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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) [ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9210
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization DELAWARE
I.R.S. Employer Identification No. 95-4035997
Address of principal executive offices 10889 WILSHIRE BLVD., LOS ANGELES, CA
Zip Code 90024
Registrant's telephone number, including area code (310) 208-8800
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
10 1/8% Senior Debentures due 2009 New York Stock Exchange
9 1/4% Senior Debentures due 2019 New York Stock Exchange
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] YES [ ] NO
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $19.2 billion, computed by reference to the closing
price on the New York Stock Exchange composite tape of $48.41 per share of
Common Stock on June 30, 2004. Shares of Common Stock held by each executive
officer and director have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not a conclusive determination for other purposes.
At January 31, 2005, there were approximately 397,230,200 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, filed in connection
with its May 6, 2005, Annual Meeting of Stockholders, are incorporated by
reference into Part III.
TABLE OF CONTENTS
PAGE
PART I
ITEMS 1 AND 2 Business and Properties..................................................................................... 4
General..................................................................................................... 4
Oil and Gas Operations...................................................................................... 4
Chemical Operations......................................................................................... 5
Capital Expenditures........................................................................................ 6
Employees................................................................................................... 6
Environmental Regulation.................................................................................... 6
Available Information....................................................................................... 6
ITEM 3 Legal Proceedings........................................................................................... 6
ITEM 4 Submission of Matters to a Vote of Security Holders......................................................... 7
Executive Officers of the Registrant........................................................................ 7
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters....................................... 8
ITEM 6 Selected Financial Data..................................................................................... 9
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
(Incorporating Item 7A)................................................................................... 9
Strategy................................................................................................ 9
Oil and Gas Segment..................................................................................... 11
Chemical Segment........................................................................................ 15
Corporate and Other..................................................................................... 17
Segment Results of Operations........................................................................... 17
Significant Items Affecting Earnings.................................................................... 19
Taxes................................................................................................... 19
Consolidated Results of Operations...................................................................... 20
Consolidated Analysis of Financial Position............................................................. 21
Liquidity and Capital Resources......................................................................... 21
Off-Balance-Sheet Arrangements.......................................................................... 23
Lawsuits, Claims, Commitments, Contingencies and Related Matters........................................ 24
Environmental Liabilities and Expenditures.............................................................. 25
Foreign Investments..................................................................................... 26
Critical Accounting Policies and Estimates.............................................................. 27
Significant Accounting Changes.......................................................................... 29
Derivative Activities and Market Risk................................................................... 31
Safe Harbor Discussion Regarding Outlook and Other Forward-Looking Data................................. 32
ITEM 8 Financial Statements and Supplementary Data................................................................. 34
Report of Independent Registered Public Accounting Firm................................................. 34
Consolidated Statements of Income....................................................................... 35
Consolidated Balance Sheets............................................................................. 36
Consolidated Statements of Stockholders' Equity......................................................... 38
Consolidated Statements of Comprehensive Income......................................................... 38
Consolidated Statements of Cash Flows................................................................... 39
Notes to Consolidated Financial Statements.............................................................. 40
Quarterly Financial Data (Unaudited).................................................................... 72
Supplemental Oil and Gas Information (Unaudited)........................................................ 74
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................................................... 82
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 83
ITEM 9A Controls and Procedures..................................................................................... 83
Disclosure Controls and Procedures...................................................................... 83
Management's Annual Assessment of and Report on Occidental's Internal Control Over Financial Reporting.. 83
Report of Independent Registered Public Accounting Firm................................................. 83
PART III
ITEM 10 Directors and Executive Officers of the Registrant.......................................................... 84
ITEM 11 Executive Compensation...................................................................................... 84
ITEM 12 Security Ownership of Certain Beneficial Owners and Management.............................................. 84
ITEM 13 Certain Relationships and Related Transactions.............................................................. 84
ITEM 14 Principal Accountant Fees and Services...................................................................... 85
PART IV
ITEM 15 Exhibits and Financial Statement Schedules.................................................................. 85
PART I
ITEMS 1 AND 2 BUSINESS AND PROPERTIES
In this report, "Occidental" refers to Occidental Petroleum Corporation, a
Delaware corporation, and/or one or more entities in which it owns a majority
voting interest (subsidiaries). Occidental's executive offices are located at
10889 Wilshire Boulevard, Los Angeles, California 90024; telephone (310)
208-8800.
GENERAL
Occidental's principal businesses consist of two industry segments. The oil
and gas segment explores for, develops, produces and markets crude oil and
natural gas. The chemical segment manufactures and markets basic chemicals,
vinyls and performance chemicals. For financial information by segment and by
geographic area, see Note 15 to the Consolidated Financial Statements of
Occidental (Consolidated Financial Statements).
For information regarding Occidental's current developments, see the
information in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (MD&A) section of this report.
OIL AND GAS OPERATIONS
GENERAL
Occidental's domestic oil and gas operations are located in Elk Hills and
other smaller locations in California, the Hugoton field in Kansas and Oklahoma,
the Permian Basin in West Texas and New Mexico, and the Gulf of Mexico.
International operations are located in Colombia, Ecuador, Oman, Pakistan,
Qatar, Russia, the United Arab Emirates and Yemen. Occidental also has
exploration interests in several other countries. For additional information
regarding Occidental's oil and gas segment, see the information under the
caption "Oil and Gas Segment" in the MD&A section of this report.
PROVED RESERVES, PRODUCTION AND PROPERTIES
The table below shows Occidental's total oil and natural gas proved
reserves and production in 2004, 2003 and 2002. See the MD&A section of this
report, Note 16 to the Consolidated Financial Statements and the information
under the caption "Supplemental Oil and Gas Information" in Item 8 of this
report for certain details regarding Occidental's oil and gas proved reserves,
the estimation process and production by country. On May 19, 2004, Occidental
reported to the U.S. Department of Energy on Form EIA-28 proved oil and gas
reserves at December 31, 2003. The amounts reported were the same as the amounts
reported in Occidental's 2003 Annual Report.
COMPARATIVE OIL AND GAS PROVED RESERVES AND PRODUCTION
Oil in millions of barrels; natural gas in billions of cubic feet; BOE in
millions of barrels of oil equivalent
2004 2003 2002
========================= =========================== =========================== ===========================
RESERVES OIL (a) GAS BOE (b) Oil (a) Gas BOE (b) Oil (a) Gas BOE (b)
----- ----- ----- ----- ----- ----- ----- ----- -----
U.S. 1,494 2,101 1,844 1,500 1,826 1,804 1,452 1,821 1,755
International 499 874 645 490 759 617 476 228 514
----- ----- ----- ----- ----- ----- ----- ----- -----
Consolidated Subsidiaries 1,993 2,975 2,489 (c) 1,990 2,585 2,421 (c) 1,928 2,049 2,269 (c)
===== ===== ===== ===== ===== ===== ===== ===== =====
Other Interests (d) 43 -- 43 48 9 50 42 -- 42
===== ===== ===== ===== ===== ===== ===== ===== =====
PRODUCTION
U.S. 93 186 124 93 194 125 85 206 119
International 66 47 74 60 27 65 57 23 61
----- ----- ----- ----- ----- ----- ----- ----- -----
Consolidated Subsidiaries 159 233 198 153 221 190 142 229 180
===== ===== ===== ===== ===== ===== ===== ===== =====
Other Interests (d) 9 -- 9 10 -- 10 8 -- 8
========================= ===== ===== ===== ===== ===== ===== ===== ===== =====
(a) Includes natural gas liquids and condensate.
(b) Natural gas volumes have been converted to equivalent BOE based on energy
content of 6,000 cubic feet (one thousand cubic feet is referred to as an
"Mcf") of gas to one barrel of oil.
(c) Stated on a net basis and after applicable royalties. Includes reserves
related to production-sharing contracts and other economic arrangements.
Proved reserves from production-sharing contracts in the Middle East and
from other economic arrangements in the U.S. were 450 million barrels of
oil equivalent (MMBOE) and 90 MMBOE in 2004, 435 MMBOE and 90 MMBOE in 2003
and 322 MMBOE and 94 MMBOE in 2002, respectively.
(d) Includes Occidental's share of reserves and production from equity
investees in Russia and Yemen, partially offset by minority interests for a
Colombian affiliate.
4
COMPETITION AND SALES AND MARKETING
As a producer of crude oil and natural gas, Occidental competes with
numerous other domestic and foreign producers. Crude oil and natural gas are
commodities that are sensitive to prevailing global conditions of supply and
demand and are sold at "spot" or contract prices or on futures markets to
refiners and other market participants. Occidental competes by developing and
producing its worldwide oil and gas reserves cost-effectively and acquiring
rights to explore in areas with known oil and gas deposits. Occidental also
competes by increasing production through enhanced oil recovery projects in
mature and underdeveloped fields and making strategic acquisitions. Occidental
focuses on operations in its core areas of the United States, the Middle East
and Latin America.
CHEMICAL OPERATIONS
GENERAL
Occidental manufactures and markets basic chemicals, vinyls and performance
chemicals directly and through various affiliates (collectively, OxyChem).
OxyChem's operations are affected by cyclical economic factors and by specific
chemical-industry conditions. For additional information regarding Occidental's
chemical segment, see the information under the caption "Chemical Segment" in
the MD&A section of this report.
PRODUCTS AND PROPERTIES
OxyChem, which is headquartered in Dallas, Texas, owns and operates
chemical manufacturing plants at 24 sites in the United States. Many of the
larger facilities are located in the Gulf Coast region of Texas and Louisiana.
In addition, OxyChem operates two chemical-manufacturing plants in Canada and
one in Chile. OxyChem also leases a cogeneration facility in Texas. A number of
additional facilities process, blend and store products. OxyChem owns and leases
an extensive fleet of railcars. OxyChem also has a 50-percent equity investment
in a Brazilian corporation that owns a chlor-alkali plant, a 50-percent equity
investment in a corporation that produces antimony oxide in Mexico and a
50-percent interest in a general partnership that produces liquid and anhydrous
potassium chloride products in Alabama.
BASIC CHEMICALS
OxyChem's basic chemicals consist of chlorine and caustic soda (which are
coproduced and referred to as an Electrochemical Unit (ECU)), potassium
chemicals and their derivatives.
Chlorine is used for chemical manufacturing in the chlorovinyl chain and
for water treatment. OxyChem produces chlorine in Alabama, Delaware, Louisiana,
New York, Texas, Brazil and Chile. Estimated annual capacity, including one
temporarily idled plant, at December 31, 2004, was 3.3 million tons in the
United States (including the 0.9-million-ton total annual capacity of the
OxyVinyls partnership, owned 76 percent by Occidental and 24 percent by PolyOne
Corporation) and 0.3 million gross tons in Brazil and Chile.
Caustic soda is used for pulp and paper production, alumina production and
other chemical manufacturing. OxyChem produces caustic soda in Delaware,
Louisiana, New York, Texas, Brazil and Chile. Estimated annual capacity,
including one temporarily idled plant, at December 31, 2004, was 3.4 million
tons in the United States (including the 1-million-ton total annual capacity of
the OxyVinyls partnership) and 0.4 million gross tons in Brazil and Chile.
Potassium chemicals are used in glass, fertilizer, cleaning products and
rubber. OxyChem produces potassium chemicals in Alabama and Delaware. Estimated
annual capacity at December 31, 2004, was 438,000 tons.
Ethylene dichloride (EDC), a chlorine derivative, is a raw material for
vinyl chloride monomer (VCM). OxyChem produces EDC in Louisiana, Texas and
Brazil. Estimated annual capacity, including one temporarily idled plant, at
December 31, 2004, was 3.0 billion pounds in the United States and 0.3 billion
gross pounds in Brazil.
VINYLS
OxyChem produces vinyls principally through its 76-percent interest in the
OxyVinyls partnership. OxyChem's vinyls products include polyvinyl chloride
(PVC) and its precursors, VCM and EDC.
OxyChem produces VCM, which is used as a raw material for PVC, in Texas. At
December 31, 2004, estimated annual capacity was 6.2 billion pounds (including
the 2.4 billion-pound total annual capacity of OxyMar, which is 88-percent owned
by OxyChem, and the 3.8 billion-pound total annual gross capacity of the
OxyVinyls partnership).
PVC resins are used in piping, electrical insulation, external construction
materials, flooring, medical and automotive products and packaging. OxyChem
produces PVC resins in Kentucky, New Jersey, Texas and Canada. At December 31,
2004, estimated annual capacity of the OxyVinyls partnership was 4.5 billion
pounds.
PERFORMANCE CHEMICALS
OxyChem's performance chemicals include chlorinated isocyanurates
(estimated capacity of 131 million pounds produced in Illinois and Louisiana),
resorcinol (estimated capacity of 52 million pounds produced in Pennsylvania),
antimony oxide (estimated capacity of 50 million pounds produced in Mexico by
OxyChem's 50-percent-owned equity investment), mercaptans (estimated capacity of
18 million pounds produced in Texas) and sodium silicates (estimated capacity of
722,000 tons produced in Georgia, Ohio, Illinois, New Jersey, Texas and
Alabama). Information regarding production capacity reflects estimated annual
capacity at December 31, 2004.
5
RAW MATERIALS
Nearly all raw materials used in OxyChem's operations are readily available
from a variety of sources. Power is provided by regional public utilities and/or
by cogeneration facilities. Most of OxyChem's key raw-materials purchases are
made through contractual relationships, rather than on the spot market. OxyChem
is generally not dependent on any single nonaffiliated supplier for a material
amount of its raw-material or energy requirements. Operations have not been
curtailed as a result of any supply interruptions.
PATENTS, TRADEMARKS AND PROCESSES
OxyChem's operations use a large number of patents, trademarks and
processes, some of which are proprietary and some of which are licensed. OxyChem
does not regard its business as being materially dependent on any single patent,
trademark or process.
SALES AND MARKETING
OxyChem's products are sold to industrial users or distributors located in
the United States, largely by its own sales force and in certain export markets.
OxyChem sells its products at current market or market-related prices through
short- and long-term sales agreements.
No significant portion of OxyChem's business is dependent on a single
third-party customer. OxyChem does not manufacture its products against a
backlog of firm orders.
COMPETITION
Occidental's chemical business competes with numerous producers. Since most
of OxyChem's products are commodities, it competes primarily on the basis of
price. Because most of OxyChem's products do not occupy proprietary positions,
OxyChem endeavors to be an efficient, low-cost producer.
CAPITAL EXPENDITURES
For information on capital expenditures, see the information under the
heading "Capital Expenditures" in the MD&A section of this report.
EMPLOYEES
Occidental employed 7,209 people at December 31, 2004, 5,730 of whom were
located in the United States. Occidental employed 3,093 people in oil and gas
operations and 2,974 people in chemical operations. An additional 1,142 people
were employed in administrative and headquarters functions. Approximately 625
U.S.-based employees are represented by labor unions.
Occidental has a long-standing policy to provide fair and equal employment
opportunities to all people without regard to race, color, religion, ethnicity,
gender, national origin, disability, age, sexual orientation, veteran status or
any other legally impermissible factor. Occidental maintains diversity and
outreach programs.
ENVIRONMENTAL REGULATION
For environmental regulation information, including associated costs, see
the information under the heading "Environmental Liabilities and Expenditures"
in the MD&A section of this report.
AVAILABLE INFORMATION
Occidental makes the following information available free of charge through
its web site at www.oxy.com:
>> Forms 10-K, 10-Q, 8-K and amendments to these forms as soon as reasonably
practicable after they are filed electronically with the SEC;
>> Other SEC filings, including Forms 3, 4 and 5; and
>> Corporate governance information, including its corporate governance
guidelines, board-committee charters and Code of Business Conduct. (See
Part III Item 10 of this report for further information.)
ITEM 3 LEGAL PROCEEDINGS
For information regarding lawsuits, claims, commitments, contingencies and
related matters, see the information in Note 9 to the Consolidated Financial
Statements.
In September 2004, Occidental received formal notification from
Petroecuador, the state oil company of Ecuador, initiating proceedings to
determine if Occidental had violated its Participation Contract for Block 15 or
the Ecuadorian Hydrocarbons Law and whether the alleged violations constitute
grounds for terminating the Participation Contract. The principal allegation
stated in the notice is an assertion that Occidental should have obtained
government approval of a farmout agreement entered into in 2000. Occidental
believes that it has complied with all material obligations under the
Participation Contract and Ecuadorian law and that any termination of the
contract based upon the stated allegations would be unfounded and would
constitute an unlawful expropriation. Occidental is cooperating with Ecuadorian
authorities in the current proceedings and will continue to strive for an
amicable resolution. Block 15 operations represent approximately 9 percent of
Occidental's 2004 consolidated production, 4 percent of its proved consolidated
reserves and 2 percent of its total property, plant and equipment, net of
accumulated depreciation, depletion and amortization.
In April 2004, a number of U.S. companies, including OxyChem, were served
with seven lawsuits filed in Nicaragua by approximately two thousand individual
plaintiffs. These individuals allege that they have sustained several billion
dollars of personal injury damages as a result of their alleged exposure to a
pesticide. In the opinion of management, these claims are without merit because,
among other things, OxyChem believes that none of the pesticide it manufactured
was ever sold or used in Nicaragua.
6
Under the applicable Nicaraguan statute, defendants are required to pay
pre-trial deposits so large as to effectively prohibit defendants from
participating fully in their defense. In two such situations, involving other
defendants, Nicaraguan courts proceeded to enter significant judgments against
the defendants under that statute. OxyChem has filed a response to the complaint
contesting jurisdiction without posting such pre-trial deposit. In December
2004, the judge in one of the cases ruled the court had jurisdiction over the
defendants, including OxyChem, and that the defendants did not have to pay the
pre-trial deposit. OxyChem intends to appeal that portion of the ruling relating
to the jurisdiction of the Nicaraguan courts. In the opinion of management, any
judgment rendered under the statute would be unenforceable in the United States.
Accordingly, management does not expect the ultimate resolution of any of
these matters to have a material adverse effect upon Occidental's consolidated
financial position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Occidental's security holders during
the fourth quarter of 2004.
EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
February 28,
Name 2005 Positions with Occidental and Subsidiaries and Five-Year Employment History
- ----------------------- ------------ ------------------------------------------------------------------------------------
Dr. Ray R. Irani 70 Chairman and Chief Executive Officer since 1990; President since 2005; Director
since 1984; Member of Executive Committee.
Stephen I. Chazen 58 Senior Executive Vice President since 2004; Chief Financial Officer since 1999;
1994-2004, Executive Vice President -- Corporate Development.
Donald P. de Brier 64 Executive Vice President, General Counsel and Secretary since 1993.
Richard W. Hallock 60 Executive Vice President -- Human Resources since 1994.
John W. Morgan 51 Executive Vice President since 2001; 1998-2001, Executive Vice President --
Operations; Occidental Oil and Gas Corporation (OOGC): President -- Western
Hemisphere since 2005; 2004, President; 2001-2004, Executive Vice President --
Worldwide Production.
R. Casey Olson 51 Executive Vice President since 2005; 2001-2005, Vice President; OOGC: President -
Eastern Hemisphere since 2005; Occidental Development Company: 2004, President;
Occidental Middle East Development Company: 2001-2003, President.
James M. Lienert 52 Vice President since 2004; Occidental Chemical Corporation: President since 2004;
2000-2002, Senior Vice President -- Basic Chemicals; OxyVinyls: 2002-2004, Senior
Vice President; Oxy Services, Inc.: 1998-2000, Vice President -- Finance.
Samuel P. Dominick, Jr. 64 Vice President and Controller since 1991.
James R. Havert 63 Vice President and Treasurer since 1998; 1992-1998, Senior Assistant Treasurer.
The current term of employment of each executive officer will expire at the May
6, 2005, organizational meeting of the Occidental Board of Directors or when a
successor is selected.
7
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TRADING PRICE RANGE AND DIVIDENDS
This section incorporates by reference the quarterly financial data
appearing under the caption "Quarterly Financial Data (Unaudited)" in Item 8 and
the information appearing under the caption "Liquidity and Capital Resources" in
the MD&A section of this report. Occidental's common stock was held by
approximately 48,459 stockholders of record at December 31, 2004, with an
estimated 126,323 additional stockholders whose shares were held for them in
street name or nominee accounts. The common stock is listed and traded
principally on the New York Stock Exchange. The quarterly financial data, which
are included in this report in the "Notes to the Consolidated Financial
Statements," set forth the range of trading prices for the common stock as
reported on the composite tape of the New York Stock Exchange and quarterly
dividend information.
In 2004, the quarterly declared dividend rate for the common stock was
$0.275 per share ($1.10 per year). On February 10, 2005, a quarterly dividend of
$0.31 per share ($1.24 per year) was declared on the common stock, payable on
April 15, 2005 to stockholders of record on March 10, 2005. The declaration of
future cash dividends is a business decision made by the Board of Directors from
time to time, and will depend on Occidental's financial condition and other
factors deemed relevant by the Board.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
All of Occidental's equity compensation plans for its employees and
non-employee directors, pursuant to which options, rights or warrants may be
granted, have been approved by the stockholders. See Note 12 to the Consolidated
Financial Statements for further information on the material terms of these
plans.
The following is a summary of the shares reserved for issuance as of
December 31, 2004, pursuant to outstanding options, rights or warrants granted
under Occidental's equity compensation plans:
(a) Number of (b) Weighted- (c) Number of securities
securities to be average exercise remaining available for
issued upon exercise price of outstanding future issuance under
of outstanding options, warrants equity compensation
options, warrants and rights plans (excluding
and rights securities in column (a))
- -------------------- -------------------- -------------------------
14,282,072 $28.99 12,222,289 *
* Includes, with respect to:
(a) the 1995 Incentive Stock Plan, 651,906 shares at maximum target level
(325,953 at target level) reserved for issuance pursuant to outstanding
performance stock awards, all of which are eligible for certification in
February 2005, and 1,641,983 deferred performance and restricted stock
awards; and
(b) the 2001 Incentive Compensation Plan, 1,575,328 shares at maximum
target level (787,664 at target level) reserved for issuance pursuant to
outstanding performance stock awards, 2,437,017 shares reserved for
issuance pursuant to restricted stock awards, 156,000 shares reserved for
issuance pursuant to deferred restricted stock awards and 6,680 shares
reserved for issuance as dividend equivalents.
Of the 5,753,375 shares that are not reserved for issuance, 5,643,368 shares are
available under the 2001 Incentive Compensation Plan, all of which may be issued
or reserved for issuance for options, rights and warrants as well as performance
stock awards, restricted stock awards, stock bonuses and dividend equivalents,
and 110,007 shares are available for issuance as restricted stock awards under
the 1996 Restricted Stock Plan for Non-employee Directors.
8
ITEM 6 SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Dollar amounts in millions, except per-share amounts
For the years ended December 31, 2004 2003 2002 2001 2000
=============================================================== ======== ======== ======== ======== ========
RESULTS OF OPERATIONS (a)
Net sales $ 11,368 $ 9,240 $ 7,247 $ 8,012 $ 8,399
Income from continuing operations $ 2,606 $ 1,601 $ 1,181 $ 1,182 $ 1,559
Net income $ 2,568 $ 1,527 $ 989 $ 1,154 $ 1,570
Earnings applicable to common stock $ 2,568 $ 1,527 $ 989 $ 1,154 $ 1,571
Basic earnings per common share from
continuing operations $ 6.59 $ 4.17 $ 3.14 $ 3.17 $ 4.23
Basic earnings per common share $ 6.49 $ 3.98 $ 2.63 $ 3.10 $ 4.26
Diluted earnings per common share $ 6.40 $ 3.93 $ 2.61 $ 3.09 $ 4.26
Core earnings (b) $ 2,489 $ 1,641 $ 1,017 $ 1,249 $ 1,351
FINANCIAL POSITION (a)
Total assets $ 21,391 $ 18,168 $ 16,548 $ 17,850 $ 19,414
Long-term debt, net $ 3,345 $ 3,993 $ 3,997 $ 4,065 $ 5,185
Trust preferred securities (c) $ -- $ 453 $ 455 $ 463 $ 473
Common stockholders' equity $ 10,550 $ 7,929 $ 6,318 $ 5,634 $ 4,774
CASH FLOW
Cash provided by operating activities $ 3,878 $ 3,074 $ 2,100 $ 2,566 $ 2,348
Capital expenditures $ (1,843) $ (1,600) $ (1,234) $ (1,305) $ (887)
Cash (used) provided by all other investing activities, net $ (445) $ (421) $ (462) $ 654 $ (2,157)
DIVIDENDS PER COMMON SHARE $ 1.10 $ 1.04 $ 1.00 $ 1.00 $ 1.00
BASIC SHARES OUTSTANDING (thousands) 395,580 383,943 376,190 372,119 368,750
- --------------------------------------------------------------- -------- -------- -------- -------- --------
(a) See the MD&A section of this report and the "Notes to Consolidated
Financial Statements" for information regarding accounting changes, asset
acquisitions and dispositions, discontinued operations, environmental
remediation, other costs and other items affecting comparability.
(b) For an explanation of core earnings, see "Significant Items Affecting
Earnings" in the MD&A section of this report.
(c) On January 20, 2004, Occidental redeemed the trust preferred securities.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A) (INCORPORATING ITEM 7A)
In this report, the term "Occidental" refers to Occidental Petroleum
Corporation (OPC) and/or one or more entities in which it owns a majority voting
interest (subsidiaries). Occidental is divided into two segments: oil and gas
and chemical.
STRATEGY
GENERAL
Occidental aims to generate competitive total returns to stockholders using
the following strategy:
>> Focus on large, long-lived oil and gas assets with growth potential.
>> Maintain financial discipline and a strong balance sheet.
>> Manage chemical segment to provide cash in excess of normal capital
expenditures.
Occidental prefers to own large, long-lived "legacy" oil and gas assets,
like those in California, the Permian Basin and Qatar, that tend to have
moderate decline rates, enhanced secondary and tertiary recovery opportunities
and economies of scale that lead to cost-effective production. Management
expects such assets to contribute substantial earnings and cash flow after
invested capital.
At Occidental, maintaining financial discipline means investing capital in
projects that management expects will generate above-cost-of-capital returns
throughout the business cycle. During periods of high commodity prices,
Occidental will use most of its cash flow after capital expenditures and
dividends to improve future earnings by making such investments or through debt
reduction.
9
The chemical business is not managed with a growth strategy. Capital is
expended to operate the chemical business in a safe and environmentally sound
way, to sustain production capacity and to focus on projects designed to lower
manufacturing costs. Asset acquisitions may be pursued when they are expected to
enhance the existing core chlor-alkali and polyvinyl chloride businesses.
Historically, the chemical segment has generated cash flow exceeding its normal
capital expenditure requirements. Occidental intends to invest this cash mainly
in strategically attractive assets or to reduce debt. As part of Occidental's
strategy to grow its oil and gas business, any excess cash generated by the
chemical segment may be used as part of the overall funding for oil and gas
growth.
OIL AND GAS
The oil and gas business seeks to add new oil and natural gas reserves at a
pace well ahead of production while keeping costs incurred for finding and
development among the lowest in the industry. The oil and gas business
implements this strategy within the limits of the overall corporate strategy
primarily by:
>> Continuing to add commercial reserves through a combination of focused
exploration and development programs conducted in and around Occidental's
core areas, which are the U.S., the Middle East and Latin America;
>> Pursuing commercial opportunities in core areas to enhance the development
of mature fields with large volumes of remaining oil by applying
appropriate technology and state-of-the-art reservoir-management practices;
and
>> Maintaining a disciplined approach in buying and selling assets at
attractive prices.
Over the past several years, Occidental has strengthened its asset base
within each of the core areas. Occidental has invested in, and disposed of,
assets with the goal of raising the average performance and potential of its
assets. See "Oil and Gas Segment -- Business Review" for a discussion of these
changes.
Occidental's overall performance during the past several years reflects the
successful implementation of its oil and gas business strategy, beginning with
the acquisition of the Elk Hills oil and gas field in California followed by the
purchase of Altura Energy in the Permian Basin in West Texas and thereafter by
several smaller acquisitions.
At the end of 2004, the Elk Hills and Permian Basin assets made up 66
percent of Occidental's consolidated proven oil reserves and 45 percent of its
consolidated proven gas reserves. On a barrels of oil equivalent (BOE) basis,
they accounted for 62 percent of Occidental's consolidated reserves. In 2004,
the combined production from these assets averaged approximately 265,000 BOE per
day, which represents approximately 47 percent of Occidental's total worldwide
production. These assets also contributed approximately 58 percent of oil and
gas segment earnings.
CHEMICAL
OxyChem's strategy is to be a low-cost producer so that it can maximize its
cash flow generation. OxyChem concentrates on the chlorovinyls chain where it
begins with chlorine, which is coproduced with caustic soda, and then converts
chlorine and ethylene, through a series of intermediate products, into PVC.
OxyChem's focus on chlorovinyls permits it to take advantage of economies of
scale.
KEY PERFORMANCE INDICATORS
GENERAL
Occidental seeks to ensure that it meets its strategic goals by
continuously measuring its success in maintaining below average debt levels and
top quartile performance compared to its peers in:
>> Overall return on equity;
>> Overall return on capital employed; and
>> Other segment specific measurements such as profit per unit produced, cost
to produce each unit, cash flow per unit, cost to find and develop new
reserves and other similar measures.
DEBT STRUCTURE
Occidental's total debt and total debt-to-capitalization ratios are shown
in the table below:
Total Debt-to-
Capitalization
Date ($ amounts in millions) Total Debt (a) Ratio
============================== ========== ====================
12/31/00 $ 6,354 57%
12/31/01 $ 4,890 46%
12/31/02 $ 4,759 43%
12/31/03 $ 4,570 37%
12/31/04 $ 3,905 27%
- ------------------------------ --------- --------------------
(a) Includes trust preferred securities (redeemed January 20, 2004), natural
gas delivery commitment (terminated in 2002), subsidiary preferred stock
and capital lease obligations.
As shown, Occidental's year-end 2004 total debt-to-capitalization ratio
declined to approximately 27 percent from the 57-percent level that existed at
the end of 2000. The decrease in the total debt-to-capitalization ratio in 2004
compared with 2000 resulted from total debt reductions of 39 percent combined
with an increase in stockholders' equity of 121 percent over the same period.
RETURN ON EQUITY
Annual 2004 (a) Three-Year Average 2002 - 2004 (b)
============================== ==============================
28% 22%
- ------------------------------ ------------------------------
(a) The Return on Equity for 2004 was calculated by dividing Occidental's 2004
earnings applicable to common stock by the average equity balance in 2004.
(b) The three-year average Return on Equity was calculated by dividing the
average annual earnings applicable to common stock over the three-year
period 2002-2004 by the average equity balance over the same period.
Over the past three years, Occidental has focused on improving its return
on equity. In 2004, Occidental's return on equity was 28 percent and the
three-year average return on equity was 22 percent. During the same three-year
period, Occidental's equity increased by over 67 percent.
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OIL AND GAS SEGMENT
BUSINESS ENVIRONMENT
Oil and gas prices are the key variables that drive the industry's
financial performance. Prices can vary significantly, even on a short-term
basis. Oil prices continued to strengthen in 2004 over their levels in the
previous year. During the year, Occidental experienced an increase in its price
differential between the average West Texas Intermediate (WTI) price and
Occidental's realized prices. Occidental's realized crude oil price was $39.11
per barrel in the fourth quarter of 2004, compared to $37.87 per barrel in the
third quarter of 2004. During this same period, WTI prices increased $4.41 per
barrel. The change in the differential between the average price of WTI and
Occidental's realized price was primarily due to a significant increase in the
volume of sour crude oil in global markets. Approximately 70 percent of
Occidental's crude oil could be classified as sour. This change in the
historical pattern of differentials makes forecasting realized prices difficult.
The average WTI market price for 2004 was $41.40 per barrel compared with $31.03
per barrel in 2003. Occidental's average realized price for oil in 2004 was
$35.09, compared with $27.25 in 2003.
NYMEX domestic natural gas prices increased approximately 12 percent from
2003. For 2004, NYMEX gas prices averaged $5.92/Mcf compared with $5.26/Mcf for
2003.
BUSINESS REVIEW
All production and reserve figures are net to Occidental unless otherwise
specified.
ELK HILLS
Occidental operates the Elk Hills oil and gas field in the southern portion
of California's San Joaquin Valley with an approximate 78-percent interest. The
field was acquired in 1998 for $3.5 billion and is the largest producer of gas
in California. Oil and gas production in 2004 was approximately 90,000 BOE per
day. Since its acquisition, total Elk Hills oil and gas production has been
approximately 235 million BOE. At the end of 2004, the property still had an
estimated 462 million BOE of proved reserves, compared to the 425 million BOE
that were recorded at the time of the acquisition.
Total gas production averaged 228 million cubic feet (MMcf) per day in 2004
compared to 246 MMcf per day in 2003.
PERMIAN BASIN
The Permian Basin extends throughout Southwest Texas and Southeast New
Mexico and is one of the largest and most active oil basins in the United
States, with the entire basin accounting for approximately 15 percent of total
U.S. oil production. Occidental is the largest producer in the Permian Basin
with an approximately 14 percent net share of the total Permian Basin oil
production. Occidental also produces and processes natural gas and natural gas
liquids (NGL) in the Permian Basin.
Most of Occidental's Permian Basin interests were obtained through the
acquisition of Altura in 2000, which was valued at approximately $3.6 billion.
On January 31, 2004, Occidental acquired a 1,300-mile oil gathering and
pipeline system in the Permian Basin that includes storage facilities at a
marketing hub in Midland. This system allows Occidental to efficiently transport
its production to these storage facilities. The pipeline is also used to
transport production for third party producers.
Occidental's total share of Permian Basin oil, gas and NGL production
averaged 175,000 BOE per day in 2004 compared to 171,000 BOE per day in 2003. At
the end of 2004, Occidental's Permian Basin properties had 1,083 million BOE in
proved reserves. Occidental's Permian Basin production is diversified across a
large number of producing areas. The largest producing areas include Wasson San
Andres, Slaughter, Levelland, North Cowden and Wasson Clearfork, which
contributed 21 percent, 11 percent, 6 percent, 6 percent and 5 percent,
respectively, to 2004 Permian BOE production.
Approximately 45 percent of Occidental's Permian Basin production is from
fields that employ the application of carbon dioxide (CO2) flood technology, an
enhanced oil recovery technique. This involves injecting CO2 into oil reservoirs
where it acts as a solvent, causing the oil to flow more freely into producing
wells. The size of these CO2 flood operations makes Occidental a world leader in
the application of this technology.
THUMS
Occidental purchased THUMS, the field contractor for an oil production unit
offshore Long Beach, California, in 2000. Occidental's share of production from
THUMS is subject to contractual arrangements similar to a production-sharing
contract (PSC), whereby Occidental's share of production varies inversely with
oil prices. For 2004, production from THUMS averaged 20,000 barrels per day.
GULF OF MEXICO
Occidental has a one-third interest in the deep-water Horn Mountain oil
field, which is Occidental's only asset in the Gulf of Mexico. BP p.l.c. (BP) is
the operator.
The field, which began production in November 2002, reached platform
capacity in the third quarter of 2003. For 2004, Occidental's production at Horn
Mountain averaged 22,000 BOE per day. In the second half of 2004, the Horn
Mountain field was shut down for about 46 days due to Hurricane Ivan. At
year-end 2004, production at the field again reached its capacity.
HUGOTON
Occidental owns a large concentration of gas reserves, production interests
and royalty interests in the Hugoton area of Kansas and Oklahoma. The Hugoton
field is the largest natural gas field discovered in North America. Occidental's
Hugoton operations produced 127,000 Mcf of natural gas per day and 3,000 barrels
of oil per day in 2004.
11
MIDDLE EAST
DOLPHIN PROJECT
Occidental's interest in the Dolphin Project, which was acquired in 2002,
consists of two separate economic interests held through two separate legal
entities. One entity, OXY Dolphin E&P, LLC, owns a 24.5-percent undivided
interest in the assets and liabilities associated with a Development and
Production Sharing Agreement (DPSA) with the Government of Qatar to develop and
produce natural gas and condensate in Qatar's North Field for 25 years from the
start of production, with a provision to request a 5-year extension. The
purchase price of the undivided working interest in the DPSA was approximately
$60 million and was recorded in Property, Plant & Equipment. This undivided
interest will be proportionately consolidated in Occidental's financial
statements.
A second entity, OXY Dolphin Pipeline, LLC, owns 24.5 percent of the stock
of Dolphin Energy Limited (Dolphin Energy). Dolphin Energy owns the rights to
build, own and operate a 260-mile-long, 48-inch natural gas pipeline which will
transport dry natural gas from Qatar to the United Arab Emirates (UAE) for the
life of the Dolphin Project or longer. Initially, the Dolphin Project will
export 2 billion cubic feet (Bcf) per day of natural gas (plus associated
liquids and byproducts). However, the pipeline is expected to have capacity to
transport up to 3.2 Bcf of natural gas per day, and Dolphin Energy is pursuing
additional business opportunities to meet the growing demand for natural gas in
the UAE and Oman. The purchase price of Dolphin Energy stock totaled
approximately $250 million and was recorded as an equity investment.
