10-Q 1 oxyform10q9302014.htm 10-Q OXY Form 10Q 9.30.2014
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
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
(State or other jurisdiction of
incorporation or organization)
 
95-4035997
(I.R.S. Employer
Identification No.)
 
 
 
5 Greenway Plaza, Suite 110
Houston, Texas
(Address of principal executive offices)
 
77046
(Zip Code)
 
(713) 215-7000
(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.    
þ Yes   o 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).    
þ Yes   o 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 Filer þ  Accelerated Filer o   Non-Accelerated Filer o  Smaller Reporting Company o
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    
o Yes   þ No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at September 30, 2014
 
 
Common stock $.20 par value
 
775,428,089 shares
 




OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES


TABLE OF CONTENTS




 
 
 
 
PAGE
 
 
 
 
 
Part I
Financial Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
Item 4.
 
 
 
 
 
Part II
Other Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
Item 6.


1



PART I    FINANCIAL INFORMATION
 

Item 1.
Financial Statements (unaudited)

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2014 AND DECEMBER 31, 2013
(Amounts in millions)

 
 
2014

 
2013

 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,897

 
$
3,393

 
 
 
 
 
 
 
Trade receivables, net
 
4,960

 
5,674

 
 
 
 
 
 
 
Inventories
 
1,359

 
1,200

 
 
 
 
 
 
 
Other current assets
 
1,291

 
1,056

 
 
 
 
 
 
 
Total current assets
 
10,507

 
11,323

 
 
 
 
 
 
 
INVESTMENTS IN UNCONSOLIDATED ENTITIES
 
1,544

 
1,459

 
 
 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $36,306 at September 30, 2014 and $33,231 at December 31, 2013
 
58,465

 
55,821

 
 
 
 
 
 
 
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
 
994

 
840

 
 
 
 
 
 
 
TOTAL ASSETS
 
$
71,510

 
$
69,443

 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 


2



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2014 AND DECEMBER 31, 2013
(Amounts in millions)

 
 
2014

 
2013

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Short-term borrowings
 
$
1,599

 
$

 
Accounts payable
 
5,511

 
5,520

 
Accrued liabilities
 
2,337

 
2,556

 
Domestic and foreign income taxes
 
74

 
358

 
Total current liabilities
 
9,521

 
8,434

 
 
 
 
 
 
 
LONG-TERM DEBT, NET
 
6,837

 
6,939

 
 
 
 
 
 
 
DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
 
 
Deferred domestic and foreign income taxes
 
7,634

 
7,197

 
Other
 
3,433

 
3,501

 
 
 
11,067

 
10,698

 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Common stock, at par value
 
178

 
178

 
Treasury stock
 
(8,146
)
 
(6,095
)
 
Additional paid-in capital
 
7,570

 
7,515

 
Retained earnings
 
44,166

 
41,831

 
Accumulated other comprehensive loss
 
(289
)
 
(303
)
 
Total equity attributable to common stock
 
43,479

 
43,126

 
 
 
 
 
 
 
Noncontrolling interest
 
606

 
246

 
Total stockholders’ equity
 
44,085

 
43,372

 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
71,510

 
$
69,443

 
The accompanying notes are an integral part of these consolidated financial statements.
 

3



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(Amounts in millions, except per-share amounts)

 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
REVENUES AND OTHER INCOME
 
 
 
 

 
 
 
 
Net sales
 
$
5,996

 
$
6,449

 
$
18,359

 
$
18,283

Interest, dividends and other income
 
31

 
26

 
107

 
89

(Loss) Gain on sale of assets and equity investments, net
 
(5
)
 

 
520

 
131

 
 
6,022

 
6,475

 
18,986

 
18,503

COSTS AND OTHER DEDUCTIONS
 
 
 
 
 
 
 
 
Cost of sales
 
3,385

 
3,214

 
9,880

 
9,531

Selling, general and administrative and other operating expenses
 
441

 
459

 
1,327

 
1,347

Asset impairments
 

 

 
471

 

Taxes other than on income
 
191

 
186

 
593

 
568

Exploration expense
 
53

 
68

 
162

 
196

Interest and debt expense, net
 
14

 
29

 
52

 
93

 
 
4,084

 
3,956

 
12,485

 
11,735

 
 
 
 
 
 
 
 
 
Income before income taxes and other items
 
1,938

 
2,519

 
6,501

 
6,768

Provision for domestic and foreign income taxes
 
(817
)
 
(1,037
)
 
(2,706
)
 
(2,782
)
Income from equity investments
 
93

 
106

 
243

 
288

Income from continuing operations
 
1,214

 
1,588

 
4,038

 
4,274

Discontinued operations, net
 
(3
)
 
(5
)
 
(1
)
 
(14
)
Net income
 
1,211

 
1,583

 
4,037

 
4,260

Less: Net income attributable to noncontrolling interest
 
(3
)
 

 
(8
)
 

NET INCOME ATTRIBUTABLE TO COMMON STOCK
 
$
1,208

 
$
1,583

 
$
4,029

 
$
4,260

 
 
 
 
 
 
 
 
 
BASIC EARNINGS PER COMMON SHARE (attributable to common stock)
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1.55

 
$
1.97

 
$
5.13

 
$
5.30

Discontinued operations, net
 

 
(0.01
)
 

 
(0.02
)
BASIC EARNINGS PER COMMON SHARE
 
$
1.55

 
$
1.96

 
$
5.13

 
$
5.28

 
 
 
 
 
 
 
 
 
DILUTED EARNINGS PER COMMON SHARE (attributable to common stock)
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1.55

 
$
1.97

 
$
5.13

 
$
5.30

Discontinued operations, net
 

 
(0.01
)
 

 
(0.02
)
DILUTED EARNINGS PER COMMON SHARE
 
$
1.55

 
$
1.96

 
$
5.13

 
$
5.28

 
 
 
 
 
 
 
 
