $ 23.274 5,952 $ 22.637 5,481 $ 22.263
========= ========= =========
OPTIONS EXERCISABLE
AT YEAR-END 4,005 3,589 3,517
=================== ========= ========= =========
For options outstanding at December 31, 1997 the exercise prices were between
$17.75 and $29.625 and the weighted average remaining contractual life was
approximately 7 years.
RESTRICTED STOCK AWARDS Pursuant to the 1995 Incentive Stock Plan, employees may
be awarded Occidental restricted common stock at the par value of $.20 per
share, with such shares vesting after four years (five years for awards issued
prior to December 1995) or earlier under certain conditions. The related expense
is amortized over the vesting period. In 1997, 149,885 shares were awarded at a
weighted-average grant-date value of $23.375 per share; 171,649 shares were
awarded in 1996 at a weighted-average grant-date value of $21.431 per share; and
21,339 shares were awarded in 1995 at a weighted-average grant-date value of
$20.875 per share.
44
29
PERFORMANCE STOCK AWARDS AND OPTIONS Performance stock awards were made to
various executive officers in January 1997 pursuant to the 1995 Incentive Stock
Plan. The number of shares of common stock to be received, under these awards,
by such officers at the end of the performance period will depend on the
attainment of performance objectives based on a peer company comparison of total
stockholder return for such period. Based on Occidental's ranking among its
peers, the grantees will receive shares of common stock in an amount ranging
from zero to 175 percent of the Target Share Award (as such amount is defined in
the grant). The shares vest or fail to vest by the end of the four-year
performance term. In 1997, 97,832 shares were awarded at a weighted-average
grant-date value of $23.375 per share; and 101,630 shares were awarded in 1996
at a weighted-average grant date value of $21.375 per share.
In 1997, 4,655,000 Performance Stock Options were granted to certain
executive officers at an exercise price of $25.375. These options expire 10
years from the grant date and have no value unless and until one of the
following events occur, at which time the grants become fully vested and
exercisable: for twenty consecutive trading days, the New York Stock Exchange
closing price of the common stock must be a) $30 or more per share within the
first three years after grant date; b) $35 or more per share after the third
year and through the fifth year; or c) $40 or more per share from the sixth year
until expiration. None of the options were exercisable at December 31, 1997. Any
income effect will be recognized at the time the options are exercisable.
Under the 1995 Stock Incentive Plan, a total of approximately 10,000,000
shares may be awarded. At December 31, 1997, 1,700,898 shares were available for
the granting of all future awards under these plans, all of which were available
to issue stock options, SARs, restricted stocks and performance stock awards.
Occidental accounts for these plans under Accounting Principles Board Opinion
No. 25. Had the compensation expense for these plans been determined in
accordance with SFAS No. 123 -- "Accounting for Stock Based Compensation" (SFAS
No. 123), Occidental's pro forma net income would have been a loss of $396
million in 1997, and net income of $666 million and $510 million in 1996 and
1995, respectively. Basic and diluted earnings per share would have been a loss
of $1.44 for 1997 and would not have changed for 1996 and 1995. The method of
accounting under SFAS No. 123 has not been applied to options granted prior to
January 1, 1995; therefore, the resulting pro forma compensation expense may not
be representative of that to be expected in future years. The fair value of each
option grant, for pro forma calculation purposes, is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 3.94, 4.20 and 4.32 percent; expected volatility of 22.36, 23.92 and 24.19
percent; risk-free rate of return 6.27, 6.79 and 6.93 percent; and expected
lives of 5, 5 and 7 years.
1996 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS Under the 1996 Restricted
Stock Plan for Non-Employee Directors, each non-employee Director of the Company
will receive awards of restricted common stock each year as additional
compensation for their services as a member of the Board of Directors. A maximum
of 50,000 shares of common stock may be awarded under the Directors Plan and
3,500 and 3,250 shares of common stock were awarded during 1997 and 1996,
respectively. At December 31, 1997, 43,250 shares of common stock were available
for the granting of future awards.
Note 13 EARNINGS PER SHARE
- --------------------------------------------------------------------------------
In 1997, Occidental adopted SFAS No. 128, which establishes standards for
computing and presenting earnings per share. As a result, earnings per share for
1996 and 1995 were restated as indicated below. Basic earnings per share was
computed by dividing net income, less preferred dividend requirements, by the
weighted average number of common shares outstanding during each year. The
computation of diluted earnings per share further assumes the dilutive effect of
stock options and the conversion of preferred stocks. The adoption of SFAS No.
128 resulted in changing only the previously reported fully diluted earnings per
share for 1995 from $1.30 per share to $1.31 per share.
45
30
The following is a calculation of earnings per share for the years ended
December 31 (in thousands, except per-share amounts):
1997 1996 1995
----------------------------------- ----------------------------------- -----------------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
================== ========= ========= ========= ========= ========= ========= ========= ========= =========
BASIC EARNINGS
- --------------
PER SHARE
- ---------
Income from
continuing
operations $ 216,970 $ 514,088 $ 357,959
Preferred stock
dividends (87,736) (92,701) (92,703)
--------- --------- ---------
Earnings(loss)
from continuing
operations
applicable to
common stock 129,234 334,341 $ .39 421,387 323,782 $ 1.30 265,256 318,073 $ .83
Discontinued
operations, net (606,625) (1.82) 183,733 .56 152,992 .48
Extraordinary
gain(loss), net -- -- (29,836) (0.09) -- --
--------- --------- --------- --------- --------- ---------
Earnings(loss)
applicable to
common stock $(477,391) $ (1.43) $ 575,284 $ 1.77 $ 418,248 $ 1.31
========= ========= ========= ========= ========= =========
DILUTED EARNINGS
- ----------------
PER SHARE
- ---------
Earnings(loss)
from continuing
operations
applicable to
common stock $ 129,234 334,341 $ 421,387 323,782 $ 265,256 318,073
Dilutive effect of
exercise of op-
tions outstanding -- 575 -- 363 -- 158
Dilutive effect of
convertible
preferred stock -- -- 34,164 28,068 -- --
--------- --------- --------- --------- --------- ---------
Earnings(loss) from
continuing
operations
applicable
to common stock 129,234 334,916 $ .39 455,551 352,213 $ 1.29 265,256 318,231 $ .83
Discontinued
operations, net (606,625) (1.82) 183,733 .52 152,992 .48
Extraordinary
gain(loss), net -- -- (29,836) (0.08) -- --
--------- --------- --------- --------- --------- ---------
Earnings(loss)
applicable to
common stock $(477,391) $ (1.43) $ 609,448 $ 1.73 $ 418,248 $ 1.31
================== ========= ========= ========= ========= ========= =========
The following items were not included in the computation of diluted earnings
per share because their effect was anti-dilutive for the years ended
December 31:
1997 1996 1995
==================================== =================== =================== ===================
Stock Options
Number of shares 508 1,188 2,134
Price range $ 26.000 - $ 29.625 $ 24.875 - $ 29.625 $ 22.000 - $ 31.125
Expiration range 8/21/98 - 12/1/07 3/31/97 - 8/18/00 8/16/96 - 4/28/03
Convertible Preferred Stock $3.875
Number of shares 33,186 33,186 33,186
Dividends paid $ 58,538 $ 58,538 $ 58,538
Convertible Preferred Stock $3.00
Number of shares 19,954 -- 30,566
Dividends paid $ 29,199 $ -- $ 34,165
- ------------------------------------ ------------------- ------------------- -------------------
Note 14 RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
Occidental has various defined contribution retirement plans for its
salaried, domestic union and nonunion hourly, and certain foreign national
employees that provide for periodic contributions by Occidental based on
plan-specific criteria, such as base pay, age level and/or employee
contributions. Occidental contributed and expensed $53 million in both 1997 and
1996 and $58 million in 1995 under the provisions of these plans.
