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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-9210
---------------------
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4035997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10889 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
(310) 208-8800
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 2005
- --------------------------------------- ---------------------------------
Common stock $.20 par value 398,251,720 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
March 31, 2005 and December 31, 2004 2
Consolidated Condensed Statements of Income --
Three months ended March 31, 2005 and 2004 4
Consolidated Condensed Statements of Cash Flows --
Three months ended March 31, 2005 and 2004 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits 26
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(Amounts in millions)
2005 2004
================================================================================ ========== ==========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,092 $ 1,199
Short-term investments 270 250
Receivables, net 2,561 2,235
Inventories 531 545
Prepaid expenses and other 183 166
Assets held for sale 17 36
---------- ----------
Total current assets 4,654 4,431
LONG-TERM RECEIVABLES, net 238 239
INVESTMENTS IN UNCONSOLIDATED ENTITIES 1,906 1,727
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation, depletion and amortization of $8,962 at
March 31, 2005 and $8,626 at December 31, 2004 15,105 14,633
OTHER ASSETS 374 361
---------- ----------
$ 22,277 $ 21,391
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(Amounts in millions)
2005 2004
================================================================================ ========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $ -- $ 459
Accounts payable 1,545 1,557
Accrued liabilities 1,253 1,123
Domestic and foreign income taxes 527 263
Liabilities held for sale 15 21
---------- ----------
Total current liabilities 3,340 3,423
---------- ----------
LONG-TERM DEBT, net of current maturities and unamortized discount 3,365 3,345
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,203 1,248
Other 2,781 2,498
---------- ----------
3,984 3,746
---------- ----------
MINORITY INTEREST 347 327
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, at par value 79 79
Additional paid-in capital 4,713 4,652
Retained earnings 6,387 5,664
Accumulated other comprehensive income 62 155
---------- ----------
11,241 10,550
---------- ----------
$ 22,277 $ 21,391
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
3
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Amounts in millions, except per-share amounts)
2005 2004
================================================================================ ========== ==========
REVENUES
Net sales $ 3,303 $ 2,557
Interest, dividends and other income 37 23
---------- ----------
3,340 2,580
---------- ----------
COSTS AND OTHER DEDUCTIONS
Cost of sales 1,532 1,380
Selling, general and administrative and other operating expenses 276 225
Environmental remediation 9 --
Exploration expense 47 54
Interest and debt expense, net 75 71
---------- ----------
1,939 1,730
---------- ----------
Income before taxes and other items 1,401 850
Provision for domestic and foreign income and other taxes 601 363
Minority interest 21 13
(Income)/loss from equity investments (71) (15)
---------- ----------
Income from continuing operations 850 489
Discontinued operations, net (4) (2)
---------- ----------
NET INCOME $ 846 $ 487
========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 2.12 $ 1.25
Discontinued operations, net (.01) (.01)
---------- ----------
Basic earnings per common share $ 2.11 $ 1.24
========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 2.09 $ 1.24
Discontinued operations, net (.01) (.01)
---------- ----------
Diluted earnings per common share $ 2.08 $ 1.23
========== ==========
DIVIDENDS PER COMMON SHARE $ .31 $ .275
========== ==========
BASIC SHARES 400.4 391.5
========== ==========
DILUTED SHARES 406.3 397.2
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
4
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Amounts in millions)
2005 2004
================================================================================ ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 850 $ 489
Adjustments to reconcile income to net cash provided by operating
activities:
Depreciation, depletion and amortization of assets 344 324
Deferred income tax provision 30 25
Other non-cash charges to income 152 91
Gains on disposition of assets, net (4) (1)
Income from equity investments (71) (15)
Dry hole and impairment expense 31 42
Changes in operating assets and liabilities (29) 68
Other operating, net (64) (50)
---------- ----------
Operating cash flow from continuing operations 1,239 973
Operating cash flow from discontinued operations (5) (8)
---------- ----------
Net cash provided by operating activities 1,234 965
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (536) (343)
Purchase of businesses, net (321) (138)
Sales of businesses and disposal of property, plant, and equipment, net 4 2
Purchase of short-term investments (41) (63)
Sales of short-term investments 21 80
Equity investments and other investing, net 27 (232)
---------- ----------
Net cash used by investing activities (846) (694)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 46 --
Repurchase of trust preferred securities -- (466)
Payments on long-term debt and capital lease liabilities (459) --
Proceeds from issuance of common stock 1 2
Cash dividends paid (109) (101)
Stock options exercised 27 99
Other (1) (1)
---------- ----------
Net cash used by financing activities (495) (467)
---------- ----------
Decrease in cash and cash equivalents (107) (196)
Cash and cash equivalents--beginning of period 1,199 573
---------- ----------
Cash and cash equivalents--end of period $ 1,092 $ 377
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2005
1. General
In these unaudited consolidated condensed financial statements,
"Occidental" means Occidental Petroleum Corporation (OPC) and/or one or
more entities where it owns a majority voting interest. Certain information
and disclosures normally included in notes to consolidated financial
statements have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations, but resultant disclosures are
in accordance with accounting principles generally accepted in the United
States of America as they apply to interim reporting. The consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto in Occidental's
Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Form
10-K).
In the opinion of Occidental's management, the accompanying consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to fairly present Occidental's
consolidated financial position as of March 31, 2005, and the consolidated
statements of income and cash flows for the three months then ended. The
income and cash flows for the period ended March 31, 2005, are not
necessarily indicative of the income or cash flows to be expected for the
full year.
Certain financial statements and notes for the prior year have been
reclassified to conform to the 2005 presentation.
