10-Q 1 form10q-20112q.htm FORM 10-Q form10q-20112q.htm
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________
 

Commission file number 1-9210
_____________________
 
OCCIDENTAL PETROLEUM CORPORATION
 
(Exact name of registrant as specified in its charter)
   
Delaware
95-4035997
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
10889 Wilshire Boulevard
 
Los Angeles, California
90024
(Address of principal executive offices)
(Zip Code)
 
(310) 208-8800
(Registrant’s telephone number, including area code)
_____________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     R Yes   £ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     R Yes   £ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See definition of "accelerated filer", "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act):

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

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

 
Class
  Outstanding at June 30, 2011
 
 
Common stock $.20 par value
  812,770,675 shares  
 
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES


TABLE OF CONTENTS




       
PAGE
         
Part I
Financial Information
 
         
 
Item 1.
Financial Statements (unaudited)
 
         
   
Consolidated Condensed Balance Sheets —
 
     
June 30, 2011 and December 31, 2010
2
         
   
Consolidated Condensed Statements of Income —
 
     
Three and six months ended June 30, 2011 and 2010
4
         
   
Consolidated Condensed Statements of Cash Flows —
 
     
Six months ended June 30, 2011 and 2010
5
         
   
Notes to Consolidated Condensed Financial Statements
6
         
 
Item 2.
Management’s Discussion and Analysis of Financial
 
     
Condition and Results of Operations
19
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
         
 
Item 4.
Controls and Procedures
28
         
Part II
Other Information
 
         
 
Item 1.
Legal Proceedings
29
         
 
Item 2.
Share Repurchase Activities
29
         
 
Item 6.
Exhibits
30
 
 
 
1
 
 
 
 
PART I    FINANCIAL INFORMATION


Item 1.
Financial Statements (unaudited)

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

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

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

 
3
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Amounts in millions, except per-share amounts)

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

 
4
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Amounts in millions)

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

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

June 30, 2011

1.
General
   
 
In these unaudited consolidated condensed financial statements, "Occidental" means Occidental Petroleum Corporation, a Delaware corporation (OPC), and/or one or more entities in which it owns a majority voting interest (subsidiaries). Occidental has made its disclosures in accordance with United States generally accepted accounting principles as they apply to interim reporting, and condensed or omitted, as permitted by the Securities and Exchange Commission’s rules and regulations, certain information and disclosures normally included in consolidated financial statements and the notes.  The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2010.
   
 
In the opinion of Occidental’s management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Occidental’s consolidated financial position as of June 30, 2011, and the consolidated statements of income and cash flows for the three and six months ended June 30, 2011 and 2010, as applicable. The income and cash flows for the periods ended June 30, 2011 and 2010 are not necessarily indicative of the income or cash flows to be expected for the full year.
   
 
Certain financial statement balances and notes for the prior year have been reclassified to conform to the 2011 presentation.
   
2.
Asset Acquisitions, Dispositions and Other Transactions
   
 
During the six months ended June 30, 2011, Occidental paid approximately $3.4 billion for domestic acquisitions, which included oil and gas properties in South Texas, California and the Permian Basin.
   
 
In the first quarter of 2011, Occidental acquired a 40-percent participating interest in Al Hosn, the high sulfur gas development project of the Shah Field in Abu Dhabi.  Occidental partnered with the Abu Dhabi National Oil Company in a 30-year joint venture agreement for the $10 billion project, of which Occidental’s portion is approximately $4 billion.  In May 2011, Occidental paid approximately $500 million for its share of development expenditures incurred by the project prior to the date the final agreement was signed.
   
 
In March 2011, Occidental redeemed all of its $1.0 billion 7-percent senior notes due 2013 and all of its $368 million 6.75-percent senior notes due 2012.  Occidental recorded a $163 million pre-tax charge related to this redemption in the first quarter of 2011.
   
 
In March 2011, Occidental borrowed $1.0 billion for short-term cash needs, all of which was repaid in April 2011.  In June 2011, Occidental borrowed $500 million for short-term cash needs, all of which was repaid in July 2011.
   
