Annual Reports

 
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  • 10-Q (Oct 30, 2013)
  • 10-Q (Aug 5, 2013)
  • 10-Q (May 1, 2013)
  • 10-Q (Nov 2, 2012)
  • 10-Q (Aug 6, 2012)
  • 10-Q (Nov 3, 2011)

 
8-K

 
Other

Occidental Petroleum 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
form10q-20103q.htm
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, 2010
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.        R Yes   £ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       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 Filer£   Non-Accelerated Filer£   Smaller Reporting Company£

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, 2010
 
 
Common stock $.20 par value
   812,585,808 shares
 
 
 
 
 
 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
           
           
TABLE OF CONTENTS
 
           
           
       
PAGE
 
           
Part I
Financial Information
   
           
 
Item 1.
Financial Statements (unaudited)
   
           
   
Consolidated Condensed Balance Sheets —
   
     
September 30, 2010 and December 31, 2009
2
 
           
   
Consolidated Condensed Statements of Income —
   
     
Three and nine months ended September 30, 2010 and 2009
4
 
           
   
Consolidated Condensed Statements of Cash Flows —
   
     
Nine months ended September 30, 2010 and 2009
5
 
           
   
Notes to Consolidated Condensed Financial Statements
6
 
           
 
Item 2.
Management’s Discussion and Analysis of Financial
   
     
Condition and Results of Operations
19
 
           
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
 
           
 
Item 4.
Controls and Procedures
29
 
           
Part II
Other Information
   
           
 
Item 1.
Legal Proceedings
30
 
           
 
Item 2.
Share Repurchase Activities
30
 
           
 
Item 6.
Exhibits
31
 
 
 
1
 
 

PART I    FINANCIAL INFORMATION
 
     
     
Item 1.
Financial Statements (unaudited)
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED BALANCE SHEETS
 
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
 
(Amounts in millions)
 
               
     
2010
   
2009
 
               
ASSETS
             
               
CURRENT ASSETS
             
               
Cash and cash equivalents
 
$
2,109
 
$
1,230
 
               
Trade receivables, net
   
4,367
   
4,142
 
               
Marketing and trading assets and other
   
899
   
1,203
 
               
Inventories
   
1,127
   
1,081
 
               
Prepaid expenses and other
   
420
   
430
 
               
Total current assets
   
8,922
   
8,086
 
               
INVESTMENTS IN UNCONSOLIDATED ENTITIES
   
1,777
   
1,732
 
               
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $22,046 at September 30, 2010 and $19,486 at December 31, 2009
   
35,974
   
33,645
 
               
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
   
830
   
766
 
               
               
TOTAL ASSETS
 
$
47,503
 
$
44,229
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
2
 
 


OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED BALANCE SHEETS
 
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
 
(Amounts in millions)
 
               
     
2010
   
2009
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
               
CURRENT LIABILITIES
             
Current maturities of long-term debt
 
$
 
$
239
 
Accounts payable
   
3,832
   
3,379
 
Accrued liabilities
   
2,162
   
2,341
 
Domestic and foreign income taxes
   
203
   
28
 
Liabilities of discontinued operations
   
101
   
105
 
               
Total current liabilities
   
6,298
   
6,092
 
               
               
LONG-TERM DEBT, NET
   
2,512
   
2,557
 
               
DEFERRED CREDITS AND OTHER LIABILITIES
             
Deferred and other domestic and foreign income taxes
   
3,450
   
3,125
 
Long-term liabilities of discontinued operations
   
120
   
136
 
Other
   
3,279
   
3,160
 
     
6,849
   
6,421
 
               
STOCKHOLDERS' EQUITY
             
Common stock, at par value
   
177
     177  
Treasury stock
   
(4,172
)
    (4,161 )
Additional paid-in capital
   
7,182
    7,127  
Retained earnings
   
28,964
     26,534  
Accumulated other comprehensive loss
   
(443
)
  (596 )
Total equity attributable to common stock
   
31,708
    29,081  
Noncontrolling interest
   
136
    78  
Total equity
   
31,844
    29,159  
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
47,503
  $ 44,229  
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
3
 
 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 
(Amounts in millions, except per-share amounts)
 
                           
   