 
DIVIDENDS PER COMMON SHARE
 
$
0.72

 
$
0.64

 
$
2.16

 
$
1.92

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 NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(Amounts in millions)

 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Net income attributable to common stock
 
$
1,208

 
$
1,583

 
$
4,029

 
$
4,260

Other comprehensive income (loss) items:
 
 
 
 
 
 
 
 
Foreign currency translation (losses) gains
 
(1
)
 

 
(1
)
 
2

Reclassification to income of realized foreign currency translation losses (a)
 

 

 

 
28

Unrealized (losses) gains on derivatives (b)
 

 

 
(5
)
 
1

Reclassification to income of realized (gains) losses on derivatives (c)
 

 
(1
)
 
8

 
(4
)
Pension and postretirement gains (d)
 
3

 
9

 
12

 
27

Other comprehensive income, net of tax (e)
 
2


8


14


54

Comprehensive income attributable to common stock
 
$
1,210

 
$
1,591

 
$
4,043

 
$
4,314

(a)
Included in the net gain on sale of its equity investment in Carbocloro, a Brazilian entity which owns a chemical facility.
(b)
Net of tax of zero for both the three months ended September 30, 2014 and 2013, and $3 and $(1) for the nine months ended September 30, 2014 and 2013, respectively.
(c)
Net of tax of zero for both the three months ended September 30, 2014 and 2013, and $(5) and $2 for the nine months ended September 30, 2014 and 2013 respectively.
(d)
Net of tax of $(2) and $(5) for the three months ended September 30, 2014 and 2013, respectively, and $(7) and $(16) for the nine months ended September 30, 2014 and 2013.
(e)
There were no other comprehensive income (loss) items related to noncontrolling interests in the three and nine months ended 2014 and 2013.


The accompanying notes are an integral part of these consolidated financial statements.

5



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(Amounts in millions)

 
 
2014

 
2013

 
CASH FLOW FROM OPERATING ACTIVITIES
 
 
 
 
 
Net income
 
$
4,037

 
$
4,260

 
Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
 
 
Discontinued operations, net
 
1

 
14

 
Depreciation, depletion and amortization of assets
 
3,943

 
3,896

 
Deferred income tax provision
 
423

 
1,016

 
Other noncash charges to income
 
159

 
258

 
Gain on sale of assets and equity investments, net
 
(520
)
 
(131
)
 
Undistributed earnings from equity investments
 
22

 
(40
)
 
Asset impairments
 
471

 

 
Dry hole expenses
 
100

 
115

 
Changes in operating assets and liabilities, net
 
(416
)
 
63

 
Other operating, net
 

 
382

 
Operating cash flow from continuing operations
 
8,220

 
9,833

 
Operating cash flow from discontinued operations, net of taxes
 
(18
)
 
(47
)
 
Net cash provided by operating activities
 
8,202

 
9,786

 
 
 
 
 
 
 
CASH FLOW FROM INVESTING ACTIVITIES
 
 
 
 
 
Capital expenditures
 
(7,525
)
 
(6,551
)
 
Payments for purchases of assets and businesses
 
(425
)
 
(342
)
 
Sale of assets and equity investments, net
 
1,387

 
270

 
Other, net
 
(267
)
 
3

 
Net cash used by investing activities
 
(6,830
)
 
(6,620
)
 
 
 
 
 
 
 
CASH FLOW FROM FINANCING ACTIVITIES
 
 
 
 
 
Payment of long-term debt
 
(107
)
 
(66
)
 
Proceeds from short-term borrowings
 
1,599

 

 
Proceeds from issuance of common stock
 
20

 
27

 
Purchases of treasury stock
 
(2,083
)
 
(64
)
 
Cash dividends paid
 
(1,649
)
 
(1,034
)
 
Contributions from noncontrolling interest
 
351

 
145

 
Other, net
 
1

 
5

 
Net cash used by financing activities
 
(1,868
)
 
(987
)
 
 
 
 
 
 
 
(Decrease) increase in cash and cash equivalents
 
(496
)
 
2,179

 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
 
3,393

 
1,592

 
Cash and cash equivalents—end of period
 
$
2,897

 
$
3,771

 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

6



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2014

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.  These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2013.

In the opinion of Occidental’s management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Occidental’s consolidated financial position as of September 30, 2014, and the consolidated statements of income, comprehensive income and cash flows for the three and nine months ended September 30, 2014 and 2013, as applicable. The income and cash flows for the periods ended September 30, 2014 and 2013 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 2014 presentation.

2. Asset Acquisitions, Dispositions and Other

In September 2014, Occidental borrowed $1.6 billion in commercial paper for short-term cash needs.

In August 2014, Occidental entered into a new five-year, $2.0 billion bank credit facility (2014 Credit Facility) which replaced its previous $2.0 billion bank credit facility (2011 Credit Facility), which was scheduled to expire in October 2016. The 2014 Credit Facility has similar terms to the 2011 Credit Facility and does not contain material adverse change clauses or debt ratings triggers that could restrict Occidental's ability to borrow under this facility. Occidental did not draw down any amounts under the 2014 Credit Facility or the 2011 Credit Facility during 2014 and no amounts were outstanding as of September 30, 2014.

In February 2014, Occidental entered into an agreement to sell its Hugoton Field operations in Kansas, Oklahoma and Colorado for $1.4 billion. The transaction was completed in April 2014 and, after taking into account purchase price adjustments, it resulted in pre-tax proceeds of $1.3 billion. Occidental recorded a pre-tax gain on the sale of $532 million or $339 million after tax.

In February 2014, Occidental announced the approval by the Board of Directors to pursue the spin-off of its California oil and gas business, into a standalone, publicly traded corporation tax-free. On October 2, 2014, the Board of Directors approved the spin-off of California Resources Corporation (CRC), a wholly owned Occidental subsidiary, to be executed in accordance with the Separation and Distribution Agreement. The Separation and Distribution Agreement and related ancillary agreements will govern the spin-off of the California oil and gas business, the transfer of assets and other matters related to the spin-off. For further discussion regarding the spin-off of CRC refer to Note 14.


