filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read together with the Consolidated Condensed Financial Statements and the notes to the Consolidated Condensed Financial Statements, which are included in this report in Part I, Item 1; the information set forth in Risk Factors under Part II, Item 1A; the Consolidated Financial Statements and the notes to the Consolidated Financial Statements, which are included in Part II, Item 8 of Occidental's 2022 Form 10-K; and the information set forth in Risk Factors under Part I, Item 1A of the 2022 Form 10-K.
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS |
Portions of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to: any projections of earnings, revenue or other financial items or future financial position or sources of financing; any statements of the plans, strategies and objectives of management for future operations or business strategy; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Words such as “estimate,” “project,” “predict,” “will,” “would,” “should,” “could,” “may,” “might,” “anticipate,” “plan,” “intend,” “believe,” “expect,” “aim,” “goal,” “target,” “objective,” "commit," "advance," “likely” or similar expressions that convey the prospective nature of events or outcomes are generally indicative of forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report unless an earlier date is specified. Unless legally required, Occidental does not undertake any obligation to update, modify or withdraw any forward-looking statements as a result of new information, future events or otherwise.
Actual outcomes or results may differ from anticipated results, sometimes materially. Forward-looking and other statements regarding Occidental's sustainability efforts and aspirations are not an indication that these statements are necessarily material to investors or require disclosure in Occidental's filings with the SEC. In addition, historical, current and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve and assumptions that are subject to change in the future, including future rulemaking. Factors that could cause results to differ from those projected or assumed in any forward-looking statement include, but are not limited to: general economic conditions, including slowdowns and recessions, domestically or internationally; Occidental’s indebtedness and other payment obligations, including the need to generate sufficient cash flows to fund operations; Occidental’s ability to successfully monetize select assets and repay or refinance debt and the impact of changes in Occidental’s credit ratings or future increases in interest rates; assumptions about energy markets; global and local commodity and commodity-futures pricing fluctuations and volatility; supply and demand considerations for, and the prices of, Occidental’s products and services; actions by OPEC and non-OPEC oil producing countries; the scope and duration of global or regional health pandemics or epidemics, and actions taken by governmental authorities and other third parties in connection therewith; results from operations and competitive conditions; future impairments of Occidental's proved and unproved oil and gas properties or equity investments, or write-downs of productive assets, causing charges to earnings; unexpected changes in costs; inflation, its impact on markets and economic activity and related monetary policy actions by governments in response to inflation; availability of capital resources, levels of capital expenditures and contractual obligations; the regulatory approval environment, including Occidental's ability to timely obtain or maintain permits or other governmental approvals, including those necessary for drilling and/or development projects; Occidental's ability to successfully complete, or any material delay of, field developments, expansion projects, capital expenditures, efficiency projects, acquisitions or dispositions; risks associated with acquisitions, mergers and joint ventures, such as difficulties integrating businesses, uncertainty associated with financial projections, projected synergies, restructuring, increased costs and adverse tax consequences; uncertainties and liabilities associated with acquired and divested properties and businesses; uncertainties about the estimated quantities of oil, NGL and natural gas reserves; lower-than-expected production from development projects or acquisitions; Occidental’s ability to realize the anticipated benefits from prior or future streamlining actions to reduce fixed costs, simplify or improve processes and improve Occidental’s competitiveness; exploration, drilling and other operational risks; disruptions to, capacity constraints in, or other limitations on the pipeline systems that deliver Occidental’s oil and natural gas and other processing and transportation considerations; volatility in the securities, capital or credit markets, including capital market disruptions and instability of financial institutions; governmental actions, war (including the Russia-Ukraine war and the Israel-Hamas war) and political conditions and events; health, safety and environmental (HSE) risks, costs and liability under existing or future federal, regional, state, provincial, tribal, local and international HSE laws, regulations and litigation (including related to climate change or remedial actions or assessments); legislative or regulatory changes, including changes relating to hydraulic fracturing or other oil and natural gas operations, retroactive royalty or production tax regimes, and deep-water and onshore drilling and permitting regulations; Occidental's ability to recognize intended benefits from its business strategies and initiatives, such as Occidental's low carbon ventures businesses or announced greenhouse gas emissions reduction targets or net-zero goals; potential liability resulting from pending or future litigation, government investigations and other proceedings; disruption or interruption of production or manufacturing or facility damage due to accidents, chemical releases, labor unrest, weather, power outages, natural disasters, cyber-attacks, terrorist acts or insurgent activity; the creditworthiness and performance of Occidental's counterparties, including financial institutions, operating partners and other parties; failure of risk management; Occidental’s ability to retain and hire key personnel; supply, transportation, and labor constraints; reorganization or restructuring of Occidental’s operations; changes in state, federal or international tax rates; and actions by third parties that are beyond Occidental's control.