 
In December 2010, Occidental executed an agreement with a subsidiary of China Petrochemical Corporation (Sinopec) to sell its Argentine oil and gas operations for after-tax proceeds of approximately $2.6 billion.  Occidental recorded a pre-tax gain of $225 million when the sale closed in February 2011.  Net revenues and pre-tax income for discontinued operations related to Argentina were $97 million and $2 million for the six months ended June 30, 2011, while there were no revenues and pre-tax income for the three months ended June 30, 2011.  Net revenues and pre-tax losses for such discontinued operations were respectively $158 million and $17 million for the three months ended June 30, 2010, and $313 million and $60 million for the six months ended June 30, 2010.  As of June 30, 2011 and December 31, 2010, the assets of discontinued operations related to Argentina were $0 and $2.9 billion, respectively, which were mainly comprised of property, plant and equipment as of December 31, 2010.  As of December 31, 2010, the liabilities of discontinued operations were $513 million, which mainly comprised deferred tax liabilities and accrued liabilities.
 

 
6
 
 
 
 

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

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

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

7
 
 
 
 

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

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

7.
Environmental Liabilities and Expenditures
   
 
Occidental’s operations are subject to stringent federal, state, local and foreign laws and regulations relating to improving or maintaining environmental quality.  Occidental’s environmental compliance costs have generally increased over time and could continue to rise in the future.  Occidental factors environmental expenditures for its operations into its business planning process as an integral part of producing quality products responsive to market demand.
   
 
The laws that require or address environmental remediation, including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar federal, state, local and foreign laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites.  OPC or certain of its subsidiaries participate in or actively monitor a range of remedial activities and government or private proceedings under these laws with respect to alleged past practices at operating, closed and third-party sites.  Remedial activities may include one or more of the following:  investigation involving sampling, modeling, risk assessment or monitoring; cleanup measures including removal, treatment or disposal; or operation and maintenance of remedial systems.  The environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs.
   
 
As of June 30, 2011, Occidental participated in or monitored remedial activities or proceedings at 168 sites.  The following table presents Occidental’s environmental remediation reserves as of June 30, 2011, the current portion of which is included in accrued liabilities ($78 million) and the remainder in deferred credits and other liabilities – other ($285 million).  The reserves are grouped as environmental remediation sites listed or proposed for listing by the U.S. Environmental Protection Agency on the CERCLA National Priorities List (NPL sites) and three categories of non-NPL sites — third-party sites, Occidental-operated sites and closed or non-operated Occidental sites.

     
Number of Sites
 
Reserve Balance (in millions)
 
NPL sites
   
38
     
$
55
 
 
Third-party sites
   
80
       
97
 
 
Occidental-operated sites
   
21
       
117
 
 
Closed or non-operated Occidental sites
   
29
       
94
 
 
Total
   
168
     
$
363
 
 

 
8
 
 
 
 

 
As of June 30, 2011, Occidental’s environmental reserves exceeded $10 million at 11 of the 168 sites described above, and 119 of the sites had reserves from $0 to $1 million each.  Occidental expects to expend funds corresponding to approximately half of the current environmental reserves over the next four years and the balance over the subsequent ten or more years.  Occidental believes its range of reasonably possible additional loss beyond those liabilities recorded for environmental remediation at the sites described above could be up to $375 million.  The status of Occidental’s involvement with the sites and related significant assumptions have not changed materially since December 31, 2010.  For management’s opinion with respect to environmental matters, refer to Note 8.
   