Several important milestones have been reached since Occidental joined the
Dolphin Project. In 2002, two development wells were drilled and tested,
providing sufficient information to complete the field development plan. In
October 2003, Dolphin Energy signed two 25-year contracts to supply
approximately one Bcf of natural gas per day to two entities in the UAE. As
stated above, demand for natural gas is growing in the UAE and Oman and a third
supply contract with the Emirate of Dubai is currently being negotiated. In
December 2003, the Government of Qatar approved the final field development plan
for the Dolphin Project.
In January 2004, Dolphin Energy was awarded engineering, procurement and
construction (EPC) contracts for the gas processing and compression plant at Ras
Laffan in Qatar as well as for two offshore gas production platforms. Dolphin
Energy is operator on behalf of the contractors under the DPSA. The remaining
major EPC contracts were also awarded during 2004. To date, Occidental has
recorded 157 million BOE of proved undeveloped oil and gas reserves for the
Dolphin Project DPSA activity.
The Ras Laffan plant will receive wet gas from Dolphin's facilities in
Qatar's North Field and will remove hydrocarbon liquids, including condensate
and natural gas liquids, for further processing and sale in the global market.
The resulting dry gas will be compressed and transported to the UAE through
Dolphin Energy's pipeline. The projected start-up date for production is in late
2006.
The Dolphin Project is expected to cost approximately $4.0 billion in
total. Occidental expects to invest approximately $1 billion of this total. The
project will be financed by a combination of participant investment and project
financing. During 2005, Occidental expects to spend a combined total of
approximately $540 million for the gas exploration and development activity and
the investment in Dolphin Energy compared to $153 million in 2004.
No revenue or production costs were recorded in 2004 for the Dolphin
Project gas exploration and development activity.
QATAR
Occidental participates in two production projects in Qatar: Idd El Shargi
South Dome (ISSD) and Idd El Shargi North Dome (ISND). Occidental is engaged in
Phase II of full field development of ISND and is in the process of developing
the ISSD field. ISSD is a satellite to the ISND field, thereby reducing the
overall capital requirement of the two projects.
Occidental expects to increase production and recoverable reserves with the
second phase of development under its existing agreement in the ISND field. This
new phase is targeting the development and recovery of additional reserves by
applying advanced drilling systems and improved reservoir characterization
techniques. Capital expenditures in Qatar for the ISSD and ISND projects were
$450 million in 2004 and are expected to be approximately $400 million in 2005.
Combined production from the two fields averaged 45,000 barrels per day in
2004.
Also, see the Dolphin Project discussed above.
YEMEN
In Yemen, Occidental owns direct-working interests in the Masila field in
Block 14 (38 percent) and a 40.4-percent interest in the East Shabwa field,
comprising a 28.6-percent direct-working interest and an 11.8-percent equity
interest in an unconsolidated entity. Occidental's production averaged 33,000
barrels of oil per day in 2004, with 29,000 coming from the Masila field and the
remainder from East Shabwa.
In addition, Occidental operates Block 20, where it owns an 80-percent
working interest. Occidental drilled two exploratory wells in Block 20 in 2004.
OMAN
Occidental's Oman business is centered in Block 9 where it is the operator
and holds a 65-percent working interest. Under the Block 9 PSC, Occidental's
share of production averaged 13,000 barrels of oil per day in 2004.
In March 2004, Occidental began selling gas to the Government of Oman under
a gas sales agreement, thereby allowing Occidental to produce previously
stranded gas and condensates from Block 9. Under the agreement, Occidental (and
its Block 9 partner) must supply approximately 114 MMcf per day of natural gas
until December 31, 2007. Thereafter, Occidental will nominate quantities that it
has available for delivery. Since March 2004, Occidental (and its partner)
supplied an average of approximately 110 MMcf per day of
12
natural gas to the Government under the gas sales agreement, including gas
delivered during a commissioning period and prior to Occidental's obligation to
deliver gas.
The minimum gross quantities to be delivered under the gas sales agreement
through December 31, 2007 represent approximately 60 percent of the expected
average gross production of gas from Block 9 during that period. As of December
31, 2004, the gross proved gas reserves from Block 9 are approximately 270
percent of the total minimum of gas that remains to be delivered under the gas
sales agreement.
Occidental also holds a 65-percent working interest in Block 27, which is
adjacent to Block 9. As operator, Occidental is conducting an active exploration
program in Block 27.
LIBYA
Occidental suspended all activities in Libya in 1986 as a result of
economic sanctions imposed by the U.S. government, but continues to hold an
interest in the assets that it formerly operated. Since the imposition of
sanctions, Occidental has derived no economic benefit from its Libyan interests
and has no Libyan assets on its balance sheet. In 2004, the U.S. government
lifted all of the principal economic sanctions against Libya. As a result,
Occidental began actively negotiating with the Libyan government for
Occidental's return to its historical assets in Libya. Those negotiations are
continuing.
Separately, in January 2005, Occidental participated in the EPSA IV
exploration bid round in Libya. Occidental was the successful bidder on nine of
the 15 areas available. Occidental will operate five onshore areas and will have
a 90-percent exploration working interest. In addition, Occidental will have a
35-percent exploration working interest in four offshore areas. The offshore
areas will be operated by Woodside Petroleum Ltd.
OTHER EASTERN HEMISPHERE
PAKISTAN
Occidental holds oil and gas working interests, that vary from 25 to 50
percent, in four Badin Blocks in Pakistan. BP is the operator. Occidental's
share of production was approximately 20,000 BOE per day in 2004.
RUSSIA
In Russia, Occidental owns 50 percent of a joint venture company,
Vanyoganneft, that operates in the western Siberian oil basin. Production for
2004 was approximately 29,000 BOE per day.
LATIN AMERICA
COLOMBIA
In April 2004, Occidental extended the term of its contract with the
Government of Colombia for the Cano Limon field. The contract was extended to
the economic life of the field. Occidental has a 35-percent net share of
production and is the operator of the field. Colombia's national oil company,
Ecopetrol, operates the Cano Limon-Covenas oil pipeline and marine-export
terminal. The pipeline transports oil produced from the Cano Limon field for
export to international markets. In addition, Occidental also has various
working interests in four exploration blocks.
Occidental's share of 2004 production averaged 33,000 barrels of oil per
day.
ECUADOR
Occidental operates Block 15 in Ecuador and has a 60-percent economic
interest therein. Although Occidental holds legal title to 100 percent of the
Block 15 Participation Contract, it has farmed out 40 percent of its economic
interest related to Block 15. Occidental's share of production averaged
approximately 46,000 barrels of oil per day in 2004. In addition, Occidental has
a 14-percent interest in the Oleoducto de Crudos Pesados Ltd. (OCP) oil export
pipeline. See "Off-Balance-Sheet Arrangements" for further information about the
OCP pipeline.
Full development of the Eden-Yuturi oil field in the southeastern corner of
Block 15 continued in 2004. Additional development wells drilled in the western
portion of the block resulted in an increase in production of approximately
21,000 barrels from the 25,000 barrels per day produced in 2003.
After completing extensive 3-D seismic surveys Occidental continues to
expand its exploration activities in Block 15.
Foreign oil companies, including Occidental, have been paying a Value Added
Tax (VAT), generally calculated on the basis of 10 to 12 percent of expenditures
for goods and services used in the production of oil for export. Until 2001, oil
companies, like other companies producing products for export, filed for and
received reimbursement of VAT. In 2001, the Ecuador tax authority announced that
the oil companies' VAT payments did not qualify for reimbursement. In 2002,
Occidental initiated an international arbitration proceeding against the
Ecuadorian Government under the United States-Ecuador bilateral investment
treaty based on Occidental's belief that the Ecuadorian Government is
arbitrarily and discriminatorily refusing to refund the VAT to Occidental. In
July 2004, a tribunal of international arbitrators awarded Occidental
compensation for VAT refunds from Occidental's Block 15 operations that were
withheld by the Ecuadorian Government and indicated that similar VAT refunds
should be paid going forward. The Ecuadorian Government has appealed the
tribunal's decision and the appeals proceedings continue at present. In the
event of an unfavorable outcome, the potential effect on Occidental's financial
statements would not be material.
In September 2004, Occidental received formal notification that
Petroecuador, the state oil company of Ecuador, was initiating proceedings to
determine if Occidental had violated its Participation Contract for Block 15 or
the Ecuadorian Hydrocarbons Law and whether the alleged violations constitute
grounds for terminating the Participation Contract. The principal allegation
stated in the notice is an assertion that Occidental should have obtained
government approval of a farmout agreement entered into in 2000. Occidental
believes that it has complied with all material obligations under the
Participation Contract and Ecuadorian law,
13
and that any termination of the contract based upon the stated allegations would
be unfounded and would constitute an unlawful expropriation. Occidental is
cooperating with the Ecuadorian authorities in the current proceedings and will
continue to strive for an amicable resolution. Block 15 operations represent
approximately 9 percent of Occidental's 2004 consolidated production, 4 percent
of its proved consolidated reserves, and 2 percent of its total property, plant
and equipment, net of accumulated depreciation, depletion and amortization.
PRODUCTION-SHARING CONTRACTS
Occidental conducts its operations in Qatar, Oman and Yemen under PSCs and,
under such contracts, receives a share of production to recover its costs and an
additional share for profit. In addition, Occidental's share of production from
THUMS is subject to contractual arrangements similar to a PSC. Occidental's
share of production from these contracts decreases when oil prices rise and
increases when oil prices decline. Overall, Occidental's net economic benefit
from these contracts is greater at higher oil prices.
PROVED RESERVES - EVALUATION AND REVIEW PROCESS
A senior corporate officer of Occidental is responsible for the internal
audit and review of its oil and gas reserves data. In addition, a Corporate
Reserves Review Committee (the Reserves Committee) has been established,
consisting of senior corporate officers, to monitor and review Occidental's oil
and gas reserves. The Reserves Committee reports to the Audit Committee of
Occidental's Board of Directors periodically throughout the year. Occidental has
retained Ryder Scott Company, L.P. (Ryder Scott), independent petroleum
engineering consultants, to review its oil and gas estimation processes.
Ryder Scott has compared Occidental's methods and procedures for estimating
oil and gas reserves to generally accepted industry standards and has reviewed
certain data, methods and procedures used in estimating reserves volumes, the
reserve and economic evaluations and reserves classifications. Ryder Scott then
reviewed the specific application of such methods and procedures for a selection
of oil and gas fields considered to be a valid representation of Occidental's
total reserves portfolio.
Based on this review, including the data, technical processes and
interpretations presented by Occidental, Ryder Scott has concluded that the
methodologies used by Occidental in preparing the relevant estimates generally
comply with current Securities and Exchange Commission (SEC) standards. Ryder
Scott has not been engaged to render an opinion as to the reserves volumes
presented by Occidental.
PROVED RESERVE ADDITIONS
Occidental consolidated subsidiaries had proved reserves at year-end 2004
of 2,489 million BOE, as compared with the year-end 2003 amount of 2,421 million
BOE. Additionally, Occidental owns investments in other interests which had
proved reserves of 43 million and 50 million BOE at year-end 2004 and 2003,
respectively. The increase in the consolidated subsidiaries reserves from all
sources was 266 million BOE, of which 212 million BOE were from proved developed
reserves and 54 million BOE were from proved undeveloped reserves.
Proved developed reserves represent approximately 78 percent of
Occidental's total proved reserves.
PROVED RESERVE ADDITIONS - CONSOLIDATED SUBSIDIARIES - 2004
Proved Proved Proved
In Millions of BOE Developed Undeveloped Total
============================== ============= ============= =============
Revisions 114 (69) 45
Improved Recovery 36 84 120
Extensions and Discoveries 23 38 61
Purchases 39 1 40
------------- ------------- -------------
Total Additions 212 54 266
============================== ============= ============= =============
Proved reserves are 80 percent crude oil and condensate and 20 percent
natural gas.
REVISIONS OF PREVIOUS ESTIMATES
In 2004, Occidental added reserves from revisions of previous estimates of
45 million BOE, 38 million of which are in the Middle East. The Dolphin Project
added 49 million BOE. These were partially offset by 11 million BOE of negative
revisions in Qatar, Yemen and Oman, due primarily to the impact of higher oil
prices reducing Occidental's share of reserves under PSCs. If oil prices
increase by $5 per barrel, less oil volume is required to recover costs, and
PSCs would reduce Occidental's share of proved reserves by approximately 22
million BOE. Oil price increases would also tend to extend the economic lives
for proved reserves from other contracts, which would partially offset these PSC
reserve volume changes. Conversely, if oil prices drop by $5 per barrel,
Occidental's share of proved reserves would increase by a similar amount. The
economic lives of other reserves would be shorter, and this would partially
offset the PSC reserve volume changes. Apart from the effects of product prices,
Occidental's approach to interpreting technical data regarding oil and gas
reserves makes it more likely future reserve revisions will be positive rather
than negative. Occidental expects future revisions to be positive as they have
been for the last several years.
IMPROVED RECOVERY
In 2004, Occidental added reserves of 120 million BOE through improved
recovery, mainly in the Permian Basin, Elk Hills field, and THUMS in the United
States and also in Qatar. In an effort to partially mitigate the decline in oil
and gas production from the Elk Hills field, from the acquisition in 1998
through year-end 2004, Occidental has successfully implemented an infill
drilling program. The Elk Hills field employs both gas flood and water flood
techniques. In the Permian Basin, the increased reserves were primarily
attributable to enhanced recovery techniques, such as drilling additional CO2
flood and water flood wells. In Qatar, Occidental is currently in the second
phase of
14
development under its existing agreement for the ISND field. This phase targets
the development and recovery of additional reserves by applying advance drilling
systems and improved reservoir characterization techniques.
EXTENSIONS AND DISCOVERIES
Occidental obtains reserve additions from extensions which are dependent on
successful exploitation programs. In 2004, Occidental added reserves of 61
million BOE, with 39 million BOE in the United States and 18 million BOE in
Ecuador. In the Rocky Mountain area, Occidental added approximately 24 million
BOE from the extension of gas reserves to proved locations, most of which will
require additional development capital. In Ecuador, Occidental continued full
development of the Eden-Yuturi oil field in Block 15.
The success of improved recovery, extension and discovery projects depends
on reservoir characteristics and technology improvements, as well as oil and gas
prices, capital costs and operating costs. Many of these factors are outside of
management's control, and will affect whether or not these historical sources of
reserve additions continue at similar levels.
PURCHASES OF PROVED RESERVES
In 2004, Occidental purchased reserves of 40 million BOE, of which 29
million BOE are in Latin America and the remainder in the United States. In
April 2004, Occidental extended the term of its contract with the Government of
Colombia to the economic life of the Cano Limon field. Of the 29 million BOE of
reserve additions, Occidental owns 25 million BOE and a minority shareholder
holds interests in the remaining 4 million BOE. See the "Oil and Gas Segment --
Business Review -- Latin America -- Colombia" section above for a more complete
description of this transaction. The reserve additions of 11 million BOE in the
United States were from various small acquisitions, primarily in the Permian
Basin, of which 84 percent were proved developed reserves. Occidental continues
to add reserves through acquisitions when properties are available at reasonable
prices. Acquisitions are dependent on successful bidding and negotiating of oil
and gas contracts at attractive terms. As market conditions change, the
available supply of properties may increase or decrease accordingly.
PROVED UNDEVELOPED RESERVES
In 2004, Occidental's proved undeveloped reserves increased by 54 million
BOE. This net increase resulted from improved recovery, extensions and
discoveries, primarily in the Elk Hills field, in the Permian Basin, in the
Rocky Mountain area and in the Dolphin Project. These proved undeveloped
additions were partially offset by reserve transfers to the proved developed
category as a result of 2004 development programs.
The Dolphin Project DPSA activity was the largest addition to proved
undeveloped reserves in 2004. The Government of Qatar approved the Dolphin
Project final field development plan in December 2003. Dolphin development
progress, including drilling additional wells and constructing platforms, lines,
a gas plant and gas compression and pipeline facilities, will continue through
an expected start up in 2006.
For details of proved reserve activity by geographic areas, see the
"Supplemental Oil and Gas Information (Unaudited)" section in the "Notes to the
Consolidated Financial Statements."
INDUSTRY OUTLOOK
The petroleum industry is highly competitive and subject to significant
volatility due to numerous market forces. Crude oil and natural gas prices are
affected by market fundamentals such as weather, inventory levels, competing
fuel prices, overall demand and the availability of supply.
Worldwide oil prices in 2004 remained at or near historical highs.
Continued economic growth, resulting in increased demand and concerns about
supply availability, could result in continued high prices. A lower demand
growth rate could result in lower crude oil prices.
Sustained high oil prices will significantly affect profitability and
returns for Occidental and other upstream producers. However, the industry has
historically experienced wide fluctuations within price cycles. Although oil
prices cannot be predicted with any certainty, the WTI price has averaged
approximately $24.90 per barrel over the past ten years. During 2004, Occidental
experienced an increase in its price differential between the average WTI price
and Occidental's realized prices. See the "Oil and Gas Segment -- Business
Environment" section above for further information.
While supply/demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, making it more
difficult to forecast prices with any degree of confidence. Over the last ten
years, the NYMEX gas price has averaged $3.40 per Mcf.
CHEMICAL SEGMENT
BUSINESS ENVIRONMENT
The chemical segment experienced improved results in 2004 due to the
continued improvement in most sectors in which OxyChem participates,
particularly the building and construction markets. The economic recovery
continued its measured growth and the supply/demand for major commodities
tightened. Product prices were higher but the resulting improvement in
profitability was partially offset by higher costs for raw materials, primarily
energy and ethylene.
Domestic chlorine demand rose nearly 7 percent compared to 2003, as many
sectors experienced volume growth. Due to the industry's efforts to improve
profitability by reducing capacity, the upturn in demand resulted in
industry-wide chlor-alkali operating rates of 99 percent, the highest since
1995.
15
BUSINESS REVIEW
CHLOR-ALKALI
Demand for chlor-alkali products improved throughout 2004 with combined
chlorine and caustic soda prices rising throughout the second half of the year.
As supply and demand remained tight, prices increased significantly in the
latter part of the year, particularly for caustic soda. OxyChem's chlor-alkali
operating rate for 2004 was 99 percent, approximately matching the industry
operating rate. The tight supply/demand supported higher chlorine prices, which
improved over 50 percent during 2004. Caustic soda volumes rose with higher
demand, especially in the alumina and pulp and paper sectors. Caustic soda
prices were highly volatile in 2004 as the impact of imports early in the year
caused spot realizations to bottom-out early in the second quarter. As demand
continued to rise with the improvement of the U.S. manufacturing sector, prices
rebounded and increased substantially by year-end. Export pricing for caustic
soda remained steady through September before rising as the worldwide
supply/demand balance tightened, exerting upward pressure on pricing.
OxyChem maintained its Deer Park chlor-alkali production facility in
Houston, Texas and its EDC facility in Ingleside, Texas in standby mode. These
idle facilities will be reactivated upon strengthening in overall economic
conditions that leads to sustained improved demand and higher margins for
caustic soda.
In December 2004, OxyChem permanently idled a circuit which produced
chlorine and caustic soda at its Delaware City plant and recorded a pre-tax
charge of $12 million.
VINYLS
Strong demand and increasing ethylene costs led to PVC price increases in
2004. Both ethylene and natural gas costs increased in 2004. PVC prices
increased 8 percent compared to 2003. These increases were in addition to the
23-percent increase in PVC resin prices in 2003, which was driven by rising
feedstock and energy costs.
Industry-wide total 2004 demand was 6 percent higher compared with 2003.
OxyChem operated its PVC facilities at an average operating rate of 94
percent for 2004, equal to the North American industry average.
EXIT OF VINYL SPECIALTY RESINS BUSINESS
At the end of 2004, Occidental decided to exit the vinyl specialty resins
business for strategic and economic reasons. This resulted in the immediate
closure of the Pottstown, Pennsylvania manufacturing facility. Occidental
recorded an after-tax charge of $32 million in 2004 and classified this business
as a discontinued operation.
AGREEMENT TO ACQUIRE VULCAN ASSETS
In October 2004, Occidental agreed to purchase three chemical manufacturing
facilities from Vulcan Materials Company for $214 million in cash, subject to
adjustment for changes in net working capital. In addition, Occidental may
become obligated to make contingent payments based upon the future performance
of these businesses, and will assume specified obligations. This transaction,
which is subject to regulatory approval, is expected to close in 2005.
DISPOSITION OF EQUISTAR INTEREST AND ACQUISITION OF LYONDELL INTEREST
In August 2002, Occidental sold its 29.5-percent share of Equistar to
Lyondell and purchased a 21-percent equity interest in Lyondell. Occidental
entered into these transactions to diversify its petrochemicals interest. These
transactions reduced Occidental's direct exposure to petrochemicals volatility,
yet allowed it to preserve, through its Lyondell investment, an economic upside
of a recovery in the petrochemicals industry. In connection with these
transactions, Occidental wrote down its investment in the Equistar partnership
to fair value by recording a $412 million pre-tax charge as of December 2001.
When this transaction closed in the third quarter of 2002, Occidental recorded
an after-tax gain of $164 million.
In November 2004, Lyondell acquired Millennium Chemicals Inc. (Millennium)
by issuing additional shares of Lyondell common stock. Under SEC Staff
Accounting Bulletin No. 51, Occidental is required to record its share of the
increase in Lyondell's net equity resulting from this issuance. The effect of
this is an increase of $121 million in the carrying value of Occidental's
investment in Lyondell and an increase in Occidental's net income of $77 million
after-tax. At December 31, 2004, Occidental owned 41.3 million shares of
Lyondell common stock, with a carrying value of $603 million and a fair-market
value of $1.2 billion. As a result of the stock issuance, Occidental's ownership
percentage of Lyondell has decreased from approximately 22 percent to 17
percent.
DISPOSITION OF CHROME AND CALENDERING OPERATIONS
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its plastic calendering
operations in Rio de Janeiro, Brazil for a $6 million note receivable. In the
third quarter of 2002, Occidental recorded an after-tax impairment charge of $69
million and classified both of these businesses as discontinued operations.
INDUSTRY OUTLOOK
Occidental's chemical business improved its profitability in 2004, nearly
doubling 2003's earnings levels. The major factors that contributed to this
improved performance are the improved U.S. economy and higher demand for major
chemical products.
If operating rates remain at their year-end 2004 levels and the U.S.
economy continues to improve, the chemical industry may experience modest price
increases in 2005. Improved profitability will depend on the amount of increase
in future energy and feedstock costs.
Construction of LNG terminals on the U.S. Gulf Coast could stabilize
natural gas prices at a lower-than-current level and thereby help improve the
competitive position of efficient Gulf Coast chemical facilities. However, this
construction may not occur in the immediate future.
16
Occidental's chemical business is profitable and is expected to remain
profitable if the current favorable economic conditions continue. If, however,
U.S. manufacturing becomes noncompetitive on a worldwide basis, this could
shorten the estimated productive lives of some of Occidental's plants, resulting
in higher annual depreciation. Significantly shorter productive lives could also
result in asset impairments, including plant closures. It is unlikely that any
changes in estimated productive lives would be uniform. While potential
impairment charges could have a material impact on the earnings in a discrete
period, such changes are unlikely to have a material effect on Occidental's
overall financial situation.
For additional discussion of the possible financial effect of a change to
the productive lives of OxyChem's assets, please see the "Critical Accounting
Policies and Estimates" section below.
CHLOR-ALKALI
Industry operating rates are near historical highs. Demand growth is
expected to remain moderate, which will put additional strains on manufacturing
capacity. Due to the high volatility of caustic soda prices in 2004, the 2004
average price was essentially unchanged from 2003. However, the caustic soda
markets tightened in the last half of 2004, which may result in increased prices
in 2005 versus 2004.
VINYLS
Consensus forecasts for 2005 gross domestic product (GDP) growth of 3.6
percent suggest expectations for a strong economy that will favorably affect the
vinyls business. Overall, OxyChem expects 2 to 3 percent growth in vinyls demand
in North America in 2005. Industry-wide PVC and VCM operating rates are expected
to be slightly lower in 2005 as a result of the restart of some idled capacity.
Chlorovinyls supply constraints, together with high ethylene costs, have
created conditions for vinyls price increases early in 2005. PVC resin producers
have announced a 2-cents-per-pound increase for January 2005. Despite the
restart of some idled capacity, VCM supply is expected to be tight due to
maintenance requirements and higher global demand for PVC. Average operating
rates for North American VCM producers are expected to exceed 93 percent.
CORPORATE AND OTHER
Corporate and Other includes the investments in Lyondell and Premcor, Inc.,
a refining business, and a leased cogeneration facility in Taft, Louisiana. In
2004, Corporate and Other also includes the results of a 1,300-mile oil pipeline
and gathering system located in the Permian Basin, which was acquired in January
2004 and is used in corporate-directed oil and gas marketing and trading
operations.
SEGMENT RESULTS OF OPERATIONS
The following discussion of Occidental's two operating segments and
corporate items should be read in conjunction with Note 15 to the Consolidated
Financial Statements.
Segment earnings generally exclude interest income, interest expense,
unallocated corporate expenses, discontinued operations and the cumulative
effect of changes in accounting principles, but include gains and losses from
dispositions of segment assets and results from the segments' equity
investments.
Foreign income and other taxes and certain state taxes are included in
segment earnings based on their 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 resulting from purchase accounting adjustments,
and the tax effects resulting from major, infrequently occurring transactions,
such as asset dispositions that relate to segment results.
The following table sets forth the sales and earnings of each operating
segment and corporate items:
SEGMENT OPERATIONS
In millions, except per share amounts
For the years ended December 31, 2004 2003 2002
================================ ======== ======== ========
SALES
Oil and Gas $ 7,582 $ 6,003 $ 4,634
Chemical 3,675 3,092 2,613
Other (a) 111 145 --
-------- -------- --------
$ 11,368 $ 9,240 $ 7,247
================================ ======== ======== ========
EARNINGS(LOSS)
Oil and Gas (b, c) $ 3,544 $ 2,664 $ 1,707
Chemical (b) 412 220 304
-------- -------- --------
3,956 2,884 2,011
Unallocated corporate items
Interest expense, net (d)
Debt and trust preferred
distributions (240) (333) (320)
Income taxes (e) (939) (666) (375)
Other (f) (171) (284) (135)
-------- -------- --------
Income from continuing
operations 2,606 1,601 1,181
Discontinued operations, net (38) (6) (97)
Cumulative effect of changes in
accounting principles, net -- (68) (95)
-------- -------- --------
Net Income $ 2,568 $ 1,527 $ 989
======== ======== ========
Basic Earnings per
Common Share $ 6.49 $ 3.98 $ 2.63
================================ ======== ======== ========
(a) The 2004 amount represents revenue from a Taft, Louisiana cogeneration
plant and the Permian Basin pipeline and gathering system. The 2003 amount
represents revenue from a Taft, Louisiana cogeneration plant.
(b) Includes U.S. federal tax charge of $6 million related to oil and gas in
2003. Segment earnings in 2002 were affected by $402 million of net credits
allocated, comprising $1 million of charges and $403 million of credits in
oil and gas and chemical, respectively. The 2002 chemical amount includes a
$392 million credit for the sale of the Equistar investment, which resulted
in a net gain of $164 million.
(c) The 2004 amount includes interest income of $18 million from loans made to
an equity investee.
(d) The 2004 amount includes $17 million of interest charges to redeem or
repurchase various debt issues during the year. The 2003 amount includes a
$61 million interest charge to repay a $450 million senior note that had 10
years of remaining life, but was subject to remarketing on April 1, 2003.
The 2002 amount is net of $21 million of interest income on notes
receivable from Altura partners.
(e) The 2004 amount includes $47 million of credits related to tax settlements
with the Internal Revenue Service. The 2004 amount also reflects a lower
U.S. income tax rate resulting from the crediting of foreign income taxes.
(f) The 2004 amount includes $169 million of corporate equity-method investment
income, $59 million of environmental remediation expense and the costs
attributable to the cogeneration plant in Taft, Louisiana. The 2003 amount
includes $58 million of corporate equity-method investment losses and $63
million of environmental remediation expense. The 2002 amount includes $22
million of preferred distributions to the Altura partners, $23 million of
environmental remediation expenses and $25 million of corporate
equity-method investment losses.
17
OIL AND GAS
In millions, except as indicated 2004 2003 2002
========================================= ======== ======== ========
SEGMENT SALES $ 7,582 $ 6,003 $ 4,634
SEGMENT EARNINGS $ 3,544 $ 2,664 $ 1,707
CORE EARNINGS (a) $ 3,544 $ 2,664 $ 1,707
NET PRODUCTION PER DAY
UNITED STATES
Crude oil and liquids (MBBL)
California 78 81 86
Permian 154 150 142
Horn Mountain 19 21 1
Hugoton 3 4 3
-------- -------- --------
Total 254 256 232
Natural Gas (MMCF)
California 237 252 286
Hugoton 127 138 148
Permian 130 129 130
Horn Mountain 13 13 --
-------- -------- --------
Total 507 532 564
LATIN AMERICA
Crude oil & condensate (MBBL)
Colombia 37 37 40
Ecuador 46 25 13
-------- -------- --------
Total 83 62 53
MIDDLE EAST
Crude oil & condensate (MBBL)
Oman 13 12 13
Qatar 45 45 42
Yemen 32 35 37
-------- -------- --------
Total 90 92 92
Natural Gas (MMCF)
Oman 55 -- --
OTHER EASTERN HEMISPHERE
Crude oil & condensate (MBBL)
Pakistan 7 9 10
Natural Gas (MMCF)
Pakistan 75 74 63
BARRELS OF OIL EQUIVALENT (MBOE)
SUBTOTAL CONSOLIDATED SUBSIDIARIES 540 520 492
Colombia-minority interest (4) (5) (5)
Russia-Occidental net interest 29 30 27
Yemen-Occidental net interest 1 2 1
-------- -------- --------
TOTAL WORLDWIDE PRODUCTION 566 547 515
======== ======== ========
AVERAGE SALES PRICES
CRUDE OIL PRICES ($ per barrel)
U.S. $ 37.72 $ 28.74 $ 23.47
Latin America $ 33.09 $ 27.21 $ 23.14
Middle East (b) $ 34.88 $ 27.81 $ 24.13
Other Eastern Hemisphere $ 33.13 $ 26.61 $ 23.02
Total consolidated subsidiaries $ 35.95 $ 28.18 $ 23.56
Other interests $ 23.83 $ 15.95 $ 14.80
Total worldwide $ 35.09 $ 27.25 $ 22.91
GAS PRICES ($ per thousand cubic feet)
U.S. $ 5.35 $ 4.81 $ 2.89
Middle East $ 0.97 $ -- $ --
Other Eastern Hemisphere $ 2.25 $ 2.04 $ 2.08
Total worldwide $ 4.56 $ 4.45 $ 2.81
EXPENSED EXPLORATION (c) $ 219 $ 139 $ 176
CAPITAL EXPENDITURES
Development $ 1,438 $ 1,097 $ 897
Exploration $ 102 $ 43 $ 55
Acquisitions and other (d, e) $ 109 $ 97 $ 86
- ----------------------------------------- -------- -------- --------
(a) For an explanation of core earnings, see "Significant Items Affecting
Earnings."
(b) These amounts exclude taxes owed by Occidental but paid by governmental
entities on its behalf.
(c) Includes dry hole write-offs and lease impairments of $159 million in 2004,
$80 million in 2003 and $96 million in 2002.
(d) Includes capitalized portion of injected CO2 of $54 million, $48 million
and $42 million in 2004, 2003 and 2002, respectively.
(e) Includes mineral acquisitions but excludes significant acquisitions
individually discussed in this report.
Core earnings in 2004 were $3.5 billion compared with $2.7 billion in 2003.
The increase in core earnings is primarily due to the effect of higher worldwide
crude oil and natural gas prices of approximately $1.2 billion and higher crude
oil volumes, partially offset by higher operating expenses, higher exploration
expense and increased DD&A rates.
Core earnings in 2003 were $2.7 billion compared with $1.7 billion in 2002.
The increase in core earnings primarily reflects the effect of higher crude oil
and natural gas prices and higher crude oil volumes, partially offset by lower
natural gas volumes, higher DD&A rates and increased costs.
Average consolidated production costs for 2004 were $6.95 per BOE compared
to the average 2003 production cost of $5.91 per BOE.
Occidental expects first quarter 2005 production to be slightly higher than
fourth quarter 2004 production, assuming oil prices remain in a $40 per barrel
range. High oil prices affect the volumes for Occidental's PSCs in Oman, Qatar
and Yemen and the production-sharing type contract at THUMS. In this current
product price range, a $1.00 change in the per barrel price of oil changes
production by approximately one thousand barrels per day. Also, see
"Production-Sharing Contracts" above.
CHEMICAL
In millions, except as indicated 2004 2003 2002
========================================== ======== ======== ========
SEGMENT SALES $ 3,675 $ 3,092 $ 2,613
SEGMENT EARNINGS $ 412 $ 220 $ 304
CORE EARNINGS (a) $ 412 $ 220 $ 140
KEY PRODUCT PRICE INDEXES (1987
through 1990 average price = 1.0)
Chlorine 2.05 1.72 1.01
Caustic soda 0.84 0.84 0.71
Ethylene dichloride 1.56 1.16 1.01
PVC commodity resins (b) 1.08 0.89 0.73
KEY PRODUCT VOLUMES
Chlorine (thousands of tons) (c) 2,892 2,733 2,807
Caustic soda (thousands of tons) 3,109 2,764 2,717
Ethylene dichloride (thousands of tons) 458 546 573
PVC commodity resins
(millions of pounds) 4,208 3,954 4,132
CAPITAL EXPENDITURES (d) $ 155 $ 344 $ 107
- ------------------------------------------ -------- -------- --------
(a) For an explanation of core earnings, see "Significant Items Affecting
Earnings."
(b) Product volumes produced at former PolyOne facilities, now part of
OxyVinyls, are excluded from the product price indexes.
(c) Product volumes include those manufactured and consumed internally.
(d) The 2003 amount includes $180 million for the purchase of a previously
leased facility in LaPorte, Texas and $44 million related to the exercise
of purchase options for certain leased railcars.
Core earnings in 2004 were $412 million compared with $220 million in 2003.
The increase in core earnings is primarily due to higher prices for chlorine,
EDC, PVC resins and VCM, partially offset by higher ethylene and energy costs.
18
Core earnings were $220 million in 2003, compared with $140 million in
2002. The increase in core earnings reflects the impact of higher prices for all
major products (PVC, EDC, chlorine and caustic), partially offset by higher
energy and ethylene costs.
Occidental expects first quarter 2005 chemical earnings to be slightly
higher than the fourth quarter 2004, assuming industry conditions remain at
year-end 2004 levels with current ethylene and energy prices and continued
strengthening of caustic soda margin realizations.
SIGNIFICANT ITEMS AFFECTING EARNINGS
Occidental's results of operations often include the effects of significant
transactions and events affecting earnings that vary widely and unpredictably in
nature, timing and amount. Therefore, management uses a measure called "core
earnings," which excludes those items. This non-GAAP measure is not meant to
disassociate those items from management's performance, but rather is meant to
provide useful information to investors interested in comparing Occidental's
earnings performance between periods. Reported earnings are considered
representative of management's performance over the long term. Core earnings is
not considered to be an alternative to operating income in accordance with
generally accepted accounting principles.
SIGNIFICANT ITEMS AFFECTING EARNINGS
Benefit (Charge) (in millions) 2004 2003 2002
============================================= ======== ======== ========
TOTAL REPORTED EARNINGS $ 2,568 $ 1,527 $ 989
============================================= ======== ======== ========
OIL AND GAS
Segment Earnings $ 3,544 $ 2,664 $ 1,707
No significant items affecting earnings -- -- --
-------- -------- --------
Segment Core Earnings $ 3,544 $ 2,664 $ 1,707
- --------------------------------------------- -------- -------- --------
CHEMICAL
Segment Earnings $ 412 $ 220 $ 304
Less:
Gain on sale of Equistar investment (a) -- -- 164
-------- -------- --------
Segment Core Earnings $ 412 $ 220 $ 140
- --------------------------------------------- -------- -------- --------
CORPORATE
Results $ (1,388) $ (1,357) $ (1,022)
Less:
Gain on Lyondell stock issuance 121 -- --
Trust preferred redemption charge (11) -- --
Settlement of tax issues 47 -- --
Debt repayment fee -- (61) --
Changes in accounting principles, net (a) -- (68) (95)
Discontinued operations, net (a) (38) (6) (97)
Tax effect of pre-tax adjustments (40) 21 --
- --------------------------------------------- -------- -------- --------
TOTAL CORE EARNINGS $ 2,489 $ 1,641 $ 1,017
============================================= ======== ======== ========
(a) These amounts are shown after-tax.
TAXES
Deferred tax liabilities, net of deferred tax assets of $822 million, were
$1.1 billion at December 31, 2004. The current portion of the deferred tax
assets of $115 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.