Additional information concerning these and other factors that may cause Occidental’s results of operations and financial position to differ from expectations can be found in Occidental’s other filings with the SEC, including Occidental’s 2022 Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
| CURRENT BUSINESS OUTLOOK |
Occidental’s operations, financial condition, cash flows and levels of expenditures are highly dependent on oil prices and, to a lesser extent, NGL and natural gas prices, the Midland-to-Gulf-Coast oil spreads, chemical product prices and inflationary pressures in the macro-economic environment. The average WTI price per barrel for the nine months ended September 30, 2023 was $77.41, compared to $98.09 for the nine months ended September 30, 2022. It is expected that the price of oil will be volatile for the foreseeable future given the current geopolitical risks, evolving macro-economic environment that impacts energy demand, future actions by OPEC and non-OPEC oil producing countries, the Russia-Ukraine war and the conflict in the Middle East, and the Biden Administration's management of the U.S. Strategic Petroleum Reserve.
Occidental works to manage inflation impacts by capitalizing on operational efficiencies, proactive contract management and working closely with vendors to secure the supply of critical materials. As of September 30, 2023, substantially all of Occidental's outstanding debt is fixed rate.
2023 PRIORITIES
Occidental’s capital and operational priorities for 2023 are intended to maximize cash flow through focused investments in short and medium-cycle projects to enhance current year and future cash flows. Occidental intends to utilize future operating cash flows to:
■preserve and enhance its existing asset base with investments in its core cash-generative oil and gas and chemical businesses as well as its emerging low-carbon businesses with a focus on its net-zero pathway;
■continue its shareholder return framework in the form of a sustainable and growing common share dividend and an active share buyback plan, driving partial redemptions of preferred stock and further improving Occidental's financial position; and
■continue to opportunistically reduce financial leverage.
During the first nine months of 2023, Occidental generated cash flow from operations of $9.1 billion and incurred capital expenditures of $4.7 billion.
DEBT RATINGS
As of September 30, 2023, Occidental’s long-term debt was rated Baa3 by Moody’s Investors Service, BBB- by Fitch Ratings and BB+ by Standard and Poor’s. Occidental's credit rating was upgraded to investment grade by Moody's Investors Service in March 2023 and by Fitch Ratings in May 2023. Any downgrade in credit ratings could impact Occidental's ability to access capital markets and increase its cost of capital. In addition, Occidental or its subsidiaries may be requested, elect to provide or in some cases be required to provide collateral in the form of cash, letters of credit, surety bonds or other acceptable support as financial assurance of their performance and payment obligations under certain contractual arrangements such as pipeline transportation contracts, environmental remediation obligations, oil and gas purchase contracts and certain derivative instruments. Occidental has no remaining debt maturities in 2023, and has $1.1 billion of debt maturities due in the third quarter of 2024.
SHAREHOLDER RETURNS
During the nine months ended September 30, 2023, Occidental declared dividends to common shareholders of $485 million or $0.54 per share and repurchased 29.1 million common shares at an average price of $61.09 per share under the stock repurchase plan announced in February 2023.
In the three months ended September 30, 2023, Occidental triggered and redeemed preferred stock with a face value of $342 million, and incurred $34 million in redemption premiums. In the nine months ended September 30, 2023, Occidental redeemed preferred stock with a face value of $1.5 billion, and incurred $151 million in redemption premiums. To the extent Occidental's trailing 12-month distributions to common shareholders is above $4.00 per share, Occidental is required to match any common shareholder distributions with preferred stock redemptions. As of the date of this filing, approximately $8.5 billion face value of preferred stock remains outstanding.
| CONSOLIDATED RESULTS OF OPERATIONS AND ITEMS AFFECTING COMPARABILITY |
Occidental’s operations and cash flows can vary significantly based on changes in oil, NGL and natural gas prices and the prices it receives for its chemical products. Such changes in prices could result in adjustments in capital investment levels and how such capital is allocated, which could impact production volumes. Changes in the macro-economic environment have impacted energy demand leading to decreases in commodities and chemical product pricing for the nine months ended September 30, 2023, compared to prior year. Increases in commodities and chemical product pricing in the third quarter of 2023 partially reversed the year-over-year trend. Occidental's results of operations and cash flows are primarily driven by these macro-economic effects. Seasonality is not a primary driver of changes in Occidental's consolidated quarterly earnings during the year.
