10-Q 1 form10q-20120630.htm FORM 10-Q form10q-20120630.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, 2012
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, 2012
 
 
Common stock $.20 par value
  809,947,385 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, 2012 and December 31, 2011
2
         
   
Consolidated Condensed Statements of Income —
 
     
Three and six months ended June 30, 2012 and 2011
4
         
   
Consolidated Condensed Statements of Comprehensive Income —
 
     
Three and six months ended June 30, 2012 and 2011
5
         
   
Consolidated Condensed Statements of Cash Flows —
 
      Six months ended June 30, 2012 and 2011 6
         
   
Notes to Consolidated Condensed Financial Statements
7
         
 
Item 2.
Management’s Discussion and Analysis of Financial
 
     
Condition and Results of Operations
19
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27
         
 
Item 4.
Controls and Procedures
28
         
Part II
Other Information
 
         
 
Item 1.
Legal Proceedings
29
         
 
Item 2.
Share Repurchase Activities
29
         
  Item 4. Mine Safety Disclosures 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, 2012 AND DECEMBER 31, 2011
(Amounts in millions)

     
2012
   
2011
 
               
ASSETS
             
               
CURRENT ASSETS
             
               
Cash and cash equivalents
 
$
4,410
 
$
3,781
 
               
Trade receivables, net
   
4,959
   
5,395
 
               
Marketing and trading assets and other
   
911
   
  916
 
               
Inventories
   
1,499
   
1,069
 
               
Prepaid expenses and other
   
354
   
381
 
               
Total current assets
   
12,133
   
11,542
 
               
INVESTMENTS IN UNCONSOLIDATED ENTITIES
   
1,972
   
2,072
 
               
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $25,805 at June 30, 2012 and $23,687 at December 31, 2011
   
49,397
   
45,684
 
               
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
   
781
   
746
 
               
               
TOTAL ASSETS
 
$
64,283
 
$
60,044
 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
2
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Amounts in millions)

     
2012
   
2011
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
               
CURRENT LIABILITIES
             
Accounts payable
 
$
5,453
 
$
5,304
 
Accrued liabilities
   
2,434
   
2,533
 
Domestic and foreign income taxes
   
   
110
 
Total current liabilities
   
7,887
   
7,947
 
               
LONG-TERM DEBT, NET
   
7,620
   
5,871
 
               
DEFERRED CREDITS AND OTHER LIABILITIES
             
Deferred and other domestic and foreign income taxes
   
5,644
   
4,846
 
Other
   
3,582
   
3,760
 
     
9,226
   
8,606
 
               
STOCKHOLDERS' EQUITY
             
Common stock, at par value
   
177
   
177
 
Treasury stock
   
(4,660
)
 
(4,502
)
Additional paid-in capital
   
7,371
   
7,286
 
Retained earnings
   
37,152
   
35,142
 
Accumulated other comprehensive loss
   
(490
)
 
(483
)
Total stockholders’ equity
   
39,550
   
37,620
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
64,283
 
$
60,044
 
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, 2012 AND 2011
(Amounts in millions, except per-share amounts)

   
Three months ended
 
Six months ended
 
   
June 30
 
June 30
 
   
2012
 
2011
 
2012
   
2011
 
REVENUES AND OTHER INCOME
                         
Net sales
 
$
5,768
 
$
6,173
 
$
12,036
 
$
11,899
 
Interest, dividends and other income
   
24
   
35
   
38
   
66
 
Gains on disposition of assets, net
   
   
   
1
   
22
 
     
5,792
   
6,208
   
12,075
   
11,987
 
COSTS AND OTHER DEDUCTIONS
                         
Cost of sales
   
3,060
   
2,720
   
6,010
   
5,246
 
Selling, general and administrative and other operating expenses
   
335
   
388
   
769
   
829
 
Taxes other than on income
   
167
   
162
   
341
   
313
 
Exploration expense
   
96
   
62
   
194
   
146
 
Interest and debt expense, net
   
28
   
27
   
58
   
242
 
     
3,686
   
3,359
   
7,372
   
6,776
 
Income before income taxes and other items
   
2,106
   
2,849
   
4,703
   
5,211
 
Provision for domestic and foreign income taxes
   
875
   
1,111
   
2,014
   
2,165
 
Income from equity investments
   
(101
)
 
(81
)
 
(203
)
 
(178
)
Income from continuing operations
   
1,332
   
1,819
   
2,892
   
3,224
 
Discontinued operations, net
   
(4
)
 
(2
)
 
(5
)
 
142
 
NET INCOME
 
$
1,328
 
$
1,817
 
$
2,887
 
$
3,366
 
                           
                           
BASIC EARNINGS PER COMMON SHARE
                         
Income from continuing operations
 
$
1.64
 
$
2.23
 
$
3.56
 
$
3.96
 
Discontinued operations, net
   
   
   