WORLDWIDE EFFECTIVE TAX RATE
The following table sets forth the calculation of the worldwide effective
tax rate for reported income from continuing operations and core earnings:
In millions 2004 2003 2002
======================================== ======== ======== ========
REPORTED INCOME
Oil and Gas (a) $ 4,311 $ 3,229 $ 2,181
Chemical (b) 414 223 (99)
Corporate and Other (411) (620) (468)
-------- -------- --------
Pre-tax income 4,314 2,832 1,614
Income tax expense
Federal and State (b) 946 673 (39)
Foreign (included in segments) (a) 762 558 472
-------- -------- --------
Total 1,708 1,231 433
-------- -------- --------
Income from continuing operations $ 2,606 $ 1,601 $ 1,181
-------- -------- --------
Worldwide effective tax rate 40% 43% 27%
-------- -------- --------
CORE INCOME
Oil and Gas (a) $ 4,311 $ 3,228 $ 2,181
Chemical (b) 414 224 143
Corporate and Other (521) (559) (468)
-------- -------- --------
Pre-tax income 4,204 2,893 1,856
Income tax expense
Federal and State (b) 952 694 367
Foreign (included in segments) (a) 763 558 472
-------- -------- --------
Total 1,715 1,252 839
-------- -------- --------
Core income $ 2,489 $ 1,641 $ 1,017
-------- -------- --------
Worldwide effective tax rate 41% 43% 45%
- ---------------------------------------- -------- -------- --------
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf. Oil and gas pre-tax income includes
the following revenue amounts for the years ended December 31, 2004, 2003
and 2002, of $525 million, $397 million and $335 million, respectively.
(b) In 2002, the $406 million tax benefit related to the gain on the sale of
the Equistar investment has been reclassified to Federal and State income
taxes.
Occidental's 2004 worldwide effective tax rate was 40 percent for reported
income and 41 percent for core income. The lower U.S. income tax rate in 2004,
compared to 2003, resulted from the crediting of foreign income taxes.
Previously, Occidental deducted foreign income taxes in determining U.S. taxable
income. An annual tax election permits a taxpayer to claim either a credit or a
deduction for foreign income taxes, whichever is more beneficial. Occidental
expects to continue its election to credit foreign income taxes in future years.
The increase in the federal and state tax rate in 2003, compared to 2002, is due
to a $406 million tax benefit in 2002 related to the gain on sale of the
Equistar investment.
19
CONSOLIDATED RESULTS OF OPERATIONS
SELECTED REVENUE ITEMS
In millions 2004 2003 2002
======================================== ======== ======== ========
Net sales $ 11,368 $ 9,240 $ 7,247
Interest, dividends and other income $ 144 $ 89 $ 143
- ---------------------------------------- -------- -------- --------
The increase in sales in 2004, compared to 2003, reflects higher crude oil,
natural gas and chemical prices, higher crude oil production and higher chemical
volumes, partially offset by lower domestic natural gas production volumes.
The increase in sales in 2003, compared to 2002, reflects higher crude oil,
natural gas and chemical prices and higher crude oil production volumes,
partially offset by lower natural gas production volumes.
Interest, dividends and other income in 2004 includes a $27 million
derivative mark-to-market adjustment for stock warrants of an equity investee
and interest income of $21 million from loans made to equity investees.
Interest, dividends and other income in 2002 includes interest income on
the notes receivable from the Altura partners of $21 million. Occidental
exercised an option in May 2002 to redeem the sellers' remaining partnership
interests in exchange for the notes receivable.
SELECTED EXPENSE ITEMS
In millions 2004 2003 2002
======================================== ======== ======== ========
Cost of sales (a) $ 4,509 $ 3,897 $ 3,299
Selling, general and administrative
and other operating expenses $ 1,008 $ 852 $ 646
Depreciation, depletion and
amortization $ 1,303 $ 1,175 $ 1,009
Exploration expense $ 219 $ 139 $ 176
Interest and debt expense, net $ 260 $ 332 $ 295
- ---------------------------------------- -------- -------- --------
(a) Excludes depreciation, depletion and amortization of $1,263 million in
2004, $1,137 million in 2003 and $978 million in 2002.
Cost of sales increased in 2004, compared to 2003, due primarily to higher
oil and gas production volumes and other operating costs, higher energy and
feedstock costs and higher crude oil volumes.
Cost of sales increased in 2003, compared to 2002, due mainly to oil volume
increases and higher operating and production costs in the oil and gas segment
and higher energy and feedstock costs in the chemical segment. The 2003 amount
also includes $156 million for the costs of operating a cogeneration facility.
Selling, general and administrative and other operating expenses increased
in 2004, compared to 2003, mainly due to higher general and administrative costs
for corporate infrastructure and general support areas and higher oil and gas
costs, including higher production-related taxes and other operating costs.
Selling, general and administrative and other operating expenses increased
in 2003 compared with 2002. The increases were in several areas. General and
administrative costs increased in both oil and gas and corporate infrastructure
and general support areas. In addition, nonoperating costs were higher in
international operations, mainly Latin America. Higher oil and gas production
taxes reflected the overall increase in worldwide production. Also, additional
expense resulted from adoption of the asset retirement obligation accounting
standard in 2003.
The increase in depreciation, depletion and amortization (DD&A) in 2004,
compared to 2003, and 2003, compared to 2002, was due to the increase in oil and
gas production from the prior year and a higher DD&A rate.
The increase in exploration expense in 2004, compared to 2003, was due
mostly to higher dry hole write-offs and impairment costs in California and the
Other Eastern Hemisphere region.
The decrease in exploration expense in 2003, compared to 2002, was due
mostly to lower dry hole write-offs and impairment costs and lower seismic,
geological and geophysical costs in 2003.
Interest and debt expense in 2004 and 2003 included pre-tax debt repayment
charges of $17 million and $61 million, respectively. Excluding the effects of
these debt repayment charges, interest and debt expense decreased in 2004,
compared to 2003, and in 2003, compared to 2002, due primarily to lower average
debt levels. In addition, since Occidental adopted Statement of Financial
Accounting Standards (SFAS) No. 150 in July 2003, the 2003 interest expense
amount includes six months of interest that had been classified as distributions
on trust preferred securities prior to the adoption.
OTHER ITEMS
In millions 2004 2003 2002
======================================== ======== ======== ========
Provision for income taxes $ 1,708 $ 1,231 $ 433
(Income) loss from equity investments $ (113) $ 9 $ 261
Gain on Lyondell stock issuance $ (121) $ -- $ --
- ---------------------------------------- -------- -------- --------
The increase in the provision for income taxes in 2004, compared to 2003,
was primarily due to an increase in income before taxes, partially offset by the
use of a lower tax rate in 2004 resulting from the crediting of foreign income
taxes. See the "Taxes" section above for further information.
The increase in the provision for income taxes in 2003, compared to 2002,
reflected an increase in income before taxes. In addition, the 2002 provision
for income taxes includes an income tax benefit of $406 million for the sale of
the Equistar investment.
The increase in the income from equity investments in 2004, compared to
results reported in 2003, was mostly attributable to improved results from
Lyondell and higher income from a Russian oil and gas affiliate.
The 2002 loss from equity investments includes a pre-tax loss of $242
million from the sale of the Equistar investment in August 2002.
The gain on Lyondell stock issuance in 2004 represents Occidental's share
of the increase in Lyondell's net equity resulting from Lyondell's issuance of
stock to purchase Millennium.
21
CONSOLIDATED ANALYSIS OF FINANCIAL POSITION
The changes in the following components of Occidental's balance sheet are
discussed below:
SELECTED BALANCE SHEET COMPONENTS
In millions 2004 2003
======================================================= ======== ========
CURRENT ASSETS
Cash and cash equivalents $ 1,449 $ 683
Trade receivables, net 1,882 795
Receivables from joint ventures, partnerships
and other 353 350
Inventories 545 489
Prepaid expenses and other 166 127
Assets held for sale 36 58
-------- --------
TOTAL CURRENT ASSETS $ 4,431 $ 2,502
-------- --------
Investments in unconsolidated subsidiaries $ 1,727 $ 1,155
Property, plant and equipment, net $ 14,633 $ 13,984
Other assets $ 361 $ 263
CURRENT LIABILITIES
Current maturities of long-term debt and capital
lease liabilities $ 459 $ 23
Accounts payable 1,557 906
Accrued liabilities 1,013 874
Dividends payable 110 101
Domestic and foreign income taxes 263 163
Trust preferred securities -- 453
Liabilities held for sale 21 6
-------- --------
TOTAL CURRENT LIABILITIES $ 3,423 $ 2,526
-------- --------
Trust preferred securities - current $ -- $ 453
Long-term debt, net $ 3,345 $ 3,993
Deferred credits and other liabilities $ 3,746 $ 3,408
Stockholders' equity $ 10,550 $ 7,929
- ------------------------------------------------------- -------- --------
ASSETS
The higher balance in cash and cash equivalents at December 31, 2004,
compared to December 31, 2003, reflects the buildup of cash, primarily as a
result of higher oil and gas prices, which is expected to be used for operating
needs, capital expenditures and potential acquisitions. The higher balance in
trade receivables at December 31, 2004, compared to December 31, 2003, reflects
higher product prices and crude oil sales volumes during the fourth quarter 2004
versus 2003. In addition, in June 2004, Occidental discontinued the sale of
interests in its outstanding receivables balance which had the effect of
increasing receivables by $360 million compared to December 31, 2003. The
increase in inventories at December 31, 2004, compared to December 31, 2003, is
primarily due to higher oil and gas marketing and trading inventory due to
higher prices and volumes during the fourth quarter 2004 versus 2003.
The higher balance in the investments in unconsolidated entities at
December 31, 2004, compared to December 31, 2003, reflects a note receivable
issued to Elk Hills Power, a gain from Lyondell's stock issuance and
mark-to-market increases in the available-for-sale Premcor investment. The
increase in the net balance in property, plant and equipment reflects capital
expenditures and acquisitions, partially offset by certain asset retirements and
DD&A expense. The higher balance in other assets at December 31, 2004, compared
to 2003, was mainly due to higher long-term prepaid pension costs and the oil
inventory line fill from the Permian Basin pipeline and gathering system
acquisition in early 2004.
LIABILITIES AND STOCKHOLDERS' EQUITY
The increase in current maturities of long-term debt and capital lease
liabilities at December 31, 2004, compared to December 31, 2003, reflects the
expected March 2005 redemption of the 7.65-percent senior notes, which were
included in long-term debt in 2003. The higher balance in accounts payable at
December 31, 2004, compared to December 31, 2003, mainly reflects higher prices
and volumes for purchased oil and gas in Occidental's marketing and trading
operations. The increase in accrued liabilities at December 31, 2004, compared
to December 31, 2003, is primarily due to higher mark-to-market adjustments on
derivative financial instruments, and higher accrued payroll amounts. The
increase in domestic and foreign income taxes-current at December 31, 2004,
compared to December 31, 2003, reflects additional taxes payable due to higher
income before taxes. The decrease in trust preferred securities-current at
December 31, 2004, compared to December 31, 2003, reflects the redemption of all
the trust preferred securities in early 2004.
The decrease in long-term debt at December 31, 2004, compared to December
31, 2003, reflects the redemption or repurchase of various debt issues during
the year. It also reflects the reclassification of the 7.65-percent senior notes
that will be redeemed in March 2005, which were classified as long-term debt in
2003 and are now classified as a current liability in 2004. Deferred credits and
other liabilities includes deferred income taxes, deferred compensation, other
post-retirement benefits, environmental remediation reserves, asset retirement
obligations and other deferred items. The increase in this account at December
31, 2004, compared to December 31, 2003, is due mainly to higher deferred
federal income tax, an increase in the asset retirement obligation, an increase
in deferred compensation and a long-term payable related to the Colombia
contract extension signed in 2004.
The increase in stockholders' equity at December 31, 2004, compared to
December 31, 2003, reflects higher net income and the issuance of new stock
related to options exercised, partially offset by dividends on common stock.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITY
During 2004, Occidental strengthened its liquidity position, generating
approximately $3.9 billion in cash from operations. At December 31, 2004,
Occidental had approximately $1.4 billion in cash on hand, an increase of $766
million from 2003. Although its income and cash flows are largely dependent on
oil and gas prices and production, Occidental believes that cash on hand and
cash generated from operations will be sufficient to fund its operating needs,
capital expenditure requirements, dividend payments and potential acquisitions.
If needed, Occidental could access its existing credit facilities.
21
Available but unused lines of committed bank credit totaled approximately
$1.5 billion at December 31, 2004. Occidental's $1.5 billion bank credit matures
on June 18, 2009. None of Occidental's committed bank credits contain material
adverse change (MAC) clauses or debt rating triggers that could restrict
Occidental's ability to borrow under these lines. Occidental's credit facilities
and debt agreements do not contain ratings triggers that could terminate bank
commitments or accelerate debt in the event of a ratings downgrade.
At December 31, 2004, under the most restrictive covenants of certain
financing agreements, Occidental's capacity for additional unsecured borrowing
was approximately $22.7 billion, and the capacity for the payment of cash
dividends and other distributions on, and for acquisitions of, Occidental's
capital stock was approximately $8.4 billion, assuming that such dividends,
distributions and acquisitions were made without incurring additional borrowing.
In January 2004, Occidental redeemed all of its outstanding 8.16 percent
Trust Preferred Redeemable Securities (trust preferred securities) at par plus
accrued interest, resulting in a decrease in current liabilities of $453
million. In the third quarter of 2004, Occidental redeemed all of its
6.5-percent senior notes, which reduced long-term debt by approximately $157
million.
In July 2004, Dolphin Energy, the operator of the Dolphin Project, entered
into an agreement with banks to provide a $1.36 billion bridge loan for the
Dolphin Project. The loan has a term of five years and is a revolving credit
facility for the first two years. Occidental guaranteed 24.5 percent of the
obligations of Dolphin Energy under the bank agreement. As part of the
financing, a subsidiary of Occidental that is an upstream participant in the
Dolphin Project entered into an on-loan agreement with Dolphin Energy to borrow
up to $245 million from the proceeds of loans under the facility agreement for
its share of upstream costs. At December 31, 2004, approximately $63 million had
been borrowed under this agreement.
In 2003, Occidental recorded a pre-tax interest charge of $61 million to
repay a $450 million 6.4-percent senior notes issue that had ten years of
remaining life, but was subject to remarketing on April 1, 2003. Occidental
refinanced $300 million of this amount and paid the remaining $150 million out
of existing cash.
In 2002, Occidental filed a shelf registration statement for up to $1
billion of various securities, including senior debt securities. In November
2002, Occidental issued $175 million of 4-percent Medium-Term Senior Notes,
Series C, and $75 million of 4.101-percent Medium-Term Senior Notes, Series C,
due 2007 for general corporate purposes. In March 2003, Occidental issued $300
million of 4.25-percent Medium-Term Senior Notes and used the proceeds to
refinance a portion of the $450 million of senior notes discussed above.
Occidental has $450 million of capacity remaining under the shelf registration.
On February 24, 2005, Occidental gave notice that it will redeem, out of
existing cash on hand, all of its outstanding $450,000,000 7.65-percent senior
notes due 2006 on March 28, 2005.
CASH FLOW ANALYSIS
In millions 2004 2003 2002
=================================== ======== ======== ========
Net cash provided by operating
activities $ 3,878 $ 3,074 $ 2,100
- ----------------------------------- -------- -------- --------
The significant increase in operating cash flow in 2004, compared to 2003,
resulted from several factors. The most important drivers were the significantly
higher oil and natural gas prices and, to a much lesser extent, chemical prices.
Although the changes in realized prices varied among the regions in which
Occidental operates, in 2004, Occidental's realized oil prices were higher
overall by 29 percent. Occidental's realized natural gas price increased over 11
percent in the U.S., where approximately 80 percent of Occidental's natural gas
was produced in 2004. Oil and gas worldwide production, on a BOE basis,
increased for 2004 overall by over 3 percent on a daily basis, as compared with
2003, which also contributed to increased cash flow. Crude oil production was
higher in Latin America, while natural gas production was higher in the Middle
East and lower in the U.S. for 2004.
Increases in sales prices realized for Occidental's major chemical product
lines ranged from zero to 34 percent, compared to 2003. Chemical prices
increased in 2004 at a higher rate than the energy-driven increase in feedstock
and power costs, thereby improving profits and cash flow. The overall impact of
the chemical price changes on cash flow was much less than for oil and gas price
changes, not only because the chemical segment earnings and cash flow are
significantly smaller than those for the oil and gas segment, but also because
of increases in energy price-driven feedstock and electric power costs, which
are major elements of manufacturing cost for the chemical segment's products.
Sales volumes for chemical products generally were higher in 2004, but this did
not have a significant effect on Occidental's earnings and cash flow.
Increases in the costs of producing oil and gas, such as purchased goods
and services, particularly materials and oil field services, partially offset
oil and gas sales price increases, but such cost increases had a much lower
effect on cash flow than the realized price increases. Other cost elements, such
as labor costs and overheads, are not significant drivers of cash flow because
they are mainly fixed within a narrow range over the short to intermediate term.
The significant increase in operating cash flow in 2003, compared to 2002,
resulted from the significantly higher oil and gas prices and, to a much lesser
extent, chemical prices. In 2003, Occidental's realized oil prices were higher
overall by 19 percent and realized natural gas prices overall were up 58
percent. Oil and gas worldwide production, on a BOE basis, increased for 2003
overall by approximately 6 percent on a daily basis, as compared with 2002,
which also contributed to increased cash flow. Crude oil production was higher
overall in the U.S. and Latin America, while natural gas production was lower in
the U.S. for 2003.
22
Sales prices realized for Occidental's major chemical product lines ranged
from 15 percent to 70 percent higher in 2003, compared to 2002. Chemical prices
in 2003 also improved at a higher rate than feedstock and power costs increases,
thus improving profits and cash flow. The overall effect of chemical price
changes on cash flow was much less than for oil and gas price changes. Sales
volumes for chemical products generally were lower in 2003, but this did not
have a significant effect on Occidental's earnings and cash flow.
Increases in the costs of production partially offset sales price
increases, but such cost increases had a much lower effect on cash flow than the
realized price increases.
Non-cash charges in 2004 include deferred compensation, stock incentive
plan amortization, environmental remediation accruals and a chemical asset
writedown. Non-cash charges in 2003 include deferred compensation, stock
incentive plan amortization and environmental remediation accruals. Non-cash
charges in 2002 include environmental remediation accruals and the asset
writedown for two chemical facilities. 2002 also includes charges for employee
benefit plans and other items.
In millions 2004 2003 2002
======================================== ======== ======== ========
Net cash used by investing activities $ (2,288) $ (2,021) $ (1,696)
- ---------------------------------------- -------- -------- --------
The 2004 amount includes the purchase of a pipeline and gathering system in
the Permian Basin and a $204 million advance to the Elk Hills Power LLC (EHP)
equity investment, which EHP used to repay a portion of its debt.
The 2003 amount includes several Permian Basin acquisitions totaling $317
million.
The 2002 amount includes approximately $250 million for the purchase of
24.5 percent of the stock of Dolphin Energy and $60 million for the purchase of
a 24.5 percent undivided interest in the DPSA related to the Dolphin Project,
plus $39 million for historical costs.
Also, see the "Capital Expenditures" section below.
In millions 2004 2003 2002
======================================== ======== ======== ========
Net cash used by financing activities $ (824) $ (516) $ (456)
- ---------------------------------------- -------- -------- --------
The 2004 amount includes $466 million paid to redeem the trust preferred
securities in January 2004 and $159 million paid to redeem Occidental's
6.5-percent senior notes.
The 2003 amount includes net debt repayments of $334 million.
The 2002 amount reflects the net $179 million buyout of the natural gas
delivery commitment and $72 million of net proceeds from the issuance of a
subsidiary's preferred stock.
Occidental paid common stock dividends of $424 million in 2004, $392
million in 2003 and $375 million in 2002.
CAPITAL EXPENDITURES
In millions 2004 2003 2002
======================================== ======== ======== ========
Oil and Gas $ 1,649 $ 1,237 $ 1,038
Chemical (a) 155 344 107
Corporate and Other 39 19 89
-------- -------- --------
TOTAL $ 1,843 $ 1,600 $ 1,234
======================================== ======== ======== ========
(a) The 2003 amount includes $180 million for the purchase of a previously
leased facility in LaPorte, Texas and $44 million related to the exercise
of purchase options for certain leased railcars.
Occidental's capital spending estimate for 2005 is approximately $1.9
billion. A majority of the capital spending will be allocated to oil and gas,
with the main focus on the Dolphin Project gas exploration and development
activity, Qatar, Elk Hills and the Permian Basin. In addition, Occidental
expects to make a further equity investment of about $200 million in Dolphin
Energy.
Commitments at December 31, 2004, for major capital expenditures during
2005 and thereafter were approximately $740 million. Occidental will fund these
commitments and capital expenditures with cash from operations and, as needed,
with proceeds from existing credit facilities.
OFF-BALANCE-SHEET ARRANGEMENTS
In the course of its business activities, Occidental pursues a number of
projects and transactions to meet its core business objectives. The accounting
and financial statement treatment of these transactions is a result of the
varying methods of funding employed. Occidental also makes commitments on behalf
of unconsolidated entities. These transactions, or groups of transactions, are
recorded in compliance with generally accepted accounting principles and, unless
otherwise noted, are not reflected on Occidental's balance sheets. The following
is a description of the business purpose and nature of these transactions.
DOLPHIN PROJECT
In July 2004, Dolphin Energy entered into an agreement with banks to
provide a $1.36 billion bridge loan for the Dolphin Project. Occidental
guaranteed 24.5 percent of the obligations of Dolphin Energy under this bank
agreement. See "Oil and Gas Segment -- Business Review -- Middle East -- Dolphin
Project" and "Liquidity and Capital Resources -- Financing Activity" for further
information.
ECUADOR
In Ecuador, Occidental has a 14-percent interest in the OCP oil export
pipeline. In the second half of 2003, the increased production from the
Eden-Yuturi oil field in the southeastern corner of Block 15 coincided with the
completion of the pipeline. As of December 31, 2004, Occidental contributed and
advanced a total of $78 million to the project. Occidental reports this
investment in its consolidated statements using the equity method of accounting.
23
The project was funded in part by senior project debt. The senior project
debt is to be repaid with the proceeds of ship-or-pay tariffs of certain
upstream producers in Ecuador, including Occidental. Under their ship-or-pay
commitments, Occidental and the other upstream producers have each assumed their
respective share of project-specific risks, including operating risk, political
risk and force-majeure risk. Occidental would be required to make an advance
tariff payment in the event of prolonged force majeure, upstream expropriation
events, bankruptcy of the pipeline company or its parent company, abandonment of
the project, termination of an investment guarantee agreement with Ecuador, or
certain defaults by Occidental. This advance tariff would be used by the
pipeline company to service or prepay project debt. At December 31, 2004,
Occidental's obligation relating to the pipeline company's senior project debt
totaled $104 million, and Occidental's obligations relating to performance bonds
totaled $14 million. Occidental's overall obligations will decrease with the
reduction of the pipeline company's senior project debt.
RECEIVABLES SALE PROGRAM
Occidental has an agreement in place to sell, under a revolving sale
program, an undivided interest in a designated pool of trade receivables. This
program is used by Occidental as a low-cost source of working capital funding.
The balance of receivables sold at December 31, 2004 and 2003 was zero and $360
million, respectively. The 2003 amount is not included in the debt and related
trade receivables accounts, respectively, on Occidental's consolidated balance
sheet. Receivables must meet certain criteria to qualify for the program.
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. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. The fair value
of any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2004, 2003 and
2002.
Although Occidental has not sold any receivables under this program since
June 2004, the program has not been terminated. However, the program can
terminate upon the occurrence of certain events, which generally are under
Occidental's control or relate to bankruptcy.
LEASES
Occidental has entered into various operating-lease agreements, mainly for
railcars, power plants, manufacturing facilities and office space. The leased
assets are used in Occidental's operations where leasing offers advantages of
greater operating flexibility and usually costs less than alternative methods of
funding that were available at the time financing decisions were made. Lease
payments are expensed mainly as cost of sales. See contractual obligation table
below.
GUARANTEES
Occidental has entered into various guarantees including performance bonds,
letters of credit, indemnities, commitments and other forms of guarantees
provided by Occidental to third parties, mainly to provide assurance that OPC
and/or its subsidiaries and affiliates will meet their various obligations
(guarantees).
At December 31, 2004, the notional amount of the guarantees was
approximately $500 million. Of this amount, approximately $400 million relates
to Occidental's guarantee of equity investees' debt and other commitments. The
debt guarantees and other commitments primarily relate to the Dolphin Energy
equity investment and the investment in the Ecuador OCP pipeline, which are
discussed above. The remaining $100 million relates to various indemnities and
guarantees provided to third parties.
CONTRACTUAL OBLIGATIONS
The table below summarizes and cross-references certain contractual
obligations that are reflected in the Consolidated Balance Sheets and/or
disclosed in the accompanying Notes.
Payments Due by Year
-------------------------------------------------
2006 2008 2010
Contractual to to and
Obligations (in millions) Total 2005 2007 2009 thereafter
========================= ========== ========== ========== ========== ==========
CONSOLIDATED
BALANCE SHEET
Long-term debt
(Note 6) (a) $ 3,766 $ 450 $ 581 $ 744 $ 1,991
Capital leases
(Note 7) 34 1 2 2 29
Other long-term
liabilities (b) 775 81 227 126 341
OTHER OBLIGATIONS
Operating leases
(Note 7) (c) 1,299 118 189 150 842
Purchase
obligations (d, e) 4,585 3,005 449 273 858
---------- ---------- ---------- ---------- ----------
TOTAL $ 10,459 $ 3,655 $ 1,448 $ 1,295 $ 4,061
========================= ========== ========== ========== ========== ==========
(a) Excludes fair value hedge mark-to-market adjustments and unamortized debt
discounts.
(b) Includes obligations under postretirement benefit and deferred compensation
plans.
(c) Amounts have not been reduced for sublease rental income.
(d) Includes long-term purchase contracts and purchase orders and contracts for
goods and services used in manufacturing and producing operations in the
normal course of business. Some of these arrangements involve take-or-pay
commitments but they do not represent debt obligations. Due to their
long-term nature, purchase contracts with terms greater than 5 years are
discounted using a 6-percent discount rate.
(e) Amounts do not include purchase obligations related to oil and gas
marketing and trading activities where an offsetting sales position exists.
LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
OPC and certain of its subsidiaries have been named in a substantial number
of lawsuits, claims and other legal proceedings. These actions seek, among other
things, compensation for alleged personal injury, breach of contract, property
damage, punitive damages, civil
24
penalties or other losses; or injunctive or declaratory relief. OPC and certain
of its subsidiaries also have been named in proceedings under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and similar
federal, state, local and foreign environmental laws. These environmental
proceedings seek funding or performance of remediation and, in some cases,
compensation for alleged property damage, punitive damages and civil penalties;
however, Occidental is usually one of many companies in these proceedings and
has to date been successful in sharing response costs with other financially
sound companies. With respect to all such lawsuits, claims and proceedings,
including environmental proceedings, Occidental accrues reserves when it is
probable a liability has been incurred and the amount of loss can be reasonably
estimated.
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax
jurisdictions. Taxable years prior to 1997 are closed for U.S. federal income
tax purposes. Taxable years 1997 through 2003 are in various stages of audit by
the Internal Revenue Service. Disputes arise during the course of such audits as
to facts and matters of law. Occidental has been in continuing tax audit
settlement discussions with the Internal Revenue Service on issues related to
foreign tax credits and various domestic income issues for the 1997 to 2000
audit years. Occidental believes that it is reasonably possible that substantive
issues for taxable years 1997 to 2000 could be favorably resolved during 2005
and that such resolutions, if they occur, could have a positive and material
effect on its results of operations and its financial condition, however,
Occidental believes such resolutions will not have a significant cash effect.
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. See Note 9 of the audited financial
statements for further discussion.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Many of these
commitments, although not fixed or determinable, involve capital expenditures
and are part of the $1.9 billion capital expenditures estimated for 2005.
Occidental has indemnified various parties against specified liabilities
that those parties might incur in the future in connection with purchases and
other transactions that they have entered into with Occidental. These
indemnities usually are contingent upon the other party incurring liabilities
that reach specified thresholds. As of December 31, 2004, Occidental is not
aware of circumstances that would lead to future indemnity claims against it for
material amounts in connection with these transactions.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If these
matters were to be ultimately resolved unfavorably at amounts substantially
exceeding Occidental's reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect upon
Occidental's consolidated financial position or results of operations. However,
after taking into account reserves, management does not expect the ultimate
resolution of any of these matters to have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining environmental quality. Foreign operations also are subject to
environmental protection laws. Costs associated with environmental compliance
have increased over time and are expected to rise in the future. Environmental
expenditures related to current operations are factored into the overall
business planning process and are considered an integral part of production in
manufacturing quality products responsive to market demand.
ENVIRONMENTAL REMEDIATION
The laws that require or address environmental remediation may apply
retroactively to past waste disposal practices and releases. In many cases, the
laws apply regardless of fault, legality of the original activities or current
ownership or control of sites. OPC or certain of its subsidiaries are currently
participating in environmental assessments and cleanups under these laws at
federal Superfund sites, comparable state sites and other domestic and foreign
remediation sites, including Occidental facilities and previously owned sites.
Also, OPC 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 in proceedings
under CERCLA and similar federal, state and local environmental laws. These
proceedings seek funding or performance of remediation and, in some cases,
compensation for alleged property damage, punitive damages and civil penalties.
Occidental manages its environmental remediation efforts through a wholly
owned subsidiary, Glenn Springs Holdings, Inc., which reports its results
directly to Occidental's corporate management.
The following table presents Occidental's environmental remediation
reserves at December 31, 2004, 2003 and 2002 grouped by three categories of
environmental remediation sites:
$ amounts in millions 2004 2003 2002
====================== =============== =============== ===============
# OF RESERVE # of Reserve # of Reserve
SITES BALANCE Sites Balance Sites Balance
----- ------- ----- ------- ----- -------
CERCLA &
equivalent sites 125 $ 239 131 $ 240 124 $ 284
Active facilities 16 75 13 79 14 46
Closed or sold
facilities 39 61 39 53 44 63
----- ------- ----- ------- ----- -------
TOTAL 180 $ 375 183 $ 372 182 $ 393
====================== ===== ======= ===== ======= ===== =======
25
The following table shows environmental reserve activity for the past three
years:
In millions 2004 2003 2002
============================== ======== ======== ========
Balance - Beginning of Year $ 372 $ 393 $ 454
Increases to provision
including interest 60 64 25
accretion
Changes from acquisitions 6 -- --
Payments (63) (83) (84)
Other -- (2) (2)
-------- -------- --------
Balance - End of Year $ 375 $ 372 $ 393
============================== ======== ======== ========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years. Occidental expects that it may continue to incur additional
liabilities beyond those recorded for environmental remediation at these and
other sites. The range of reasonably possible loss for existing environmental
remediation matters could be up to $375 million beyond the amount accrued.
For management's opinion, refer to the "Lawsuits, Claims, Commitments,
Contingencies and Related Matters" section above.
CERCLA AND EQUIVALENT SITES
At December 31, 2004, OPC or certain of its subsidiaries have been named in
125 CERCLA or state equivalent proceedings, as shown below.
Reserve
Description ($ amounts in millions) # of Sites Balance
=================================== ========== ==========
Minimal/No exposure (a) 101 $ 6
Reserves between $1-10 MM 17 64
Reserves over $10 MM 7 169
---------- ----------
TOTAL 125 $ 239
=================================== ========== ==========
(a) Includes 27 sites for which Maxus Energy Corporation has retained the
liability and indemnified Occidental, 7 sites where Occidental has denied
liability without challenge, 54 sites where Occidental's reserves are less
than $50,000 each, and 13 sites where reserves are between $50,000 and $1
million each.
The seven sites with individual reserves over $10 million in 2004 are a
former copper mining and smelting operation in Tennessee, two closed landfills
in Western New York, groundwater treatment facilities at three currently closed
or formerly owned chemical plants (Montague, Michigan, Western New York and
Tacoma, Washington) and replacement of a municipal drinking water treatment
plant in Western New York.
ACTIVE FACILITIES
Certain subsidiaries of OPC are currently addressing releases of substances
from past operations at 16 active facilities. Four facilities -- certain oil and
gas properties in the southwestern United States, a chemical plant in Louisiana,
a chemical plant in Texas, and a phosphorous recovery operation in Tennessee --
account for 75 percent of the reserves associated with these facilities.
CLOSED OR SOLD FACILITIES
There are 39 sites formerly owned or operated by certain subsidiaries of
OPC that have ongoing environmental remediation requirements in which Occidental
or its subsidiaries are involved. Three sites account for 62 percent of the
reserves associated with this group. The three sites are: an active refinery in
Louisiana where Occidental indemnifies the current owner and operator for
certain remedial actions, a water treatment facility at a former coal mine in
Pennsylvania, and a former OxyChem chemical plant in Ohio operated by new
ownership.
ENVIRONMENTAL COSTS
Occidental's costs, some of which may include estimates, relating to
compliance with environmental laws and regulations, are shown below for each
segment:
In millions 2004 2003 2002
============================== ======== ======== ========
OPERATING EXPENSES
Oil and Gas $ 54 $ 40 $ 32
Chemical 59 55 54
-------- -------- --------
$ 113 $ 95 $ 86
======== ======== ========
CAPITAL EXPENDITURES
Oil and Gas $ 48 $ 98 $ 70
Chemical 12 15 16
-------- -------- --------
$ 60 $ 113 $ 86
======== ======== ========
REMEDIATION EXPENSES
Corporate $ 59 $ 63 $ 23
============================== ======== ======== ========
Operating expenses are incurred on a continual basis. Capital expenditures
relate to longer-lived improvements in currently operating facilities.
Remediation expenses relate to existing conditions caused by past operations and
do not contribute to current or future revenue generation. Although total costs
may vary in any one year, over the long term, segment operating and capital
expenditures for environmental compliance generally are expected to increase.
Occidental presently estimates that capital expenditures for environmental
compliance will be approximately $65 million for 2005 and $80 million for 2006.
FOREIGN INVESTMENTS
Portions of Occidental's assets outside North America are exposed to
political and economic risks. Occidental conducts its financial affairs so as to
mitigate its exposure against those risks. At December 31, 2004, the carrying
value of Occidental's assets in countries outside North America aggregated
approximately $4.1 billion, or approximately 19 percent of Occidental's total
assets at that date. Of such assets, approximately $2.9 billion are located in
the Middle East, approximately $972 million are located in Latin America, and
substantially all of the remainder are located in Pakistan. For the year ended
December 31, 2004, net sales outside North America totaled $3.1 billion, or
approximately 27 percent of total net sales.
26
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The process of preparing financial statements in accordance with GAAP
requires the management of Occidental to make estimates and judgments regarding
certain items and transactions. It is possible that materially different amounts
could be recorded if these estimates and judgments change or if the actual
results differ from these estimates and judgments. Occidental considers the
following to be its most critical accounting policies and estimates that involve
the judgment of Occidental's management. There has been no material change to
these policies over the past three years. The selection and development of these
critical accounting policies and estimates have been discussed with the Audit
Committee of the Board of Directors.
OIL AND GAS PROPERTIES
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized. The
costs of exploratory wells are initially capitalized pending a determination of
whether proved reserves have been found. At the completion of drilling
activities, the costs of exploratory wells remain capitalized if a determination
is made that proved reserves have been found. If no proved reserves have been
found, the costs of each of the related exploratory wells are charged to
expense. In some cases, a determination of proved reserves cannot be made at the
completion of drilling, requiring additional testing and evaluation of the
wells. Occidental's practice is to expense the costs of such exploratory wells
if a determination of proved reserves has not been made within a twelve-month
period after drilling is complete. Occidental has no oil and gas reserves for
which the determination of commercial viability is subject to the completion of
major additional capital expenditures. Annual lease rentals, exploration costs,
geological, geophysical and seismic costs are expensed as incurred.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids (NGLs) that geological and engineering data
demonstrate with reasonable certainty can be recovered in future years from
known reservoirs under existing economic and operating conditions considering
future production and development costs. There are several factors that could
change Occidental's recorded oil and gas reserves. Occidental receives a share
of production from PSCs to recover its costs and an additional share for profit.
Occidental's share of production from these contracts decreases when oil prices
rise and increases when oil prices decline. Overall, Occidental's net economic
benefit from these contracts is greater at higher oil prices. In other
contractual arrangements, sustained lower product prices may lead to a situation
where production of proved reserves becomes uneconomical. Estimation of future
production and development costs is also subject to change partially due to
factors beyond Occidental's control, such as energy costs and inflation or
deflation of oil field service costs. These factors, in turn, could lead to a
reduction in the quantity of recorded proved reserves. PSCs also affect
reserves. As prices increase, Occidental's share of proved recorded reserves
decreases while a decrease in price causes recorded proved reserves to increase.
See the "Oil and Gas Segment -- Proved Reserves Additions" section above for
further information. An additional factor that could result in a change of
proved reserves is the reservoir decline rates being different from those
assumed when the reserves were initially recorded. Overall, Occidental's
revisions to proved reserves were positive for 2004, 2003 and 2002 and amounted
to less than 2 percent of the total reserves for each year. Additionally,
Occidental is required to perform impairment tests pursuant to SFAS No. 144
generally when prices decline and/or reserve estimates change significantly.