Three months ended
 
Nine months ended
 
   
September 30
 
September 30
 
   
2010
 
2009
 
2010
   
2009
 
REVENUES AND OTHER INCOME
                         
Net sales
 
$
4,896
 
$
4,104
 
$
14,428
 
$
10,864
 
Interest, dividends and other income
   
27
   
22
   
88
   
80
 
Gains on disposition of assets, net
   
6
   
   
1
   
7
 
     
4,929
   
4,126
   
14,517
   
10,951
 
COSTS AND OTHER DEDUCTIONS
                         
Cost of sales
   
2,444
   
2,130
   
7,318
   
6,253
 
Selling, general and administrative and other operating expenses
   
288
   
359
   
972
   
991
 
Taxes other than on income
   
117
   
105
   
367
   
320
 
Environmental remediation
   
6
   
10
   
6
   
10
 
Exploration expense
   
83
   
56
   
212
   
168
 
Interest and debt expense, net
   
26
   
40
   
96
   
99
 
     
2,964
   
2,700
   
8,971
   
7,841
 
Income before income taxes and other items
   
1,965
   
1,426
   
5,546
   
3,110
 
Provision for domestic and foreign income taxes
   
816
   
549
   
2,345
   
1,245
 
(Income) from equity investments
   
(69
)
 
(66
)
 
(193
)
 
(154
)
Income from continuing operations
   
1,218
   
943
   
3,394
   
2,019
 
Discontinued operations, net
   
(5
)
 
(2
)
 
(18
)
 
(7
)
Net income
   
1,213
   
941
   
3,376
   
2,012
 
Less: Net income attributable to noncontrolling interest
   
(22
)
 
(14
)
 
(58
)
 
(35
)
NET INCOME ATTRIBUTABLE TO COMMON STOCK
 
$
1,191
 
$
927
 
$
3,318
 
$
1,977
 
                           
BASIC EARNINGS PER COMMON SHARE (attributable to common stock)
                         
Income from continuing operations
 
$
1.47
 
$
1.14
 
$
4.10
 
$
2.44
 
Discontinued operations, net
   
(0.01
)
 
   
(0.02
)
 
(0.01
)
BASIC EARNINGS PER COMMON SHARE
 
$
1.46
 
$
1.14
 
$
4.08
 
$
2.43
 
                                 
DILUTED EARNINGS PER COMMON SHARE (attributable to common stock)
                         
Income from continuing operations
 
$
1.47
 
$
1.14
 
$
4.09
 
$
2.44
 
Discontinued operations, net
   
(0.01
)
 
   
(0.02
)
 
(0.01
)
DILUTED EARNINGS PER COMMON SHARE
 
$
1.46
 
$
1.14
 
$
4.07
 
$
2.43
 
                           
DIVIDENDS PER COMMON SHARE
 
$
0.38
 
$
0.33
 
$
1.09
 
$
0.98
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
4
 
 


OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 
(Amounts in millions)
 
               
     
2010
   
2009
 
CASH FLOW FROM OPERATING ACTIVITIES
             
Net income
 
$
3,376
 
$
2,012
 
Adjustments to reconcile net income to net cash provided by operating activities
             
Discontinued operations, net
   
18
   
7
 
Depreciation, depletion and amortization of assets
   
2,608
   
2,297
 
Deferred income tax provision
   
236
   
247
 
Other noncash charges to income
   
345
   
333
 
Gains on disposition of assets, net
   
(1
)
 
(7
)
Income from equity investments
   
(193
)
 
(154
)
Dry hole and impairment expense
   
124
   
130
 
Changes in operating assets and liabilities, net
   
348
   
(826
)
Other operating, net
   
(181
)
 
(165
)
Operating cash flow from continuing operations
   
6,680
   
3,874
 
Operating cash flow from discontinued operations
   
(73
)
 
(31
)
Net cash provided by operating activities
   
6,607
   
3,843
 
CASH FLOW FROM INVESTING ACTIVITIES
             
Capital expenditures
   
(2,816
)
 
(2,649
)
Payments for purchases of assets and businesses
   
(1,892
)
 
(582
)
Sale of assets
   
18
   
47
 
Equity investments and other, net
   
116
   
(64
)
Net cash used by investing activities
   
(4,574
)
 
(3,248
)
CASH FLOW FROM FINANCING ACTIVITIES
             
Proceeds from long-term debt
   
   
740
 
Payments of long-term debt
   
(311
)
 
(699
)
Proceeds from issuance of common stock
   
7
   
16
 
Purchases of treasury stock
   
(11
)
 
(29
)
Excess share-based tax benefits and other
   
9
   
17
 
Distributions to noncontrolling interest
   
   
(15
)
Cash dividends paid
   
(848
)
 