(0.01
)
 
0.18
 
BASIC EARNINGS PER COMMON SHARE
 
$
1.64
 
$
2.23
 
$
3.55
 
$
4.14
 
DILUTED EARNINGS PER COMMON SHARE
                         
Income from continuing operations
 
$
1.64
 
$
2.23
 
$
3.56
 
$
3.96
 
Discontinued operations, net
   
   
   
(0.01
)
 
0.17
 
DILUTED EARNINGS PER COMMON SHARE
 
$
1.64
 
$
2.23
 
$
3.55
 
$
4.13
 
DIVIDENDS PER COMMON SHARE
 
$
0.54
 
$
0.46
 
$
1.08
 
$
0.92
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
4
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Amounts in millions)

   
Three months ended
 
Six months ended
 
   
June 30
 
June 30
 
   
2012
 
2011
 
2012
   
2011
 
Net income
 
$
1,328
 
$
1,817
 
$
2,887
 
$
3,366
 
Other comprehensive income (loss) items:
                         
Foreign currency translation adjustments
   
(12
)
 
7
   
(8
)
 
13
 
Pension and postretirement adjustments (a)
   
8
   
7
   
13
   
14
 
Unrealized (losses) gains on derivatives (b)
   
(2
)
 
21
   
12
   
(4
)
Reclassification of realized losses (gains) on derivatives and other (c)
   
4
   
35
   
(24
)
 
49
 
Other comprehensive income (loss), net of tax
   
(2
)
 
70
   
(7
)
 
72
 
Comprehensive income
 
$
1,326
 
$
1,887
 
$
2,880
 
$
3,438
 

(a)
Net of tax (expense) of $(5) and $(4) for the three months ended June 30, 2012 and 2011, respectively, and $(8) for each of the six month periods ended June 30, 2012 and 2011.
 
(b)
Net of tax (expense)/benefit of zero and $(13) for the three months ended June 30, 2012 and 2011, respectively, and $(8) and $2 for the six months ended June 30, 2012 and 2011.
 
(c)
Net of tax (expense)/benefit of $(2) and $(19) for the three months ended June 30, 2012 and 2011, respectively, and $15 and $(27) for the six months ended June 30, 2012 and 2011.
 
 
 
5
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Amounts in millions)

     
2012
   
2011
 
CASH FLOW FROM OPERATING ACTIVITIES
             
Net income
 
$
2,887
 
$
3,366
 
Adjustments to reconcile net income to net cash provided by
operating activities:
             
Discontinued operations, net
   
5
   
(142
)
Depreciation, depletion and amortization of assets
   
2,172
   
1,729
 
Deferred income tax provision
   
794
   
517
 
Other noncash charges to income
   
110
   
205
 
Gains on disposition of assets, net
   
(1
)
 
(22
)
Undistributed earnings from equity investments
   
(8
)
 
(25
)
Dry hole and impairment expense
   
166
   
94
 
Changes in operating assets and liabilities, net
   
16
   
(125
)
Other operating, net
   
(166
)
 
(25
)
Operating cash flow from continuing operations
   
5,975
   
5,572
 
Operating cash flow from discontinued operations, net of taxes
   
(17
)
 
(8
)
Net cash provided by operating activities
   
5,958
   
5,564
 
CASH FLOW FROM INVESTING ACTIVITIES
             
Capital expenditures
   
(5,125
)
 
(2,958
)
Payments for purchases of assets and businesses
   
(1,081
)
 
(3,905
)
Sales of assets, net
   
5
   
45
 
Other, net
   
39
   
(43
)
Investing cash flow from continuing operations
   
(6,162
)
 
(6,861
)
Investing cash flow from discontinued operations
   
   
2,570
 
Net cash used by investing activities
   
(6,162
)
 
(4,291
)
CASH FLOW FROM FINANCING ACTIVITIES
             
Proceeds from long-term debt
   
1,736
   
 
Proceeds from short-term borrowings, net
   
   
500
 
Payments of long-term debt
   
   
(1,523
)
Proceeds from issuance of common stock
   
58
   
5
 
Purchases of treasury stock
   
(152
)
 
(43
)
Distributions to noncontrolling interest
   
   
(121
)
Cash dividends paid
   
(813
)
 
(685
)
Other, net
   
4
   
10
 
Net cash provided (used) by financing activities
   
833
   
(1,857
)
Increase (decrease) in cash and cash equivalents
   
629
   
(584
)
Cash and cash equivalents—beginning of period
   
3,781
   
2,578
 
Cash and cash equivalents—end of period
 
$
4,410
 
$
1,994
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
6
 
 
 
 
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

June 30, 2012
1.
General
   
 
In these unaudited consolidated condensed financial statements, "Occidental" means Occidental Petroleum Corporation, a Delaware corporation (OPC), or OPC and one or more entities in which it owns a controlling 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, 2011.
   