The following table sets forth earnings of each operating segment and corporate items:
| millions | Three months ended September 30, 2023 | % Change | Three months ended June 30, 2023 | |||||||||||
| Net income | ||||||||||||||
| Oil and gas (a) | $ | 1,969 | 86 | % | $ | 1,059 | ||||||||
| Chemical | 373 | (14) | % | 436 | ||||||||||
| Midstream and marketing (a) | (130) | (333) | % | (30) | ||||||||||
| Total | 2,212 | 51 | % | 1,465 | ||||||||||
| Unallocated Corporate Items (a) | ||||||||||||||
| Interest expense, net | (230) | — | % | (230) | ||||||||||
| Income tax expense | (434) | 7 | % | (467) | ||||||||||
| Other items, net | (173) | (288) | % | 92 | ||||||||||
| Net income | $ | 1,375 | 60 | % | $ | 860 | ||||||||
| Less: Preferred stock dividends and redemption premiums | $ | (219) | 14 | % | $ | (255) | ||||||||
| Net income attributable to common stockholders | $ | 1,156 | 91 | % | $ | 605 | ||||||||
| Net income per share attributable to common stockholders - diluted | $ | 1.20 | 90 | % | $ | 0.63 |
(a) Refer to the Items Affecting Comparability table which sets forth items affecting Occidental's earnings that vary widely and unpredictably in nature, timing and amount.
| millions | Nine months ended September 30, 2023 | % Change | Nine months ended September 30, 2022 | ||||||||
| Net income | |||||||||||
| Oil and gas (a) | $ | 4,668 | (55) | % | $ | 10,337 | |||||
| Chemical | 1,281 | (38) | % | 2,051 | |||||||
| Midstream and marketing (a) | (158) | (150) | % | 318 | |||||||
| Total | 5,791 | (54) | % | 12,706 | |||||||
| Unallocated Corporate Items (a) | |||||||||||
| Interest expense, net | (698) | 9 | % | (770) | |||||||
| Income tax expense | (1,372) | (304) | % | (340) | |||||||
| Other items, net | (223) | (2) | % | (219) | |||||||
| Net income | $ | 3,498 | (69) | % | $ | 11,377 | |||||
| Less: Preferred stock dividends and redemption premiums | $ | (754) | (26) | % | $ | (600) | |||||
| Net income attributable to common stockholders | $ | 2,744 | (75) | % | $ | 10,777 | |||||
| Net income per share attributable to common stockholders - diluted | $ | 2.83 | (73) | % | $ | 10.64 |
(a) Refer to the Items Affecting Comparability table which sets forth items affecting Occidental's earnings that vary widely and unpredictably in nature, timing and amount.
ITEMS AFFECTING COMPARABILITY
The following table sets forth items affecting the comparability of Occidental's earnings that vary widely and unpredictably in nature, timing and amount:
| Three months ended | Nine months ended | ||||||||||||||||
| millions | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Oil and gas | |||||||||||||||||
| Asset sales gains, net - domestic | $ | 142 | $ | — | $ | 142 | $ | 147 | |||||||||
| Asset impairments - domestic | — | (209) | (209) | — | |||||||||||||
| Legal settlement gain | — | — | 26 | — | |||||||||||||
| Asset sales gains, net - international | — | — | — | 10 | |||||||||||||
| Total oil and gas | 142 | (209) | (41) | 157 | |||||||||||||
| Midstream and marketing | |||||||||||||||||
| Asset sales gains, net | 51 | — | 51 | 62 | |||||||||||||
| Asset impairments and other charges (a) | (34) | — | (60) | — | |||||||||||||
| Derivative gains (losses), net | (81) | 48 | (41) | (186) | |||||||||||||
| Total midstream and marketing | (64) | 48 | (50) | (124) | |||||||||||||
| Corporate | |||||||||||||||||
| Anadarko acquisition-related costs | — | — | — | (82) | |||||||||||||
| Interest rate swap gains, net | — | — | — | 332 | |||||||||||||
| Maxus receivable valuation allowance adjustment | — | 260 | 260 | (22) | |||||||||||||
| Early debt extinguishment | — | — | — | 143 | |||||||||||||
| Total corporate | — | 260 | 260 | 371 | |||||||||||||
| Income tax impact of legal entity reorganization | — | — | — | 2,636 | |||||||||||||
| Exploration license expiration tax benefit | — | — | — | 23 | |||||||||||||
| State tax rate revaluation | — | — | — | (29) | |||||||||||||
| Deferred taxes on Algeria contract renewal | 3 | (68) | (65) | — | |||||||||||||
| Income taxes | (17) | (22) | (37) | (89) | |||||||||||||
| Income | 64 | 9 | 67 | 2,945 | |||||||||||||
| Preferred redemption premiums | (42) | (65) | (187) | — | |||||||||||||
| Total | $ | 22 | $ | (56) | $ | (120) | $ | 2,945 | |||||||||
(a) Included in Income from equity investments and other in the Consolidated Condensed Statement of Operations.
Q3 2023 compared to Q2 2023
Excluding items affecting comparability, the increase in net income for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, was primarily due to higher domestic crude oil, natural gas and NGL commodity prices and higher domestic crude oil volumes, partially offset by lower international sales volumes and an increase in lease operating expense in the oil and gas segment and lower realized caustic sales prices in the chemical segment.