(794
)
Net cash used by financing activities
   
(1,154
)
 
(764
)
Increase (decrease) in cash and cash equivalents
   
879
   
(169
)
Cash and cash equivalents—beginning of period
   
1,230
   
1,777
 
Cash and cash equivalents—end of period
 
$
2,109
 
$
1,608
 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
5
 
 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
     
September 30, 2010
 
1.
General
 
     
 
In these unaudited consolidated condensed financial statements, "Occidental" means Occidental Petroleum Corporation, a Delaware 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, and condensed or omitted, as permitted by the Securities and Exchange Commission’s rules and regulations, certain information and disclosures normally included in consolidated financial statements and the notes.  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, 2009.
 
     
 
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, 2010, and the consolidated statements of income and cash flows for the three and nine months ended September 30, 2010 and 2009, as applicable. The income and cash flows for the periods ended September 30, 2010 and 2009 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 2010 presentation.
 
     
2.
Asset Acquisitions, Dispositions and Other Transactions
 
     
 
In January 2010, Occidental and its partners signed a technical service contract with the government of Iraq to develop the Zubair Field in Iraq.
 
     
 
During the nine months ended September 30, 2010, Occidental agreed to acquire various interests, mostly in operated, producing properties in the Permian and midcontinent regions, for approximately $2.1 billion.  Occidental also obtained a ten-year extension for its hydrocarbon concessions in the Santa Cruz province of Argentina.
 
     
3.
Accounting and Disclosure Changes
 
     
 
Fair Value Measurements – Beginning in the quarter ended March 31, 2010, Occidental enhanced its fair value measurement disclosures as a result of adopting new disclosure requirements issued by the Financial Accounting Standards Board (FASB) in January 2010. The new rules require interim and year-end disclosures of: (i) fair value measurements by classes of assets and liabilities; (ii) valuation techniques and inputs used for Level 2 or 3 fair value measurements; and (iii) significant transfers into and out of Level 1 and 2 measurements and the reasons for the transfers.
 
     
 
Variable Interest Entities – Beginning January 1, 2010, Occidental modified its method of assessing the consolidation of variable interest entities as a result of adopting new accounting requirements issued by the FASB in June 2009.  This new rule had no impact on Occidental’s financial statements upon adoption and will require assessment on an ongoing basis.
 
 
 
6
 
 

4.
Comprehensive Income
 
     
 
The following table presents Occidental’s comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009 (in millions):
 

     
Periods ended September 30
 
     
Three months
 
Nine months
 
     
2010
 
2009
 
2010
 
2009
 
 
Net income attributable to common stock
 
$
1,191
 
$
927
 
$
3,318
 
$
1,977
 
 
Other comprehensive income (loss) items
                         
 
Foreign currency translation adjustments
   
8
   
10
   
4
   
28
 
 
Pension and post-retirement adjustments
   
7
   
7
   
20
   
19
 
 
Unrealized gains (losses) on derivatives
   
7
   
(8
)
 
67
   
(54
)
 
Reclassification of realized losses (gains) on derivatives and other
   
18
   
16
   
62
   
(6
)
 
Other comprehensive income (loss), net of tax
   
40
   
25
   
153
   
(13
)
 
Comprehensive income attributable to common stock
 
$
1,231
 
$
952
 
$
3,471
 
$
1,964
 

 
Other than net income related to noncontrolling interest, there were no “other comprehensive income (loss) items” or changes to equity related to noncontrolling interests for the three and nine months ended September 30, 2010 and 2009.
 
     
5.
Supplemental Cash Flow Information
 
     
 
Occidental paid U.S. federal, state and foreign income taxes of approximately $1.9 billion and $915 million during the nine months ended September 30, 2010 and 2009, respectively.  Additionally, net payments for taxes related to discontinued operations were $44 million and $8 million for the nine months ended September 30, 2010 and 2009, respectively.  Interest paid totaled approximately $108 million and $116 million for the nine months ended September 30, 2010 and 2009, respectively.
 
     
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 as of September 30, 2010 and December 31, 2009 consisted of the following (in millions):
 

     
2010
 
2009
 
 
Raw materials
   
$
59
     
$
63
   
 
Materials and supplies
     
488
       
515
   
 
Finished goods
     
661
       
584
   
         
1,208
       
1,162
   
 
LIFO reserve
     
(81
)
     
(81
)
 
 
Total
   
$
1,127
     
$
1,081
   
 
 
7
 
 

7.
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.  Occidental’s environmental compliance costs have generally increased over time and could continue to rise in the future.  Occidental factors environmental expenditures for its operations into its business planning process as an integral part of producing quality products responsive to market demand.
 
