Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2008

 

OR

 

o 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.     R Yes     £ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act):

 

Large Accelerated FilerR    Accelerated Filero   Non-Accelerated Filero   Smaller Reporting Companyo

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

£ Yes   R 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 September 30, 2008

 

 

 

 

 

Common stock $.20 par value

 

 

 

809,877,220 shares

 


Table of Contents

 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES

 

CONTENTS

 

 

 

 

 

 

PAGE

 

 

 

 

 

 

Part I

 

Financial Information

 

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets —
September 30, 2008 and December 31, 2007

 

2

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Income —
Three and nine months ended September 30, 2008 and 2007

 

4

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows —
Nine months ended September 30, 2008 and 2007

 

5

 

 

 

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

 

6

 

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

 

15

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

26

 

 

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

26

 

 

 

 

 

 

 

 

Item 2.

Share Repurchase Activities

 

27

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

28

 

 

1


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PART I    FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

(Amounts in millions)

 

 

 

2008

 

 

2007

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,452

 

$

1,964

 

 

 

 

 

 

 

 

 

Receivables, net

 

 

6,878

 

 

5,389

 

 

 

 

 

 

 

 

 

Inventories

 

 

957

 

 

910

 

 

 

 

 

 

 

 

 

Prepaid expenses and other

 

 

333

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

9,620

 

 

8,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM RECEIVABLES, net

 

 

203

 

 

203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENTS IN UNCONSOLIDATED ENTITIES

 

 

1,250

 

 

783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT, net of accumulated

 

 

 

 

 

 

 

depreciation, depletion and amortization of $15,398 at
September 30, 2008 and $13,638 at December 31, 2007

 

 


30,854

 

 


26,278

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

 

662

 

 

660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

42,589

 

$

36,519

 

The accompanying notes are an integral part of these financial statements.

 

 

2


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OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

(Amounts in millions)

 

 

 

2008

 

 

2007

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Current maturities of long-term debt and notes payable

 

$

714

 

$

47

 

Accounts payable

 

 

4,907

 

 

4,263

 

Accrued liabilities

 

 

2,005

 

 

1,611

 

Domestic and foreign income taxes

 

 

322

 

 

227

 

Liabilities of discontinued operations

 

 

116

 

 

118

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

8,064

 

 

6,266

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities and unamortized discount

 

 

 

1,057

 

 

 

1,741

 

 

 

 

 

 

 

 

 

DEFERRED CREDITS AND OTHER LIABILITIES

 

 

 

 

 

 

 

Deferred and other domestic and foreign income taxes

 

 

2,874

 

 

2,324

 

Long-term liabilities of discontinued operations

 

 

160

 

 

174

 

Other

 

 

3,466

 

 

3,156

 

 

 

 

6,500

 

 

5,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST

 

 

31

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Common stock, at par value

 

 

176

 

 

175

 

Treasury stock

 

 

(4,121

)

 

(2,610

)

Additional paid-in capital

 

 

7,083

 

 

7,071

 

Retained earnings

 

 

24,501

 

 

18,819

 

Accumulated other comprehensive loss

 

 

(702

)

 

(632

)

 

 

 

 

26,937

 

 

22,823

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

42,589

 

$

36,519

 

The accompanying notes are an integral part of these financial statements.

 

 

3


Table of Contents

 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Amounts in millions, except per-share amounts)

 

 

Three months ended

 

Nine months ended

 

 

 

September 30

 

September 30

 

 

 

2008

 

2007

 

2008

 

 

2007

 

REVENUES AND OTHER INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,060

 

$

4,841

 

$

20,196

 

$

13,267

 

Interest, dividends and other income

 

 

59

 

 

57

 

 

192

 

 

298

 

Gains on disposition of assets, net

 

 

 

 

157

 

 

25

 

 

877

 

 

 

 

7,119

 

 

5,055

 

 

20,413

 

 

14,442

 

COSTS AND OTHER DEDUCTIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

2,844

 

 

2,297

 

 

7,987

 

 

6,553

 

Selling, general and administrative
and other operating expenses

 

 

393

 

 

405

 

 

1,273

 

 

1,129

 

Environmental remediation

 

 

(2

)

 

10

 

 

28

 

 

71

 

Exploration expense

 

 

61

 

 

126

 

 

193

 

 

321

 

Interest and debt expense, net

 

 

24

 

 

48

 

 

94

 

 

297

 

 

 

 

3,320

 

 

2,886

 

 

9,575

 

 

8,371

 

Income before taxes and other items

 

 

3,799

 

 

2,169

 

 

10,838

 

 

6,071

 

Provision for domestic and foreign
income and other taxes

 

 

1,546

 

 

862

 

 

4,511

 

 

2,450

 

Minority interest

 

 

38

 

 

16

 

 

104

 

 

44

 

Income from equity investments

 

 

(57

)

 

(25

)

 

(168

)

 

(53

)

Income from continuing operations

 

 

2,272

 

 

1,316

 

 

6,391

 

 

3,630

 

Discontinued operations, net

 

 

(1

)

 

8

 

 

23

 

 

318

 

 

NET INCOME

 

$

  2,271

 

$

  1,324

 

$

6,414

 

$

3,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.79

 

$

1.58

 

$

7.79

 

$

4.34

 

Discontinued operations, net

 

 

 

 

0.01

 

 

0.03

 

 

0.38

 

Basic earnings per common share

 

$

2.79

 

$

1.59

 

$

7.82

 

$

4.72

 

 

DILUTED EARNINGS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.78

 

$

1.57

 

$

7.76

 

$

4.31

 

Discontinued operations, net

 

 

 

 

0.01

 

 

0.03

 

 

0.38

 

Diluted earnings per common share

 

$

2.78

 

$

1.58

 

$

7.79

 

$

4.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER COMMON SHARE

 

$

0.32

 

$

0.25

 

$

0.89

 

$

0.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE BASIC SHARES

 

 

815.3

 

 

833.1

 

 

820.1

 

 

837.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES

 

 

817.7

 

 

837.0

 

 

823.8

 

 

840.9

 

The accompanying notes are an integral part of these financial statements.