Occidental has reclassified its auction rate security investments from cash
and cash equivalents to short-term investments on its March 31, 2005
balance sheet. These investments contain a short-term repricing feature. As
a result, their carrying values approximate their fair values. There have
been no realized gains or losses on these investments during 2005 or 2004.
Prior period financial statements have also been reclassified to conform to
the current presentation. This reclassification resulted in no change to
Occidental's results of operations or cash flow from operations for any
period.
Refer to Note 1 to the consolidated financial statements in the 2004 Form
10-K for a summary of significant accounting policies.
2. Asset Acquisitions, Dispositions and Other Transactions
In the first quarter of 2005, Occidental made several oil and gas
acquisitions in the Permian Basin for approximately $304 million in cash.
In the first quarter of 2005, Occidental redeemed all of its 7.65 percent
senior notes which reduced current maturities of long-term debt by
approximately $459 million. This resulted in an after-tax charge of $6
million.
3. Accounting Changes
In April 2005, the FASB issued FASB Staff Position No. (FSP) FAS 19-1,
"Accounting for Suspended Well Costs." FSP FAS 19-1 specifies new
accounting guidance for when successful efforts companies can capitalize
exploratory well costs. The guidance also requires new disclosures related
6
to these costs. FSP FAS 19-1 is effective in the first reporting period
beginning after April 4, 2005 and should be applied prospectively to
existing and new exploratory well costs. Occidental plans to adopt this
statement effective July 1, 2005 and it is not expected to have a material
effect on the financial statements upon adoption.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47,
"Accounting for Conditional Asset Retirement Obligations." FIN 47 specifies
the accounting treatment for conditional asset retirement obligations under
the provisions of Statement of Accounting Standard (SFAS) No. 143. FIN 47
is effective no later than the end of fiscal years ending after December
15, 2005. Occidental plans to adopt this statement effective December 31,
2005. Occidental is currently assessing the effect of FIN 47 on its
financial statements.
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 at the beginning of the first fiscal
year ending after June 15, 2005. Occidental will adopt the provisions of
this statement effective January 1, 2006. 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.
4. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Three Months Ended March 31, 2005 2004
======================================================= ========== ==========
Net income $ 846 $ 487
Other comprehensive income items
Foreign currency translation adjustments (12) (7)
Derivative mark-to-market adjustments (184) (2)
Unrealized gain on securities 103 29
---------- ----------
Other comprehensive income, net of tax (93) 20
---------- ----------
Comprehensive income $ 753 $ 507
======================================================= ========== ==========
During the first quarter of 2005, Occidental entered into a series of fixed
price swaps and costless collar agreements that qualify as cash-flow hedges
for the sale of its crude oil production. These hedges, which begin in July
2005 and continue to the end of 2011, will hedge less than 4% of
Occidental's current crude oil production. The first quarter 2005
derivative mark-to-market adjustment includes an after-tax loss of $176
million from changes in these cash flow hedges. See Item 3. Quantitative
and Qualitative Disclosures About Market Risk for further information.
5. Supplemental Cash Flow Information
During the three months ended March 31, 2005 and 2004, net cash payments
for federal, foreign and state income taxes were approximately $108 million
and $64 million, respectively. Interest paid (net of interest capitalized
of $3 million and $2 million, respectively) totaled approximately $98
million and $83 million for the three months ended March 31, 2005 and 2004,
respectively.
7
6. Inventories
A portion of inventories is valued under the LIFO method. The valuation of
LIFO inventory for interim periods is based on Occidental's estimates of
year-end inventory levels and costs. Inventories consist of the following
(in millions):
Balance at March 31, 2005 December 31, 2004
=================================== ==================== ====================
Raw materials $ 60 $ 62
Materials and supplies 165 157
Finished goods 360 380
---------- ----------
585 599
LIFO reserve (54) (54)
---------- ----------
Total $ 531 $ 545
=================================== ========== ==========
7. Asset Retirement Obligations
The following summarizes the activity of the asset retirement obligations
of which $7 million and $4 million is included in accrued liabilities at
March 31, 2005 and 2004, respectively, and the remaining balance is
included in deferred credits and other liabilities - other (in millions):
Three Months Ended March 31, 2005 2004
============================================================ ========== ==========
Beginning balance $ 206 $ 167
Liabilities incurred in the period 1 9
Liabilities settled in the period (1) (3)
Acquisition and other 1 16
Accretion expense 3 3
---------- ----------
Ending balance $ 210 $ 192
============================================================ ========== ==========
8. Environmental Expenditures
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining environmental quality. Foreign operations also are subject to
environmental-protection laws. The laws that require or address
environmental remediation may apply 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 sites subject to the federal
Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), comparable state sites and other domestic and foreign remediation
sites, including Occidental facilities and previously owned sites.
8
The following table presents Occidental's environmental remediation
reserves at March 31, 2005, the current portion of which ($76 million) is
included in accrued liabilities. The remaining amount is included in
deferred credits and other liabilities - other. The reserves are grouped by
three categories of environmental remediation sites ($ amounts in
millions):
# of Sites Reserve
=================================== =============== ===============
CERCLA & Equivalent Sites 124 $ 240
Active Facilities 16 73
Closed or Sold Facilities 39 63
--------------- ---------------
Total 179 $ 376
=================================== =============== ===============
In determining the environmental remediation 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. Occidental expects 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 $375 million beyond the
amount accrued.