 
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, 2012, and the consolidated statements of income, comprehensive income and cash flows for the three and six months ended June 30, 2012 and 2011, as applicable. The income and cash flows for the periods ended June 30, 2012 and 2011 are not necessarily indicative of the income or cash flows to be expected for the full year.
   
 
Certain financial statements and notes for the prior year have been reclassified to conform to the 2012 presentation.
   
2.
Asset Acquisitions, Dispositions and Other Transactions
   
 
During the six months ended June 30, 2012, Occidental paid approximately $1.0 billion for domestic oil and gas properties, mainly in the Williston Basin, South Texas and the Permian Basin.
   
 
In June 2012, Occidental issued $1.75 billion of debt which comprised $1.25 billion of 2.70-percent senior unsecured notes due 2023 and $500 million of 1.50-percent senior unsecured notes due 2018. Occidental received net proceeds of approximately $1.74 billion. Interest on the notes will be payable semi-annually in arrears in February and August of each year for both series of notes.
   
   
3.
Accounting and Disclosure Changes
   
 
Fair Value Measurements – Beginning in the quarter ended March 31, 2012, Occidental enhanced its fair value measurement application and disclosures as a result of adopting new requirements issued by the Financial Accounting Standards Board in May 2011.  The new rules include revisions to the standards for the use of fair value measurements and additional disclosures for: (i) all transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) Level 3 measurements; and (iii) hierarchy classifications used for assets and liabilities whose fair value is disclosed only in the footnotes.  The new rules did not have a material impact on Occidental.
   
   
4.
Supplemental Cash Flow Information
   
 
Occidental paid United States federal, state and foreign income taxes for continuing operations of approximately $1.3 billion and $1.6 billion during the six months ended June 30, 2012 and 2011, respectively. Interest paid totaled approximately $95 million and $236 million (including $154 million for early debt extinguishment premium) for the six months ended June 30, 2012 and 2011, respectively.
 
 
7
 
 
 
 
 
5.
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, 2012, and December 31, 2011, consisted of the following (in millions):

     
2012
 
2011
 
Raw materials
   
$
65
     
$
69
 
 
Materials and supplies
     
534
       
443
 
 
Finished goods
     
998
       
655
 
         
1,597
       
1,167
 
 
LIFO reserve
     
(98
)
     
(98
)
 
Total
   
$
1,499
     
$
1,069
 

6.
Environmental Liabilities and Expenditures
   
 
Occidental’s operations are subject to stringent federal, state, local and foreign laws and regulations related to improving or maintaining environmental quality.  Occidental’s environmental compliance costs have generally increased over time and are expected to rise in the future.  Occidental factors environmental expenditures for its operations 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, 2012, Occidental participated in or monitored remedial activities or proceedings at 164 sites.  The following table presents Occidental’s environmental remediation reserves as of June 30, 2012, the current portion of which is included in accrued liabilities ($79 million) and the remainder in deferred credits and other liabilities — other ($257 million).  The reserves are grouped as environmental remediation sites listed or proposed for listing by the United States 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
   
37
     
$
56
 
 
Third-party sites
   
76
       
82
 
 
Occidental-operated sites
   
22
       
114
 
 
Closed or non-operated Occidental sites
   
29
       
84
 
 
Total
   
164
     
$
336
 
 
 
8
 
 
 
 
 
 
As of June 30, 2012, Occidental’s environmental reserves exceeded $10 million at 10 of the 164 sites described above, and 114 of the sites had reserves from zero to $1 million each.  Occidental expects to expend funds corresponding to approximately half of the current environmental reserves at the sites described above over the next four years and the balance at these sites over the subsequent 10 or more years.  Occidental believes its range of reasonably possible additional losses beyond those liabilities recorded for environmental remediation at these sites could be up to $370 million.  The status of Occidental’s involvement with the sites and related significant assumptions have not changed materially since December 31, 2011.  For management’s opinion with respect to environmental matters, refer to Note 7.
   
7.
Lawsuits, Claims, Commitments and Other Contingencies
   
 
OPC or certain of its subsidiaries are involved, 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 or other losses, punitive damages, civil penalties or injunctive or declaratory relief.  OPC or certain of its subsidiaries also have been involved 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 or such subsidiaries are usually among many companies in these proceedings and have to date been successful in sharing response costs with other financially sound companies.  Occidental accrues reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated.  Occidental has disclosed its reserve balance for environmental matters.  Reserve balances for other matters as of June 30, 2012, and December 31, 2011, were not material to Occidental's consolidated balance sheets.  Occidental also evaluates the amount of reasonably possible losses that it could incur as a result of the matters mentioned above.  Occidental has disclosed its range of reasonably possible additional losses for sites where it is a participant in environmental remediation.  Occidental believes that other reasonably possible 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 2009 have concluded for United States federal income tax purposes, subsequent taxable years, including the current year, are under various stages of review by the United States 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.
   