There have been no impairments of reserves over the past three years.
Depreciation and depletion of oil and gas producing properties is
determined by the unit-of-production method and could change with revisions to
estimated proved recoverable reserves. The change in the depreciation and
depletion rate over the past three years due to revisions of previous reserve
estimates has been immaterial.
If Occidental's consolidated oil and gas reserves were to change based on
the factors mentioned above, the most significant impact would be on the
depreciation and depletion rate. For example, a 5-percent increase in the amount
of consolidated oil and gas reserves would change the rate from $5.25 per barrel
to $4.99 per barrel, which would increase pre-tax income by $52 million
annually. A 5-percent decrease in the oil and gas reserves would change the rate
from $5.25 per barrel to $5.52 per barrel and would result in a decrease in
pre-tax income of $52 million annually.
A portion of the carrying value of Occidental's oil and gas properties is
attributable to unproved properties. At December 31, 2004, the costs
attributable to unproved properties were approximately $500 million. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
costs attributable to the properties will be subject to depreciation and
depletion. If the exploration and development work were to be unsuccessful, the
capitalized costs of the properties related to this unsuccessful work would be
expensed in the year in which the determination was made. The timing of any
writedowns of these unproven properties, if warranted, depends upon the nature,
timing and extent of future exploration and development activities and their
results. Occidental believes its exploration and development efforts will allow
it to realize the unproved property balance.
CHEMICAL ASSETS
The most critical accounting policy affecting Occidental's chemical assets
is the determination of the estimated useful lives of its property, plant and
equipment. Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities. The estimated useful lives of Occidental's chemical assets,
which range from 3 years to 50 years, are used to
27
compute depreciation expense and are also used for impairment tests. The
estimated useful lives used for the chemical facilities are based on the
assumption that Occidental will provide an appropriate level of annual
expenditures to ensure productive capacity is sustained. Without these continued
expenditures, the useful lives of these plants could significantly decrease.
Other factors that could change the estimated useful lives of Occidental's
chemical plants include higher or lower product prices, which are particularly
affected by both domestic and foreign competition, feedstock costs, energy
prices, environmental regulations, competition and technological changes.
Occidental is required to perform impairment tests on its assets whenever
events or changes in circumstances lead to a reduction in the estimated useful
lives or estimated future cash flows that would indicate that the carrying
amount may not be recoverable, or when management's plans change with respect to
those assets. Under the provisions of SFAS No. 144, Occidental must compare the
undiscounted future cash flows of an asset to its carrying value. The key
factors that could significantly affect future cash flows are future product
prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy costs, significantly increased regulation
and remaining estimated useful life.
Due to a temporary decrease in demand for some of its products, Occidental
temporarily idled an EDC plant in June 2001 and a chlor-alkali plant in December
2001. These idle facilities will be reactivated upon strengthening in overall
economic conditions that leads to sustained improved demand and higher margins
for caustic soda. Management expects that these plants will become operational
in the future. The net book value of these plants was $113 million at December
31, 2004. Based on year-end value, the chlor-alkali plant that closed on
December 1, 2001 has a 24-percent minority interest of $22 million. These
facilities are periodically tested for impairment and, based on the results, no
impairment is deemed necessary at this time. Occidental continues to depreciate
these facilities based on their remaining estimated useful lives.
Over the prior three years, the change in the depreciation rate due to
changes in estimated useful lives has been immaterial.
Occidental's net property, plant and equipment for chemicals is
approximately $2.4 billion and its depreciation expense for 2005 is expected to
be approximately $225 million. If the estimated useful lives of Occidental's
chemical plants were to decrease based on the factors mentioned above, the most
significant impact would be on depreciation expense. For example, a reduction in
the remaining useful lives of 20 percent would increase depreciation and reduce
pre-tax earnings by approximately $55 million per year.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
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 and the reasonably possible range of loss, Occidental refers to
currently available information, including relevant past experience, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. 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. Environmental reserves are
recorded on a discounted basis only when a reserve is initially established and
the aggregate amount of the estimated costs for a specific site and the timing
of cash payments are reliably determinable. The reserve methodology for a
specific site is not modified once it has been established. Recoveries and
reimbursements are recorded in income when receipt is probable. For the years
ended December 31, 2004 and 2003, Occidental has not accrued any reimbursements
or indemnification recoveries for environmental remediation matters as assets.
Many factors could result in changes to Occidental's environmental reserves
and reasonably possible range of loss. The most significant are:
>> The original cost estimate may have been inaccurate.
>> Modified remedial measures might be necessary to achieve the required
remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology
reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or
limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial
objectives, more intensive or costly measures may be required.
>> The remedial measure might take more or less time than originally
anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture
rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify
and control contaminant sources.
>> The regulatory agency might ultimately reject or modify Occidental's
proposed remedial plan and insist upon a different course of action.
28
Additionally, other events might occur that could affect Occidental's
future remediation costs, such as:
>> The discovery of more extensive contamination than had been originally
anticipated. For some sites with impacted groundwater, accurate definition
of contaminant plumes requires years of monitoring data and computer
modeling. Migration of contaminants may follow unexpected pathways along
geologic anomalies that could initially go undetected. Additionally, the
size of the area requiring remediation may change based upon risk
assessment results following site characterization or interim remedial
measures.
>> Improved remediation technology might decrease the cost of remediation. In
particular, for groundwater remediation sites with projected long-term
operation and maintenance, the development of more effective treatment
technology, or acceptance of alternative and more cost-effective treatment
methodologies such as bioremediation, could significantly affect
remediation costs.
>> Laws and regulations might change to impose more or less stringent
remediation requirements.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating Occidental's ultimate share of
liability. Based on these factors, Occidental believes that it will not be
required to assume a share of liability of other potentially responsible
parties, with whom it is alleged to be jointly liable, in an amount that would
have a material effect on Occidental's consolidated financial position,
liquidity or results of operations.
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: CERCLA or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
nonperforming parties.
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
If the environmental reserve balance were to either increase or decrease
based on the factors mentioned above, the amount of the increase or decrease
would be immediately recognized in earnings. For example, if the reserve balance
were to decrease by 10 percent, Occidental would record a pre-tax gain of $38
million. If the reserve balance were to increase by 10 percent, Occidental would
record an additional remediation expense of $38 million.
OTHER LOSS CONTINGENCIES
Occidental is involved with numerous lawsuits, claims, proceedings and
audits in the normal course of its operations. Occidental records a loss
contingency for these matters when it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. In addition, Occidental discloses, in aggregate, its
exposure to loss in excess of the amount recorded on the balance sheet for these
matters if it is reasonably possible that an additional material loss may be
incurred. Occidental reviews its loss contingencies on an ongoing basis so that
they are adequately reserved on the balance sheet.
These reserves are based on judgments made by management with respect to
the likely outcome of these matters and are adjusted as appropriate.
Management's judgments could change based on new information, changes in laws or
regulations, changes in management's plans or intentions, the outcome of legal
proceedings, settlements or other factors.
SIGNIFICANT ACCOUNTING CHANGES
Listed below are significant changes in Occidental's accounting principles.
SFAS NO. 150
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." SFAS No. 150 establishes accounting standards for
how a company classifies and measures financial instruments that have
characteristics of liabilities and equity. Occidental adopted the provisions of
this statement on July 1, 2003. As a result of the adoption, Occidental's
mandatorily redeemable trust preferred securities were classified as a liability
and the payments to the holders of the securities were recorded as interest
expense. On January 20, 2004, all of the trust preferred securities were
redeemed.
FIN 46 AND FIN 46-R (REVISED)
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities (VIE)." FIN 46 requires a company
to consolidate a VIE if it is designated as the primary beneficiary of that
entity even if the company does not have a majority of voting interests. A VIE
is generally defined as an entity whose equity is unable to finance its
activities or whose owners lack the risks and rewards of ownership. The
statement also imposes disclosure requirements for all the VIEs of a company,
even if the
29
company is not the primary beneficiary. The provisions of this statement apply
at inception for any entity created after January 31, 2003. Occidental adopted
the provisions of this Interpretation for its existing entities on April 1,
2003, which resulted in the consolidation of its OxyMar investment. As a result
of the OxyMar consolidation, assets increased by $166 million and liabilities
increased by $178 million. There was no material effect on net income as a
result of the consolidation. In April 2004, Marubeni exercised its option to put
its interest in OxyMar to Occidental by paying approximately $20 million to
Occidental.
See Note 14 to the Consolidated Financial Statements for information on
VIEs where Occidental is not the primary beneficiary.
In December 2003, the FASB revised FIN 46 to exempt certain entities from
its requirements and to clarify certain issues arising during the initial
implementation of FIN 46. Occidental adopted the revised interpretation in the
first quarter of 2004 and it did not have a material impact on the financial
statements when adopted.
EITF ISSUE NO. 02-3
In the third quarter of 2002, Occidental adopted certain provisions of
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities." These provisions prescribed
significant changes in how revenue from energy trading is recorded.
Historically, Occidental had two major types of oil and gas revenues: (1)
revenues from its equity production; and (2) revenues from the sale of oil and
gas produced by other companies, but purchased and resold by Occidental,
referred to as revenue from trading activities. Both types of sales involve
physical deliveries and had been historically recorded on a gross basis in
accordance with generally accepted accounting principles. With the adoption of
EITF Issue No. 02-3, Occidental now reflects the revenue from trading activities
on a net basis. There were no changes in gross margins, net income, cash flow or
earnings per share for any period as a result of adopting this requirement.
However, net sales and cost of sales were reduced by equal and offsetting
amounts to reflect the adoption of this requirement. For the year ended December
31, 2002, net sales and cost of sales were reduced from amounts previously
reported by approximately $2.2 billion (representing amounts for the first two
quarters of 2002) to conform to the current presentation.
From 1999 to 2002, Occidental accounted for certain energy-trading
contracts in accordance with EITF Issue No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." EITF Issue No. 98-10
required that all energy-trading contracts must be marked to fair value with
gains and losses included in earnings, whether the contracts were derivatives or
not. In October 2002, the EITF rescinded EITF Issue No. 98-10, thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
adopted this accounting change in the first quarter of 2003 and recorded an $18
million after-tax charge as a cumulative effect of a change in accounting
principles.
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under SFAS No. 143, companies
are required to recognize the fair value of a liability for an asset retirement
obligation in the period in which the liability is incurred if there is a legal
obligation to dismantle the asset and reclaim or remediate the property at the
end of its useful life. Occidental adopted SFAS No. 143 in the first quarter of
2003. The initial adoption resulted in an after-tax charge of $50 million, which
was recorded as a cumulative effect of a change in accounting principles. The
adoption increased net property, plant and equipment by $73 million, increased
asset retirement obligations by $151 million and decreased deferred tax
liabilities by $28 million. The pro forma asset retirement obligation, if the
adoption of this statement had occurred on January 1, 2002, would have been $131
million at January 1, 2002 and $151 million at December 31, 2002.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement are
applied to companies starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense of
approximately $6 million recorded in each of the years' income statements for
the three-year period ended December 31, 2001. As a result, elimination of
goodwill amortization would not have had a material impact on net income or
earnings per share of any of the years presented and, as a result, the
transitional disclosures of adjusted net income excluding goodwill amortization
described by SFAS No. 142 have not been presented. Upon implementation of SFAS
No. 142 in the first quarter of 2002, three separate specialty chemical
businesses were identified as separate reporting units and tested for goodwill
impairment. All three of these businesses are components of the chemical
segment. The fair value of each of the three reporting units was determined
through third party appraisals. The appraisals determined fair value to be the
price that the assets could be sold for in a current transaction between willing
parties. As a result of the impairment testing, Occidental recorded a cumulative
after-tax effect of changes in accounting principles reduction in net income of
approximately $95 million due to the impairment of all the goodwill attributed
to these reporting units.
30
DERIVATIVE ACTIVITIES AND MARKET RISK
GENERAL
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is an instrument that, among
other characteristics, derives its value from changes in another instrument or
variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices. Based on current levels of production, if oil prices vary overall by
$1 per barrel, it would have an estimated quarterly effect on income of
approximately $29 million before U.S. income taxes. If natural gas prices vary
by $0.25 per Mcf, it would have an estimated quarterly effect on income of
approximately $10 million before U.S. income taxes. If production levels change
in the future, the sensitivity of Occidental's results to oil and gas prices
also would change.
Occidental's results are also sensitive to fluctuations in chemical prices.
If chlorine and caustic soda prices vary by $10/ton, it would have approximately
a $12 million and $25 million, respectively, annual effect on income before U.S.
income taxes. If PVC prices vary by $.01/lb, it would have approximately a $27
million annual effect on income before U.S. income taxes. If EDC prices vary by
$10/ton, it would have approximately a $3 million annual effect on income before
U.S. income taxes. Historically, price changes either precede or follow raw
material and feedstock price changes; therefore, the margin improvement of price
changes can be mitigated. According to Chemical Market Associates, Inc.,
December 2004 average contract prices were: chlorine--$310/ton, caustic
soda--$305/ton, PVC--$0.495/lb and EDC--$460/ton.
MARKETING AND TRADING OPERATIONS
Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and to mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Occidental's use of derivatives in hedging marketing and trading activities
relates primarily to managing cash flows from third-party purchases.
RISK MANAGEMENT
Occidental conducts its risk management activities for energy commodities
(which include buying, selling, marketing, trading, and hedging activities)
under the controls and governance of its Risk Management Policy. The Chief
Financial Officer and the Risk Management Committee, comprising members of
Occidental's management, oversee these controls, which are implemented and
enforced by the Trading Control Officer. The Trading Control Officer provides an
independent and separate check on results of marketing and trading activities.
Controls for energy commodities include limits on credit, limits on trading,
segregation of duties, delegation of authority and a number of other policy and
procedural controls.
FAIR VALUE OF MARKETING AND TRADING DERIVATIVE CONTRACTS
The following tables reconcile the changes in the fair value of
Occidental's marketing and trading contracts during 2004 and 2003 and segregate
the open contracts at December 31, 2004 by maturity periods.
In millions 2004 2003
================================================== ======== ========
Fair value of contracts outstanding at $ 32 $ (2)
beginning of year
(Gains) losses on changes for contracts realized
or otherwise settled during the year (94) 50
Changes in fair value attributable to changes in
valuation techniques and assumptions -- --
Gains (losses) or other changes in fair value 92 (16)
-------- --------
Fair value of contracts outstanding at end of year $ 30 $ 32
================================================== ======== ========
Maturity Periods
-------------------------------------------
Source of 2006 2008 2010 and Total
Fair Value 2005 to 2007 to 2009 thereafter Fair Value
==================== ======== ======== ======== ========== ==========
Prices actively $ 16 $ 8 $ -- $ -- $ 24
quoted
Prices provided by
other external
sources (4) 3 4 1 4
Prices based on
models and other
valuation methods (2) (2) 2 4 2
-------- -------- -------- ---------- ----------
TOTAL $ 10 $ 9 $ 6 $ 5 $ 30
==================== ======== ======== ======== ========== ==========
PRODUCTION HEDGES
On a limited basis, Occidental uses cash-flow hedges for the sale of crude
oil and natural gas production. No cash flow hedges were used for the sale of
production in 2003 and no material amounts were used during 2004. There were no
material crude oil or gas cash flow hedges on future production at December 31,
2004. No fair value hedges were used for oil and gas production during 2004 or
2003.
QUANTITATIVE INFORMATION
Occidental uses value at risk to estimate the potential effects of changes
in fair values of commodity-based derivatives and commodity contracts used in
marketing and trading activities. This method determines the maximum potential
negative short-term change in fair value with a 95-percent level of confidence.
The Marketing and Trading Value at Risk was immaterial during all of 2004.
31
INTEREST RATE RISK
GENERAL
Occidental's exposure to changes in interest rates relates primarily to its
long-term debt obligations. To reduce its interest rate risk, Occidental has
entered into several interest-rate swaps that effectively convert approximately
$1.7 billion of fixed-rate debt to variable-rate debt with maturities ranging
from 2006 to 2009.
TABULAR PRESENTATION OF INTEREST RATE RISK
In millions of U.S. dollars, except rates
The table below provides information about Occidental's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest-rate swaps and debt obligations.
Interest rate swaps are presented at fair value and by maturity date. Debt
amounts represent principal payments by maturity date.
U.S.Dollar U.S. Dollar
Year of Fixed-Rate Interest-Rate Variable-Rate
Maturity Debt Swaps Debt Grand Total (a)
========== =============== =============== =============== ===============
2005 $ -- $ 9 $ 450 $ 459
2006 46 -- -- 46
2007 -- 9 535 544
2008 10 22 395 427
2009 -- 4 339 343
2010 287 -- -- 287
Thereafter 1,589 -- 115 1,704
--------------- --------------- --------------- ---------------
TOTAL $ 1,932 $ 44 $ 1,834 $ 3,810
=============== =============== =============== ===============
Average
interest
rate 7.21% 3.93% 3.76% 5.53%
=============== =============== =============== ===============
Fair Value $ 2,341 $ 44 $ 1,991 $ 4,376
========== =============== =============== =============== ===============
(a) Excludes $6 million of unamortized debt discounts.
CREDIT RISK
Occidental's energy contracts are spread among several counterparties.
Creditworthiness is reviewed before doing business with a new counterparty and
on an ongoing basis. Occidental monitors aggregated counterparty exposure
relative to credit limits, and manages credit-enhancement issues. Credit
exposure for each customer is monitored for outstanding balances, current month
activity, and forward mark-to-market exposure.
FOREIGN CURRENCY RISK
Several of Occidental's foreign operations are located in countries whose
currencies generally depreciate against the U.S. dollar. Typically, effective
currency forward markets do 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. Most international crude oil sales are denominated in U.S.
dollars. Additionally, all of Occidental's oil and gas foreign entities have the
U.S. dollar as the functional currency. At December 31, 2004 and 2003,
Occidental had not entered into any foreign currency derivative instruments. The
effect of exchange-rate transactions in foreign currencies is included in
periodic income.
SAFE HARBOR DISCUSSION REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA
Portions of this report, including Items 1 and 2 and the information
appearing under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including the information under the sub
captions "Strategy," "Oil and Gas Segment -- Industry Outlook," and "Chemical
Segment -- Industry Outlook," contain forward-looking statements and involve
risks and uncertainties that could significantly affect expected results of
operations, liquidity, cash flows and business prospects. Words such as
"estimate," "project," "predict," "will," "anticipate," "plan," "intend,"
"believe," "expect" or similar expressions that convey the uncertainty of future
events or outcomes generally identify forward-looking statements. Occidental
expressly disclaims any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or otherwise.
Factors that could cause results to differ materially from forward-looking
statements include, but are not limited to, those listed below:
EXTERNAL RISKS
VOLATILE GLOBAL COMMODITY PRICING FLUCTUATIONS BEYOND OCCIDENTAL'S CONTROL
STRONGLY AFFECT ITS REVENUES, PROFITABILITY, OPERATING CASH FLOW AND FUTURE
GROWTH RATE.
As discussed in the section entitled "Derivative Activities and Market Risk
- -- Commodity Price Risk -- Production Hedges," Occidental typically does not
hedge against price fluctuations in either of its businesses with the result
that its financial results correlate closely to the price it obtains for its
products in the global markets in which they compete. Historically, prices for
Occidental's products have been volatile. In addition, a significant portion of
the oil Occidental produces is sour crude, which has tended to experience lower
rates of price increase because there is comparatively more sour crude oil
available.
Drilling and exploration activity levels, inventory levels, production
disruptions, the actions of OPEC (increasing prices or limiting Occidental's
production), price speculation and geophysical and technical limitations affect
the global short-term and long-term supply of oil and gas and interact to
contribute to price volatility. Because of the long lead times associated with
drilling and exploration projects, Occidental may commit significant amounts of
capital to oil and gas projects and cannot be certain of the level of demand
that will exist when it finishes a project. The health of the global economy,
alternative sources of energy, such as coal, and efforts at efficient
consumption can also affect the demand for oil and gas.
Demand for Occidental's chemicals products correlates most strongly with
the health of the global economy. Occidental also depends on feedstocks and
energy to produce chemicals, both of which are commodities subject to
significant price fluctuations.
32
OCCIDENTAL'S BUSINESSES OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT.
Occidental's future oil and gas production depends on its ability to
acquire or find additional reserves at prices below that at which it can sell
the oil and gas it produces from them, after operating costs. Occidental can
acquire reserves by purchasing existing producing assets or by acquiring
exploration rights and successfully drilling wells that produce hydrocarbons in
commercial quantities. Industry competition for reserves may cause Occidental to
shift toward higher risk exploration activity or force it to pay more for
acquisitions. Rising exploration and development activity in the industry
generally increases the costs of oil and gas services.
Participants in the chemicals industry compete primarily based on price and
the industry consists of many domestic and foreign competitors. In addition, the
industry has been characterized by sporadic global expansion, often leading to
overcapacity, whenever currently foreseeable prices appear to support expansion,
which has often led to overcapacity.
In both industries, Occidental uses nonproprietary technology and business
management techniques, which limits its ability to achieve significant
comparative production efficiencies.
OCCIDENTAL'S BUSINESSES MAY EXPERIENCE CATASTROPHIC OCCURRENCES.
Natural disasters, such as hurricanes, occur regularly and may occasionally
affect Occidental's businesses. In addition, well blowouts and oilfield fires,
armed conflicts, civil unrest and industrial accidents may occur and may have an
effect on Occidental's businesses. Occidental maintains insurance against a
number of these risks, however, it partially self-insures and insurance may not
always provide the coverage expected or desired due to contractual limitations,
unavailability, cost of insurance and the insurers' financial health.
VARIED GOVERNMENTAL AND POLITICAL ACTIONS AFFECT OCCIDENTAL'S RESULTS OF
OPERATIONS.
The transnational character of Occidental's oil and gas business subjects
it to the decisions of many governments and political interests. As a result,
Occidental faces increased risks of change in laws and regulations, including,
but not limited to, those related to taxes, royalty rates, permitted production
rates, import, export and use of products, and environmental protection, as well
as risk of expropriation or reduction of entitlements to produce hydrocarbons.
Occidental operates some of its oil and gas business in countries that
occasionally experience political instability, which increases Occidental's risk
of loss or delayed production associated with armed conflict, civil unrest,
security problems, restrictions on production equipment imports and sanctions
that prevent continued operations. Occidental may face the risk of increased
costs if it is perceived not to be respecting or advancing the economic and
social progress of the communities in which it operates. Since Occidental's
assets are long-lived, the magnitude of these risks can vary during the time it
operates in a country.
CERTAIN OF OCCIDENTAL'S MAJOR CHEMICALS PRODUCTS ARE COPRODUCED IN A FIXED
RATIO, WHICH LIMITS ITS ABILITY TO EXPLOIT PRICING OPPORTUNITIES.
Because chlorine and caustic soda must be produced together in a fixed
ratio, an imbalance in demand between the products ultimately requires
Occidental to reduce output or cut prices to restore demand balance. Either
action in turn limits Occidental's profits on these commodities.
TECHNOLOGICAL CHANGES MAY CHANGE THE NATURE OF THE ENERGY INDUSTRY.
Rising oil and gas prices create incentives to find alternative energy
sources that could replace oil and gas over the long term.
INTERNAL RISKS
OCCIDENTAL MAY INCUR SIGNIFICANT COSTS IN EXPLORATION OR DEVELOPMENT
EFFORTS WHICH MAY PROVE UNSUCCESSFUL OR UNPROFITABLE.
Occidental may misinterpret geologic or engineering data, which may result
in significant losses on unsuccessful exploration or development drilling
efforts.
Occidental is subject to the risks of project delays and cost overruns due
to unexpected geologic conditions, equipment failures and accidents, adverse
weather and construction or start-up delays and other associated risks.
INADEQUATE COST CONTAINMENT COULD REDUCE OCCIDENTAL'S COMPETITIVENESS.
Occidental works to minimize the costs associated with its businesses but
the impact of its efforts may not be sufficient to offset any negative effects
related to the main elements of cost, which consist of reserve acquisition costs
for oil and gas and feedstock and energy costs for chemicals.
CROSS-REFERENCES TO OTHER RISK DISCUSSIONS
Additional risks related to competition, foreign operations, litigation,
environmental matters, derivatives and market risks, and oil and gas reserve
estimation fluctuations are discussed elsewhere in this report under the
headings "Lawsuits, Claims, Commitments, Contingencies and Related Matters,"
"Environmental Liabilities and Expenditures," "Derivative Activities and Market
Risk," "Critical Accounting Policies and Estimates -- Oil and Gas Properties,"
"Business and Properties -- Oil and Gas Operations -- Competition and Sales and
Marketing," "Business and Properties -- Chemical Operations -- Competition," and
"Foreign Investments."
33
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Occidental Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of Occidental
Petroleum Corporation and subsidiaries (the Company) as of December 31, 2004 and
2003, and the related consolidated statements of income, stockholders' equity,
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2004. In connection with our audits of the
consolidated financial statements, we also have audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Occidental
Petroleum Corporation and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As explained in Note 4 to the consolidated financial statements, effective
January 1, 2003, the Company changed its method of accounting for inventories
purchased from third parties and its method of accounting for asset retirement
obligations. Effective April 1, 2003, the Company changed its method of
accounting for the consolidation of variable interest entities. Effective July
1, 2003, the Company changed its method of accounting for certain financial
instruments with characteristics of both liabilities and equity. Effective
January 1, 2002, the Company changed its method of accounting for the impairment
of goodwill and other intangibles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Occidental Petroleum Corporation's internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal Control--
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 25, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
February 25, 2005
34
CONSOLIDATED STATEMENTS OF INCOME Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
For the years ended December 31, 2004 2003 2002
=========================================================================== ========== ========== ==========
REVENUES
Net sales $ 11,368 $ 9,240 $ 7,247
Interest, dividends and other income 144 89 143
Gains on disposition of assets, net 1 32 10
---------- ---------- ----------
11,513 9,361 7,400
---------- ---------- ----------
COSTS AND OTHER DEDUCTIONS
Cost of sales (excludes depreciation, depletion and amortization of 4,509 3,897 3,299
$1,263 in 2004, $1,137 in 2003 and $978 in 2002)
Selling, general and administrative and other operating expenses 1,008 852 646
Depreciation, depletion and amortization 1,303 1,175 1,009
Environmental remediation 59 63 23
Exploration expense 219 139 176
Interest and debt expense, net 260 332 295
---------- ---------- ----------
7,358 6,458 5,448
---------- ---------- ----------
INCOME BEFORE TAXES AND OTHER ITEMS 4,155 2,903 1,952
Provision for domestic and foreign income and other taxes 1,708 1,231 433
Minority interest 75 62 77
(Income) loss from equity investments (113) 9 261
Gain on Lyondell stock issuance (121) -- --
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 2,606 1,601 1,181
Discontinued operations, net (38) (6) (97)
Cumulative effect of changes in accounting principles, net -- (68) (95)
---------- ---------- ----------
NET INCOME $ 2,568 $ 1,527 $ 989
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 6.59 $ 4.17 $ 3.14
Discontinued operations, net (0.10) (0.01) (0.26)
Cumulative effect of changes in accounting principles, net -- (0.18) (0.25)
---------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE $ 6.49 $ 3.98 $ 2.63
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 6.50 $ 4.12 $ 3.12
Discontinued operations, net (0.10) (0.01) (0.26)
Cumulative effect of changes in accounting principles, net -- (0.18) (0.25)
---------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE $ 6.40 $ 3.93 $ 2.61
========== ========== ==========
DIVIDENDS PER COMMON SHARE $ 1.10 $ 1.04 $ 1.00
=========================================================================== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
35
CONSOLIDATED BALANCE SHEETS Occidental Petroleum Corporation
In millions and Subsidiaries
Assets at December 31, 2004 2003
========================================================================================== ========== ==========
CURRENT ASSETS
Cash and cash equivalents $ 1,449 $ 683
Trade receivables, net of reserves of $27 in 2004 and $24 in 2003 1,882 795
Receivables from joint ventures, partnerships and other 353 350
Inventories 545 489
Prepaid expenses and other 166 127
Assets held for sale 36 58
---------- ----------
TOTAL CURRENT ASSETS 4,431 2,502
---------- ----------
LONG-TERM RECEIVABLES, NET 239 264
---------- ----------
INVESTMENTS IN UNCONSOLIDATED ENTITIES 1,727 1,155
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas segment, successful efforts method 18,314 16,698
Chemical segment 4,476 4,416
Corporate and other 469 275
---------- ----------
23,259 21,389
Accumulated depreciation, depletion and amortization (8,626) (7,405)
---------- ----------
14,633 13,984
OTHER ASSETS 361 263
---------- ----------
$ 21,391 $ 18,168
========================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
36
CONSOLIDATED BALANCE SHEETS Occidental Petroleum Corporation
In millions, except share amounts and Subsidiaries
Liabilities and Equity at December 31, 2004 2003
========================================================================================== ========== ==========
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $ 459 $ 23
Accounts payable 1,557 906
Accrued liabilities 1,013 874
Dividends payable 110 101
Domestic and foreign income taxes 263 163
Trust preferred securities -- 453
Liabilities held for sale 21 6
---------- ----------
TOTAL CURRENT LIABILITIES 3,423 2,526
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES AND UNAMORTIZED DISCOUNT 3,345 3,993
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,248 1,001
Other 2,498 2,407
---------- ----------
3,746 3,408
---------- ----------
CONTINGENT LIABILITIES AND COMMITMENTS
MINORITY INTEREST 327 312
---------- ----------
STOCKHOLDERS' EQUITY
Nonredeemable preferred stock; $1.00 par value, authorized 50 million shares;
outstanding shares: 2004 -- none and 2003 -- none -- --
Common stock, $.20 par value; authorized 500 million shares;
outstanding shares: 2004 -- 396,727,424 and 2003 -- 387,047,948 79 77
Additional paid-in capital 4,652 4,272
Retained earnings 5,664 3,530
Accumulated other comprehensive income 155 50
---------- ----------
10,550 7,929
---------- ----------
$ 21,391 $ 18,168
========================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Occidental Petroleum Corporation
In millions and Subsidiaries
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income(Loss)
======================================================= ========== ========== ========== ===============
BALANCE, DECEMBER 31, 2001 $ 75 $ 3,857 $ 1,788 $ (86)
Net income -- -- 989 --
Other comprehensive income, net of tax -- -- -- 59
Dividends on common stock -- -- (474) --
Issuance of common stock -- 22 -- --
Exercises of options and other, net -- 88 -- --
- ------------------------------------------------------- ---------- ---------- ---------- ---------------
BALANCE, DECEMBER 31, 2002 $ 75 $ 3,967 $ 2,303 $ (27)
Net income -- -- 1,527 --
Other comprehensive income, net of tax -- -- -- 77
Dividends on common stock -- -- (300) --
Issuance of common stock -- 11 -- --
Exercises of options and other, net 2 294 -- --
- ------------------------------------------------------- ---------- ---------- ---------- ---------------
BALANCE, DECEMBER 31, 2003 $ 77 $ 4,272 $ 3,530 $ 50
Net income -- -- 2,568 --
Other comprehensive income, net of tax -- -- -- 105
Dividends on common stock -- -- (434) --
Issuance of common stock -- 8 -- --
Exercises of options and other, net 2 372 -- --
- ------------------------------------------------------- ---------- ---------- ---------- ---------------
BALANCE, DECEMBER 31, 2004 $ 79 $ 4,652 $ 5,664 $ 155
======================================================= ========== ========== ========== ===============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In millions
For the years ended December 31, 2004 2003 2002
================================================================= ========== ========== ==========
Net income $ 2,568 $ 1,527 $ 989
Other comprehensive income(loss) items:
Foreign currency translation adjustments (a) 3 38 5
Derivative mark-to-market adjustments (b) 7 2 (6)
Minimum pension liability adjustments (c) -- 13 (5)
Unrealized gains on securities (d) 95 24 65
---------- ---------- ----------
Other comprehensive income, net of tax 105 77 59
---------- ---------- ----------
Comprehensive income $ 2,673 $ 1,604 $ 1,048
================================================================= ========== ========== ==========
(a) Net of tax of $(1), $15 and $0 in 2004, 2003 and 2002, respectively.
(b) Net of tax of $4, $1 and $(5) in 2004, 2003 and 2002, respectively.
(c) Net of tax of $0, $7 and $(3) in 2004, 2003 and 2002, respectively.
(d) Net of tax of $51, $13 and $35 in 2004, 2003 and 2002, respectively.
The accompanying notes are an integral part of these financial statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS Occidental Petroleum Corporation
In millions and Subsidiaries
For the years ended December 31, 2004 2003 2002
===================================================================================== ========== ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 2,606 $ 1,601 $ 1,181
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets 1,303 1,175 1,009
Amortization of debt discount and deferred financing costs 19 6 7
Deferred income tax provision(benefit) 170 65 (130)
Other noncash charges to income 448 313 37
Gains on disposition of assets, net (1) (32) (10)
(Income) loss from equity investments (113) 9 261
Gain on Lyondell stock issuance (121) -- --
Dry hole and impairment expense 159 80 96
Changes in operating assets and liabilities:
Increase in accounts and notes receivable (1,081) (223) (347)
Increase in inventories (94) (2) (74)
Increase in prepaid expenses and other assets (57) (48) (38)
Increase in accounts payable and accrued liabilities 725 84 172
Increase in current domestic and foreign income taxes 83 231 115
Other operating, net (150) (168) (174)
---------- ---------- ----------
Operating cash flow from continuing operations 3,896 3,091 2,105
Operating cash flow from discontinued operations (18) (17) (5)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,878 3,074 2,100
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (1,843) (1,600) (1,234)
Sale of businesses and disposal of property, plant and equipment, net 9 70 41
Purchase of businesses, net (208) (351) (492)
Equity investments and other, net (245) (139) (5)
---------- ---------- ----------
Investing cash flow from continuing operations (2,287) (2,020) (1,690)
Investing cash flow from discontinued operations (1) (1) (6)
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (2,288) (2,021) (1,696)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 60 297 248
Payments of long-term debt and capital lease liabilities (239) (631) (199)
Proceeds from issuance of common stock 7 10 22
Repurchase of trust preferred securities (466) (2) (9)
Purchases for natural gas delivery commitment -- -- (95)
Buyout of natural gas commitment, net -- -- (179)
Proceeds from subsidiary preferred stock issuance -- -- 72
Cash dividends paid (424) (392) (375)
Stock options exercised 238 200 60
Other financing, net -- 2 (1)
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (824) (516) (456)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 766 537 (52)
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 683 146 198
---------- ---------- ----------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 1,449 $ 683 $ 146
===================================================================================== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Occidental Petroleum Corporation
and Subsidiaries
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NATURE OF OPERATIONS
In these Notes, the term "Occidental" or "the Company" refers to Occidental
Petroleum Corporation (OPC) and/or one or more entities where it owns a majority
voting interest. Occidental is a multinational organization whose principal
business segments are oil and gas and chemical. The oil and gas segment explores
for, develops, produces and markets crude oil and natural gas. The chemical
segment manufactures and markets basic chemicals, vinyls and performance
chemicals.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of OPC, entities
in which it owns a majority voting interest, variable-interest entities (VIE) in
which it is the primary beneficiary and its undivided interests in oil and gas
exploration and production ventures. Occidental's proportionate share of oil and
gas exploration and production ventures, in which it has a direct working
interest, is accounted for by reporting its proportionate share of assets,
liabilities, revenues and costs within the relevant lines on the balance sheets,
income statements and cash flow statements.
In addition, certain financial statements, notes and supplementary data for
prior years have been reclassified to conform to the 2004 presentation.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities include both equity method and
available-for-sale investments. Amounts representing Occidental's percentage
interest in the underlying net assets of affiliates (excluding undivided
interests in oil and gas exploration and production ventures) in which it does
not have a majority voting interest but as to which it exercises significant
influence, are accounted for under the equity method. Occidental records its
share of gains or losses that arise from equity-method investee stock issuances
in the income statement. Occidental reviews equity method investments for
impairment whenever events or changes in circumstances indicate that an
other-than-temporary decline in value has occurred. The amount of impairment, if
any, is based on quoted market prices, where available, or other valuation
techniques, including discounted cash flows.
Investments in which Occidental does not exercise significant influence are
accounted for as available-for-sale investments and are carried at fair value,
based on quoted market prices, with unrealized gains and losses reported in
Other Comprehensive Income (OCI), net of taxes, until such investment is sold or
collected. In disposal, the accumulated unrealized gain or loss included in OCI
is transferred to income.
REVENUE RECOGNITION
Revenue is recognized from oil and gas production when title has passed to
the customer, which occurs when the product is shipped. Revenue from marketing
and trading activities is recognized on settled transactions, upon completion of
contract terms and for physical deliveries upon title transfer. For unsettled
transactions, contracts that meet specified accounting criteria are marked to
market. Revenue from all marketing and trading activities, including revenue
from buy/sell arrangements with the same counterparty, is reported on a net
basis.
Revenue from chemical product sales is recognized when the product is
shipped and title has passed to the customer. Prices are fixed at the time of
shipment. Customer incentive programs provide for payments or credits to be made
to customers based on the volume of product purchased over a defined period.