 

 

4


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OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Amounts in millions)

 

 

 

 

2008

 

 

2007

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

 

$

6,414

 

$

3,948

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Discontinued operations, net

 

 

(23

)

 

(318

)

Depreciation, depletion and amortization of assets

 

 

1,957

 

 

1,740

 

Deferred income tax provision (benefit)

 

 

397

 

 

(25

)

Other non-cash charges to income

 

 

484

 

 

632

 

Gain on disposition of assets, net

 

 

(25

)

 

(877

)

Income from equity investments

 

 

(168

)

 

(53

)

Dry hole and impairment expense

 

 

134

 

 

186

 

Changes in operating assets and liabilities

 

 

(822

)

 

(846

)

Other operating, net

 

 

(245

)

 

(217

)

Operating cash flow from continuing operations

 

 

8,103

 

 

4,170

 

Operating cash flow from discontinued operations

 

 

33

 

 

154

 

Net cash provided by operating activities

 

 

8,136

 

 

4,324

 

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,223

)

 

(2,510

)

Purchase of businesses and assets, net

 

 

(3,315

)

 

(991

)

Sale of businesses and disposal of property, plant, and equipment, net

 

 

22

 

 

460

 

Short term investments - purchases

 

 

 

 

(10

)

Short term investments - sales

 

 

 

 

250

 

Sale of equity investments and available-for-sale investments

 

 

51

 

 

1,157

 

Equity investments and other investing, net

 

 

(105

)

 

(124

)

Investing cash flow from continuing operations

 

 

(6,570

)

 

(1,768

)

Investing cash flow from discontinued operations

 

 

 

 

(9

)

Net cash used by investing activities

 

 

(6,570

)

 

(1,777

)

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

51

 

 

97

 

Payments of long-term debt and notes payable

 

 

(71

)

 

(1,145

)

Proceeds from issuance of common stock

 

 

22

 

 

15

 

Purchases of treasury stock

 

 

(1,487

)

 

(910

)

Excess tax benefits related to share-based payments

 

 

74

 

 

44

 

Cash dividends paid

 

 

(677

)

 

(557

)

Stock options exercised

 

 

10

 

 

25

 

Net cash used by financing activities

 

 

(2,078

)

 

(2,431

)

(Decrease) Increase in cash and cash equivalents

 

 

(512

)

 

116

 

Cash and cash equivalents—beginning of period

 

 

1,964

 

 

1,339

 

Cash and cash equivalents—end of period

 

$

1,452

 

$

1,455

 

The accompanying notes are an integral part of these financial statements.

 

 

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Table of Contents

 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

September 30, 2008

 

1.                   General

 

In these unaudited consolidated condensed financial statements, “Occidental” means Occidental Petroleum Corporation (OPC) and/or one or more entities in which it owns a majority voting interest (subsidiaries). Occidental has made its disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to consolidated financial statements in accordance with the Securities and Exchange Commission’s rules and regulations. 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, 2007.

 

In the opinion of Occidental’s management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Occidental’s consolidated financial position as of September 30, 2008, and the consolidated statements of income and cash flows for the three and nine months ended September 30, 2008 and 2007, as applicable. The income and cash flows for the periods ended September 30, 2008 and 2007, are not necessarily indicative of the income or cash flows to be expected for the full year.

 

2.                   Asset Acquisitions, Dispositions and Other Transactions

 

In October 2008, Occidental issued $1 billion of 7% senior notes receiving $985 million of net proceeds. Interest on the notes will be payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2009. The notes will mature on November 1, 2013.

 

In February 2008, Occidental purchased from Plains Exploration & Production Company (Plains) a 50-percent interest in oil and gas properties in the Permian Basin and Colorado.  In September 2008, Occidental entered into an agreement with Plains to purchase all of Plains’ remaining interests in the Permian Basin and Colorado for the approximate purchase price of $1.25 billion, which is expected to close in the fourth quarter of 2008.

 

In July 2008, Occidental purchased a 15-percent interest in the Joslyn Oil Sands Project in northern Alberta, Canada for approximately $500 million in cash.  Occidental expects to spend approximately $2 billion over a number of years with production expected to commence in 2014.

 

In June 2008, Occidental signed an agreement with a third party to construct a west Texas gas processing plant and pipeline infrastructure that will provide carbon dioxide (CO2) for Occidental’s enhanced oil recovery projects in the Permian Basin.  Occidental will own and operate the new facility and pipeline system and is expected to incur capital expenditures of approximately $1.1 billion constructing this project over several years.

 

On June 23, 2008, Occidental signed 30-year agreements with the Libyan National Oil Company (NOC) to upgrade its existing petroleum contracts. Total expected capital investment is estimated to be $5 billion over the next five years, of which Occidental’s portion will be approximately $1.9 billion.  NOC will contribute 50 percent, Occidental will contribute 37.5 percent and its partner will contribute 12.5 percent of the development capital.  Under these contracts, Occidental and its partner will pay a signature bonus of $1 billion, of which Occidental’s share, 75 percent, is $750 million.  Occidental and its partner made the first payment of $600 million, of which Occidental’s share was $450 million, in June 2008.  The remaining annual payments of $200 million, of which Occidental’s share is $150 million, are due in each of the next two years.  The new agreements allow NOC and Occidental to design and implement major field redevelopment and exploration programs in the Sirte Basin.

 

6


Table of Contents

 

3.                   Accounting Changes

 

In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP concluded that instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing basic earnings per share (EPS) under the two-class method that is described in FASB Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share.”  FSP EITF Issue No. 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 with prior period retrospective application. Occidental is currently assessing the effect of this FSP on its financial statements, which is not expected to be material.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133.” SFAS No. 161 provides new disclosure requirements for an entity’s derivative and hedging activities.   SFAS No. 161 is effective for periods beginning after November 15, 2008. Occidental is currently assessing the effect of SFAS No. 161 on its financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  This statement provides a fair value option that allows companies to measure certain financial instruments, on an instrument by instrument basis, at fair value.  SFAS No. 159 is effective for financial statements issued for periods beginning after November 15, 2007.  Since Occidental did not elect the fair value option on any qualifying financial assets and liabilities when it adopted SFAS No. 159 on January 1, 2008, or during the first three quarters of 2008, this statement has had no impact on Occidental’s financial statements.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for periods beginning after November 15, 2007. In February 2008, the FASB issued FSP FAS 157-2, which defers the effective date of SFAS No. 157 for non-financial assets and liabilities that are not recorded at fair value on a recurring basis until periods beginning after November 15, 2008.  Occidental adopted the non-deferred portion of SFAS No. 157 on January 1, 2008 on a prospective basis.  See Note 11 for further information.  In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” FSP FAS 157-3 clarifies the application of SFAS No. 157, in a market that is not active.  FSP FAS 157-3 became effective upon issuance, October 10, 2008, and includes prior periods for which financial statements have not been issued. The adoption of FSP FAS 157-3 has not had a material impact on Occidental’s financial statements.

