10-Q 1 form10q-20093q.htm FORM 10-Q form10q-20093q.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________
 
Commission file number 1-9210
_____________________
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4035997
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

10889 Wilshire Boulevard
   
Los Angeles, California
 
90024
(Address of principal executive offices)
 
(Zip Code)
 
(310) 208-8800
(Registrant’s telephone number, including area code)
_____________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    R Yes    £ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    R Yes    £ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See definition of "accelerated filer", "large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act):

Large Accelerated FilerR   Accelerated Filer£   Non-Accelerated Filer£   Smaller Reporting Company£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    £ Yes    R No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
Class
 
Outstanding at September 30, 2009
 
Common stock $.20 par value
 
811,667,233 shares

 
 
 
 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
 
 
TABLE OF CONTENTS
 
 
 
 
       
PAGE
         
Part I
Financial Information
 
         
 
Item 1.
Financial Statements (unaudited)
 
         
   
Consolidated Condensed Balance Sheets —
 
     
September 30, 2009 and December 31, 2008
2
         
   
Consolidated Condensed Statements of Income —
 
     
Three and nine months ended September 30, 2009 and 2008
4
         
   
Consolidated Condensed Statements of Cash Flows —
 
     
Nine months ended September 30, 2009 and 2008
5
         
   
Notes to Consolidated Condensed Financial Statements
6
         
 
Item 2.
Management’s Discussion and Analysis of Financial
 
     
Condition and Results of Operations
18
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
         
 
Item 4.
Controls and Procedures
29
         
Part II
Other Information
 
         
 
Item 1.
Legal Proceedings
30
         
 
Item 2.
Share Repurchase Activities
30
         
 
Item 6.
Exhibits
31
 
 
1
 
 

 
Item 1.
Financial Statements (unaudited)
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(Amounts in millions)
 
     
2009
   
2008
 
               
ASSETS
             
               
CURRENT ASSETS
             
               
Cash and cash equivalents
 
$
1,608
 
$
1,777
 
               
Trade receivables, net
   
3,330
   
3,117
 
               
Marketing and trading assets and other
   
622
   
1,012
 
               
Inventories
   
1,132
   
958
 
               
Prepaid expenses and other
   
308
   
308
 
               
               
Total current assets
   
7,000
   
7,172
 
               
               
               
               
               
INVESTMENTS IN UNCONSOLIDATED ENTITIES
   
1,450
   
1,263
 
               
               
               
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $18,537 at September 30, 2009 and $16,462 at December 31, 2008
   
32,905
   
32,266
 
               
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
   
859
   
836
 
               
               
               
TOTAL ASSETS
 
$
42,214
 
$
41,537
 
The accompanying notes are an integral part of these consolidated financial statements.

 
2
 
 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(Amounts in millions)
 
     
2009
   
2008
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
               
CURRENT LIABILITIES
             
Current maturities of long-term debt and notes payable
 
$
239
 
$
698
 
Accounts payable
   
2,999
   
3,306
 
Accrued liabilities
   
1,682
   
1,861
 
Domestic and foreign income taxes
   
79
   
158
 
Liabilities of discontinued operations
   
107
   
111
 
               
Total current liabilities
   
5,106
   
6,134
 
               
               
LONG-TERM DEBT, NET
   
2,556
   
2,049
 
               
DEFERRED CREDITS AND OTHER LIABILITIES
             
Deferred and other domestic and foreign income taxes
   
2,813
   
2,660
 
Long-term liabilities of discontinued operations
   
140
   
152
 
Other
   
3,079
   
3,217
 
     
6,032
   
6,029
 
               
STOCKHOLDERS’ EQUITY
             
Common stock, at par value
   
177
   
176
 
Treasury stock
   
(4,150
)
 
(4,121
)
Additional paid-in capital
   
7,132
   
7,113
 
Retained earnings
   
25,864
   
24,684
 
Accumulated other comprehensive loss
   
(565
)
 
(552
)
Noncontrolling interest
   
62
   
25
 
     
28,520
   
27,325
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
42,214
 
$
41,537
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Amounts in millions, except per-share amounts)
 
   
Three months ended
 
Nine months ended
 
   
September 30
 
September 30
 
      2009  
2008
 
2009
    2008  
REVENUES AND OTHER INCOME
                         
Net sales
 
$
4,104
 
$
7,060
 
$
10,864
 
$
20,196
 
Interest, dividends and other income
   
22
   
59
   
80
   
192
 
Gains on disposition of assets, net
   
   
   
7
   
25
 
     
4,126
   
7,119
   
10,951
   
20,413
 
COSTS AND OTHER DEDUCTIONS
                         
Cost of sales
   
2,130
   
2,780
   
6,253
   
7,800
 
Selling, general and administrative and other operating expenses
   
359
   
295
   
991
   
994
 
Taxes other than on income
   
105
   
162
   
320
   
466
 
Environmental remediation
   
10
   
(2
)
 
10
   
28
 
Exploration expense
   
56
   
61
   
168
   
193
 
Interest and debt expense, net
   
40
   
24
   
99
   
94
 
     
2,700
   
3,320
   
7,841
   
9,575
 
Income before income taxes and other items
   
1,426
   
3,799
   
3,110
   
10,838
 
Provision for domestic and foreign income taxes
   
549
   
1,546
   
1,245
   
4,511
 
Income from equity investments
   
(66
)
 
(57
)
 
(154
)
 
(168
)
Income from continuing operations
   
943
   
2,310
   
2,019
   
6,495
 
Discontinued operations, net
   
(2
)
 
(1
)
 
(7
)
 
23
 
Net income
   
941
   
2,309
   
2,012
   
6,518
 
Less: Net income attributable to noncontrolling interest
   
(14
)
 
(38
)
 
(35
)
 
(104
)
NET INCOME ATTRIBUTABLE TO COMMON STOCK
 
$
927
 
$
2,271
 
$
1,977
 
$
6,414
 
                           
BASIC EARNINGS PER COMMON SHARE – ATTRIBUTABLE TO COMMON STOCK
                         
Income from continuing operations
 
$
1.14
 
$
2.78
 
$
2.44
 
$
7.78
 
Discontinued operations, net
   
   
   
(0.01
)
 