The following table shows additional detail regarding reserves for CERCLA
or CERCLA-equivalent proceedings in which OPC or certain of its
subsidiaries were involved at March 31, 2005 ($ amounts in millions):
Description # of Sites Reserve
=================================== =============== ===============
Minimal/No Exposure (a) 99 $ 6
Reserves between $1-10 MM 18 69
Reserves over $10 MM 7 165
--------------- ---------------
Total 124 $ 240
=================================== =============== ===============
(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, 52 sites where Occidental's
reserves are less than $50,000 each, and 13 sites where reserves are
between $50,000 and $1 million each.
Refer to Note 8 to the consolidated financial statements in the 2004 Form
10-K for additional information regarding Occidental's environmental
expenditures.
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
9
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. Earlier this year, Occidental made preliminary settlement
proposals to the Government of Ecuador as a potential framework to resolve
this dispute. It is reasonably possible that a negotiated settlement would
negatively affect the future profitability of, and production and reserves
from, Block 15 operations. On April 20, 2005, in the midst of significant
public protests, Ecuador's Congress removed the country's President from
office, and the country's Vice President became President. A new cabinet
has not been fully formed, and Occidental has not been able to determine
what position the new Government will take regarding foreign investors, the
petroleum industry in general and Occidental's dispute in particular.
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 Occidental Chemical
Corporation (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 similar situations, involving other defendants, Nicaraguan courts have
proceeded to enter significant judgments against the defendants under that
statute. OxyChem has filed a response to the complaints 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 plaintiffs had waived the
requirement of the pre-trial deposit. OxyChem has appealed that portion of
the ruling relating to the jurisdiction of the Nicaraguan courts.
Thereafter, the trial court ordered defendants, including OxyChem, to file
an answer. In order to preserve its jurisdictional defense, OxyChem elected
not to make a substantive appearance in the case. In the opinion of
management, any judgment rendered under the statute would be unenforceable
in the United States.
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 guarantees outstanding at March 31, 2005, which encompass
performance bonds, letters of credit, indemnities, commitments and other
forms of guarantees provided by Occidental to third parties, mainly to
provide assurance that Occidental and/or its subsidiaries and affiliates
will meet their various obligations (guarantees). At March 31, 2005, the
notional amount of these guarantees was approximately $500 million. Of this
amount, approximately $400 million relates to Occidental's guarantees of
equity investees' debt and other commitments. The remaining $100 million
relates to various indemnities and guarantees provided to third parties.
10
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.
10. Income Taxes
The provision for taxes based on income for the 2005 and 2004 interim
periods was computed in accordance with Interpretation No. 18 of Accounting
Principles Board Opinion (APB) No. 28 on reporting taxes for interim
periods and was based on projections of total year pretax income. The
provision for income taxes for the first quarter of 2005 includes a $10
million charge related to a state income tax issue. The provision for
income taxes for the first quarter of 2004 includes a $20 million credit
from settlement of a tax issue.
11. Stock-Based Compensation
Occidental accounts for its stock incentive plans (Plans) using the
intrinsic value method under APB No. 25 and related interpretations. 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 (in
$ millions, except per share amounts):
Three Months Ended March 31, 2005 2004
================================================== ========== ==========
Net income $ 846 $ 487
Add: Stock-based compensation included in net
income, net of tax, under APB No. 25 35 9
Deduct : Stock-based compensation, net of tax,
determined under SFAS No. 123 fair value method (38) (13)
---------- ----------
Pro-forma net income $ 843 $ 483
================================================== ========== ==========
Earnings Per Share:
Basic - as reported $ 2.11 $ 1.24
Basic - pro forma $ 2.11 $ 1.23
Diluted - as reported $ 2.08 $ 1.23
Diluted - pro forma $ 2.08 $ 1.22
-------------------------------------------------- ---------- ----------
11
12. Retirement Plans and Postretirement Benefits
Occidental has various defined benefit and defined contribution retirement
plans for its salaried, domestic union and nonunion hourly, and certain
foreign national employees.
The following table sets forth the components of the net periodic benefit
costs for Occidental's defined benefit pension and postretirement benefit
plans as of March 31 (in millions):
Three Months Ended March 31, 2005 2004
=================================== ============================== ==============================
Pension Postretirement Pension Postretirement
Net Periodic Benefit Cost Benefit Benefit Benefit Benefit
=================================== ========== =============== ========== ===============
Service cost $ 3 $ 2 $ 3 $ 2
Interest cost 6 8 6 8
Expected return on plan assets (7) -- (5) --
Recognized actuarial (gain) / loss 1 4 1 3
---------- --------------- ---------- ---------------
Total $ 3 $ 14 $ 5 $ 13
=================================== ========== =============== ========== ===============
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 is reviewing its retiree health care plans in light of these
final regulations, which may change Occidental's obligations under the
plans. At this time, Occidental is unable to determine the impact of the
new Medicare provisions. The retiree medical obligations and costs reported
do not reflect the impact of this legislation in accordance with FSP No.
FAS 106-2. Occidental intends to adopt the accounting requirements of this
standard and adjust its retiree medical obligations and costs during the
second quarter of 2005.
Occidental funded approximately $2 million in cash to its domestic defined
benefit pension plans for the quarter ended March 31, 2005 and it does not
expect to contribute any further amount in 2005.
Refer to Note 13 to the consolidated financial statements in the 2004 Form
10-K for additional information regarding Occidental's retirement plans and
postretirement benefits.
12
13. Industry Segments
As of January 1, 2005, Occidental revised its reporting of segment earnings
to show segment earnings before income taxes. All domestic and foreign
income tax expense is now reflected in the "Corporate and other" column.