 

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4.                   Comprehensive Income

 

The following table presents Occidental’s comprehensive income items for the three and nine months ended September 30, 2008 and 2007 (in millions):

 

 

 

Periods Ended September 30

 

 

 

Three months

 

Nine months

 

 

 

 

2008

 

 

2007

 

 

2008

 

 

2007

 

Net income

 

$

2,271

 

$

1,324

 

$

6,414

 

$

3,948

 

Other comprehensive income (loss) items

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(20

)

 

4

 

 

(9

)

 

11

 

Derivative mark-to-market adjustments

 

 

404

 

 

(21

)

 

(158

)

 

(81

)

Pension and post-retirement adjustments

 

 

6

 

 

3

 

 

(4

)

 

7

 

Reclassification of realized (gains) losses (a)

 

 

20

 

 

1

 

 

87

 

 

(197

)

Unrealized gains (losses) on securities

 

 

(2

)

 

 

 

14

 

 

93

 

Other comprehensive income (loss), net of tax

 

 

408

 

 

(13

)

 

(70

)

 

(167

)

Comprehensive income

 

$

2,679

 

$

1,311

 

$

6,344

 

$

3,781

 

 

(a)   Amounts include the reclassification of the after-tax gain on the sale of approximately 2.4 and 21.0 million shares of Lyondell Chemical Company (Lyondell) common stock in the three and nine months ended September 30, 2007.  Additionally, these amounts include reclassification of realized losses on derivatives of $20 million and $103 million for the three and nine months ended September 30, 2008, respectively, and $27 million and $20 million for the three and nine months ended September 30, 2007, respectively.

 

5.      Supplemental Cash Flow Information

 

During the nine months ended September 30, 2008 and 2007, net cash payments for federal, foreign and state income taxes paid by continuing operations were approximately $2.1 billion and $1.7 billion, respectively.  These amounts exclude taxes owed by Occidental but paid by government entities on its behalf which totaled $1,801 million and $919 million for the nine months ended September 30, 2008 and 2007, respectively.  Net cash payments for federal, foreign and state income taxes paid by discontinued operations for the nine months ended September 30, 2008 and 2007, were approximately $7 million and $17 million, respectively.  During the first nine months of 2008, Occidental received a net payment of $61 million from Ecuador for disputed tax refunds.  Interest paid (net of interest capitalized of $43 million and $46 million, respectively) totaled approximately $38 million and $250 million for the nine months ended September 30, 2008 and 2007, respectively.  The 2007 amount includes $178 million of interest paid for the partial repurchase of various debt issues in the open market.

 

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

 

September 30, 2008

 

December 31, 2007

 

Raw materials

 

 

$

108

 

 

 

$

92

 

 

Materials and supplies

 

 

 

403

 

 

 

 

349

 

 

Finished goods

 

 

 

548

 

 

 

 

571

 

 

 

 

 

 

1,059

 

 

 

 

1,012

 

 

LIFO reserve

 

 

 

(102

)

 

 

 

(102

)

 

Total

 

 

$

957

 

 

 

$

910

 

 

 

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7.                   Asset Retirement Obligations

 

The asset retirement obligations at September 30, 2008 and 2007, were $515 million and $392 million, respectively, of which $492 million and $379 million, respectively, are included in deferred credits and other liabilities-other and the remaining balance is included in accrued liabilities.  The following summarizes the activity of the asset retirement obligations for the nine months ended September 30, 2008 and 2007 (in millions):

 

Nine months ended September 30,

 

2008

 

2007

 

Beginning balance

 

 

$

471

 

 

 

$

362

 

 

Liabilities incurred in the period

 

 

 

17

 

 

 

 

11

 

 

Liabilities settled in the period

 

 

 

(8

)

 

 

 

(12

)

 

Acquisitions and other

 

 

 

13

 

 

 

 

14

 

 

Accretion expense

 

 

 

22

 

 

 

 

17

 

 

Ending balance

 

 

$

515

 

 

 

$

392

 

 

 

8.                   Environmental Liabilities and Expenditures

 

Occidental’s operations are subject to stringent federal, state, local and foreign laws and regulations relating to improving or maintaining environmental quality.  The laws that require or address environmental remediation may apply retroactively to past waste disposal practices and releases of substances to the environment.  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 participate in environmental assessments and cleanups under these laws at currently-owned facilities, previously-owned sites and third-party sites.

 

At September 30, 2008, the current portion of Occidental’s environmental remediation reserves ($69 million) is included in accrued liabilities and the remaining amount ($375 million) is included in deferred credits and other liabilities-other.  The following table presents the environmental remediation reserves in three categories of sites at September 30, 2008:

 

 

 

 

 

 

 

 

 

Number
of Sites

 

Reserve Balance
(in millions)

 

CERCLA (a) & equivalent sites

 

103

 

 

$

198

Active facilities

 

17

 

 

 

103

Closed or sold facilities

 

44

 

 

 

143

Total

 

164

 

 

$

444

 

(a)   Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

 

Occidental believes it is reasonably possible that it will continue to incur additional liabilities beyond those recorded for environmental remediation at these sites.  The range of reasonably possible loss for existing environmental remediation matters could be up to $410 million beyond the amount accrued.  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.

 

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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 September 30, 2008:

 

Description

 

Number
of Sites

 

Reserve Balance
(in millions)

Minimal/No Exposure (a)

 

83

 

 

$

6

 

Reserves between $1-10 million

 

14

 

 

 

45

 

Reserves over $10 million

 

6

 

 

 

147

 

Total

 

103

 

 

$

198

 

 

(a)   Includes 32 sites for which Maxus Energy Corporation has retained the liability and indemnified Occidental, including the Diamond Alkali Superfund Site in Newark, New Jersey.  In connection with that site, Occidental Chemical Corporation (OCC) and Tierra Solutions, Inc., Maxus’ affiliate, signed a Settlement Agreement and Order on Consent for Removal Action with the U.S. EPA in June 2008.  Maxus and Tierra will fund and perform the work required under the Consent Order.  Also included are 3 sites where Occidental has denied liability without challenge, 30 sites where Occidental’s reserves are less than $50,000 each, and 18 sites where reserves are between $50,000 and $1 million each.

 

 

 

 

 

9.                   Lawsuits, Claims, Commitments, Contingencies and Related Matters

 

OPC or certain of its subsidiaries have been named in many 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 recovery of other losses, or injunctive or declaratory relief.  OPC or 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.

 

Since 2004, OCC has been served with ten lawsuits filed in Nicaragua by approximately 2,600 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.  OCC is aware of, but has not been served in, 24 additional cases in Nicaragua, which Occidental understands make similar allegations.  In the opinion of management, the claims against OCC are without merit because, among other things, OCC 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.  OCC filed a response to the complaints contesting jurisdiction without posting such pre-trial deposit.  In 2004, the judge in one of the cases (Osorio Case) ruled the court had jurisdiction over the defendants, including OCC, and that the plaintiffs had waived the requirement of the pre-trial deposit.  In order to preserve its jurisdictional defense, OCC elected not to make a substantive appearance in the Osorio Case.  In 2005, the judge in the Osorio Case entered judgment against several defendants, including OCC, for damages totaling approximately $97 million. In December 2006, the court in a second case in Nicaragua (Rios Case) entered a judgment against several defendants, including OCC, for damages totaling approximately $800 million.  While preserving its jurisdictional defenses, OCC has appealed the judgments in the Osorio and Rios Cases.  In September 2007, the plaintiffs in the Osorio Case filed an action in state court in Florida seeking to enforce the Nicaraguan judgment.  That action was removed to and is presently pending in federal court.  OCC has no assets in Nicaragua and, in the opinion of management, any judgment rendered under the statute, including in the Osorio and Rios Cases, would be unenforceable in the United States.