Occidental provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. Beginning in 1993, certain salaried participants pay for all medical
cost increases in excess of increases in the Consumer Price Index (CPI). The
benefits generally are funded by Occidental as
46
31
the benefits are paid during the year. The cost of providing these benefits is
based on claims filed and insurance premiums paid for the period. The total cost
of these benefits was approximately $79 million in 1997, $89 million in 1996
and $78 million in 1995. The 1997, 1996 and 1995 costs included $31 million, $37
million and $17 million, respectively, for postretirement costs, as discussed
below.
Occidental's retirement and postretirement defined benefit plans are accrued
based on various assumptions and discount rates, as described below. The
actuarial assumptions used could change in the near term as a result of changes
in expected future trends and other factors which, depending on the nature of
the changes, could cause increases or decreases in the liabilities accrued.
RETIREMENT PLANS Pension costs for Occidental's defined benefit pension plans,
determined by independent actuarial valuations, are funded by payments to trust
funds, which are administered by independent trustees. The components of the net
pension cost for 1997, 1996 and 1995 were as follows (in millions):
For the years ended December 31, 1997 1996 1995
========================================================= ========= ========= =========
Service cost -- benefits earned during the period $ 8 $ 9 $ 9
Interest cost on projected benefit obligation 25 23 23
Actual return on plan assets (46) (31) (43)
Net amortization and deferral 26 21 32
Curtailments and settlements (1) 1 12
--------- --------- ---------
Net pension cost $ 12 $ 23 $ 33
========================================================= ========= ========= =========
In 1997, 1996 and 1995, Occidental recorded adjustments to retained earnings
of credits of $17 million, $8 million and $16 million, respectively, to reflect
the net-of-tax difference between the additional liability required under
pension accounting provisions and the corresponding intangible asset.
The following table sets forth the defined benefit plans' funded status and
amounts recognized in Occidental's consolidated balance sheets at December 31,
1997 and 1996 (in millions):
1997 1996
---------------------- ----------------------
ASSETS ACCUMU- ASSETS ACCUMU-
EXCEED LATED EXCEED LATED
ACCUMU- BENEFITS ACCUMU- BENEFITS
LATED EXCEED LATED EXCEED
Balance at December 31, BENEFITS ASSETS BENEFITS ASSETS
=========================================== ========= ========= ========= =========
PRESENT VALUE OF THE ESTIMATED PENSION
BENEFITS TO BE PAID IN THE FUTURE
Vested benefits $ 187 $ 90 $ 75 $ 208
Nonvested benefits 12 3 4 11
--------- --------- --------- ---------
Accumulated benefit obligations 199 93 79 219
Effect of projected future salary
increases(a) 13 6 12 9
--------- --------- --------- ---------
Total projected benefit obligations 212 99 91 228
Plan assets at fair value 231 65 95 169
--------- --------- --------- ---------
PROJECTED BENEFIT OBLIGATION IN EXCESS
OF(LESS THAN) PLAN ASSETS $ (19) $ 34 $ (4) $ 59
=========================================== ========= ========= ========= =========
Projected benefit obligation in excess
of (less than) plan assets $ (19) $ 34 $ (4) $ 59
Unrecognized net asset(obligation) (1) (4) 1 (8)
Unrecognized prior service (cost) benefit (3) (4) -- (9)
Unrecognized net gain (loss) (13) 5 (4) (25)
Additional minimum liability(b) -- 4 -- 39
--------- --------- --------- ---------
PENSION LIABILITY(ASSET) $ (36) $ 35 $ (7) $ 56
=========================================== ========= ========= ========= =========
(a) The effect of salary increases related primarily to international
salary-based plans.
(b) A related amount up to the limit allowable under SFAS No. 87 --
"Employers' Accounting for Pensions" has been included in other assets.
Amounts exceeding such limits have been charged to retained earnings.
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent in 1997 and 1996. The rate of
increase in future compensation levels used in determining the actuarial present
value of the projected benefit obligations was between 4.5 percent and 5.5
percent in both 1997 and 1996. The expected long-term rate of return on assets
was 8 percent in 1997 and 1996.
47
32
POSTRETIREMENT BENEFITS The postretirement benefit obligation as of December 31,
1997 and 1996 was determined by application of the terms of medical and dental
benefits and life insurance coverage, including the effect of established
maximums on covered costs, together with relevant actuarial assumptions and
health care cost trend rates projected at a CPI increase of 3 percent in 1997
and 1996 (except for union employees). For union employees, the health care cost
trend rates were projected at annual rates ranging ratably from 8.5 percent in
1997 to 5 percent through the year 2004 and level thereafter. The effect of a 1
percent annual increase in these assumed cost trend rates would increase the
accumulated postretirement benefit obligation by approximately $14 million in
1997; the annual service and interest costs would not be materially affected.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation as of December 31, 1997 and 1996 was 7.5
percent. Occidental's funding policy generally is to pay claims as they come
due.
The following table sets forth the postretirement plans' combined status,
reconciled with the amounts included in the consolidated balance sheets at
December 31, 1997 and 1996 (in millions):
Balance at December 31, 1997 1996
=========================================================== ========= =========
Accumulated postretirement benefit obligation
Retirees $ 220 $ 255
Fully eligible active plan participants 48 49
Other active plan participants 69 73
--------- ---------
Total accumulated postretirement benefit obligation $ 337 $ 377
========= =========
Unfunded status $ 337 $ 377
Unrecognized prior service cost (2) (5)
Unrecognized net gain (loss) 73 40
--------- ---------
Accrued postretirement benefit cost $ 408 $ 412
=========================================================== ========= =========
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the
following components (in millions):
For the years ended December 31, 1997 1996 1995
================================================================== ========= ========= =========
Service cost -- benefits attributed to service during the period $ 6 $ 6 $ 7
Interest cost on accumulated postretirement benefit obligation 27 29 34
Net amortization and deferral 1 2 2
Curtailments and settlements (3) -- (26)
--------- --------- ---------
Net periodic postretirement benefit cost $ 31 $ 37 $ 17
================================================================== ========= ========= =========
Note 15 INVESTMENTS
- --------------------------------------------------------------------------------
Investments in companies, 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 accounted
for on the equity method. At December 31, 1997, Occidental's equity investments
consisted primarily of a pipeline in the Dutch sector of the North Sea, an
investment of approximately 30 percent in the common shares of CanadianOxy and
various chemical partnerships and joint ventures. Equity investments paid
dividends of $50 million, $48 million and $34 million to Occidental in 1997,
1996 and 1995, respectively. Cumulative undistributed earnings since
acquisition, in the amount of $204 million, of 50-percent-or-less-owned
companies have been accounted for by Occidental under the equity method. At
December 31, 1997 and 1996, Occidental's investment in equity investees exceeded
the historical underlying equity in net assets by approximately $226 million and
$258 million, respectively, which is being amortized into income over periods
not exceeding 40 years. The aggregate market value of the investment in
CanadianOxy, based on the quoted market price for CanadianOxy common shares, was
$910 million at December 31, 1997, compared with an aggregate book value of $263
million.