YTD 2023 compared to YTD 2022
Excluding items affecting comparability, the decrease in net income for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to lower worldwide crude oil, domestic NGL and domestic natural gas commodity prices and an increase in lease operating expense in the oil and gas segment and lower realized PVC prices and lower demand across most product lines in the chemical segment and lower crude margins
due to the timing of crude sales in the marketing business, partially offset by higher domestic sales volumes in the oil and gas segment and lower ethylene and energy costs in the chemical segment.
SELECTED STATEMENTS OF OPERATIONS ITEMS
| Three months ended | Nine months ended | |||||||||||||||||||
| millions | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | ||||||||||||||||
| Net sales | $ | 7,158 | $ | 6,702 | $ | 21,085 | $ | 28,415 | ||||||||||||
| Interest, dividends and other income | $ | 50 | $ | 28 | $ | 107 | $ | 122 | ||||||||||||
| Gain on sale of assets, net | $ | 192 | $ | 1 | $ | 197 | $ | 232 | ||||||||||||
| Oil and gas operating expense | $ | 1,189 | $ | 1,130 | $ | 3,400 | $ | 2,925 | ||||||||||||
| Transportation and gathering expense | $ | 363 | $ | 375 | $ | 1,122 | $ | 1,089 | ||||||||||||
| Chemical and midstream cost of sales | $ | 682 | $ | 791 | $ | 2,218 | $ | 2,488 | ||||||||||||
| Purchased commodities | $ | 520 | $ | 490 | $ | 1,508 | $ | 2,627 | ||||||||||||
| Selling, general and administrative expenses | $ | 258 | $ | 277 | $ | 776 | $ | 687 | ||||||||||||
| Other operating and non-operating expense | $ | 328 | $ | 10 | $ | 646 | $ | 909 | ||||||||||||
| Taxes other than on income | $ | 290 | $ | 266 | $ | 862 | $ | 1,188 | ||||||||||||
| Depreciation, depletion and amortization | $ | 1,712 | $ | 1,709 | $ | 5,142 | $ | 5,107 | ||||||||||||
| Asset impairments and other charges | $ | — | $ | 209 | $ | 209 | $ | — | ||||||||||||
| Anadarko acquisition-related costs | $ | — | $ | — | $ | — | $ | 82 | ||||||||||||
| Exploration expense | $ | 125 | $ | 102 | $ | 329 | $ | 98 | ||||||||||||
| Interest and debt expense, net | $ | 230 | $ | 230 | $ | 698 | $ | 770 | ||||||||||||
| Gains on interest rate swaps, net | $ | — | $ | — | $ | — | $ | 332 | ||||||||||||
| Income from equity investments and other | $ | 106 | $ | 185 | $ | 391 | $ | 586 | ||||||||||||
| Income tax expense | $ | (434) | $ | (467) | $ | (1,372) | $ | (340) |
Q3 2023 compared to Q2 2023
Net sales increased for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, due to higher domestic crude oil, natural gas and NGL commodity prices and higher domestic crude oil volumes, partially offset by lower international sales volumes in the oil and gas segment and lower realized caustic sales prices in the chemical segment.
Gain on sale of assets for the three months ended September 30, 2023 included a gain on the sale of certain non-core proved and unproved properties in the Permian Basin of $142 million and a $51 million of gain on the sale of 5.1 million limited partner units in WES.
Other operating and non-operating expense increased for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, due to the $260 million remeasurement of the valuation allowance for the Maxus Liquidating Trust recorded in the three months ended June 30, 2023. See Note 8 - Lawsuits, Claims, Commitments and Contingencies for further information.
YTD 2023 compared to YTD 2022
Net sales decreased for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to lower worldwide crude oil, domestic NGL and domestic natural gas commodity prices in the oil and gas segment, lower realized PVC sales prices and lower demand across most product lines in the chemical segment and lower crude margins due to the timing of crude sales in the marketing business, partially offset by higher domestic sales volumes in the oil and gas segment.
Oil and gas operating expense increased for the nine months ended September 30, 2023, compared to the same period in 2022, primarily as a result of higher domestic workover and maintenance activity.
Chemical and midstream cost of sales decreased for the nine months ended September 30, 2023, compared to the same period in 2022, primarily as a result of lower ethylene and energy cost in the chemical segment and lower power generation cost of sales in the midstream and marketing segment.
Purchased commodities decreased for the nine months ended September 30, 2023, compared to the same period in 2022, due to lower volumes and prices on third-party crude purchases in the midstream and marketing segment.
Other operating and non-operating expense decreased for the nine months ended September 30, 2023, compared to same period in 2022, due to the $260 million remeasurement of the valuation allowance for the Maxus Liquidating Trust recorded in the three months ended June 30, 2023. See Note 8 - Lawsuits, Claims, Commitments and Contingencies for further information.