This change has been retrospectively applied to prior period results. The
following table presents Occidental's interim industry segment and
corporate disclosures (in millions):
Corporate
Oil and Gas Chemical and Other Total
======================================== =============== =============== =============== ===============
Quarter ended March 31, 2005
Net sales $ 2,219 $ 1,061 $ 23 $ 3,303
=============== =============== =============== ===============
Pretax operating profit (loss) $ 1,349 $ 214 $ (112)(a) $ 1,451
Income taxes -- -- (601)(b) (601)
Discontinued operations, net -- -- (4) (4)
--------------- --------------- --------------- ---------------
Net income (loss) $ 1,349 $ 214 $ (717)(c) $ 846
======================================== =============== =============== =============== ===============
Quarter ended March 31, 2004
Net sales $ 1,693 $ 834 $ 30 $ 2,557
=============== =============== =============== ===============
Pretax operating profit (loss) $ 915 $ 56 $ (119)(a) $ 852
Income taxes -- -- (363)(b) (363)
Discontinued operations, net -- -- (2) (2)
--------------- --------------- --------------- ---------------
Net income (loss) $ 915 $ 56 $ (484)(d) $ 487
======================================== =============== =============== =============== ===============
(a) Includes unallocated net interest expense, administration expense and other
items.
(b) Includes all foreign and domestic income taxes. The 2005 amount includes a
$10 million charge related to a state income tax issue. The 2004 amount
includes a $20 million tax credit settlement.
(c) Includes a $10 million pre-tax interest charge to redeem 7.65 percent
senior notes ($6 million net of tax).
(d) Includes a trust preferred securities redemption pre-tax charge of $11
million ($7 million net of tax).
14. Subsequent Events
In April 2005, Valero Energy Corp. (Valero) and Premcor Inc. (Premcor)
announced that the companies have executed a merger agreement for Valero to
acquire Premcor in an $8 billion transaction. Under the terms of the
agreement, Premcor shareholders will have the right to receive 0.99 shares
of Valero common stock or $72.76 in cash for each share of Premcor common
stock, or they can receive a combination of both, subject to proration so
that 50 percent of the total Premcor shares are acquired for cash. At March
31, 2005, Occidental owned over 9 million shares of Premcor.
In April 2005, Occidental signed a heads of agreement with the government
of Oman to develop the Mukhaizna oil field in Oman. If the terms of the
understanding are implemented, Occidental would be operator of the field.
In May 2005, Dolphin Energy Limited signed a gas sales agreement with Dubai
Supply Authority (DUSUP) to deliver future supplies of Dolphin gas from
Qatar to the DUSUP power plant in Jebel Ali. The agreement provides for the
supply of up to 700 million standard cubic feet of gas per day for a period
of 25 years.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Occidental (as defined in Note 1 to the consolidated condensed financial
statements) reported net income for the first quarter of 2005 of $846 million,
on net sales of $3.3 billion, compared with net income of $487 million, on net
sales of $2.6 billion, for the same period of 2004. Basic earnings per common
share were $2.11 for the first quarter of 2005, compared with basic earnings per
common share of $1.24 for the same period of 2004.
Net income for the first quarter of 2005 included a $10 million pre-tax interest
charge to redeem outstanding 7.65 percent senior notes and a $10 million charge
related to a state income tax issue. Net income for the first quarter of 2004
included a pre-tax charge of $11 million for the redemption of all of the
outstanding 8.16 percent Trust Preferred Redeemable Securities (trust preferred
securities) and a $20 million credit from settlement of a tax issue. Net income
for the first quarter of 2005, compared to the same period in 2004, reflected
higher oil and gas prices and higher chemical margins resulting from higher
chemical prices.
SELECTED INCOME STATEMENT ITEMS
The increase of $746 million in net sales in the first quarter of 2005, compared
with the same period in 2004, primarily reflected higher worldwide crude oil,
natural gas and chemical prices.
The increase of $152 million in cost of sales for the first quarter of 2005,
compared with the same period in 2004, primarily reflected higher oil and gas
production costs, higher energy and chemical raw material costs and higher DD&A
expense mainly due to accelerated drilling and workovers in Yemen and Elk Hills
and a facility expansion in Qatar. The increase of $51 million in selling,
general and administrative and other operating expenses for the first quarter of
2005, compared to the same period in 2004, primarily reflected increases in
various oil and gas costs, including production-related taxes and other
operating costs. Interest and debt expense, net for the first quarter of 2005
included a pre-tax debt redemption charge of $10 million and for the first
quarter of 2004 included a trust preferred securities redemption pre-tax charge
of $11 million. The provision for income taxes for the first quarter of 2005
included a $10 million charge related to a state tax issue and the first quarter
of 2004 included a $20 million credit from settlement of a tax issue. The
increase of $56 million in income from equity investments for the first quarter
of 2005, compared to the same period in 2004, was attributable primarily to
first quarter 2005 income of $44 million from the Lyondell equity investment
compared to a loss of $3 million in the first quarter of 2004.
SELECTED ANALYSIS OF FINANCIAL POSITION
The increase in receivables, net of $326 million at March 31, 2005, compared
with December 31, 2004, was due to higher sales prices. The increase of $179
million in investments in unconsolidated entities at March 31, 2005, compared
with December 31, 2004, was due to increased equity investee income and a fair
value adjustment recorded in other comprehensive income on the Premcor Inc.
available-for-sale investment, partially offset by dividends received from
equity investees.
The increase in domestic and foreign income taxes payable of $264 million at
March 31, 2005, compared with December 31, 2004, was due to the fact that the
first estimated payment for federal and state income taxes is not paid until
April 2005.