0.03
 
BASIC EARNINGS PER COMMON SHARE
 
$
1.14
 
$
2.78
 
$
2.43
 
$
7.81
 
                           
DILUTED EARNINGS PER COMMON SHARE – ATTRIBUTABLE TO COMMON STOCK
                         
Income from continuing operations
 
$
1.14
 
$
2.77
 
$
2.44
 
$
7.74
 
Discontinued operations, net
   
   
   
(0.01
)
 
0.03
 
DILUTED EARNINGS PER COMMON SHARE
 
$
1.14
 
$
2.77
 
$
2.43
 
$
7.77
 
                           
DIVIDENDS PER COMMON SHARE
 
$
0.33
 
$
0.32
 
$
0.98
 
$
0.89
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Amounts in millions)
 
     
2009
   
2008
 
CASH FLOW FROM OPERATING ACTIVITIES
             
Net income
 
$
2,012
 
$
6,518
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Discontinued operations, net
   
7
   
(23
)
Depreciation, depletion and amortization expense
   
2,297
   
1,957
 
Deferred income tax provision
   
247
   
397
 
Other non-cash charges to income
   
333
   
380
 
Gains on disposition of assets, net
   
(7
)
 
(25
)
Income from equity investments
   
(154
)
 
(168
)
Dry hole and impairment expense
   
130
   
134
 
Changes in operating assets and liabilities
   
(826
)
 
(822
)
Other operating, net
   
(165
)
 
(245
)
Operating cash flow from continuing operations
   
3,874
   
8,103
 
Operating cash flow from discontinued operations
   
(31
)
 
33
 
Net cash provided by operating activities
   
3,843
   
8,136
 
CASH FLOW FROM INVESTING ACTIVITIES
             
Capital expenditures
   
(2,649
)
 
(3,070
)
Purchases of businesses and assets, net
   
(582
)
 
(3,404
)
Sales of assets, net
   
47
   
22
 
Sales of investments
   
   
51
 
Equity investments and other investing, net
   
(64
)
 
(58
)
Net cash used by investing activities
   
(3,248
)
 
(6,459
)
CASH FLOW FROM FINANCING ACTIVITIES
             
Proceeds from long-term debt
   
740
   
51
 
Payments of long-term debt
   
(699
)
 
(71
)
Proceeds from issuance of common stock
   
 16
   
22
 
Purchases of treasury stock
   
(29
)
 
(1,487
)
Excess tax benefits related to share-based payments
   
15
   
74
 
Cash dividends paid
   
(794
)
 
(677
)
Stock options exercised
   
2
   
10
 
Distributions to noncontrolling interest
   
(15
)
 
(111
)
Net cash used by financing activities
   
(764
)
 
(2,189
)
Decrease in cash and cash equivalents
   
(169
)
 
(512
)
Cash and cash equivalents—beginning of period
   
1,777
   
1,964
 
Cash and cash equivalents—end of period
 
$
1,608
 
$
1,452
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5
 
 

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
September 30, 2009
1.
General
 
     
 
In these unaudited consolidated condensed financial statements, "Occidental" means Occidental Petroleum Corporation, a Delaware corporation (OPC), and/or one or more entities in which it owns a majority voting interest (subsidiaries). Occidental has made its disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, and condensed or omitted, as permitted by the Securities and Exchange Commission’s rules and regulations, certain information and disclosures normally included in consolidated financial statements and the notes.  The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2008.
 
     
 
In the opinion of Occidental’s management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Occidental’s consolidated financial position as of September 30, 2009, and the consolidated statements of income and cash flows for the three and nine months ended September 30, 2009 and 2008, as applicable. The income and cash flows for the periods ended September 30, 2009 and 2008, are not necessarily indicative of the income or cash flows to be expected for the full year.
 
     
 
Occidental’s management has evaluated events from October 1, 2009 through November 2, 2009 and has made the appropriate disclosures.
 
     
2.
Asset Acquisitions, Dispositions and Other Transactions
 
     
 
In October 2009, Occidental announced it signed an agreement to purchase Phibro LLC (Phibro) from Citigroup Inc. for approximately net asset value as of the closing date, which is anticipated to be by the end of the year.  Phibro, primarily a trader in oil and gas, will become a part of Occidental's midstream, marketing and other segment.
 
     
 
In July 2009, Occidental repaid its $600 million debt associated with the Dolphin Project.
 
     
 
In May 2009, Occidental issued $750 million of 4.125-percent senior unsecured notes, receiving $740 million of net proceeds. Interest on the notes will be payable semi-annually in arrears on June 1 and December 1 of each year. The notes will mature on June 1, 2016.
 
     
 
In April 2009, Occidental and its partner signed a Development and Production Sharing Agreement (DPSA) with the National Oil and Gas Authority of Bahrain for further development of the Bahrain Field.  The DPSA is expected to become effective in the fourth quarter of 2009.  Under this agreement, a Joint Operating Company will serve as operator for the project under the DPSA.
 
     
3.
Accounting and Disclosure Changes
 
     
 
In the quarter ended June 30, 2009, Occidental adopted new disclosure requirements for its evaluation of subsequent events as a result of new accounting standards issued by the Financial Accounting Standards Board (FASB) in May 2009.
 
     
 
In the quarter ended June 30, 2009, Occidental adopted new disclosure requirements for the fair value of financial instruments in interim periods when it is practicable to estimate such values as a result of new accounting standards issued by the FASB in April 2009.
 
 
 
6
 
 
 
 
 
Beginning January 1, 2009, Occidental modified its calculation of basic earnings per share (EPS) in accordance with new accounting standards issued by the FASB in June 2008.  Under this new accounting standard, instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are considered participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing EPS under the two-class method.  While prior period EPS data has been adjusted retrospectively, this change had no material impact on Occidental’s financial statements.
 
     
 
Beginning January 1, 2009, Occidental adopted new disclosure requirements for its derivative and hedging activities as a result of new accounting standards issued by the FASB in March 2008.
 
     
 
Beginning January 1, 2009, Occidental prospectively adopted the deferred portion of new accounting standards related to the application of the measurement and disclosure framework of non-financial assets and liabilities that are recorded at fair value on a non-recurring basis.  These new standards were issued by the FASB in February 2008.
 