 

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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 2001 are generally closed for U.S. federal and state corporate income tax purposes.  Taxable years 2001 through the current year are in various stages of audit by the U.S. Internal Revenue Service.  Foreign government tax authorities are in various stages of auditing Occidental, and income taxes for taxable years from 2002 through 2007 remain subject to examination in certain tax jurisdictions.  Disputes may arise during the course of such audits as to facts and matters of law.

 

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 or its subsidiaries and other affiliates will meet their various obligations (guarantees).  At September 30, 2008, the notional amount of the guarantees subject to reporting requirements was approximately $260 million, which consists of Occidental’s guarantees of equity investees’ debt, primarily from the Dolphin Project equity investment, and other commitments.

 

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, or the timing of these liabilities.  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.

 

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10.             Retirement Plans and Postretirement Benefits

 

The following table sets forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and postretirement benefit plans for the three and nine months ended September 30, 2008 and 2007 (in millions):

 

Three months ended September 30

 

2008

 

2007

Net Periodic Benefit Costs

 

Pension
Benefit

 

Postretirement
Benefit

 

Pension
Benefit

 

Postretirement
Benefit

Service cost

 

$

2

 

 

$

3

 

 

$

1

 

 

$

3

 

Interest cost

 

 

7

 

 

 

10

 

 

 

6

 

 

 

8

 

Expected return on plan assets

 

 

(9

)

 

 

 

 

 

(12

)

 

 

 

Recognized actuarial loss

 

 

 

 

 

4

 

 

 

3

 

 

 

6

 

Total

 

$

 

 

$

17

 

 

$

(2

)

 

$

17

 

 

Nine months ended September 30

 

2008

 

2007

Net Periodic Benefit Costs

 

Pension
Benefit

 

Postretirement
Benefit

 

Pension
Benefit

 

Postretirement
Benefit

Service cost

 

$

6

 

 

$

10

 

 

$

7

 

 

$

9

 

Interest cost

 

 

21

 

 

 

29

 

 

 

21

 

 

 

27

 

Expected return on plan assets

 

 

(28

)

 

 

 

 

 

(28

)

 

 

 

Recognized actuarial loss

 

 

1

 

 

 

12

 

 

 

3

 

 

 

12

 

Total

 

$

 

 

$

51

 

 

$

3

 

 

$

48

 

 

Occidental contributed $1 million and $3 million to its defined benefit pension plans for the three and nine months ended September 30, 2008, respectively, and expects to contribute an additional $1 million in the remainder of 2008.  Occidental contributed $1 million and $3 million to its defined benefit pension plans for the three and nine months ended September 30, 2007, respectively.

 

11.             Fair Value Measurements

 

As discussed in Note 3, Occidental adopted the non-deferred portion of SFAS No. 157 on January 1, 2008 on a prospective basis.  In accordance with SFAS No. 157, Occidental has categorized its assets and liabilities that are measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy: Level 1 is the use of quoted prices in active markets for identical assets or liabilities; Level 2 is the use of other observable inputs other than quoted prices; and Level 3 is the use of unobservable inputs.

 

As permitted under SFAS No. 157, Occidental utilizes the mid-point price between bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value. Occidental utilizes market data and assumptions in pricing the assets or liabilities, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  Occidental primarily applies the market approach for recurring fair value measurements and utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Certain of Occidental’s financial instruments are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

 

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The following table provides fair value measurement information for such assets and liabilities that are measured on a recurring basis (in millions):

 

 

 

 

 

Fair Value Measurements at
September 30, 2008 Using

Description

 

Total Fair
Value

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables, net

 

$

179

 

 

$

 

 

$

179

 

 

$

 

Long-term receivables, net

 

 

39

 

 

 

 

 

 

39

 

 

 

 

Investments in unconsolidated entities - available for sale securities

 

 

4

 

 

 

4

 

 

 

 

 

 

 

Total assets

 

$

222

 

 

$

4

 

 

$

218

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

473

 

 

$

79

 

 

$

394

 

 

$

 

Deferred credits and other liabilities-other

 

 

566

 

 

 

 

 

 

566

 

 

 

 

 

Total liabilities

 

$

1,039

 

 

$

79

 

 

$

960

 

 

$

 

 

12.            Industry Segments

 

Occidental conducts its continuing operations through three operating segments: (1) oil and gas, (2) chemical and (3) midstream, marketing and other activities.  The oil and gas segment explores for, develops and produces crude oil, natural gas and natural gas liquids (NGLs).  The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals.  The midstream, marketing and other segment gathers, processes, transports, stores and markets crude oil, natural gas, NGLs and CO2 production, and generates electricity at various facilities.

 

Occidental changed its alignment of operating segments at the beginning of 2008.  In previous years, oil and gas and a portion of the midstream, marketing and other activities were reported as a single oil and gas segment and some of the corporate-directed midstream, marketing and other activities were reported under corporate and other.  In the last two years, the Dolphin pipeline began transporting natural gas to the United Arab Emirates and Occidental acquired a common carrier pipeline system in the Permian Basin, various gas processing plants and the remaining ownership interest in a cogeneration facility.  The addition of these activities to the existing midstream and marketing infrastructure caused management to realign its operating segments in order to increase its focus on its midstream, marketing and other activities on a stand-alone basis.  All segment information for prior periods has been revised to retrospectively reflect the current segment reporting structure.  The change to segment reporting has no effect on Occidental’s reported consolidated earnings.

 

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Table of Contents

 

The following table presents Occidental’s industry segment and corporate disclosures (in millions):

 

 

 

Oil and
Gas

 

Chemical

 

Midstream,
Marketing
and Other

 

Corporate
and
Eliminations

 

Total

 

Nine months ended
September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

15,441

 

 

$

4,107

 

 

$

1,204

 

 

$

(556

)

(a)

$

20,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax operating profit (loss)

 

$

10,312

 

 

$

542

 

 

$

350

 

 

$

(302

)

(b)(c)

$

10,902

 

 

Income taxes

 

 

 

 

 

 

 

(4,511

)

(d)

(4,511

)

 

Discontinued operations

 

 

 

 

 

 

 

23

 

(e)

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

10,312

 

 

$

542

 

 

$

350

 

 

$

(4,790

)

 

$

6,414

 

 

Nine months ended
September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

9,182

 

 

$

3,530

 

 

$

975

 

 

$

(420

)

(a)

$

13,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax operating profit (loss)

 

$

5,496

 

(f)

$

507

 

 

$

229

 

 

$

(152

)

(b)(c)

$

6,080

 

 

Income taxes

 

 

 

 

 

 

 

(2,450

)

(d)

(2,450

)

 

Discontinued operations

 

 

 

 

 

 

 

318

 

(e)

318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5,496

 

 

$

507

 

 

$

229

 

 

$

(2,284

)

 

$

3,948

 

 

 

(a)   Intersegment sales are generally made at prices approximately equal to those that the selling entity is able to obtain in third-party transactions.

