01—Abstract
Summary
Summary of the 10-K filed March 9, 2001. Cited figures are marked; the original filing is the authoritative source.
Occidental Petroleum's 2000 10-K shows a transformed company.
Net income rose to $1.57 billiona ($4.26 per diluted share) on net sales of $13.6 billion, up from $448 million ($1.24) on $7.8 billion in 1999. Earnings before special items were $1.33 billion versus $253 million a year earlier. The improvement was driven mainly by the oil and gas segment, which earned $2.4 billion on $9.8 billion of sales.
Higher crude prices (domestic realizations of $26.66b/bbl versus $15.81), the Altura and THUMS acquisitions, and higher domestic volumes all contributed. Return on equity reached 37.9% in 2000. The balance sheet changed significantly.
Occidental bought Altura Energy (now Occidental Permian) for about $3.6 billionc, funded in part by a $1.9 billion non-recourse term loan that sits outside the company's recourse debt. Total debt-to-capitalization fell to about 57% from 61% at year-end 1999, helped by proceeds from the CanadianOxy sale and the Gulf of Mexico monetization. Minority interest jumped to $2.265 billion, mostly preferred interests retained by the Altura sellers, which is a claim ahead of common equity that investors should weigh.
The outlook is mixed. Management expects 2001 oil and gas results to benefit from California gas prices, but chemical margins are guided lower because of high energy and feedstock costs and soft demand. The company shut its Convent, Louisiana chlor-alkali and EDC plant effective February 28, 2001, and has exited several chemical intermediates businesses.
Capital spending is budgeted at about $1.1 billiond for 2001, and the company says it will keep reducing debt from free cash flow. Known contingencies include an ESOP class action settlement of $25 million and environmental reserves of $402 million.
02—Key points
Key Highlights
- Net income of $1.57 billion ($4.26/share) in 2000, up from $448 million ($1.24/share) in 1999; earnings before special items were $1.33 billion versus $253 million.
- Oil and gas segment earnings of $2.4 billion on $9.8 billion of sales, driven by higher crude and gas prices and the Altura and THUMS acquisitions; U.S. oil production rose to 172,000 bbl/day from 73,000.
- Altura Energy acquisition (~$3.6 billion value, closed April 2000) added roughly 850 million barrels of proved oil reserves and about 142,000 BOE/day of production, financed partly with a $1.9 billion non-recourse loan.
- Proved reserves nearly doubled to 2.17 billion BOE from 1.35 billion, with reserve replacement of 588% of 2000 production including acquisitions.
- Debt reduction: total debt-to-capitalization improved to about 57% from 67% at end-1997; public debt fell more than $850 million versus 1999, with a $2 billion debt-reduction target exceeded by about $800 million.
- Chemicals weakened in 2H 2000 and the 2001 outlook is negative: chlor-alkali/vinyl operating rates fell to the low 80% range, and the Convent plant was idled from February 28, 2001.
- Minority interest rose to $2.27 billion from $252 million, mainly preferred interests held by Altura sellers, a senior claim that reduces residual common equity value.
03—Questions
Frequently Asked Questions
How much of 2000's earnings came from one-time items, and what is the underlying trend?
Special items added about $1.0 billion to 2000 net income, including a $493 million pre-tax gain on the CanadianOxy sale and a $639 million total gain on asset dispositions. Earnings before special items were $1.33 billion, against $253 million in 1999. Even on that adjusted basis, earnings rose sharply, but a significant share of the improvement still reflects unusually high 2000 commodity prices.
Is the Altura acquisition financed in a way that affects investors' claims on the company?
Partly. Altura's $2.4 billion borrowing is recourse only to Altura assets, and at year-end it stood at $1.9 billion as a non-recourse term loan. The sellers also retained a preferred limited partnership interest of about $2.0 billion, which appears as minority interest and gets distributions ahead of common shareholders. Investors should treat these as senior claims on the Altura assets when valuing the common stock.
What are the main risks to 2001 earnings?
Chemical margins are expected to decline due to high energy and feedstock costs and weak demand, and the Convent chlor-alkali plant is idle. Oil and gas results depend on commodity prices, with management pointing to a favorable California gas price differential in early 2001. The company also faces Colombian pipeline disruptions affecting Cano Limon output (down to 93,000 gross bbl/day from 125,000) and an ESOP class action, whose $25 million settlement hearing was set for March 15, 2001.
Will the company keep paying its dividend and reducing debt?
The quarterly dividend is $0.25 per share ($1.00 per year), and a $0.25 dividend was declared February 8, 2001, payable April 15, 2001. Management expects sufficient cash in 2001 for operations, about $1.1 billion of capital spending, dividends and mandatory debt repayments. It intends to reduce debt further from free cash flow. Dividend levels remain at the board's discretion.
How significant are the environmental liabilities?
Environmental reserves were about $402 million at year-end 2000, down from $454 million, mostly from payments. Occidental has been identified at 125 Superfund or comparable state sites, of which 54 have accrued reserves. Environmental compliance spending is modest, about $74 million in operating expenses and $38 million in capital in 2000, with roughly $40 million per year in capital expected for 2001 and 2002.
04—Continue