10-Q 1 oxyform10q63017.htm 10-Q Document
UNITED STATES 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, 2017
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 a smaller reporting company, or an emerging growth company. (See definition of "accelerated filer", "large accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act): 

Large Accelerated Filer        þ    Accelerated Filer        o    Non-Accelerated Filer     o
Smaller Reporting Company    o    Emerging Growth Company    o

If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    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 June 30, 2017
 
 
Common stock $.20 par value
 
764,573,083
 




OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES


TABLE OF CONTENTS




 
 
 
 
PAGE
 
 
 
 
 
Part I
Financial Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017 and December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Three and six months ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
Three and six months ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
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
JUNE 30, 2017, AND DECEMBER 31, 2016
(Amounts in millions)

 
 
2017
 
2016
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,218

 
$
2,233

 
 
 
 
 
 
 
Trade receivables, net
 
3,913

 
3,989

 
 
 
 
 
 
 
Inventories
 
920

 
866

 
 
 
 
 
 
 
Assets held for sale
 
558

 

 
 
 
 
 
 
 
Other current assets
 
466

 
1,340

 
 
 
 
 
 
 
Total current assets
 
8,075


8,428

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENTS IN UNCONSOLIDATED ENTITIES
 
1,572

 
1,401

 
 
 
 
 
 
 
 
 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $37,330 at June 30, 2017, and $38,956 at December 31, 2016
 
31,466

 
32,337

 
 
 
 
 
 
 
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
 
869

 
943

 
 
 
 
 
 
 
TOTAL ASSETS
 
$
41,982

 
$
43,109

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


2



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2017, AND DECEMBER 31, 2016
(Amounts in millions except share amounts)

 
 
2017
 
2016
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Current maturities of long-term debt
 
$
500

 
$

 
Accounts payable
 
3,825

 
3,926

 
Accrued liabilities
 
2,050

 
2,436

 
Liabilities of assets held for sale
 
16

 

 
Total current liabilities
 
6,391

 
6,362

 
 
 
 
 
 
 
LONG-TERM DEBT, NET
 
9,324

 
9,819

 
 
 
 
 
 
 
DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
 
 
Deferred domestic and foreign income taxes
 
1,059

 
1,132

 
Other
 
4,171

 
4,299

 
Total deferred credits and other liabilities
 
5,230

 
5,431

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Common stock, at par value (892,647,217 shares at June 30, 2017, and 892,214,604 shares at December 31, 2016)
 
179

 
178

 
Treasury stock (128,074,134 shares at June 30, 2017, and 127,977,306 shares at December 31, 2016)
 
(9,149
)
 
(9,143
)
 
Additional paid-in capital
 
7,824

 
7,747

 
Retained earnings
 
22,435

 
22,981

 
Accumulated other comprehensive loss
 
(252
)
 
(266
)
 
Total stockholders’ equity
 
21,037


21,497

 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
41,982

 
$
43,109

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

3



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017, AND 2016
(Amounts in millions, except per-share amounts)

 
 
Three months ended June 30
 
Six months ended June 30
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
REVENUES AND OTHER INCOME
 
 
 
 
 
 
 
 
Net sales
 
$
3,060

 
$
2,531

 
$
6,017

 
$
4,654

Interest, dividends and other income
 
31

 
27

 
52

 
47

Gain on sale of assets, net
 
512

 

 
512

 
138

 
 
3,603

 
2,558

 
6,581

 
4,839

COSTS AND OTHER DEDUCTIONS
 
 
 
 
 
 
 
 
Cost of sales
 
1,486

 
1,244

 
2,912

 
2,525

Selling, general and administrative and other operating
expenses
 
352

 
338

 
624

 
610

Taxes other than on income
 
77

 
74

 
145

 
149

Depreciation, depletion and amortization
 
989

 
1,070

 
1,931

 
2,172

Asset impairments and related items
 

 

 
13

 
78

Exploration expense
 
8

 
27

 
19

 
36

Interest and debt expense, net
 
86

 
88

 
167

 
148

 
 