7



3. Accounting and Disclosure Changes

In August 2014, the Financial Accounting Standards Board (FASB) issued rules relating to management’s responsibility to evaluate the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The evaluation should be based on events and conditions either known or reasonably knowable as of the financial statement issue date. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes disclosing such doubts. These rules are effective for annual periods ending after December 15, 2016. The rules are not expected to have an impact on Occidental’s financial statements upon adoption.
In June 2014, the FASB issued rules affecting entities that grant their employees share-based payment awards in which the terms of the awards provide that a performance target can be achieved after the requisite service period. The new rules require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Entities may apply the update either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. These rules are effective for annual periods beginning on or after December 15, 2015. The rules are not expected to have a material impact on Occidental's financial statements upon adoption but will require assessment on an ongoing basis.

In May 2014, the FASB issued rules relating to revenue recognition. Under the new rules, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The rules also require more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These rules are effective for the Company for interim and annual periods beginning after December 15, 2016. The rules are not expected to have a material impact on Occidental's financial statements upon adoption.

In April 2014, the FASB issued rules changing the requirements for reporting discontinued operations so that only the disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results will be reported as discontinued operations in the financial statements. These rules are effective for annual periods beginning on or after December 15, 2014. The rules are not expected to have a material impact on Occidental's financial statements upon adoption.

In July 2013, the FASB issued rules requiring net, rather than gross, presentation of a deferred tax asset for a net operating loss or other tax credit and any related liability for unrecognized tax benefits. The rules became effective on January 1, 2014, and did not have a material impact on Occidental's financial statements.

4. Supplemental Cash Flow Information

Occidental paid United States federal, state and foreign income taxes for continuing operations of $2.6 billion and $1.3 billion during the nine months ended September 30, 2014 and 2013, respectively. The first nine months of 2014 included taxes paid for a portion of the gain on sale of the Hugoton Field and the 2013 sale of a portion of its equity interest in Plains All-American Pipeline, L.P. The first nine months of 2013 included the collection of a $0.4 billion tax receivable. Interest paid totaled $199 million and $215 million for the nine months ended September 30, 2014 and 2013, respectively.

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 September 30, 2014 and December 31, 2013 consisted of the following (in millions):

 
 
2014

 
2013

 
 
 
 
 
Raw materials
 
$
80

 
$
74

Materials and supplies
 
657

 
628

Finished goods
 
713

 
589

 
 
1,450

 
1,291

 
 
 
 
 
LIFO reserve
 
(91
)
 
(91
)
Total
 
$
1,359

 
$
1,200



8



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.  

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 of hazardous substances; or operation and maintenance of remedial systems.  Government or private proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs.

As of September 30, 2014, Occidental participated in or monitored remedial activities or proceedings at 153 sites.  The following table presents Occidental’s environmental remediation reserves as of September 30, 2014, the current portion of which is included in accrued liabilities ($78 million) and the remainder in deferred credits and other liabilities — other ($252 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
 
30

 
$
24

Third-party sites
 
72

 
94

Occidental-operated sites
 
19

 
110

Closed or non-operated Occidental sites
 
32

 
102

Total
 
153

 
$
330


As of September 30, 2014, Occidental’s environmental reserves exceeded $10 million each at 11 of the 153 sites described above, and 103 of the sites had reserves from $0 to $1 million each.  Based on current estimates, Occidental expects to expend funds corresponding to approximately half of the current environmental reserves at the sites described above over the next three to 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 $390 million.  The status of Occidental’s involvement with the sites and related significant assumptions has not changed materially since December 31, 2013.  For additional information regarding environmental matters, refer to Note 7.

7. Lawsuits, Claims, Commitments and 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 are 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. Usually OPC or such subsidiaries are among many companies in these environmental proceedings and have to date been successful in sharing response costs with other financially sound companies.  Further, some lawsuits, claims and legal proceedings involve acquired or disposed assets with respect to which a third party or Occidental retains liability or indemnifies the other party for conditions that existed prior to the transaction.


9



Occidental has entered into a written settlement agreement with the State of New Jersey (the State) to resolve claims asserted by the State against Occidental arising from Occidental’s acquisition of Diamond Shamrock Chemicals Company (DSCC) and historic operations of DSCC’s Lister Avenue Plant. If the settlement is approved by the court, then Occidental will pay the State $190 million and, under certain circumstances, perform or fund future work on behalf of the State along a portion of the Passaic River. When Occidental acquired the stock of DSCC in 1986, Maxus Energy Corporation, a subsidiary of YPF S.A. (Maxus), retained liability for the Lister Avenue Plant, which is part of the Diamond Alkali Superfund Site, as well as other sites. Maxus is also obligated to indemnify Occidental for the State of New Jersey settlement. Occidental is pursuing Maxus to recover the settlement costs. This State of New Jersey settlement does not cover any potential Occidental share of costs associated with the EPA’s proposed clean-up plan of the Passaic River announced in April 2014. Maxus is also responsible for federal clean-up or other costs associated with the Lister Avenue Plant and the Diamond Alkali Superfund Site.

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 balances for environmental matters.  Reserve balances for other matters as of September 30, 2014 and December 31, 2013 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. Although taxable years through 2009 for United States federal income tax purposes have been audited by the United States Internal Revenue Service (IRS) pursuant to its Compliance Assurance Program, subsequent taxable years are currently under review. Additionally, in December 2012, Occidental filed United States federal refund claims for tax years 2008 and 2009, which are subject to IRS review. 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 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 September 30, 2014, 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.