Total customer incentive payments over a given period are estimated and recorded
as a reduction to revenue ratably over the contract period. Such estimates are
evaluated and revised as warranted.
RISKS AND UNCERTAINTIES
The process of preparing consolidated financial statements in conformity
with U.S. 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 consolidated balance sheet are deferred tax
assets of $822 million as of December 31, 2004, 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.
40
The accompanying consolidated financial statements include assets of
approximately $4.1 billion as of December 31, 2004, and net sales of
approximately $3.1 billion for the year ended December 31, 2004, 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 mitigate its exposure against such risks and would seek
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 may have a significant impact on
Occidental's results of operations for any particular year.
Also, see "Property, Plant and Equipment" below.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are readily
convertible to cash. Cash equivalents totaled approximately $1.4 billion and
$661 million at December 31, 2004 and 2003, respectively.
TRADE RECEIVABLES
Occidental has an agreement in place to sell, under a revolving sale
program, an undivided interest in a designated pool of non-interest bearing
trade receivables. This program is used by Occidental as a low-cost source of
working capital funding. During 2004, Occidental discontinued, for the present
time, the sale of its receivables. The balance of receivables sold at December
31, 2004 and 2003 was zero and $360 million, respectively. Receivables sold are
not included in the debt and related trade receivables accounts, respectively,
on Occidental's consolidated balance sheets.
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. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. During the
years ended December 31, 2004, 2003 and 2002, the cost of this program amounted
to approximately 1.7 percent, 1.5 percent and 2.1 percent, respectively, of the
weighted average amount of the receivables sold in each year. The fair value of
any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2004, 2003 and
2002.
The program can terminate upon the occurrence of certain events, which
generally are under Occidental's control or relate to bankruptcy. If the program
were terminated and there were amounts outstanding, alternative funding would
have to be arranged, which could result in an increase in debt recorded on the
consolidated balance sheet, with a corresponding increase in the accounts
receivable balance.
INVENTORIES
For the oil and gas segment, materials and supplies are valued at the lower
of average cost or market. Inventories are reviewed periodically (at least
annually) for obsolescence. Oil and natural gas liquids (NGLs) inventories and
natural gas trading inventory are valued at the lower of cost or market.
For the chemical segment, Occidental generally values its inventories using
the last-in, first-out (LIFO) method as it better matches current costs and
current revenue. Accordingly, Occidental accounts for most of its domestic
inventories in its chemical business, other than materials and supplies, on the
LIFO method. For other countries, Occidental uses the first-in, first-out (FIFO)
method (if the costs of goods are specifically identifiable) or the average-cost
method (if the costs of goods are not specifically identifiable). Occidental
accounts for materials and supplies using a weighted average cost method.
PROPERTY, PLANT AND EQUIPMENT
OIL AND GAS
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 16).
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized. The
costs of exploratory wells are initially capitalized pending a determination of
whether proved reserves have been found. At the completion of drilling
activities, the costs of exploratory wells remain capitalized if a determination
is made that proved reserves have been found. If no proved reserves have been
found, the costs of each of the related exploratory wells are charged to
expense. In some cases, a determination of proved reserves cannot be made at the
completion of drilling, requiring additional testing and evaluation of the
wells. Occidental's practice is to expense the costs of such exploratory wells
if a determination of proved reserves has not been made within a twelve-month
period after drilling is complete. Occidental has no oil and gas reserves for
which the determination of commercial viability is subject to the completion of
major additional capital expenditures. Annual lease rentals, exploration costs,
geological, geophysical and seismic costs are expensed as incurred.
41
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and NGLs that geological and engineering data demonstrate with
reasonable certainty can be recovered in future years from known reservoirs
under existing economic and operating conditions considering future production
and development costs. Depreciation and depletion of oil and gas producing
properties is determined by the unit-of-production method.
The carrying value of Occidental's property, plant and equipment (PP&E) is
based on the cost incurred to acquire the PP&E, net of accumulated depreciation,
depletion and amortization (DD&A) and net of any impairment charges. Occidental
is required to perform impairment tests on its assets whenever events or changes
in circumstances lead to a reduction in the estimated useful lives or estimated
future cash flows that would indicate that the carrying amount may not be
recoverable, or when management's plans change with respect to those assets.
Occidental assesses assets for impairment by comparing undiscounted future cash
flows of an asset to its carrying value. Impaired assets are written down to
their estimated fair values, generally their estimated discounted future net
pre-tax cash flows.
A portion of the carrying value of Occidental's oil and gas properties are
attributable to unproved properties. At December 31, 2004, the costs
attributable to unproved properties were approximately $500 million. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
costs attributable to the properties will be subject to depreciation and
depletion. If the exploration and development work were to be unsuccessful, the
capitalized costs of the properties related to this unsuccessful work would be
expensed in the year in which the determination was made. The timing of any
writedowns of these unproven properties, if warranted, depends upon the nature,
timing and extent of future exploration and development activities and their
results. Occidental believes its exploration and development efforts will allow
it to realize the unproved property balance.
CHEMICAL
Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities.
The estimated useful lives of Occidental's chemical assets, which range
from 3 years to 50 years, are used to compute depreciation expense and are also
used for impairment tests. The estimated useful lives used for the chemical
facilities are based on the assumption that Occidental will provide an
appropriate level of annual expenditures to ensure productive capacity is
sustained. Without these continued expenditures, the useful lives of these
plants could significantly decrease. Other factors which could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy prices, environmental regulations,
competition and technological changes.
Occidental performs impairment tests on its chemical assets whenever events
or changes in circumstances lead to a reduction in the estimated useful lives or
estimated future cash flows that would indicate that the carrying amount may not
be recoverable, or when management's plans change with respect to those assets.
Occidental compares the undiscounted future cash flows of an asset to its
carrying value. The key factors which could significantly affect future cash
flows are future product prices, which are particularly affected by both
domestic and foreign competition, feedstock costs, energy costs, significantly
increased regulation and remaining estimated useful life. Impaired assets are
written down to their estimated fair values.
Due to a temporary decrease in demand for some of its products, Occidental
temporarily idled an ethylene dichloride (EDC) plant in June 2001 and a
chlor-alkali plant in December 2001. These idle facilities will be reactivated
upon strengthening in overall economic conditions that leads to sustained
improved demand and higher margins for caustic soda. Management expects that
these plants will become operational in the future. The net book value of these
plants was $113 million at December 31, 2004. Based on year-end value, the
chlor-alkali plant that closed in December 2001 has a 24-percent minority
interest of $22 million. These facilities are periodically tested for impairment
and, based on the results, no impairment is deemed necessary at this time.
Occidental continues to depreciate these facilities based on their remaining
estimated useful lives.
ACCRUED LIABILITIES--CURRENT
Accrued liabilities include accrued payroll, commissions and related
expenses of $246 million and $200 million at December 31, 2004 and 2003,
respectively.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
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 and the reasonably possible range of loss, Occidental refers to
currently available information, including relevant past experience, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. 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.
42
Environmental reserves are recorded on a discounted basis only when a reserve is
initially established and the aggregate amount of the estimated costs for a
specific site and the timing of cash payments are reliably determinable. The
reserve methodology for a specific site is not modified once it has been
established. Recoveries and reimbursements are recorded in income when receipt
is probable. For the years ended December 31, 2004 and 2003, Occidental has not
accrued any reimbursements or indemnification recoveries for environmental
remediation matters as assets.
Many factors could result in changes to Occidental's environmental reserves
and reasonably possible range of loss. The most significant are: >> The original
cost estimate may have been inaccurate.
>> Modified remedial measures might be necessary to achieve the required
remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology
reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or
limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial
objectives, more intensive or costly measures may be required.
>> The remedial measure might take more or less time than originally
anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture
rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify
and control contaminant sources.
>> The regulatory agency might ultimately reject or modify Occidental's
proposed remedial plan and insist upon a different course of action.
Additionally, other events might occur that could affect Occidental's
future remediation costs, such as:
>> The discovery of more extensive contamination than had been originally
anticipated. For some sites with impacted groundwater, accurate definition
of contaminant plumes requires years of monitoring data and computer
modeling. Migration of contaminants may follow unexpected pathways along
geologic anomalies that could initially go undetected. Additionally, the
size of the area requiring remediation may change based upon risk
assessment results following site characterization or interim remedial
measures.
>> Improved remediation technology might decrease the cost of remediation. In
particular, for groundwater remediation sites with projected long-term
operation and maintenance, the development of more effective treatment
technology, or acceptance of alternative and more cost-effective treatment
methodologies such as bio--remediation, could significantly affect
remediation costs.
>> Laws and regulations might change to impose more or less stringent
remediation requirements.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating Occidental's ultimate share of
liability. Based on these factors, Occidental believes that it will not be
required to assume a share of liability of other potentially responsible
parties, with whom it is alleged to be jointly liable, in an amount that would
have a material effect on Occidental's consolidated financial position,
liquidity or results of operations.
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
nonperforming parties.
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
43
ASSET RETIREMENT OBLIGATIONS
Occidental recognizes the fair value of a liability for an asset retirement
obligation in the period in which the liability is incurred if there is a legal
obligation to dismantle the asset and reclaim or remediate the property at the
end of its useful life. The liability amounts are based on future retirement
cost estimates and incorporate many assumptions such as expected economic
recoveries of oil and gas, time to abandonment, future inflation rates and the
adjusted risk free rate of interest. When the liability is initially recorded,
Occidental capitalizes the cost by increasing the related property, plant and
equipment balances. Over time, the liability is increased and expense is
recognized for the change in its present value, and the initial capitalized cost
is depreciated over the useful life of the asset. No market risk premium has
been included in Occidental's liability since no reliable estimate can be made
at this time. See Note 4.
The following table summarizes the activity of the asset retirement
obligation, of which $7 million and $4 million is included in accrued
liabilities at December 31, 2004 and 2003, respectively. The remaining balance
in both years is included in deferred credits and other liabilities - other:
For the years ended December 31, (in millions) 2004 2003
================================================================================ ========== ==========
Beginning balance $ 167 $ --
Cumulative effect of change in accounting principles -- 151
Liabilities incurred 21 6
Liabilities settled (9) (7)
Accretion expense 12 11
Acquisitions and other 18 1
Revisions to estimated cash flows (3) 5
---------- ----------
Ending balance $ 206 $ 167
================================================================================ ========== ==========
DERIVATIVE INSTRUMENTS
All derivative instruments are carried at fair value and are classified in
receivables from joint ventures, partnerships and other, long-term receivables,
accrued liabilities and deferred credits and other liabilities - other.
Occidental classifies its fair value swap interest receipts as reductions of
interest expense. Cash flow hedge gains and losses, including any
ineffectiveness, are classified within the net sales line item. Gains and losses
are netted in the income statement and are netted on the balance sheets when a
right of offset exists.
Occidental applies either fair value or cash flow hedge accounting when
transactions meet specified criteria for hedge accounting treatment. If the
derivative does not qualify as a hedge or is not designated as a hedge, the gain
or loss is immediately recognized in earnings. If the derivative qualifies for
hedge accounting, the gain or loss on the derivative is either recognized in
income with an offsetting adjustment to the basis of the item being hedged for
fair value hedges, or deferred in OCI to the extent the hedge is effective for
cash flow hedges.
A hedge is regarded as highly effective and qualifies for hedge accounting
if, at inception and throughout its life, it is expected that changes in the
fair value or cash flows of the hedged item are almost fully offset by the
changes in the fair value of changes in cash flows of the hedging instrument and
actual effectiveness is within a range of 80 percent to 125 percent. In the case
of hedging a forecasted transaction, the transaction must be highly probable and
must present an exposure to variations in cash flows that could ultimately
affect reported net profit or loss. Occidental discontinues hedge accounting
when it is determined that a derivative has ceased to be highly effective as a
hedge; when the derivative expires, or is sold, terminated, or exercised; when
the hedged item matures or is sold or repaid; or when a forecasted transaction
is no longer deemed highly probable.
FINANCIAL INSTRUMENTS FAIR VALUE
Occidental values financial instruments as required by Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of
Financial Instruments." The carrying amounts of cash and cash equivalents
approximate fair value because of the short maturity of those instruments. The
carrying value of other on-balance-sheet financial instruments, other than debt,
approximates fair value, and the cost, if any, to terminate off-balance-sheet
financial instruments is not significant.
STOCK INCENTIVE PLANS
Occidental has stock incentive plans (Plans) that are more fully described
in Note 12. Occidental accounts for those Plans under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations.
For stock options, restricted stock and Share Units, compensation expense,
if any, is measured as the difference between the quoted market price of
Occidental's stock at the grant date, less the amount, if any, that the employee
must pay to acquire the stock. The stock option, restricted stock and Share Unit
compensation expense, if any, is recognized on a straight-line basis over the
vesting periods of the respective awards. For performance stock, compensation
expense is measured for each period based on the number of shares expected to
vest and the changes in the quoted market value of Occidental's stock during the
vesting period. Performance stock compensation expense or benefit, as
applicable, is
44
recognized on a straight-line basis over the vesting periods of the awards. For
stock appreciation rights (SARs), compensation expense is measured as the amount
by which the quoted market value of Occidental's stock exceeds the SAR exercise
price. Changes in Occidental's share price between the date of grant and through
the date when the SARs are exercised or have expired, are recognized as
compensation expense in each period. Had compensation expense for those Plans
been determined in accordance with SFAS No. 123, "Accounting for Stock Based
Compensation," Occidental's pro forma net income and earnings per share would
have been as follows:
For the years ended December 31, (in millions) 2004 2003 2002
========================================================================================== ======== ======== ========
Net income, as reported $ 2,568 $ 1,527 $ 989
Add: Stock-based employee compensation expense included in reported net income
determined under APB Opinion No. 25, net of related tax effects 47 38 18
Deduct: Total stock-based employee compensation expense determined under the SFAS No. 123
fair value-based method for all awards, net of related tax effects (61) (56) (37)
-------- -------- --------
Pro forma net income $ 2,554 $ 1,509 $ 970
========================================================================================== ======== ======== ========
Earnings Per Share:
Basic -- as reported $ 6.49 $ 3.98 $ 2.63
Basic -- pro forma $ 6.46 $ 3.93 $ 2.58
Diluted Earnings per Share
Diluted -- as reported $ 6.40 $ 3.93 $ 2.61
Diluted -- pro forma $ 6.37 $ 3.88 $ 2.55
- ------------------------------------------------------------------------------------------ -------- -------- --------
The fair value of each option grant, for pro forma calculation purposes, is
estimated using the Black-Scholes option-pricing model. The weighted average
grant-date fair value of options granted was $8.03, $3.20 and $5.36 in 2004,
2003 and 2002, respectively. The fair value of each option grant is estimated
with the following weighted average assumptions:
For the years ended December 31, 2004 2003 2002
========================================================================================== ======== ======== ========
Assumptions used:
Risk-free interest rate 3.4% 1.63% 3.89%
Dividend yield 2.23% 3.37% 3.93%
Volatility factor 21% 21% 32%
Expected life (years) 3.6 2.4 3.5
- ------------------------------------------------------------------------------------------ -------- -------- --------
These grants have limitations on transferability. In the case of executive
management, such options may not be exercised for approximately two months of
each calendar quarter. The use of short-term volatility measures as a proxy for
long-term volatility provides significant uncertainty as to the fair value of
the options. These factors could result in the market value of the options being
less than the Black-Scholes values. Expected life is estimated based on the
actual weighted average life of historical option activity of the grantee
population at the date of grant.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments, net of refunds, during the years 2004, 2003 and 2002
included federal, foreign and state income taxes of approximately $931 million,
$538 million and $111 million, respectively. Interest paid (net of interest
capitalized) totaled approximately $205 million, $310 million and $250 million
for the years 2004, 2003 and 2002, respectively. (See Note 3 for detail of
noncash investing and financing activities regarding certain acquisitions.)
FOREIGN CURRENCY TRANSACTIONS
The functional currency applicable to all of Occidental's foreign oil and
gas operations is the U.S. dollar since cash flows are denominated principally
in U.S. dollars. Occidental's chemical operations in Brazil use the Real as the
functional currency. The effect of exchange-rate changes on transactions
denominated in nonfunctional currencies generated a loss of $13 million in 2004,
$3 million in 2003 and $26 million in 2002. The 2002 amount related to the
writedown and sale of Occidental's calendering operations in Rio de Janeiro,
Brazil.
45
NOTE 2 DERIVATIVE ACTIVITIES INCLUDING FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Occidental's market risk exposures relate mainly to commodity prices and,
to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is an instrument that, among
other characteristics, derives its value from changes in another instrument or
variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices.
MARKETING AND TRADING OPERATIONS
Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Occidental's use of derivatives in hedging marketing and trading activities
primarily relates to managing cash flows from third-party purchases.
PRODUCTION HEDGES
On a limited basis, Occidental uses cash-flow hedges for the sale of crude
oil and natural gas production. No cash flow hedges were used for the sale of
production in 2003 and no material amounts were used in 2004. There were no
material crude oil or gas cash flow hedges on future production at December 31,
2004. No fair value hedges were used for oil and gas production during 2004 and
2003.
FAIR VALUE OF MARKETING AND TRADING DERIVATIVE CONTRACTS
The following tables reconcile the changes in the fair value of
Occidental's marketing and trading contracts during 2004 and 2003 and segregate
the open contracts at December 31, 2004 by maturity periods.
In millions 2004 2003
=============================================================================================== ========== ==========
Fair value of contracts outstanding at beginning of year $ 32 $ (2)
(Gains) losses on changes for contracts realized or otherwise settled during the year (94) 50
Changes in fair value attributable to changes in valuation techniques and assumptions -- --
Gains (losses) or other changes in fair values 92 (16)
---------- ----------
Fair value of contracts outstanding at end of year $ 30 $ 32
=============================================================================================== ========== ==========
Maturity Periods
-------------------------------------------------------
2006 2008 2010 and Total
Source of Fair Value 2005 to 2007 to 2009 thereafter Fair Value
================================================== ========== ========== ========== ========== ==========
Prices actively quoted $ 16 $ 8 $ -- $ -- $ 24
Prices provided by other external sources (4) 3 4 1 4
Prices based on models and other valuation methods (2) (2) 2 4 2
---------- ---------- ---------- ---------- ----------
TOTAL $ 10 $ 9 $ 6 $ 5 $ 30
================================================== ========== ========== ========== ========== ==========
INTEREST RATE RISK
GENERAL
Occidental is exposed to risk resulting from changes in interest rates and
it enters into various derivative financial instruments to manage interest-rate
exposure. Interest-rate swaps, forward locks and futures contracts are entered
into periodically as part of Occidental's overall strategy to manage its
interest rate risk exposures.
46
HEDGING ACTIVITIES
Occidental has entered into several interest-rate swaps that qualified for
fair value hedge accounting. These derivatives effectively convert approximately
$1.7 billion of fixed-rate debt to variable-rate debt with maturities ranging
from 2006 to 2009. The fair value of interest-rate swaps, based on third party
broker quotes, were $44 million and $87 million at December 31, 2004 and 2003,
respectively. As a result of fair value hedges, the amount of interest expense
recorded in the income statement was lower by approximately $56 million, $58
million and $45 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
Occidental was a party to a series of forward interest-rate locks, which
qualified as cash-flow hedges. The hedges were related to the construction of a
cogeneration plant leased by Occidental that was completed in December 2002. The
remaining loss on the hedges through December 2004 was approximately $20 million
after-tax, which is recorded in accumulated OCI and is being recognized in
earnings over the lease term of 26 years on a straight-line basis.
Certain of Occidental's equity investees have entered into additional
derivative instruments that qualify as cash-flow hedges. Occidental reflects its
proportionate share of these cash-flow hedges in OCI.
CREDIT RISK
Occidental's energy contracts are spread among several counterparties.
Creditworthiness is reviewed before doing business with a new counterparty and
on an ongoing basis. Occidental monitors aggregated counterparty exposure
relative to credit limits, and manages credit-enhancement issues. Credit
exposure for each customer is monitored for outstanding balances, current month
activity, and forward mark-to-market exposure.
FOREIGN CURRENCY RISK
Several of Occidental's foreign operations are located in countries whose
currencies generally depreciate against the U.S. dollar. Typically, effective
currency forward markets do 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. Most international crude oil sales are denominated in U.S.
dollars. Additionally, all of Occidental's oil and gas foreign entities have the
U.S. dollar as the functional currency. At December 31, 2004 and 2003,
Occidental had not entered into any foreign currency derivative instruments. The
effect of exchange-rate transactions in foreign currencies is included in
periodic income.
DERIVATIVE AND FAIR VALUE DISCLOSURES
The following table shows derivative financial instruments included in the
consolidated balance sheets:
Balance at December 31, (in millions) 2004 2003
================================================================================ ========== ==========
Derivative financial instrument assets (a)
Current $ 145 $ 138
Non-current 82 118
---------- ----------
$ 227 $ 256
========== ==========
Derivative financial instrument liabilities (a)
Current $ 132 $ 85
Non-current 30 23
---------- ----------
$ 162 $ 108
================================================================================ ========== ==========
(a) Amounts include energy-trading contracts.
The following table summarizes net after-tax derivative activity recorded in
accumulated OCI (AOCI):
Balance at December 31, (in millions) 2004 2003
================================================================================ ========== ==========
Beginning Balance $ (24) $ (26)
Gains (losses) from changes in current cash flow hedges 33 (17)
Amount reclassified to income (26) 19
---------- ----------
Ending Balance $ (17) $ (24)
================================================================================ ========== ==========
During the next twelve months, Occidental expects that less than $1 million
of net derivative after-tax gains included in AOCI, based on their valuation at
December 31, 2004, will be reclassified into earnings. Hedge ineffectiveness did
not have a material impact on earnings for the years ended December 31, 2004 and
2003.
47
NOTE 3 BUSINESS COMBINATIONS AND ASSET ACQUISITIONS AND DISPOSITIONS
- --------------------------------------------------------------------------------
2004
In January 2004, Occidental acquired a 1,300-mile oil pipeline and
gathering system located in the Permian Basin for approximately $143 million in
cash.
In October 2004, Occidental agreed to purchase three chemical manufacturing
facilities from Vulcan Materials Company for $214 million in cash, subject to
adjustment for changes in net working capital. In addition, Occidental will
assume specified obligations, and may become obligated to make contingent
payments based upon the future performance of these businesses. This
transaction, which is subject to regulatory approval, is expected to close in
2005.
For strategic and economic reasons, Occidental exited the vinyl specialty
resins business by closing the Pottstown, Pennsylvania manufacturing facility
(Specialty Resins) effective January 5, 2005, and recorded an after-tax charge
of $32 million as of December 31, 2004. Occidental's assets and liabilities
related to Specialty Resins are classified as held for sale and as discontinued
operations in the income statements for all periods presented. Specialty Resins'
net sales included in discontinued operations were $98 million, $86 million and
$91 million for 2004, 2003 and 2002, respectively, and net losses from
discontinued operations were $38 million, $6 million and $18 million,
respectively.
In November 2004, Lyondell acquired Millennium Chemicals Inc. (Millennium)
by issuing additional shares of Lyondell common stock. Under Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 51, Occidental is
required to record its share of the increase in Lyondell's net equity resulting
from this issuance. The effect of this is an increase of $121 million in the
carrying value of Occidental's investment in Lyondell and an increase in
Occidental's net income of $77 million after-tax. Occidental owns 41.3 million
shares of Lyondell common stock. As a result of the stock issuance, Occidental's
ownership percentage of Lyondell has decreased from approximately 22 percent to
17 percent.
2003
In 2003, Occidental made several oil and gas acquisitions in the Permian
Basin for approximately $317 million in cash and sold approximately $34 million
of these assets shortly thereafter. No gain or loss was recorded on these sales.
2002
Occidental's interest in the Dolphin Project, which was acquired in 2002,
consists of two separate economic interests held through two separate legal
entities. One entity, OXY Dolphin E&P, LLC, owns a 24.5-percent undivided
interest in the assets and liabilities associated with a Development and
Production Sharing Agreement (DPSA) with the Government of Qatar to develop and
produce natural gas and condensate in Qatar's North Field for 25 years from the
start of production, with a provision to request a 5-year extension. The
purchase price of the undivided working interest in the DPSA was approximately
$60 million and was recorded in Property, Plant and Equipment. This undivided
interest will be proportionately consolidated in Occidental's financial
statements.
A second entity, OXY Dolphin Pipeline, LLC, owns 24.5 percent of the stock
of Dolphin Energy Limited (Dolphin Energy). Dolphin Energy owns the rights to
build, own and operate a 260-mile-long, 48-inch natural gas pipeline which will
transport dry natural gas from Qatar to the United Arab Emirates (UAE) for the
life of the Dolphin Project or longer. Initially, the Dolphin Project will
export 2 billion cubic feet (Bcf) per day of natural gas (plus associated
liquids and byproducts). However, the pipeline is expected to have capacity to
transport up to 3.2 Bcf of natural gas per day, and Dolphin Energy is pursuing
additional business opportunities to meet the growing demand for natural gas in
the UAE and Oman. The purchase price of Dolphin Energy stock totaled
approximately $250 million and was recorded as an equity investment.
In August 2002, Occidental and Lyondell Chemical Company completed an
agreement for Occidental to sell its 29.5-percent share of Equistar to Lyondell
and to purchase a 21-percent equity interest in Lyondell. Occidental entered
into these transactions to diversify its petrochemicals interests. These
transactions reduced Occidental's direct exposure to petrochemicals volatility,
yet allowed it to preserve, through its Lyondell investment, an economic upside
of a recovery in the petrochemicals industry. In connection with these
transactions, Occidental wrote down its investment in the Equistar partnership
to fair value by recording a $412 million pre-tax charge as of December 2001.
After the write-down, the net book value of Occidental's investment in Equistar
at December 31, 2001, after considering tax effects, approximated the fair value
of the Lyondell shares Occidental expected to receive, less transaction costs.
Occidental recorded an after-tax gain of $164 million in the third quarter of
2002, as a result of closing these transactions on August 22, 2002. Occidental's
initial carrying value of the Lyondell investment was $489 million, which
represented the fair value of Lyondell's shares at closing.
In 2002, Occidental increased its ownership in Badin Block 1 and 2R by
purchasing additional interests in these two blocks from the Government of
Pakistan for approximately $72 million.
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its plastic calendering
operations in Brazil for a $6 million note receivable. In the third quarter of
2002, Occidental recorded an after-tax impairment charge of $69 million and
classified both of these businesses as discontinued operations. The fair value
of these businesses was determined by the expected sales proceeds from third
party buyers. When these transactions closed, no significant gain or loss was
recorded. For the year ended December 31, 2002, these discontinued operations
had revenues of $91 million, and pre-tax loss of $98 million.
48
NOTE 4 ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
FUTURE ACCOUNTING CHANGES
FASB NO. 151
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, "Inventory Costs, an amendment of APB Opinion No. 43, Chapter 4."
SFAS No. 151 clarifies the accounting treatment for various inventory costs and
overhead allocations. SFAS No. 151 is effective for inventory costs incurred
after July 1, 2005. Occidental will adopt this statement in the third quarter of
2005 and it is not expected to have a material effect on the financial
statements when adopted.
FASB NO. 153
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 specifies the criteria
required to record a nonmonetary asset exchange using carryover basis. SFAS No.
153 is effective for nonmonetary asset exchanges occurring after July 1, 2005.
Occidental will adopt this statement in the third quarter of 2005 and it is not
expected to have a material effect on the financial statements when adopted.
SFAS NO. 123R
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No.
123R) "Share-Based Payments." SFAS No. 123R requires that the cost from all
share-based payment transactions, including stock options, be recognized in the
financial statements at fair value. Occidental currently uses the
intrinsic-value method to account for these share-based payments. SFAS No. 123R
is effective for public companies in the first interim period after June 15,
2005.
Occidental will adopt the provisions of this statement in the third quarter
of 2005. Occidental anticipates adopting SFAS No. 123R using the modified
prospective method, which will not require Occidental to restate prior periods.
Occidental is currently assessing the effect of SFAS No. 123R on its financial
statements.
EITF ISSUE NO. 4-13
The Emerging Issues Task Force (EITF) is currently considering EITF Issue
No. 4-13, "Accounting for Purchases and Sales of Inventory with the Same
Counterparty" which will determine whether buy/sell arrangements should be
accounted for at historical cost and whether these arrangements should be
reported on a gross or net basis. Buy/sell arrangements are typically
contractual arrangements where the buy and sell agreements are entered into in
contemplation of one another with the same counterparty. The SEC has questioned
the gross treatment of these types of arrangements. Occidental reports all
buy/sell arrangements on a net basis. Therefore, if EITF Issue No. 4-13 required
companies to report buy/sell arrangements on a net basis, it would have no
effect on Occidental's financial statements.
RECENTLY ADOPTED ACCOUNTING CHANGES
FSP FAS 106-2
In May 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which specifies the accounting
and disclosure requirements for the prescription drug benefits that are
available under this new plan. Occidental adopted the disclosure provisions of
this pronouncement in the second quarter of 2004. See Note 13 for more
information.
FIN 46 AND FIN 46-R (REVISED)
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities (VIE)." FIN 46 requires a company
to consolidate a VIE if it is designated as the primary beneficiary of that
entity even if the company does not have a majority of voting interests. A VIE
is generally defined as an entity whose equity is unable to finance its
activities or whose owners lack the risks and rewards of ownership. The
statement also imposes disclosure requirements for all the VIEs of a company,
even if the company is not the primary beneficiary. The provisions of this
statement apply at inception for any entity created after January 31, 2003.
Occidental adopted the provisions of this Interpretation for its existing
entities on April 1, 2003, which resulted in the consolidation of its OxyMar
investment. As a result of the OxyMar consolidation, assets increased by $166
million and liabilities increased by $178 million. There was no material effect
on net income as a result of the consolidation. In April 2004, Marubeni
exercised its option to put its interest in OxyMar to Occidental by paying
approximately $20 million to Occidental. See Note 14 for more information on
VIEs where Occidental is not the primary beneficiary.
In December 2003, the FASB revised FIN 46 to exempt certain entities from
its requirements and to clarify certain issues arising during the initial
implementation of FIN 46. Occidental adopted the revised interpretation in the
first quarter of 2004 and it did not have a material impact on the financial
statements when adopted.
49
SFAS NO. 132 REVISED
In December 2003, the FASB issued a revision to SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits" to improve
financial statement disclosures for defined benefit plans. The standard requires
that companies provide additional details about their plan assets, benefit
obligations, cash flows and other relevant information, such as plan assets by
category. A description of investment policies and strategies for these asset
categories and target allocation percentages or target ranges are also required
in financial statements. This statement is effective for financial statements
with fiscal years ending after December 15, 2003. Occidental adopted this
statement in the fourth quarter of 2003 and provided the required disclosures in
Note 13.
SFAS NO. 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes accounting standards for how a company classifies and
measures financial instruments that have characteristics of liabilities and
equity. Occidental adopted the provisions of this statement on July 1, 2003. As
a result of the adoption, Occidental's mandatorily redeemable trust preferred
securities were classified as a liability and the payments to the holders of the
securities were recorded as interest expense. On January 20, 2004, all of the
trust preferred securities were redeemed.
SFAS NO. 149
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. Occidental adopted this statement in the third quarter of 2003 and it did
not have a material effect on its financial statements.
SFAS NO. 143
Effective January 1, 2003 Occidental adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. See Note 1 for more
information.
The initial adoption of SFAS No. 143 on January 1, 2003 resulted in an
after-tax charge of $50 million, which was recorded as a cumulative effect of a
change in accounting principles. The adoption increased net property, plant and
equipment by $73 million, increased asset retirement obligations by $151 million
and decreased deferred tax liabilities by $28 million. The pro forma asset
retirement obligation, if the adoption of this statement had occurred on January
1, 2002, would have been $131 million at January 1, 2002 and $151 million at
December 31, 2002.
FIN 45
In January 2003, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires a company to recognize a liability for
the obligations it has undertaken in issuing a guarantee. This liability would
be recorded at the inception of a guarantee and would be measured at fair value.
FIN 45 also requires certain disclosures related to guarantees, which are
included in Note 9. Occidental adopted the measurement provisions of this
statement in the first quarter of 2003 and it did not have an effect on the
financial statements when adopted.
EITF ISSUE NO. 02-3
In October 2002, Occidental adopted certain provisions of Emerging Issues
Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." As a result of adopting EITF Issue No. 02-3, there
were no changes to gross margins, net income, cash flow, or earnings per share
for any period; however, net sales and cost of sales were reduced by equal and
offsetting amounts to reflect the adoption of this requirement. For the year
ended December 31, 2002, net sales and cost of sales were reduced from amounts
previously reported by approximately $2.2 billion (representing amounts for the
first two quarters of 2002), to conform to the current presentation.
From 1999 to 2002, Occidental accounted for certain energy-trading
contracts in accordance with EITF Issue No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." EITF Issue No. 98-10
required that all energy-trading contracts must be marked to fair value with
gains and losses included in earnings, whether the contracts were derivatives or
not. In October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
adopted this accounting change in the first quarter of 2003 and recorded an $18
million after-tax charge as a cumulative effect of a change in accounting
principles.
50
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental adopted SFAS No. 146 in the first quarter of 2003 and it did
not have a material effect on its financial statements.
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental implemented SFAS No. 145 in the fourth quarter of
2002 and all comparative financial statements have been reclassified to conform
to the 2002 presentation. Since Occidental had no 2002 extraordinary items,
there was no effect on the 2002 presentation. There was no effect on net income
or basic earnings per common share upon adoption.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement are
applied to companies starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense of
approximately $6 million recorded in each of the years' income statements for
the three-year period ended December 31, 2001. As a result, elimination of
goodwill amortization would not have had a material impact on net income or
earnings per share in any of the years presented and, as a result, the
transitional disclosures of adjusted net income excluding goodwill amortization
described by SFAS No. 142 have not been presented. Upon implementation of SFAS
No. 142 in the first quarter of 2002, three separate specialty chemical
businesses were identified as separate reporting units and tested for goodwill
impairment. All three of these businesses are components of the chemical
segment. The fair value of each of the three reporting units was determined
through third party appraisals. The appraisals determined fair value to be the
price that the assets could be sold for in a current transaction between willing
parties. As a result of the impairment testing, Occidental recorded a cumulative
after-tax effect of changes in accounting principles reduction in net income of
approximately $95 million due to the impairment of all the goodwill attributed
to these reporting units.
NOTE 5 INVENTORIES
- --------------------------------------------------------------------------------
Inventories of approximately $137 million and $171 million were valued
under the LIFO method at December 31, 2004 and 2003, respectively. Inventories
consisted of the following:
Balance at December 31, (in millions) 2004 2003
================================================================================ ========== ==========
Raw materials $ 62 $ 42
Materials and supplies 157 141
Finished goods 380 328
---------- ----------
599 511
LIFO reserve (54) (22)
---------- ----------
TOTAL $ 545 $ 489
================================================================================ ========== ==========
51
NOTE 6 LONG-TERM DEBT AND TRUST PREFERRED SECURITIES
- --------------------------------------------------------------------------------
Long-term debt and trust preferred securities consisted of the following:
Balance at December 31, (in millions) 2004 2003
================================================================================ ========== ==========
OCCIDENTAL PETROLEUM CORPORATION
6.75% senior notes due 2012 $ 489 $ 500
7.65% senior notes to be redeemed March 2005 (a) 459 476
7.375% senior notes due 2008 (a) 417 426
8.45% senior notes due 2029 350 350
9.25% senior debentures due 2019 300 300
5.875% senior notes due 2007 (a) 293 318
10.125% senior debentures due 2009 (a) 280 280
4.25% medium-term notes due 2010 275 300
7.2% senior debentures due 2028 200 200
4% medium-term notes due 2007 (a) 176 178
8.75% medium-term notes due 2023 100 100
4.101% medium-term notes due 2007 (a) 75 76
11.125% senior notes due 2010 12 12
Medium-term notes due 2004 through 2008 (8.10% at December 31, 2004) 10 33
6.5% senior notes due 2005 (a) -- 161
---------- ----------
3,436 3,710
---------- ----------
SUBSIDIARY DEBT
1.65% to 7.5% unsecured notes due 2006 through 2030 374 313
---------- ----------
3,810 4,023
LESS:
Unamortized discount, net (6) (7)
Current maturities (459) (23)
---------- ----------
TOTAL LONG-TERM DEBT 3,345 3,993
TRUST PREFERRED SECURITIES -- 453
---------- ----------
TOTAL $ 3,345 $ 4,446
================================================================================ ========== ==========
(a) Amounts include mark-to-market adjustments due to fair value hedges of $44
million at December 31, 2004 and $87 million at December 31, 2003.
On June 18, 2004, Occidental entered into a $1.5 billion five-year
revolving bank credit facility (Credit Facility). Up to $200 million of the
Credit Facility is available in the form of letters of credit. Borrowings under
the Credit Facility bear interest at various benchmark rates, including LIBOR,
plus a margin based on Occidental's senior debt ratings. Additionally,
Occidental pays an annual facility fee (0.110 percent in 2004) on the total
commitment amount, which is based on Occidental's senior debt ratings. The
Credit Facility provides for the termination of the loan commitments and
requires immediate repayment of any outstanding amounts if certain events of
default occur or if Occidental files for bankruptcy. Occidental had not drawn
down any amounts on the Credit Facility at December 31, 2004.