(b)   Includes net interest expense, administration expense, environmental remediation and other pre-tax items.

(c)   Net interest expense for the first nine months of 2008 included interest expense of $94 million offset by $84 million of interest income.  Net interest expense for the first nine months of 2007 included interest expense of $297 million offset by $111 million of interest income.  The first nine months of 2007 also included a $326 million pre-tax gain from the sale of Lyondell common stock, $167 million of pre-tax interest charges for the purchase of various debt issues in the open market, and a $47 million pre-tax charge for a plant closure and related environmental remediation reserve.

(d)   Includes all foreign and domestic income taxes from continuing operations.

(e)   In the first nine months of 2008, Occidental received a $61 million payment from Ecuador for disputed tax refunds.  In 2007, Occidental completed an exchange with BP p.l.c. (BP) of oil and gas interests in Horn Mountain for BP’s oil and gas interests in the Permian Basin and a gas processing plant in Texas.  Occidental also sold its oil and gas interests in Pakistan to BP.

(f)    Included an after-tax gain of $412 million from the sale of Occidental’s Russian joint venture interest, an after-tax gain of $112 million from certain litigation settlements, a $103 million pre-tax gain from the sale of exploration properties, partially offset by a $74 million pre-tax charge for exploration impairments, and a $35 million pre-tax gain from the sale of oil and gas interests.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Consolidated Results of Operations

 

Occidental (which means Occidental Petroleum Corporation (OPC) and/or one or more entities in which it owns a majority voting interest) reported net income for the first nine months of 2008 of $6.4 billion, on net sales of $20.2 billion, compared with net income of $3.9 billion, on net sales of $13.3 billion for the same period of 2007.  Diluted earnings per common share were $7.79 and $4.69 for the first nine months of 2008 and 2007, respectively.  Occidental reported net income for the third quarter of 2008 of $2.3 billion, on net sales of $7.1 billion, compared with net income of $1.3 billion, on net sales of $4.8 billion for the same period of 2007.  Diluted earnings per common share were $2.78 for the third quarter of 2008, compared with diluted earnings per share of $1.58 for the same period of 2007.

 

Net income for the three and nine months ended September 30, 2008, compared to the same periods of 2007, reflected higher crude oil and natural gas prices, higher oil and gas production and lower exploration expense, which were partially offset by higher depreciation, depletion and amortization (DD&A) rates and operating expenses.

 

Net income for the three and nine months ended September 30, 2007, included a $42 million pre-tax gain from the sale of Lyondell Chemical Company (Lyondell) common stock, and a $103 million pre-tax gain from the sale of exploration properties, partially offset by a $74 million pre-tax charge from the impairment of assets.  Net income for the first nine months of 2007 also included an additional $284 million pre-tax gain from the sale of Lyondell common stock, a $167 million pre-tax interest charge for the partial repurchase of various debt issues in the open market, a $412 million after-tax gain from the sale of Occidental’s Russian joint venture interest and a $112 million after-tax gain from certain litigation settlements.  Discontinued operations for the nine months ended September 30, 2007 included after-tax gains of $226 million from a series of transactions with BP p.l.c. (BP), as well as the results of operations of these assets before disposal.

 

Selected Income Statement Items

 

The increases in net sales of $2.2 billion and $6.9 billion for the three and nine months ended September 30, 2008, respectively, compared with the same periods of 2007, reflected higher worldwide crude oil and natural gas prices and higher oil and gas production, particularly from the Dolphin Project, which began production in the third quarter of 2007.  The decrease in interest, dividends and other income of $106 million for the nine months ended September 30, 2008, compared with the same period of 2007, reflected $112 million of after-tax gains from certain litigation settlements in 2007.  For the three months and nine months ended September 30, 2007, gains on disposition of assets included a $42 million pre-tax gain from the sale of Lyondell common stock and a $103 million pre-tax gain from the sale of exploration properties.  For the nine months ended September 30, 2007, gains on disposition of assets also included a $412 million after-tax gain from the sale of Occidental’s Russian joint venture interest, a $284 million pre-tax gain from the sale of Lyondell common stock and a $35 million pre-tax gain from the sale of miscellaneous domestic oil and gas interests.

 

The increase in cost of sales of $547 million and $1.4 billion for the three and nine months ended September 30, 2008, respectively, compared with the same periods of 2007, reflected higher DD&A rates, ad valorem taxes, and workover and field operating costs.  The increase in selling, general and administrative and other operating expenses of $144 million for the nine months ended September 30, 2008, compared with the same period in 2007, reflected higher oil and gas production taxes.  Environmental remediation expenses for the nine months ended September 30, 2007 reflected a $47 million pre-tax charge for plant closure and related environmental remediation reserve.  Exploration expense for the three and nine months ended September 30, 2007, reflected a $74 million pre-tax charge for exploration impairments.  Interest and debt expense, net for the nine months ended September 30, 2007, reflected pre-tax interest charges of $167 million for the purchase of various debt issues in the open market.  Discontinued operations for the nine months ended September 30, 2007 included after-tax gains of $226 million from a series of transactions with BP, as well as the results of operations of these assets before disposal.

 

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Selected Analysis of Financial Position

 

The increase in receivables, net of $1.5 billion at September 30, 2008, compared with December 31, 2007, reflected higher crude oil prices and sales volumes during the third quarter of 2008 compared to the fourth quarter of 2007.  The increase in investments in unconsolidated entities of $467 million at September 30, 2008, compared with December 31, 2007, reflected the 2008 acquisitions of an equity investment in a U.S. oil and gas pipeline entity and the increase in equity income from the Dolphin pipeline investment.  The increase in property, plant and equipment, net of $4.6 billion at September 30, 2008, compared with December 31, 2007, was due to capital expenditures, the purchase of oil and gas interests from Plains Exploration & Production Company and an interest in the Joslyn Oil Sands Project, the signature bonus from the Libya contracts and the acquisitions of other miscellaneous oil and gas interests, partially offset by DD&A.

 

The increase in current maturities of long-term debt and capital lease liabilities of $667 million at September 30, 2008, compared with December 31, 2007, was due to the reclassification from long-term debt, net for debt with current maturities at September 30, 2008, including the Dolphin Energy Ltd. loans.  The increase in accounts payable of $644 million at September 30, 2008, compared with December 31, 2007, reflected higher crude oil prices, especially in the marketing and trading operations, during the third quarter of 2008 compared to the fourth quarter of 2007.  The increase in accrued liabilities $394 million at September 30, 2008, compared with December 31, 2007, was mainly due to higher mark-to-market adjustments on derivative instruments, the accrual of the current portion of the signature bonus for the Libya agreements signed in June 2008 and higher ad valorem taxes.  The decrease in long-term debt, net of $684 million at September 30, 2008, compared with December 31, 2007, was due to the reclassification from long-term debt, net to debt with current maturities at September 30, 2008.  The increase in deferred credit and other liabilities – other of $310 million at September 30, 2008, compared with December 31, 2007, reflected the accrual of the noncurrent portion of the signature bonus and other long-term payables for the Libya agreements.  The increase in stockholders’ equity of $4.1 billion at September 30, 2008, compared with December 31, 2007, reflected net income for the nine months ended September 30, 2008, partially offset by year-to-date treasury stock repurchases of approximately 19.8 million shares and dividend payments.