10



8. Retirement and Postretirement Benefit Plans

The following table sets forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and postretirement benefit plans for the three and nine months ended September 30, 2014 and 2013 (in millions):

Three months ended September 30
 
2014
 
2013
Net Periodic Benefit Costs
 
Pension Benefit
 
Postretirement Benefit
 
Pension Benefit
 
Postretirement Benefit
Service cost
 
$
3

 
$
7

 
$
3

 
$
8

Interest cost
 
6

 
10

 
6

 
11

Expected return on plan assets
 
(8
)
 

 
(7
)
 

Recognized actuarial loss
 
1

 
4

 
10

 
9

Total
 
$
2

 
$
21

 
$
12

 
$
28

Nine months ended September 30
 
2014
 
2013
Net Periodic Benefit Costs
 
Pension Benefit
 
Postretirement Benefit
 
Pension Benefit
 
Postretirement Benefit
Service cost
 
$
9

 
$
19

 
$
10

 
$
22

Interest cost
 
18

 
34

 
19

 
32

Expected return on plan assets
 
(25
)
 

 
(23
)
 

Recognized actuarial loss
 
4

 
16

 
18

 
29

Total
 
$
6

 
$
69

 
$
24

 
$
83


Occidental contributed $1 million in each of the three month periods ended September 30, 2014 and 2013, and $4 million and $3 million in the nine month periods ended September 30, 2014 and 2013, respectively, to its defined benefit pension plans.

9. Fair Value Measurements

Occidental has categorized its assets and liabilities that are measured at fair value in a three-level fair value hierarchy, based on the inputs to the valuation techniques: Level 1 — using quoted prices in active markets for the assets or liabilities; Level 2 — using observable inputs other than quoted prices for the assets or liabilities; and Level 3 — using unobservable inputs.  Transfers between levels, if any, are recognized at the end of each reporting period.


11



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 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:

Ø
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) bilateral financial commodity contracts, foreign exchange 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 and 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.
Ø
Embedded commodity derivatives – Occidental values embedded commodity derivatives based on a market approach that considers various assumptions, including quoted forward commodity prices and market yield curves. The assumptions used include inputs that are observable and unobservable in the marketplace, and the fair value is designated as Level 3 within the valuation hierarchy.

Occidental generally uses an income approach to measure fair value when observable inputs are unavailable. This approach utilizes management’s judgments regarding expectations of projected cash flows, and discounts those cash flows using a 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 September 30, 2014 and December 31, 2013 (in millions):
 
 
Fair Value Measurements at
 
 
 
 
 
 
September 30, 2014 Using
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(a) 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
580

 
$
110

 
$

 
$
(631
)
 
$
59

Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
601

 
$
172

 
$

 
$
(655
)
 
$
118


 
 
Fair Value Measurements at
 
 
 
 
 
 
December 31, 2013 Using
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(a) 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
185

 
$
195

 
$

 
$
(329
)
 
$
51

Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
199

 
$
223

 
$

 
$
(364
)
 
$
58


(a) Represents the impact of netting assets, liabilities and collateral when a legal right of offset exists.





12




Fair Values — Nonrecurring
During the nine months ended September 30, 2014 and 2013, 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 long term fixed-rate debt, approximate fair value.  The cost, if any, to terminate Occidental's 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 instruments’ maturities.  The estimated fair values of Occidental’s debt as of September 30, 2014 and December 31, 2013 was $7.1 billion, for both dates, and its carrying value was $6.9 billion for both September 30, 2014 and December 31, 2013. Occidental classifies its debt as Level 1.

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 cash-flow hedge treatment and management elects and documents such treatment.  Otherwise, any fair value gains or losses are recognized in earnings in the current period.

Occidental uses a variety of derivative instruments, including cash-flow hedges and derivative instruments not designated as hedging instruments, to obtain average prices for the relevant production month and to improve realized prices for oil and gas. Occidental only occasionally hedges its oil and gas production, and, when it does, the volumes are usually insignificant. 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.

Cash-Flow Hedges
Occidental entered into financial swap agreements in November 2012 for the sale of a portion of its natural gas production in California. These swap agreements hedged 50 million cubic feet of natural gas per day beginning in January 2013 through March 2014 and qualified as cash-flow hedges. The weighted-average strike price of these swaps was $4.30.

Occidental’s marketing and trading operations, from time to time, store natural gas purchased from third parties at Occidental’s North American leased storage facilities.  Derivative instruments used to fix margins on the future sales of stored volumes ended March 31, 2014.  As of September 30, 2014, Occidental did not have any cash-flow hedges on stored volumes of natural gas. At December 31, 2013, Occidental had approximately 11 billion cubic feet of natural gas held in storage, and had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 13 billion cubic feet of stored natural gas.

Occidental's after-tax gains and losses recognized in, and reclassified to income from, Accumulated Other Comprehensive Income (AOCI) for derivative instruments classified as cash-flow hedges for the three and nine months ended September 30, 2014 and 2013, and the ending AOCI balances for each period were not material. Occidental expects to reclassify an insignificant amount, based on the valuation as of September 30, 2014, of net after-tax derivative losses from AOCI into income during the next 12 months. The gains and losses reclassified to income were recognized in net sales, and the amount of the ineffective portion of cash-flow hedges was immaterial for the three and nine months ended September 30, 2014 and 2013.


13



Derivatives Not Designated as Hedging Instruments
The following table summarizes Occidental’s net volumes of outstanding commodity derivatives contracts not designated as hedging instruments, including both financial and physical derivative contracts as of September 30, 2014 and December 31, 2013.
 
 
Net Outstanding Position
 
 
 
Long / (Short)
 
Commodity
 
2014
 
2013
 
Oil (million barrels)
 
(24
)
 
(1
)
 
Natural gas (billion cubic feet)
 
(71
)
 
(10
)
 
Precious metals (million troy ounces)
 

 
1

 

The volumes in the table above exclude contracts tied to index prices, for which the fair value, if any, is minimal at any point in time. These excluded contracts do not expose Occidental to price risk because the contract prices fluctuate with index prices.
 
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 September 30, 2014 and December 31, 2013.