In January 1999, Occidental issued 21,000,000 shares of 8.16-percent Trust
Originated Preferred Securities (trust preferred securities) to the public.
Holders of the trust preferred securities are entitled to cumulative cash
distributions at an annual rate of 8.16 percent of the liquidation amount of $25
per security. The trust preferred securities must be redeemed by January 20,
2039, but could be redeemed in whole, or in part, beginning January 20, 2004.
Starting July 1, 2003, upon adoption of SFAS No. 150, the trust preferred
securities were classified as a liability, and distributions on the trust
preferred securities, which were previously recorded as minority interest on the
statement of operations, were recorded as interest expense. On January 20, 2004,
Occidental redeemed all of the trust preferred securities for par of $466
million plus accrued interest.
In 2004, Occidental recorded a $3 million pre-tax interest charge related
to the open market purchase and retirement of $51 million of its senior notes,
and a $3 million pre-tax interest charge, net of a $2 million gain related to
the settlement of an interest-rate swap, to redeem all of its $157 million
outstanding 6.5-percent senior notes which were due in 2005.
At March 31, 2003, Occidental redeemed its 6.4-percent senior notes due
2013 and recorded a pre-tax interest charge of $61 million.
52
At December 31, 2004, minimum principal payments on long-term debt
subsequent to December 31, 2004 aggregated $3,766 million, of which $450 million
is due in 2005, $46 million in 2006, $535 million in 2007, $405 million in 2008,
$339 million in 2009, $287 million in 2010 and $1,704 million thereafter. These
amounts do not include the unamortized discount of $6 million and fair value
hedge mark-to-market gains of $44 million. The unamortized discount is generally
being amortized to interest expense on the effective interest method over the
lives of the related issuances.
At December 31, 2004, under the most restrictive covenants of certain
financing agreements, Occidental's capacity for additional unsecured borrowing
was approximately $22.7 billion and the capacity for the payment of cash
dividends and other distributions on, and for acquisitions of, Occidental's
capital stock was approximately $8.4 billion, assuming that such dividends,
distributions and acquisitions were made without incurring additional
borrowings.
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 values of Occidental's debt, including trust preferred
securities, at December 31, 2004 and 2003, was approximately $4.3 billion and
approximately $5.0 billion, respectively, compared with a carrying value of
approximately $3.8 billion, and approximately $4.5 billion, respectively.
NOTE 7 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The present value of minimum capital lease payments, net of the current
portion, totaled $26 million at both December 31, 2004 and 2003. These amounts
are included in other liabilities.
Operating and capital lease agreements, which include leases for
manufacturing facilities, office space, railcars and tanks, frequently include
renewal and/or purchase options and require Occidental to pay for utilities,
taxes, insurance and maintenance expense.
At December 31, 2004, 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 (a)
================================================================================ ========== ==========
2005 $ 1 $ 110
2006 1 95
2007 1 78
2008 1 67
2009 1 65
Thereafter 29 808
---------- ----------
TOTAL MINIMUM LEASE PAYMENTS 34 $ 1,223
==========
Less:
Imputed interest (8)
----------
PRESENT VALUE OF MINIMUM CAPITAL LEASE PAYMENTS, NET OF CURRENT PORTION $ 26
================================================================================ ==========
(a) At December 31, 2004, sublease rental amounts included in the future
operating lease payments totaled $76 million, as follows (in millions):
2005--$8, 2006--$8, 2007--$8, 2008--$8, 2009--$10 and thereafter--$34.
Rental expense for operating leases, net of sublease rental income, was
$120 million in 2004, $118 million in 2003 and $81 million in 2002. Rental
expense was net of sublease income of $8 million in 2004, $8 million in 2003 and
$7 million in 2002.
Included in both the 2004 and 2003 property, plant and equipment accounts
were $10 million of property leased under capital leases and $8 million of
related accumulated amortization.
NOTE 8 ENVIRONMENTAL LIABILITIES AND EXPENDITURES
- --------------------------------------------------------------------------------
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining environmental quality. Foreign operations also are subject to
environmental-protection laws. Costs associated with environmental compliance
have increased over time and are expected to rise in the future. Environmental
expenditures related to current operations are factored into the overall
business planning process and are considered an integral part of production in
manufacturing quality products responsive to market demand.
The laws that require or address environmental remediation may apply
retroactively to past waste disposal practices and releases. In many cases, the
laws apply regardless of fault, legality of the original activities or current
ownership or control of sites. Occidental Petroleum Corporation (OPC) or certain
of its subsidiaries are currently participating in environmental assessments and
cleanups under these laws at federal Superfund sites, comparable state sites and
other domestic and foreign remediation sites, including Occidental facilities
and previously owned sites. Also, OPC and certain of its subsidiaries have been
involved in a substantial number of governmental and private proceedings
involving
53
historical practices at various sites including, in some instances, having been
named in proceedings under CERCLA and similar federal, state and local
environmental laws. These proceedings seek funding or performance of remediation
and, in some cases, compensation for alleged property damage, punitive damages
and civil penalties.
Occidental manages its environmental remediation efforts through a wholly
owned subsidiary, Glenn Springs Holdings, Inc., which reports its results
directly to Occidental's corporate management. The following table presents
Occidental's environmental remediation reserves, the current portion of which is
included in accrued liabilities ($76 million in 2004, $76 million in 2003 and
$84 million in 2002) and the remainder in deferred credits and other liabilities
- - other ($299 million in 2004, $296 million in 2003 and $309 million in 2002).
The reserves are grouped by three categories of environmental remediation sites:
$ amounts in millions 2004 2003 2002
============================== ========================= ========================= =========================
RESERVE Reserve Reserve
NUMBER OF SITES BALANCE Number of Sites Balance Number of Sites Balance
--------------- ------- --------------- ------- --------------- -------
CERCLA & equivalent sites 125 $ 239 131 $ 240 124 $ 284
Active facilities 16 75 13 79 14 46
Closed or sold facilities 39 61 39 53 44 63
--------------- ------- --------------- ------- --------------- -------
TOTAL 180 $ 375 183 $ 372 182 $ 393
============================== =============== ======= =============== ======= =============== =======
The following table shows environmental reserve activity for the past three
years:
In millions 2004 2003 2002
=========================================================================== ========== ========== ==========
Balance -- Beginning of Year $ 372 $ 393 $ 454
Increases to provision including interest accretion 60 64 25
Changes from acquisitions/dispositions 6 -- --
Payments (63) (83) (84)
Other -- (2) (2)
---------- ---------- ----------
Balance -- End of Year $ 375 $ 372 $ 393
=========================================================================== ========== ========== ==========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years. Occidental expects that it may continue to incur additional
liabilities beyond those recorded for environmental remediation at these and
other sites. The range of reasonably possible loss for existing environmental
remediation matters could be up to $375 million beyond the amount accrued. For
management's opinion, refer to Note 9.
At December 31, 2004, OPC or certain of its subsidiaries have been named in
125 CERCLA or state equivalent proceedings, as shown below.
Description ($ amounts in millions) Number of Sites Reserve Balance
=========================================================================== =============== ===============
Minimal/No exposure (a) 101 $ 6
Reserves between $1-10 MM 17 64
Reserves over $10 MM 7 169
--------------- ---------------
TOTAL 125 $ 239
=========================================================================== =============== ===============
(a) Includes 27 sites for which Maxus Energy Corporation has retained the
liability and indemnified Occidental, 7 sites where Occidental has denied
liability without challenge, 54 sites where Occidental's reserves are less
than $50,000 each, and 13 sites where reserves are between $50,000 and $1
million each.
The seven sites with individual reserves over $10 million in 2004 are a
former copper mining and smelting operation in Tennessee, two closed landfills
in Western New York, groundwater treatment facilities at three currently closed
or formerly owned chemical plants (Montague, Michigan, Western New York and
Tacoma, Washington) and replacement of a municipal drinking water treatment
plant in Western New York.
Certain subsidiaries of OPC are currently addressing releases of substances
from past operations at 16 active facilities. Four facilities -- certain oil and
gas properties in the southwestern United States, a chemical plant in Louisiana,
a chemical plant in Texas and a phosphorous recovery operation in Tennessee --
account for 75 percent of the reserves associated with these facilities.
There are 39 sites formerly owned or operated by certain subsidiaries of
OPC that have ongoing environmental remediation requirements in which OPC or its
subsidiaries are involved. Three sites account for 62 percent of the reserves
associated with this group. The three sites are: an active refinery in Louisiana
where Occidental indemnifies the current owner and operator for certain remedial
actions, a water treatment facility at a former coal mine in Pennsylvania, and a
former OxyChem chemical plant in Ohio operated by new ownership.
54
Occidental's costs, some of which may include estimates, relating to
compliance with environmental laws and regulations are shown below for each
segment:
In millions 2004 2003 2002
================================================================================ ======== ======== ========
OPERATING EXPENSES
Oil and Gas $ 54 $ 40 $ 32
Chemical 59 55 54
-------- -------- --------
$ 113 $ 95 $ 86
======== ======== ========
CAPITAL EXPENDITURES
Oil and Gas $ 48 $ 98 $ 70
Chemical 12 15 16
-------- -------- --------
$ 60 $ 113 $ 86
======== ======== ========
REMEDIATION EXPENSES
Corporate $ 59 $ 63 $ 23
================================================================================ ======== ======== ========
Operating expenses are incurred on a continual basis. Capital expenditures
relate to longer-lived improvements in currently operating facilities.
Remediation expenses relate to existing conditions caused by past operations and
do not contribute to current or future revenue generation. Although total costs
may vary in any one year, over the long term, segment operating and capital
expenditures for environmental compliance generally are expected to increase.
NOTE 9 LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
- --------------------------------------------------------------------------------
OPC and certain of its subsidiaries have been named in a substantial number
of lawsuits, claims and other legal proceedings. These actions seek, among other
things, compensation for alleged personal injury, breach of contract, property
damage, punitive damages, civil penalties or other losses; or injunctive or
declaratory relief. OPC and certain of its subsidiaries also have been named in
proceedings under CERCLA and similar federal, state, local and foreign
environmental laws. These environmental proceedings seek funding or performance
of remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties; however, Occidental is usually one of many
companies in these proceedings and has to date been successful in sharing
response costs with other financially sound companies. With respect to all such
lawsuits, claims and proceedings, including environmental proceedings,
Occidental accrues reserves when it is probable a liability has been incurred
and the amount of loss can be reasonably estimated.
In September 2004, Occidental received formal notification from
Petroecuador, the state oil company of Ecuador, initiating proceedings to
determine if Occidental had violated its Participation Contract for Block 15 or
the Ecuadorian Hydrocarbons Law and whether the alleged violations constitute
grounds for terminating the Participation Contract. The principal allegation
stated in the notice is an assertion that Occidental should have obtained
government approval of a farmout agreement entered into in 2000. Occidental
believes that it has complied with all material obligations under the
Participation Contract and Ecuadorian law and that any termination of the
contract based upon the stated allegations would be unfounded and would
constitute an unlawful expropriation. Occidental is cooperating with Ecuadorian
authorities in the current proceedings and will continue to strive for an
amicable resolution. Block 15 operations represent approximately nine percent of
Occidental's 2004 consolidated production, four percent of its proved
consolidated reserves and two percent of its total property, plant and
equipment, net of accumulated depreciation, depletion and amortization.
In April 2004, a number of U.S. companies, including OxyChem, were served
with seven lawsuits filed in Nicaragua by approximately two thousand individual
plaintiffs. These individuals allege that they have sustained several billion
dollars of personal injury damages as a result of their alleged exposure to a
pesticide. In the opinion of management, these claims are without merit because,
among other things, OxyChem believes that none of the pesticide it manufactured
was ever sold or used in Nicaragua. Under the applicable Nicaraguan statute,
defendants are required to pay pre-trial deposits so large as to effectively
prohibit defendants from participating fully in their defense. In two such
situations, involving other defendants, Nicaraguan courts proceeded to enter
significant judgments against the defendants under that statute. OxyChem has
filed a response to the complaint contesting jurisdiction without posting such
pre-trial deposit. In December 2004, the judge in one of the cases ruled the
court had jurisdiction over the defendants, including OxyChem, and that the
defendants did not have to pay the pre-trial deposit. OxyChem intends to appeal
that portion of the ruling relating to the jurisdiction of the Nicaraguan
courts. In the opinion of management, any judgment rendered under the statute
would be unenforceable in the United States.
55
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax
jurisdictions. Taxable years prior to 1997 are closed for U.S. federal income
tax purposes. Taxable years 1997 through 2003 are in various stages of audit by
the Internal Revenue Service. Disputes arise during the course of such audits as
to facts and matters of law. Occidental has been in continuing tax audit
settlement discussions with the Internal Revenue Service on issues related to
foreign tax credits and various domestic income issues for the 1997 to 2000
audit years. Occidental believes that it is reasonably possible that substantive
issues for taxable years 1997 to 2000 could be favorably resolved during 2005
and that such resolutions, if they occur, could have a positive and material
effect on its results of operations and its financial condition, however,
Occidental believes such resolutions will not have a significant cash effect.
At December 31, 2004, commitments for major capital expenditures during
2005 and thereafter were approximately $740 million.
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, 2004, the net present
value of the fixed and determinable portion of the obligations under these
agreements, which were used to collateralize financings of the respective
suppliers, aggregated $36 million, which was payable as follows (in millions):
2005--$12, 2006--$11, 2007--$10 and 2008--$3. Fixed payments under these
agreements were $19 million in 2004, $16 million in 2003 and $15 million in
2002.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Many of these
commitments, although not fixed or determinable, involve capital expenditures
and are part of the $1.9 billion capital expenditures estimated for 2005.
Occidental has entered into various guarantees including performance bonds,
letters of credit, indemnities, commitments and other forms of guarantees
provided by Occidental to third parties, mainly to provide assurance that OPC
and/or its subsidiaries and affiliates will meet their various obligations
(guarantees).
At December 31, 2004, the notional amount of the guarantees was
approximately $500 million. Of this amount, approximately $400 million relates
to Occidental's guarantee of equity investees' debt and other commitments. The
debt guarantees and other commitments primarily relate to the Dolphin Energy
equity investment and the investment in the Ecuador Oleoducto de Crudos Pesados
Ltd. (OCP) pipeline. The remaining $100 million relates to various indemnities
and guarantees provided to third parties.
Occidental has indemnified various parties against specified liabilities
that those parties might incur in the future in connection with purchases and
other transactions that they have entered into with Occidental. These
indemnities usually are contingent upon the other party incurring liabilities
that reach specified thresholds. As of December 31, 2004, Occidental is not
aware of circumstances that would lead to future indemnity claims against it for
material amounts in connection with these transactions.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If these
matters were to be ultimately resolved unfavorably at amounts substantially
exceeding Occidental's reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect upon
Occidental's consolidated financial position or results of operations. However,
after taking into account reserves, management does not expect the ultimate
resolution of any of these matters to have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
NOTE 10 DOMESTIC AND FOREIGN INCOME AND OTHER TAXES
- --------------------------------------------------------------------------------
The domestic and foreign components of income from continuing operations
before domestic and foreign income and other taxes were as follows:
For the years ended December 31, (in millions) Domestic Foreign Total
=========================================================================== ========== ========== ==========
2004 $ 2,412 $ 1,902 $ 4,314
========== ========== ==========
2003 $ 1,516 $ 1,316 $ 2,832
========== ========== ==========
2002 $ 467 $ 1,147 $ 1,614
=========================================================================== ========== ========== ==========
56
The provisions(credits) for domestic and foreign income and other taxes
from continuing operations consisted of the following:
U.S. State
For the years ended December 31, (in millions) Federal and Local Foreign Total
================================================================= ========= ========= ========= =========
2004
Current $ 697 $ 50 $ 791 $ 1,538
Deferred 182 17 (29) 170
--------- --------- --------- ---------
$ 879 $ 67 $ 762 $ 1,708
================================================================= ========= ========= ========= =========
2003
Current $ 564 $ 29 $ 573 $ 1,166
Deferred 85 (5) (15) 65
--------- --------- --------- ---------
$ 649 $ 24 $ 558 $ 1,231
================================================================= ========= ========= ========= =========
2002
Current $ 79 $ 9 $ 475 $ 563
Deferred (102) (25) (3) (130)
--------- --------- --------- ---------
$ (23) $ (16) $ 472 $ 433
================================================================= ========= ========= ========= =========
The credit for deferred federal and state and local income taxes in 2002
results primarily from the sale of the investment in Equistar.
The following is a reconciliation, stated as a percentage of pre-tax
income, of the U.S. statutory federal income tax rate to Occidental's effective
tax rate on income from continuing operations:
For the years ended December 31, 2004 2003 2002
================================================================================ ======== ======== ========
U.S. federal statutory tax rate 35 % 35 % 35 %
Operations outside the United States (a) 5 8 12
Benefit from sale of subsidiary stock -- -- (21)
State taxes, net of federal benefit 1 1 --
Audit settlement (1) -- --
Other -- (1) 1
-------- -------- --------
Tax rate provided by Occidental 40 % 43 % 27 %
================================================================================ ======== ======== ========
(a) Included in these figures is the impact of not providing U.S. taxes on the
unremitted earnings of certain foreign subsidiaries. The effect on 2004 was
insignificant after the benefit of foreign tax credits in the U.S. The
effect of this treatment is to reduce the U.S. federal tax rate by
approximately 5 percent in 2003 and 7 percent in 2002.
The tax effects of temporary differences resulting in deferred income taxes
at December 31, 2004 and 2003 were as follows:
2004 2003
----------------------------- -----------------------------
DEFERRED DEFERRED Deferred Deferred
Items resulting in temporary differences (in millions) TAX ASSETS TAX LIABILITIES Tax Assets Tax Liabilities
============================================================ ========== =============== ========== ===============
Property, plant and equipment differences $ 79 $ 1,417 $ 79 $ 1,317
Equity investments including partnerships -- 470 -- 365
Environmental reserves 173 -- 163 --
Postretirement benefit accruals 132 -- 127 --
Deferred compensation and fringe benefits 164 -- 144 --
Asset retirement obligation 58 -- 58 --
State income taxes 50 -- 44 --
All other 166 68 224 83
---------- --------------- ---------- ---------------
Total deferred taxes $ 822 $ 1,955 $ 839 $ 1,765
============================================================ ========== =============== ========== ===============
Included in total deferred tax assets was a current portion aggregating
$115 million and $75 million as of December 31, 2004 and 2003, respectively,
that was reported in prepaid expenses and other.
A deferred tax liability of approximately $50 million at December 31, 2004,
and $210 million at December 31, 2003, 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
reduction in the deferred tax liability is primarily due to the ability to
credit foreign taxes in the U.S.
The discontinued operations include an income tax benefit of $23 million in
2004, $4 million in 2003 and $29 million in 2002.
The cumulative effect of changes in accounting principles was reduced by an
income tax benefit of $38 million in 2003 and $6 million in 2002.
57
Additional paid-in capital was credited $75 million in 2004, $30 million in
2003 and $7 million in 2002 for a tax benefit resulting from the exercise of
certain stock options.
NOTE 11 STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The following is an analysis of common stock:
(shares in thousands) Common Stock
================================================================================ ==============
Balance, December 31, 2001 374,126
Issued 1,027
Options exercised and other, net 2,707
- -------------------------------------------------------------------------------- --------------
Balance, December 31, 2002 377,860
Issued 1,156
Options exercised and other, net 8,032
- -------------------------------------------------------------------------------- --------------
Balance, December 31, 2003 387,048
Issued 813
Options exercised and other, net 8,866
- -------------------------------------------------------------------------------- --------------
BALANCE, DECEMBER 31, 2004 396,727
================================================================================ ==============
NONREDEEMABLE PREFERRED STOCK
Occidental has authorized 50,000,000 shares of preferred stock with a par
value of $1.00 per share. At December 31, 2004, 2003 and 2002, Occidental had no
outstanding shares of preferred stock.
EARNINGS PER SHARE AND ANTI-DILUTIVE COMPUTATIONS
Basic earnings per share was computed by dividing net income plus, in 2003
and 2002, the effect of repurchase of trust preferred securities 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.
The following are the share amounts used to compute the basic and diluted
earnings per share for the years ended December 31:
In millions 2004 2003 2002
======================================================= ================== ================== ==================
BASIC EARNINGS PER SHARE
Basic Shares Outstanding 395.6 383.9 376.2
================== ================== ==================
DILUTED EARNINGS PER SHARE
Basic shares outstanding 395.6 383.9 376.2
Dilutive effect of exercise of options outstanding 4.7 3.9 2.7
Other .8 .8 .6
------------------ ------------------ ------------------
Dilutive Shares 401.1 388.6 379.5
======================================================= ================== ================== ==================
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:
2004 2003 2002
======================================================= ================== ================== ==================
STOCK OPTIONS
Number of anti-dilutive options (in millions) NONE None 0.02
Price range -- -- $29.063 -- $29.438
Expiration range -- -- 12/1/07 -- 4/29/08
- ------------------------------------------------------- ------------------ ------------------ ------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
AOCI consisted of the following:
Balance at December 31, (in millions) 2004 2003
============================================================================= ================== ==================
Foreign currency translation adjustments $ (15) $ (18)
Derivative mark-to-market adjustments (17) (24)
Minimum pension liability adjustments 3 3
Unrealized gains on securities 184 89
------------------ ------------------
TOTAL $ 155 $ 50
============================================================================= ================== ==================
58
NOTE 12 STOCK INCENTIVE PLANS
- --------------------------------------------------------------------------------
Occidental has established several stock incentive plans offering certain
employees and management stock options, restricted stock, stock appreciation
rights and performance stock awards. These awards are granted under the 1995 and
2001 Incentive Stock Plans. The 1995 Plan was terminated, for the purposes of
further award grants, upon the effective date of the 2001 Plan; however, certain
1995 Plan award grants are outstanding at December 31, 2004. An aggregate of 27
million share-based awards are reserved for issuance under the 2001 Plan and at
December 31, 2004, approximately 5.6 million share-based awards were available
for future awards. Occidental has also established the 1996 Restricted Stock
Plan for non-employee directors, where non-employee directors receive awards of
restricted stock as additional compensation for their services as members of the
Board of Directors. A maximum of 250,000 shares of stock may be awarded under
the Directors Plan and at December 31, 2004, approximately 110,000 shares of
common stock were available for future grants.
Occidental applies the intrinsic value method in accounting for its stock
incentive plans. The pro forma effect on net income and earnings per share, had
Occidental applied the fair value recognition provisions of SFAS No. 123, is
shown in Note 1.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Under the stock option plan, certain employees are granted awards that are
settled in physical stock. Certain employees are granted stock appreciation
rights (SARs) awards that are settled only in cash. Exercise prices are equal to
the quoted market value of Occidental's stock on the date of grant. Generally,
the options and SARs vest ratably over three years with a maximum term of ten
years and one month. Under certain conditions, the stock option and SARs awards
are forfeitable.
The following is a summary of stock option and SARs transactions during
2004, 2003 and 2002 (Options and SARs in thousands):
2004 2003 2002
------------------------------------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED Weighted Weighted
AVERAGE AVERAGE Average Average
EXERCISE EXERCISE Exercise Exercise
OPTIONS PRICE SARS PRICE Options Price Options Price
======================= ========== ========== ========== ========== ========== ========== ========== ==========
BEGINNING BALANCE 23,012 $ 26.53 -- $ -- 26,972 $ 24.22 25,390 $ 23.40
Granted or issued 886 $ 49.32 3,504 $ 49.32 5,191 $ 31.13 4,904 $ 26.43
Exercised (9,563) $ 24.95 -- $ -- (8,999) $ 22.30 (3,097) $ 21.12
Forfeited or expired (53) $ 26.59 (1) $ 49.32 (152) $ 24.96 (225) $ 22.52
---------- ---------- ---------- ----------
ENDING BALANCE 14,282 $ 28.99 3,503 $ 49.32 23,012 $ 26.53 26,972 $ 24.22
EXERCISABLE AT YEAR END 8,715 $ 26.58 -- $ -- 12,535 $ 24.62 16,186 $ 23.33
- ----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The following is a summary of stock options and SARs outstanding at
December 31, 2004 (Options and SARs in thousands):
UNITS OUTSTANDING EXERCISABLE
----------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
==================== =========== ================ ============= =========== ============
OPTIONS
$14.88 -- $20.50 635 4.9 $ 20.28 635 $ 20.28
$23.13 -- $26.43 5,254 5.5 $ 26.05 3,777 $ 25.90
$26.75 -- $31.13 7,507 7.7 $ 29.39 4,303 $ 28.10
$49.32 -- $49.32 886 9.5 $ 49.32 -- $ --
----------- -----------
$14.88 -- $49.32 14,282 6.9 $ 28.99 8,715 $ 26.58
=========== ===========
SARS
$49.32 -- $49.32 3,503 9.5 $ 49.32 -- $ --
- -------------------- ----------- ---------------- ------------- ----------- ------------
59
RESTRICTED AND PERFORMANCE STOCK PLANS
RESTRICTED STOCK PLANS
Under the restricted stock plans, certain executives are awarded restricted
common stock and the right to receive shares (Share Units). The restricted stock
and Share Units vest between three and five years and are forfeitable under
certain conditions. The Share Units are generally deferred until retirement.
Restricted stock and vested Share Units are included in the basic shares
outstanding, while the unvested restricted stock and unvested Share Units are
included in the diluted shares outstanding.
A summary of Occidental's unvested restricted stock and Share Units as of
December 31, 2004, 2003 and 2002, and changes during the respective years ended,
is presented below (restricted stock and Share Units in thousands):
2004 2003 2002
------------------------- ------------------------- -------------------------
RESTRICTED WEIGHTED Restricted Weighted Restricted Weighted
STOCK AND AVERAGE Stock and Average Stock and Average
SHARE GRANT DATE Share Grant Date Share Grant Date
UNITS FAIR VALUE Units Fair Value Units Fair Value
============================== ========== ========== ========== ========== ========== ==========
Unvested at January 1 1,754 $ 29.28 1,466 $ 25.25 623 $ 23.49
Granted or issued 719 $ 50.69 815 $ 33.10 927 $ 26.73
Vested (1,068) $ 30.02 (527) $ 24.00 (84) $ 28.50
---------- ---------- ----------
Unvested at December 31 1,405 $ 39.47 1,754 $ 29.28 1,466 $ 25.25
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
PERFORMANCE STOCK PLANS
Under the performance stock plans, certain executives are awarded
performance stock. The performance stock contingently vests at the end of a
four-year period, with payouts that range from zero to 200 percent of the target
award. As the unvested performance stock awards are contingently issuable
shares, they are not included in the computation of basic or diluted earnings
per share calculation.
A summary of Occidental's unvested performance stock as of December 31,
2004, 2003 and 2002, and changes during the respective years ended, is presented
below (performance stock in thousands):
2004 2003 2002
PERFORMANCE STOCK Performance Stock Performance Stock
============================== =================== =================== ===================
Unvested at January 1 (a) 2,562 2,855 2,470
Granted (a) 388 569 622
Vested (653) (805) (188)
Forfeited (b) (70) (57) (49)
------------------- ------------------- -------------------
Unvested at December 31 (a) 2,227 2,562 2,855
============================== =================== =================== ===================
(a) Unvested awards and award grants are presented at the maximum 200 percent
payout.
(b) Forfeitures primarily represent the performance stock that did not vest due
to not meeting the maximum performance criteria.
NOTE 13 RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
Occidental has various benefit plans for its salaried, domestic union and
nonunion hourly, and certain foreign national employees.
DEFINED CONTRIBUTION PLANS
All domestic employees and certain foreign national employees are eligible
to participate in one or more of the defined contribution retirement or savings
plans that provide for periodic contributions by Occidental based on
plan-specific criteria, such as base pay, age level, and/or employee
contributions. Certain salaried employees participate in a supplemental
retirement plan that provides restoration of benefits lost due to governmental
limitations on qualified retirement benefits. The accrued liabilities for the
supplemental retirement plan were $60 million, $55 million and $52 million as of
December 31, 2004, 2003 and 2002, respectively, and Occidental expensed $59
million in 2004, $59 million in 2003 and $57 million in 2002 under the
provisions of these defined contribution and supplemental retirement plans.
60
DEFINED BENEFIT PLANS
Participation in the defined benefit plans is limited and approximately
1,200 domestic and 800 foreign national employees, mainly union, nonunion hourly
and certain acquired employees with grandfathered benefits, are currently
accruing benefits under these plans.
Pension costs for Occidental's defined benefit pension plans, determined by
independent actuarial valuations, are generally funded by payments to trust
funds, which are administered by independent trustees.
OTHER POSTRETIREMENT BENEFIT PLANS
Occidental provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. The benefits generally are funded by Occidental as 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 benefit costs
including the postretirement costs were approximately $98 million in 2004, $94
million in 2003, and $91 million in 2002.
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. Regulations governing the Medical Prescription drug
benefit and other key elements of the Medicare Modernization Act were released
by the Department of Health and Human Services Centers for Medicare and Medicaid
Services on January 21, 2005. Occidental intends to review its retiree health
care plans in light of these final regulations, which may change Occidental's
obligations under the plan. At this time, Occidental is unable to determine the
impact of the new Medicare provisions. Therefore, the retiree medical
obligations and costs reported do not reflect the impact of this legislation in
accordance with FSP No. FAS 106-2. Once Occidental is able to determine the
impact of these provisions, it will adopt the accounting requirements of this
standard.
OBLIGATIONS AND FUNDED STATUS
Occidental uses a measurement date of December 31 for all defined pension
and postretirement benefit plans.
Pension Benefits Postretirement Benefits
-------------------- --------------------------------------------
Unfunded Plans Funded Plans
-------------------- --------------------
For the years ended December 31, (in millions) 2004 2003 2004 2003 2004 2003
======================================================= ======== ======== ======== ======== ======== ========
CHANGES IN BENEFIT OBLIGATION:
Benefit obligation -- beginning of year $ 392 $ 357 $ 544 $ 501 $ 19 $ 14
Service cost -- benefits earned during the period 12 13 7 6 1 1
Interest cost on projected benefit obligation 24 23 32 33 1 1
Actuarial loss 32 19 55 52 5 4
Foreign currency exchange rate changes 11 3 -- -- -- --
Benefits paid (23) (22) (52) (48) (1) (1)
Plan amendments -- (1) -- -- -- --
-------- -------- -------- -------- -------- --------
Benefit obligation -- end of year $ 448 $ 392 $ 586 $ 544 $ 25 $ 19
======================================================= ======== ======== ======== ======== ======== ========
CHANGES IN PLAN ASSETS:
Fair value of plan assets -- beginning of year $ 309 $ 251 $ -- $ -- $ 1 $ --
Actual return on plan assets 46 48 -- -- -- --
Foreign currency exchange rate changes 1 1 -- -- -- --
Employer contribution 65 31 -- -- 1 2
Benefits paid (23) (22) -- -- (1) (1)
-------- -------- -------- -------- -------- --------
Fair value of plan assets -- end of year $ 398 $ 309 $ -- $ -- $ 1 $ 1
======================================================= ======== ======== ======== ======== ======== ========
FUNDED STATUS:
Unfunded obligation $ (50) $ (83) $ (586) $ (544) $ (24) $ (18)
Unrecognized prior service cost 3 4 8 8 -- --
Unrecognized net loss 72 64 213 170 13 8
-------- -------- -------- -------- -------- --------
Net amount recognized $ 25 $ (15) $ (365) $ (366) $ (11) $ (10)
======================================================= ======== ======== ======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for defined benefit pension plans with accumulated benefit
obligation in excess of plan assets were $111 million, $99 million and $20
million, respectively, as of December 31, 2004 and $184 million, $166 million
and $96 million, respectively, as of December 31, 2003. The projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for
defined benefit pension plans with plan assets in excess of accumulated benefit
obligation were $337 million, $326 million, and $378 million respectively, as of
December 31, 2004 and $208 million, $205 million, and $213 million,
respectively, as of December 31, 2003.
61
In 2002, a 401(h) account was established within one of Occidental's
defined benefit pension plans. This plan allows Occidental to fund
postretirement medical benefits for employees at one of its operations.
Contributions to this 401(h) account are made at Occidental's discretion. All of
Occidental's other postretirement benefit plans are unfunded.
Amount recognized in the consolidated balance sheets consists of:
Pension Benefits Postretirement Benefits
-------------------- --------------------------------------------
Unfunded Plans Funded Plans
-------------------- --------------------
For the years ended December 31, (in millions) 2004 2003 2004 2003 2004 2003
======================================================= ======== ======== ======== ======== ======== ========
Prepaid benefit cost $ 110 $ 66 $ -- $ -- $ -- $ --
Accrued benefit liability (85) (81) (365) (366) (11) (10)
-------- -------- -------- -------- -------- --------
Net amount recognized $ 25 $ (15) $ (365) $ (366) $ (11) $ (10)
======================================================= ======== ======== ======== ======== ======== ========
Occidental recorded a credit to accumulated other comprehensive income of
$13 million in 2003 and a charge of $5 million in 2002, to reflect the
net-of-tax difference between the additional liability required under pension
accounting provisions and the corresponding intangible asset. No amount was
recorded to accumulated other comprehensive income in 2004.
COMPONENTS OF NET PERIODIC BENEFIT COST
Pension Benefits Postretirement Benefits
------------------------ ---------------------------------------------------
Unfunded Plans Funded Plans
------------------------ ------------------------
For the years ended December 31, (in millions) 2004 2003 2002 2004 2003 2002 2004 2003 2002
================================================= ====== ====== ====== ====== ====== ====== ====== ====== ======
NET PERIODIC BENEFIT COSTS:
Service cost -- benefits earned during the period $ 12 $ 13 $ 10 $ 7 $ 6 $ 6 $ 1 $ 1 $ --
Interest cost on benefit obligation 23 23 26 32 33 33 1 1 1
Expected return on plan assets (25) (20) (20) -- -- -- -- -- --
Amortization of prior service cost 1 1 1 1 1 -- -- -- --
Recognized actuarial loss 2 3 1 11 8 6 -- -- --
Curtailments and settlements -- -- 1 -- -- -- -- -- --
Currency adjustments 11 2 (8) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net periodic benefit cost $ 24 $ 22 $ 11 $ 51 $ 48 $ 45 $ 2 $ 2 $ 1
================================================= ====== ====== ====== ====== ====== ====== ====== ====== ======
ADDITIONAL INFORMATION
Occidental's defined benefit pension and postretirement defined benefit
plans are accrued based on various assumptions and discount rates. Fair value of
assets is used to determine pension expense. Occidental funds and expenses
negotiated pension increases for domestic union employees over the term of their
collective bargaining agreement.
The following table sets forth the weighted average assumptions used to
determine Occidental's benefit obligation and net periodic benefit cost for
domestic plans:
Pension Benefits Postretirement Benefits
-------------------- --------------------------------------------
Unfunded Plans Funded Plans
-------------------- --------------------
For the years ended December 31, (in millions) 2004 2003 2004 2003 2004 2003
======================================================= ======== ======== ======== ======== ======== ========
BENEFIT OBLIGATION ASSUMPTIONS:
Discount rate 5.50% 6.00% 5.50% 6.00% 5.50% 6.00%
Rate of compensation increase 4.00 4.00 -- -- -- --
NET PERIODIC BENEFIT COST ASSUMPTIONS:
Discount rate 6.00% 6.65% 6.00% 6.65% 6.00% 6.65%
Expected long term rate of return on assets 8.00 8.00 -- -- 8.00 8.00
Rate of compensation increase 4.00 4.00 -- -- -- --
======================================================= ======== ======== ======== ======== ======== ========
For domestic pension plans, Occidental bases the discount rate on the
average yield provided by the Moody's Aa Corporate Bond Index. The weighted
average rate of increase in future compensation levels is consistent with
Occidental's past and anticipated future compensation increases for employees
participating in retirement plans that determine benefits using compensation.
The long-term rate of return on assets assumption is established with regard to
current market factors but within the context of historical returns. Historical
returns and correlation of equities and fixed income securities are studied.
Current market factors such as inflation and interest rates are also evaluated.
62
For pension plans outside of the United States, the assumptions used in
determining the benefit obligation vary by country. For countries in
hyperinflationary environments, real discount rates were used. The real discount
rates used in these countries ranged from a low of 4.8 percent to a high of 5.5
percent at both December 31, 2004 and 2003. For countries under a more stable
inflationary environment, the nominal discount rates were used in determining
the benefit obligation. The nominal discount rates used ranged from a low of 4
percent to a high of 8 percent at both December 31, 2004 and 2003. Occidental
bases its discount rate for foreign pension plans on rates indicative of
government and/or investment grade corporate debt in the applicable country. The
average rate of increase in future compensation levels ranged from a low of 3
percent to a high of 7 percent in 2004 and from a low of 3 percent to a high of
8 percent in 2003, dependent on local economic conditions and salary budgets.