 
OPC, its subsidiaries or both have 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, 2012, Occidental is not aware of circumstances that it believes would reasonably be expected to lead to indemnity claims that would result in payments materially in excess of reserves.
 
 
9
 
 
 
 
 
8.
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, 2012 and 2011 (in millions):

 
Three months ended June 30
 
2012
 
2011
 
Net Periodic Benefit Costs
 
Pension
Benefit
 
Postretirement
Benefit
 
Pension
Benefit
 
Postretirement
Benefit
 
Service cost
 
$
3
   
$
6
   
$
5
   
$
5
 
 
Interest cost
   
7
     
11
     
8
     
12
 
 
Expected return on plan assets
   
(8
)
   
     
(8
)
   
 
 
Recognized actuarial loss
   
5
     
9
     
3
     
7
 
 
Total
 
$
7
   
$
26
   
$
8
   
$
24
 

 
 
Six months ended June 30
 
2012
 
2011
 
Net Periodic Benefit Costs
 
Pension
Benefit
 
Postretirement
Benefit
 
Pension
Benefit
 
Postretirement
Benefit
 
Service cost
 
$
6
   
$
13
   
$
10
   
$
11
 
 
Interest cost
   
14
     
22
     
15
     
23
 
 
Expected return on plan assets
   
(16
)
   
     
(16
)
   
 
 
Recognized actuarial loss
   
10
     
17
     
6
     
15
 
 
Total
 
$
14
   
$
52
   
$
15
   
$
49
 

 
 
Occidental contributed approximately $2 million in each of the three-month periods ended June 30, 2012 and 2011, and approximately $3 million and $4 million in the six-month periods ended June 30, 2012 and 2011, respectively, to its defined benefit pension plans.
   
9.
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 for identical assets or liabilities; 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:
 
 
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, foreign exchange contracts, options and physical commodity forward purchase and sale contracts, including contracts that meet the accounting definition of an embedded derivative, 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 generally 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 risk-adjusted risk-free 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, 2012, and December 31, 2011 (in millions):

     
Fair Value Measurements at
June 30, 2012 Using
       
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(a)
Total Fair
Value
 
Assets:
                             
 
Commodity derivatives
 
$
684
 
$
745
 
$
 
$
(1,197
)
$
232
 
Liabilities:
                             
 
Commodity derivatives
 
$
627
 
$
893
 
$
 
$
(1,272
)
$
248

 
     
Fair Value Measurements at
December 31, 2011 Using
       
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(a)
Total Fair
Value
 
Assets:
                             
 
Commodity derivatives
 
$
310
 
$
640
 
$
 
$
(758
)
$
192
 
Liabilities:
                             
 
Commodity derivatives
 
$
311
 
$
652
 
$
 
$
(782
)
$
181

 
(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, 2012 and 2011, 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, 2012, and December 31, 2011, which were classified as Level 1, were approximately $8.2 billion and $6.4 billion, compared to carrying values of $7.6 billion and $5.9 billion, respectively.
   
10.
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 a variety of derivative instruments to improve realized prices for its oil and gas.  Additionally, Occidental’s Phibro trading unit engages in trading activities using derivatives for the purpose of generating profits mainly from market price changes of commodities.  In the past, Occidental has also used derivatives to reduce its exposure to price volatility on a small portion of its oil and gas production.
   
 
Cash-Flow Hedges
 
Through December 31, 2011, Occidental held a series of collar agreements for 12,000 barrels of oil per day of its existing domestic production that qualified as cash-flow hedges at a weighted-average strike price that ranged from $32.92 to $46.35.
   
 
In 2009, Occidental entered into financial swap agreements related to the sale of a portion of its existing natural gas production from the Rocky Mountain region of the United States that qualified as cash-flow hedges and terminated as of March 31, 2012.  These swap agreements hedged the sale of 50 million cubic feet of natural gas per day at an average strike price of $6.07.
   
 
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 through March 31, 2013.  As of June 30, 2012, and December 31, 2011, Occidental had approximately 17 billion cubic feet and 25 billion cubic feet of natural gas held in storage, respectively.  As of June 30, 2012, and December 31, 2011, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 23 billion cubic feet and 35 billion cubic feet of this stored natural gas, respectively.

