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Occidental Petroleum 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-10.4
  3. Ex-10.5
  4. Ex-10.6
  5. Ex-10.7
  6. Ex-12
  7. Ex-31.1
  8. Ex-31.2
  9. Ex-32.1
  10. Ex-32.1
form10q-20112q.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 June 30, 2011
 
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 June 30, 2011
 
 
Common stock $.20 par value
   812,770,675 shares  
 
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES


TABLE OF CONTENTS




       
PAGE
         
Part I
Financial Information
  
         
 
Item 1.
Financial Statements (unaudited)
  
         
   
Consolidated Condensed Balance Sheets —
  
     
June 30, 2011 and December 31, 2010
2
         
   
Consolidated Condensed Statements of Income —
  
     
Three and six months ended June 30, 2011 and 2010
4
         
   
Consolidated Condensed Statements of Cash Flows —
  
     
Six months ended June 30, 2011 and 2010
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
28
         
 
Item 4.
Controls and Procedures
28
         
Part II
Other Information
  
         
 
Item 1.
Legal Proceedings
29
         
 
Item 2.
Share Repurchase Activities
29
         
 
Item 6.
Exhibits
30
 
 
 
1
 
 
 
 
PART I    FINANCIAL INFORMATION


Item 1.
Financial Statements (unaudited)

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010
(Amounts in millions)

     
2011
    
2010
  
               
ASSETS
              
               
CURRENT ASSETS
              
               
Cash and cash equivalents
  
$
1,994
  
$
2,578
  
               
Trade receivables, net
    
5,542
    
5,032
  
               
Marketing and trading assets and other
    
813
    
  900
  
               
Assets of discontinued operations
    
―
    
2,861
  
               
Inventories
    
1,202
    
1,041
  
               
Prepaid expenses and other
    
392
    
647
  
               
Total current assets
    
9,943
    
13,059
  
               
INVESTMENTS IN UNCONSOLIDATED ENTITIES
    
2,084
    
2,039
  
               
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $22,100 at June 30, 2011 and $20,630 at December 31, 2010
    
41,795
    
36,536
  
               
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
    
773
    
798
  
               
TOTAL ASSETS
  
$
54,595
  
$
52,432
  
   
The accompanying notes are an integral part of these consolidated financial statements.
  
 

 
2
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010
(Amounts in millions)
 
     
2011
    
2010
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
               
CURRENT LIABILITIES
              
Short-term borrowings
  
$
500
  
$
―
  
Accounts payable
    
5,030
    
4,646
  
Accrued liabilities
    
2,230
    
2,397
  
Domestic and foreign income taxes
    
237
    
170
  
Liabilities of discontinued operations
    
96
    
612
  
               
Total current liabilities
    
8,093
    
7,825
  
               
               
LONG-TERM DEBT, NET
    
3,749
    
5,111
  
               
DEFERRED CREDITS AND OTHER LIABILITIES
              
Deferred and other domestic and foreign income taxes
    
4,002
    
3,445
  
Long-term liabilities of discontinued operations
    
107
    
115
  
Other
    
3,484
    
3,452
  
     
7,593
    
7,012
  
               
STOCKHOLDERS' EQUITY
              
Common stock, at par value
    
177
    
177
  
Treasury stock
    
(4,271
)
  
(4,228
)
Additional paid-in capital
    
7,221
    
7,191
  
Retained earnings
    
32,485
    
29,868
  
Accumulated other comprehensive loss
    
(452
)
  
(524
)
Total stockholders’ equity
    
35,160
    
32,484
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
54,595
  
$
52,432
  
   
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 SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Amounts in millions, except per-share amounts)

   
Three months ended
  
Six months ended
  
   
June 30
  
June 30
  
   
2011
  
2010
  
2011
    
2010
  
REVENUES AND OTHER INCOME
                          
Net sales
  
$
6,173
  
$
4,603
  
$
11,899
  
$
9,219
  
Interest, dividends and other income
    
35
    
40
    
67
    
61
  
Gains (losses) on disposition of assets, net
    
―
    
(6
)
  
21
    
(5
)
     