The expected long-term rate of return on plan assets was 5.5 percent in excess
of local inflation in both 2004 and 2003.
The postretirement benefit obligation 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 Consumer
Price Index (CPI) increase of 3 percent as of December 31, 2004 and 2003
(beginning in 1993, participants other than certain union employees have paid
for all medical cost increases in excess of increases in the CPI). For certain
union employees, the health care cost trend rates were projected at annual rates
ranging ratably from 12 percent in 2004 to 6 percent through the year 2010 and
level thereafter. A 1-percent increase or a 1-percent decrease in these assumed
health care cost trend rates would result in an increase of $17 million or a
reduction of $16 million, respectively, in the postretirement benefit obligation
as of December 31, 2004, and an increase or reduction of $1 million in interest
cost in 2004. The annual service costs would not be materially affected by these
changes
The actuarial assumptions used could change in the near term as a result of
changes in expected future trends and other factors that, depending on the
nature of the changes, could cause increases or decreases in the plan
liabilities accrued.
Asset allocations of Occidental's defined benefit pension and funded
postretirement benefit plans at December 31, 2004 and 2003 are as follows:
Pension Benefits Postretirement Benefit
---------------------- -----------------------
Funded Plans
-----------------------
For the years ended December 31, 2004 2003 2004 2003
=========================================================== ========== ========== ========== ==========
Asset Category:
Equity securities 56% 60% 58% --%
Debt securities 44 40 42 100
---------- ---------- ---------- ----------
Total 100% 100% 100% 100%
=========================================================== ========== ========== ========== ==========
Occidental employs a total return investment approach that uses a mix of
equity and fixed income investments to maximize the long-term return of plan
assets at a prudent level of risk. The investments are monitored by Occidental's
Investment Committee in its role as fiduciary. The Investment Committee,
consisting of senior Occidental executives, selects and employs various external
professional investment management firms to manage specific assignments across
the spectrum of asset classes. The resulting aggregate investment portfolio
contains a diversified blend of equity and fixed-income investments.
Furthermore, equity investments are diversified across U.S. and non-U.S. stocks,
as well as differing styles and market capitalizations. Other asset classes such
as private equity and real estate may be used to enhance long-term returns while
improving portfolio diversification. Investment performance is measured and
monitored on an ongoing basis through quarterly investment and manager guideline
compliance reviews, annual liability measurements, and periodic studies.
Occidental expects to contribute $3 million to its defined benefit pension
plans during 2005. All of the contributions are expected to be in the form of
cash.
Estimated future benefit payments, which reflect expected future service,
as appropriate, are expected to be paid as follows:
For the years ended December 31, (in millions) Pension Benefits Postretirement Benefits
=========================================================== ======================= =======================
2005 $ 22 $ 54
2006 22 55
2007 23 55
2008 24 54
2009 24 54
2010 -- 2014 139 265
=========================================================== ======================= =======================
63
NOTE 14 INVESTMENTS AND RELATED-PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
At December 31, 2004 and 2003, investments in unconsolidated entities
comprised $1,003 million and $870 million of equity method investments and $310
million and $40 million of advances to equity method investees, respectively.
The remainder of the balances reflects available-for-sale securities.
EQUITY INVESTMENTS
At December 31, 2004, Occidental's equity investments consist mainly of a
17-percent interest in Lyondell Chemical Company acquired in August 2002, a
24.5-percent interest in the stock of Dolphin Energy (see Note 3 for further
discussion), and other various partnerships and joint ventures, discussed below.
Equity investments paid dividends of $91 million, $81 million and $22 million to
Occidental in 2004, 2003 and 2002, respectively. At December 31, 2004,
cumulative undistributed earnings of equity-method investees since acquisition
were $58 million. At December 31, 2004, Occidental's investments in equity
investees exceeded the underlying equity in net assets by $413 million, of which
$293 million represents goodwill that will not be amortized and $115 million
represents intangible assets, which is amortized over the life of the underlying
lease of the assets, when placed into service.
In November 2004, Lyondell acquired Millennium Chemical Company by issuing
additional shares of Lyondell common stock. Under SEC SAB No. 51, Occidental is
required to record its share of the increase in Lyondell's net equity resulting
from this issuance. The effect of this is an increase of $121 million in the
carrying value of Occidental's investment in Lyondell and an increase in
Occidental's net income of $77 million after-tax. Occidental owns 41.3 million
shares of Lyondell common stock. As a result of the stock issuance, Occidental's
ownership percentage of Lyondell has decreased from approximately 22 percent to
17 percent. Because Occidental continues to have significant influence on
Lyondell, it will continue to record this investment under the equity method.
The fair value of Lyondell stock owned by Occidental was $1.2 billion and
$670 million at December 31, 2004 and 2003, respectively.
The following table presents Occidental's percentage interest in the
summarized financial information of its equity method investments:
For the years ended December 31, (in millions) 2004 2003 2002
================================================================= ======== ======== ========
Revenues $ 1,785 $ 1,179 $ 1,782
Costs and expenses 1,672 1,188 2,043
-------- -------- --------
Net income (loss) $ 113 $ (9) $ (261)
================================================================= ======== ======== ========
Balance at December 31, 2004 2003
================================================================= ======== ========
Current assets $ 915 $ 366
Non-current assets $ 2,570 $ 1,860
Current liabilities $ 718 $ 432
Long-term debt $ 1,574 $ 1,001
Other non-current liabilities $ 603 $ 394
Stockholders' equity $ 590 $ 399
- ----------------------------------------------------------------- -------- --------
In July 2004, Dolphin Energy entered into an agreement with banks to
provide a $1.36 billion bridge loan for the Dolphin Project. Occidental
guaranteed 24.5 percent of the obligations of Dolphin Energy under this bank
agreement. See Note 3 for further information.
In Ecuador, Occidental has a 14-percent interest in the OCP oil export
pipeline. Occidental made capital contributions of $64 million in 2003, of which
$60 million was converted to a note receivable in 2004. As of December 31, 2004,
Occidental has contributed and advanced a total of $78 million to the project.
The OCP project was funded in part by senior project debt. The senior
project debt is to be repaid with the proceeds of ship-or-pay tariffs of certain
upstream producers in Ecuador, including Occidental. Under their ship-or-pay
commitments, Occidental and the other upstream producers have each assumed their
respective share of project-specific risks, including operating risk, political
risk and force-majeure risk. Occidental would be required to make an advance
tariff payment in the event of prolonged force majeure, upstream expropriation
events, bankruptcy of the pipeline company or its parent company, abandonment of
the project, termination of an investment guarantee agreement with Ecuador, or
certain defaults by Occidental. This advance tariff would be used by the
pipeline company to service or prepay project debt. Occidental's obligation
relating to the pipeline company's senior project debt totaled $104 million, and
Occidental's obligations relating to performance bonds totaled $14 million at
December 31, 2004. As Occidental ships product using the pipeline, its overall
obligations will decrease with the reduction of the pipeline company's senior
project debt.
64
Occidental has a 50-percent interest in Elk Hills Power LLC (EHP), a
limited liability company that operates a gas-fired, power-generation plant in
California. OCP and EHP are VIEs under the provisions of FIN 46. Occidental has
concluded it is not the primary beneficiary of OCP or EHP and, therefore,
accounts for these investments using the equity method.
ADVANCES TO EQUITY INVESTEES
In 2004, Occidental advanced $204 million to an equity method investee
under a note receivable (Note). The Note bears interest at 2 percent and is due
December 31, 2007. In 2003, Occidental contributed $60 million to an equity
method investee that was converted to a subordinated revolving credit agreement
(Revolver) in 2004. The Revolver bears interest at 18 percent and expires on
December 31, 2021.
AVAILABLE-FOR-SALE SECURITIES
Occidental accounts for its investment in Premcor Inc., an independent
petroleum refiner, as an available-for-sale security carried at fair value. As
of December 31, 2004 and 2003, the fair value of Occidental's investment in
Premcor was $381 million and $235 million, respectively, with cumulative
unrealized after-tax gains of $184 million and $89 million, respectively, in
OCI.
RELATED-PARTY TRANSACTIONS
Occidental purchases power, steam and chemicals from its equity investees
and sells chemicals and power to its equity investees at market related prices.
During 2004, 2003 and 2002, Occidental entered into the following transactions
and had amounts due from/to with its related parties:
For the years ended December 31, (in millions) 2004 2003 2002
================================================================================ ========== ========== ==========
Purchases $ 1,035 $ 707 $ 604
Sales 517 502 284
Services 13 1 7
Advances and amounts due from (a) 315 74 82
Amounts due to 23 21 70
- -------------------------------------------------------------------------------- ---------- ---------- ----------
(a) Amounts have been restated in prior periods to include advances to conform
to current year presentation.
NOTE 15 INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
Occidental has identified two reportable segments through which it conducts
its continuing operations: oil and gas and chemical. The factors for determining
the reportable segments were based on the distinct nature of their operations.
They are managed as separate business units because each requires and is
responsible for executing a unique business strategy. 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, basic chemicals, vinyls and performance
chemicals.
Earnings of industry segments and geographic areas generally exclude
interest income, interest expense, environmental remediation expenses,
unallocated corporate expenses, discontinued operations and cumulative effect of
changes in accounting principles, but include income from equity investments
(except as noted below) and gains and losses from dispositions of segment and
geographic area assets.
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 resulting from purchase accounting
adjustments, which arose from the implementation in 1992 of SFAS No. 109,
"Accounting for Income Taxes," and the tax effects resulting from major,
infrequently occurring transactions such as asset sales and legal settlements
that relate to segment results.
Identifiable assets are those assets used in the operations of the
segments. Corporate and other assets consist of cash, short-term investments,
certain corporate receivables, a 17-percent equity investment in Lyondell, a
12-percent ownership interest in Premcor, Inc., a leased cogeneration facility
in Taft, Louisiana and a common carrier oil pipeline company.
65
INDUSTRY SEGMENTS
In millions
Corporate
Oil and Gas Chemical and Other Total
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2004
Net sales $ 7,582 (a) $ 3,675 (b) $ 111 (i) $ 11,368
=========== =========== =========== ===========
Pretax operating profit(loss) $ 4,311 $ 414 $ (411)(d) $ 4,314
Income taxes (767) (2) (939)(e) (1,708)
Discontinued operations, net -- -- (38) (38)
----------- ----------- ----------- -----------
Net income(loss) (c) $ 3,544 $ 412 $ (1,388)(g) $ 2,568
=========== =========== =========== ===========
Unconsolidated equity investments $ 426 $ 83 $ 1,218 $ 1,727
=========== =========== =========== ===========
Property, plant and equipment additions, net (h) $ 1,649 $ 155 $ 39 $ 1,843
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 1,041 $ 243 $ 19 $ 1,303
=========== =========== =========== ===========
Total assets $ 14,549 $ 3,470 $ 3,372 $ 21,391
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2003
Net sales $ 6,003 (a) $ 3,092 (b) $ 145 (i) $ 9,240
=========== =========== =========== ===========
Pretax operating profit(loss) $ 3,229 $ 223 $ (620)(d) $ 2,832
Income taxes (565) (3) (663)(e) (1,231)
Discontinued operations, net -- -- (6) (6)
Cumulative effect of changes in accounting principles, net -- -- (68) (68)
----------- ----------- ----------- -----------
Net income(loss) (c) $ 2,664 $ 220 $ (1,357)(g) $ 1,527
=========== =========== =========== ===========
Unconsolidated equity investments $ 386 $ 61 $ 708 $ 1,155
=========== =========== =========== ===========
Property, plant and equipment additions, net (h) $ 1,237 $ 344 $ 19 $ 1,600
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 957 $ 203 $ 15 $ 1,175
=========== =========== =========== ===========
Total assets $ 13,089 $ 3,512 $ 1,567 $ 18,168
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2002
Net sales $ 4,634 (a) $ 2,613 (b) $ -- $ 7,247
=========== =========== =========== ===========
Pretax operating profit(loss) $ 2,181 $ (99) $ (468)(d) $ 1,614
Income taxes (474) 403 (362)(e) (433)
Discontinued operations, net -- -- (97) (97)
Cumulative effect of changes in accounting principles, net -- -- (95) (95)
----------- ----------- ----------- -----------
Net income(loss) (c) $ 1,707 $ 304 (f) $ (1,022)(g) $ 989
=========== =========== =========== ===========
Unconsolidated equity investments $ 339 $ (11) $ 728 $ 1,056
=========== =========== =========== ===========
Property, plant and equipment additions, net (h) $ 1,038 $ 107 $ 89 $ 1,234
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 819 $ 180 $ 10 $ 1,009
=========== =========== =========== ===========
Total assets $ 12,271 $ 3,069 $ 1,208 $ 16,548
============================================================= =========== =========== =========== ===========
Footnotes:
- ----------
(a) Oil sales represented approximately 78 percent, 74 percent and 77 percent
of net oil and gas sales for the periods ended December 31, 2004, 2003 and
2002, respectively. In 2004, sales to a major oil and gas company totaled
approximately 10.5 percent of consolidated net sales. The loss of this
customer would have no impact on Occidental since crude oil and natural gas
are both commodities and are actively traded on futures markets and the oil
and gas could be sold to other market participants.
(b) Total product sales for the chemical segment were as follows:
Basic Chemicals Commodity Vinyl Resins Performance Chemicals
====================== ====================== ======================
YEAR ENDED DECEMBER 31, 2004 33% 57% 10%
Year ended December 31, 2003 36% 52% 12%
Year ended December 31, 2002 38% 49% 13%
66
Footnotes continued:
- --------------------
(c) Segment earnings include charges and credits for major infrequently
occurring transactions in lieu of U.S. federal income taxes. In 2003, the
amounts allocated to the oil and gas segment were charges of $6 million. In
2002, the amounts allocated to the segments were charges of $1 million and
a credit of $403 million in oil and gas and chemical, respectively.
(d) Includes unallocated net interest expense, administration expense,
environmental remediation and other items.
(e) Includes unallocated income taxes.
(f) Chemicals includes the 2002 gain on sale of Equistar investment of $164
million, net of tax.
(g) Includes the following significant items affecting earnings for the years
ended December 31:
Benefit (Charge) (In millions) 2004 2003 2002
======================================================= ========== ========== ==========
CORPORATE
Gain on Lyondell stock issuance $ 121 $ -- $ --
Trust preferred redemption charge (11) -- --
Settlement of federal tax issues 47 -- --
Debt repayment charge -- (61) --
Tax effect of pre-tax adjustments (40) 21 --
Discontinued operations, net * (38) (6) (97)
Changes in accounting principles, net * -- (68) (95)
-------------------------------------------------------- ---------- ---------- ----------
* Amounts shown after-tax.
(h) Excludes acquisitions of businesses. Amounts include capitalized interest
of $10 million in 2004, $4 million in 2003 and $12 million in 2002.
(i) The 2004 amount represents revenue from a common carrier oil pipeline
company and an electricity cogeneration facility in Taft, Louisiana. The
2003 amount represents revenue from the cogeneration facility.
GEOGRAPHIC AREAS
In millions
Net sales (a) Property, plant and equipment, net
-------------------------------------- --------------------------------------
For the years ended December 31, 2004 2003 2002 2004 2003 2002
=================================== ========== ========== ========== ========== ========== ==========
United States $ 8,055 $ 6,719 $ 5,107 $ 11,612 $ 11,581 $ 10,974
Qatar 900 691 566 1,497 1,171 955
Colombia 629 489 381 207 100 98
Yemen 538 472 422 329 349 316
Ecuador 488 220 98 290 224 176
Canada 230 206 150 36 38 33
Oman 253 178 158 271 229 155
Pakistan 171 168 151 123 156 189
United Arab Emirates -- -- -- 240 109 93
Other Foreign 104 97 214 28 27 25
---------- ---------- ---------- ---------- ---------- ----------
Total $ 11,368 $ 9,240 $ 7,247 $ 14,633 $ 13,984 $ 13,014
=================================== ========== ========== ========== ========== ========== ==========
(a) Sales are shown by individual country based on the location of the entity
making the sale.
67
NOTE 16 COSTS AND RESULTS OF OIL AND GAS PRODUCING ACTIVITIES
- --------------------------------------------------------------------------------
Capitalized costs relating to oil and gas producing activities and related
accumulated DD&A were as follows:
Consolidated Subsidiaries
------------------------------------------------------------------
Other
United Latin Middle Eastern Other
In millions States America East Hemisphere Total Interests (c)
================================ ========== ========== ========== ========== ========== ==========
DECEMBER 31, 2004
Proved properties $ 11,480 $ 1,238 $ 4,048 $ 256 $ 17,022 $ 32
Unproved properties (a) 457 20 18 -- 495 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL PROPERTY COSTS 11,937 1,258 4,066 256 17,517 32
Support facilities 500 56 100 86 742 15
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CAPITALIZED COSTS (b) 12,437 1,314 4,166 342 18,259 47
Accumulated depreciation,
depletion and amortization (3,553) (816) (1,829) (217) (6,415) (13)
---------- ---------- ---------- ---------- ---------- ----------
NET CAPITALIZED COSTS $ 8,884 $ 498 $ 2,337 $ 125 $ 11,844 $ 34
================================ ========== ========== ========== ========== ========== ==========
DECEMBER 31, 2003
Proved properties $ 10,547 $ 978 $ 3,298 $ 246 $ 15,069 $ 34
Unproved properties (a) 867 10 20 -- 897 1
---------- ---------- ---------- ---------- ---------- ----------
TOTAL PROPERTY COSTS 11,414 988 3,318 246 15,966 35
Support facilities 443 57 97 81 678 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CAPITALIZED COSTS (b) 11,857 1,045 3,415 327 16,644 35
Accumulated depreciation,
depletion and amortization (2,949) (720) (1,557) (171) (5,397) (1)
---------- ---------- ---------- ---------- ---------- ----------
NET CAPITALIZED COSTS $ 8,908 $ 325 $ 1,858 $ 156 $ 11,247 $ 34
================================ ========== ========== ========== ========== ========== ==========
DECEMBER 31, 2002
Proved properties $ 9,736 $ 883 $ 2,706 $ 259 $ 13,584 $ 35
Unproved properties (a) 1,205 2 102 -- 1,309 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL PROPERTY COSTS 10,941 885 2,808 259 14,893 35
Support facilities 332 50 58 51 491 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CAPITALIZED COSTS (b) 11,273 935 2,866 310 15,384 35
Accumulated depreciation,
depletion and amortization (2,560) (661) (1,348) (121) (4,690) 9
---------- ---------- ---------- ---------- ---------- ----------
NET CAPITALIZED COSTS
$ 8,713 $ 274 $ 1,518 $ 189 $ 10,694 $ 44
================================ ========== ========== ========== ========== ========== ==========
(a) Primarily consists of California properties.
(b) Includes costs related to leases, exploration costs, lease and well
equipment, pipelines and terminals, gas plants and other equipment.
(c) Includes capitalized costs for equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
68
Costs incurred in oil and gas property acquisition, exploration and
development activities, whether capitalized or expensed, were as follows:
Consolidated Subsidiaries
------------------------------------------------------------------
Other
United Latin Middle Eastern Other
In millions States America East Hemisphere Total Interests (b)
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2004
Property Acquisition Costs
Proved Properties $ 43 $ 94 $ 21 $ -- $ 158 $ (12)
Unproved Properties 4 -- -- 4 8 --
Exploration costs 31 47 28 52 158 --
Development costs 568 144 715 11 1,438 11
Asset Retirement Costs 13 12 -- -- 25 (1)
---------- ---------- ---------- ---------- ---------- ----------
COSTS INCURRED (a, b) $ 659 $ 297 $ 764 $ 67 $ 1,787 $ (2)
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2003
Property Acquisition Costs
Proved Properties $ 345 $ -- $ 19 $ -- $ 364 $ --
Unproved Properties 4 -- -- -- 4 --
Exploration costs 27 30 17 24 98 (1)
Development costs 465 98 516 18 1,097 10
Asset Retirement Costs 12 -- -- -- 12 --
---------- ---------- ---------- ---------- ---------- ----------
COSTS INCURRED (a, b) $ 853 $ 128 $ 552 $ 42 $ 1,575 $ 9
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2002
Property Acquisition Costs
Proved Properties $ 72 $ -- $ 19 $ 72 $ 163 $ --
Unproved Properties -- -- 29 -- 29 --
Exploration costs 54 30 34 16 134 --
Development costs 457 97 312 24 890 7
---------- ---------- ---------- ---------- ---------- ----------
COSTS INCURRED (a, b) $ 583 $ 127 $ 394 $ 112 $ 1,216 $ 7
================================ ========== ========== ========== ========== ========== ==========
(a) Excludes capitalized CO2 of $54 million in 2004, $48 million in 2003 and
$42 million in 2002.
(b) Includes equity investees' costs in Russia and Yemen, partially offset by
minority interests in a Colombian affiliate.
69
The results of operations of Occidental's oil and gas producing activities,
which exclude oil and gas trading activities and items such as asset
dispositions, corporate overhead, interest and royalties, were as follows:
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other
In millions States America East Hemisphere Total Interests (c)
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2004
Revenues $ 4,467 $ 994 $ 1,690 (a) $ 149 $ 7,300 $ 200
Production costs 1,016 168 175 16 1,375 122
Exploration expenses 117 28 20 49 214 1
Other operating expenses 226 73 77 16 392 6
Depreciation, depletion and
amortization 622 96 276 46 1,040 12
---------- ---------- ---------- ---------- ---------- ----------
PRETAX INCOME 2,486 629 1,142 22 4,279 59
Income tax expense(b) 689 270 525 (a) 14 1,498 9
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS $ 1,797 $ 359 $ 617 $ 8 $ 2,781 $ 50
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2003
Revenues $ 3,637 $ 612 $ 1,341 (a) $ 147 $ 5,737 $ 138
Production costs 813 122 183 16 1,134 91
Exploration expenses 79 20 17 23 139 (1)
Other operating expenses 207 41 76 13 337 7
Depreciation, depletion and
amortization 637 60 209 48 954 17
---------- ---------- ---------- ---------- ---------- ----------
PRETAX INCOME 1,901 369 856 47 3,173 24
Income tax expense(b) 500 179 415 (a) 26 1,120 9
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS $ 1,401 $ 190 $ 441 $ 21 $ 2,053 $ 15
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2002
Revenues $ 2,622 $ 453 $ 1,146 (a) $ 133 $ 4,354 $ 107
Production costs 753 92 137 21 1,003 61
Exploration expenses 105 27 28 15 175 1
Other operating expenses 152 (7) 59 8 212 10
Depreciation, depletion and
amortization 570 41 171 24 806 13
---------- ---------- ---------- ---------- ---------- ----------
PRETAX INCOME 1,042 300 751 65 2,158 22
Income tax expense(b) 210 113 357 (a) 28 708 10
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS $ 832 $ 187 $ 394 $ 37 $ 1,450 $ 12
================================ ========== ========== ========== ========== ========== ==========
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf.
(b) U.S. federal income taxes reflect expenses allocated for U.S. income tax
purposes only 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.
(c) Includes results of operations for equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
70
RESULTS PER UNIT OF PRODUCTION (Unaudited)
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other
In millions States America East Hemisphere Total (e) Interests (d)
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2004
Revenues from net production
Oil ($/bbl.) $ 37.72 $ 32.75 $ 50.85 (a) $ 33.13 $ 39.56 $ 24.31
========== ========== ========== ========== ========== ==========
Natural gas ($/Mcf) $ 5.35 $ -- $ 0.97 $ 2.25 $ 4.60 $ --
========== ========== ========== ========== ========== ==========
Barrel of oil equivalent
($/bbl.)(b,c) $ 35.97 $ 32.75 $ 46.65 (a) $ 20.63 $ 36.87 $ 24.31
Production costs 8.18 5.54 4.83 2.21 6.95 12.11
Exploration expenses 0.94 0.92 0.55 6.78 1.08 0.09
Other operating expenses 1.82 2.41 2.13 2.21 1.98 0.83
Depreciation, depletion and
amortization 5.01 3.16 7.62 6.37 5.25 1.66
---------- ---------- ---------- ---------- ---------- ----------
PRETAX INCOME 20.02 20.72 31.52 3.06 21.61 9.62
Income tax expense 5.55 8.90 14.49 (a) 1.94 7.57 2.77
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS $ 14.47 $ 11.82 $ 17.03 $ 1.12 $ 14.04 $ 6.85
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2003
Revenues from net production
Oil ($/bbl.) $ 28.74 $ 26.98 $ 39.49 (a) $ 26.68 $ 31.02 $ 16.30
========== ========== ========== ========== ========== ==========
Natural gas ($/Mcf) $ 4.81 $ -- $ -- $ 2.04 $ 4.49 $ --
========== ========== ========== ========== ========== ==========
Barrel of oil equivalent
($/bbl.)(b,c) $ 28.57 $ 26.98 $ 39.49 (a) $ 18.52 $ 29.90 $ 16.30
Production costs 6.39 5.38 5.39 2.02 5.91 8.50
Exploration expenses 0.62 0.88 0.50 2.90 0.72 --
Other operating expenses 1.63 1.81 2.24 1.64 1.76 0.79
Depreciation, depletion and
amortization 5.00 2.64 6.15 6.05 4.97 1.93
---------- ---------- ---------- ---------- ---------- ----------
PRETAX INCOME 14.93 16.27 25.21 5.91 16.54 5.08
Income tax expense 3.93 7.89 12.22 (a) 3.27 5.84 2.19
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS $ 11.00 $ 8.38 $ 12.99 $ 2.64 $ 10.70 $ 2.89
================================ ========== ========== ========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 2002
Revenues from net production
Oil ($/bbl.) $ 23.47 $ 23.26 $ 34.12 (a) $ 22.63 $ 26.20 $ 14.98
========== ========== ========== ========== ========== ==========
Natural gas ($/Mcf) $ 2.89 $ -- $ -- $ 2.08 $ 2.81 $ --
========== ========== ========== ========== ========== ==========
Barrel of oil equivalent
($/bbl.)(b,c) $ 21.30 $ 23.26 $ 34.12 (a) $ 17.76 $ 23.71 $ 14.98
Production costs 6.12 4.72 4.08 2.80 5.46 6.75
Exploration expenses 0.85 1.39 0.83 2.00 0.95 0.10
Other operating expenses 1.23 (0.36) 1.76 1.07 1.15 0.78
Depreciation, depletion and
amortization 4.63 2.11 5.09 3.20 4.39 1.76
---------- ---------- ---------- ---------- ---------- ----------
PRETAX INCOME 8.47 15.40 22.36 8.69 11.76 5.59
Income tax expense 1.71 5.80 10.63 (a) 3.74 3.86 2.35
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS $ 6.76 $ 9.60 $ 11.73 $ 4.95 $ 7.90 $ 3.24
================================ ========== ========== ========== ========== ========== ==========
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
(c) Revenues from net production exclude royalty payments and other
adjustments.
(d) Includes results of operations for equity investees in Russia and Yemen.
(e) The computation of results per unit of production included in the
denominator 2.1 mmboe and 4.2 mmboe produced by Occidental that were
subject to volumetric production payments for the years 2003 and 2002.
71
2004 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 (a) JUNE 30 (a) SEPTEMBER 30 (a) DECEMBER 31
============================================================= ========== ========== ============ ============
Segment net sales
Oil and gas $ 1,693 $ 1,783 $ 2,033 $ 2,073
Chemical 834 911 945 985
Other 30 30 27 24
---------- ---------- ------------ ------------
Net sales $ 2,557 $ 2,724 $ 3,005 $ 3,082
========== ========== ============ ============
Gross profit $ 1,177 $ 1,286 $ 1,544 $ 1,588
========== ========== ============ ============
Segment earnings
Oil and gas $ 750 $ 814 $ 1,003 $ 977
Chemical 54 89 139 130
---------- ---------- ------------ ------------
804 903 1,142 1,107
Unallocated corporate items
Interest expense, net
Debt and trust preferred distributions (68) (60) (59) (53)
Income taxes (192) (210) (275) (262)
Other (55) (49) (49) (18)
---------- ---------- ------------ ------------
Income from continuing operations 489 584 759 774
Discontinued operations, net (2) (3) (1) (32)
---------- ---------- ------------ ------------
Net income $ 487 $ 581 $ 758 $ 742
========== ========== ============ ============
Basic earnings per common share
Income from continuing operations $ 1.25 $ 1.48 $ 1.91 $ 1.94
Discontinued operations, net (.01) -- -- (.08)
Cumulative effect of changes in accounting principles, net -- -- -- --
---------- ---------- ------------ ------------
Basic earnings per common share $ 1.24 $ 1.48 $ 1.91 $ 1.86
========== ========== ============ ============
Diluted earnings per common share
Income from continuing operations $ 1.24 $ 1.46 $ 1.88 $ 1.91
Discontinued operations, net (.01) -- -- (.08)
---------- ---------- ------------ ------------
Diluted earnings per common share $ 1.23 $ 1.46 $ 1.88 $ 1.83
========== ========== ============ ============
Dividends per common share $ .275 $ .275 $ .275 $ .275
========== ========== ============ ============
Market price per common share
High $ 47.22 $ 49.72 $ 56.46 $ 60.75
Low $ 41.95 $ 43.54 $ 47.76 $ 53.94
============================================================= ========== ========== ============ ============
(a) Interim period amounts have been restated to reflect discontinued
operations.
73
2003 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended March 31 (a) June 30 (a) September 30 (a) December 31
============================================================= ========== ========== ============ ============
Segment net sales
Oil and gas $ 1,553 $ 1,440 $ 1,480 $ 1,530
Chemical 767 764 771 790
Other 28 41 46 30
---------- ---------- ------------ ------------
Net sales $ 2,348 $ 2,245 $ 2,297 $ 2,350
========== ========== ============ ============
Gross profit $ 1,075 $ 1,005 $ 1,038 $ 1,088
========== ========== ============ ============
Segment earnings
Oil and gas $ 727 $ 637 $ 660 $ 640
Chemical 38 47 63 72
---------- ---------- ------------ ------------
765 684 723 712
Unallocated corporate items
Interest expense, net
Debt and trust preferred distributions (135) (64) (71) (63)
Income taxes (179) (169) (161) (157)
Other (56) (75) (44) (109)
---------- ---------- ------------ ------------
Income from continuing operations 395 376 447 383
Discontinued operations, net (2) (2) (1) (1)
Cumulative effect of changes in accounting principles, net (68) -- -- --
---------- ---------- ------------ ------------
Net income $ 325 $ 374 $ 446 $ 382
========== ========== ============ ============
Basic earnings per common share
Income from continuing operations $ 1.04 $ .99 $ 1.16 $ .99
Discontinued operations, net -- (.01) -- --
Cumulative effect of changes in accounting principles, net (.18) -- -- --
---------- ---------- ------------ ------------
Basic earnings per common share $ .86 $ .98 $ 1.16 $ .99
========== ========== ============ ============
Diluted earnings per common share
Income from continuing operations $ 1.03 $ .98 $ 1.14 $ .97
Discontinued operations, net -- (.01) -- --
Cumulative effect of changes in accounting principles, net (.18) -- -- --
---------- ---------- ------------ ------------
Diluted earnings per common share $ .85 $ .97 $ 1.14 $ .97
========== ========== ============ ============
Dividends per common share $ .26 $ .26 $ .26 $ .26
========== ========== ============ ============
Market price per common share
High $ 30.74 $ 34.40 $ 35.84 $ 42.98
Low $ 27.17 $ 29.55 $ 30.64 $ 34.70
============================================================= ========== ========== ============ ============
(a) Quarterly amounts have been restated to reflect discontinued operations.
73
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 (in millions of barrels)
include condensate. The reserves are stated after applicable royalties. These
estimates include reserves in which Occidental holds an economic interest under
production-sharing contracts and other economic arrangements.
The reserve estimation process involves reservoir engineers, geoscientists,
planning engineers and financial analysts. As part of this process, all reserve
volumes are estimated by a forecast of production rates, operating costs and
capital expenditures. Price differentials between benchmark prices and prices
realized and specifics of each operating agreement are then used to estimate the
net reserves. Production rate forecasts are derived by a number of methods,
including estimates from decline curve analyses, material balance calculations
that take into account the volume of substances replacing the volumes produced
and associated reservoir pressure changes, or computer simulation of the
reservoir performance. Operating costs and capital costs are forecast based on
past experience combined with expectations of future cost for the specific
reservoirs. In many cases, activity-based cost models for a reservoir are
utilized to project operating costs as production rates and the number of wells
for production and injection vary.
A senior corporate officer of Occidental is responsible for the internal
audit and review of its oil and gas reserves data. In addition, a Corporate
Reserves Review Committee (the Reserves Committee) has been established,
consisting of senior corporate officers, to monitor and review Occidental's oil
and gas reserves. The Reserves Committee reports to the Audit Committee of
Occidental's Board of Directors periodically throughout the year. Occidental has
retained Ryder Scott Company, L.P. (Ryder Scott), independent petroleum
engineering consultants, to review its oil and gas estimation processes.
Ryder Scott has compared Occidental's methods and procedures for estimating
oil and gas reserves to generally accepted industry standards and has reviewed
certain data, methods and procedures used in estimating reserves volumes, the
reserve and economic evaluations and reserves classifications. Ryder Scott then
reviewed the specific application of such methods and procedures for a selection
of oil and gas fields considered to be a valid representation of Occidental's
total reserves portfolio.
Based on this review, including the data, technical processes and
interpretations presented by Occidental, Ryder Scott has concluded that the
methodologies used by Occidental in preparing the relevant estimates generally
comply with current Securities and Exchange Commission standards. Ryder Scott
has not been engaged to render an opinion as to the reserves volumes presented
by Occidental.
Estimates of proven reserves are collected in a database and changes in
this database are reviewed by engineering personnel to ensure accuracy. Finally,
reserve volumes and changes are reviewed and approved by Occidental's senior
management.
74
OIL RESERVES
In millions of barrels
Consolidated Subsidiaries
-----------------------------------------------------------------
Other
United Latin Middle Eastern Other
States America East (a) Hemisphere Total Interests (b)
========================================== ========== ========== ========== ========== ========== ==========
PROVED DEVELOPED AND UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 2001 1,371 152 321 9 1,853 44
Revisions of previous estimates 28 13 (31) 3 13 (1)
Improved recovery 69 1 42 -- 112 5
Extensions and discoveries 22 11 6 1 40 --
Purchases of proved reserves 51 -- -- 5 56 2
Sales of proved reserves (4) -- -- -- (4) --
Production (85) (19) (34) (4) (142) (8)
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002 1,452 158 304 14 1,928 42
Revisions of previous estimates (11) -- 10 -- (1) 6
Improved recovery 58 6 21 -- 85 4
Extensions and discoveries 4 11 25 1 41 6
Purchases of proved reserves 98 -- -- -- 98 --
Sales of proved reserves (8) -- -- -- (8) --
Production (93) (23) (34) (3) (153) (10)
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2003 1,500 152 326 12 1,990 48
Revisions of previous estimates (4) (4) 16 (3) 5 5
Improved recovery 72 6 10 -- 88 1
Extensions and discoveries 9 18 3 -- 30 2
Purchases of proved reserves 10 29 -- -- 39 (4)
Production (93) (30) (33) (3) (159) (9)
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2004 1,494 171 322 6 1,993 43
========================================== ========== ========== ========== ========== ========== ==========
PROVED DEVELOPED RESERVES (c)
December 31, 2001 1,106 91 232 8 1,437 35
========== ========== ========== ========== ========== ==========
December 31, 2002 1,183 85 228 12 1,508 34
========== ========== ========== ========== ========== ==========
December 31, 2003 1,262 116 227 11 1,616 35
========== ========== ========== ========== ========== ==========
DECEMBER 31, 2004 1,260 151 208 6 1,625 37
========================================== ========== ========== ========== ========== ========== ==========
(a) All Middle East reserves are related to PSCs.
(b) Includes reserves applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
(c) Approximately 3 percent of the proved developed reserves at December 31,
2004 are nonproducing. Over half of these reserves are located in Latin
America and the remainder is in the United States and Middle East. Plans
are to begin producing these reserves in 2005.
75
GAS RESERVES
In billions of cubic feet
Consolidated Subsidiaries
-----------------------------------------------------------------
Other
United Latin Middle Eastern Other
States America East (a) Hemisphere Total Interests
========================================== ========== ========== ========== ========== ========== ==========
PROVED DEVELOPED AND UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 2001 1,962 -- -- 106 2,068 --
Revisions of previous estimates (39) -- -- (15) (54) --
Improved recovery 39 -- 106 6 151 --
Extensions and discoveries 57 -- -- 3 60 --
Purchases of proved reserves 14 -- -- 45 59 --
Sales of proved reserves (6) -- -- -- (6) --
Production (b) (206) -- -- (23) (229) --
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002 1,821 -- 106 122 2,049 --
Revisions of previous estimates 47 -- (10) 7 44 --
Improved recovery 68 -- -- 2 70 9
Extensions and discoveries 38 -- 558 1 597 --
Purchases of proved reserves 55 -- -- -- 55 --
Sales of proved reserves (9) -- -- -- (9) --
Production (b) (194) -- -- (27) (221) --
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2003 1,826 -- 654 105 2,585 9
Revisions of previous estimates 94 -- 134 13 241 (9)
Improved recovery 180 -- -- 5 185 --
Extensions and discoveries 181 -- -- 10 191 --
Purchases of proved reserves 7 -- -- -- 7 --
Sales of proved reserves (1) -- -- -- (1) --
Production (186) -- (20) (27) (233) --
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2004 2,101 -- 768 106 2,975 --
========================================== ========== ========== ========== ========== ========== ==========
PROVED DEVELOPED RESERVES (c)
December 31, 2001 1,718 -- -- 89 1,807 --
========== ========== ========== ========== ========== ==========
December 31, 2002 1,630 -- -- 110 1,740 --
========== ========== ========== ========== ========== ==========
December 31, 2003 1,618 -- 91 94 1,803 9
========== ========== ========== ========== ========== ==========
DECEMBER 31, 2004 1,644 -- 100 95 1,839 --
========================================== ========== ========== ========== ========== ========== ==========
(a) All Middle East reserves are related to PSCs.