 
12
 
 
 
 
 
 
The following table presents the pre-tax gains and losses recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the three and six months ended June 30, 2012 and 2011 (in millions):

     
Periods ended June 30
 
     
Three Months
 
Six Months
 
 
Commodity Contracts – cash-flow hedges
   
2012
   
2011
   
2012
   
2011
 
 
Unrealized gains (losses) recognized in AOCI
 
$
(2
)
$
34
 
$
20
 
$
(6
)
 
Losses (gains) reclassified into income
 
$
6
 
$
54
 
$
(39
)
$
76
 
 
Gains recognized in income – ineffective portion
 
$
 
$
1
 
$
 
$
 

 
The following table summarizes net after-tax derivative activity recorded in AOCI for the three and six months ended June 30, 2012 and 2011 (in millions):

     
Periods ended June 30
 
     
Three Months
 
Six Months
 
       
2012
   
2011
   
2012
   
2011
 
 
Beginning balance AOCI
 
$
(13
)
$
(122
)
$
1
 
$
(111
)
 
Unrealized gains (losses) recognized in AOCI
   
(2
)
 
21
   
12
   
(4
)
 
Losses (gains) reclassified to income
   
4
   
35
   
(24
)
 
49
 
 
Ending balance AOCI
 
$
(11
)
$
(66
)
$
(11
)
$
(66
)
 
 
 
Occidental expects that during the next twelve months an insignificant amount of net after-tax derivative losses included in AOCI, based on their valuation as of June 30, 2012, will be reclassified into income.
   
 
Derivatives Not Designated as Hedging Instruments
 
Occidental’s third-party marketing and trading activities focus on purchasing oil, natural gas liquids (NGLs) and gas for resale from partners, producers and third parties whose oil and gas supply is located near its midstream and marketing assets, such as pipelines, processing plants and storage facilities.  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’s strategy is to profit from market price changes using derivatives not designated as hedging instruments.
 
 
13
 
 
 
 
 
 
The following table presents gross volumes of Occidental’s commodity derivatives contracts not designated as hedging instruments as of June 30, 2012, and December 31, 2011:

     
Volumes
 
Commodity
 
2012
 
2011
 
Sales contracts related to Occidental’s production
           
 
Oil (million barrels)
 
14
   
9
 
               
 
Third-party marketing and trading activities
           
 
Purchase contracts
           
 
Oil (million barrels)
 
158
   
109
 
 
Natural gas (billion cubic feet)
 
342
   
481
 
 
Precious metals (million troy ounces)
 
1
   
4
 
               
 
Sales contracts
           
 
Oil (million barrels)
 
152
   
109
 
 
Natural gas (billion cubic feet)
 
451
   
723
 
 
Precious metals (million troy ounces)
 
   
1
 

 
 
In addition, Occidental typically has certain other commodity trading contracts, such as agricultural products, power and other metals as well as foreign exchange contracts.  These contracts were not material to Occidental as of June 30, 2012, and December 31, 2011.
   
 
For third-party marketing and trading activities, a substantial portion of sales contracts are typically fulfilled by purchase contracts with substantially identical terms entered into within a short time.  For a substantial portion of the sales commitments not satisfied by such contracts as of June 30, 2012, Occidental entered into offsetting contracts after June 30, 2012.  Occidental believes it has the ability to fulfill any remaining portion through its equity production or through additional third-party purchases.
   
 
Approximately $86 million of losses and $77 million of gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended June 30, 2012 and 2011, respectively.  Approximately $35 million of losses and $106 million of gains from derivatives not designated as hedging instruments were recognized in net sales for the six months ended June 30, 2012 and 2011, respectively.
 
 
14
 
 
 
 
 
 
Fair Value of Derivatives
 
The following table presents the gross fair value of Occidental’s outstanding derivatives as of June 30, 2012, and December 31, 2011 (in millions):

     
Asset Derivatives
     
Liability Derivatives
     
 
June 30, 2012
 
Balance Sheet Location
 
Fair Value
 
 Balance Sheet Location
 
Fair Value
 
 
Cash-flow hedges (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
 
$
4
 
Accrued liabilities
 
$
1
 
                         
 
Derivatives not designated as hedging instruments (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
   
1,369
 
Accrued liabilities
   
1,465
 
   
Long-term receivables and other assets, net
   
56
 
Deferred credits and other liabilities
   
54
 
           
1,425
       
1,519
 
 
Total gross fair value
       
1,429
       
1,520
 
 
Less: counterparty netting and cash collateral (b)
       
(1,197
)
     
(1,272
)
 
Total net fair value of derivatives
     
$
232
     
$
248
 
 
 
     
Asset Derivatives
     
Liability Derivatives
     
 
December 31, 2011
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
 
Cash-flow hedges (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
 
$
41
 
Accrued liabilities
 
$
5
 
   
Long-term receivables and other assets, net
   
3
 
Deferred credits and other liabilities
   
 
           
44
       
5
 
                         
 
Derivatives not designated as hedging instruments (a)
                     
 
Commodity contracts
 
Marketing and trading assets and other
   
835
 
Accrued liabilities
   
887
 
   
Long-term receivables and other assets, net
   
71
 
Deferred credits and other liabilities
   
71
 
           
906
       
958
 
 
Total gross fair value
       
950
       
963
 
 
Less: counterparty netting and cash collateral (c)
       
(758
)
     
(782
)
 
Total net fair value of derivatives
     
$
192
     
$
181
 

 
(a)
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, 2012, collateral received of $66 million has been netted against derivative assets and collateral paid of $141 million has been netted against derivative liabilities.
 