8.
Lawsuits, Claims, Commitments, Contingencies and Related Matters
   
 
OPC or certain of its subsidiaries are named, in the normal course of business, in lawsuits, claims and other legal proceedings that seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.  OPC or certain of its subsidiaries also have been named in proceedings under CERCLA and similar federal, state, local and foreign environmental laws.  These environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties and injunctive relief; however, Occidental is usually one of many companies in these proceedings and has to date been successful in sharing response costs with other financially sound companies.  The ultimate amount of losses and the timing of any such losses that Occidental may incur resulting from currently outstanding lawsuits, claims and proceedings cannot be determined reliably at this time.  Occidental accrues reserves for all of these matters when it is probable that a liability has been incurred and the liability can be reasonably estimated.  Reserve balances as of June 30, 2011 and December 31, 2010 were not material to Occidental's consolidated balance sheets.  Occidental also evaluates the amount of reasonably possible additional losses that it could incur as a result of the matters mentioned above.  Occidental has disclosed its range of reasonably possible losses for sites where it is a participant in environmental remediation.  Occidental believes that other reasonably possible additional losses that it could incur in excess of reserves accrued on the balance sheet would not be material to its consolidated financial position or results of operations.
   
 
During the course of its operations, Occidental is subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions.  While the audits of corporate tax returns for taxable years through 2008 have concluded for U.S. federal income tax purposes, the 2009 through 2011 taxable years are currently under review by the U.S. Internal Revenue Service pursuant to its Compliance Assurance Program.  Taxable years from 2000 through the current year remain subject to examination by foreign and state government tax authorities in certain jurisdictions.  In certain of these jurisdictions, tax authorities are in various stages of auditing Occidental’s income taxes.  During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law.  Occidental believes that the resolution of outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations.
   
 
Occidental has indemnified various parties against specified liabilities that those parties might incur in the future in connection with purchases and other transactions that they have entered into with Occidental.  These indemnities usually are contingent upon the other party incurring liabilities that reach specified thresholds.  As of June 30, 2011, Occidental is not aware of circumstances that it believes would reasonably be expected to lead to future indemnity claims against it in connection with these transactions that would result in payments materially in excess of reserves.
 

 
9
 
 
 
 

9.
Retirement Plans and Postretirement Benefits
   
 
The following table sets forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and postretirement benefit plans for the three and six months ended June 30, 2011 and 2010 (in millions):

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

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


 
Occidental contributed $2 million and $3 million in the three-month periods ended June 30, 2011 and 2010, respectively, and $4 million and $5 million in the six-month periods ended June 30, 2011 and 2010, respectively, to its defined benefit pension plans.
     
10.
Fair Value Measurements
     
 
Occidental has categorized its assets and liabilities that are measured at fair value, based on the priority of the inputs to the valuation techniques, in a three-level fair value hierarchy: Level 1 – using quoted prices in active markets for identical assets or liabilities; Level 2 – using observable inputs other than quoted prices; and Level 3 – using unobservable inputs.  Transfers between levels, if any, are recognized at the end of each reporting period.
     
 
Fair Values – Recurring
 
Occidental primarily applies the market approach for recurring fair value measurements, maximizes its use of observable inputs and minimizes its use of unobservable inputs. Occidental utilizes the mid-point price between bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value. In addition to using market data, Occidental makes assumptions in valuing its assets and liabilities, including assumptions about the risks inherent in the inputs to the valuation technique.  For assets and liabilities carried at fair value, Occidental measures fair value using the following methods:
     
   
Trading securities – Quoted prices in active markets exist and are used to provide fair values for these instruments. These securities are classified as Level 1.
 

 
10
 
 
 
 

   
Commodity derivatives – Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date.  These derivatives are classified as Level 1. Over-the-Counter (OTC) financial commodity contracts, options and physical commodity forward purchase and sale contracts are generally valued using quotations provided by brokers or industry-standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility factors, credit risk and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable prices at which transactions are executed in the marketplace. Occidental classifies these measurements as Level 2.
     
 
Occidental generally uses an income approach to measure fair value when there is not a market-observable price for an identical or similar asset or liability.  This approach utilizes management’s assumptions regarding expectations of projected cash flows, and discounts the expected cash flows using a commensurate risk-adjusted discount rate.
     
 
The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of June 30, 2011 and December 31, 2010 (in millions):

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

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

 
11
 
 
 
 
 
 
Fair Values - Nonrecurring
 
During the three and six months ended June 30, 2011 and 2010, Occidental did not have any assets or liabilities measured at fair value on a non-recurring basis.
   