(b) Production excludes 12.7 bcf and 25.3 bcf subject to volumetric production
payments for the years 2003 and 2002, respectively.
(c) Approximately 2 percent of the proved developed reserves at December 31,
2004 are nonproducing. Plans are to begin producing these reserves in 2005.
76
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 pre-tax 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, 2004, 2003 and 2002. 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.
The year-end prices used to calculate future cash flows vary by producing
area and market conditions. For the 2004, 2003 and 2002 disclosures, the West
Texas Intermediate oil prices used were $43.45 per barrel, $32.52 per barrel and
$31.17 per barrel, respectively. The Henry Hub gas prices used for the 2004,
2003 and 2002 disclosures were $6.03/MMBtu, $5.79/MMBtu and $4.75/MMBtu,
respectively.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
In millions
Consolidated Subsidiaries
--------------------------------------------------------------
Other
United Latin Middle Eastern Other
States America East Hemisphere Total Interests
============================================= ========== ========== ========== ========== ========== ==========
AT DECEMBER 31, 2004
Future cash flows $ 67,273 $ 5,161 $ 12,042 $ 438 $ 84,914 $ 959
Future costs
Production costs and other operating
expenses (28,518) (2,334) (3,236) (147) (34,235) (633)
Development costs (b) (2,214) (185) (1,421) (30) (3,850) (55)
---------- ---------- ---------- ---------- ---------- ----------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 36,541 2,642 7,385 261 46,829 271
Future income tax expense (11,751) (986) -- (89) (12,826) 40
---------- ---------- ---------- ---------- ---------- ----------
FUTURE NET CASH FLOWS 24,790 1,656 7,385 172 34,003 311
Ten percent discount factor (14,104) (443) (3,389) (27) (17,963) (59)
---------- ---------- ---------- ---------- ---------- ----------
STANDARDIZED MEASURE $ 10,686 $ 1,213 $ 3,996 $ 145 $ 16,040 $ 252
============================================= ========== ========== ========== ========== ========== ==========
AT DECEMBER 31, 2003
Future cash flows $ 53,939 $ 3,977 $ 10,232 $ 556 $ 68,704 $ 987
Future costs
Production costs and other operating
expenses (22,584) (1,404) (2,945) (112) (27,045) (434)
Development costs (b) (1,931) (129) (1,382) (39) (3,481) (87)
---------- ---------- ---------- ---------- ---------- ----------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 29,424 2,444 5,905 405 38,178 466
Future income tax expense (9,090) (1,070) (626) (169) (10,955) (141)
---------- ---------- ---------- ---------- ---------- ----------
FUTURE NET CASH FLOWS 20,334 1,374 5,279 236 27,223 325
Ten percent discount factor (11,644) (355) (2,390) (47) (14,436) (81)
---------- ---------- ---------- ---------- ---------- ----------
STANDARDIZED MEASURE $ 8,690 $ 1,019 $ 2,889 $ 189 $ 12,787 $ 244
============================================= ========== ========== ========== ========== ========== ==========
AT DECEMBER 31, 2002
Future cash flows $ 46,806 $ 3,407 $ 8,555 $ 628 $ 59,396 $ 429
Future costs
Production costs and other operating
expenses (18,288) (907) (2,227) (102) (21,524) (286)
Development costs (b) (1,997) (165) (969) (28) (3,159) (40)
---------- ---------- ---------- ---------- ---------- ----------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 26,521 2,335 5,359 498 34,713 103
Future income tax expense (7,929) (906) (333) (190) (9,358) --
---------- ---------- ---------- ---------- ---------- ----------
FUTURE NET CASH FLOWS 18,592 1,429 5,026 308 25,355 103
Ten percent discount factor (10,342) (440) (2,079) (65) (12,926) (22)
---------- ---------- ---------- ---------- ---------- ----------
STANDARDIZED MEASURE $ 8,250 $ 989 $ 2,947 $ 243 $ 12,429 $ 81
============================================= ========== ========== ========== ========== ========== ==========
(a) Includes future net cash flows applicable to equity investees in Russia and
Yemen, partially offset by minority interests in a Colombian affiliate.
(b) Includes dismantlement and abandonment costs.
77
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVE QUANTITIES
In millions
For the years ended December 31, 2004 2003 2002
==================================================================================================== ======== ======== ========
BEGINNING OF YEAR $ 12,787 $ 12,429 $ 6,534
-------- -------- --------
Sales and transfers of oil and gas produced, net of production costs and other operating expenses (5,397) (4,162) (2,910)
Net change in prices received per barrel, net of production costs and other operating expenses 5,868 1,874 9,684
Extensions, discoveries and improved recovery, net of future production and development costs 1,929 1,287 1,496
Change in estimated future development costs (1,058) (833) (543)
Revisions of quantity estimates 115 133 (87)
Development costs incurred during the period 1,434 1,078 954
Accretion of discount 1,641 1,545 757
Net change in income taxes (a) (712) (638) (2,820)
Purchases and sales of reserves in place, net 565 637 448
Changes in production rates and other (1,132) (563) (1,084)
-------- -------- --------
NET CHANGE 3,253 358 5,895
-------- -------- --------
END OF YEAR $ 16,040 $ 12,787 $ 12,429
==================================================================================================== ======== ======== ========
(a) Income taxes were reduced due to the ability to credit foreign taxes in the
U.S. U.S. tax on foreign entities was zero, $486 million and $276 million
for 2004, 2003 and 2002, respectively.
AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS OF OIL AND GAS
The following table sets forth, for each of the three years in the period
ended December 31, 2004, Occidental's approximate average sales prices and
average production costs of oil and gas. Production costs are the costs incurred
in lifting the oil and gas to the surface and include gathering, treating,
primary processing, field storage, property taxes and insurance on proved
properties, but do not include depreciation, depletion and amortization,
royalties, income taxes, interest, general and administrative and other
expenses.
Consolidated Subsidiaries
-----------------------------------------------------------
Other
United Latin Middle Eastern Other
States America (a) East Hemisphere (a) Total Interests (c)
=================================================== ======== ======= ======== ========== ========= =========
2004
Oil -- Average sales price ($/bbl.) $ 37.72 $ 33.09 $ 34.88 (d) $ 33.13 $ 35.95 $ 23.83
Gas -- Average sales price ($/Mcf) $ 5.35 $ -- $ 0.97 $ 2.25 $ 4.56 $ --
Average oil and gas production cost ($/bbl.) (b) $ 8.18 $ 5.54 $ 4.83 $ 2.21 $ 6.95 $ 12.11
- --------------------------------------------------- -------- ------- -------- ---------- --------- ---------
2003
Oil -- Average sales price ($/bbl.) $ 28.74 $ 27.21 $ 27.81 (d) $ 26.61 $ 28.18 $ 15.95
Gas -- Average sales price ($/Mcf) $ 4.81 $ -- $ -- $ 2.04 $ 4.45 $ --
Average oil and gas production cost ($/bbl.) (b) $ 6.39 $ 5.38 $ 5.39 $ 2.02 $ 5.91 $ 8.50
- --------------------------------------------------- -------- ------- -------- ---------- --------- ---------
2002
Oil -- Average sales price ($/bbl.) $ 23.47 $ 23.14 $ 24.13 (d) $ 23.02 $ 23.56 $ 14.80
Gas -- Average sales price ($/Mcf) $ 2.89 $ -- $ -- $ 2.08 $ 2.81 $ --
Average oil and gas production cost ($/bbl.) (b) $ 6.12 $ 4.72 $ 4.08 $ 2.80 $ 5.46 $ 6.75
- --------------------------------------------------- -------- ------- -------- ---------- --------- ---------
(a) Sales prices include royalties with respect to certain of Occidental's
interests.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
(c) Includes prices and costs applicable to equity investees in Russia and
Yemen.
(d) Excludes taxes owed by Occidental but paid by governmental entities on its
behalf.
78
NET PRODUCTIVE AND DRY -- EXPLORATORY AND DEVELOPMENT WELLS COMPLETED
The following table sets forth, for each of the three years in the period
ended December 31, 2004, Occidental's net productive and dry-exploratory and
development wells completed.
Consolidated Subsidiaries
----------------------------------------------------------------------
Other
United Latin Middle Eastern Other
States America East Hemisphere Total Interests (a)
========================= ========== ========== ========== ========== ========== ==========
2004
Oil -- Exploratory 2.8 1.8 3.7 -- 8.3 --
Development 345.9 31.0 66.4 0.4 443.7 5.0
Gas -- Exploratory 1.4 -- 0.7 1.0 3.1 --
Development 36.7 -- 2.6 2.2 41.5 --
Dry -- Exploratory 2.6 1.1 1.1 2.5 7.3 --
Development 9.0 1.0 -- 0.3 10.3 (0.1)
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
2003
Oil -- Exploratory 1.0 2.2 1.3 0.4 4.9 (0.1)
Development 277.2 26.2 61.0 2.1 366.5 4.0
Gas -- Exploratory -- -- -- -- -- --
Development 35.1 -- 1.3 -- 36.4 --
Dry -- Exploratory 4.0 6.0 3.6 1.3 14.9 (0.9)
Development 15.7 1.2 1.7 -- 18.6 0.1
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
2002
Oil -- Exploratory 2.9 1.2 3.8 -- 7.9 --
Development 258.5 16.8 58.1 2.7 336.1 8.6
Gas -- Exploratory -- -- -- 0.5 0.5 --
Development 17.9 -- -- 0.6 18.5 --
Dry -- Exploratory 5.1 1.2 1.6 0.5 8.4 --
Development 20.8 1.1 -- 0.8 22.7 (0.1)
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(a) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth, as of December 31, 2004, 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.
Consolidated Subsidiaries
------------------------------------------------------------------------
Other
United Latin Middle Eastern Other
Wells at December 31, 2004 States America East Hemisphere Total Interests (c)
================================ ============ ============ ============ ============ ============ ============
Oil -- Gross (a) 18,073 (441) 376 (--) 766 (20) 76 (--) 19,291 (461) 438 (50)
Net (b) 12,192 (320) 199 (--) 448 (20) 33 (--) 12,872 (340) 200 (25)
Gas -- Gross (a) 2,506 (82) -- (--) 15 (2) 26 (--) 2,547 (84) 1 (--)
Net (b) 2,107 (41) -- (--) 11 (2) 12 (--) 2,130 (43) 1 (--)
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(a) The total number of wells in which interests are owned.
(b) The sum of fractional interests.
(c) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
79
PARTICIPATION IN EXPLORATORY AND DEVELOPMENT WELLS BEING DRILLED
The following table sets forth, as of December 31, 2004, Occidental's
participation in exploratory and development wells being drilled.
Consolidated Subsidiaries
------------------------------------------------------------------------
Other
United Latin Middle Eastern Other
Wells at December 31, 2004 States America East Hemisphere Total Interests (a)
================================== ============ ============ ============ ============ ============ ============
Exploratory and development wells
-- Gross 45 5 4 1 55 1
-- Net 28 3 3 1 35 1
- ---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(a) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
At December 31, 2004, Occidental was participating in 102 pressure
maintenance projects in the United States, 6 in Latin America, 20 in the Middle
East and 4 in the Other Eastern Hemisphere.
OIL AND GAS ACREAGE
The following table sets forth, as of December 31, 2004, Occidental's
holdings of developed and undeveloped oil and gas acreage.
Consolidated Subsidiaries
------------------------------------------------------------------------
Other
Thousands of acres at United Latin Middle Eastern Other
December 31, 2004 States America East Hemisphere Total Interests (e)
================================== ============ ============ ============ ============ ============ ============
Developed (a) -- Gross (b) 4,348 38 522 568 5,476 114
-- Net (c) 2,909 22 211 269 3,411 35
Undeveloped (d) -- Gross (b) 1,721 7,870 2,127 14,569 26,287 5
-- Net (c) 1,039 5,359 1,437 6,991 14,826 (188)
- ---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(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
interests under production-sharing contracts and other economic
arrangements.
(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.
(e) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
80
OIL AND NATURAL GAS PRODUCTION PER DAY
The following table sets forth, for each of the three years in the period
ended December 31, 2004, Occidental's oil, natural gas liquids and natural gas
production per day.
2004 2003 2002
=========================================================================== ========== ========== ==========
United States
Crude oil and liquids (MBL)
California 78 81 86
Permian 154 150 142
Horn Mountain 19 21 1
Hugoton 3 4 3
---------- ---------- ----------
TOTAL 254 256 232
Natural Gas (MMCF)
California 237 252 286
Hugoton 127 138 148
Permian 130 129 130
Horn Mountain 13 13 --
---------- ---------- ----------
TOTAL 507 532 564
Latin America
Crude oil (MBL)
Colombia 37 37 40
Ecuador 46 25 13
---------- ---------- ----------
TOTAL 83 62 53
Middle East
Crude oil (MBL)
Oman 13 12 13
Qatar 45 45 42
Yemen 32 35 37
---------- ---------- ----------
TOTAL 90 92 92
Natural Gas (MMCF)
Oman 55 -- --
Other Eastern Hemisphere
Crude oil (MBL)
Pakistan 7 9 10
Natural Gas (MMCF)
Pakistan 75 74 63
Barrels of Oil Equivalent (MBOE)
- --------------------------------
Subtotal consolidated subsidiaries 540 520 492
Colombia - minority interest (4) (5) (5)
Russia - Occidental net interest 29 30 27
Yemen - Occidental net interest 1 2 1
---------- ---------- ----------
Total worldwide production 566 547 515
=========================================================================== ========== ========== ==========
81
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Occidental Petroleum Corporation
In millions and Subsidiaries
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
========================================================= ========== ========== ========== ========== ==========
2004
Allowance for doubtful accounts $ 24 $ 3 $ -- $ -- $ 27
========== ========== ========== ========== ==========
Environmental $ 372 $ 60 $ 6 $ (63)(a) $ 375
Foreign and other taxes, litigation and other reserves 1,167 41 -- (126)(b) 1,082
---------- ---------- ---------- ---------- ----------
$ 1,539 $ 101 $ 6 $ (189) $ 1,457 (c)
========================================================= ========== ========== ========== ========== ==========
2003
Allowance for doubtful accounts $ 28 $ -- $ -- $ (4) $ 24
========== ========== ========== ========== ==========
Environmental $ 393 $ 64 $ -- $ (85)(a) $ 372
Foreign and other taxes, litigation and other reserves 1,104 14 80 (31)(d) 1,167
---------- ---------- ---------- ---------- ----------
$ 1,497 $ 78 $ 80 $ (116) $ 1,539 (c)
========================================================= ========== ========== ========== ========== ==========
2002
Allowance for doubtful accounts $ 35 $ -- $ -- $ (7) $ 28
========== ========== ========== ========== ==========
Environmental $ 454 $ 25 $ -- $ (86)(a) $ 393
Foreign and other taxes, litigation and other reserves 930 8 193 (27)(d) 1,104
---------- ---------- ---------- ---------- ----------
$ 1,384 $ 33 $ 193 $ (113) $ 1,497 (c)
========================================================= ========== ========== ========== ========== ==========
(a) Primarily represents payments.
(b) Primarily represents balance sheet reclassifications and reclassifications
to income.
(c) Of these amounts, $154 million, $132 million and $160 million in 2004, 2003
and 2002, respectively, are classified as current.
(d) Primarily represents balance sheet reclassifications.
82
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Occidental's Chief Executive Officer and Chief Financial Officer supervised
and participated in Occidental's evaluation of its disclosure controls and
procedures as of the end of the period covered by this report. Disclosure
controls and procedures are controls and procedures designed to ensure that
information required to be disclosed in Occidental's periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Based upon that
evaluation, Occidental's Chief Executive Officer and Chief Financial Officer
concluded that Occidental's disclosure controls and procedures are effective.
There has been no change in Occidental's internal control over financial
reporting during the fourth quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, Occidental's internal control over
financial reporting.
MANAGEMENT'S ANNUAL ASSESSMENT OF AND REPORT ON OCCIDENTAL'S INTERNAL CONTROL
OVER FINANCIAL REPORTING
The management of Occidental Petroleum Corporation (Occidental) is
responsible for establishing and maintaining adequate internal control over
financial reporting. Occidental's system of internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of consolidated financial statements
for external purposes in accordance with generally accepted accounting
principles. Occidental's internal control over financial reporting includes
those policies and procedures that: (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of Occidental's assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
Occidental's receipts and expenditures are being made only in accordance with
authorizations of Occidental's management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Occidental's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of Occidental's internal control
system as of December 31, 2004 based on the criteria for effective internal
control over financial reporting described in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management believes that, as of
December 31, 2004, Occidental's system of internal control over financial
reporting is effective.
Occidental's independent auditors, KPMG LLP, have issued an attestation
report on management's assessment of Occidental's internal control over
financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Occidental Petroleum Corporation:
We have audited management's assessment, included in the accompanying
Management's Annual Assessment of and Report on Occidental's Internal Control
Over Financial Reporting, that Occidental Petroleum Corporation and its
subsidiaries (the Company) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
83
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Occidental Petroleum Corporation and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of income, stockholders'
equity, comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2004, and our report dated February 25,
2005 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Los Angeles, California
February 25, 2005
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Occidental has adopted a Code of Business Conduct (Code). The Code applies
to the chief executive officer, chief financial officer, chief accounting
officer and persons performing similar functions (Key Personnel). The Code also
applies to Occidental's directors, its employees and the employees of entities
it controls. The Code is posted on the Occidental website www.oxy.com.
Occidental will satisfy any disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, any provision of the Code with
respect to its Key Personnel or directors by disclosing the nature of that
amendment or waiver on its website.
This item incorporates by reference the information regarding Occidental's
directors appearing under the caption "Election of Directors" in Occidental's
definitive proxy statement filed in connection with its May 6, 2005, Annual
Meeting of Stockholders (2005 Proxy Statement). See also the list of
Occidental's executive officers and related information under "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11 EXECUTIVE COMPENSATION
This item incorporates by reference the information appearing under the
captions "Executive Compensation" (excluding, however, the information appearing
under the subcaptions "Report of the Executive Compensation and Human Resources
Committee" and "Performance Graph") and "Election of Directors -- Information
Regarding the Board of Directors and Its Committees" in the 2005 Proxy
Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item incorporates by reference the information with respect to
security ownership appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 2005 Proxy Statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
84
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
This item incorporates by reference the information with respect to
accountant fees and services appearing under the sub-captions "Audit and Other
Fees" and "Report of the Audit Committee" in the 2005 Proxy Statement.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) (1) AND (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference is made to the Index to Financial Statements and Related Information
under Item 8 in Part II hereof, where these documents are listed.
(A) (3). EXHIBITS
3.(i)* Restated Certificate of Incorporation of Occidental, dated
November 12, 1999 (filed as Exhibit 3.(i) to the Annual Report on
Form 10-K of Occidental for the fiscal year ended December 31,
1999, File No. 1-9210).
3.(i)(A)* Certificate of Change of Location of Registered Office and of
Registered Agent, dated July 6, 2001. (filed as Exhibit 3.1(i) to
the Registration Statement on Form S-3 of Occidental, File No.
333-82246).
3.(ii)* Bylaws of Occidental, as amended through February 12, 2004 (filed
as Exhibit 3.(ii) to the Annual Report on Form 10-K of Occidental
for the fiscal year ended December 31, 2003, File No. 1-9210).
4.1* Occidental Petroleum Corporation Five-Year Credit Agreement,
dated as of June 18, 2004, among Occidental, JPMorgan Chase Bank
and Citicorp USA, Inc., as Co-Syndication Agents, BNP Paribas,
Bank of America, N.A., Barclays Bank PLC and The Royal Bank of
Scotland PLC as Co-Documentation Agents, The Bank of Nova Scotia,
as Administrative Agent, and the banks named therein (filed as
Exhibit 4.1 to the Quarterly Report on Form 10-Q of Occidental
for the fiscal quarter ended June 30, 2004, File No. 1-9210).
4.2* Indenture (Senior Debt Securities), dated as of April 1, 1998,
between Occidental and The Bank of New York, as Trustee (filed as
Exhibit 4 to the Registration Statement on Form S-3 of
Occidental, File No. 333-52053).
4.3* Specimen certificate for shares of Common Stock (filed as Exhibit
4.9 to the Registration Statement on Form S-3 of Occidental, File
No. 333-82246).
4.4 Instruments defining the rights of holders of other long-term
debt of Occidental and its subsidiaries are not being filed since
the total amount of securities authorized under each of such
instruments does not exceed 10 percent of the total assets of
Occidental and its subsidiaries on a consolidated basis.
Occidental agrees to furnish a copy of any such instrument to the
Commission upon request.
All of the Exhibits numbered 10.1 to 10.67 are management contracts and
compensatory plans required to be identified specifically as responsive to Item
601(b)(10)(iii)(A) of Regulation S-K pursuant to Item 15(c) of Form 10-K.
10.1 Amended and Restated Employment Agreement, dated as of February
10, 2005, between Occidental and Dr. Ray R. Irani.
10.2* Employment Agreement, dated as of November 17, 2000, between
Occidental and Dr. Dale R. Laurance (filed as Exhibit 10.3 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.3* Employment Agreement Amendment, dated July 19, 2004 between
Occidental and Dale R. Laurance (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Occidental for the fiscal
quarter ended June 30, 2004, File No. 1-9210).
10.4* Consulting Agreement entered into as of July 19, 2004, between
Occidental and Dale R. Laurance (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Occidental for the fiscal
quarter ended June 30, 2004, File No. 1-9210).
10.5 Employment Agreement, dated as of January 13, 2005, between
Occidental and Stephen I. Chazen.
10.6* Employment Agreement, dated May 19, 2003, between Occidental and
Donald P. de Brier (filed as Exhibit 10.1 to the Quarterly Report
on Form 10-Q of Occidental for the quarterly period ended June
30, 2003, File No. 1-9210).
10.7* Form of Indemnification Agreement between Occidental and each of
its directors and certain executive officers (filed as Exhibit B
to the Proxy Statement of Occidental for its May 21, 1987, Annual
Meeting of Stockholders, File No. 1-9210).
- ---------------------------------
*Incorporated herein by reference
85
10.8* Occidental Petroleum Corporation Split Dollar Life Insurance
Program and Related Documents (filed as Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 1994, File No. 1-9210).
10.9* Split Dollar Life Insurance Agreement, dated January 24, 2002, by
and between Occidental and Donald P. de Brier (filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 2002, File No. 1-9210).
10.10* Occidental Petroleum Insured Medical Plan, as amended and
restated effective April 29, 1994, amending and restating the
Occidental Petroleum Corporation Executive Medical Plan (as
amended and restated effective April 1, 1993) (filed as Exhibit
10 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ending March 31, 1994, File No. 1-9210).
10.11* Occidental Petroleum Corporation 1987 Stock Option Plan, as
amended through September 12, 2002 (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.12* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1987 Stock Option Plan (filed as Exhibit
10.2 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 1992, File No. 1-9210).
10.13* Form of Nonqualified Stock Option Agreement, with Stock
Appreciation Right, under Occidental Petroleum Corporation 1987
Stock Option Plan (filed as Exhibit 10.3 to the Quarterly Report
on Form 10-Q of Occidental for the quarterly period ended March
31, 1992, File No. 1-9210).
10.14* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1987 Stock Option Plan (filed as Exhibit
10.4 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 1992, File No. 1-9210).
10.15* Form of Incentive Stock Option Agreement, with Stock Appreciation
Right, under Occidental Petroleum Corporation 1987 Stock Option
Plan (filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q
of Occidental for the quarterly period ended March 31, 1992, File
No. 1-9210).
10.16* Occidental Petroleum Corporation Deferred Compensation Plan,
Second Amendment and Restatement Effective as of January 1, 2003
(filed as Exhibit 10.14 to the Annual Report on Form 10-K of
Occidental for the fiscal year ended December 31, 2003, File No.
1-9210).
10.17 Amendment to Occidental Petroleum Corporation Deferred
Compensation Plan.
10.18* Occidental Petroleum Corporation 2005 Deferred Compensation Plan
(filed as Exhibit 10.1 to the Current Report on Form 8-K of
Occidental dated October 14, 2004 (date of earliest event
reported), filed October 20, 2004, File No. 1-9210).
10.19 Amendment to Occidental Petroleum Corporation 2005 Deferred
Compensation Plan.
10.20* Occidental Petroleum Corporation Senior Executive Supplemental
Life Insurance Plan (effective as of January 1, 1986, as amended
and restated effective as of January 1, 1996) (filed as Exhibit
10.25 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 1995, File No. 1-9210).
10.21* Occidental Petroleum Corporation Senior Executive Survivor
Benefit Plan (effective as of January 1, 1986, as amended and
restated effective as of January 1, 1996) (filed as Exhibit 10.27
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1995, File No. 1-9210).
10.22* Amendment No. 1 to Occidental Petroleum Corporation Senior
Executive Survivor Benefit Plan, dated February 28, 2002 (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended March 31, 2002, File
No. 1-9210).
10.23* Occidental Petroleum Corporation 1995 Incentive Stock Plan, as
amended (filed as Exhibit 10.28 to the Annual Report on Form 10-K
of Occidental for the fiscal year ended December 31, 1999, File
No. 1-9210).
10.24* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.2 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.25* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.3 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.26* Form of Restricted Stock Agreement under Occidental Petroleum
Corporation 1995 Incentive Stock Plan (filed as Exhibit 99.5 to
the Registration Statement on Form S-8 of Occidental, File No.
33-64719).
10.27* Form of Performance Stock Agreement under Occidental Petroleum
Corporation 1995 Incentive Stock Plan (filed as Exhibit 99.6 to
the Registration Statement on Form S-8 of Occidental, File No.
33-64719).
- ---------------------------------
*Incorporated herein by reference
86
10.28* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
10.2 to the Current Report on Form 8-K of Occidental, dated
January 6, 1999 (date of earliest event reported), filed January
6, 1999, File No. 1-9210, amends Form previously filed as Exhibit
10.1 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719 and incorporated by reference as Exhibit 10.39
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1997, File No. 1-9210).
10.29* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
10.3 to the Current Report on Form 8-K of Occidental, dated
January 6, 1999 (date of earliest event reported), filed January
6, 1999, File No. 1-9210, amends Form previously filed as Exhibit
10.2 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719 and incorporated by reference as Exhibit 10.40
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1997, File No. 1-9210).
10.30* Form of Incentive Stock Option Agreement (With Accelerated
Performance Vesting) under Occidental Petroleum Corporation 1995
Incentive Stock Plan (filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 1999, File No. 1-9210).
10.31* Form of Nonqualified Stock Option Agreement (With Accelerated
Performance Vesting) under Occidental Petroleum Corporation 1995
Incentive Stock Plan (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 1999, File No. 1-9210).
10.32* Form of 1997 Performance Stock Option Agreement under the 1995
Incentive Stock Plan of Occidental Petroleum Corporation (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended June 30, 1997, File No.
1-9210).
10.33* Form of Amendment to 1997 Performance Stock Option Agreement
under the 1995 Incentive Stock Plan of Occidental Petroleum
Corporation (filed as Exhibit 10.43 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 1999,
File No. 1-9210).
10.34* Occidental Petroleum Corporation 1996 Restricted Stock Plan for
Non-Employee Directors, as amended April 30, 2004 (filed as
Exhibit 99.1 to the Registration Statement on Form S-8 of
Occidental, File No. 333-115099)
10.35* Form of Restricted Stock Option Assignment under Occidental
Petroleum Corporation 1996 Restricted Stock Plan for Non-Employee
Directors (filed as Exhibit 99.2 to the Registration Statement on
Form S-8 of Occidental, File No. 333-02901).
10.36* Form of Restricted Stock Agreement under Occidental Petroleum
Corporation 1996 Restricted Stock Plan for Non-Employee Directors
(filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended March 31, 2003, File
No. 1-9210).
10.37* Occidental Petroleum Corporation Supplemental Retirement Plan,
Amended and Restated Effective as of January 1, 1999, reflecting
amendments effective through March 1, 2001 (filed as Exhibit 10.3
to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 2001, File No. 1-9210).
10.38* Amendment Number 2 to the Occidental Petroleum Corporation
Supplemental Retirement Plan (As Amended and Restated Effective
January 1, 1999 Reflecting Amendments Effective through March 1,
2001) (filed as Exhibit 10.1 to the Current Report on Form 8-K of
Occidental dated December 7, 2004 (date of earliest event
reported), filed December 8, 2004, File No. 1-9210.
10.39 Summary of Material Terms and Conditions of Supplemental
Retirement Allocations (effective as of January 1, 2005).
10.40* Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(as amended through September 12, 2002) (filed as Exhibit 10.2 to
the Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.41* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2001, File No.
1-9210).
10.42* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2001, File No.
1-9210).
10.43* Form of Restricted Common Share Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.40 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2001, File No. 1-9210).
- ---------------------------------
*Incorporated herein by reference
87
10.44* Form of Performance Based Stock Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.41 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2001, File No. 1-9210).
10.45* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (July 2002
version) (filed as Exhibit 10.4 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002, File No.
1-9210).
10.46* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (July 2002
version) (filed as Exhibit 10.5 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002, File No.
1-9210).
10.47* Form of Restricted Common Share Agreement (with mandatory
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (filed as Exhibit
10.6 to the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.48* Form of Restricted Common Share Agreement (with mandatory
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (December 2002
version) (filed as Exhibit 10.47 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 2002,
File No. 1-9210).
10.49* Terms and Conditions for Incentive Stock Option Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(July 2003 version) (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 2003, File No. 1-9210).
10.50* Terms and Conditions for Nonqualified Stock Option Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(July 2003 version) (filed as Exhibit 10.4 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 2003, File No. 1-9210).
10.51* Terms and Conditions of Restricted Share Unit Award (with
mandatory deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (July 2003 version)
(filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended June 30, 2003, File No.
1-9210).
10.52* Terms and Conditions of Restricted Share Unit Award (with
mandatory deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (December 2003
version) (filed as Exhibit 10.45 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 2003,
File No. 1-9210).
10.53* Terms and Conditions of Performance Based Stock Award (deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan (December 2003 version - Corporate)
(filed as Exhibit 10.46 to the Annual Report on Form 10-K of
Occidental for the fiscal year ended December 31, 2003, File No.
1-9210).
10.54* Terms and Conditions of Performance Based Stock Award (deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan (December 2003 version - Occidental
Chemical) (filed as Exhibit 10.47 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 2003,
File No. 1-9210).
10.55* Terms and Conditions of Stock Appreciation Rights Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the fiscal quarter ended June 30, 2004, File No.
1-9210).
10.56* Terms and Conditions of Restricted Share Unit Award (without
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (filed as Exhibit
10.3 to the Quarterly Report on Form 10-Q of Occidental for the
fiscal quarter ended June 30, 2004, File No. 1-9210).
10.57 Terms and Conditions of Restricted Share Unit Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version).
10.58 Terms and Conditions of Performance Based Stock Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version).
10.59 Terms and Conditions of Performance Based Stock Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version - Chemicals).
10.60 Terms and Conditions of Performance Based Stock Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version - Oil and Gas).
10.61* Occidental Petroleum Corporation Deferred Stock Program (filed as
Exhibit 10.3 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2002, File No.
1-9210).
10.62 Amendment to Occidental Petroleum Corporation Deferred Stock
Program.
- ---------------------------------
*Incorporated herein by reference
88
10.63* Occidental Petroleum Corporation 2005 Deferred Stock Program
(filed as Exhibit 10.2 to the Current Report on Form 8-K of
Occidental dated October 14, 2004 (date of earliest event
reported), filed October 20, 2004, File No. 1-9210).
10.64 Amendment to Occidental Petroleum Corporation 2005 Deferred Stock
Program.
10.65* Occidental Petroleum Corporation Executive Incentive Compensation
Plan (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
of Occidental for the quarterly period ended March 31, 2001, File
No. 1-9210).
10.66* Description of financial counseling program (filed as Exhibit
10.50 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 2003, File No. 1-9210).
10.67* Description of group excess liability insurance program (filed as
Exhibit 10.51 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2003, File No. 1-9210).
10.68* Securities Purchase Agreement, dated as of July 8, 2002, by and
between Lyondell Chemical Company and Occidental Chemical Holding
Corporation (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.69* Stockholders Agreement, dated as of August 22, 2002, by and among
Lyondell Chemical Company and the Stockholders as defined therein
(incorporated by reference to Exhibit 10.2 to the Current Report
on Form 8-K of Occidental dated August 22, 2002 (date of earliest
event reported), filed September 6, 2002, File No. 1-9210).
10.70* Warrant for the Purchase of Shares of Common Stock, issued August
22, 2002 (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.71* Registration Rights Agreement, dated as of August 22, 2002, by
and between Occidental Chemical Holding Corporation and Lyondell
Chemical Company (incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K of Occidental dated August 22,
2002 (date of earliest event reported), filed September 6, 2002,
File No. 1-9210).
10.72* Occidental Partner Sub Purchase Agreement, dated July 8, 2002, by
and among Lyondell Chemical Company, Occidental Chemical Holding
Corporation, Oxy CH Corporation and Occidental Chemical
Corporation (incorporated by reference to Exhibit 10.5 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
12 Statement regarding computation of total enterprise ratios of
earnings to fixed charges for the five years ended December 31,
2004.
21 List of subsidiaries of Occidental at December 31, 2004.
23.1 Independent Registered Public Accounting Firm's Consent.
23.2 Expert Consent.
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------------------------
*Incorporated herein by reference
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
March 1, 2005 By: /s/ RAY R. IRANI
-------------------------------------
Ray R. Irani
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RAY R. IRANI Chairman of the Board of Directors, March 1, 2005
- ------------------------------- President and Chief Executive Officer
Ray R. Irani
/s/ STEPHEN I. CHAZEN Senior Executive Vice President March 1, 2005
- ------------------------------- and Chief Financial Officer
Stephen I. Chazen
/s/ SAMUEL P. DOMINICK, JR. Vice President and March 1, 2005
- ------------------------------- Controller (Chief
Samuel P. Dominick, Jr. Accounting Officer)
/s/ RONALD W. BURKLE Director March 1, 2005
- -------------------------------
Ronald W. Burkle
/s/ JOHN S. CHALSTY Director March 1, 2005
- -------------------------------
John S. Chalsty
/s/ EDWARD P. DJEREJIAN Director March 1, 2005
- -------------------------------
Edward P. Djerejian
/s/ R. CHAD DREIER Director March 1, 2005
- -------------------------------
R. Chad Dreier
/s/ JOHN E. FEICK Director March 1, 2005
- -------------------------------
John E. Feick
/s/ IRVIN W. MALONEY Director March 1, 2005
- -------------------------------
Irvin W. Maloney
90
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RODOLFO SEGOVIA Director March 1, 2005
- -------------------------------
Rodolfo Segovia
/s/ AZIZ D. SYRIANI Director March 1, 2005
- -------------------------------
Aziz D. Syriani
/s/ ROSEMARY TOMICH Director March 1, 2005
- -------------------------------
Rosemary Tomich
/s/ WALTER L. WEISMAN Director March 1, 2005
- -------------------------------
Walter L. Weisman
91
EXHIBIT INDEX
EXHIBITS
- --------
10.1 Amended and Restated Employment Agreement, dated as of February 10,
2005, between Occidental and Dr. Ray R. Irani.
10.5 Employment Agreement, dated as of January 13, 2005, between
Occidental and Stephen I. Chazen.
10.17 Amendment to Occidental Petroleum Corporation Deferred Compensation
Plan.
10.19 Amendment to Occidental Petroleum Corporation 2005 Deferred
Compensation Plan.
10.39 Summary of Material Terms and Conditions of Supplemental Retirement
Allocations (effective as of January 1, 2005).
10.57 Terms and Conditions of Restricted Share Unit Award under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (December 2004
version).
10.58 Terms and Conditions of Performance Based Stock Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version).
10.59 Terms and Conditions of Performance Based Stock Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version - Chemicals).
10.60 Terms and Conditions of Performance Based Stock Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(December 2004 version - Oil and Gas).
10.62 Amendment to Occidental Petroleum Corporation Deferred Stock Program.
10.64 Amendment to Occidental Petroleum Corporation 2005 Deferred Stock
Program.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the five years ended December 31, 2004.
21 List of subsidiaries of Occidental at December 31, 2004.
23.1 Independent Auditors' Consent.
23.2 Expert Consent.
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.