Occidental and its subsidiaries' purchases from certain chemical partnerships
were $232 million, $183 million and $192 million in 1997, 1996 and 1995,
respectively. Occidental and its subsidiaries' sales to certain chemical
partnerships were $328 million, $245 million and $263 million, in 1997, 1996 and
1995, respectively.
48
33
The following table presents Occidental's proportional interest in the
summarized financial information of its equity method investments (in millions):
For the years ended December 31, 1997 1996 1995
===================================== ========= ========= =========
Revenues $ 959 $ 849 $ 764
Costs and expenses 958 779 670
--------- --------- ---------
Net income $ 1 $ 70 $ 94
===================================== ========= ========= =========
Balance at December 31, 1997 1996
===================================== ========= =========
Current assets $ 297 $ 257
Noncurrent assets $ 1,564 $ 1,108
Current liabilities $ 252 $ 156
Noncurrent liabilities $ 1,113 $ 657
Stockholders' equity $ 496 $ 552
- ------------------------------------- --------- ---------
Investments also include certain cost method investments, in which Occidental
owns less than 20 percent of the voting stock. At December 31, 1997, these
investments consisted primarily of the shares in Clark (see Note 8).
Note 16 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 table presents summarized financial information for OXY USA (in
millions):
For the years ended December 31, 1997 1996 1995
======================================= ========= ========= =========
Revenues $ 1,004 $ 982 $ 709
Costs and expenses 1,004 882 778
--------- --------- ---------
Net income (loss) $ -- $ 100 $ (69)
======================================= ========= ========= =========
Balance at December 31, 1997 1996
======================================= ========= =========
Current assets $ 150 $ 183
Intercompany receivable $ 29(a) $ 428
Noncurrent assets $ 2,024 $ 2,028
Current liabilities $ 259 $ 277
Interest bearing note to parent $ 89 $ 105
Noncurrent liabilities $ 1,106 $ 1,221
Stockholders' equity $ 749(a) $ 1,036
- --------------------------------------- --------- ---------
(a) Includes effect of dividend distribution of an intercompany receivable.
Note 17 INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
Occidental conducts its continuing operations through two industry segments:
oil and gas and chemical. The oil and gas segment explores for, develops,
produces and markets crude oil and natural gas domestically and internationally.
The chemical segment manufactures and markets, domestically and internationally,
a variety of chlorovinyls (basic chemicals and polymers and plastics) specialty
chemicals and petrochemicals.
Earnings of industry segments and geographic areas exclude interest income,
interest expense, unallocated corporate expenses, discontinued operations,
extraordinary items and income from equity investments, but include gains from
dispositions of segment and geographic area assets (see Note 4). Intersegment
sales and transfers between geographic areas are made at prices approximating
current market values and are not significant.
Foreign income and other taxes and certain state taxes are included in
segment earnings on the basis of operating results. U.S. federal income taxes
are not allocated to segments except for amounts in lieu thereof that represent
the tax effect of operating charges or credits resulting from purchase
accounting adjustments which arise due to the implementation in 1992 of SFAS No.
109 -- "Accounting for Income Taxes."
Identifiable assets are those assets used in the operations of the segments.
Corporate assets consist of cash, short-term investments, certain corporate
receivables, an intrastate pipeline, other assets and net assets of discontinued
operations.
49
34
INDUSTRY SEGMENTS
In millions
Oil
and Gas Chemical Corporate Total
================================================== ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUES $ 3,680 $ 4,353 $ 68 $ 8,101
========= ========= ========= =========
Pretax operating profit (loss)(a,b) $ 664 $ 497 $ (633) $ 528
Income taxes (263) (26) (22) (311)
Discontinued operations, net -- -- (607) (607)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 401(c) $ 471(d) $ (1,262)(e)$ (390)
========= ========= ========= =========
Property, plant and equipment additions, net(f) $ 1,040 $ 396 $ 3 $ 1,439
========= ========= ========= =========
Depreciation, depletion and amortization $ 528 $ 261 $ 33 $ 822
========= ========= ========= =========
TOTAL ASSETS $ 4,789 $ 5,486 $ 5,007 $ 15,282
================================================== ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1996
TOTAL REVENUES $ 3,695 $ 4,484 $ 133 $ 8,312
========= ========= ========= =========
Pretax operating profit (loss)(a,b) $ 739 $ 683 $ (566) $ 856
Income taxes (259) (15) (68) (342)
Discontinued operations, net -- -- 184 184
Extraordinary gain (loss), net -- -- (30) (30)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 480(g) $ 668(h) $ (480)(i)$ 668
========= ========= ========= =========
Property, plant and equipment additions, net(f) $ 651 $ 262 $ 14 $ 927
========= ========= ========= =========
Depreciation, depletion and amortization $ 493 $ 236 $ 32 $ 761
========= ========= ========= =========
TOTAL ASSETS $ 4,496 $ 5,429 $ 5,056 $ 14,981
================================================== ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUES $ 3,043 $ 5,410 $ 180 $ 8,633
========= ========= ========= =========
Pretax operating profit (loss)(a,b) $ 211 $ 1,107 $ (647) $ 671
Income taxes (166) (27) (120) (313)
Discontinued operations, net -- -- 153 153
--------- --------- --------- ---------
NET INCOME (LOSS) $ 45(j) $ 1,080(k) $ (614) $ 511
========= ========= ========= =========
Property, plant and equipment additions, net(f) $ 480 $ 243 $ 11 $ 734
========= ========= ========= =========
Depreciation, depletion and amortization $ 451 $ 262 $ 55 $ 768
========= ========= ========= =========
TOTAL ASSETS $ 4,594 $ 5,181 $ 5,567 $ 15,342
================================================== ========= ========= ========= =========
(a) Research and development costs were $16 million in 1997 and 1996 and $21
million in 1995.
(b) Divisional earnings include charges and credits in lieu of U.S. federal
income taxes. In 1997, the amounts allocated to the divisions were
credits of $13 million and $26 million in oil and gas and chemical,
respectively. In 1996, the amounts allocated to the divisions were
credits of $15 million and $26 million in oil and gas and chemical,
respectively. In 1995, the amounts allocated to the divisions were
credits of $16 million and $27 million in oil and gas and chemical,
respectively.
(c) Includes pretax charges of $256 million for the write-down of various
nonstrategic and impaired assets including assets expected to be sold
and related costs and additional environmental and other reserves.
(d) Includes pretax charges of $147 million related to additional
environmental matters and the write-down of various idled assets.