     
 
The laws that require or address environmental remediation, including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar federal, state, local and foreign laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites.  OPC or certain of its subsidiaries participate in or actively monitor a range of remedial activities and government or private proceedings under these laws with respect to alleged past practices at operating, closed and third-party sites.  Remedial activities may include one or more of the following:  investigation involving sampling, modeling, risk assessment or monitoring; cleanup measures including removal, treatment or disposal; or operation and maintenance of remedial systems.  The environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs.
 
     
 
As of September 30, 2010, Occidental participated in or monitored remedial activities or proceedings at 169 sites.  The following table presents Occidental’s environmental remediation reserves as of September 30, 2010, the current portion of which is included in accrued liabilities ($82 million) and the remainder in deferred credits and other liabilities – other ($286 million).  The reserves are grouped as environmental remediation sites listed or proposed for listing by the U.S. Environmental Protection Agency on the CERCLA National Priorities List (NPL sites) and three categories of non-NPL sites — third-party sites, Occidental-operated sites and closed or non-operated Occidental sites.
 

     
Number of Sites
 
Reserve Balance
(in millions)
 
 
NPL sites
   
39
     
$
56
   
 
Third-party sites
   
82
       
94
   
 
Occidental-operated sites
   
19
       
115
   
 
Closed or non-operated Occidental sites
   
29
       
103
   
 
Total
   
169
     
$
368
   


 
As of September 30, 2010, Occidental’s environmental reserves exceeded $10 million at 13 of the 169 sites described above, and 121 of the sites had reserves from $0 to $1 million each.  Occidental expects to expend funds corresponding to about half of the current environmental reserves over the next four years and the balance over the subsequent ten or more years.  Occidental believes its range of reasonably possible additional loss beyond those liabilities recorded for environmental remediation at the sites described above could be up to $375 million.  The status of Occidental’s involvement with the sites and related significant assumptions have not changed materially since December 31, 2009.  For management’s opinion with respect to environmental matters, refer to Note 8.
 
 
 
8
 
 

8.
Lawsuits, Claims, Commitments, Contingencies and Related Matters
 
     
 
OPC or certain of its subsidiaries are named, in the normal course of business, in lawsuits, claims and other legal proceedings that 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 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, civil penalties and injunctive relief; 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.  While the audits of corporate tax returns for taxable years through 2008 have concluded for U.S. federal income tax purposes, the 2009 and 2010 taxable years are currently under review by the U.S. Internal Revenue Service pursuant to its Compliance Assurance Program.  Taxable years from 2000 through 2009 remain subject to examination by foreign and state government tax authorities in certain jurisdictions.  In certain of these locations, tax authorities are in various stages of auditing Occidental’s income taxes.  During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law.
 
     
 
Occidental has indemnified various parties against specified liabilities that those parties might incur in the future in connection with purchases and other transactions that they have entered into with Occidental.  These indemnities usually are contingent upon the other party incurring liabilities that reach specified thresholds.  As of September 30, 2010, Occidental is not aware of circumstances that it believes would reasonably be expected to lead to future indemnity claims against it in connection with these transactions that would result in payments materially in excess of reserves.
 
     
 
The ultimate amount of losses and the timing of any such losses that OPC and its subsidiaries may incur resulting from currently outstanding lawsuits, claims and proceedings, audits, commitments, contingencies and related matters cannot be determined reliably at this time.  If these matters were ultimately resolved unfavorably at amounts substantially exceeding Occidental’s reserves, an outcome not currently expected, 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.
 
 
 
9
 
 

9.
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, 2010 and 2009 (in millions):
 

 
Three months ended September 30
 
2010
 
2009
 
 
Net Periodic Benefit Costs
 
Pension
Benefit
 
Postretirement
Benefit
 
Pension
Benefit
 
Postretirement
Benefit
 
 
Service cost
 
$
4
   
$
5
   
$
4
   
$
4
   
 
Interest cost
   
8
     
11
     
7
     
10
   
 
Expected return on plan assets
   
(8
)
   
     
(6
)
   
   
 
Amortization of prior service cost
   
     
     
1
     
   
 