 
6,208
    
 
4,637
    
 
11,987
    
 
9,275
  
COSTS AND OTHER DEDUCTIONS
                          
Cost of sales
    
2,720
    
2,292
    
5,246
    
4,565
  
Selling, general and administrative and other operating expenses
    
388
    
282
    
829
    
631
  
Taxes other than on income
    
162
    
125
    
313
    
246
  
Exploration expense
    
62
    
69
    
146
    
125
  
Interest and debt expense, net
    
27
    
30
    
242
    
67
  
     
 
3,359
    
 
2,798
    
 
6,776
    
 
5,634
  
Income before income taxes and other items
    
2,849
    
1,839
    
5,211
    
3,641
  
Provision for domestic and foreign income taxes
    
1,111
    
809
    
2,165
    
1,555
  
(Income) from equity investments
    
(81
)
  
(59
)
  
(178
)
  
(124
)
Income from continuing operations
    
1,819
    
1,089
    
3,224
    
2,210
  
Discontinued operations, net
    
(2
)
  
(14
)
  
142
    
(47
)
Net income
    
1,817
    
1,075
    
3,366
    
2,163
  
Less: Net income attributable to noncontrolling interest
    
―
    
(12
)
  
―
    
(36
)
NET INCOME ATTRIBUTABLE TO
                          
COMMON STOCK
  
$
1,817
  
$
1,063
  
$
3,366
  
$
2,127
  
                           
                           
BASIC EARNINGS PER COMMON SHARE (attributable to common stock)
                          
Income from continuing operations
  
$
2.23
  
$
1.32
  
$
3.96
  
$
2.67
  
Discontinued operations, net
    
―
    
(0.01
)
  
0.18
    
(0.06
)
BASIC EARNINGS PER COMMON SHARE
  
$
2.23
  
$
1.31
  
$
4.14
  
$
2.61
  
DILUTED EARNINGS PER COMMON SHARE (attributable to common stock)
                          
Income from continuing operations
  
$
2.23
  
$
1.32
  
$
3.96
  
$
2.67
  
Discontinued operations, net
    
―
    
(0.01
)
  
0.17
    
(0.06
)
DILUTED EARNINGS PER COMMON SHARE
  
$
2.23
  
$
1.31
  
$
4.13
  
$
2.61
  
DIVIDENDS PER COMMON SHARE
  
$
0.46
  
$
0.38
  
$
0.92
  
$
0.71
  
  
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 SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Amounts in millions)

     
2011
    
2010
  
CASH FLOW FROM OPERATING ACTIVITIES
              
Net income
  
$
3,366
  
$
2,163
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Discontinued operations, net
    
(142
)
  
47
  
Depreciation, depletion and amortization of assets
    
1,729
    
1,561
  
Deferred income tax provision
    
517
    
159
  
Other noncash charges to income
    
317
    
266
  
(Gains) losses on disposition of assets, net
    
(21
)
  
5
  
Undistributed earnings from equity investments
    
(25
)
  
(65
)
Dry hole and impairment expense
    
94
    
69
  
Changes in operating assets and liabilities, net
    
(132
)
  
304
  
Other operating, net
    
(131
)
  
(218
)
Operating cash flow from continuing operations
    
5,572
    
4,291
  
Operating cash flow from discontinued operations, net of taxes
    
(8
)
  
30
  
Net cash provided by operating activities
    
5,564
    
4,321
  
CASH FLOW FROM INVESTING ACTIVITIES
              
Capital expenditures
    
(2,958
)
  
(1,560
)
Payments for purchases of assets and businesses
    
(3,905
)
  
(664
)
Sales of assets, net
    
45
    
17
  
Other, net
    
(43
)
  
34
  
Investing cash flow from continuing operations
    
(6,861
)
  
(2,173
)
Investing cash flow from discontinued operations
    
2,570
    
(235
)
Net cash used by investing activities
    
(4,291
)
  
(2,408
)
CASH FLOW FROM FINANCING ACTIVITIES
              
Proceeds from short-term borrowings, net
    
500
    
―
  
Payments of long-term debt
    
(1,523
)
  
(299
)
Proceeds from issuance of common stock
    
5
    
5
  
Purchases of treasury stock
    
(43
)
  
(11
)
Excess share-based tax benefits and other
    
10
    
7
  
Distributions to noncontrolling interest
    
(121
)
  
―
  
Cash dividends paid
    
(685
)
  
(538
)
Net cash used by financing activities
    
(1,857
)
  
(836
)
(Decrease) increase in cash and cash equivalents
    
(584
)
  
1,077
  
Cash and cash equivalents—beginning of period
    
2,578
    
1,224
  
Cash and cash equivalents—end of period
  
$
1,994
  
$
2,301
  
 
The accompanying notes are an integral part of these consolidated financial statements.
  