2,998

 
2,841

 
5,811

 
5,718

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and other items
 
605

 
(283
)
 
770

 
(879
)
Benefit (provision) for domestic and foreign income taxes
 
(285
)
 
96

 
(363
)
 
299

Income from equity investments
 
187

 
51

 
217

 
84

Income (loss) from continuing operations
 
507

 
(136
)
 
624

 
(496
)
Discontinued operations, net
 

 
(3
)
 

 
435

NET INCOME (LOSS)
 
$
507

 
$
(139
)
 
$
624

 
$
(61
)
 
 
 
 
 
 
 
 
 
BASIC EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.66


$
(0.18
)
 
$
0.81

 
$
(0.65
)
Discontinued operations, net
 

 

 

 
0.57

BASIC EARNINGS PER COMMON SHARE
 
$
0.66

 
$
(0.18
)
 
$
0.81

 
$
(0.08
)
 
 
 
 
 
 
 
 
 
DILUTED EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.66

 
$
(0.18
)
 
$
0.81

 
$
(0.65
)
Discontinued operations, net
 

 

 

 
0.57

DILUTED EARNINGS PER COMMON SHARE
 
$
0.66

 
$
(0.18
)
 
$
0.81

 
$
(0.08
)
 
 
 
 
 
 
 
 
 
DIVIDENDS PER COMMON SHARE
 
$
0.76

 
$
0.75

 
$
1.52

 
$
1.50

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




4



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017, AND 2016
(Amounts in millions)

 
 
Three months ended June 30
 
Six months ended June 30
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
507

 
$
(139
)
 
$
624

 
$
(61
)
Other comprehensive income (loss) items:
 
 
 
 
 
 
 
 
Foreign currency translation gains
 

 

 
1

 
1

Unrealized gains (losses) on derivatives (a)
 
1

 
(3
)
 
6

 
(13
)
Pension and postretirement gains (losses) (b)
 
(1
)
 
7

 
8

 
12

Reclassification to income of realized (gains) losses on derivatives(c)
 
1

 
1

 
(1
)
 
8

Other comprehensive income, net of tax
 
1


5

 
14

 
8

Comprehensive income (loss)
 
$
508

 
$
(134
)
 
$
638

 
$
(53
)

(a)
Net of tax of zero and $1 for the three months ended June 30, 2017 and 2016, respectively, and $(3) and $7 for the six months ended June 30, 2017, and 2016, respectively.
(b)
Net of tax of $1 and $(4) for the three months ended June 30, 2017 and 2016, respectively, and $(4) and $(7) for the six months ended June 30, 2017, and 2016, respectively.
(c)
Net of tax of zero for the three months ended June 30, 2017 and 2016, respectively, and $1 and $(4) for the six months ended June 30, 2017, and 2016, respectively.

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

5



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(Amounts in millions)
 
 
2017
 
2016
 
CASH FLOW FROM OPERATING ACTIVITIES
 
 
 
 
 
Net income (loss)
 
$
624

 
$
(61
)
 
Adjustments to reconcile income (loss) to net cash provided by
operating activities:
 
 
 
 
 
Discontinued operations, net
 

 
(435
)
 
Depreciation, depletion and amortization of assets
 
1,931

 
2,172

 
Deferred income tax provision (benefit)
 
(24
)
 
76

 
Other noncash charges to income
 
43

 
37

 
Gain on sale of assets, net
 
(512
)
 
(138
)
 
Asset impairments and related items
 
13

 
78

 
Dry hole expenses
 
7

 
28

 
Changes in operating assets and liabilities, net
 
(306
)
 
(511
)
 
Other operating, net
 
729

 
(304
)
 
Operating cash flow from continuing operations
 
2,505

 
942

 
Operating cash flow from discontinued operations
 

 
876

 
Net cash provided by operating activities
 
2,505

 
1,818

 
 
 
 
 
 
 
CASH FLOW FROM INVESTING ACTIVITIES
 
 
 
 
 
Capital expenditures
 
(1,492
)
 
(1,247
)
 
Change in capital accrual
 
(35
)
 
(209
)
 