Recognized actuarial loss
   
3
     
6
     
4
     
5
   
 
Total
 
$
7
   
$
22
   
$
10
   
$
19
   

 
Nine months ended September 30
 
2010
 
2009
 
 
Net Periodic Benefit Costs
 
Pension
Benefit
 
Postretirement
Benefit
 
Pension
Benefit
 
Postretirement
Benefit
 
 
Service cost
 
$
13
   
$
14
   
$
12
   
$
12
   
 
Interest cost
   
23
     
33
     
21
     
30
   
 
Expected return on plan assets
   
(24
)
   
     
(19
)
   
   
 
Amortization of prior service cost
   
1
     
     
1
     
   
 
Recognized actuarial loss
   
9
     
19
     
12
     
16
   
 
Total
 
$
22
   
$
66
   
$
27
   
$
58
   


 
Occidental contributed $3 million and $2 million in the three month periods ended September 30, 2010 and 2009, respectively, and $8 million and $7 million in the nine month periods ended September 30, 2010 and 2009, respectively, to its defined benefit pension plans.
 
       
       
10.
Fair Value Measurements
 
       
 
Occidental has categorized its assets and liabilities that are measured at fair value, based on the priority of the inputs to the valuation techniques, in a three-level fair value hierarchy: Level 1 – using quoted prices in active markets for identical assets or liabilities; Level 2 – using observable inputs other than quoted prices; and Level 3 – using unobservable inputs.
 
       
 
Fair Values – Recurring
 
 
Occidental primarily applies the market approach for recurring fair value measurements, maximizes its use of observable inputs and minimizes its use of unobservable inputs. 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. In addition to using market data, Occidental makes assumptions in valuing its assets and liabilities, including assumptions about the risks inherent in the inputs to the valuation technique.  For assets and liabilities carried at fair value, Occidental measures fair value using the following methods:
 
       
   
Trading equity securities – Quoted prices in active markets exist and are used to provide fair values for these instruments. These securities are classified as Level 1.
 
 
 
10
 
 


   
Commodity derivatives – Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date.  These derivatives are classified as Level 1. Over-the-Counter (OTC) financial commodity contracts, options and physical commodity forward purchase and sale contracts are generally valued using quotations provided by brokers or industry-standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility factors, credit risk and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable prices at which transactions are executed in the marketplace. Occidental classifies these measurements as Level 2.
 
       
 
The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of September 30, 2010 and December 31, 2009 (in millions):
 

     
Fair Value Measurements at
September 30, 2010 Using
             
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Total Fair Value
 
 
Assets:
                               
 
Trading equity securities – natural resources industry
 
$
114
 
$
 
$
 
$
 
$
114
 
 
Commodity derivatives
   
289
   
822
   
   
(807
)
 
304
 
 
Total assets
 
$
403
 
$
822
 
$
 
$
(807
)
$
418
 
 
Liabilities:
                               
 
Commodity derivatives
 
$
268
 
$
950
 
$
 
$
(863
)
$
355
 
 
Total liabilities
 
$
268
 
$
950
 
$
 
$
(863
)
$
355
 

       
Fair Value Measurements at
December 31, 2009 Using
             
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Total Fair Value
 
 
Assets:
                               
 
Trading equity securities – natural resources industry
 
$
230
 
$
 
$
 
$
 
$
230
 
 
Commodity derivatives
   
243
   
612
   
   
(645
)
 
210
 
 
Total assets
 
$
473
 
$
612
 
$
 
$
(645
)
$
440
 
 
Liabilities:
                               
 
Commodity derivatives
 
$
280
 
$
920
 
$
 
$
(665
)
$
535
 
 
Total liabilities
 
$
280
 
$
920
 
$
 
$
(665
)
$
535
 
 
(a)
Represents the impact of netting assets, liabilities and collateral when a legal right of offset exists.
 

 
Fair Values - Nonrecurring
 
 
During the three and nine months ended September 30, 2010 and 2009, Occidental did not have any assets or liabilities measured at fair value on a non-recurring basis.
 
 
 
11
 
 

 
Other Financial Instruments
 
 
The carrying amounts of cash and cash equivalents and other on-balance-sheet financial instruments, other than fixed-rate debt, approximate fair value.  The cost, if any, to terminate off-balance-sheet financial instruments is not significant.  Occidental estimates the fair value of fixed-rate debt based on the quoted market prices for those instruments or on quoted market yields for similarly rated debt instruments, taking into account such similar instruments’ maturities.  The estimated fair values of Occidental’s debt, as of September 30, 2010 and December 31, 2009, were approximately $2.9 billion and $3.1 billion, respectively, compared to carrying values of $2.5 billion and $2.8 billion, respectively.
 