 

 
5
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

June 30, 2011

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 United States generally accepted accounting principles 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, 2010.
   
 
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 June 30, 2011, and the consolidated statements of income and cash flows for the three and six months ended June 30, 2011 and 2010, as applicable. The income and cash flows for the periods ended June 30, 2011 and 2010 are not necessarily indicative of the income or cash flows to be expected for the full year.
   
 
Certain financial statement balances and notes for the prior year have been reclassified to conform to the 2011 presentation.
   
2.
Asset Acquisitions, Dispositions and Other Transactions
   
 
During the six months ended June 30, 2011, Occidental paid approximately $3.4 billion for domestic acquisitions, which included oil and gas properties in South Texas, California and the Permian Basin.
   
 
In the first quarter of 2011, Occidental acquired a 40-percent participating interest in Al Hosn, the high sulfur gas development project of the Shah Field in Abu Dhabi.  Occidental partnered with the Abu Dhabi National Oil Company in a 30-year joint venture agreement for the $10 billion project, of which Occidental’s portion is approximately $4 billion.  In May 2011, Occidental paid approximately $500 million for its share of development expenditures incurred by the project prior to the date the final agreement was signed.
   
 
In March 2011, Occidental redeemed all of its $1.0 billion 7-percent senior notes due 2013 and all of its $368 million 6.75-percent senior notes due 2012.  Occidental recorded a $163 million pre-tax charge related to this redemption in the first quarter of 2011.
   
 
In March 2011, Occidental borrowed $1.0 billion for short-term cash needs, all of which was repaid in April 2011.  In June 2011, Occidental borrowed $500 million for short-term cash needs, all of which was repaid in July 2011.
   
 
In December 2010, Occidental executed an agreement with a subsidiary of China Petrochemical Corporation (Sinopec) to sell its Argentine oil and gas operations for after-tax proceeds of approximately $2.6 billion.  Occidental recorded a pre-tax gain of $225 million when the sale closed in February 2011.  Net revenues and pre-tax income for discontinued operations related to Argentina were $97 million and $2 million for the six months ended June 30, 2011, while there were no revenues and pre-tax income for the three months ended June 30, 2011.  Net revenues and pre-tax losses for such discontinued operations were respectively $158 million and $17 million for the three months ended June 30, 2010, and $313 million and $60 million for the six months ended June 30, 2010.  As of June 30, 2011 and December 31, 2010, the assets of discontinued operations related to Argentina were $0 and $2.9 billion, respectively, which were mainly comprised of property, plant and equipment as of December 31, 2010.  As of December 31, 2010, the liabilities of discontinued operations were $513 million, which mainly comprised deferred tax liabilities and accrued liabilities.
 

 
6
 
 
 
 

 
Occidental has ceased its exploration activity in Libya due to the ongoing political unrest there and sanctions imposed by the United States government in February 2011.  As a result, Occidental wrote off the entire amount of the capitalized and suspended exploration costs incurred to date, including lease acquisition costs, of approximately $35 million in the first quarter of 2011.  The producing fields in Libya are operated by Libyan companies and the impact of the current situation on those operations is uncertain at this time.  Further, United States sanctions currently prevent Occidental from participating in those operations.  The net book value of Occidental’s Libyan producing properties as of June 30, 2011 was $847 million. At December 31, 2010, these properties had net proved reserves estimated at 57 million barrels, approximately 2 percent of Occidental’s total proved reserves. Occidental Libya’s 2010 sales and production volumes were 13,000 BOE per day, representing less than 2 percent of Occidental’s worldwide volumes.  Going forward, Occidental will not report any production from Libya until permitted.  Occidental’s Libyan operations, excluding exploration costs, had $25 million and $31 million of after-tax income and cash flows, respectively, for the year ended December 31, 2010.
  