Taxes other than on income decreased for the nine months ended September 30, 2023, compared to the same period in 2022, due to decreases in production taxes, which are directly tied to revenues, and ad valorem taxes.
Asset impairments and other charges for the nine months ended September 30, 2023 included a pre-tax impairment of $180 million related to undeveloped acreage in the northern non-core area of the Powder River Basin and a $29 million impairment related to an equity method investment in the Black Butte Coal Company.
Exploration expense increased for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to dry hole expense in the Gulf of Mexico.
The increase in income tax expense for the nine months ended September 30, 2023, compared to the same period in 2022, resulted primarily from the tax benefit in 2022 associated with Occidental's legal entity reorganization. See Income Taxes section for further discussion.
| SEGMENT RESULTS OF OPERATIONS |
SEGMENT RESULTS OF OPERATIONS
Occidental’s principal businesses consist of three reporting segments: oil and gas, chemical and midstream and marketing. The oil and gas segment explores for, develops and produces oil and condensate, NGL and natural gas. The chemical segment mainly manufactures and markets basic chemicals and vinyls. The midstream and marketing segment purchases, markets, gathers, processes, transports and stores oil (which includes condensate), NGL, natural gas, CO2 and power. It also optimizes its transportation and storage capacity and invests in entities that conduct similar activities such as WES.
The midstream and marketing segment also includes Occidental's low carbon ventures businesses. Occidental's low carbon ventures businesses seek to leverage Occidental’s legacy of carbon management expertise to develop carbon capture, utilization and storage projects, including the commercialization of direct air capture technology, invest in other low-carbon technologies intended to reduce greenhouse gas emissions from Occidental's operations and strategically partner with other industries to help reduce their emissions.
OIL AND GAS SEGMENT
The following table sets forth the average sales volumes per day for oil and NGL in Mbbl and for natural gas in MMcf:
| Three months ended | Nine months ended | ||||||||||||||||
| September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | ||||||||||||||
| Sales Volumes per Day | |||||||||||||||||
| Oil (Mbbl) | |||||||||||||||||
| United States | 534 | 521 | 535 | 495 | |||||||||||||
| International | 104 | 112 | 107 | 111 | |||||||||||||
| NGL (Mbbl) | |||||||||||||||||
| United States | 252 | 251 | 248 | 223 | |||||||||||||
| International | 37 | 35 | 34 | 31 | |||||||||||||
| Natural Gas (MMcf) | |||||||||||||||||
| United States | 1,267 | 1,310 | 1,300 | 1,210 | |||||||||||||
| International | 501 | 507 | 473 | 437 | |||||||||||||
| Total Sales Volumes (Mboe) (a) | 1,222 | 1,222 | 1,220 | 1,135 |
(a) Natural gas volumes have been converted to Boe based on energy content of six Mcf of gas to one barrel of oil. Barrels of oil equivalent does not necessarily result in price equivalency.
The following table presents information about Occidental's average realized prices and index prices:
| Three months ended | Nine months ended | ||||||||||||||||
| September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | ||||||||||||||
| Average Realized Prices | |||||||||||||||||
| Oil ($/Bbl) | |||||||||||||||||
| United States | $ | 81.36 | $ | 72.70 | $ | 75.93 | $ | 98.43 | |||||||||
| International | $ | 77.32 | $ | 77.76 | $ | 77.50 | $ | 97.72 | |||||||||
| Total Worldwide | $ | 80.70 | $ | 73.59 | $ | 76.19 | $ | 98.30 | |||||||||
| NGL ($/Bbl) | |||||||||||||||||
| United States | $ | 20.22 | $ | 17.80 | $ | 20.43 | $ | 39.38 | |||||||||
| International | $ | 26.59 | $ | 28.45 | $ | 29.03 | $ | 35.14 | |||||||||
| Total Worldwide | $ | 21.04 | $ | 19.08 | $ | 21.45 | $ | 38.85 | |||||||||
| Natural Gas ($/Mcf) | |||||||||||||||||
| United States | $ | 1.92 | $ | 1.36 | $ | 2.09 | $ | 5.83 | |||||||||
| International | $ | 1.87 | $ | 1.88 | $ | 1.89 | $ | 1.89 | |||||||||
| Total Worldwide | $ | 1.90 | $ | 1.50 | $ | 2.04 | $ | 4.79 | |||||||||
| Average Index Prices | |||||||||||||||||
| WTI oil ($/Bbl) | $ | 82.26 | $ | 73.83 | $ | 77.41 | $ | 98.09 | |||||||||
| Brent oil ($/Bbl) | $ | 86.08 | $ | 78.02 | $ | 82.10 | $ | 102.21 | |||||||||
| NYMEX gas ($/Mcf) | $ | 2.59 | $ | 2.30 | $ | 2.92 | $ | 6.21 | |||||||||
| Average Realized Prices as Percentage of Average Index Prices | |||||||||||||||||
| Worldwide oil as a percentage of average WTI | 98 | % | 100 | % | 98 | % | 100 | % | |||||||||
| Worldwide oil as a percentage of average Brent | 94 | % | 94 | % | 93 | % | 96 | % | |||||||||
| Worldwide NGL as a percentage of average WTI | 26 | % | 26 | % | 28 | % | 40 | % | |||||||||
| Domestic natural gas as a percentage of average NYMEX | 74 | % | 59 | % | 72 | % | 94 | % |
Significant Activity
For the three and nine months ended September 30, 2023, Occidental sold certain non-core proved and unproved properties in the Permian Basin for $202 million, resulting in a net gain on sale of assets of $142 million. For the nine months ended September 30, 2023, Occidental recorded a pre-tax impairment of $180 million related to undeveloped acreage in the northern non-core area of the Powder River Basin where Occidental has determined not to pursue future exploration and appraisal activities and a $29 million impairment related to an equity method investment in the Black Butte Coal Company and a $26 million litigation settlement gain.