14
SEGMENT OPERATIONS
As of January 1, 2005, Occidental revised its reporting of segment earnings to
show segment earnings before income taxes. All domestic and foreign income tax
expense is now reflected in the income taxes line under Unallocated Corporate
Items. This reporting change has been retrospectively applied to prior period
results. The following table sets forth the sales and earnings of each industry
segment and unallocated corporate items (in millions):
Three Months Ended
March 31
-------------------------
2005 2004
================================================================================ ========== ==========
NET SALES
Oil and gas $ 2,219 $ 1,693
Chemical 1,061 834
Other 23 30
---------- ----------
NET SALES $ 3,303 $ 2,557
========== ==========
SEGMENT EARNINGS
Oil and gas $ 1,349 $ 915
Chemical 214 56
---------- ----------
1,563 971
UNALLOCATED CORPORATE ITEMS
Interest expense, net (a) (61) (68)
Income taxes (b) (601) (363)
Other (51) (51)
---------- ----------
INCOME FROM CONTINUING OPERATIONS 850 489
Discontinued operations, net (4) (2)
---------- ----------
NET INCOME $ 846 $ 487
================================================================================ ========== ==========
(a) The first quarter 2005 includes a $10 million pre-tax interest charge to
redeem all the outstanding 7.65 percent senior notes. The first quarter
2004 includes an $11 million pre-tax interest charge to redeem the trust
preferred securities.
(b) The first quarter 2005 includes a $10 million charge related to a state
income tax issue. The first quarter 2004 includes a $20 million credit
related to the settlement of an issue with the Internal Revenue Service.
15
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.
The following table sets forth the core earnings and significant items affecting
earnings for each operating segment and corporate and other:
Three Months Ended March 31
-------------------------------------------------------
(in millions, except per share amounts) 2005 EPS 2004 EPS
======================================================= ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 846 $ 2.11 $ 487 $ 1.24
========== ========== ========== ==========
OIL AND GAS
Segment Earnings $ 1,349 $ 915
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 1,349 915
---------- ----------
CHEMICAL
Segment Earnings 214 56
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 214 56
---------- ----------
CORPORATE AND OTHER
Results (717) (484)
Less:
Trust preferred securities redemption charge -- (11)
7.65% debt redemption charge (10) --
State tax issue charge (10) --
Settlement of tax issue -- 20
Tax effect of pre-tax adjustments 4 4
Discontinued operations, net * (4) (2)
---------- ----------
Corporate Core Results (697) (495)
---------- ----------
TOTAL CORE EARNINGS $ 866 $ 2.16 $ 476 $ 1.22
======================================================= ========== ========== ========== ==========
* These amounts are shown after tax
16
WORLDWIDE EFFECTIVE TAX RATE
The following table sets forth the calculation of the worldwide effective tax
rate for reported income and core earnings:
Three Months Ended
March 31
----------------------------
(in millions) 2005 2004
================================================================================ ========== ==========
REPORTED INCOME
Oil & Gas (a) $ 1,349 $ 915
Chemicals 214 56
Corporate & other (112) (119)
---------- ----------
Pre-tax income 1,451 852
Income tax expense
Federal and state 349 193
Foreign (a) 252 170
---------- ----------
Total 601 363
---------- ----------
Income from continuing operations $ 850 $ 489
========== ==========
Worldwide effective tax rate 41% 43%
========== ==========
CORE EARNINGS
Oil & Gas (a) $ 1,349 $ 915
Chemical 214 56
Corporate & other (102) (108)
---------- ----------
Pre-tax income 1,461 863
Income tax expense
Federal and state 343 217
Foreign (a) 252 170
---------- ----------
Total 595 387
---------- ----------
Core Earnings $ 866 $ 476
========== ==========
Worldwide effective tax rate 41% 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 revenue amounts of $187 million for the first quarter
of 2005 and $116 million for the first quarter of 2004.
Occidental's first quarter 2005 worldwide effective tax rate was 41 percent. The
first quarter 2005 reflected a lower U.S. income tax rate resulting from the
crediting of foreign income taxes. Prior to the second quarter 2004, foreign
income taxes were deducted in determining U.S. taxable income. An annual tax
election permits a taxpayer to claim a credit or deduction for foreign income
taxes, whichever is more beneficial. Occidental expects to continue its election
to credit foreign income taxes in future years. Occidental expects the tax rate
for the second quarter to be approximately 41 percent.
17
OIL AND GAS SEGMENT
Three Months Ended
March 31
-------------------------
Summary of Operating Statistics 2005 2004
======================================================= ========== ==========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 247 258
Latin America 74 79
Middle East 101 95
Other Eastern Hemisphere 5 9
NATURAL GAS (MMCF)
United States 528 527
Middle East 56 11
Other Eastern Hemisphere 78 75
BARRELS OF OIL EQUIVALENT (MBOE)(A)
Consolidated subsidiaries 537 543
Other interests 28 25
---------- ----------
Worldwide production 565 568
======================================================= ========== ==========
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States $ 44.24 $ 32.62
Latin America $ 39.87 $ 28.99
Middle East $ 42.00 $ 30.08
Other Eastern Hemisphere $ 37.97 $ 29.37
Total consolidated subsidiaries $ 42.68 $ 31.19
Other interests $ 28.20 $ 19.75
Total Worldwide $ 41.71 $ 30.44
NATURAL GAS ($/MCF)
United States $ 5.94 $ 5.00
Middle East $ 0.96 $ 0.97
Other Eastern Hemisphere $ 2.21 $ 2.23
Total consolidated subsidiaries $ 5.04 $ 4.55
Other interests $ 0.15 $ --
Total Worldwide $ 4.89 $ 4.55
======================================================= ========== ==========
(a) 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.