Payments for purchases of assets and businesses
 
(377
)
 
(34
)
 
Proceeds from sale of assets
 
609

 
260

 
Equity investments and other, net
 
(67
)
 
(104
)
 
Net cash used by investing activities
 
(1,362
)

(1,334
)
 
 
 
 
 
 
 
CASH FLOW FROM FINANCING ACTIVITIES
 
 
 
 
 
Change in restricted cash
 

 
1,193

 
Proceeds from long-term debt, net
 

 
2,718

 
Payment of long-term debt, net
 

 
(2,710
)
 
Proceeds from issuance of common stock
 
16

 
29

 
Purchases of treasury stock
 
(6
)
 
(15
)
 
Cash dividends paid
 
(1,168
)
 
(1,149
)
 
Net cash provided (used) by financing activities
 
(1,158
)
 
66

 
 
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
(15
)
 
550

 
Cash and cash equivalents — beginning of period
 
2,233

 
3,201

 
Cash and cash equivalents — end of period
 
$
2,218

 
$
3,751

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



6



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2017

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 (GAAP) 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 unaudited 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, 2016.

In the opinion of Occidental’s management, the accompanying unaudited 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, 2017, the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017, and 2016, and cash flows for the six months ended June 30, 2017 and 2016, as applicable. The income and cash flows for the periods ended June 30, 2017 and 2016 are not necessarily indicative of the income or cash flows to be expected for the full year.

2. Asset Acquisitions, Dispositions and Other

In June 2017, Occidental entered into a sales agreement to sell non-strategic acreage in Andrews and Martin Counties, Texas, for approximately $0.6 billion. The assets and liabilities related to these operations were presented as held for sale at June 30, 2017, and primarily included property, plant and equipment and asset retirement obligations. Concurrently, Occidental entered into a purchase agreement to increase its ownership interests and assume operatorship in CO2 enhanced oil recovery (EOR) properties located in its Permian EOR business unit for $0.6 billion. These transactions closed in the third quarter of 2017, and are subject to customary price adjustments.
In April 2017, Occidental completed the sale of its South Texas operations for net proceeds of $0.5 billion resulting in pre-tax gain of $0.5 billion. The assets and liabilities related to these operations were presented as held for sale at March 31, 2017, and primarily included property, plant and equipment and asset retirement obligations.

3. Accounting and Disclosure Changes

In March 2017, the Financial Accounting Standards Board (FASB) issued guidance related to presentation of net periodic pension cost and net periodic postretirement benefit cost. The rules become effective for annual periods beginning after December 15, 2017. These rules are not expected to have a material impact to Occidental's financial statements upon adoption.

In 2016, the FASB issued rules clarifying several aspects of the new revenue recognition standard, Topic 606, Revenue from Contracts with Customers, previously issued in May 2014. The guidance is effective for interim and annual reporting periods starting January 1, 2018. Under the new standard, 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 and services. The new standard also requires more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Occidental plans to adopt the standard using the modified retrospective approach and recognize a cumulative effect adjustment to Retained Earnings as of January 1, 2018, the date of adoption, subject to certain additional disclosures. Occidental continues to make progress on evaluating the accounting implications of the standard and has stratified all revenue streams within each operating segment and has compiled an inventory of all contracts. A representative sample of contracts has been pulled from these significant revenue streams and reviewed in detail against the requirements of the new standard to identify whether such contracts are in scope of the new standard; whether there will be material changes in the timing or amount of revenue recognized; whether processes and controls are in place to evaluate new contracts for revenue recognition and to assemble any additional required disclosures. Occidental has finalized the scoping strategy for review of existing and newly executed contracts and assessed disclosure requirements. Additionally,

7



Occidental has developed training materials to instruct accounting staff on the new standard and should finalize estimates of potential financial impacts by the end of the third quarter. Based upon work performed through June 30, 2017, Occidental does not currently anticipate a material impact to earnings as a result of adopting the new standard and is continuing to evaluate the impact of this and other provisions of the standard on its accounting policies, internal controls and consolidated financial statements and related disclosures.