 

Segment Operations

 

Occidental conducts its continuing operations through three operating segments: (1) oil and gas, (2) chemical and (3) midstream, marketing and other activities.  The oil and gas segment explores for, develops and produces crude oil, natural gas and natural gas liquids (NGLs).  The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals.  The midstream, marketing and other segment gathers, processes, transports, stores and markets crude oil, natural gas, NGLs and carbon dioxide (CO2) production, and generates electricity at various facilities.

 

Occidental changed its alignment of operating segments at the beginning of 2008.  In previous years, oil and gas and a portion of the midstream, marketing and other activities were reported as a single oil and gas segment and some of the corporate-directed midstream, marketing and other activities were reported under corporate and other.  In the last two years, the Dolphin pipeline began transporting natural gas to the United Arab Emirates and Occidental acquired a common carrier pipeline system in the Permian Basin, various gas processing plants and the remaining ownership interest in a cogeneration facility.  The addition of these activities to the existing midstream and marketing infrastructure caused management to realign its operating segments in order to increase its focus on its midstream, marketing and other activities on a stand-alone basis.  All segment information for prior periods has been revised to retrospectively reflect the current segment reporting structure.  The change to segment reporting has no effect on Occidental’s reported consolidated earnings.

 

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Periods Ended September 30

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

2008

 

2007

 

2008

 

2007

 

Net Sales

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

5,422

 

$

3,401

 

$

15,441

 

$

9,182

 

Chemical

 

1,454

 

1,241

 

4,107

 

3,530

 

Midstream, marketing and other

 

381

 

337

 

1,204

 

975

 

Eliminations

 

(197

)

(138

)

(556

)

(420

)

Net Sales

 

$

7,060

 

$

4,841

 

$

20,196

 

$

13,267

 

Segment Earnings (a)

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

3,618

 

$

1,955

 

$

10,312

 

$

5,496

 

Chemical

 

219

 

212

 

542

 

507

 

Midstream, marketing and other

 

66

 

86

 

350

 

229

 

 

 

3,903

 

2,253

 

11,204

 

6,232

 

 

 

 

 

 

 

 

 

 

 

Unallocated Corporate Items

 

 

 

 

 

 

 

 

 

Interest expense, net (a)

 

(3

)

(11

)

(10

)

(186

)

Income taxes

 

(1,546

)

(862

)

(4,511

)

(2,450

)

Other (expense) income (a)

 

(82

)

(64

)

(292

)

34

 

Income from Continuing Operations

 

2,272

 

1,316

 

6,391

 

3,630

 

Discontinued operations, net of tax (a)

 

(1

)

8

 

23

 

318

 

Net Income

 

$

2,271

 

$

1,324

 

$

6,414

 

$

3,948

 

 

 

(a)   Refer to “Significant Items Affecting Earnings”, “Oil and Gas Segment”, “Chemical Segment”, “Midstream, Marketing and Other Segment” and “Corporate” discussions that follow.

 

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Significant Items Affecting Earnings

 

The following table sets forth the effects on Occidental’s earnings of significant transactions and events that vary widely and unpredictably in nature, timing and amount for the three and nine months ended September 30, 2008 and 2007 (in millions):

 

 

 

Periods Ended September 30

 

 

 

Three Months

 

Nine Months

 

 

 

2008

 

2007

 

2008

 

2007

 

Oil & Gas

 

 

 

 

 

 

 

 

 

Russian joint venture sale*

 

$

 

$

 

$

 

$

412

 

Legal settlements*

 

 

 

 

112

 

Gain on sale of exploration properties

 

 

103

 

 

103

 

Exploration impairments

 

 

(74

)

 

(74

)

Gain on sale of oil and gas interests

 

 

12

 

 

35

 

Total Oil and Gas

 

$

 

$

41

 

$

 

$

588

 

 

 

 

 

 

 

 

 

 

 

Chemical

 

 

 

 

 

 

 

 

 

No Significant Items Affecting Earnings

 

$

 

$

 

$

 

$

 

Total Chemical

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Midstream, marketing and other

 

 

 

 

 

 

 

 

 

No Significant Items Affecting Earnings

 

$

 

$

 

$

 

$

 

Total Midstream, marketing and other

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

Debt purchase expense

 

$

 

$

 

$

 

$

(167

)

Gain on sale of Lyondell shares

 

 

42

 

 

326

 

Facility closure

 

 

 

 

(47

)

Tax effect of pre-tax items

 

 

23

 

 

(11

)

Discontinued operations, net*

 

(1

)

8

 

23

 

318

 

Total Corporate

 

$

(1

)

$

73

 

$

23

 

$

419

 

Total

 

$

(1

)

$

114

 

$

23

 

$

1,007

 

 

* Amounts shown after tax.

 

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Worldwide Effective Tax Rate

 

The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations (in millions):

 

 

 

Periods Ended September 30

 

 

 

Three Months

 

Nine Months

 

 

 

2008

 

2007

 

2008

 

2007

 

Oil & Gas earnings (a)

 

$

3,618

 

$

1,955

 

$

10,312

 

$

5,496

 

Chemical earnings

 

219

 

212

 

542

 

507

 

Midstream, marketing and other earnings

 

66

 

86

 

350

 

229

 

Unallocated corporate items

 

(85

)

(75

)

(302

)

(152

)

Pre-tax income

 

3,818

 

2,178

 

10,902

 

6,080

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

Federal and state

 

716

 

363

 

2,123

 

1,085

 

Foreign (a)

 

830

 

499

 

2,388

 

1,365

 

Total

 

1,546

 

862

 

4,511

 

2,450

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2,272

 

$

1,316

 

$

6,391

 

$

3,630

 

 

 

 

 

 

 

 

 

 

 

Worldwide effective tax rate

 

40%

 

40%

 

41%

 

40%

 

 

(a)   Revenues and income tax expense include taxes owed by Occidental but paid by governmental entities on its behalf. Oil and gas earnings and income tax expense each include the following amounts by period (in millions): third quarter 2008—$730 and third quarter 2007—$331, first nine months 2008—$1,801 and first nine months of 2007—$919.