Occidental fulfills short positions through its own production or by third-party purchase contracts. Subsequent to September 30, 2014, Occidental entered into purchase contracts for a substantial portion of the short positions outstanding at quarter end and has sufficient production capacity and the ability to enter into additional purchase contracts to satisfy the remaining positions.

Approximately $72 million of net losses from derivatives not designated as hedging instruments and $56 million of net gains were recognized in net sales for the three months ended September 30, 2014 and 2013, respectively. Approximately $12 million of net gains from derivatives not designated as hedging instruments and $41 million of net gains were recognized in net sales for the nine months ended September 30, 2014 and 2013, respectively.  


14



Fair Value of Derivatives
The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of September 30, 2014 and December 31, 2013 (in millions):
 
 
Asset Derivatives
 
 
 
Liability Derivatives
 
 
September 30, 2014
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Cash-flow hedges (a)
 
 
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
$

 
Accrued liabilities
 
$

Long-term receivables and other assets, net
 

 
Deferred credits and other liabilities
 

 
 
 
 

 
 
 

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments (a)
 
 
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
681

 
Accrued liabilities
 
765

Long-term receivables and other assets, net
 
9

 
Deferred credits and other liabilities
 
8

 
 
 
 
690

 
 
 
773

Total gross fair value
 
 
 
690

 
 
 
773

Less: counterparty netting and cash collateral (b,d)
 
 
 
(631
)
 
 
 
(655
)
Total net fair value of derivatives
 
 
 
$
59

 
 
 
$
118

 
 
 
Asset Derivatives
 
 
 
Liability Derivatives
 
 
December 31, 2013
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Cash-flow hedges (a)
 
 
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
$

 
Accrued liabilities
 
$
4

Long-term receivables and other assets, net
 

 
Deferred credits and other liabilities
 

 
 
 
 

 
 
 
4

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments (a)
 
 
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
367

 
Accrued liabilities
 
407

Long-term receivables and other assets, net
 
13

 
Deferred credits and other liabilities
 
11

 
 
 
 
380

 
 
 
418

Total gross fair value
 
 
 
380

 
 
 
422

Less: counterparty netting and cash collateral (c,d)
 
 
 
(329
)
 
 
 
(364
)
Total net fair value of derivatives
 
 
 
$
51

 
 
 
$
58

(a)
Fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and presented on a net basis in the consolidated balance sheets.
(b)
As of September 30, 2014, collateral received of $6 million has been netted against derivative assets and collateral paid of $31 million has been netted against derivative liabilities.
(c)
As of December 31, 2013, collateral received of $11 million has been netted against derivative assets and collateral paid of $46 million has been netted against derivative liabilities.
(d)
Select clearinghouses and brokers require Occidental to post an initial margin deposit. Collateral, mainly for initial margin, of $81 million and $103 million deposited by Occidental has not been reflected in these derivative fair value tables as of September 30, 2014 and December 31, 2013, respectively. This collateral is included in other current assets in the consolidated balance sheets as of September 30, 2014, and December 31, 2013, respectively.


15



See Note 9 for fair value measurement disclosures on derivatives.

Credit Risk
A substantial portion of Occidental’s derivative transaction volume is executed through exchange-traded contracts, which are subject to minimal credit risk as a significant portion of these transactions is settled on a daily margin basis with select clearinghouses and brokers.  Occidental executes the rest of its derivative transactions in the 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 September 30, 2014 and December 31, 2013, Occidental had a net liability of $6 million and $8 million, respectively, which is net of collateral posted of $24 million and $23 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 September 30, 2014 and December 31, 2013.

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, natural gas liquids (NGLs) and natural gas.  The chemical segment mainly manufactures and markets basic chemicals and vinyls.  The midstream and marketing segment gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power.  It also trades around its assets, including transportation and storage capacity, and trades oil, NGLs, gas and other commodities. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.

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. Intersegment sales eliminate upon consolidation and are generally made at prices approximating those that the selling entity would be able to obtain in third-party transactions.


16



The following tables present Occidental’s industry segments (in millions):
 
 
Oil
 
 
 
Midstream
 
Corporate
 
 
 
 
and
 
 
 
and
 
and
 
 
 
 
Gas
 
Chemical
 
Marketing
 
Eliminations
 
Total
Three months ended September 30,
   2014
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
4,652

 
$
1,232

 
$
362

 
$
(250
)
 
$
5,996

Pre-tax operating profit (loss)
 
$
1,899

 
$
140

 
$
128

 
$
(136
)
(b) 
$
2,031

Income taxes
 

 

 

 
(817
)
(c) 
(817
)
Discontinued operations, net
 

 

 

 
(3
)
 
(3
)
Net income attributable to
   noncontrolling interest
 

 

 
(3
)
 

 
(3
)
Net income (loss) attributable to
   common stock
 
$
1,899

 
$
140

 
$
125

 
$
(956
)
 
$
1,208

 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
   2013
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
5,018

 
$
1,200

 
$
442

 
$
(211
)
 
$
6,449

Pre-tax operating profit (loss)
 
$
2,363

 
$
181

 
$
212

 
$
(131
)
(b) 
$
2,625

Income taxes
 

 

 

 
(1,037
)
(c) 
(1,037
)
Discontinued operations, net
 

 

 

 
(5
)
 
(5
)
Net income (loss) attributable to
   common stock
 
$
2,363

 
$
181

 
$
212

 
$
(1,173
)
 
$
1,583

 
 
Oil
 
 
 
Midstream
 
Corporate
 
 
 
 
and
 
 
 
and
 
and
 
 
 
 
Gas
 
Chemical
 
Marketing
 
Eliminations
 
Total
Nine months ended September 30,
   2014
 
 
 
 
 
 
 
 
  
 
Net sales
 
$
14,135

(a) 
$
3,694

 
$
1,327

 
$
(797
)
 
$
18,359

Pre-tax operating profit (loss)
 