In February 2016, the FASB issued rules which require Occidental to recognize most leases, including operating leases, on the balance sheet. The new rules require lessees to recognize a right-of-use asset and lease liability for all leases with lease terms of more than 12 months. The lease liability represents the discounted obligation to make future minimum lease payments and the corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement and presentation of expenses and cash flows by a lessee. Recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. Occidental is the lessee under various agreements for real estate, equipment, plants and facilities, aircraft, IT hardware and vehicles that are currently accounted for as operating leases, refer to Note 6, Lease Commitments in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2016. As a result, these new rules will increase reported assets and liabilities. Occidental will not early-adopt this standard. Occidental will apply the revised lease rules for our interim and annual reporting periods starting January 1, 2019, using a modified retrospective approach, including several optional practical expedients related to leases commenced before the effective date. Occidental is currently evaluating the effect of these rules on its financial statements, developing training materials for accounting staff and reviewing external software solutions for the identification, documentation and tracking of leases in order to create an adoption plan based on Occidental's population of leases under the revised definition of leases. The quantitative impacts of the new standard are dependent on the leases in force at the time of adoption. As a result, the evaluation of the effect of the new standard will extend over future periods.

4. Supplemental Cash Flow Information

Occidental paid foreign and state income taxes of $375 million and $288 million during the six months ended June 30, 2017, and 2016, respectively. Occidental received federal income tax refunds of $749 million and $302 million in the six months ended June 30, 2017 and 2016, respectively. Interest paid totaled $155 million and $154 million in each of the six months ended June 30, 2017, and 2016, respectively.

5. Inventories

Inventories as of June 30, 2017, and December 31, 2016, consisted of the following (in millions):
 
 
2017
 
2016
 
 
 
 
 
 
 
Raw materials
 
$
79

 
$
65

 
Materials and supplies
 
453

 
446

 
Finished goods
 
429

 
395

 
 
 
961

 
906

 
 
 
 
 
 
 
Revaluation to LIFO
 
(41
)
 
(40
)
 
Total
 
$
920

 
$
866

 

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

8



disposal of hazardous substances; or operation and maintenance of remedial systems. These 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, 2017, Occidental participated in or monitored remedial activities or proceedings at 147 sites.  The following table presents Occidental’s environmental remediation reserves as of June 30, 2017. The current portion of $131 million is included in accrued liabilities and the noncurrent portion of $742 million is included in deferred credits and other liabilities — other.  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
 
34

 
$
460

 
Third-party sites
 
67

 
172

 
Occidental-operated sites
 
17

 
107

 
Closed or non-operated Occidental sites
 
29

 
134

 
Total
 
147

 
$
873

 