     
3.
Accounting and Disclosure Changes
  
     
 
Occidental has not made any significant accounting and disclosure changes for the three and six months ended June 30, 2011.
  
     
4.
Comprehensive Income
  
     
 
The following table presents Occidental’s comprehensive income for the three and six months ended June 30, 2011 and 2010 (in millions):
  

     
Periods ended June 30
  
     
Three months
  
Six months
  
     
2011
  
2010
  
2011
  
2010
  
 
Net income attributable to common stock
  
$
1,817
  
$
1,063
  
$
3,366
  
$
2,127
  
 
Other comprehensive income items:
                          
 
Foreign currency translation adjustments
    
7
    
(1
 )  
13
    
(4
)
 
Pension and postretirement adjustments
    
7
    
6
    
14
    
13
  
 
Unrealized gains (losses) on derivatives
    
21
    
37
    
(4
)
  
60
  
 
Reclassification of realized losses on derivatives and other
    
35
    
23
    
49
    
44
  
 
Other comprehensive income, net of tax
    
70
    
65
    
72
    
113
  
 
Comprehensive income attributable to common stock
  
$
1,887
  
$
1,128
  
$
3,438
  
$
2,240
  

 
There were no other comprehensive income items related to noncontrolling interests for the three and six months ended June 30, 2011 and 2010.
  
     
5.
Supplemental Cash Flow Information
  
     
 
Occidental paid U.S. federal, state and foreign income taxes for continuing operations of approximately $1.6 billion and $1.3 billion during the six months ended June 30, 2011 and 2010, respectively.  Additionally, net payments for income taxes related to discontinued operations were $0 and $46 million for the six months ended June 30, 2011 and 2010, respectively.  Interest paid totaled approximately $236 million (including $154 million for early extinguishment premium) and $83 million for the six months ended June 30, 2011 and 2010, respectively.
  
 
 

7
 
 
 
 

6.
Inventories
   
 
A portion of inventories is valued under the LIFO method.  The valuation of LIFO inventory for interim periods is based on Occidental’s estimates of year-end inventory levels and costs.  Inventories as of June 30, 2011 and December 31, 2010 consisted of the following (in millions):

     
2011
  
2010
 
Raw materials
    
$
69
      
$
63
  
 
Materials and supplies
      
433
        
414
  
 
Finished goods
      
772
        
636
  
         
1,274
        
1,113
  
 
LIFO reserve
      
(72
)
      
(72
)
 
Total
    
$
1,202
      
$
1,041
  

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 June 30, 2011, Occidental participated in or monitored remedial activities or proceedings at 168 sites.  The following table presents Occidental’s environmental remediation reserves as of June 30, 2011, the current portion of which is included in accrued liabilities ($78 million) and the remainder in deferred credits and other liabilities – other ($285 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
    
38
      
$
55
  
 
Third-party sites
    
80
        
97
  
 
Occidental-operated sites
    
21
        
117
  
 
Closed or non-operated Occidental sites
    
29
        
94
  
 
Total
    
168
      
$
363
  
 

 
8
 
 
 
 

 
As of June 30, 2011, Occidental’s environmental reserves exceeded $10 million at 11 of the 168 sites described above, and 119 of the sites had reserves from $0 to $1 million each.  Occidental expects to expend funds corresponding to approximately 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, 2010.  For management’s opinion with respect to environmental matters, refer to Note 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.  The ultimate amount of losses and the timing of any such losses that Occidental may incur resulting from currently outstanding lawsuits, claims and proceedings cannot be determined reliably at this time.  Occidental accrues reserves for all of these matters when it is probable that a liability has been incurred and the liability can be reasonably estimated.  Reserve balances as of June 30, 2011 and December 31, 2010 were not material to Occidental's consolidated balance sheets.  Occidental also evaluates the amount of reasonably possible additional losses that it could incur as a result of the matters mentioned above.  Occidental has disclosed its range of reasonably possible losses for sites where it is a participant in environmental remediation.  Occidental believes that other reasonably possible additional losses that it could incur in excess of reserves accrued on the balance sheet would not be material to its consolidated financial position or results of operations.
   