 
Other Financial Instruments
 
The carrying amounts of cash and cash equivalents and other on-balance-sheet financial instruments, other than fixed-rate debt, approximate fair value.  The cost, if any, to terminate off-balance-sheet financial instruments is not significant.  Occidental estimates the fair value of fixed-rate debt based on the quoted market prices for those instruments or on quoted market yields for similarly rated debt instruments, taking into account such similar instruments’ maturities.  The estimated fair values of Occidental’s debt, as of June 30, 2011 and December 31, 2010, were approximately $4.5 billion and $5.5 billion, respectively, compared to carrying values of $4.2 billion and $5.1 billion, respectively.
   
11.
Derivatives
   
 
Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.  Occidental applies hedge accounting when transactions meet specified criteria for such treatment and management elects to do so. If a derivative does not qualify or is not designated and documented as a cash-flow hedge, any fair value gains or losses are recognized in earnings in the current period.
   
 
Through its marketing and trading activities and within its established policy controls and procedures, Occidental uses derivative instruments, including a combination of short-term futures, forwards, options and swaps, to improve realized prices for its crude oil, gas and natural gas liquids (NGL). Additionally, Occidental, through its Phibro trading unit, engages in trading activities using derivatives for the purpose of generating profits mainly from market price changes of commodities. Occidental has also used derivatives to reduce its exposure to price volatility on a small portion of its crude oil and gas production.
   
 
Cash-Flow Hedges
 
As of June 30, 2011 and December 31, 2010, Occidental held a series of collar agreements that qualify as cash-flow hedges for the sale of approximately 3 percent of its crude oil production.  These agreements are for existing domestic production and continue to the end of 2011.  The following table presents the daily quantities and weighted-average strike prices of Occidental's collar positions as of June 30, 2011 and December 31, 2010:

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

 
In 2009, Occidental entered into financial swap agreements related to the sale of a portion of its natural gas production from the Rocky Mountain region of the United States that qualify as cash-flow hedges. The following table presents the daily quantities and weighted-average prices that will be received by Occidental as of June 30, 2011 and December 31, 2010:

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

12
 
 
 
 

 
Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s North American leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These agreements continue through March 31, 2012.  As of June 30, 2011 and December 31, 2010, Occidental had approximately 11 billion cubic feet and 28 billion cubic feet of natural gas held in storage, respectively. As of June 30, 2011 and December 31, 2010, Occidental had cash-flow hedges for the forecasted sale, to be settled by physical delivery, of approximately 5 billion cubic feet and 24 billion cubic feet of this natural gas held in storage, respectively.
 
     
 
The following table presents the pre-tax gains and losses recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the three and six months ended June 30, 2011 and 2010 (in millions):
 

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

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

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

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

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

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

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

 
14
 
 
 
 

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

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

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

 
(a)
The above fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheet.
 
 
(b)
As of June 30, 2011, collateral received of $45 million has been netted against derivative assets and collateral paid of $74 million has been netted against derivative liabilities.
 
 
(c)
As of December 31, 2010, collateral received of $39 million has been netted against derivative assets and collateral paid of $95 million has been netted against derivative liabilities.
 

 
See Note 10 for fair value measurement disclosures on derivatives.
 
 
 

15
 
 
 
 

 
Credit Risk
 
A majority of Occidental’s derivative transaction volume is executed through exchange-traded contracts, which are subject to nominal credit risk as a significant portion of these transactions are executed on a daily margin basis.  Collateral of $64 million and $154 million deposited by Occidental for such contracts with clearing houses and brokers, which has not been reflected in the derivative fair value tables, is included in the marketing and trading assets and other balance as of June 30, 2011 and December 31, 2010, respectively.
   
 
In addition, Occidental executes a portion of its derivative transactions in the over-the-counter (OTC) market.  Occidental is subject to counterparty credit risk to the extent the counterparty to the derivatives is unable to meet its settlement commitments.  Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by spreading the credit risk among many such counterparties, by entering into master netting arrangements with the counterparties and by requiring collateral, as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments to reflect counterparty risk, if necessary.  Certain of Occidental's OTC derivative instruments contain credit risk contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each would need to post.  As of June 30, 2011 and December 31, 2010, Occidental had a net liability of $66 million and $234 million, respectively, for which the amount of collateral posted was $35 million and $10 million, respectively.  Occidental believes that if it had received a one-notch reduction in its credit ratings, it would not have resulted in a material change in its collateral-posting requirements as of June 30, 2011 and December 31, 2010.
   