     
 
Beginning January 1, 2009, Occidental adopted new accounting standards related to the accounting and disclosure requirements for business combinations.  The new standards were issued by the FASB in December 2007 and April 2009 and had no material impact on Occidental’s financial statements upon adoption.
 
     
 
On January 1, 2009, Occidental adopted new accounting standards affecting the presentation and disclosure requirements related to noncontrolling interests in subsidiaries. Occidental adopted these new standards prospectively, except for the presentation and disclosure requirements which were applied retrospectively to all periods presented. These new standards were issued in December 2007 and had no material impact on Occidental’s financial statements upon adoption.
 
     
4.
Comprehensive Income
 
     
 
The following table presents Occidental’s comprehensive income for the three and nine months ended September 30, 2009 and 2008 (in millions):
 
 
   
Periods Ended September 30
 
   
Three months
 
Nine months
 
     
2009
   
2008
   
2009
   
2008
 
Net income attributable to common stock
 
$
927
 
$
2,271
 
$
1,977
 
$
6,414
 
Other comprehensive income (loss) items
                         
Foreign currency translation adjustments
   
10
   
(20
)
 
28
   
(9
)
Pension and post-retirement adjustments
   
7
   
6
   
19
   
(4
)
Unrealized gains (losses) on derivatives
   
(8
)
 
404
   
(54
)
 
(158
)
Reclassification of realized losses (gains) on derivatives
   
16
   
20
   
(6
)
 
103
 
Unrealized gains (losses) on securities
   
   
(2
)
 
   
14
 
Realized losses on securities
   
   
   
   
(16
)
Other comprehensive income (loss), net of tax
   
25
   
408
   
(13
)
 
(70
)
Comprehensive income attributable to common stock
 
$
952
 
$
2,679
 
$
1,964
 
$
6,344
 
 
 
There were no other comprehensive income (loss) items related to noncontrolling interests for the three and nine months ended September 30, 2009 and 2008.
 
 
 
7
 
 
 
 
 
5.
Supplemental Cash Flow Information
 
     
 
Income taxes paid (received) for the nine months ended September 30, 2009 and 2008 were $(168) million and $1.7 billion for U.S. taxes, respectively, and $1.1 billion and $2.3 billion for foreign taxes, respectively.  Interest paid totaled approximately $116 million and $93 million for the nine months ended September 30, 2009 and 2008, respectively.
 
     
6.
Inventories
 
     
 
A portion of inventories is valued under the LIFO method.  The valuation of LIFO inventory for interim periods is based on Occidental’s estimates of year-end inventory levels and costs.  Inventories as of September 30, 2009 and December 31, 2008 consisted of the following (in millions):
 
 
   
2009
 
2008
 
Raw materials
   
$
48
     
$
123
   
Materials and supplies
     
555
       
412
   
Finished goods
     
600
       
494
   
       
1,203
       
1,029
   
LIFO reserve
     
(71
)
     
(71
)
 
Total
   
$
1,132
     
$
958
   
 
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 including sampling, modeling, risk assessment or monitoring; cleanup measures including removal, treatment or disposal; or operation and maintenance of remedial systems.  The environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs.
 
     
 
As of September 30, 2009, Occidental participated in or monitored remedial activities or proceedings at 167 sites.  The following table presents Occidental’s environmental remediation reserves as of September 30, 2009, the current portion of which is included in accrued liabilities ($67 million) and the remainder in deferred credits and other liabilities — other ($334 million).  The reserves are grouped in four categories of environmental remediation sites — sites listed or proposed for listing by the U.S. Environmental Protection Agency on the CERCLA National Priorities List (NPL) as well as non-NPL third-party sites, Occidental-operated sites and closed or non-operated Occidental sites.
 
 
 
8
 
 
 
   
Number
of Sites
 
Reserve Balance
(in millions)
 
NPL sites
   
40
     
$
56
   
Third-party sites
   
77
       
99
   
Occidental-operated sites
   
19
       
127
   
Closed or non-operated Occidental sites
   
31
       
119
   
Total
   
167
     
$
401
   
 
 
As of September 30, 2009, Occidental’s environmental reserves exceeded $10 million at 14 of the 167 sites described above, and 117 of the sites had reserves from $0 to $1 million.  Occidental expects to expend funds corresponding to about half of the current environmental reserves over the next four years and the balance over the subsequent ten or more years.  Occidental believes its range of reasonably possible additional loss beyond those liabilities recorded for environmental remediation at the sites described above could be up to $390 million.  The status of Occidental’s involvement with the sites and related significant assumptions have not changed materially since December 31, 2008.  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.  With respect to all such lawsuits, claims and proceedings, including environmental proceedings, Occidental accrues reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated.
 
     
 
Lawsuits have been filed in Nicaragua against Occidental Chemical Corporation (OxyChem) and other companies that once manufactured or used a pesticide, dibromochloropropane (DBCP).  These lawsuits claim damages of several billion dollars for alleged personal injuries.  In the opinion of management, the claims against OxyChem are without merit because, among other things, the DBCP it manufactured was never sold or used in Nicaragua.  In order to preserve its jurisdictional defense, OxyChem elected not to make a substantive appearance in these cases.  Nicaraguan courts have entered judgments of approximately $900 million against four defendants, including OxyChem.  Under Nicaraguan law, the judgments would be shared equally among the defendants.  The plaintiffs attempted to enforce one judgment in Miami.  In January 2009, the federal district court in Miami granted summary judgment in favor of OxyChem and refused to enforce the judgment finding the Nicaraguan court lacked personal jurisdiction because there was no evidence that any OxyChem DBCP was used in Nicaragua and that OxyChem did not otherwise have sufficient contacts with Nicaragua.  In October 2009, the same court concluded the following additional grounds existed for not enforcing the Nicaraguan judgment: the Nicaraguan trial court lacked jurisdiction under a Nicaraguan DBCP statute; the judgment was rendered under a judicial system that does not provide procedures compatible with due process of law and lacks impartial tribunals; and enforcing the judgment would violate Florida public policy.  OxyChem has no assets in Nicaragua and, in the opinion of management, no such Nicaraguan judgment would be enforceable in the United States.
 
     
 
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 for taxable years through 2007 have concluded for U.S. federal income tax purposes, the 2008 taxable year as well as the current period are currently under audit by the U.S. Internal Revenue Service pursuant to its compliance assurance
 
 
 
9
 
 
 
 
 
program.  Foreign government tax authorities are in various stages of auditing Occidental, and income taxes for taxable years from 2000 through 2008 remain subject to examination in certain jurisdictions.  During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law.
 