As of June 30, 2017, Occidental’s environmental reserves exceeded $10 million each at 16 of the 147 sites described above, and 86 of the sites each had reserves of $1 million or less.  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 estimable amount of reasonably possible additional losses beyond those liabilities recorded for environmental remediation at these sites could range up to $1.1 billion. The status of Occidental's involvement with the sites and related significant assumptions, including those sites indemnified by Maxus Energy Corporation (see further discussion below), has not changed materially since December 31, 2016.  
When Occidental acquired Diamond Shamrock Chemicals Company (DSCC) in 1986, Maxus Energy Corporation (Maxus), currently a subsidiary of YPF S.A. (YPF), agreed to indemnify Occidental for a number of environmental sites, including the Diamond Alkali Superfund Site (Site) along a portion of the Passaic River. On June 17, 2016, Maxus and several affiliated companies filed for Chapter 11 bankruptcy in Federal District Court in the State of Delaware. Prior to filing for bankruptcy, Maxus defended and indemnified Occidental in connection with cleanup and other costs associated with the sites subject to the indemnity, including the Site. Occidental is pursuing Maxus’ current and former parent companies, YPF and Repsol, as the alter egos of Maxus, to recover all indemnified costs, which will include costs to be incurred at the Site.
In March 2016, the EPA issued a Record of Decision (ROD) specifying remedial actions required for the lower 8.3 miles of the Lower Passaic River. The ROD does not address any potential remedial action for the upper nine miles of the Lower Passaic River or Newark Bay. During the third quarter of 2016, and following Maxus’s bankruptcy filing, Occidental and the EPA entered into an Administrative Order on Consent (AOC) to complete the design of the proposed cleanup plan outlined in the ROD at an estimated cost of $165 million. The EPA announced that it will pursue similar agreements with other potentially responsible parties.
Occidental has accrued a reserve relating to its estimated allocable share of the costs to perform the design and the remediation called for in the AOC and the ROD, as well as for certain other Maxus-indemnified sites. Occidental’s accrued estimated environmental reserve does not consider any recoveries for indemnified costs. Occidental’s ultimate share of this liability may be higher or lower than the reserved amount, and is subject to final design plans and the resolution of Occidental's allocable share with other potentially responsible parties. Occidental continues to evaluate the costs to be incurred to comply with the AOC, the ROD and to perform remediation at other Maxus-indemnified sites in light of the Maxus bankruptcy and the share of ultimate liability of other potentially responsible parties. In June 2017, the court overseeing the Maxus bankruptcy approved a plan to liquidate Maxus and create a trust to pursue claims against YPF, Repsol and others to satisfy claims by Occidental and other creditors for past and future cleanup and other costs. The trust will pursue claims against YPF, Repsol and others and will distribute assets to Maxus’ creditors in accordance with the trust agreement and reorganization plan.


9



7. Lawsuits, Claims, Commitments and Contingencies

Occidental 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. Occidental 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 Occidental 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.

In accordance with applicable accounting guidance, Occidental accrues reserves for outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. In Note 6, Environmental Liabilities and Expenditures, Occidental has disclosed its reserve balances for environmental remediation matters that satisfy this criteria. Reserve balances for matters, other than environmental remediation, that satisfy this criteria as of June 30, 2017, and December 31, 2016, were not material to Occidental’s consolidated condensed balance sheets.

Occidental also evaluates the amount of reasonably possible losses that it could incur as a result of outstanding lawsuits, claims and proceedings and discloses its estimable range of reasonably possible additional losses for sites where it is a participant in environmental remediation. Occidental believes that other reasonably possible losses for non-environmental matters 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. Occidental reassesses the probability and estimability of contingent losses as new information becomes available.

Tax Matters

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.  Taxable years from 2002 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.

Indemnities to Third Parties

Occidental, 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 June 30, 2017, 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 Post-retirement Benefit Plans

The following tables set forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and post-retirement benefit plans for the three and six months ended June 30, 2017 and 2016 (in millions):
Three months ended June 30
 
2017
 
2016
Net Periodic Benefit Costs
 
Pension Benefit
 
Post-retirement Benefit
 
Pension Benefit
 
Post-retirement Benefit
Service cost
 
$
2

 
$
5

 
$
2

 
$
5

Interest cost
 
4

 
10

 
4

 
10

Expected return on plan assets
 
(6
)
 

 
(6
)
 

Recognized actuarial loss
 
2

 
4

 
3

 
6

Settlement loss
 

 

 
2

 

Total
 
$
2

 
$
19

 
$
5

 
$
21

 
Six months ended June 30
 
2017
 
2016
Net Periodic Benefit Costs
 
Pension Benefit
 
Post-retirement Benefit
 
Pension Benefit
 
Post-retirement Benefit
Service cost
 
$
4

 
$
10

 
$
4

 
$
10

Interest cost
 
8

 
20

 
8

 
20

Expected return on plan assets
 
(12
)
 

 
(12
)
 

Recognized actuarial loss
 
4

 
8

 
6

 
11

Settlement loss
 

 

 
2

 

Total
 
$
4

 
$
38

 
$
8

 
$
41


Occidental contributed approximately $1 million in each of the three months ended June 30, 2017, and 2016, respectively, and approximately $2 million in each of the six months ended June 30, 2017, and 2016, respectively, to its defined benefit 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.