12.
Industry Segments
   
 
Occidental conducts its continuing operations through three segments: (1) oil and gas; (2) chemical; and (3) midstream, marketing and other (midstream and marketing).  The oil and gas segment explores for, develops, produces and markets crude oil, NGL and condensate (collectively “liquids”), and natural gas.  The chemical segment manufactures and markets basic chemicals, vinyls and other chemicals.  The midstream and marketing segment gathers, treats, processes, transports, stores, purchases and markets liquids, natural gas, carbon dioxide (CO2) and power.  It also trades around its assets, including pipelines and storage capacity, and trades oil and gas, other commodities and commodity-related securities.
   
 
Earnings of industry segments generally exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from segment equity investments.
 

 
16
 
 
 
 

 
The following table presents Occidental’s industry segment and corporate disclosures (in millions):
 
 
             
Midstream,
 
Corporate
     
             
Marketing
 
and
     
     
Oil and Gas
 
Chemical
 
and Other
 
Eliminations
 
Total
 
 
Six months ended
                               
 
June 30, 2011
                               
                                   
 
Net sales
 
$
8,958
 
$
2,490
 
$
853
 
$
(402
) (a)
$
11,899
 
                                   
 
Pretax operating profit (loss)
 
$
5,092
 
$
472
 
$
301
 
$
(476
) (b)
$
5,389
 
 
Income taxes
   
   
   
   
(2,165
) (c)
 
(2,165
)
 
Discontinued operations, net
   
   
   
   
142
   (d)
 
142
 
 
Net income (loss) attributable to common stock
 
$
5,092
 
$
472
 
$
301
 
$
(2,499
)
$
3,366
 
                                   
 
Six months ended
                               
 
June 30, 2010
                               
                                   
 
Net sales
 
$
7,009
 
$
1,969
 
$
605
 
$
(364
) (a)
$
9,219
 
                                   
 
Pretax operating profit (loss)
 
$
3,764
 
$
138
 
$
107
 
$
(244
) (b)
$
3,765
 
 
Income taxes
   
   
   
   
(1,555
) (c)
 
(1,555
)
 
Discontinued operations, net
   
   
   
   
(47
)
 
(47
)
 
Net income attributable to noncontrolling interest
   
(36
)
 
   
   
   
(36
)
 
Net income (loss) attributable to common stock
 
$
3,728
 
$
138
 
$
107
 
$
(1,846
)
$
2,127
 
 
 
(a)
Intersegment sales eliminate upon consolidation and are generally made at prices approximating those that the selling entity is able to obtain in third-party transactions.
 
 
(b)
Includes net interest expense (including the early debt extinguishment costs of $163 million for the six months ended June 30, 2011), administration expense, environmental remediation and other pre-tax items.
 
 
(c)
Includes all foreign and domestic income taxes from continuing operations.
 
 
(d)
Reflects the after-tax gain from the sale of the Argentine operations.
 
 
 
 
17
 
 
 
 

13.
Earnings Per Share
 
     
 
Occidental’s instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are considered participating securities prior to vesting, and, therefore, have been included in the earnings allocations in computing basic and diluted EPS under the two-class method.
 
     
 
Basic EPS was computed by dividing net income attributable to common stock, net of income attributable to participating securities, by the weighted-average number of common shares outstanding during each period, net of treasury shares and including vested but unissued shares and share units. The computation of diluted EPS further reflected the dilutive effect of stock options and unvested stock awards.
 