 
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 through 2011 taxable years are currently under review by the U.S. Internal Revenue Service pursuant to its Compliance Assurance Program.  Taxable years from 2000 through the current year remain subject to examination by foreign and state government tax authorities in certain jurisdictions.  In certain of these jurisdictions, 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 believes that the resolution of outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations.
   
 
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 June 30, 2011, 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.
 

 
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 six months ended June 30, 2011 and 2010 (in millions):

 
Three months ended June 30
  
2011
  
2010
 
Net Periodic Benefit Costs
  
Pension
Benefit
  
Postretirement
Benefit
  
Pension
Benefit
  
Postretirement
Benefit
 
Service cost
  
$
5
    
$
5
    
$
5
    
$
4
  
 
Interest cost
    
8
      
12
      
7
      
11
  
 
Expected return on plan assets
    
(8
)
    
―
      
(8
)
    
―
  
 
Amortization of prior service cost
    
―
      
―
      
1
      
―
  
 
Recognized actuarial loss
    
3
      
7
      
3
      
7
  
 
Total
  
$
8
    
$
24
    
$
8
    
$
22
  

 
 
Six months ended June 30
  
2011
  
2010
 
Net Periodic Benefit Costs
  
Pension
Benefit
  
Postretirement
Benefit
  
Pension
Benefit
  
Postretirement
Benefit
 
Service cost
  
$
10
    
$
11
    
$
9
    
$
9
  
 
Interest cost
    
15
      
23
      
15
      
22
  
 
Expected return on plan assets
    
(16
)
    
―
      
(16
)
    
―
  
 
Amortization of prior service cost
    
―
      
―
      
1
      
―
  
 
Recognized actuarial loss
    
6
      
15
      
6
      
13
  
 
Total
  
$
15
    
$
49
    
$
15
    
$
44
  


 
Occidental contributed $2 million and $3 million in the three-month periods ended June 30, 2011 and 2010, respectively, and $4 million and $5 million in the six-month periods ended June 30, 2011 and 2010, 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.  Transfers between levels, if any, are recognized at the end of each reporting period.
     
 
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 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.
     
 
Occidental generally uses an income approach to measure fair value when there is not a market-observable price for an identical or similar asset or liability.  This approach utilizes management’s assumptions regarding expectations of projected cash flows, and discounts the expected cash flows using a commensurate risk-adjusted discount rate.
     
 
The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of June 30, 2011 and December 31, 2010 (in millions):

     
Fair Value Measurements at
June 30, 2011 Using
          
 
Description
  
Level 1
  
Level 2
  
Level 3
  
Netting and Collateral
(a)
Total Fair Value
  
 
Assets:
                                
 
Trading equity securities – natural resources industry
  
$
135
  
$
―
  
$
―
  
$
―
  
$
135
  
 
Commodity derivatives
    
481
    
608
    
―
    
(801
)
  
288
  
 
Total assets
  
$
616
  
$
608
  
$
―
  
$
(801
)
$
423
  
 
Liabilities:
                                
 
Commodity derivatives
  
$
377
  
$
764
  
$
―
  
$
(830
)
$
311
  
 
Total liabilities
  
$
377
  
$
764
  
$
―
  
$
(830
)
$
311
  

     
Fair Value Measurements at
December 31, 2010 Using
          
 
Description
  
Level 1
  
Level 2
  
Level 3
  
Netting and Collateral
(a)
Total Fair Value
  
 
Assets:
                                
 
Trading equity securities – natural resources industry
  
$
116
  
$
―
  
$
―
  
$
―
  
$
116
  
 
Trading U.S. treasury securities
    
10
    
―
    
―
    
―
    
10
  
 
Commodity derivatives
    
178
    
797
    
―
    
(680
)
  
295
  
 
Total assets
  
$
304
  
$
797
  
$
―
  
$
(680
)
$
421
  
 
Liabilities:
                                
 
Commodity derivatives
  
$
201
  
$
916
  
$
―
  
$
(736
)
$
381
  
 
Total liabilities
  
$
201
  
$
916
  
$
―
  
$
(736
)
$
381
  
 
 
(a)
Represents the impact of netting assets, liabilities and collateral when a legal right of offset exists.
  