(e) Includes a pretax charge of $75 million for the extinguishment of
existing liabilities and open-ended financial commitments under
employment agreements with two senior executives and an after-tax charge
of $750 million for the discontinued natural gas transmission operation.
(f) Excludes acquisitions of other businesses of $29 million in chemical in
1997, $58 million in chemical in 1996 and $11 million in oil and gas in
1995. Includes capitalized interest of $14 million in 1997, $5 million
in 1996 and $4 million in 1995.
(g) Includes a charge of $105 million for the write-down of investment in
the Republic of Komi.
(h) Includes a pretax gain of $170 million related to favorable litigation
settlements and a charge of $75 million for additional environmental
reserves, and the related state tax effects.
(i) Includes a $100 million reduction in the deferred tax asset valuation
allowance.
(j) Includes charges of $109 million for settlement of litigation and $95
million for reorganization costs.
(k) Includes a pretax gain of $40 million from the sale of a PVC facility at
Addis, Louisiana.
50
35
GEOGRAPHIC AREAS(a,b)
In millions
Other
United Western Eastern
States Hemisphere Hemisphere Corporate Total
=================================== ========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUES $ 6,261(c) $ 678 $ 1,094 $ 68 $ 8,101
========= ========= ========= ========= =========
Geographic earnings (loss) before
taxes $ 564 $ 191 $ 406 $ (633) $ 528
Income taxes (18) (64) (207) (22) (311)
Discontinued operations, net -- -- -- (607) (607)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 546 $ 127 $ 199 $ (1,262) $ (390)
========= ========= ========= ========= =========
TOTAL ASSETS $ 7,584 $ 997 $ 1,694 $ 5,007 $ 15,282
=================================== ========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1996
TOTAL REVENUES $ 6,379(c) $ 769 $ 1,031 $ 133 $ 8,312
========= ========= ========= ========= =========
Geographic earnings (loss) before
taxes $ 922 $ 260 $ 240 $ (566) $ 856
Income taxes (15) (90) (169) (68) (342)
Discontinued operations, net -- -- -- 184 184
Extraordinary gain (loss), net -- -- -- (30) (30)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 907 $ 170 $ 71 $ (480) $ 668
========= ========= ========= ========= =========
TOTAL ASSETS $ 7,659 $ 897 $ 1,369 $ 5,056 $ 14,981
=================================== ========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUES $ 6,985(c) $ 672 $ 796 $ 180 $ 8,633
========= ========= ========= ========= =========
Geographic earnings (loss) before
taxes $ 913 $ 182 $ 223 $ (647) $ 671
Income taxes (24) (56) (113) (120) (313)
Discontinued operations, net -- -- -- 153 153
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 889 $ 126 $ 110 $ (614) $ 511
========= ========= ========= ========= =========
TOTAL ASSETS $ 7,446 $ 783 $ 1,546 $ 5,567 $ 15,342
=================================== ========= ========= ========= ========= =========
(a) Included in the consolidated balance sheets were liabilities of
approximately $336 million, $254 million and $285 million at December
31, 1997, 1996 and 1995, respectively, which pertained to operations
based outside the United States and Canada.
(b) Investments in foreign countries are subject to the actions of those
countries, which could significantly affect Occidental's operations and
investments in those countries.
(c) Includes export sales, consisting of chemical products, of approximately
$438 million, $673 million and $1.039 billion in 1997, 1996 and 1995,
respectively.
51
36
Note 18 COSTS AND RESULTS OF OIL AND GAS PRODUCING ACTIVITIES
- --------------------------------------------------------------------------------
Capitalized costs relating to oil and gas producing activities and related
accumulated depreciation, depletion and amortization, were as follows (in
millions):
Other
United Western Eastern Total
States Hemisphere Hemisphere Worldwide
======================================================= ========= ========= ========= =========
DECEMBER 31, 1997
Proved properties $ 4,806 $ 1,765 $ 1,801 $ 8,372
Unproved properties 71 12 80 163
--------- --------- --------- ---------
TOTAL PROPERTY COSTS(a) 4,877 1,777 1,881 8,535
Support facilities 13 143 60 216
--------- --------- --------- ---------
TOTAL CAPITALIZED COSTS 4,890 1,920 1,941 8,751
Accumulated depreciation, depletion and amortization (2,916) (1,390) (685) (4,991)
--------- --------- --------- ---------
NET CAPITALIZED COSTS $ 1,974 $ 530 $ 1,256 $ 3,760
========= ========= ========= =========
Share of equity investees' net capitalized costs(b) $ 84 $ 432 $ 133 $ 649
======================================================= ========= ========= ========= =========
DECEMBER 31, 1996
Proved properties $ 4,695 $ 1,891 $ 1,274 $ 7,860
Unproved properties 64 33 97 194
--------- --------- --------- ---------
TOTAL PROPERTY COSTS(a) 4,759 1,924 1,371 8,054
Support facilities 11 125 54 190
--------- --------- --------- ---------
TOTAL CAPITALIZED COSTS 4,770 2,049 1,425 8,244
Accumulated depreciation, depletion and amortization (2,760) (1,554) (522) (4,836)
--------- --------- --------- ---------
NET CAPITALIZED COSTS $ 2,010 $ 495 $ 903 $ 3,408
========= ========= ========= =========
Share of equity investees' net capitalized costs(b) $ 76 $ 80 $ 152 $ 308
======================================================= ========= ========= ========= =========
DECEMBER 31, 1995
Proved properties $ 4,614 $ 1,754 $ 1,224 $ 7,592
Unproved properties 78 36 184 298
--------- --------- --------- ---------
TOTAL PROPERTY COSTS(a) 4,692 1,790 1,408 7,890
Support facilities 21 119 50 190
--------- --------- --------- ---------
TOTAL CAPITALIZED COSTS 4,713 1,909 1,458 8,080
Accumulated depreciation, depletion and amortization (2,680) (1,474) (381) (4,535)
--------- --------- --------- ---------
NET CAPITALIZED COSTS $ 2,033 $ 435 $ 1,077 $ 3,545
========= ========= ========= =========
Share of equity investees' net capitalized costs(b) $ 68 $ 66 $ 164 $ 298
======================================================= ========= ========= ========= =========
(a) Includes costs related to leases, exploration costs, lease and well
equipment, pipelines and terminals, gas plants and other equipment.
(b) Excludes amounts applicable to synthetic fuels.