$
6,185

 
$
409

 
$
522

 
$
(372
)
(b) 
$
6,744

Income taxes
 

 

 

 
(2,706
)
(c) 
(2,706
)
Discontinued operations, net
 

 

 

 
(1
)
 
(1
)
Net income attributable to
   noncontrolling interest
 

 

 
(8
)
 

 
(8
)
Net income (loss) attributable to
   common stock
 
$
6,185

 
$
409

 
$
514

 
$
(3,079
)
 
$
4,029

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
   2013
 
 
 
 
 
 
 
 
  
 
Net sales
 
$
14,179

 
$
3,562

 
$
1,164

 
$
(622
)
 
$
18,283

Pre-tax operating profit (loss)
 
$
6,383

 
$
615

(d) 
$
475

 
$
(417
)
(b) 
$
7,056

Income taxes
 

 

 

 
(2,782
)
(c) 
(2,782
)
Discontinued operations, net
 

 

 

 
(14
)
 
(14
)
Net income (loss) attributable to
   common stock
 
$
6,383

 
$
615

 
$
475

 
$
(3,213
)
 
$
4,260


(a) Includes second quarter pre-tax gain of $532 million for the Hugoton sale. In addition, in June 2014, management determined it would not pursue the exploration and development of certain of its non-producing domestic oil and gas acreage, and Occidental recorded a pre-tax impairment charge of $471 million.
(b) Includes unallocated net interest expense, administration expense, environmental remediation and other pre-tax items. The nine month period ended September 30, 2013 includes a $55 million pre-tax charge for the estimated costs related to employment and post-employment benefits for Occidental's former Executive Chairman and termination of certain other employees and consulting arrangements.
(c) Includes all foreign and domestic income taxes from continuing operations.
(d) Includes a $131 million pre-tax gain for the sale of an equity investment in Carbocloro, a Brazilian entity which owns a chemical facility.


17



12. Earnings Per Share

Occidental’s instruments containing rights to nonforfeitable dividends granted in stock-based awards are considered participating securities prior to vesting and, therefore, have been deducted from earnings 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 allocated 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 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 nine months ended September 30, 2014 and 2013:
 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
(in millions, except per-share amounts)
 
2014

 
2013

 
2014

 
2013

Basic EPS
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1,214

 
$
1,588

 
$
4,038

 
$
4,274

Less: Income from continuing operations attributable to noncontrolling interest
 
(3
)
 

 
(8
)
 

Income from contributing operations attributable to common stock
 
1,211

 
1,588

 
4,030

 
4,274

Discontinued operations, net
 
(3
)
 
(5
)
 
(1
)
 
(14
)
Net Income
 
1,208


1,583

 
4,029

 
4,260

Less: Net Income allocated to participating securities
 
(3
)
 
(4
)
 
(8
)
 
(9
)
Net income, net of participating securities
 
1,205

 
1,579

 
4,021

 
4,251

 
 
 
 
 
 
 
 
 
Weighted average number of basic shares
 
777.4

 
805.1

 
783.7

 
804.8

Basic EPS
 
$
1.55

 
$
1.96

 
$
5.13

 
$
5.28

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Net income, net of participating securities
 
$
1,205

 
$
1,579

 
$
4,021

 
$
4,251

Weighted average number of basic shares
 
777.4

 
805.1

 
783.7

 
804.8

Dilutive effect of potentially dilutive securities
 
0.3

 
0.6

 
0.4

 
0.6

Total diluted weighted average common shares
 
777.7

 
805.7

 
784.1

 
805.4

Diluted EPS
 
$
1.55

 
$
1.96

 
$
5.13

 
$
5.28


13.
Variable Interest Entity

In November 2012, Occidental and Magellan Midstream Partners, L.P. (Magellan) formed BridgeTex Pipeline Company, LLC (BridgeTex) to construct a pipeline to transport crude oil between the Permian region and the Gulf Coast refinery markets. The pipeline began commercial service in September 2014. Occidental indirectly owns a 50% interest in BridgeTex, which is a variable interest entity that Occidental consolidates. This investment is not material to Occidental's financial statements. As of September 30, 2014 and December 31, 2013, the BridgeTex assets and liabilities mainly comprised cash and cash equivalents and property, plant and equipment (PP&E). As of September 30, 2014, BridgeTex's total cash, PP&E and non-controlling amounts (including Magellan's interests) were $66 million, $1 billion and $606 million, respectively. As of December 31, 2013, BridgeTex's cash, PP&E and non controlling amounts were $82 million, $420 million and $246 million, respectively. BridgeTex's assets cannot be used for the obligations of, nor do BridgeTex's creditors have recourse to, OPC or its other subsidiaries.


18



14. Planned Spin-Off of California Resources Corporation

In connection with the planned spin-off, on November 30, 2014, Occidental intends to distribute, on a pro-rata basis, at least 80.1% of CRC common stock to Occidental shareholders as of November 17, 2014, the record date for the spin-off, with each Occidental shareholder to receive 0.4 shares of CRC for every share of Occidental common stock. Fractional shares of CRC will not be distributed and any fractional shares of CRC otherwise issuable to an Occidental shareholder will be sold in the open market on such shareholder's behalf, and such shareholder will receive a cash payment with respect to that fractional share. Occidental intends to dispose of the up to 19.9% of retained CRC shares within 18 months following the spin-off.

The CRC spin-off has been structured to qualify as a tax-free distribution to U.S. holders of Occidental common stock for U.S. federal income tax purposes. Occidental has received a private letter ruling from the Internal Revenue Service with respect to the treatment of certain aspects of the spin-off. Based on the private letter ruling and certain facts, assumptions, representations and undertakings made by Occidental and CRC, Occidental will receive an opinion of counsel to the effect that for U.S. federal income tax purposes, the distribution of CRC common stock and certain related transactions will not be taxable to Occidental or U.S. holders of Occidental common stock, except in respect to cash received in lieu of fractional share interests which generally will be taxable to such holders as capital gain.