Oil and gas segment and core earnings for the first quarter of 2005 were $1.3
billion, compared with $915 million for the same period of 2004. The increase in
earnings for the first quarter of 2005, compared to the first quarter of 2004,
reflected higher prices for crude oil and natural gas, partially offset by
higher production-related taxes and higher utility costs which were the result
of higher oil and gas prices, and higher DD&A rates due to accelerated drilling
and workovers of wells in Yemen and Elk Hills and a facilities expansion project
in Qatar.
The increase of $526 million in net sales in the first quarter of 2005, compared
with the same period in 2004, reflected higher prices for crude oil and natural
gas.
18
The average West Texas Intermediate price in the first quarter of 2005 was
$49.84 per barrel and the average New York Mercantile Exchange (NYMEX) price for
natural gas was $6.89 per million BTUs. A change of 10 cents per million BTUs in
NYMEX gas prices impacts quarterly oil and gas segment earnings by approximately
$5 million while a $1.00 per-barrel change in oil prices has a quarterly impact
of approximately $36 million.
Average production costs for the first quarter 2005 were $7.77 per barrel of oil
equivalent (BOE) compared to the average 2004 production cost of $6.95 per BOE.
Occidental expects second quarter 2005 oil and gas production to be slightly
higher than the first quarter 2005 production because the first quarter did not
include production from the Permian Basin acquisitions which occurred at the end
of the quarter. The effect of these acquisitions will be partially offset by
downtime expected at Horn Mountain for scheduled pipeline maintenance. In
addition, production could vary due to price-driven adjustments in the volumes
under production-sharing contracts in Oman, Qatar, Yemen and Long Beach.
In April 2005, Occidental signed a heads of agreement with the government of
Oman to develop the Mukhaizna oil field in Oman. If the terms of the
understanding are implemented, Occidental would be operator of the field. The
field currently is producing approximately 10,000 barrels of oil per day.
Occidental and its partners would expect to invest over $2 billion to implement
a large-scale steam flood to increase production to approximately 150,000
barrels of oil per day within the next few years.
CHEMICAL SEGMENT
Three Months Ended
March 31
-------------------------
Summary of Operating Statistics 2005 2004
================================================== ========== ==========
MAJOR PRODUCT VOLUMES (M TONS, EXCEPT PVC
RESINS)
Chlorine (a) 705 706
Caustic Soda 714 732
Ethylene Dichloride 130 122
PVC Resins (millions of pounds) 1,025 1,071
MAJOR PRODUCT PRICE INDEX (1987 THROUGH 1990
AVERAGE PRICE = 1.0)
Chlorine 2.56 1.60
Caustic Soda 1.52 0.71
Ethylene Dichloride 1.78 1.32
PVC Resins (b) 1.29 0.94
================================================== ========== ==========
(a) Product volumes include those manufactured and consumed internally.
(b) Product volumes produced at former PolyOne facilities, now part of
Occidental, are excluded from the product price indexes.
Chemical segment and core earnings for the first quarter of 2005 were $214
million, compared with $56 million for the same period of 2004. The increase in
earnings for the first quarter of 2005, compared with the same period in 2004,
was due primarily to higher margins in all major products resulting from higher
sales prices, partially offset by higher energy and feedstock costs.
The increase of $227 million in net sales in the first quarter of 2005, compared
with the same period in 2004, primarily reflected higher prices for all major
products.
Occidental expects second quarter 2005 chemical earnings to be similar to the
first quarter 2005 as it expects no weakening in demand or margin decline for
its major products in the second quarter.
19
CORPORATE AND OTHER
Unallocated corporate items - income taxes for the first quarter of 2005
includes a $10 million charge related to a state tax issue. The first quarter of
2004 includes a $20 million credit related to a settlement of a tax issue.
LIQUIDITY AND CAPITAL RESOURCES
Occidental's net cash provided by operating activities was $1.2 billion for the
first quarter of 2005, compared with $965 million for the same period of 2004.
The significant increase in operating cash flow in 2005, compared to 2004,
resulted from several factors. The most important drivers were the significantly
higher oil and natural gas prices and, to a much lesser extent, higher chemical
prices. In the first quarter of 2005, compared to the same period in 2004,
Occidental's realized oil price was higher by 37 percent and Occidental's
realized natural gas price increased almost 19 percent in the U.S., where
approximately 80 percent of Occidental's natural gas was produced.
Increases in sales prices realized for Occidental's major chemical product lines
for the first quarter of 2005, compared to the first quarter of 2004, ranged
from 35 to 114 percent. Chemical prices increased in the first quarter of 2005
at a higher rate than the energy-driven increase in feedstock and power costs,
thereby improving margins and cash flow. Chemical price changes had a less
significant effect on cash flow because chemical segment earnings and cash flow
are significantly smaller than those for the oil and gas segment and 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.
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.
Occidental's net cash used by investing activities was $846 million for the
first quarter of 2005, compared with $694 million for the same period of 2004.
The 2005 amount includes two Permian Basin acquisitions totaling $304 million.
The 2004 amount includes the purchase of a pipeline and gathering system in the
Permian Basin and a $208 million advance to the Elk Hills Power LLC (EHP) equity
investment which EHP used to repay a portion of its debt. Capital expenditures
for the first quarter of 2005 were $536 million, including $506 million in oil
and gas. Capital expenditures for the first quarter of 2004 were $343 million,
including $326 million in oil and gas. The 2005 amount includes $90 million for
exploration lease bonuses in Libya.