 
(c)
As of December 31, 2011, collateral received of $42 million has been netted against derivative assets and collateral paid of $66 million has been netted against derivative liabilities.
 

 
See Note 9 for fair value measurement disclosures on derivatives.

 
15
 
 
 
 
 
 
Credit Risk
 
A substantial portion 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 $51 million and $173 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, 2012, and December 31, 2011, respectively.
   
 
Occidental executes the rest 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, 2012 and December 31, 2011, Occidental had a net liability of $32 million and $58 million, respectively, which are net of collateral posted of $73 million and $27 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, 2012, and December 31, 2011.
   
11.
Industry Segments
   
 
Occidental conducts its 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 and produces oil and condensate, NGLs and natural gas.  The chemical segment mainly manufactures and markets basic chemicals and vinyls.  The midstream and marketing segment gathers, treats, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power.  It also trades around its assets, including pipelines and storage capacity, and trades oil, NGLs, gas and other commodities.
   
 
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 the segments' equity investments.

 
16
 
 
 
 
 
 
The following tables present Occidental’s industry segment and corporate disclosures (in millions):

             
Midstream,
 
Corporate
     
             
Marketing
 
and
     
     
Oil and Gas
 
Chemical
 
and Other
 
Eliminations
 
Total
 
 
Three months ended
                               
 
June 30, 2012
                               
                                   
 
Net sales
 
$
4,495
 
$
1,172
 
$
262
 
$
(161
) (a)
$
5,768
 
                                   
 
Pretax operating profit (loss)
 
$
2,043
 
$
194
 
$
77
 
$
(107
) (b)
$
2,207
 
 
Income taxes
   
   
   
   
(875
) (c)
 
(875
)
 
Discontinued operations, net
   
   
   
   
(4
)
 
(4
)
 
Net income (loss)
 
$
2,043
 
$
194
 
$
77
 
$
(986
)
$
1,328
 
 
Three months ended
                               
 
June 30, 2011
                               
                                   
 
Net sales
 
$
4,591
 
$
1,325
 
$
441
 
$
(184
) (a)
$
6,173
 
                                   
 
Pretax operating profit (loss)
 
$
2,624
 
$
253
 
$
187
 
$
(134
) (b)
$
2,930
 
 
Income taxes
   
   
   
   
(1,111
) (c)
 
(1,111
)
 
Discontinued operations, net
   
   
   
   
(2
)
 
(2
)
 
Net income (loss)
 
$
2,624
 
$
253
 
$
187
 
$
(1,247
)
$
1,817
 

             
Midstream,
 
Corporate
     
             
Marketing
 
and
     
     
Oil and Gas
 
Chemical
 
and Other
 
Eliminations
 
Total
 
 
Six months ended
   
 
   
 
   
 
   
 
   
 
 
 
June 30, 2012
   
 
   
 
                   
                                   
 
Net sales
 
$
9,397
 
$
2,320
 
$
655
 
$
(336
) (a)
$
12,036
 
                                   
 
Pretax operating profit (loss)
 
$
4,547
 
$
378
 
$
208
 
$
(227
) (b)
$
4,906
 
 
Income taxes
   
   
   
   
(2,014
) (c)
 
(2,014
)
 
Discontinued operations, net
   
   
   
   
(5
)
 
(5
)
 
Net income (loss)
 
$
4,547
 
$
378
 
$
208
 
$
(2,246
)
$
2,887
 
                                   
 
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)
 
$
5,092
 
$
472
 
$
301
 
$
(2,499
)
$
3,366
 

 
(a)
Intersegment sales eliminate upon consolidation and are generally made at prices approximately equal to those that the selling entity would be able to obtain in third-party transactions.
 
 
(b)
Includes unallocated 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 an after-tax gain from the sale of the Argentine operations.
 