 

 
11
 
 
 
 
 
 
Fair Values - Nonrecurring
 
During the three and six months ended June 30, 2011 and 2010, Occidental did not have any assets or liabilities measured at fair value on a non-recurring basis.
   
 
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 June 30, 2011 and December 31, 2010, were approximately $4.5 billion and $5.5 billion, respectively, compared to carrying values of $4.2 billion and $5.1 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 and management elects to do so. If a derivative does not qualify or is not designated and documented as a cash-flow hedge, any fair value gains or losses are recognized in earnings in the current period.
   
 
Through its marketing and trading activities and within its established policy controls and procedures, Occidental uses derivative instruments, including a combination of short-term futures, forwards, options and swaps, to improve realized prices for its crude oil, gas and natural gas liquids (NGL). 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. Occidental has also used derivatives to reduce its exposure to price volatility on a small portion of its crude oil and gas production.
   
 
Cash-Flow Hedges
 
As of June 30, 2011 and December 31, 2010, Occidental held a series of collar agreements that qualify as cash-flow hedges for the sale of approximately 3 percent of its crude oil production.  These agreements are for existing domestic production and 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 June 30, 2011 and December 31, 2010:

 
Crude Oil – Collars
  
Daily Volume (barrels)
  
Average Floor
  
Average Cap
 
July 2011 –
            
 
December 2011 (a)
  
12,000
  
$32.92
  
$46.27
 
 
(a)
At December 31, 2010, these contracts were outstanding with the same daily volumes and terms indicated and also covered the period from January 1, 2011 to June 30, 2011.

 
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 June 30, 2011 and December 31, 2010:

 
Natural Gas – Swaps
  
Daily Volume (cubic feet)
  
Average Price
 
July 2011 – March 2012 (a)
  
50 million
  
$6.07
 
 
(a)
At December 31, 2010, these contracts were outstanding with the same daily volumes and terms indicated and also covered the period from January 1, 2011 to June 30, 2011.
 
 

12
 
 
 
 

 
Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s North American leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These agreements continue through March 31, 2012.  As of June 30, 2011 and December 31, 2010, Occidental had approximately 11 billion cubic feet and 28 billion cubic feet of natural gas held in storage, respectively. As of June 30, 2011 and December 31, 2010, Occidental had cash-flow hedges for the forecasted sale, to be settled by physical delivery, of approximately 5 billion cubic feet and 24 billion cubic feet of this natural gas held in storage, respectively.
  
     
 
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 six months ended June 30, 2011 and 2010 (in millions):
  

     
Periods ended June 30
  
     
Three Months
  
Six Months
  
 
Commodity Contracts
    
2011
    
2010
    
2011
    
2010
  
 
Unrealized gains (losses) recognized in AOCI – effective portion
  
$
34
  
$
58
  
$
(6
)
$
95
  
 
Amount of losses reclassified from AOCI into income – effective portion
  
$
54
  
$
30
  
$
76
  
$
62
  
 
Gains (losses) recognized in income – ineffective portion
  
$
1
  
$
(3
)
$
―
  
$
(1
)

 
The following table summarizes net after-tax derivative activity recorded in AOCI for the three and six months ended June 30, 2011 and 2010 (in millions):
  

     
Periods ended June 30
  
     
Three Months
  
Six Months
  
       
2011
    
2010
    
2011
    
2010
  
 
Beginning balance – AOCI
  
$
(122
)
$
(183
)
$
(111
)
$
(227
)
 
Gains (losses) from changes in cash-flow hedges
    
21
    
37
    
(4
)
  
60
  
 
Losses reclassified to income
    
35
    
19
    
49
    
40
  
 
Ending balance – AOCI
  
$
(66
)
$
(127
)
$
(66
)
$
(127
)

 
During the next twelve months, Occidental expects that approximately $53 million of net after-tax derivative losses included in AOCI, based on their valuation as of June 30, 2011, will be reclassified into income.
  
     
 
Derivatives Not Designated as Hedging Instruments
  
 
Occidental’s third-party marketing and trading activities focus on purchasing crude oil, natural gas and NGL for resale from partners, producers and third parties whose 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 third-party marketing and trading purchase and sales contracts generally approximate each other with respect to aggregate volumes and terms.  In addition, Occidental’s Phibro trading unit uses derivative instruments, including forwards, futures, swaps and options, some of which may be for physical delivery, in its strategy to profit from market price changes.
  