     
 
The following table presents the calculation of basic and diluted EPS for the three and six months ended June 30, 2011 and 2010:
 

     
Periods Ended June 30
 
     
Three months
 
Six months
 
 
(in millions, except per-share amounts)
   
2011
   
2010
   
2011
   
2010
 
 
Basic EPS
                         
 
Income from continuing operations
 
$
1,819
 
$
1,089
 
$
3,224
 
$
2,210
 
 
Less: Income from continuing operations attributable to noncontrolling interest
   
   
(12
)
 
   
(36
)
 
Income from continuing operations attributable to common stock
   
1,819
   
1,077
   
3,224
   
2,174
 
 
Discontinued operations, net
   
(2
)
 
(14
)
 
142
   
(47
)
 
Net income attributable to common stock
   
1,817
   
1,063
   
3,366
   
2,127
 
 
Less: Net income allocated to participating securities
   
(3
)
 
(1
)
 
(6
)
 
(3
)
 
Net income attributable to common stock, net of participating securities
 
$
1,814
 
$
1,062
 
$
3,360
 
$
2,124
 
 
Weighted average number of basic shares
   
812.5
   
812.6
   
812.5
   
812.3
 
 
Basic EPS
 
$
2.23
 
$
1.31
 
$
4.14
 
$
2.61
 
                             
 
Diluted EPS
                         
 
Net income attributable to common stock, net of participating securities
 
$
1,814
 
$
1,062
 
$
3,360
 
$
2,124
 
 
Weighted average number of basic shares
   
812.5
   
812.6
   
812.5
   
812.3
 
 
Dilutive effect of potentially dilutive securities
   
0.8
   
1.2
   
0.8
   
1.4
 
 
Total diluted weighted average common shares
   
813.3
   
813.8
   
813.3
   
813.7
 
 
Diluted EPS
 
$
2.23
 
$
1.31
 
$
4.13
 
$
2.61
 
 
 

18
 
 
 
 

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 $1.8 billion for the second quarter of 2011 on net sales of $6.2 billion, compared to net income of $1.1 billion on net sales of $4.6 billion for the same period of 2010.  Diluted earnings per share (EPS) were $2.23 for the second quarter of 2011, compared to $1.31 for the same period of 2010.  Occidental reported net income of $3.4 billion for the first six months of 2011 on net sales of $11.9 billion, compared to net income of $2.1 billion on net sales of $9.2 billion for the same period of 2010.  Diluted EPS were $4.13 and $2.61 for the first six months of 2011 and 2010, respectively.
 
Net income for the three and six months ended June 30, 2011, compared to the same periods of 2010, reflected higher worldwide crude oil and NGL prices, higher margins and volumes across most chemical products and higher margins in the marketing business, while the increase for the six months also reflected higher margins in the trading business.
 
Net income for the six months ended June 30, 2011 included net after-tax charges of $46 million.  These items included pre-tax gains of $225 million from the sale of the Argentine operations and $22 million from the sale of an interest in a Colombian pipeline.  Pre-tax charges included $163 million related to the early redemption of $1.4 billion face value of debt, a $35 million write-off of the entire accumulated cost of exploration properties in Libya and non-recurring charges for state and foreign taxes of $62 million.
 
Unless indicated otherwise, net income and EPS reflect net income attributable to common stock.
 
Selected Income Statement Items
 
The increase in net sales for the three and six months ended June 30, 2011, compared with the same periods of 2010, reflected higher prices and margins in all segments as well as higher chemical volumes.  The increase in net sales for the six-month periods also included higher oil and gas sales volumes.
 
The increase in cost of sales for the three and six months ended June 30, 2011, compared with the same periods of 2010, reflected higher oil and gas operating costs, including workovers and maintenance activity and higher support costs.  The increase in interest and debt expense, net, for the six-month periods was mainly due to the $163 million early debt extinguishment charge recorded in the first quarter of 2011.
 
The increase in provision for domestic and foreign income taxes for the three and six months ended June 30, 2011, compared with the same periods of 2010, reflected higher pre-tax income, partially offset by lower effective tax rates.  The lower tax rates are due to higher proportionate domestic income in 2011, compared to 2010.  The income from discontinued operations, net, for the six months ended June 30, 2011, primarily reflected the $144 million after-tax gain recorded from the sale of the Argentine operations.
 