52
37
Costs incurred relating to oil and gas producing activities, whether
capitalized or expensed, were as follows (in millions):
Other
United Western Eastern Total
States Hemisphere Hemisphere Worldwide
=================================== ========= ========= ========= =========
DECEMBER 31, 1997
Acquisition of properties
Proved $ 50 $ -- $ 50 $ 100
Unproved 41 -- -- 41
Exploration costs 19 37 122 178
Development costs 270 102 443 815
--------- --------- --------- ---------
$ 380 $ 139 $ 615 $ 1,134
========= ========= ========= =========
Share of equity investees' costs $ 35 $ 514 $ 51 $ 600
=================================== ========= ========= ========= =========
DECEMBER 31, 1996
Acquisition of properties
Proved $ 8 $ -- $ 28 $ 36
Unproved 9 -- -- 9
Exploration costs 30 55 80 165
Development costs 212 118 244 574
--------- --------- --------- ---------
$ 259 $ 173 $ 352 $ 784
========= ========= ========= =========
Share of equity investees' costs $ 35 $ 36 $ 54 $ 125
=================================== ========= ========= ========= =========
DECEMBER 31, 1995
Acquisition of properties
Proved $ 4 $ -- $ 55 $ 59
Unproved 7 -- 4 11
Exploration costs 29 34 70 133
Development costs 173 110 118 401
--------- --------- --------- ---------
$ 213 $ 144 $ 247 $ 604
========= ========= ========= =========
Share of equity investees' costs $ 28 $ 23 $ 25 $ 76
=================================== ========= ========= ========= =========
53
38
The results of operations of Occidental's oil and gas producing activities,
which exclude oil trading activities and items such as asset dispositions,
corporate overhead and interest, were as follows (in millions):
Other
Western Eastern
United Hemi- Hemi- Total
States sphere(a) sphere Worldwide
======================================================== ========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 1997
Revenues $ 920 $ 478 $ 969(b) $ 2,367
Production costs 246 154 172 572
Exploration expenses 17 19 83 119
Other operating expenses 50 49 105 204
Other expense -- asset write-downs 132 -- -- 132
Depreciation, depletion and amortization 246(c) 85 178 509
--------- --------- --------- ---------
PRETAX INCOME (LOSS) 229 171 431 831
Income tax expense (benefit)(d) 46 56 206(b) 308
--------- --------- --------- ---------
RESULTS OF OPERATIONS $ 183 $ 115 $ 225 $ 523
========= ========= ========= =========
Share of equity investees' results of operations $ 8 $ (4) $ 25 $ 29
======================================================== ========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenues $ 906 $ 571 $ 912(b) $ 2,389
Production costs 241 157 184 582
Exploration expenses 25 28 67 120
Other operating expenses 49 51 124 224
Other expense -- write-down of investment in Komi -- -- 105 105
Depreciation, depletion and amortization 234(c) 83 164 481
--------- --------- --------- ---------
PRETAX INCOME (LOSS) 357 252 268 877
Income tax expense (benefit)(d) 81 89 169(b) 339
--------- --------- --------- ---------
RESULTS OF OPERATIONS $ 276 $ 163 $ 99 $ 538
========= ========= ========= =========
Share of equity investees' results of operations $ 8 $ 3 $ 25 $ 36
======================================================== ========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenues $ 702 $ 467 $ 679(b) $ 1,848
Production costs 238 157 141 536
Exploration expenses 22 30 54 106
Other operating expenses 51 67 118 236
Depreciation, depletion and amortization 249(c) 69 128 446
--------- --------- --------- ---------
PRETAX INCOME (LOSS) 142 144 238 524
Income tax expense (benefit)(d) 16 52 113(b) 181
--------- --------- --------- ---------
RESULTS OF OPERATIONS(e) $ 126 $ 92 $ 125 $ 343
========= ========= ========= =========
Share of equity investees' results of operations $ 6 $ 1 $ 25 $ 32
======================================================== ========= ========= ========= =========
(a) Includes amounts applicable to operating interests in which Occidental
receives an agreed-upon fee per barrel of crude oil produced.
(b) Revenues and income tax expense include taxes owed by Occidental but
paid by governmental entities on its behalf.
(c) Includes a credit of $13 million, $15 million and $16 million in 1997,
1996 and 1995, respectively, under the method of allocating amounts in
lieu of taxes.
(d) U.S. federal income taxes reflect expense allocations related to oil and
gas activities, including allocated interest and corporate overhead.
Foreign income taxes were included in geographic areas on the basis of
operating results.
(e) The 1995 amounts have been restated as a result of cost
reclassifications to be on a consistent basis with 1997 and 1996. The
new presentation reflects the current cost structure of the oil and gas
producing activities of Occidental.
54
39
Note 19 SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On January 31, 1998 Occidental completed the sale of MidCon as discussed in
Note 4.
In February 1998, Occidental announced that it will redeem in March 1998, all
of the 15,106,444 outstanding voting and nonvoting shares of its $3.875
preferred stock at a call price of $51.9375 per share plus accumulated and
unpaid dividends to but not including the redemption date. Each share of
preferred stock is convertible at the option of the holder, until the close of
business on the redemption date, into approximately 2.2 shares of Occidental
common stock. If all the shares of preferred stock were converted into common
stock, Occidental would issue approximately 33.2 million shares of common stock.
Also in February 1998, Occidental sold its entire interest in an oilfield
development project in Venezuela for approximately $205 million cash plus
contingent payments of up to $90 million over six years based on oil prices. The
gain on the sale was not material.
On February 5, 1998, Occidental acquired the U.S. government's 78 percent
interest in the Elk Hills field for $3.5 billion. The Elk Hills field
acquisition was funded using a portion of the proceeds from the sale of MidCon,
together with proceeds of commercial paper borrowings.
From January 1, 1998 through February 16, 1998 Occidental repurchased 6.1
million shares of its common stock under the common stock repurchase program.
See Note 12 for a discussion of the common stock repurchase program.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors, Occidental Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of OCCIDENTAL
PETROLEUM CORPORATION (a Delaware corporation) and consolidated subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997 (included on pages 29 through 56). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Occidental Petroleum
Corporation and consolidated subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
February 16, 1998
56
40
1997 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
============================== ========= ========= ============ =========== ==========
Divisional net sales
Oil and gas $ 842 $ 1,055 $ 883 $ 887 $ 3,667
Chemical 1,075 1,103 1,124 1,047 4,349
--------- --------- --------- --------- ---------
Net sales $ 1,917 $ 2,158 $ 2,007 $ 1,934 $ 8,016
========= ========= ========= ========= =========
Gross profit $ 589 $ 554 $ 560 $ 469 $ 2,172
========= ========= ========= ========= =========
Divisional earnings
Oil and gas $ 228 $ 133 $ 136 $ (96) $ 401
Chemical 92 184 223 (28) 471
--------- --------- --------- --------- ---------
320 317 359 (124) 872
Unallocated corporate items
Interest expense, net (101) (101) (100) (105) (407)
Income taxes (85) (62) (17) 104 (60)
Other (7) (16) (112) (53) (188)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations 127 138 130 (178) 217
Discontinued operations, net 52 20 27 (706) (607)
Extraordinary gain(loss), net -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 179 $ 158 $ 157(a) $ (884)(b) $ (390)
========= ========= ========= ========= =========
Basic earnings per common
share
Income (loss) from
continuing operations $ .32 $ .35 $ .32 $ (.58) $ .39
Discontinued operations,
net .16 .06 .08 (2.07) (1.82)
Extraordinary gain (loss),
net -- -- -- -- --
--------- --------- --------- --------- ---------
Basic earnings (loss) per
common share $ .48 $ .41 $ .40 $ (2.65) $ (1.43)
========= ========= ========= ========= =========
Diluted earnings per common
share
Income (loss) from
continuing operations $ .31 $ .34 $ .31 $ (.58) $ .39
Discontinued operations,
net .15 .05 .07 (2.07) (1.82)
Extraordinary gain (loss),
net -- -- -- -- --
--------- --------- --------- --------- ---------
Diluted earnings (loss) per
common share $ .46 $ .39 $ .38 $ (2.65) $ (1.43)
========= ========= ========= ========= =========
Dividends per common share $ .25 $ .25 $ .25 $ .25 $ 1.00
========= ========= ========= ========= =========
Market price per common share
High $ 26 3/4 $ 25 7/8 $ 26 1/4 $ 30 3/4
Low $ 23 1/8 $ 21 3/4 $ 23 3/8 $ 25 7/8
============================== ========= ========= ========= =========
(a) Includes a pretax charge of $75 million for the extinguishment of
existing liabilities and open-ended financial commitments under
employment agreements with two senior executives.