     
11.
Derivatives
 
     
 
Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.  Occidental applies hedge accounting when transactions meet specified criteria for such treatment. If a derivative does not qualify or is not designated and documented as a hedge, any fair value gains or losses are recognized in earnings in the current period.
 
     
 
Occidental has used derivatives to reduce its long-term exposure to price volatility on a small portion of its oil and gas production. Through its low-risk marketing and trading activities and within its established policy controls and procedures, Occidental has also used derivative instruments, including a combination of short-term futures, forwards, options and swaps, to improve realized prices for its oil and gas.  Additionally, Occidental, through its Phibro trading unit, engages in trading activities using derivatives for the purpose of generating profits mainly from market price changes of commodities.
 
     
 
Cash-Flow Hedges
 
 
As of September 30, 2010 and December 31, 2009, Occidental held a series of collar agreements that qualify as cash-flow hedges for the sale of approximately 2 percent of its crude oil production.  These agreements continue to the end of 2011.  The following table presents the daily quantities and weighted-average strike prices of Occidental's collar positions as of September 30, 2010 and December 31, 2009:
 

 
Crude Oil – Collars
 
Daily Volume (barrels)
 
Average Floor
 
Average Cap
 
 
October 2010  December 2010 (a)
 
12,000
 
$33.00
 
$46.35
 
 
January 2011  December 2011 (a)
 
12,000
 
$32.92
 
$46.27
 

 
In 2009, Occidental entered into financial swap agreements related to the sale of a portion of its natural gas production from the Rocky Mountain region of the United States that qualify as cash-flow hedges. The following table presents the daily quantities and weighted-average prices that will be received by Occidental as of September 30, 2010 and December 31, 2009:
 

 
Natural Gas – Swaps
 
Daily Volume (cubic feet)
 
Average Price
 
 
October 2010 – December 2010 (a)
 
40 million
 
$5.03
 
 
December 2010 – March 2012 (a)
 
50 million
 
$6.07
 
               
 
(a)
At December 31, 2009, these contracts were outstanding with the same daily volumes and terms indicated and also covered the period from January 1, 2010 to September 30, 2010.
 

 
Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These derivative agreements continue through April 2011.  As of September 30, 2010 and December 31, 2009, Occidental had approximately 27 billion cubic feet and 28 billion cubic feet of natural gas held in storage, respectively. As of September 30, 2010 and December 31, 2009, Occidental had designated the forecasted sale of approximately 20 billion cubic feet and 24 billion cubic feet of natural gas from storage as cash-flow hedges, respectively.
 
 
 
12
 
 

 
The following table presents the pre-tax gains and losses recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the three and nine months ended September 30, 2010 and 2009 (in millions):
 

     
Periods ended September 30
 
     
Three Months
 
Nine Months
 
 
Commodity Contracts
   
2010
   
2009
   
2010
   
2009
 
 
Unrealized gains (losses) recognized in AOCI –  effective portion
 
$
10
 
$
(13
)
$
105
 
$
(85
)
 
Amount of (gains) losses reclassified from AOCI into income – effective portion
 
$
28
 
$
26
 
$
91
 
$
(10
)
 
(Losses) gains recognized in income – ineffective portion
 
$
(1
)
$
1
 
$
 
$
10
 
 

 
The following table summarizes net after-tax derivative activity recorded in AOCI for the three and nine months ended September 30, 2010 and 2009 (in millions):
 

     
Periods ended September 30
 
     
Three Months
 
Nine Months
 
       
2010
   
2009
   
2010
   
2009
 
 
Beginning balance
 
$
(127
)
$
(218
)
$
(227
)
$
(150
)
 
Unrealized gains (losses) from changes in cash-flow hedges
   
7
   
(8
)
 
67
   
(54
)
 
Losses (gains) reclassified to income
   
18
   
16
   
58
   
(6
)
 
Ending balance
 
$
(102
)
$
(210
)
$
(102
)
$
(210
)
 

 
During the next twelve months, Occidental expects that approximately $72 million of net after-tax derivative losses included in AOCI, based on their valuation as of September 30, 2010, will be reclassified into income.
 