 

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Oil and Gas Segment

 

 

 

Periods Ended September 30

 

 

 

Three Months

 

Nine Months

 

Summary of Operating Statistics

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Production per Day:

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil and Natural Gas Liquids (MBBL)

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

261

 

 

265

 

 

260

 

 

259

 

Middle East/North Africa

 

 

117

 

 

109

 

 

127

 

 

115

 

Latin America

 

 

81

 

 

73

 

 

75

 

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas (MMCF)

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

570

 

 

604

 

 

584

 

 

597

 

Middle East

 

 

190

 

 

103

 

 

200

 

 

54

 

Latin America

 

 

45

 

 

40

 

 

40

 

 

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barrels of Oil Equivalent (MBOE) per day (a) (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated subsidiaries

 

 

593

 

 

572

 

 

599

 

 

566

 

Other interests

 

 

(5

)

 

(2

)

 

(5

)

 

(3

)

Worldwide production

 

 

588

 

 

570

 

 

594

 

 

563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Sales Price: (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil ($/BBL)

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

109.50

 

$

68.83

 

$

104.82

 

$

59.71

 

Middle East/North Africa

 

$

114.11

 

$

71.30

 

$

106.81

 

$

63.93

     

Latin America

 

$

77.76

 

$

60.77

 

$

78.23

 

$

53.00

 

Total consolidated subsidiaries

 

$

104.26

 

$

67.87

 

$

100.41

 

$

59.52

 

Other interests

 

$

94.17

 

$

74.08

 

$

110.39

 

$

65.30

 

Worldwide production

 

$

104.15

 

$

67.81

 

$

100.39

 

$

59.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas ($/MCF)

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

9.35

 

$

5.90

 

$

9.18

 

$

6.45

 

Latin America

 

$

4.40

 

$

2.68

 

$

4.22

 

$

2.31

 

Worldwide production

 

$

7.11

 

$

5.05

 

$

6.95

 

$

5.78

 

 

(a)   Natural gas volumes have been converted to BOE based on energy content of 6,000 cubic feet (one thousand cubic feet is referred to as a “Mcf”) of gas to one barrel of oil.

(b)   Occidental sold its interest in a Russian joint venture in January 2007.  In June 2007, Occidental sold its Pakistan operations to BP and swapped its Horn Mountain operations to BP, classifying these operations as discontinued operations on a retrospective application basis.  Horn Mountain, Pakistan and Russian joint venture production have been excluded for all periods for comparability.

 

Oil and gas segment earnings for the three and nine months ended September 30, 2008, were $3.6 billion and $10.3 billion, respectively, compared with $2.0 billion and $5.5 billion of segment earnings for the same periods of 2007.  The increase in oil and gas segment earnings for the three and nine months ended September 30, 2008, compared to the same period of 2007, reflected higher crude oil and natural gas prices, higher oil and gas production and lower exploration expense, partially offset by higher DD&A rates and operating expenses.

 

Occidental’s realized oil price for the third quarter of 2008 was $104.15 per barrel compared to $67.81 per barrel for the third quarter of 2007.  Domestic realized gas prices increased from $5.90 per MCF in the third quarter of 2007 to $9.35 per MCF for the third quarter of 2008.  Based on the 2008 third quarter prices, a change of 50 cents per million BTUs in NYMEX gas prices impacts quarterly oil and gas segment earnings by approximately $24 million, while a $1.00 per-barrel change in oil prices has a quarterly pre-tax impact of approximately $39 million.

 

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The increase in production for the three months ended September 30, 2008, compared to the same period of 2007, was primarily due to an increase of 31,000 BOE per day from the Dolphin Project which began production in the third quarter of 2007, partially offset by 5,000 BOE per day lower volumes attributable to Hurricane Ike and 13,000 BOE per day lower volumes in Libya as a result of the new contract that became effective in the third quarter of 2008.  The increase in production for the nine months ended September 30, 2008, compared to the same period of 2007, was primarily due to an increase of 44,000 BOE per day from the Dolphin Project, partially offset by 5,000 BOE per day lower volumes in Libya.

 

Average production cost for the first nine months of 2008 was $14.80 per BOE compared to the average annual 2007 production cost of $12.33 per BOE.  Approximately 38 percent of the increase was a result of increased energy costs.  The increases reflected higher production taxes and ad valorem taxes, workovers and field operating costs.

 

On June 23, 2008, Occidental signed 30-year agreements with the Libyan National Oil Company (NOC) to upgrade its existing petroleum contracts. Total expected capital investment is estimated to be $5 billion over the next five years, of which Occidental’s portion will be approximately $1.9 billion. NOC will contribute 50 percent, Occidental will contribute 37.5 percent and its partner will contribute 12.5 percent of the development capital.  Under these contracts, Occidental and its partner will pay a signature bonus of $1 billion, of which Occidental’s share, 75 percent, is $750 million.  Occidental and its partner made the first payment of $600 million, of which Occidental’s share was $450 million, in June 2008.  The remaining annual payments of $200 million, of which Occidental’s share is $150 million, are due in each of the next two years.  The new agreements allow NOC and Occidental to design and implement major field redevelopment and exploration programs in the Sirte Basin.

 

In February 2008, Occidental purchased from Plains Exploration & Production Company (Plains) a 50-percent interest in oil and gas properties in the Permian Basin and Colorado.  In September 2008, Occidental entered into an agreement with Plains to purchase all of Plains’ remaining interests in the Permian Basin and Colorado for the approximate purchase price of $1.25 billion, which is expected to close in the fourth quarter of 2008.

 

Chemical Segment

 

Chemical segment earnings for the three and nine months ended September 30, 2008, were $219 million and $542 million, respectively, compared with $212 million and $507 million for the same periods of 2007.  The increase in chemical segment earnings for the three and nine months ended September 30, 2008, compared with the same periods of 2007, was due to higher caustic soda margins, partially offset by lower volumes and margins for chlorine and polyvinyl chloride.

 

Midstream, Marketing and Other Segment

 

Midstream, marketing and other segment earnings for the three and nine months ended September 30, 2008, were $66 million and $350 million, compared with $86 million and $229 million for the same periods of 2007.  Midstream, marketing and other segment earnings for the three months ended September 30, 2008, reflected lower margins in crude oil marketing, partially offset by higher income from the Dolphin pipeline investment, which came on line in the second half of 2007, and higher margins in gas processing and power generation.  Midstream, marketing and other segment earnings for the nine months ended September 30, 2008, reflected higher income from the Dolphin pipeline and higher NGL margins in the gas processing business, partially offset by lower margins in crude oil marketing.

 

In June 2008, Occidental signed an agreement with a third party to construct a west Texas gas processing plant and pipeline infrastructure that will provide carbon dioxide (CO2) for Occidental’s enhanced oil recovery projects in the Permian Basin.  Occidental will own and operate the new facility and pipeline system and is expected to incur capital expenditures of approximately $1.1 billion constructing this project over several years.

 

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Corporate

 

In July 2008, Occidental purchased a 15-percent interest in the Joslyn Oil Sands Project in northern Alberta, Canada for approximately $500 million in cash.  Occidental expects to spend approximately $2 billion over a number of years with production expected to commence in 2014.