Q3 2023 compared to Q2 2023
Oil and gas segment income was $2.0 billion for the three months ended September 30, 2023, compared with segment income of $1.1 billion for the three months ended June 30, 2023. Excluding the impact of items affecting comparability, oil and gas segment results for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, reflected higher domestic crude oil, natural gas and NGL commodity prices and higher domestic crude oil volumes, partially offset by lower international sales volumes and an increase in lease operating expense in the oil and gas segment.
Average daily sales volumes remained consistent for the three months ended September 30, 2023, compared to the three months ended June 30, 2023.
YTD 2023 compared to YTD 2022
Oil and gas segment income was $4.7 billion for the nine months ended September 30, 2023, compared with segment income of $10.3 billion for the nine months ended September 30, 2022. Excluding the impact of items affecting comparability, oil and gas segment results for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, reflected lower worldwide crude oil, domestic NGL and domestic natural gas commodity prices and an increase in lease operating expense, partially offset by higher domestic sales volumes.
The increase in average daily sales volumes of 85 Mboe/d for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily reflected increased activity in the Permian Basin.
The following table presents an analysis of the impacts of changes in average realized prices and sales volumes with regard to Occidental's domestic and international oil and gas revenue:
| Increase (Decrease) Related to | ||||||||||||||
| millions | Three months ended June 30, 2023 (b) | Price Realizations | Net Sales Volumes | Three Months Ended September 30, 2023 (b) | ||||||||||
| United States Revenue | ||||||||||||||
| Oil | $ | 3,446 | $ | 424 | $ | 127 | $ | 3,997 | ||||||
| NGL | 352 | 65 | 2 | 419 | ||||||||||
| Natural gas | 161 | 64 | (4) | 221 | ||||||||||
| Total | $ | 3,959 | $ | 553 | $ | 125 | $ | 4,637 | ||||||
| International Revenue | ||||||||||||||
| Oil (a) | $ | 795 | $ | 4 | $ | (57) | $ | 742 | ||||||
| NGL | 90 | (9) | 10 | 91 | ||||||||||
| Natural gas | 87 | (1) | 1 | 87 | ||||||||||
| Total | $ | 972 | $ | (6) | $ | (46) | $ | 920 |
| Increase (Decrease) Related to | ||||||||||||||
| millions | Nine Months Ended September 30, 2022 (b) | Price Realizations | Net Sales Volumes | Nine Months Ended September 30, 2023 (b) | ||||||||||
| United States Revenue | ||||||||||||||
| Oil | $ | 13,311 | $ | (3,298) | $ | 1,080 | $ | 11,093 | ||||||
| NGL | 2,139 | (1,244) | 336 | 1,231 | ||||||||||
| Natural gas | 1,916 | (1,320) | 141 | 737 | ||||||||||
| Total | $ | 17,366 | $ | (5,862) | $ | 1,557 | $ | 13,061 | ||||||
| International Revenue | ||||||||||||||
| Oil (a) | $ | 2,958 | $ | (383) | $ | (320) | $ | 2,255 | ||||||
| NGL | 302 | (55) | 19 | 266 | ||||||||||
| Natural gas | 225 | 1 | 20 | 246 | ||||||||||
| Total | $ | 3,485 | $ | (437) | $ | (281) | $ | 2,767 |
(a) Includes the impact of international production sharing contracts.
(b) Excludes "other" oil and gas revenue. See Note 2 - Revenue in the notes to the Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q for additional information regarding other revenue.
CHEMICAL SEGMENT
Q3 2023 compared to Q2 2023
Chemical segment earnings for the three months ended September 30, 2023 were $373 million, compared to $436 million for the three months ended June 30, 2023. The decrease in segment earnings was driven primarily by lower realized caustic soda pricing.