     
 
Occidental has indemnified various parties against specified liabilities that those parties might incur in the future in connection with purchases and other transactions that they have entered into with Occidental.  These indemnities usually are contingent upon the other party incurring liabilities that reach specified thresholds.  Currently, Occidental is not aware of circumstances that it believes would reasonably be expected to lead to future indemnity claims against it in connection with these transactions that would result in payments materially in excess of reserves.
 
     
 
The ultimate amount of losses and the timing of any such losses that OPC and its subsidiaries may incur resulting from currently outstanding lawsuits, claims and proceedings, audits, commitments, contingencies and related matters cannot be determined reliably at this time.  If these matters were ultimately resolved unfavorably at amounts substantially exceeding Occidental’s reserves, an outcome not currently expected, it is possible that such outcome could have a material adverse effect upon Occidental’s consolidated financial position or results of operations.  However, after taking into account reserves, management does not expect the ultimate resolution of any of these matters to have a material adverse effect upon Occidental’s consolidated financial position or results of operations.
 
     
9.
Retirement Plans and Postretirement Benefits
 
     
 
The following table sets forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and postretirement benefit plans for the three and nine months ended September 30, 2009 and 2008 (in millions):
 
 
Three months ended September 30
 
2009
 
2008
 
Net Periodic Benefit Costs
 
Pension Benefit
 
Postretirement Benefit
 
Pension Benefit
 
Postretirement Benefit
 
Service cost
 
$
4
   
$
4
   
$
2
   
$
3
   
Interest cost
   
7
     
10
     
7
     
10
   
Expected return on plan assets
   
(6
)
   
     
(9
)
   
   
Amortization of prior service cost
   
1
     
     
     
   
Recognized actuarial loss
   
4
     
5
     
     
4
   
Total
 
$
10
   
$
19
   
$
   
$
17
   
 
Nine months ended September 30
 
2009
 
2008
 
Net Periodic Benefit Costs
 
Pension Benefit
 
Postretirement Benefit
 
Pension Benefit
 
Postretirement Benefit
 
Service cost
 
$
12
   
$
12
   
$
6
   
$
10
   
Interest cost
   
21
     
30
     
21
     
29
   
Expected return on plan assets
   
(19
)
   
     
(28
)
   
   
Amortization of prior service cost
   
1
     
     
     
   
Recognized actuarial loss
   
12
     
16
     
1
     
12
   
Total
 
$
27
   
$
58
   
$
   
$
51
   
 
 
Occidental contributed $2 million and $7 million to its defined benefit pension plans for the three and nine months ended September 30, 2009, respectively, and expects to contribute an additional $3 million in the remainder of 2009. Occidental contributed $1 million and $3 million to its defined benefit pension plans for the three and nine months ended September 30, 2008, respectively.
 
 
 
10
 
 
 
 
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 technique, into a three-level fair value hierarchy: Level 1 is the use of quoted prices in active markets for identical assets or liabilities; Level 2 is the use of other observable inputs other than quoted prices; and Level 3 is the use of unobservable inputs.  The following table provides fair value measurement information for such assets and liabilities that are measured on a recurring basis (in millions):
 
 
       
Fair Value Measurements at
September 30, 2009 Using:
 
Description
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Assets:
                         
Derivative financial instruments(a)
                         
Marketing and trading assets and other
 
$
128
 
$
10
 
$
118
 
$
 
Long-term receivables and other assets, net
   
136
   
   
136
   
 
Total assets
 
$
264
 
$
10
 
$
254
 
$
 
                           
Liabilities:
                         
Derivative financial instruments(a)
                         
Accrued liabilities
 
$
(230
)
$
(6
)
$
(224
)
$
 
Deferred credits and other liabilities-other
   
(305
)
 
   
(305
)
 
 
Total liabilities
 
$
(535
)
$
(6
)
$
(529
)
$
 

(a)
Derivative fair values are reported on a net basis to the extent a legal right of offset with a counterparty exists.
 

 
For the nine months ended September 30, 2009, Occidental did not have any assets or liabilities measured at fair value on a non-recurring basis.
 
     
 
Occidental primarily applies the market approach for recurring fair value measurements and 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 risk and the risks inherent in the inputs to the valuation technique.
 
     
 
Certain of Occidental's derivative instruments, however, are valued using industry-standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these 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.
 
     
 
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 its fixed-rate debt based on the quoted market prices for its debt instruments or on quoted market yields for similarly rated debt instruments, taking into account their maturities.  The estimated fair values of Occidental’s debt, at September 30, 2009 and December 31, 2008, were approximately $3.1 billion and $2.9 billion, respectively, compared to carrying values of $2.8 billion and $2.7 billion, respectively.
 
 
 
11
 
 
 
 
Occidental’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, trade receivables and energy derivative contracts.  Occidental’s cash and cash equivalents are spread among major international financial institutions.  Occidental’s trade receivables and energy derivative contracts are spread among various counterparties.  Creditworthiness is reviewed prior to conducting business with a new counterparty and on an ongoing basis.  Occidental monitors aggregate credit exposure for each counterparty relative to established credit limits.  Credit exposure to each counterparty is monitored for outstanding balances, current month activity, and forward mark-to-market exposures.  Losses associated with credit risk have been immaterial for all periods presented.
 
     
11.
Derivatives
 
     
 
As discussed in Note 3, Occidental adopted new accounting standards for derivative disclosures on January 1, 2009.  Derivatives are carried at fair value and, when a legal right of offset with the same counterparty exists, Occidental records these derivatives on a net basis.  Occidental applies hedge accounting when transactions meet specified criteria for such treatment.  If a derivative does not qualify as a hedge or is not designated and documented as a hedge, any fair value gains or losses are recognized in earnings in the current period.  For cash-flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) with an offsetting adjustment to the basis of the item being hedged.  Realized gains or losses from cash-flow hedges, and any ineffectiveness, are recorded as a component of net sales in the consolidated statements of income. Ineffectiveness is primarily created by a basis difference between the hedged item and the hedging instrument due to location, quality or grade of the physical commodity transactions.  Gains and losses from derivative instruments are reported net in the consolidated statements of income. There were no fair value hedges as of and for the three and nine months ended September 30, 2009.
 