The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of June 30, 2017, and December 31, 2016 (in millions):
Embedded Derivatives
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
 
Total Fair
Value
Fair Value Measurements at June 30, 2017:
Liabilities:
 
 
 


 
 
 


 


Accrued Liabilities
 
$

 
$
64

 
$

 
$

 
$
64

Deferred credits and other liabilities - other
 
$

 
$
201

 
$

 
$

 
$
201

 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2016:
Liabilities:
 
 
 
 
 
 
 
 
 
 
Accrued Liabilities
 
$

 
$
43

 
$

 
$

 
$
43

Deferred credits and other liabilities - other
 
$

 
$
178

 
$

 
$

 
$
178



11



Fair Values — Nonrecurring

During the six months ended June 30, 2017, Occidental did not have any assets or liabilities measured at fair value on a nonrecurring basis. During the year ended December 31, 2016, Occidental recognized pre-tax impairment charges of $15 million related to proved oil and gas properties.

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 value of Occidental’s debt as of June 30, 2017, and December 31, 2016, was $10.2 billion and its carrying value net of unamortized discount and debt issuance costs as of June 30, 2017, and December 31, 2016, was $9.8 billion. The majority of Occidental's debt is classified as Level 1, with $227 million classified as Level 2.

10. Derivatives

Occidental uses a variety of derivative financial instruments and physical contracts, including those designated as cash-flow hedges, to manage its exposure to commodity price fluctuations, transportation commitments and to fix margins on the future sale of stored volumes of oil and natural gas. Where Occidental buys product for its own consumption or sells its production to a defined customer, Occidental elects normal purchases and normal sales exclusions. Occidental usually applies cash-flow hedge accounting treatment to derivative financial instruments to lock in margins on the forecasted sales of its natural gas storage volumes, and at times for other strategies to lock in margins. Occidental also enters into derivative financial instruments for speculative or trading purposes; however, the results of any transactions are immaterial to the marketing portfolio.

The financial instruments not designated as hedges will impact Occidental's earnings through mark-to-market until the offsetting future physical commodity is delivered. For GAAP purposes, any physical inventory is carried at the lower of cost or market on the balance sheet. A substantial majority of Occidental's physical derivative contracts are index-based and carry no mark-to-market value in earnings. Net gains and losses associated with derivative instruments not designated as hedging instruments are recognized currently in net sales. Net gains and losses attributable to derivative instruments subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings.

Credit Risk

The majority of Occidental's counterparty credit risk is related to the physical delivery of energy commodities to its customers and their inability to meet their settlement commitments. Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by entering into netting arrangements with counterparties and by requiring collateral, as appropriate. Occidental actively reviews the creditworthiness of its counterparties and monitors credit exposures against assigned credit limits by adjusting credit limits to reflect counterparty risk, if necessary. Occidental also enters into future contracts through regulated exchanges with select clearinghouses and brokers, which are subject to minimal credit risk as a significant portion of these transactions settle on a daily margin basis.
Certain of Occidental's over-the-counter 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. 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, 2017, and December 31, 2016.

12



Cash-Flow Hedges

Occidental’s marketing operations store natural gas purchased from third parties at Occidental’s leased storage facilities. Derivative instruments are used to fix margins on the future sales of the stored volumes. These agreements continue through 2018. As of June 30, 2017, Occidental had approximately 7 billion cubic feet (Bcf) of natural gas held in storage, and had cash-flow hedges for the forecasted sales to be settled by physical delivery of approximately 6 Bcf of stored natural gas. As of December 31, 2016, Occidental had approximately 7 Bcf of natural gas held in storage, and had cash-flow hedges for the forecasted sales, to be settled by physical delivery, of approximately 7 Bcf of stored natural gas. The amount of cash-flow hedges, including the ineffective portion, was immaterial for the six months ended June 30, 2017, and the year ended December 31, 2016.