Occidental's net cash used by financing activities was $495 million in the first
quarter of 2005, compared with $467 million for the same period of 2004. The
2005 amount includes total cash paid of $459 million for the redemption of 7.65
percent senior notes. The 2004 amount includes total cash paid of $466 million
to repurchase the trust preferred securities in January 2004.
In the first quarter 2005, Occidental filed a shelf registration statement for
up to $1.5 billion of various securities. No securities have been issued.
Available but unused lines of committed bank credit totaled approximately $1.5
billion at March 31, 2005 and cash and cash equivalents and short-term
investments totaled $1.4 billion on the March 31, 2005 balance sheet.
At March 31, 2005, under the most restrictive covenants of certain financing
agreements, Occidental's capacity for additional unsecured borrowing was
approximately $24.9 billion, and the capacity for the payment of cash dividends
and other distributions on, and for acquisitions of, Occidental's capital stock
20
was approximately $9.2 billion, assuming that such dividends, distributions and
acquisitions were made without incurring additional borrowing.
Occidental currently expects to spend approximately $2.2 billion on its 2005
capital spending program. Although its income and cash flows are largely
dependent on oil and gas prices and production, Occidental believes that cash on
hand, short-term investments 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.
ENVIRONMENTAL EXPENDITURES
Occidental's operations in the United States are subject to stringent federal,
state and local laws and regulations relating to improving or maintaining
environmental quality. Foreign operations also are subject to
environmental-protection laws. The laws that require or address environmental
remediation may apply 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 sites subject to the federal Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), comparable state sites and other
domestic and foreign remediation sites, including Occidental facilities and
previously owned sites.
The following table presents Occidental's environmental remediation reserves at
March 31, 2005, the current portion of which ($76 million) is included in
accrued liabilities. The remaining amount is included in deferred credits and
other liabilities - other. The reserves are grouped by three categories of
environmental remediation sites ($ amounts in millions):
# of Sites Reserve
=================================== =============== ===============
CERCLA & Equivalent Sites 124 $ 240
Active Facilities 16 73
Closed or Sold Facilities 39 63
--------------- ---------------
Total 179 $ 376
=================================== =============== ===============
In determining the environmental remediation 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. Occidental expects 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 $375
million beyond the amount accrued.
The following table shows additional detail regarding reserves for CERCLA or
CERCLA-equivalent proceedings in which OPC or certain of its subsidiaries were
involved at March 31, 2005 ($ amounts in millions):
Description # of Sites Reserve
=================================== =============== ===============
Minimal/No Exposure (a) 99 $ 6
Reserves between $1-10 MM 18 69
Reserves over $10 MM 7 165
--------------- ---------------
Total 124 $ 240
=================================== =============== ===============
(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, 52 sites where Occidental's
reserves are less than $50,000 each, and 13 sites where reserves are
between $50,000 and $1 million each.
21
Refer to the "Environmental Expenditures" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in the 2004 Form 10-K
for additional information regarding Occidental's environmental expenditures.
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. Earlier this year, Occidental made
preliminary settlement proposals to the Government of Ecuador as a potential
framework to resolve this dispute. It is reasonably possible that a negotiated
settlement would negatively affect the future profitability of, and production
and reserves from, Block 15 operations. On April 20, 2005, in the midst of
significant public protests, Ecuador's Congress removed the country's President
from office, and the country's Vice President became President. A new cabinet
has not been fully formed, and Occidental has not been able to determine what
position the new Government will take regarding foreign investors, the petroleum
industry in general and Occidental's dispute in particular. 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 Occidental Chemical
Corporation (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 similar situations, involving other
defendants, Nicaraguan courts have proceeded to enter significant judgments
against the defendants under that statute. OxyChem has filed a response to the
complaints 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 plaintiffs had waived the
requirement of the pre-trial deposit. OxyChem has appealed that portion of the
ruling relating to the jurisdiction of the Nicaraguan courts. Thereafter, the
trial court ordered defendants, including OxyChem, to file an answer. In order
to preserve its jurisdictional defense, OxyChem elected not to make a
substantive appearance in the case. In the opinion of management, any judgment
rendered under the statute would be unenforceable in the United States.
22
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 guarantees outstanding at March 31, 2005, which encompass
performance bonds, letters of credit, indemnities, commitments and other forms
of guarantees provided by Occidental to third parties, mainly to provide
assurance that Occidental and/or its subsidiaries and affiliates will meet their
various obligations (guarantees). At March 31, 2005, the notional amount of
these guarantees was approximately $500 million. Of this amount, approximately
$400 million relates to Occidental's guarantees of equity investees' debt and
other commitments. The remaining $100 million relates to various indemnities and
guarantees provided to third parties.
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.
ACCOUNTING CHANGES
In April 2005, the FASB issued FASB Staff Position No. (FSP) FAS 19-1,
"Accounting for Suspended Well Costs." FSP FAS 19-1 specifies new accounting
guidance for when successful efforts companies can capitalize exploratory well
costs. The guidance also requires new disclosures related to these costs. FSP
FAS 19-1 is effective in the first reporting period beginning after April 4,
2005 and should be applied prospectively to existing and new exploratory well
costs. Occidental plans to adopt this statement effective July 1, 2005 and it is
not expected to have a material effect on the financial statements upon
adoption.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47, "Accounting for
Conditional Asset Retirement Obligations." FIN 47 specifies the accounting
treatment for conditional asset retirement obligations under the provisions of
Statement of Accounting Standard (SFAS) No. 143. FIN 47 is effective no later
than the end of fiscal years ending after December 15, 2005. Occidental plans to
adopt this statement effective December 31, 2005. Occidental is currently
assessing the effect of FIN 47 on its financial statements.