     
 
Occidental is exposed to commodity price risk.  Occidental has used derivatives to reduce its long-term exposure to price volatility on a small portion of its oil and gas production.  Through its low-risk marketing and trading activities and within its established policy controls and procedures, Occidental also uses derivative instruments, including a combination of short-term futures, forwards, options and swaps to improve realized prices for its oil and gas.
 
     
 
A majority of Occidental’s derivative transactions are exchange-traded contracts, which are subject to nominal credit risk as a significant portion of these derivative transactions are executed on a daily margin basis.  Cash collateral of $132 million deposited by Occidental with clearing houses, which has not been reflected in the derivative fair value tables, is included in the marketing and trading assets and other balance as of September 30, 2009.
 
     
 
In addition, Occidental executes a portion of its derivative transactions in the over-the-counter (OTC) market with various high-credit-quality counterparties.  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, and by entering into master netting arrangements with the counterparties, as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments against the derivative assets to reflect counterparty risk, if necessary.  Certain of Occidental's OTC derivative instruments contain collateral thresholds.  If credit thresholds are exceeded or if Occidental’s or the counterparty’s credit rating is reduced by the major credit rating agencies, Occidental or the counterparty may be required to post collateral via available cash or letters of credit to satisfy the difference between the current exposure and the negotiated credit threshold.  As of September 30, 2009, Occidental had a liability of $292 million, which represents the fair value of derivative instruments with credit-risk-related contingent features.  As of September 30, 2009, Occidental was not required to post collateral for these derivative instruments.  Occidental believes that if it had received a one-notch reduction in its credit rating, it would not have resulted in a material change in its collateral-posting requirements as of September 30, 2009.
 
 
 
12
 
 
 
 
 
Cash-Flow Hedges
 
 
Occidental holds 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 continue to the end of 2011.  The following table presents the daily notional amounts and weighted average strike prices of Occidental’s collar positions as of September 30, 2009.
 
 
   
Crude Oil  Collars
 
   
Daily Volume
(barrels)
 
Average Floor
 
Average Cap
 
2009
 
13,000
 
$33.15
 
$47.41
 
2010
 
12,000
 
$33.00
 
$46.35
 
2011
 
12,000
 
$32.92
 
$46.27
 
 
 
Occidental entered into natural gas swap agreements related to the sale, for 2010, of a portion of its production from the Rockies that qualify as cash-flow hedges.  The following table presents the daily notional amounts and weighted average strike prices, net to Occidental, of these hedges as of September 30, 2009.
 
 
   
Natural Gas - Swaps
 
   
Daily Volume
 
Average Strike Price
 
2010
 
40 million cubic feet
 
$5.03
 
 
 
Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These agreements continue through 2010.  As of September 30, 2009, Occidental has the following outstanding natural gas commodity contracts that were designated as cash-flow hedges:
 
 
Natural Gas Contracts
 
Volumes
 
Forecasted sales
 
24 billion cubic feet
 
 
 
As of September 30, 2009, Occidental had approximately 27 billion cubic feet of natural gas, which it holds in storage.
 
     
 
The following table presents the pre-tax gains (losses) recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the three and nine months ended September 30, 2009 (in millions):
 
 
 
13
 
 
 
 
Three months ended September 30, 2009
 
Cash-Flow Hedges
 
Gains (losses) Recognized
in AOCI –
Effective Portion
 
Amount of Losses Reclassified from AOCI into Income –
Effective Portion
 
Gains Recognized
in Income – Ineffective Portion
 
Commodity contracts 
                         
Occidental’s crude oil production
 
$
8
   
$
(26
)
 
$
1
   
Commodity contracts 
                         
Third-party natural gas marketing and trading activities
   
(21
)
   
     
   
Total
 
$
(13
)
 
$
(26
)
 
$
1
   
 
Nine months ended September 30, 2009
 
Cash-Flow Hedges
 
Gains (Losses) Recognized
in AOCI –
Effective Portion
 
Amount of Gains (Losses) Reclassified from AOCI into Income –
Effective Portion
 
Gains Recognized
in Income – Ineffective Portion
 
Commodity contracts 
                         
Occidental’s crude oil production
 
$
(89
)
 
$
(40
)
 
$
10
   
Commodity contracts 
                         
Third-party natural gas marketing and trading activities
   
4
     
50
     
   
Total
 
$
(85
)
 
$
10
   
$
10
   
 
 
The following table summarizes net after-tax derivative activity recorded in AOCI for the three and nine months ended September 30, 2009 and 2008 (in millions):
 
 
   
Periods ended September 30
 
   
Three Months
 
Nine Months
 
     
2009
   
2008
   
2009
   
2008
 
Beginning Balance
 
$
(218
)
$
(920
)
$
(150
)
$
(441
)
Gains (losses) from changes in cash-flow hedges
   
(8
)
 
404
   
(54
)
 
(158
)
Losses (gains) reclassified to income
   
16
   
20
   
(6
)
 
103
 
Ending Balance
 
$
(210
)
$
(496
)
$
(210
)
$
(496
)
 
 
During the next twelve months, Occidental expects that approximately $85 million of net after-tax derivative losses included in AOCI, based on their valuation as of September 30, 2009, will be reclassified into income.
 
     
 
Derivatives not designated as hedging instruments
 
 
Occidental’s third-party marketing and trading activities are focused on purchasing crude oil and natural gas for resale from partners, producers and third parties whose oil and gas supply is located near the midstream assets such as pipelines, processing plants and storage facilities that are owned or leased by Occidental.  These purchases allow Occidental to aggregate volumes to maximize prices received for Occidental’s production.  The aggregate volumes and durations of these third-party marketing and trading purchase and sales contracts generally approximate each other.
 