In October 2014, in connection with the planned spin-off from Occidental, CRC issued $5.0 billion in senior notes (the California Notes) in a private placement, including $1.0 billion of 5.0% senior notes due January 2020, $1.75 billion of 5.50% senior notes due September 2021, and $2.25 billion of 6.0% senior notes due November 2024. The California Notes are fully and unconditionally guaranteed by the material subsidiaries of CRC. Occidental received $4.95 billion in net proceeds from the private placement as a result of a cash distribution from CRC as part of the planned spin-off.

In September 2014, CRC entered into a five-year, $1.0 billion Term Loan Facility and a five-year, $2.0 billion Revolving Credit Facility with a syndicate of lenders (the CRC Credit Facilities). The CRC Credit Facilities were entered into as part of the planned spin-off of CRC from Occidental. Borrowings under the CRC Credit Facilities bear interest at either LIBOR or an alternate base rate plus an applicable margin. All obligations under the CRC Credit Facilities are guaranteed by certain subsidiaries of CRC. CRC intends to borrow funds under the CRC Credit Facilities to make a $1.25 billion cash distribution to Occidental concurrent with the spin-off and to repay any intercompany balances to Occidental prior to the spin-off.

When Occidental completes the spin-off of CRC at the end of November, the results of operations and cash flows of CRC will be reclassified into discontinued operations in Occidental’s consolidated statements of income and cash flows for all periods presented.





19



Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
In this report, “Occidental” means Occidental Petroleum Corporation (OPC), or OPC and one or more entities in which it owns a controlling interest (subsidiaries). Portions of this report contain forward-looking statements and involve risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows and business prospects. Actual results may differ from anticipated results, sometimes materially, and reported results should not be considered an indication of future performance. Factors that could cause results to differ include, but are not limited to: global commodity pricing fluctuations; supply and demand considerations for Occidental's products; higher-than-expected costs; the regulatory approval environment; reorganization or restructuring of Occidental's operations, including any delay of, or other negative developments affecting, the spin-off of California Resources Corporation; not successfully completing, or any material delay of, field developments, expansion projects, capital expenditures, efficiency projects, acquisitions or dispositions; lower-than-expected production from development projects or acquisitions; exploration risks; general economic slowdowns domestically or internationally; political conditions and events; liability under environmental regulations including remedial actions; litigation; disruption or interruption of production or manufacturing or facility damage due to accidents, chemical releases, labor unrest, weather, natural disasters, cyber attacks or insurgent activity; failure of risk management; changes in law or regulations; or changes in tax rates. Words such as “estimate,” “project,” “predict,” “will,” “would,” “should,” “could,” “may,” “might,” “anticipate,” “plan,” “intend,” “believe,” “expect,” “aim,” “goal,” “target,” “objective,” “likely” or similar expressions that convey the prospective nature of events or outcomes generally indicate forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Occidental does not undertake any obligation to update any forward-looking statements, as a result of new information, future events or otherwise. Material risks that may affect Occidental's results of operations and financial position appear in Part I, Item 1A “Risk Factors” of the 2013 Form 10-K.


Consolidated Results of Operations
 
Occidental reported net income of $1.2 billion for the third quarter of 2014 on net sales of $6.0 billion, compared to net income of $1.6 billion on net sales of $6.4 billion for the same period of 2013.  Diluted earnings per share (EPS) were $1.55 and $1.96 for the third quarters of 2014 and 2013, respectively. Occidental reported net income of $4.0 billion for the first nine months of 2014 on net sales of $18.4 billion, compared to net income of $4.3 billion on net sales of $18.3 billion for the same period of 2013.  Diluted EPS were $5.13 for the nine months of 2014, compared to $5.28 for the same period of 2013.  
 
Net income for the three months ended September 30, 2014, compared to the same periods of 2013, reflected lower realized prices for oil, lower international oil volumes, higher oil and gas segment operating costs and depreciation, depletion, and amortization (DD&A) expense and lower marketing and trading performance, which were partially offset by higher oil volumes in the United States.

Net income for the nine months ended September 30, 2014 included an after-tax gain of $339 million from the sale of Occidental's operations in Hugoton Field, and a $300 million after-tax impairment charge related to certain non-producing domestic oil and gas acreage.

Selected Income Statement Items

Net sales for the three and nine months ended September 30, 2014, compared to the same period of 2013, reflected lower realized prices for oil and lower international oil volumes, partially offset by higher domestic oil volumes and improved domestic natural gas prices.

Cost of sales for the three and nine months ended September 30, 2014, compared to the same periods in 2013, reflected higher raw material and energy costs in the chemical segment, as well as higher domestic oil and gas operating expenses, in particular, higher costs for increased downhole maintenance activities as well as higher costs for carbon dioxide (CO2), steam, and power.
The decrease in the provision for domestic and foreign income taxes for the nine months ended September 30, 2014, compared to the same period of 2013, was due to a lower pre-tax income in 2014, compared to 2013.


20



Selected Analysis of Financial Position
 
See “Liquidity and Capital Resources” for discussion about the changes in cash and cash equivalents.
 
The increase in inventories was due to higher oil inventories at September 30, 2014, compared to December 31, 2013, due to the timing of international liftings. The decrease in trade receivables was a direct result of lower realized prices for oil and the timing of collections on international liftings. The increase in other current assets reflected higher oil and gas joint venture and partner receivables. The increase in property, plant and equipment, net, reflected capital expenditures of $7.5 billion after partner contributions, partially offset by DD&A, asset sales and impairments. The increase in long-term receivables and other assets was a result of line fill due to the start of commercial service on the BridgeTex pipeline.
The increase in deferred domestic and foreign income taxes was mainly due to accelerated tax depreciation on capital expenditures. The increase in stockholders' equity reflected net income for the nine months of 2014, offset partially by stock repurchases and dividends.