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 at the beginning of the first fiscal year
ending after June 15, 2005. Occidental will adopt the provisions of this
statement effective January 1, 2006. 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.
23
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND FORWARD-LOOKING INFORMATION
Portions of this report contain forward-looking statements and involve risks and
uncertainties that could significantly affect expected results of operations,
liquidity, cash flows and business prospects. Factors that could cause results
to differ materially include, but are not limited to: exploration risks such as
drilling unsuccessful wells, global commodity pricing fluctuations; competitive
pricing pressures; higher-than-expected costs, including feedstocks; crude oil
and natural gas prices; chemical prices; potential liability for remedial
actions under existing or future environmental regulations and litigation;
potential liability resulting from pending or future litigation; general
domestic and international political conditions; potential disruption or
interruption of Occidental's production or manufacturing facilities due to
accidents, political events or insurgent activity; potential failure to achieve
expected production from existing and future oil and gas development projects;
the supply/demand considerations for Occidental's products; any general economic
recession or slowdown domestically or internationally; regulatory uncertainties;
and not successfully completing, or any material delay of, any development of
new fields, expansion, capital expenditure, efficiency-improvement project,
acquisition or disposition. Forward-looking statements are generally accompanied
by words such as "estimate", "project", "predict", "will", "anticipate", "plan",
"intend", "believe", "expect" or similar expressions that convey the uncertainty
of future events or outcomes. Occidental expressly disclaims any obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed might not occur.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first quarter of 2005, Occidental entered into a series of fixed
price swaps and costless collar agreements that qualify as cash-flow hedges for
the sale of its crude oil production. These hedges, which begin in July 2005 and
continue to the end of 2011, will hedge less than 4% of Occidental's current
crude oil production. The following table provides information about these
cash-flow hedges in a tabular presentation.
Fair Value
Liability
2005(a) 2006 2007 2008 2009 2010 2011 (in millions)
-------- -------- -------- -------- -------- -------- -------- -------------
Crude Oil Fixed
Price Swaps
- --------------------------
Daily Volume (bpd) 14 10 8 -- -- -- -- $ 114
Average Price $ 45.61 $ 41.61 $ 40.04
Crude Oil Costless Collars
- --------------------------
Daily Volume (bpd) 2 6 7 14 13 12 12 156
Average Floor $ 44.00 $ 41.33 $ 40.43 $ 34.07 $ 33.15 $ 33.00 $ 32.92
Average Cap $ 49.75 $ 48.05 $ 45.21 $ 47.47 $ 47.41 $ 46.35 $ 46.27
-------------
$ 270
=============
(a) Hedges for 2005 are in place only from July 2005 to December 2005.
For the three months ended March 31, 2005, there were no other material changes
in the information required to be provided under Item 305 of Regulation S-K
included under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations (Incorporating Item 7A) - Derivative
Activities and Market Risk" in Occidental's 2004 Annual Report on Form 10-K.
ITEM 4. 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 first quarter of 2005 that has materially affected, or is
reasonably likely to materially affect, Occidental's internal control over
financial reporting.
25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
This item incorporates by reference the information regarding lawsuits, claim,
commitments, contingencies and related matters in Note 9 to the consolidated
condensed financial statements in Part I of this Form 10-Q.
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. Earlier this year, Occidental made
preliminary settlement proposals to the Government of Ecuador as a potential
framework to resolve this dispute. It is reasonably possible that a negotiated
settlement would negatively affect the future profitability of, and production
and reserves from, Block 15 operations. On April 20, 2005, in the midst of
significant public protests, Ecuador's Congress removed the country's President
from office, and the country's Vice President became President. A new cabinet
has not been fully formed, and Occidental has not been able to determine what
position the new Government will take regarding foreign investors, the petroleum
industry in general and Occidental's dispute in particular. 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. 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 similar
situations, involving other defendants, Nicaraguan courts have proceeded to
enter significant judgments against the defendants under that statute. OxyChem
has filed a response to the complaints 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
plaintiffs had waived the requirement of the pre-trial deposit. OxyChem has
appealed that portion of the ruling relating to the jurisdiction of the
Nicaraguan courts. Thereafter, the trial court ordered defendants, including
OxyChem, to file an answer. In order to preserve its jurisdictional defense,
OxyChem elected not to make a substantive appearance in the case. 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 6. EXHIBITS
10.1 Executive Stock Ownership Guidelines.
10.2 1996 Restricted Stock Plan for Non-Employee Directors,
amended as of February 10, 2005.
26
11 Statement regarding the computation of earnings per
share for the three months ended March 31, 2005 and
2004.
12 Statement regarding the computation of total enterprise
ratios of earnings to fixed charges for the three
months ended March 31, 2005 and 2004 and the five years
ended December 31, 2004.
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
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
DATE: May 4, 2005 S. P. Dominick, Jr.
--------------------------------------------------
S. P. Dominick, Jr., Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
28
EXHIBIT INDEX
EXHIBITS
- --------
10.1 Executive Stock Ownership Guidelines.
10.2 1996 Restricted Stock Plan for Non-Employee Directors, amended as
of February 10, 2005.
11 Statement regarding the computation of earnings per share for the
three months ended March 31, 2005 and 2004.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the three months ended March 31,
2005 and 2004 and the five years ended December 31, 2004.
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
29