     
 
Derivatives Not Designated as Hedging Instruments
 
 
Occidental’s third-party marketing and trading activities focus on purchasing crude oil and natural gas for resale from partners, producers and third parties whose oil and gas supply is located near midstream and marketing assets, such as pipelines, processing plants and storage facilities, that are owned or leased by Occidental.  These purchases allow Occidental to aggregate volumes to maximize prices received for Occidental’s production.  The aggregate volumes and durations of these third-party marketing and trading purchase and sales contracts generally approximate each other.  In addition, Occidental’s Phibro trading unit uses derivative instruments, including forward purchases and sales for physical delivery, futures, swaps and options, in its strategy to profit from market price changes.
 
 
 
13
 
 

 
The following table presents gross volumes of Occidental’s commodity derivatives not designated as hedging instruments as of September 30, 2010 and December 31, 2009:
 

     
Volumes
 
 
Commodity
 
2010
 
2009
 
 
Occidental’s production sales contracts
             
 
Crude oil (million barrels)
 
12
   
9
   
                 
 
Third-party marketing and trading activities
             
 
Purchase contracts
             
 
Crude oil (million barrels)
 
156
   
161
   
 
Natural gas (billion cubic feet)
 
1,176
   
1,391
   
                 
 
Sales contracts
             
 
Crude oil (million barrels)
 
157
   
182
   
 
Natural gas (billion cubic feet)
 
1,454
   
1,561
   
 

 
In addition, Occidental has certain other commodity trading contracts, including agricultural products, metals, precious metals, electricity and foreign exchange contracts, which were not material to Occidental as of September 30, 2010 and December 31, 2009.
 
     
 
Approximately $88 million and $76 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended September 30, 2010 and 2009, respectively.  Approximately $141 million and $37 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the nine months ended September 30, 2010 and 2009, respectively.
 
 
 
14
 
 

 
Fair Value of Derivatives
 
 
The following table presents the gross fair value of Occidental’s outstanding derivatives as of September 30, 2010 and December 31, 2009 (in millions):
 

     
Asset Derivatives
       
Liability Derivatives
       
 
September 30, 2010
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
 
Cash-flow hedges (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
 
$
58
 
Accrued liabilities
 
$
165
 
   
Long-term receivables and other assets, net
   
18
 
Deferred credits and other liabilities
   
44
 
           
76
       
209
 
                         
 
Derivatives not designated as hedging instruments (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
   
954
 
Accrued liabilities
   
928
 
   
Long-term receivables and other assets, net
   
81
 
Deferred credits and other liabilities
   
81
 
           
1,035
       
1,009
 
 
Total gross fair value
       
1,111
       
1,218
 
 
Less: counterparty netting and cash collateral (b)
       
(807
)
     
(863
)
 
Total net fair value
     
$
304
     
$
355
 

       
Asset Derivatives
       
Liability Derivatives
       
 
December 31, 2009
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
 
Cash-flow hedges (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
 
$
2
 
Accrued liabilities
 
$
168
 
   
Long-term receivables and other assets, net
   
5
 
Deferred credits and other liabilities
   
174
 
             
7
       
342
 
                           
 
Derivatives not designated as hedging instruments (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
   
776
 
Accrued liabilities
   
789
 
   
Long-term receivables and other assets, net
   
72
 
Deferred credits and other liabilities
   
69
 
             
848
       
858
 
 
Total gross fair value
       
855
       
1,200
 
 
Less: counterparty netting and cash collateral (c)
       
(645
)
     
(665
)
 
Total net fair value
     
$
210
     
$
535
 
                           
 
(a)
The above fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheet.
 
 
(b)
As of September 30, 2010, collateral received of $49 million has been netted against derivative assets and collateral paid of $105 million has been netted against derivative liabilities.
 
 
(c)
As of December 31, 2009, collateral received of $23 million has been netted against derivative assets and collateral paid of $43 million has been netted against derivative liabilities.
 

 
See Note 10 for fair value measurement disclosures on derivatives.
 
 
 
15
 
 

 
Credit Risk
 
 
A majority of Occidental’s derivative transactions are exchange-traded contracts, which are subject to nominal credit risk as a significant portion of these transactions are executed on a daily margin basis.  Collateral of $158 million and $222 million deposited by Occidental for such contracts with clearing houses and broker, which has not been reflected in the derivative fair value tables, is included in the marketing and trading assets and other balance as of September 30, 2010 and December 31, 2009, respectively.
 