YTD 2023 compared to YTD 2022
Chemical segment earnings for the nine months ended September 30, 2023 were $1.3 billion, compared to $2.1 billion for the nine months ended September 30, 2022. The decrease in segment earnings was driven primarily by lower realized PVC pricing as well as lower sales volumes due to decreased demand across most product lines, partially offset by lower ethylene and energy costs.
MIDSTREAM AND MARKETING SEGMENT
Subsequent Events
In November 2023, Occidental entered into a joint venture agreement with BlackRock, through a fund managed by its Diversified Infrastructure business, for the development of Occidental’s first large-scale Direct Air Capture plant in Ector County, Texas. The agreement provides $550 million of committed investment from BlackRock's fund.
In August 2023, Occidental entered into an agreement with Carbon Engineering Ltd., its equity method investee, to purchase the remaining 67.83% interest not already owned by Occidental or its affiliates for total cash consideration of approximately $1.1 billion, resulting in Carbon Engineering becoming a wholly owned subsidiary of Occidental. The purchase price will be made in three approximately equal annual payments, with the first payment to be made at closing. This transaction closed on November 3, 2023, and Occidental made the first payment of $355 million. The remaining two payments will be paid on the first and second anniversaries of closing. With this purchase Occidental intends to accelerate technological innovation and cost reductions in Carbon Engineering's direct-air-capture technology. The transaction qualifies as a business combination and will be accounted for using the acquisition method of accounting. Occidental's purchase price allocation is currently in process and as such was incomplete as of the issuance of these unaudited Consolidated Condensed Financial Statements.
Q3 2023 compared to Q2 2023
Midstream and marketing segment losses for the three months ended September 30, 2023 were $130 million, compared to segment losses of $30 million for the three months ended June 30, 2023. Excluding the impact of items affecting comparability, the increase in midstream and marketing third quarter results reflected higher crude margins due the timing impact of crude sales in the marketing business, partially offset by higher expenses due to the increase in activities in the low carbon ventures businesses.
YTD 2023 compared to YTD 2022
Midstream and marketing segment losses for the nine months ended September 30, 2023 were $158 million, compared with segment earnings of $318 million for the nine months ended September 30, 2022. Excluding the impact of items affecting comparability, the decrease in midstream and marketing segment results was primarily driven by lower crude margins due to the timing of crude sales in the marketing business and lower NGL and sulfur prices impacting gas processing, increased activities in the low carbon ventures businesses, and lower equity method investment income from WES.
| INCOME TAXES |
The following table sets forth the calculation of the worldwide effective tax rate for income:
| Three months ended | Nine months ended | ||||||||||||||||
| millions, except percentages | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Income before income taxes | $ | 1,809 | $ | 1,327 | $ | 4,870 | $ | 11,717 | |||||||||
| Income tax benefit (expense) | |||||||||||||||||
| Domestic - federal and state | (322) | (203) | (825) | 522 | |||||||||||||
| International | (112) | (264) | (547) | (862) | |||||||||||||
| Total income tax expense | (434) | (467) | (1,372) | (340) | |||||||||||||
| Net income | $ | 1,375 | $ | 860 | $ | 3,498 | $ | 11,377 | |||||||||
| Worldwide effective tax rate | 24 | % | 35 | % | 28 | % | 3 | % |
Occidental estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which Occidental operates, adjusted for certain discrete items. Each quarter, Occidental updates these rates and records a cumulative adjustment to its income taxes by applying the rates to the pre-tax income excluding certain discrete items. Occidental’s quarterly estimate of its effective tax rates can vary significantly based on various
forecasted items, including future commodity prices, capital expenditures, expenses for which tax benefits are not recognized and the geographic mix of pre-tax income and losses.
The 24%, 35%, and 28% worldwide effective tax rates for the three months ended September 30, 2023, three months ended June 30, 2023, and nine months ended September 30, 2023, respectively, are primarily driven by Occidental's jurisdictional mix of income. U.S. income is taxed at a U.S. federal statutory rate of 21%, while international income is subject to tax at statutory rates as high as 55%. These effective rates differ from the 3% tax rate for income from continuing operations for the nine months ended September 30, 2022, which was impacted by a tax benefit associated with Occidental's legal entity reorganization as described above.
See Note 6 - Income Taxes in the notes to the Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q for additional information regarding Occidental’s income taxes and legal entity reorganization in 2022.
| LIQUIDITY AND CAPITAL RESOURCES |
As of September 30, 2023, Occidental had $611 million of cash and cash equivalents on hand. Through the date of this filing, Occidental has drawn no amounts under its RCF, which has $4.0 billion of borrowing capacity and matures in June 2025. Additionally, Occidental has up to $600 million of available borrowing capacity on its receivables securitization facility which matures in December 2024. There were no amounts outstanding on Occidental's receivable securitization facility as of September 30, 2023.