 
 
14
 
 
 
 
 
The following table presents gross volumes of Occidental’s derivatives not designated as hedging instruments as of September 30, 2009:
 
 
Commodity
 
Volumes
 
Occidental’s production sales contracts
     
Crude oil
 
8 million barrels
 
       
Third-party marketing and trading activities
     
Purchase contracts
     
Crude oil
 
74 million barrels
 
Natural gas
 
1,039 billion cubic feet
 
Sales contracts
     
Crude oil
 
85 million barrels
 
Natural gas
 
1,042 billion cubic feet
 
 
 
Approximately $56 million and $20 million of gains from derivatives not designated as hedging instruments  entered for Occidental’s oil and gas production and the third-party marketing and trading activities, respectively, were recognized in net sales for the three months ended September 30, 2009.  Approximately $9 million of losses and $46 million of gains from derivatives not designated as hedging instruments entered for Occidental’s oil and gas production and the third-party marketing and trading activities, respectively, were recognized in net sales for the nine months ended September 30, 2009.
 
     
 
The following table presents the gross fair value of Occidental’s outstanding derivatives as of September 30, 2009 (in millions):
 
 
   
Asset Derivatives
Balance Sheet Location
 
Fair Value(a)
 
Liability Derivatives Balance Sheet Location
 
Fair Value(a)
 
                       
Cash-flow hedges
                     
Commodity contracts
 
Marketing and trading assets and other
 
$
8
  Accrued liabilities  
$
(139
)
 
Long-term receivables and other assets, net
   
 
Deferred credits and other liabilities
   
(175
)
       
$
8
     
$
(314
)
                       
Derivatives not designated as hedging instruments
                     
Commodity contracts
 
Marketing and trading assets and other
 
$
447
 
Accrued liabilities
 
$
(418
)
 
Long-term receivables and other assets, net
   
163
 
Deferred credits and other liabilities
   
(157
)
       
$
610
     
$
(575
)
                       
Total derivatives
     
$
618
     
$
(889
)

(a)
The above fair values are presented at gross amounts even when the derivatives are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheet.
 

 
See Note 10 for Fair Value Measurements disclosures on derivatives.
 
 
 
15
 
 
 
 
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, natural gas liquids (NGLs), condensate and natural gas.  The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals.  The midstream and marketing segment gathers, treats, processes, transports, stores, trades and markets crude oil, natural gas, NGLs, condensate and carbon dioxide and generates and markets power.
 
     
 
Segment earnings generally exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from the segments’ equity investments.
 
     
 
The following table presents Occidental’s industry segment and corporate disclosures (in millions):
 
 
   
Oil and Gas
 
Chemical
 
Midstream, Marketing and Other
 
Corporate and Eliminations
 
Total
 
Nine months ended September 30, 2009
                               
Net sales
 
$
7,952
 
$
2,445
 
$
763
 
$
(296
)(a)
$
10,864
 
Pretax operating profit (loss)
 
$
3,127
 
$
356
 
$
154
 
$
(373
)(b)
$
3,264
 
Income taxes
   
   
   
   
(1,245
)(c)
 
(1,245
)
Discontinued operations
   
   
   
   
(7
)
 
(7
)
Net income attributable to noncontrolling interest
   
(35
)
 
   
   
   
(35
)
Net income (loss) attributable to common stock
 
$
3,092
 
$
356
 
$
154
 
$
(1,625
)
$
1,977
 
Nine months ended September 30, 2008
                               
Net sales
 
$
15,441
 
$
4,107
 
$
1,204
 
$
(556
)(a)
$
20,196
 
Pretax operating profit (loss)
 
$
10,416
 
$
542
 
$
350
 
$
(302
)(b)
$
11,006
 
Income taxes
   
   
   
   
(4,511
)(c)
 
(4,511
)
Discontinued operations
   
   
   
   
23
  (d)
 
23
 
Net income attributable to noncontrolling interest
   
(104
)
 
   
   
   
(104
)
Net income (loss) attributable to common stock
 
$
10,312
 
$
542
 
$
350
 
$
(4,790
)
$
6,414
 
 
(a)
Intersegment sales are generally made at prices approximately equal to those that the selling entity is able to obtain in third-party transactions.
 
(b)
Includes net interest expense, administration expense, environmental remediation and other pre-tax items.
 
(c)
Includes all foreign and domestic income taxes from continuing operations.
 
(d)
In 2008, Occidental received a $61 million refund of taxes from Ecuador.
 

 
16
 
 
 
 
13.
Earnings Per Share
 
     
 
As discussed in Note 3, Occidental adopted a new accounting standard for EPS on January 1, 2009.  Under this new accounting standard, nonvested share-based payment awards granted by Occidental containing rights to nonforfeitable dividends are considered participating securities. These securities allow the holders to participate in all dividends declared with the holders of common stock. Accordingly, Occidental applies the two-class method when computing basic and diluted EPS.
 
     
 
Basic EPS was computed by dividing net income attributable to common stock by the weighted-average number of common shares outstanding during each period, net of treasury shares and including vested but unissued shares and share units. The computation of diluted EPS further reflected the dilutive effect of stock options and performance-based stock awards. The following table presents the calculation of basic and diluted EPS for the three and nine months ended September 30, 2009 and 2008:
 
 
   
Periods Ended September 30
 
   
Three months
 
Nine months
 
(in millions, except per share amounts)
   
2009
   
2008
   
2009
   
2008
 
Basic EPS
                         
Income from continuing operations
 
$
943
 
$
2,310
 
$
2,019
 
$
6,495
 
Less: Income from continuing operations attributable to noncontrolling interest
   
(14
)
 
(38
)
 
(35
)
 
(104
)
Net income from continuing operations attributable to common stock
   
929
   
2,272
   
1,984
   
6,391
 
Discontinued operations
   
(2
)
 
(1
)
 
(7
)
 
23
 
Net income attributable to common stock
   
927
   
2,271
   
1,977
   
6,414
 
Less: Net income allocated to participating securities
   
(1
)
 
(4
)
 
(3
)
 
(13
)
Net income attributable to common stock, net of participating securities
 
$
926
 
$
2,267
 
$
1,974
 
$
6,401
 
Weighted average number of basic shares
   
811.8
   
815.3
   
811.1
   
820.1
 
Basic EPS
 
$
1.14
 
$
2.78
 
$
2.43
 
$
7.81
 
                           
Diluted EPS
                         
Net income attributable to common stock, net of participating securities
 
$
926
 
$
2,267
 
$
1,974
 
$
6,401
 
Weighted average number of basic shares
   
811.8
   
815.3
   
811.1
   
820.1
 
Dilutive effect of potentially dilutive securities
   
2.6
   
2.3
   
2.8
   
3.4
 
Total diluted weighted average common shares
   
814.4
   
817.6
   
813.9
   
823.5
 
Diluted EPS
 
$
1.14
 
$
2.77
 
$
2.43
 
$
7.77
 
 
 