     
 
In addition, Occidental executes a portion of its derivative transactions in the OTC market.  Occidental is subject to counterparty credit risk to the extent the counterparty to the derivatives is unable to meet its settlement commitments.  Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by spreading the credit risk among many such counterparties, by entering into master netting arrangements with the counterparties and by requiring collateral as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments to reflect counterparty risk, if necessary.  Certain of Occidental's OTC derivative instruments contain credit risk contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each would need to post.  As of September 30, 2010 and December 31, 2009, Occidental had a net liability of $222 million and $350 million, respectively, for which the amount of collateral posted was $56 million and $14 million, respectively.  Occidental believes that if it had received a one-notch reduction in its credit rating, it would not have resulted in a material change in its collateral-posting requirements as of September 30, 2010 and December 31, 2009.
 
     
12.
Industry Segments
 
     
 
Occidental conducts its continuing operations through three segments: (1) oil and gas; (2) chemical; and (3) midstream, marketing and other (midstream and marketing).  The oil and gas segment explores for, develops, produces and markets crude oil, including natural gas liquids (NGLs) and condensate, as well as natural gas.  The chemical segment manufactures and markets basic chemicals, vinyls and other chemicals.  The midstream and marketing segment gathers, treats, processes, transports, stores, purchases and markets crude oil (including NGLs and condensate), natural gas, CO2 and power.  The segment also trades around its assets, including pipelines and storage facilities, and trades commodities and commodity-related securities.
 
     
 
Segment earnings generally exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from the segments’ equity investments.
 
 
 
16
 
 

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

                   
Midstream,
 
Corporate
       
                   
Marketing
 
and
       
       
Oil and Gas
 
Chemical
 
and Other
 
Eliminations
 
Total
 
 
Nine months ended September 30, 2010
                               
                                     
 
Net sales
 
$
10,963
 
$
3,020
 
$
993
 
$
(548
)(a)
$
14,428
 
                                     
 
Pretax operating profit (loss)
 
$
5,475
 
$
327
 
$
270
 
$
(333
)(b)
$
5,739
 
 
Income taxes
   
   
   
   
(2,345
)(c)
 
(2,345
)
 
Discontinued operations, net
   
   
   
   
(18
)
 
(18
)
 
Net income attributable to noncontrolling interest
   
(58
)
 
   
   
   
(58
)
 
Net income (loss) attributable to common stock
 
$
5,417
 
$
327
 
$
270
 
$
(2,696
)
$
3,318
 
                                     
 
Nine months ended September 30, 2009
                               
                                     
 
Net sales
 
$
7,952
 
$
2,445
 
$
763
 
$
(296
)(a)
$
10,864
 
                                     
 
Pretax operating profit (loss)
 
$
3,127
 
$
356
 
$
154
 
$
(373
)(b)
$
3,264
 
 
Income taxes
   
   
   
   
(1,245
)(c)
 
(1,245
)
 
Discontinued operations, net
   
   
   
   
(7
)
 
(7
)
 
Net income attributable to noncontrolling interest
   
(35
)
 
   
   
   
(35
)
 
Net income (loss) attributable to common stock
 
$
3,092
 
$
356
 
$
154
 
$
(1,625
)
$
1,977
 
                                     
 
(a)
Intersegment sales are generally made at prices approximating 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)
Includes all foreign and domestic income taxes from continuing operations.
 
 
 
17
 
 

13.
Earnings Per Share
 
     
 
Occidental’s instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are considered participating securities prior to vesting, and therefore, have been included in the earnings allocations in computing basic and diluted EPS under the two-class method.
 
     
 
Basic EPS was computed by dividing net income attributable to common stock by the weighted-average number of common shares outstanding during each period, net of treasury shares and including vested but unissued shares and share units. The computation of diluted EPS further reflected the dilutive effect of stock options and unvested stock awards.
 
     
 
The following table presents the calculation of basic and diluted EPS for the three and nine months ended September 30, 2010 and 2009:
 

     
Periods Ended September 30
 
     
Three months
 
Nine months
 
 
(in millions, except per-share amounts)
   
2010
   
2009
   
2010
   
2009
 
 
Basic EPS
                         
 
Income from continuing operations
 
$
1,218
 
$
943
 
$
3,394
 
$
2,019
 
 
Less: Income from continuing operations attributable to noncontrolling interest
   
(22
)
 
(14
)
 
(58
)
 
(35
)
 
Income from continuing operations attributable to common stock
   
1,196
   
929
   
3,336
   
1,984
 
 
Discontinued operations, net
   
(5
)
 
(2