Selected Analysis of Financial Position
 
See “Liquidity and Capital Resources” for discussion about the change in cash and cash equivalents.
 
The increase in trade receivables, net, reflected higher oil and NGL sales prices in the second quarter of 2011, compared to the fourth quarter of 2010.  The decrease in assets of discontinued operations was due to the sale of Occidental’s Argentine operations, which closed in February 2011.  The increase in inventories reflected 2011 production which had not been lifted as of the end of the second quarter and higher third-party marketing activity.  The decrease in prepaid expenses and other reflected the closing of the South Texas acquisition in January 2011, for which a deposit was made in 2010.  The increase in property, plant and equipment, net, reflected capital expenditures of approximately $3 billion and acquisitions of $4.1 billion, partially offset by DD&A.
 

 
19
 
 
 
 
The increase in short-term borrowings reflected $500 million net borrowings for short-term needs, all of which have been repaid.  The increase in accounts payable was primarily due to the increase in the price of crude oil and higher capital expenditures for the second quarter of 2011, compared to the fourth quarter of 2010.  The decrease in accrued liabilities was primarily due to mark-to-market activity for derivative financial instruments.  The decrease in liabilities of discontinued operations was due to the sale of Occidental’s Argentine operations.  The decrease in long-term debt, net, reflected the first quarter 2011 early redemption of $1.4 billion of senior notes.  The increase in deferred and other domestic and foreign income taxes was due to higher capital expenditures.  The increase in stockholder’s equity reflected net income for the first six months of 2011, partially offset by dividend payments.
 
Segment Operations
 
Occidental conducts its continuing operations through three segments: (1) oil and gas; (2) chemical; and (3) midstream and marketing.  The oil and gas segment explores for, develops, produces and markets crude oil, NGL and condensate (collectively “liquids”), and natural gas.  The chemical segment manufactures and markets basic chemicals, vinyls and other chemicals.  The midstream and marketing segment gathers, treats, processes, transports, stores, purchases and markets liquids, natural gas, CO2 and power.  It also trades around its assets, including pipelines and storage capacity, and trades oil and gas, other commodities and commodity-related securities.
 
The following table sets forth the sales and earnings of each operating segment and corporate items for the three and six months ended June 30, 2011 and 2010 (in millions):
 
   
Periods Ended June 30
 
   
Three Months
 
Six Months
 
     
2011
   
2010
 
2011
   
2010
 
Net Sales (a)
                         
Oil and Gas
 
$
4,591
 
$
3,518
 
$
8,958
 
$
7,009
 
Chemical
   
1,325
   
1,013
   
2,490
   
1,969
 
Midstream, Marketing and Other
   
441
   
236
   
853
   
605
 
Eliminations
   
(184
)
 
(164
)
 
(402
)
 
(364
)
   
$
6,173
 
$
4,603
 
$
11,899
 
$
9,219
 
                           
Segment Earnings (b)
                         
Oil and Gas
 
$
2,624
 
$
1,867
 (c)
$
5,092
 
$
3,728
 (c)
Chemical
   
253
   
108
   
472
   
138
 
Midstream, Marketing and Other
   
187
   
13
   
301
   
107
 
     
3,064
   
1,988
   
5,865
   
3,973
 
                           
                           
Unallocated Corporate Items (b)
                         
Interest expense, net
   
(22
)
 
(20
)
 
(236
)
 
(55
)
Income taxes
   
(1,111
)
 
(809
)
 
(2,165
)
 
(1,555
)
Other expense, net
   
(112
)
 
(82
)
 
(240
)
 
(189
)
                           
                           
Income from continuing operations
   
1,819
   
1,077
 (c)
 
3,224
   
2,174
 (c)
Discontinued operations, net (b)
   
(2
)
 
(14
)
 
142
 (d)
 
(47
)
Net income
 
$
1,817
 
$
1,063
 (c)
$
3,366
 
$
2,127
 (c)

(a)
Intersegment sales eliminate upon consolidation and are generally made at prices approximating those that the selling entity is able to obtain in third-party transactions.
 