17
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Consolidated Results of Operations
 
Occidental (which means Occidental Petroleum Corporation (OPC) and/or one or more entities in which it owns a majority voting interest) reported net income of $2.0 billion for the first nine months of 2009 on net sales of $10.9 billion, compared to net income of $6.4 billion on net sales of $20.2 billion for the same period of 2008.  Diluted earnings per common share (EPS) were $2.43 and $7.77 for the first nine months of 2009 and 2008, respectively.  Occidental reported net income of $927 million for the third quarter of 2009 on net sales of $4.1 billion, compared to net income of $2.3 billion on net sales of $7.1 billion for the same period of 2008.  Diluted EPS were $1.14 for the third quarter of 2009 compared to diluted EPS of $2.77 for the same period in 2008.
 
Net income for the three and nine months ended September 30, 2009, compared to the same periods of 2008, reflected lower crude oil and natural gas prices, lower margins and volumes in the chemical segment and lower margins in the gas processing business, partially offset by higher oil and gas sales volumes and lower operating expenses, and for the three-month periods only, by better results in marketing operations.
 
Net income for the nine months ended September 30, 2009 included after-tax charges of $26 million for severance, $10 million for railcar leases and $5 million for rig termination costs.
 
Unless indicated otherwise, net income and EPS refer to net income attributable to common stock.
 
Selected Income Statement Items
 
The decrease in net sales for the three and nine months ended September 30, 2009, compared to the same periods of 2008, reflected lower oil, gas, caustic soda and polyvinyl chloride prices and lower volumes for chlorine, caustic soda, potassium hydroxide and polyvinyl chloride, partially offset by higher oil and gas sales volumes.
 
The decrease in cost of sales for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was due to lower oil and gas operating costs, lower volumes for chlorine, caustic soda, potassium hydroxide and polyvinyl chloride and lower feedstock and energy costs.
 
The decrease in the provision for domestic and foreign income taxes for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was due to lower income before taxes and reduced effective tax rates which reflect the relinquishment of international exploration contracts.
 
Selected Analysis of Financial Position
 
See “Liquidity and Capital Resources” for discussion about the change in cash and cash equivalents.  The decrease in marketing, trading assets and other was due to lower receivables from derivative financial instruments, joint ventures and collection of federal tax receivables.  The increase in investments in unconsolidated entities was due to the equity income from the unconsolidated investments and an investment in a pipeline network, offset by dividends received from the unconsolidated entities. The increase in property, plant and equipment was due to capital expenditures, partially offset by depreciation, depletion and amortization.
 
The decrease in current maturities of long-term debt and notes payable as of September 30, 2009, compared to December 31, 2008, was due to the retirement of the $600 million debt associated with the Dolphin Project, partially offset by the maturities of the 4.25-percent medium-term senior notes in the first quarter of 2010.  The decrease in accounts payable and accrued liabilities was due to lower operating costs.  The increase in long-term debt, net, was attributable to the second quarter issuance of $750 million of 4.125-percent senior unsecured notes due on June 1, 2016, partially offset by the maturities of the 4.25-percent medium-term senior notes due in the first quarter of 2010. The increase in stockholders’ equity reflected net income for the first nine months of 2009, partially offset by dividend payments.
 
 
18
 
 
 
Segment Operations
 
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, natural gas liquids (NGLs), condensate and natural gas.  The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals.  The midstream and marketing segment gathers, treats, processes, transports, stores, trades and markets crude oil, natural gas, NGLs, condensate and carbon dioxide (CO2) and generates and markets power.
 
Segment earnings generally exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from the segments’ equity investments.  Seasonality is not a primary driver of changes in Occidental’s consolidated quarterly earnings during the year.
 
The following table sets forth the sales and earnings of each operating segment and corporate items for the three and nine months ended September 30, 2009 and 2008 (in millions):
 
   
Periods Ended September 30
 
   
Three Months
 
Nine Months
 
     
2009
   
2008
   
2009
   
2008
 
Net Sales(a)
                         
Oil and Gas
 
$
3,089
 
$
5,422
 
$
7,952
 
$
15,441
 
Chemical
   
842
   
1,454
   
2,445
   
4,107
 
Midstream, Marketing and Other
   
285
   
381
   
763
   
1,204
 
Eliminations
   
(112
)
 
(197
)
 
(296
)
 
(556
)
   
$
4,104
 
$
7,060
 
$
10,864
 
$
20,196
 
Segment Earnings (b)
                         
Oil and Gas (c)
 
$
1,464
 
$
3,618
 
$
3,092
 
$
10,312
 
Chemical
   
72
   
219
   
356
   
542
 
Midstream, Marketing and Other
   
77
   
 66
   
154
   
350
 
     
1,613
   
3,903
   
3,602
   
11,204
 
                           
Unallocated Corporate Items
                         
Interest expense, net (b)
   
(33
)
 
(3
)
 
(76
)
 
(10
)
Income taxes
   
(549
)
 
(1,546
)
 
(1,245
)
 
(4,511
)
Other expense, net (b)
   
(102
)
 
(82
)
 
(297
)
 
(292
)
                           
Income from continuing operations (c)
   
929
   
2,272
   
1,984
   
6,391
 
Discontinued operations, net  (b)
   
(2
)
 
(1
)
 
(7
)
 
23
 
Net income (c)
 
$
927
 
$
2,271
 
$
1,977
 
$
6,414
 

(a)
Intersegment sales are generally made at prices approximately equal to those that the selling entity is able to obtain in third-party transactions.
 
(b)
Refer to “Significant Items Affecting Earnings,” “Oil and Gas Segment,” “Chemical Segment,” “Midstream, Marketing and Other Segment” and “Corporate” discussions that follow.
 
(c)
Represents amounts attributable to common stock shown after deducting noncontrolling interest amounts of $14 million and $38 million for the three months ended September 30, 2009 and 2008, respectively, and $35 million and $104 million for the nine months ended September 30, 2009 and 2008, respectively.
 