17
 
 
 
 
 
12.
Earnings Per Share
   
 
Occidental’s instruments containing rights to nonforfeitable dividends granted in stock-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, net of 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 reflects the additional 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, 2012 and 2011:

     
Periods Ended June 30
 
     
Three months
 
Six months
 
 
(in millions, except per-share amounts)
   
2012
   
2011
   
2012
   
2011
 
 
Basic EPS
                         
 
Income from continuing operations
 
$
1,332
 
$
1,819
 
$
2,892
 
$
3,224
 
 
Discontinued operations, net
   
(4
)
 
(2
)
 
(5
)
 
142
 
 
Net income
   
1,328
   
1,817
   
2,887
   
3,366
 
 
Less: Net income allocated to participating securities
   
(2
)
 
(3
)
 
(4
)
 
(6
)
 
Net income, net of participating securities
 
$
1,326
 
$
1,814
 
$
2,883
 
$
3,360
 
 
Weighted average number of basic shares
   
810.3
   
812.5
   
810.4
   
812.5
 
 
Basic EPS
 
$
1.64
 
$
2.23
 
$
3.55
 
$
4.14
 
                             
 
Diluted EPS
                         
 
Net income, net of participating securities
 
$
1,326
 
$
1,814
 
$
2,883
 
$
3,360
 
 
Weighted average number of basic shares
   
810.3
   
812.5
   
810.4
   
812.5
 
 
Dilutive effect of potentially dilutive securities
   
0.7
   
0.8
   
0.8
   
0.8
 
 
Total diluted weighted average common shares
   
811.0
   
813.3
   
811.2
   
813.3
 
 
Diluted EPS
 
$
1.64
 
$
2.23
 
$
3.55
 
$
4.13
 

 
18
 
 
 
 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results of Operations
 
In this report, “Occidental” refers to Occidental Petroleum Corporation (OPC), or OPC and one or more entities in which it owns a controlling interest. Occidental reported net income of $1.3 billion for the second quarter of 2012 on net sales of $5.8 billion, compared to net income of $1.8 billion on net sales of $6.2 billion for the same period of 2011.  Diluted earnings per share (EPS) were $1.64 for the second quarter of 2012, compared to $2.23 for the same period of 2011.  Occidental reported net income of $2.9 billion for the first six months of 2012 on net sales of $12.0 billion, compared to net income of $3.4 billion on net sales of $11.9 billion for the same period of 2011.  Diluted EPS were $3.55 and $4.13 for the first six months of 2012 and 2011, respectively.
 
Net income for the three months ended June 30, 2012, compared to the same period of 2011, reflected lower oil, natural gas liquids (NGLs) and gas prices, higher oil and gas operating costs and depreciation, depletion and amortization (DD&A) rates, lower margins in the marketing and trading and gas processing businesses, lower domestic and export caustic volumes, lower vinyl chloride monomer (VCM) export volumes and lower polyvinyl chloride (PVC) and VCM export prices, partially offset by higher oil volumes and higher income in the pipeline businesses.  Net income for the six months ended June 30, 2012, compared to the same period of 2011, reflected higher oil and gas operating costs and DD&A rates, lower natural gas and NGL prices, lower chemical export volumes and prices due to the weakening economic conditions in Europe and Asia, and lower margins in the marketing and trading businesses, partially offset by higher oil prices, higher oil, NGL and gas volumes and higher income in the pipeline businesses.

Selected Income Statement Items

The decrease in net sales for the three months ended June 30, 2012, compared to the same period of 2011, reflected lower oil, NGL and gas prices, lower margins in the marketing and trading businesses, lower domestic and export caustic volumes, lower VCM export volumes, lower PVC and VCM export prices and lower sales in the gas processing businesses, partially offset by higher oil and gas volumes.  The increase in net sales for the six months ended June 30, 2012, compared to the same period of 2011, reflected higher oil prices and higher oil, NGL and gas volumes, partially offset by lower NGL and natural gas prices, lower chemical export volumes and prices and lower margins in the marketing and trading businesses.
 
The increase in cost of sales for the three and six months ended June 30, 2012, compared to the same periods of 2011, reflected higher oil and gas operating costs and DD&A rates, partially offset by lower natural gas and ethylene costs related to the chemical segment.  The decrease in interest and debt expense, net, for the six months ended June 30, 2012, was mainly due to the $163 million early debt extinguishment charge recorded in the first quarter of 2011.
 
The decrease in the provision for domestic and foreign income taxes for the three and six months ended June 30, 2012, compared to the same periods of 2011, was due to lower pre-tax income, partially offset by higher effective tax rates.  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 changes in cash and cash equivalents, as well as long-term debt, net.
 
The decrease in trade receivables, net, was due to lower oil and gas prices in the second quarter of 2012, compared to the end of 2011.  The increase in inventories was primarily due to higher volumes of oil held by the midstream and marketing segment at the end of the second quarter of 2012, compared to the fourth quarter of 2011. The increase in property, plant and equipment, net, reflected capital expenditures of approximately $5.1 billion and acquisitions of $1.0 billion, partially offset by DD&A.
 