(b) Includes pretax charges of $256 million for the write-down of various
nonstrategic and impaired assets including assets expected to be sold
and related costs and additional environmental and other reserves in the
oil and gas division, $147 million related to additional environmental
matters and the write-down of various idled assets in the chemical
division and an after-tax charge of $750 million for the discontinued
natural gas transmission operation.
57
41
1996 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
============================== ========= ========= ============ =========== ==========
Divisional net sales
Oil and gas $ 753 $ 879 $ 1,149 $ 899 $ 3,680
Chemical 1,068 1,058 1,084 1,097 4,307
--------- --------- --------- --------- ---------
Net sales $ 1,821 $ 1,937 $ 2,233 $ 1,996 $ 7,987
========= ========= ========= ========= =========
Gross profit $ 481 $ 544 $ 550 $ 616 $ 2,191
========= ========= ========= ========= =========
Divisional earnings
Oil and gas $ 161 $ 144 $ 20 $ 155 $ 480
Chemical 118 212 228 110 668
--------- --------- --------- --------- ---------
279 356 248 265 1,148
Unallocated corporate items
Interest expense, net (132) (113) (107) (102) (454)
Income taxes (44) (83) 36 (18) (109)
Other (17) (11) (13) (30) (71)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations 86 149 164 115 514
Discontinued operations, net 78 32 30 44 184
Extraordinary gain(loss), net (30) -- -- -- (30)
--------- --------- --------- --------- ---------
Net income (loss) $ 134 $ 181(a) $ 194(b) $ 159 $ 668
========= ========= ========= ========= =========
Basic earnings per common
share
Income (loss) from
continuing operations $ .20 $ .39 $ .44 $ .28 $ 1.30
Discontinued operations,
net .24 .10 .09 .13 .56
Extraordinary gain (loss),
net (.09) -- -- -- (.09)
--------- --------- --------- --------- ---------
Basic earnings (loss) per
common share $ .35 $ .49 $ .53 $ .41 $ 1.77
========= ========= ========= ========= =========
Diluted earnings per common
share
Income (loss) from
continuing operations $ .20 $ .39 $ .42 $ .28 $ 1.29
Discontinued operations,
net .24 .09 .09 .13 .52
Extraordinary gain (loss),
net (.09) -- -- -- (.08)
--------- --------- --------- --------- ---------
Diluted earnings (loss) per
common share $ .35 $ .48 $ .51 $ .41 $ 1.73
========= ========= ========= ========= =========
Dividends per common share $ .25 $ .25 $ .25 $ .25 $ 1.00
========= ========= ========= ========= =========
Market price per common share
High $ 27 $ 27 1/4 $ 25 7/8 $ 25 5/8
Low $ 20 1/8 $ 24 1/4 $ 21 1/2 $ 20 1/2
============================== ========= ========= ========= =========
(a) Includes a $130 million benefit related to a favorable litigation
settlement, and a charge of $75 million for additional environmental
reserves relating to various existing sites, and the related state tax
effects in the chemical division.
(b) Includes a charge of $105 million for the write-down of an investment in
an oil and gas project in the Republic of Komi, a $40 million benefit
related to a favorable litigation settlement in the chemical division
and a $100 million benefit for a reduction in the deferred tax asset
valuation allowance.
58
42
SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
The following tables set forth Occidental's net interests in quantities of
proved developed and undeveloped reserves of crude oil, condensate and natural
gas and changes in such quantities. Crude oil reserves include condensate. The
reserves are stated after applicable royalties. Estimates of reserves have been
made by Occidental engineers. These estimates include reserves in which
Occidental holds an economic interest under service contracts and other
arrangements.
RESERVES
Oil in millions of barrels, natural gas in billions of cubic feet
Other
United Western Eastern Total
States Hemisphere Hemisphere Worldwide
---------------------- ---------------------- ---------------------- ----------------------
Oil Gas Oil(a) Gas Oil Gas Oil Gas
=========================== ========= ========= ========= ========= ========= ========= ========= =========
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 1994 218 1,979 418 -- 282 354 918 2,333
Revisions of previous
estimates 6 25 14 -- 51 (14) 71 11
Improved recovery 6 6 24 -- 12 -- 42 6
Extensions and
discoveries 5 35 8 -- 12 373 25 408
Purchases of proved
reserves -- 4 -- -- -- 9 -- 13
Sales of proved
reserves (16)(b) (5) -- -- (9)(b) (37) (25) (42)
Production (23) (223) (47) -- (31) (46) (101) (269)
- ---------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 196 1,821 417 -- 317 639 930 2,460
Revisions of
previous estimates 11 26 (19) -- 77 200 69 226
Improved recovery 1 -- -- -- 18 -- 19 --
Extensions and
discoveries 16 105 3 -- 11 40 30 145
Purchases of proved
reserves 1 18 -- -- -- 3 1 21
Sales of proved
reserves (1) (6) -- -- (46) -- (47) (6)
Production (21) (220) (47) -- (37) (42) (105) (262)
- ---------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 203 1,744 354 -- 340 840 897 2,584
Revisions of
previous estimates (1) 23 3 -- 14 (2) 16 21
Improved recovery 11 -- -- -- 2 -- 13 --
Extensions and
discoveries 6 58 -- -- 34 22 40 80
Purchases of
proved reserves 1 38 -- -- 36 10 37 48
Sales of proved
reserves (2) (10) -- -- -- (7) (2) (17)
Production (21) (218) (41) -- (39) (40) (101) (258)
- ---------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 197 1,635 316 -- 387 823 900 2,458
============================ ========= ========= ========= ========= ========= ========= ========= =========
PROPORTIONAL
INTEREST IN EQUITY
INVESTEES' RESERVES
December 31, 1994 5 32 11 84 25 46 41 162
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1995 5 36 12 81 21 39 38 156
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1996 5 47 14 77 20 30 39 154
========= ========= ========= ========= ========= ========= ========= =========
DECEMBER 31, 1997 5 45 45 168 27 25 77 238
============================ ========= ========= ========= ========= ========= ========= ========= =========
See footnotes on following page.