 
 
 
13
 
 
 
 

 
The following table presents gross volumes of Occidental’s commodity derivatives contracts not designated as hedging instruments as of June 30, 2011 and December 31, 2010:

     
Volumes
 
Commodity
  
2011
  
2010
 
Sales contracts related to Occidental’s production
            
 
Crude oil (million barrels)
  
9
    
8
  
               
 
Third-party marketing and trading activities
            
 
Purchase contracts
            
 
Crude oil (million barrels)
  
205
    
136
  
 
Natural gas (billion cubic feet)
  
888
    
833
  
 
Precious metals (million troy ounces)
  
1
    
13
  
               
 
Sales contracts
            
 
Crude oil (million barrels)
  
191
    
144
  
 
Natural gas (billion cubic feet)
  
998
    
1,156
  
 
Precious metals (million troy ounces)
  
1
    
1
  

 
 
In addition, Occidental has certain other commodity trading contracts, including agricultural products, metals and electricity, as well as foreign exchange contracts, which were not material to Occidental as of June 30, 2011 and December 31, 2010.
   
 
Occidental has crude oil sales contracts representing a small portion of Occidental’s domestic crude oil production.  Additionally, for third-party marketing and trading activities, a substantial portion of the sales contracts that exist at the end of a reporting period are typically fulfilled by existing purchase contracts with substantially identical terms. For a substantial portion of the natural gas sales commitments not satisfied by such contracts as of June 30, 2011, Occidental has entered into offsetting contracts after June 30, 2011. The remaining portion is not material to Occidental.
   
 
Approximately $200 million and $67 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended June 30, 2011 and 2010, respectively.  Approximately $189 million and $44 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the six months ended June 30, 2011 and 2010, respectively.
 

 
14
 
 
 
 

 
Fair Value of Derivatives
  
 
The following table presents the gross fair value of Occidental’s outstanding derivatives as of June 30, 2011 and December 31, 2010 (in millions):
  

     
Asset Derivatives
      
Liability Derivatives
      
 
June 30, 2011
  
Balance Sheet Location
  
Fair Value
  
 Balance Sheet Location
  
Fair Value
  
                         
 
Cash-flow hedges (a)
                      
 
Commodity contracts
  
Marketing and trading assets and other
  
$
29
  
Accrued liabilities
  
$
113
  
           
29
        
113
  
                         
 
Derivatives not designated as hedging instruments (a)
                      
 
Commodity contracts
  
Marketing and trading assets and other
    
999
  
Accrued liabilities
    
968
  
   
Long-term receivables and other assets, net
    
61
  
Deferred credits and other liabilities
    
60
  
           
1,060
        
1,028
  
 
Total gross fair value
        
1,089
        
1,141
  
 
Less: counterparty netting and cash collateral (b)
        
(801
)
      
(830
)
 
Total net fair value of derivatives
      
$
288
      
$
311
  

     
Asset Derivatives
      
Liability Derivatives
      
 
December 31, 2010
  
Balance Sheet Location
  
Fair Value
  
Balance Sheet Location
  
Fair Value
  
                         
 
Cash-flow hedges (a)
                      
 
Commodity contracts
  
Marketing and trading assets and other
  
$
51
  
Accrued liabilities
  
$
209
  
   
Long-term receivables and other assets, net
    
9
  
Deferred credits and other liabilities
    
―
  
           
60
        
209
  
                         
 
Derivatives not designated as hedging instruments (a)
                      
 
Commodity contracts
  
Marketing and trading assets and other
    
829
  
Accrued liabilities
    
823
  
   
Long-term receivables and other assets, net
    
86
  
Deferred credits and other liabilities
    
85
  
           
915
        
908
  
 
Total gross fair value
        
975
        
1,117
  
 
Less: counterparty netting and cash collateral (c)
        
(680
)
      
(736
)
 
Total net fair value of derivatives
      
$
295
      
$
381
  

 
(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 June 30, 2011, collateral received of $45 million has been netted against derivative assets and collateral paid of $74 million has been netted against derivative liabilities.
  