 
19
 
 
 
 
 
The decrease in domestic and foreign income taxes payable was due to the timing of estimated tax payments. The increase in deferred and other domestic and foreign income taxes was mainly due to the deferred taxes related to the capital expenditures in the six months ended June 30, 2012.  The increase in stockholders’ equity reflected net income for the first six months of 2012, partially offset by dividend payments and stock purchases.
 
Segment Operations
 
Occidental conducts its 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 and produces oil and condensate, NGLs and natural gas.  The chemical segment mainly manufactures and markets basic chemicals and vinyls.  The midstream and marketing segment gathers, treats, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power.  It also trades around its assets, including pipelines and storage capacity, and trades oil, NGLs, gas and other commodities.
 
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, 2012 and 2011 (in millions):
 
   
Periods Ended June 30
 
   
Three Months
 
Six Months
 
     
2012
   
2011
 
2012
   
2011
 
Net Sales (a)
                         
Oil and Gas
 
$
4,495
 
$
4,591
 
$
9,397
 
$
8,958
 
Chemical
   
1,172
   
1,325
   
2,320
   
2,490
 
Midstream, Marketing and Other
   
262
   
441
   
655
   
853
 
Eliminations
   
(161
)
 
(184
)
 
(336
)
 
(402
)
   
$
5,768
 
$
6,173
 
$
12,036
 
$
11,899
 
Segment Earnings (b)
                         
Oil and Gas
 
$
2,043
 
$
2,624
 
$
4,547
 
$
5,092
 
Chemical
   
194
   
253
   
378
   
472
 
Midstream, Marketing and Other
   
77
   
187
   
208
   
301
 
     
2,314
   
3,064
   
5,133
   
5,865
 
                           
Unallocated Corporate Items (b)
                         
Interest expense, net
   
(25
)
 
(22
)
 
(53
)
 
(236
)
Income taxes
   
(875
)
 
(1,111
)
 
(2,014
)
 
(2,165
)
Other expense, net
   
(82
)
 
(112
)
 
(174
)
 
(240
)
                           
Income from continuing operations
   
1,332
   
1,819
 
 
2,892
   
3,224
 
Discontinued operations, net (c)
   
(4
)
 
(2
)
 
(5
)
 
142
 
Net income
 
$
1,328
 
$
1,817
 
$
2,887
 
$
3,366
 

(a)
Intersegment sales eliminate upon consolidation and are generally made at prices approximately equal to those that the selling entity would be 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)
The six months ended June 30, 2011 amount reflects an 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, 2012 and 2011, 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
 
     
2012
   
2011
   
2012
   
2011
 
Oil & Gas
                         
Libya exploration write-off
 
$
 
$
 
$
 
$
(35
)
Gain 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*
   
(4
)
 
(2
)
 
(5
)
 
142
 
Total Corporate
 
$
(4
)
$
(2
)
$
(5
)
$
(4
)
Total
 
$
(4
)
$
(2
)
$
(5
)
$
(46
)

*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, 2012 and 2011 (in millions):
 
   
Periods Ended June 30
 
   
Three Months
 
Six Months
 
     
2012
   
2011
   
2012
   
2011
 
Oil & Gas earnings
 
$
2,043
 
$
2,624
 
$
4,547
 
$
5,092
 
Chemical earnings
   
194
   
253
   
378
   
472
 
Midstream, Marketing and Other earnings
   
77
   
187
   
208
   
301
 
Unallocated corporate items
   
(107
)
 
(134
)
 
(227
)
 
(476
)
Pre-tax income
   
2,207
   
2,930
   
4,906
   
5,389
 
Income tax expense
                         
Federal and state
   
254
   
557
   
700
   
927
 
Foreign
   
621
   
554
   
1,314
   
1,238
 
Total
   
875
   
1,111
   
2,014
   
2,165
 
Income from continuing operations
 
$
1,332
 
$
1,819
 
$
2,892
 
$
3,224
 
Worldwide effective tax rate
   
40%
   
38%
   
41%
   
40%
 
 

21
 
 
 
 
 
Oil and Gas Segment
 
The following tables set forth the production and sales volumes of oil, NGLs and natural gas per day for the three and six months ended June 30, 2012 and 2011.  The differences between the production and sales volumes per day are generally due to the timing of shipments at Occidental’s international locations where product is loaded onto tankers.
 
   
Periods Ended June 30
   
Three Months
 
Six Months
Production per Day
   
2012
   
2011
   
2012
   
2011
Oil (MBBL)
                       
United States
   
249
   
226
   
246
   
224
Middle East/North Africa
   
181
   
177
   
186
   
195
Latin America (a)
   
31
   
30
   
27
   
31
                         
NGLs (MBBL)
                       
United States
   
73
   
71
   
73
   
65
Middle East/North Africa
   
9
   
11
   
9
   
10
                         
Natural Gas (MMCF)