 
 
19
 
 
 
Significant Items Affecting Earnings
 
The following table sets forth, for the three and nine months ended September 30, 2009 and 2008, the effects of significant transactions and events affecting Occidental’s earnings that vary widely and unpredictably in nature, timing and amount (in millions):
 
   
Periods Ended September 30
 
   
Three Months
 
Nine Months
 
     
2009
   
2008
   
2009
   
2008
 
Oil & Gas
                         
Rig terminations
 
$
 
$
 
$
(8
)
$
 
Total Oil and Gas
 
$
 
$
 
$
(8
)
$
 
                           
Chemical
                         
No significant items affecting earnings
 
$
 
$
 
$
 
$
 
Total Chemical
 
$
 
$
 
$
 
$
 
                           
Midstream, Marketing and Other
                         
No significant items affecting earnings
 
$
 
$
 
$
 
$
 
Total Midstream, Marketing and Other
 
$
 
$
 
$
 
$
 
                           
Corporate
                         
Severance accrual
 
$
 
$
 
$
(40
)
$
 
Railcar leases
   
   
   
(15
)
 
 
Tax effect of pre-tax adjustments
   
   
   
22
   
 
Discontinued operations, net*
   
(2
)
 
(1
)
 
(7
)
 
23
 
Total Corporate
 
$
(2
)
$
(1
)
$
(40
)
$
23
 
Total
 
$
(2
)
$
(1
)
$
(48
)
$
23
 
*Amounts shown after tax.
 
 
20
 
 
 
 
Worldwide Effective Tax Rate
 
The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations for the three and nine months ended September 30, 2009 and 2008 (in millions):
 
 
   
Periods Ended September 30
 
   
Three Months
 
Nine Months
 
     
2009
   
2008
   
2009
   
2008
 
Oil & Gas earnings (a)(b)
 
$
1,464
 
$
3,618
 
$
3,092
 
$
10,312
 
Chemical earnings
   
72
   
219
   
356
   
542
 
Midstream, Marketing and Other earnings
   
77
   
66
   
154
   
350
 
Unallocated corporate items
   
(135
)
 
( 85
)
 
(373
)
 
(302
)
Pre-tax income (b)
   
1,478
   
3,818
   
3,229
   
10,902
 
                           
Income tax expense
                         
Federal and state
   
189
   
716
   
349
   
2,123
 
Foreign (a)
   
360
   
830
   
896
   
2,388
 
Total
   
549
   
1,546
   
1,245
   
4,511
 
                           
Income from continuing operations (b)
 
$
929
 
$
2,272
 
$
1,984
 
$
6,391
 
                           
Worldwide effective tax rate
   
37%
   
40%
   
39%
   
41%
 

(a)
Oil and gas pre-tax income and income tax expense include income taxes owed by Occidental but paid by governmental entities on its behalf of $338 million and $730 million for the three months ended September 30, 2009 and 2008, respectively, and $827 million and $1,801 million for the nine months ended September 30, 2009 and 2008, respectively.
 
(b)
Represents amounts after deducting noncontrolling interest amounts of $14 million and $38 million for the three months ended September 30, 2009 and 2008, respectively, and $35 million and $104 million for the nine months ended September 30, 2009 and 2008, respectively.
 
 
 
21
 
 
 
Oil and Gas Segment
 
The following tables set forth the sales volumes and production of oil and liquids and natural gas per day for the three and nine months ended September 30, 2009 and 2008.  The difference between the sales volumes and production per day is generally due to the timing of shipments at Occidental’s international locations where product is loaded onto tankers.  Sales at these locations are not recognized until title passes, which generally occurs when a tanker is loaded.
 
   
Periods Ended September 30
 
   
Three Months
 
Nine Months
 
Sales Volumes per Day
   
2009
   
2008
   
2009
   
2008
 
Oil and Liquids (MBBL)
                         
United States
   
269
   
261
   
271
   
260
 
Middle East/North Africa
   
132
   
117
   
139
   
127
 
Latin America
   
74
   
81
   
83
   
75
 
                           
Natural Gas (MMCF)
                         
United States
   
653
   
570
   
632
   
584
 
Middle East
   
230
   
190
   
241
   
200
 
Latin America
   
45
   
45
   
47
   
40
 
                           
Barrels of Oil Equivalent (MBOE) per day (a)
                         
Consolidated subsidiaries
   
630
   
593
   
646
   
599
 
Other interests
   
(2
)
 
(5
)
 
(3
)
 
(5
)
Worldwide sales volumes
   
628
   
588
   
643
   
594
 
                           
Production per Day
                         
Oil and Liquids (MBBL)
                         
United States
   
269
   
261
   
271
   
260
 
Middle East/North Africa
   
136
   
118
   
140
   
127
 
Latin America
   
74
   
82
   
82
   
76
 
                           
Natural Gas (MMCF)
                         
United States
   
653
   
570
   
632
   
584
 
Middle East
   
230
   
190
   
241
   
200
 
Latin America
   
45
   
45
   
47
   
40
 
                           
Barrels of Oil Equivalent (MBOE) per day (a)
                         
Consolidated subsidiaries
   
634
   
595
   
646
   
600
 
Other interests
   
(2
)
 
(4
)
 
(3
)
 
(4
)
Worldwide production
   
632
   
591
   
643
   
596
 

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

 
22
 
 
 
   
Periods Ended September 30
 
   
Three Months
 
Nine Months
 
Average Sales Prices
   
2009
   
2008
   
2009
   
2008
 
Crude Oil ($/BBL)
                         
United States
 
$
63.37
 
$
109.50
 
$
52.04
 
$
104.82
 
Middle East/North Africa
 
$
66.04
 
$
114.11
 
$
53.55
 
$
106.81
 
Latin America
 
$
55.40
 
$
77.76
 
$
46.51
 
$
78.23
 
Total consolidated subsidiaries
 
$
62.72
 
$
104.26
 
$
51.41
 
$
100.41
 
Other interests
 
$
71.18
 
$
94.17
 
$
57.61
 
$
110.39
 
Worldwide
 
$
62.79
 
$
104.15
 
$
51.44
 
$
100.39
 
                           
Natural Gas ($/MCF)
                         
United States
 
$
3.04
 
$
9.35
 
$
3.15
 
$
9.18
 
Latin America
 
$
2.87
 
$
4.40
 
$
3.04
 
$
4.22