(b)
Refer to “Significant Transactions and Events 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 $12 million and $36 million for the three- and six-month periods ended June 30, 2010, respectively.
 
(d)
Reflects the after-tax gain from the sale of the Argentine operations.
 
 

 
20
 
 
 
 

Significant Transactions and Events Affecting Earnings
 
   
The following table sets forth, for the three and six months ended June 30, 2011 and 2010, 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 June 30
 
   
Three Months
 
Six Months
 
     
2011
   
2010
   
2011
   
2010
 
Oil & Gas
                         
Libya exploration write-off
 
$
 
$
 
$
(35
)
$
 
Gains on sale of Colombian pipeline interest
   
   
   
22
   
 
Foreign tax
   
   
   
(29
)
 
 
Total Oil and Gas
 
$
 
$
 
$
(42
)
$
 
Chemical
                         
No significant items affecting earnings
 
$
 
$
 
$
 
$
 
Total Chemical
 
$
 
$
 
$
 
$
 
Midstream, Marketing and Other
                         
No significant items affecting earnings
 
$
 
$
 
$
 
$
 
Total Midstream, Marketing and Other
 
$
 
$
 
$
 
$
 
Corporate
                         
Premium on debt extinguishments
 
$
 
$
 
$
(163
)
$
 
State income tax charge
   
   
   
(33
)
 
 
Tax effect of pre-tax adjustments
   
   
   
50
   
 
Discontinued operations, net*
   
(2
)
 
(14
)
 
142
 
`
(47
)
Total Corporate
 
$
(2
)
$
(14
)
$
(4
)
$
(47
)
Total
 
$
(2
)
$
(14
)
$
(46
)
$
(47
)
 
*Amounts shown after tax.
 

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

   
Periods Ended June 30
 
   
Three Months
 
Six Months
 
     
2011
   
2010
   
2011
   
2010
 
Oil & Gas earnings
 
$
2,624
 
$
1,867
 
$
5,092
 
$
3,728
 
Chemical earnings
   
253
   
108
   
472
   
138
 
Midstream, Marketing and Other earnings
   
187
   
13
   
301
   
107
 
Unallocated corporate items
   
(134
)
 
(102
)
 
(476
)
 
(244
)
Pre-tax income
   
2,930
   
1,886
   
5,389
   
3,729
 
                           
Income tax expense
                         
Federal and state
   
557
   
329
   
927
   
636
 
Foreign
   
554
   
480
   
1,238
   
919
 
Total
   
1,111
   
809
   
2,165
   
1,555
 
                           
Income from continuing operations
 
$
1,819
 
$
1,077
 
$
3,224
 
$
2,174
 
                           
Worldwide effective tax rate
   
38%
   
43%
   
40%
   
42%
 
 
 

21
 
 
 
 
Oil and Gas Segment

The following tables set forth the sales and production volumes of crude oil, NGL and natural gas per day for the three and six months ended June 30, 2011 and 2010.  The differences between the sales volumes and production per day are generally due to the timing of shipments at Occidental’s international locations where product is loaded onto tankers.  In addition, Occidental has not had a lifting in Iraq as of June 30, 2011, but expects to have a lifting in the third quarter of 2011.
 
   
Periods Ended June 30
   
Three Months
 
Six Months
Sales Volumes per Day
   
2011
   
2010
   
2011
   
2010
Crude Oil (MBBL)
                       
United States
   
226
   
217
   
224
   
219
Middle East/North Africa
   
167
   
204
   
189
   
193
Latin America (a,b)
   
30
   
31
   
31
   
35
                         
NGL (MBBL)
                       
United States
   
71
   
52
   
65
   
50
Middle East/North Africa
   
11
   
15
   
10
   
13
                         
Natural Gas (MMCF)
                       
United States
   
761
   
681
   
748
   
678
Middle East/North Africa
   
424
   
444
   
421
   
445
Latin America (b)
   
16
   
15
   
16
   
13
Total sales volumes (MBOE) (a,b,c)
   
705
   
709
   
717
   
700