 

In the nine month period ended September 30, 2007, Occidental recorded a $326 million pre-tax gain from the sale of 21.0 million shares of Lyondell stock, $167 million of pre-tax interest charges for the purchase of various debt issues in the open market and a $47 million pre-tax charge for a plant closure and related environmental remediation reserve.

 

Liquidity and Capital Resources

 

Occidental’s net cash provided by operating activities was $8.1 billion for the first nine months of 2008, compared with $4.3 billion for the same period of 2007.  The increase in operating cash flow in 2008, compared to 2007, reflected the effect of several drivers.  The most important drivers were higher oil and natural gas prices and production.  In the first nine months of 2008, compared to the same period in 2007, Occidental’s realized oil price was higher by 69 percent and Occidental’s realized natural gas price increased 42 percent in the U.S., where approximately 71 percent of Occidental’s natural gas was produced.  Oil and gas production increased approximately 5.5 percent in the first nine months of 2008, compared to the same period in 2007, mainly due to the start-up of the Dolphin Project in the second half of 2007.

 

Occidental’s net cash used by investing activities was $6.6 billion for the first nine months of 2008, compared with $1.8 billion for the same period of 2007.  The 2008 amount included cash payments for the acquisitions of oil and gas interests from Plains for $1.5 billion, an interest in the Joslyn Oil Sands Project for approximately $500 million and an equity interest in a U.S. oil and gas pipeline entity for approximately $330 million.  The 2008 amount also includes the first payment of the signature bonus under the Libya agreements of $450 million.  The 2007 amount included cash proceeds of $672 million from the sale of Lyondell common stock, $460 million from the sale of other businesses and properties, $485 million received from the sale of a joint venture interest in Russia, and $250 million from the sale of short-term investments.  The 2007 amount also included cash paid for the acquisitions of various oil and gas interests, a common carrier pipeline system and a gas processing plant in Texas totaling $991 million.  Capital expenditures for the first nine months of 2008 were $3.2 billion, including $2.6 billion for oil and gas.  Capital expenditures for the first nine months of 2007 were $2.5 billion, including $2.2 billion for oil and gas.

 

Occidental’s net cash used by financing activities was $2.1 billion in the first nine months of 2008, compared with $2.4 billion for the same period of 2007.  The 2008 amount included $1.5 billion of cash paid for repurchases of 19.4 million shares of Occidental’s common stock at an average price of $76.52 per share and dividend payments of $677 million.  The weighted average basic shares outstanding for the nine months of 2008 totaled 820.1 million and the weighted average diluted shares outstanding totaled 823.8 million.  At September 30, 2008, there were 810.1 million basic shares outstanding and the diluted shares were 813.8 million.  Any future share repurchases will continue to be funded solely from available cash from operations.  The 2007 amount included $910 million of cash paid for repurchases of Occidental’s common stock, $1.0 billion of net debt payments which included the purchase of various debt issues in the open market and $557 million of dividend payments.

 

Available but unused lines of committed bank credit totaled approximately $1.5 billion at September 30, 2008, and cash and cash equivalents totaled $1.45 billion on the September 30, 2008 balance sheet.

 

At September 30, 2008, under the most restrictive covenants of certain financing agreements, Occidental’s capacity for additional unsecured borrowing was approximately $65.4 billion, and the capacity for the payment of cash dividends and other distributions on, and for acquisitions of, Occidental’s capital stock was approximately $25.0 billion, assuming that such dividends, distributions and acquisitions were made without incurring additional borrowing.  Since year-end 2007, Occidental’s long-term senior unsecured debt has been

 

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upgraded from A- to A by Standard and Poor’s Ratings Services, from A3 to A2 by Moody’s Investors Service and from A (low) to A by Dominion Bond Rating Service.

 

In October 2008, Occidental issued $1 billion of 7% senior notes receiving $985 million of net proceeds. Interest on the notes will be payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2009. The notes will mature on November 1, 2013.

 

Occidental currently expects to spend approximately $4.5 to $4.7 billion on its 2008 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 and cash generated from operations will be sufficient to fund its operating needs, capital expenditure requirements, dividend payments and anticipated acquisitions.

 

Environmental Liabilities and Expenditures

 

Occidental’s operations are subject to stringent federal, state, local and foreign laws and regulations relating to improving or maintaining environmental quality.  The laws that require or address environmental remediation may apply retroactively to past waste disposal practices and releases of substances to the environment.  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 participate in environmental assessments and cleanups under these laws at currently-owned facilities, previously-owned sites and third-party sites.

 

At September 30, 2008, the current portion of Occidental’s environmental remediation reserves ($69 million) is included in accrued liabilities and the remaining amount ($375 million) is included in deferred credits and other liabilities-other.  The following table presents the environmental remediation reserves in three categories of sites at September 30, 2008:

 

 

 

Number
of Sites

 

Reserve Balance
(in millions)

 

CERCLA (a) & equivalent sites

 

103

 

 

$

198

 

Active facilities

 

17

 

 

 

103

 

Closed or sold facilities

 

44

 

 

 

143

 

Total

 

164

 

 

$

444

 

 

(a)   Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

 

Occidental believes it is reasonably possible that it will continue to incur additional liabilities beyond those recorded for environmental remediation at these sites.  The range of reasonably possible loss for existing environmental remediation matters could be up to $410 million beyond the amount accrued.  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.

 

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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 September 30, 2008:

 

Description

 

Number
of Sites

 

Reserve Balance
(in millions)

 

Minimal/No Exposure (a)

 

83

 

 

6

 

Reserves between $1-10 million

 

14

 

 

 

45

 

Reserves over $10 million

 

6

 

 

 

147

 

Total

 

103

 

 

198

 

 

 

(a)   Includes 32 sites for which Maxus Energy Corporation has retained the liability and indemnified Occidental, including the Diamond Alkali Superfund Site in Newark, New Jersey.  In connection with that site, Occidental Chemical Corporation (OCC) and Tierra Solutions, Inc., Maxus’ affiliate, signed a Settlement Agreement and Order on Consent for Removal Action with the U.S. EPA in June 2008.  Maxus and Tierra will fund and perform the work required under the Consent Order.  Also included are 3 sites where Occidental has denied liability without challenge, 30 sites where Occidental’s reserves are less than $50,000 each, and 18 sites where reserves are between $50,000 and $1 million each.

 

Refer to the “Environmental Liabilities and Expenditures” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K) for additional information regarding Occidental’s environmental expenditures.

 

Lawsuits, Claims, Commitments, Contingencies and Related Matters

 

OPC or certain of its subsidiaries have been named in many 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 recovery of other losses, or injunctive or declaratory relief.  OPC or 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.

 

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 2001 are generally closed for U.S. federal and state corporate income tax purposes.  Taxable years 2001 through the current year are in various stages of audit by the U.S. Internal Revenue Service.  Foreign government tax authorities are in various stages of auditing Occidental, and income taxes for