 
(c)
As of December 31, 2010, collateral received of $39 million has been netted against derivative assets and collateral paid of $95 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 transaction volume is executed through 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 $64 million and $154 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 June 30, 2011 and December 31, 2010, respectively.
   
 
In addition, Occidental executes a portion of its derivative transactions in the over-the-counter (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 June 30, 2011 and December 31, 2010, Occidental had a net liability of $66 million and $234 million, respectively, for which the amount of collateral posted was $35 million and $10 million, respectively.  Occidental believes that if it had received a one-notch reduction in its credit ratings, it would not have resulted in a material change in its collateral-posting requirements as of June 30, 2011 and December 31, 2010.
   
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, NGL and condensate (collectively “liquids”), and 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 liquids, natural gas, carbon dioxide (CO2) and power.  It also trades around its assets, including pipelines and storage capacity, and trades oil and gas, other commodities and commodity-related securities.
   
 
Earnings of industry segments 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 segment 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
  
 
Six months ended
                                
 
June 30, 2011
                                
                                   
 
Net sales
  
$
8,958
  
$
2,490
  
$
853
  
$
(402
) (a)
$
11,899
  
                                   
 
Pretax operating profit (loss)
  
$
5,092
  
$
472
  
$
301
  
$
(476
) (b)
$
5,389
  
 
Income taxes
    
―
    
―
    
―
    
(2,165
) (c)
  
(2,165
)
 
Discontinued operations, net
    
―
    
―
    
―
    
142
   (d)
  
142
  
 
Net income (loss) attributable to common stock
  
$
5,092
  
$
472
  
$
301
  
$
(2,499
)
$
3,366
  
                                   
 
Six months ended
                                
 
June 30, 2010
                                
                                   
 
Net sales
  
$
7,009
  
$
1,969
  
$
605
  
$
(364
) (a)
$
9,219
  
                                   
 
Pretax operating profit (loss)
  
$
3,764
  
$
138
  
$
107
  
$
(244
) (b)
$
3,765
  
 
Income taxes
    
―
    
―
    
―
    
(1,555
) (c)
  
(1,555
)
 
Discontinued operations, net
    
―
    
―
    
―
    
(47
)
  
(47
)
 
Net income attributable to noncontrolling interest
    
(36
)
  
―
    
―
    
―
    
(36
)
 
Net income (loss) attributable to common stock
  
$
3,728
  
$
138
  
$
107
  
$
(1,846
)
$
2,127
  
 
 
(a)
Intersegment sales eliminate upon consolidation and are generally made at prices approximating those that the selling entity is able to obtain in third-party transactions.
  
 
(b)
Includes net interest expense (including the early debt extinguishment costs of $163 million for the six months ended June 30, 2011), administration expense, environmental remediation and other pre-tax items.
  
 
(c)
Includes all foreign and domestic income taxes from continuing operations.
  
 
(d)
Reflects the after-tax gain from the sale of the Argentine 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, net of income attributable to participating securities, 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 six months ended June 30, 2011 and 2010:
  

     
Periods Ended June 30
  
     
Three months
  
Six months
  
 
(in millions, except per-share amounts)
    
2011
    
2010
    
2011
    
2010
  
 
Basic EPS
                          
 
Income from continuing operations
  
$
1,819
  
$
1,089
  
$
3,224
  
$
2,210
  
 
Less: Income from continuing operations attributable to noncontrolling interest
    
―
    
(12
)
  
―
    
(36
)
 
Income from continuing operations attributable to common stock
    
1,819
    
1,077
    
3,224
    
2,174
  
 
Discontinued operations, net
    
(2
)
  
(14
)
  
142
    
(47
)
 
Net income attributable to common stock
    
1,817
    
1,063
    
3,366
    
2,127
  
 
Less: Net income allocated to participating securities
    
(3
)
  
(1
)
  
(6
)
  
(3
)
 
Net income attributable to common stock, net of participating securities
  
$
1,814
  
$
1,062
  
$
3,360
  
$
2,124
  
 
Weighted average number of basic shares
    
812.5
    
812.6
    
812.5
    
812.3
  
 
Basic EPS
  
$
2.23
  
$
1.31
  
$
4.14
  
$
2.61
  
                             
 
Diluted EPS