59
43
RESERVES continued
Oil in millions of barrels, natural gas in billions of cubic feet
Other
United Western Eastern Total
States Hemisphere Hemisphere Worldwide
---------------------- ---------------------- ---------------------- ----------------------
Oil Gas Oil(a) Gas Oil Gas Oil Gas
======================== ========= ========= ========= ========= ========= ========= ========= =========
PROVED DEVELOPED
RESERVES
December 31, 1994 169 1,851 258 -- 173 264 600 2,115
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1995 149 1,747 283 -- 195 235 627 1,982
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1996 153 1,677 260 -- 213 205 626 1,882
========= ========= ========= ========= ========= ========= ========= =========
DECEMBER 31, 1997 151 1,571 235 -- 251 207 637 1,778
======================== ========= ========= ========= ========= ========= ========= ========= =========
PROPORTIONAL
INTEREST IN EQUITY
INVESTEES' RESERVES
December 31, 1994 4 27 7 77 24 38 35 142
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1995 5 30 10 75 16 31 31 136
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1996 4 41 13 69 15 25 32 135
========= ========= ========= ========= ========= ========= ========= =========
DECEMBER 31, 1997 4 31 38 140 21 20 63 191
======================== ========= ========= ========= ========= ========= ========= ========= =========
(a) Portions of these reserves are being produced pursuant to exclusive
service contracts.
(b) Includes approximately 14 million and 6 million barrels of oil (which
approximate 17.7 million barrels of WTI-equivalent oil) in the United
States and Eastern Hemisphere, respectively, associated with the advance
sale of crude oil (see Note 8).
STANDARDIZED MEASURE, INCLUDING YEAR-TO-YEAR CHANGES THEREIN, OF DISCOUNTED
FUTURE NET CASH FLOWS For purposes of the following disclosures, estimates were
made of quantities of proved reserves and the periods during which they are
expected to be produced. Future cash flows were computed by applying year-end
prices to Occidental's share of estimated annual future production from proved
oil and gas reserves, net of royalties. Future development and production costs
were computed by applying year-end costs to be incurred in producing and further
developing the proved reserves. Future income tax expenses were computed by
applying, generally, year-end statutory tax rates (adjusted for permanent
differences, tax credits, allowances and foreign income repatriation
considerations) to the estimated net future pretax cash flows. The discount was
computed by application of a 10 percent discount factor. The calculations
assumed the continuation of existing economic, operating and contractual
conditions at each of December 31, 1997, 1996 and 1995. However, such arbitrary
assumptions have not necessarily proven to be the case in the past. Other
assumptions of equal validity would give rise to substantially different
results.
60
44
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
In millions
Other
Western Eastern
United Hemi- Hemi- Total
States sphere(a) sphere Worldwide
====================================================== ========= ========= ========= =========
AT DECEMBER 31, 1997
Future cash flows $ 7,462 $ 3,335 $ 7,197 $ 17,994
Future costs
Production costs and other operating expenses (2,863) (1,661) (3,172) (7,696)
Development costs(b) (456) (230) (1,485) (2,171)
--------- --------- --------- ---------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 4,143 1,444 2,540 8,127
Future income tax expense (1,246) (458) (249) (1,953)
--------- --------- --------- ---------
FUTURE NET CASH FLOWS 2,897 986 2,291 6,174
Ten percent discount factor (1,215) (352) (917) (2,484)
--------- --------- --------- ---------
STANDARDIZED MEASURE 1,682 634 1,374 3,690
Share of equity investees' standardized measure 89 202 179 470
--------- --------- --------- ---------
$ 1,771 $ 836 $ 1,553 $ 4,160
====================================================== ========= ========= ========= =========
AT DECEMBER 31, 1996
Future cash flows $ 8,887 $ 4,642 $ 8,399 $ 21,928
Future costs
Production costs and other operating expenses (3,296) (1,853) (3,139) (8,288)
Development costs(b) (514) (289) (1,184) (1,987)
--------- --------- --------- ---------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 5,077 2,500 4,076 11,653
Future income tax expense (1,646) (875) (457) (2,978)
--------- --------- --------- ---------
FUTURE NET CASH FLOWS 3,431 1,625 3,619 8,675
Ten percent discount factor (1,462) (555) (1,418) (3,435)
--------- --------- --------- ---------
STANDARDIZED MEASURE 1,969 1,070 2,201 5,240
Share of equity investees' standardized measure 117 104 234 455
--------- --------- --------- ---------
$ 2,086 $ 1,174 $ 2,435 $ 5,695
====================================================== ========= ========= ========= =========
AT DECEMBER 31, 1995
Future cash flows $ 6,110 $ 4,206 $ 5,639 $ 15,955
Future costs
Production costs and other operating expenses (2,479) (1,824) (2,303) (6,606)
Development costs(b) (496) (269) (689) (1,454)
--------- --------- --------- ---------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 3,135 2,113 2,647 7,895
Future income tax expense (916) (655) (234) (1,805)
--------- --------- --------- ---------
FUTURE NET CASH FLOWS 2,219 1,458 2,413 6,090
Ten percent discount factor (979) (564) (957) (2,500)
--------- --------- --------- ---------
STANDARDIZED MEASURE 1,240 894 1,456 3,590
Share of equity investees' standardized measure 76 53 239 368
--------- --------- --------- ---------
$ 1,316 $ 947 $ 1,695 $ 3,958
====================================================== ========= ========= ========= =========
(a) Includes amounts applicable to operating interests in which Occidental
receives an agreed-upon fee per barrel of crude oil produced.
(b) Includes dismantlement and abandonment costs.
61
45
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
In millions
For the years ended December 31, 1997 1996 1995
===================================================================== ========= ========= =========
BEGINNING OF YEAR $ 5,240 $ 3,590 $ 3,302
--------- --------- ---------
Sales and transfers of oil and gas produced, net of production
costs and other operating expenses (1,561) (1,640) (1,169)
Net change in prices received per barrel, net of production
costs and other operating expenses (2,071) 2,604 672
Extensions, discoveries and improved recovery, net of future
production and development costs 379 576 170
Change in estimated future development costs (455) (620) (110)
Revisions of quantity estimates 132 863 394
Development costs incurred during the period 798 573 401
Accretion of discount 498 305 369
Net change in income taxes 795 (655) (195)
Purchases and sales of reserves in place, net 92 (403) (247)
Changes in production rates and other (157) 47 3
--------- --------- ---------
NET CHANGE (1,550) 1,650 288
--------- --------- ---------
END OF YEAR $ 3,690 $ 5,240 $ 3,590
===================================================================== ========= ========= =========
The information set forth below does not include information with respect to
operations of equity investees.
The following table sets forth, for each of the three years in the period
ended December 31, 1997, Occidental's approximate average sales prices and
average production costs of oil and gas. Production costs are the costs incurred
in lifting the oil and gas to the surface and include gathering, treating,
primary processing, field storage, property taxes and insurance on proved
properties, but do not include depreciation, depletion and amortization,
royalties, income taxes, interest, general and administrative and other
expenses.
AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS OF OIL AND GAS
Other
Western Eastern
United Hemi- Hemi-
For the years ended December 31, States sphere(a,b) sphere(a)
=================================================== ========= ========= =========
1997
Oil -- Average sales price ($/bbl.) $ 18.72 $ 11.88 $ 17.21
Gas -- Average sales price ($/Mcf) $ 2.39 $ -- $ 2.40
Average oil and gas production cost ($/bbl.)(c) $ 4.17 $ 3.73 $ 3.63
- --------------------------------------------------- --------- --------- ---------
1996
Oil -- Average sales price ($/bbl.) $ 18.98 $ 12.66 $ 17.66
Gas -- Average sales price ($/Mcf) $ 2.11 $ -- $ 2.23
Average oil and gas production cost ($/bbl.)(c) $ 4.05 $ 3.37 $ 4.09
- --------------------------------------------------- --------- --------- ---------
1995
Oil -- Average sales price ($/bbl.) $ 15.78 $ 10.28 $ 15.85
Gas -- Average sales price ($/Mcf) $ 1.51 $ -- $ 2.07
Average oil and gas production cost ($/bbl.)(c) $ 4.16 $ 3.35 $ 3.61
- --------------------------------------------------- --------- --------- ---------
(a) Sales prices include royalties with respect to certain of Occidental's
interests.
(b) Sales prices include fees received under service contracts.
(c) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
62
46
The following table sets forth, for each of the three years in the period
ended December 31, 1997, Occidental's net productive and dry exploratory and
development wells drilled.
NET PRODUCTIVE AND DRY--EXPLORATORY AND DEVELOPMENT WELLS DRILLED
Other
Western Eastern
United Hemi- Hemi- Total
For the years ended December 31, States sphere sphere Worldwide
====================================================== ========= ========= ========= =========
1997
Oil-- Exploratory -- 2.3 1.0 3.3
Development 98.8 15.6 43.6 158.0
Gas-- Exploratory 1.2 -- 1.4 2.6
Development 76.0 -- 2.1 78.1
Dry-- Exploratory 5.6 -- 10.2 15.8
Development 18.1 1.0 1.1 20.2
- ------------------------------------------------------ --------- --------- --------- ---------
1996
Oil-- Exploratory -- 2.8 3.6 6.4
Development 61.6 23.2 18.4 103.2
Gas-- Exploratory 2.6 -- 2.0 4.6
Development 103.2 -- 1.7 104.9
Dry-- Exploratory 5.5 2.5 6.2 14.2
Development 15.6 0.5 2.1 18.2
- ------------------------------------------------------ --------- --------- --------- ---------
1995
Oil-- Exploratory 1.4 0.7 2.0 4.1
Development 79.3 20.6 26.8 126.7
Gas-- Exploratory 9.0 -- 1.7 10.7
Development 90.1 -- 4.7 94.8
Dry-- Exploratory 5.5 2.7 7.9 16.1
Development 14.5 0.4 -- 14.9
- ------------------------------------------------------ --------- --------- --------- ---------
The following table sets forth, as of December 31, 1997, Occidental's
productive oil and gas wells (both producing wells and wells capable of
production). The numbers in parentheses indicate the number of wells with
multiple completions.
PRODUCTIVE OIL AND GAS WELLS
Other
United Western Eastern Total
Wells at December 31, 1997 States Hemisphere Hemisphere Worldwide
==================================== ================== ================== ================== ==================
Oil-- Gross(a) 8,634 (250) 411 (-) 798 (46) 9,843 (296)
Net(b) 4,955 (57) 282 (-) 421 (34) 5,658 (91)
Gas-- Gross(a) 3,531 (179) -- (-) 115 (-) 3,646 (179)
Net(b) 2,489 (46) -- (-) 37 (-) 2,526 (46)
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
(a) The total number of wells in which interests are owned or which are
operated under service contracts.
(b) The sum of fractional interests.
The following table sets forth, as of December 31, 1997, Occidental's
participation in exploratory and development wells being drilled.
PARTICIPATION IN EXPLORATORY AND DEVELOPMENT WELLS BEING DRILLED
Other
Western Eastern
United Hemi- Hemi- Total
Wells at December 31, 1997 States sphere sphere Worldwide
====================================================== ========= ========= ========= =========
Exploratory and development wells-- Gross 34 5 15 54
Net 27 4 7 38
- ------------------------------------------------------ --------- --------- --------- ---------
At December 31, 1997, Occidental was participating in 43 pressure maintenance
and waterflood projects in the United States, 4 in Latin America, 10 in the
Middle East and 2 in Russia.
63
47
The following table sets forth, as of December 31, 1997, Occidental's
holdings of developed and undeveloped oil and gas acreage.
OIL AND GAS ACREAGE
Other
Western Eastern
United Hemi- Hemi- Total
Thousands of acres States sphere sphere Worldwide
====================================================== ========= ========= ========= =========
Developed(a) -- Gross(b) 2,587 129 11,389 14,105
Net(c) 1,544 120 5,451 7,115
- ------------------------------------------------------ --------- --------- --------- ---------
Undeveloped(d) -- Gross(b) 1,625 2,857 32,472 36,954
Net(c) 851 2,649 16,382 19,882
- ------------------------------------------------------ --------- --------- --------- ---------
(a) Acres spaced or assigned to productive wells.
(b) Total acres in which interests are held.
(c) Sum of the fractional interests owned, based on working interests or
shares of production, if under production-sharing agreements.
(d) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas,
regardless of whether the acreage contains proved reserves.
The following table sets forth, for each of the three years in the period
ended December 31, 1997, Occidental's domestic oil and natural gas production.
OIL AND NATURAL GAS PRODUCTION--DOMESTIC
Oil Production Natural Gas Production
Thousands of barrels per day Millions of cubic feet per day
----------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
======================================= ========= ========= ========= ========= ========= =========
California 1 2 5 -- -- --
Gulf of Mexico 12 10 11 138 154 157
Kansas 6 6 6 190 186 193
Louisiana 5 6 7 39 43 39
Mississippi -- 1 1 5 3 4
New Mexico 2 3 3 28 24 22
Oklahoma 4 4 5 50 52 57
Texas 22 21 21 123 126 128
Wyoming -- -- -- 9 9 8
Other States 5 4 5 14 4 4
--------- --------- --------- --------- --------- ---------
TOTAL 57 57 64 596 601 612
======================================= ========= ========= ========= ========= ========= =========
The following table sets forth, for each of the three years in the period
ended December 31, 1997, Occidental's international oil and natural gas
production.
OIL AND NATURAL GAS PRODUCTION--INTERNATIONAL
Oil Production Natural Gas Production
Thousands of barrels per day Millions of cubic feet per day
----------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
======================================= ========= ========= ========= ========= ========= =========
Colombia 24 29 30 -- -- --
Congo -- 4 9 -- -- --
Ecuador 15 18 20 -- -- --
Netherlands -- -- -- 72 72 78
Oman 14 13 12 -- -- --
Pakistan 7 6 6 38 43 49
Peru 50 54 58 -- -- --
Qatar 45 38 20 -- -- --
Russia 26 25 23 -- -- --
Venezuela 25 27 21 -- -- --
Yemen 14 15 15 -- -- --
--------- --------- --------- --------- --------- ---------
TOTAL 220 229 214 110 115 127
======================================= ========= ========= ========= ========= ========= =========
64