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, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, CO2 and power.  It also trades around its assets, including transportation and storage capacity, and trades oil, NGLs, gas and other commodities. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.


21



The following table sets forth the sales and earnings of each operating segment and corporate items for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
 
 
2014

 
2013

 
2014

 
2013

Net Sales (a)
 
 
 
 
 
 
 
 
Oil and Gas
 
$
4,652

 
$
5,018

 
$
14,135

 
$
14,179

Chemical
 
1,232

 
1,200

 
3,694

 
3,562

Midstream and Marketing
 
362

 
442

 
1,327

 
1,164

Eliminations
 
(250
)
 
(211
)
 
(797
)
 
(622
)
 
 
$
5,996

 
$
6,449

 
$
18,359

 
$
18,283

Segment Earnings (b)
 
 
 
 
 
 
 
 
Oil and Gas
 
$
1,899

 
$
2,363

 
$
6,185

 
$
6,383

Chemical
 
140

 
181

 
409

 
615

Midstream and Marketing (c)
 
125

 
212

 
514

 
475

 
 
2,164

 
2,756

 
7,108

 
7,473

 
 
 
 
 
 
 
 
 
Unallocated Corporate Items (b)
 
 
 
 
 
 
 
 
Interest expense, net
 
(13
)
 
(28
)
 
(47
)
 
(87
)
Income taxes
 
(817
)
 
(1,037
)
 
(2,706
)
 
(2,782
)
Other expense, net
 
(123
)
 
(103
)
 
(325
)
 
(330
)
 
 
 
 
 
 
 
 
 
Income from continuing operations (c)
 
1,211

 
1,588

 
4,030

 
4,274

Discontinued operations, net
 
(3
)
 
(5
)
 
(1
)
 
(14
)
 
 
 
 
 
 
 
 
 
Net income attributable to common stock (c)
 
$
1,208

 
$
1,583

 
$
4,029

 
$
4,260

(a) Intersegment sales eliminate upon consolidation and are generally made at prices approximating 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 and Marketing Segment” and "Corporate" discussions that follow.
(c) Represents amounts attributable to common stock shown after deducting a noncontrolling interest amount of $3 million and $8 million for the three and nine months ended September 30, 2014, respectively.



22



Significant Transactions and Events Affecting Earnings
 
The following table sets forth, for the three and nine months ended September 30, 2014 and 2013, significant transactions and events affecting Occidental’s earnings that vary widely and unpredictably in nature, timing and amount (in millions):
 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Oil & Gas
 
 
 
 
 
 
 
 
Hugoton sale gain
 
$
(3
)
 
$

 
$
532

 
$

Asset impairments
 

 

 
(471
)
 

Total Oil and Gas
 
$
(3
)
 
$

 
$
61

 
$

 
 
 
 
 
 
 
 
 
Chemical
 
 
 
 
 
 
 
 
Carbocloro sale gain
 
$

 
$

 
$

 
$
131

Total Chemical
 
$

 
$

 
$

 
$
131

 
 
 
 
 
 
 
 
 
Midstream and Marketing
 
 
 
 
 
 
 
 
No significant items affecting earnings
 
$

 
$

 
$

 
$

Total Midstream and Marketing
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
 
Spin-off costs and other
 
$
(21
)
 
$

 
$
(38
)
 
$

Charge for former executives and consultants
 

 

 

 
(55
)
Tax effect of pre-tax adjustments
 
3

 

 
(16
)
 
(25
)
Discontinued operations, net*
 
(3
)
 
(5
)
 
(1
)
 
(14
)
Total Corporate
 
$
(21
)
 
$
(5
)
 
$
(55
)
 
$
(94
)
 
 
 
 
 
 
 
 
 
Total
 
$
(24
)
 
$
(5
)
 
$
6

 
$
37

*Amounts shown after tax.
 

23



Worldwide Effective Tax Rate

The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations for the three and nine months ended September 30, 2014 and 2013 ($ in millions):
 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Oil & Gas earnings
 
$
1,899

 
$
2,363

 
$
6,185

 
$
6,383

Chemical earnings
 
140

 
181

 
409

 
615

Midstream and Marketing earnings
 
128

 
212

 
522

 
475

Unallocated corporate items
 
(136
)
 
(131
)
 
(372
)
 
(417
)
Pre-tax income
 
2,031

 
2,625

 
6,744

 
7,056

 
 
 
 
 
 
 
 
 
Income tax expense
 
 
 
 
 
 
 
 
Federal and state
 
273

 
461

 
1,078

 
1,085

Foreign
 
544

 
576

 
1,628

 
1,697

Total
 
817

 
1,037

 
2,706

 
2,782

 
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1,214

 
$
1,588

 
$
4,038

 
$
4,274

 
 
 
 
 
 
 
 
 
Worldwide effective tax rate (a)
 
40%

 
40%

 
40%

 
39%

(a)    The nine months ended 2013 amount includes the benefit from the relinquishment of an international exploration block.

24



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 nine months ended September 30, 2014 and 2013.  The differences between the production and sales volumes per day are generally due to the timing of shipments at Occidental’s international locations where the product is loaded onto tankers.
 
 
 
Three months ended September 30
 
  Nine months ended September 30
 
 
 
Production per Day
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Oil (MBBL)
 
 
 
 
 
 
 
 
United States (a)
 
282

 
267

 
278

 
264

Middle East/North Africa
 
171

 
180

 
171

 
182

Latin America
 
29

 
30

 
25

 
29

NGLs (MBBL)
 
 
 
 
 
 
 
 
United States (a)
 
74

 
79

 
73

 
78

Middle East/North Africa
 
7

 
7

 
7

 
7

Natural Gas (MMCF)
 
 
 
 
 
 
 
 
United States (a)
 
711

 
781

 
728

 
799

Middle East/North Africa
 
426

 
431

 
416

 
432

Latin America
 
12

 
12

 
12

 
13