Derivatives Not Designated as Hedging Instruments

The following table summarizes the amounts reported in net sales related to the outstanding commodity derivative instruments not designated as hedging instruments as of June 30, 2017, and December 31, 2016:
(in millions, except Long/(Short) volumes)
 
2017
 
2016
Gain (loss) on derivatives not designated as hedges
 
 
 
 
Oil commodity contracts
 
$
18

 
$
(5
)
Natural gas commodity contracts
 
$
1

 
$
1

 
 
 
 
 
Outstanding net volumes on derivatives not designated as hedges
 
 
 
 
Oil Commodity Contracts
 
 
 
 
Volume (MMBL)
 
106

 
67

Price Per Bbl
 
$
48.71

 
$
53.86

 
 
 
 
 
Natural gas commodity contracts
 
 
 
 
Volume (Bcf)
 
(35
)
 
(12
)
Price Per MMBTU
 
$
2.82

 
$
3.19




13



Fair Value of Derivatives

The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of June 30, 2017, and December 31, 2016 (in millions):
As of June 30, 2017
 
Fair Value Measurements Using
 
Netting (b)
 
Total Fair Value
(in millions)
 
(Commodity Contracts)
 
Level 1
 
Level 2
 
Level 3
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Cash-flow hedges: (a)
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$

 
$
1

 
$

 
$

 
$
1

Long-term receivables and other assets, net
 
$

 
$

 
$

 
$

 
$

Derivatives not designated as hedging instruments: (a)
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$
395

 
$
37

 
$

 
$
(398
)
 
$
34

Long-term receivables and other assets, net
 
$
16

 
$
1

 
$

 
$
(15
)
 
$
2

Liabilities:
 
 
 
 
 
 
 
 
 
 
Cash-flow hedges: (a)
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
$

 
$

 
$

 
$

 
$

Deferred credits and liabilities
 
$

 
$

 
$

 
$

 
$

Derivatives not designated as hedging instruments: (a)
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
$
375

 
$
36

 
$

 
$
(398
)
 
$
13

Deferred credits and liabilities
 
$
15

 
$
4

 
$

 
$
(15
)
 
$
4


As of December 31, 2016
 
Fair Value Measurements Using
 
Netting (b)
 
Total Fair Value
(in millions)
 
(Commodity Contracts)
 
Level 1
 
Level 2
 
Level 3
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Cash-flow hedges: (a)
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$

 
$
1

 
$

 
$

 
$
1

Long-term receivables and other assets, net
 
$

 
$

 
$

 
$

 
$

Derivatives not designated as hedging instruments: (a)
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$
166

 
$
57

 
$

 
$
(196
)
 
$
27

Long-term receivables and other assets, net
 
$
2

 
$
3

 
$

 
$
(2
)
 
$
3

Liabilities:
 
 
 
 
 
 
 
 
 
 
Cash-flow hedges (a)
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
$

 
$
6

 
$

 
$

 
$
6

Deferred credits and liabilities
 
$

 
$

 
$

 
$

 
$

Derivatives not designated as hedging instruments: (a)
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
$
172

 
$
51

 
$

 
$
(196
)
 
$
27

Deferred credits and liabilities
 
$
1

 
$
6

 
$

 
$
(2
)
 
$
5


(a)
Fair values are presented at gross amounts, including when the derivatives are subject to netting arrangements and presented on a net basis in the consolidated condensed balance sheets.
(b)
These amounts do not include collateral. As of June 30, 2017, collateral received of $23 million has been netted against derivative assets and collateral paid of $2 million has been netted against derivative liabilities. As of December 31, 2016, collateral received of $4 million has been netted against derivative assets and collateral paid of $13 million has been netted against derivative liabilities. Collateral deposited by Occidental, mainly for initial margin, of $21 million and $25 million as of June 30, 2017, and December 31, 2016, respectively, has not been reflected in these derivative fair value tables. This collateral is included in other current assets in the consolidated condensed balance sheets.

11. Industry Segments

Occidental conducts its operations through three segments: (1) oil and gas; (2) chemical; and (3) 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,

14



NGLs, natural gas, CO2 and power. It also trades around its assets, including transportation and storage capacity. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.

Results 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 and geographic area 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.