Operating cash flow was $9.1 billion for the nine months ended September 30, 2023, compared to $12.8 billion for the nine months ended September 30, 2022. The decrease in operating cash flow from continuing operations was primarily due to lower commodity prices as compared to the same period in 2022.
Occidental’s net cash used by investing activities was $5.0 billion for the nine months ended September 30, 2023, compared to $3.0 billion for the nine months ended September 30, 2022. Capital expenditures, of which the majority were for the oil and gas segment, were approximately $4.7 billion for the nine months ended September 30, 2023, compared to $3.0 billion for the nine months ended September 30, 2022. Also included in cash flow used by investing activities is Occidental's additional investment in NET Power, a clean energy technology company, totaling $351 million for the nine months ended September 30, 2023. For the nine months ended September 2023, Occidental sold certain non-core proved and unproved properties in the Permian Basin for proceeds of $202 million as well as sold WES 5.1 million of its limited partner units owned by Occidental for proceeds of $128 million.
Occidental’s net cash used by financing activities was $4.4 billion for the nine months ended September 30, 2023, compared to $11.4 billion for the nine months ended September 30, 2022. Cash used by financing activities for the nine months ended September 30, 2023 reflected treasury share repurchases of $1.6 billion. An additional $175 million of treasury share repurchases settled subsequent to September 30, 2023 for total common share repurchases of $1.8 billion in the nine months ended September 30, 2023. As of September 30, 2023, Occidental had $1.2 billion remaining of the $3.0 billion share repurchase program that was announced in February 2023. The program does not obligate Occidental to acquire any specific number of shares and may be discontinued at any time. Financing cash flows also included redemptions of preferred stock with a face value of $1.5 billion, $151 million in redemption premiums and dividend payments of $1.0 billion on preferred and common stock. Additionally, cash flows from financing activities for the nine months ended September 30, 2023, included the proceeds from and subsequent repayment of $0.9 billion from the receivable securitization facilities. Cash used by financing activities for the nine months ended September 30, 2022 reflected repayments of debt of $8.3 billion, dividend payments of $863 million on preferred and common stock, and treasury share repurchases of $2.5 billion.
Occidental’s Zero Coupons can be put to Occidental in October of each year, in whole or in part, for the then accreted value of the outstanding Zero Coupons. The Zero Coupons can next be put to Occidental in October 2024, which, if put in whole, would require a payment of approximately $362 million at such date. None of the outstanding Zero Coupons were put to Occidental in October 2023. Occidental currently has the ability to meet this obligation and may use available capacity under the RCF and other committed facilities to satisfy the put should it be exercised.
As of September 30, 2023, and through the date of this filing, Occidental was in compliance with all covenants in its financing agreements. Occidental has no remaining debt maturities in 2023, $1.1 billion in 2024, $1.2 billion in 2025, $1.4 billion in 2026 and $14.2 billion thereafter. Occidental currently expects its cash on hand, operating cash flows and funds available from the RCF and other committed facilities to be sufficient to meet its near-term debt maturities, operating expenditures, capital expenditures and other obligations for the next 12 months from the date of this filing.
Occidental or its subsidiaries have provided financial assurances through a combination of cash, letters of credit and surety bonds. As of September 30, 2023, Occidental had not issued any letters of credit under the RCF or other committed facilities. For additional information, see Risk Factors in Part I, Item 1A of Occidental’s 2022 Form 10-K.
| ENVIRONMENTAL LIABILITIES AND EXPENDITURES |
Occidental’s operations are subject to stringent federal, regional, state, provincial, tribal, local and international laws and regulations related to improving or maintaining environmental quality. Occidental’s environmental compliance costs have generally increased over time and are expected to rise in the future. Occidental factors environmental expenditures for its operations as an integral part of its business planning process.
The laws that require or address environmental remediation, including CERCLA and similar federal, regional, state, provincial, tribal, local and international laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites. Occidental 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 Third-Party, Currently Operated, and Closed or Non-Operated 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, natural resource damages, punitive damages, civil penalties, injunctive relief and government oversight costs.
See Note 7 - Environmental Liabilities and Expenditures in the notes to the Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q and the Environmental Liabilities and Expenditures section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2022 Form 10-K for additional information regarding Occidental’s environmental liabilities and expenditures.
| LAWSUITS, CLAIMS, COMMITMENTS AND CONTINGENCIES |
Occidental accrues reserves for outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. Occidental has disclosed its reserve balances for environmental remediation matters and its estimated range of reasonably possible additional losses for such matters. See Note 7 - Environmental Liabilities and Expenditures and Note 8 - Lawsuits, Claims, Commitments and Contingencies in the notes to the Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q for further information.
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