The following tables present Occidental’s industry segments (in millions):
 
 
Oil
 
 
 
Midstream
 
Corporate
 
 
 
 
and
 
 
 
and
 
and
 
 
 
 
Gas
 
Chemical
 
Marketing
 
Eliminations
 
Total
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,848

 
$
1,156

 
$
270

 
$
(214
)
 
$
3,060

Pre-tax operating profit (loss)
 
$
627

(a) 
$
230

 
$
119

(b) 
$
(184
)
(c) 
$
792

Income taxes
 

 

 

 
(285
)
(d) 
(285
)
Net income (loss)
 
$
627

 
$
230

 
$
119

 
$
(469
)
 
$
507

 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,625

 
$
908

 
$
141

 
$
(143
)
 
$
2,531

Pre-tax operating profit (loss)
 
$
(117
)
 
$
88

 
$
(58
)
 
$
(145
)
(c) 
$
(232
)
Income taxes
 

 

 

 
96

(d) 
96

Discontinued operations, net
 

 

 

 
(3
)
 
(3
)
Net income (loss)
 
$
(117
)

$
88


$
(58
)

$
(52
)

$
(139
)
 
 
 
Oil
 
 
 
Midstream
 
Corporate
 
 
 
 
and
 
 
 
and
 
and
 
 
 
 
Gas
 
Chemical
 
Marketing
 
Eliminations
 
Total
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,742

 
$
2,224

 
$
481

 
$
(430
)
 
$
6,017

Pre-tax operating profit (loss)
 
$
847

(a) 
$
400

 
$
72

(b) 
$
(332
)
(c) 
$
987

Income taxes
 

 

 

 
(363
)
(d) 
(363
)
Net income (loss)
 
$
847

 
$
400

 
$
72

 
$
(695
)
 
$
624

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,900

 
$
1,798

 
$
274

 
$
(318
)
 
$
4,654

Pre-tax operating profit (loss)
 
$
(602
)
 
$
302

(e) 
$
(153
)
 
$
(342
)
(c) 
$
(795
)
Income taxes
 

 

 

 
299

(d) 
299

Discontinued operations, net
 

 

 

 
435

 
435

Net income (loss)
 
$
(602
)
 
$
302

 
$
(153
)
 
$
392

 
$
(61
)
 
(a) Includes gain on sale of domestic oil and gas assets, including South Texas, of $510 million.
(b) Includes a non-cash fair value gain of $88 million on the Plains equity investment.
(c) Includes unallocated net interest expense, administration expense, environmental remediation and other pre-tax items.
(d) Includes all foreign and domestic income taxes from continuing operations.
(e) Includes gain on sale of $57 million and $31 million related to the Occidental Tower in Dallas, Texas and a non-core specialty chemicals business, respectively.


15



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, net income allocated to these participating securities has 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 six months ended June 30, 2017 and 2016 (in millions, except per-share amounts):
 
 
Three months ended
 June 30
 
Six months ended
June 30
 
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
 
Basic EPS
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
507

 
$
(136
)
 
$
624

 
$
(496
)
 
Discontinued operations, net
 

 
(3
)
 

 
435

 
Net income (loss)
 
507

 
(139
)
 
624

 
(61
)
 
 
 
 
 
 
 
 
 
 
 
Less: Net income allocated to participating securities
 
(2
)
 

 
(2
)
 

 
Net income (loss), net of participating securities
 
505

 
(139
)
 
622

 
(61
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of basic shares
 
764.9

 
763.6

 
764.7

 
763.5

 
Basic EPS
 
$
0.66

 
$
(0.18
)
 
$
0.81

 
$
(0.08
)
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
 
Net income (loss), net of participating securities
 
$
505

 
$
(139
)
 
$
622

 
$
(61
)
 
Weighted average number of basic shares
 
764.9

 
763.6

 
764.7

 
763.5

 
Dilutive effect of potentially dilutive securities
 
1.0

 

 
0.8

 

 
Total diluted weighted average common shares
 
765.9

 
763.6

 
765.5

 
763.5

 
Diluted EPS
 
$
0.66

 
$
(0.18
)
 
$
0.81

 
$
(0.08
)
 


16



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; not successfully completing, or any material delay of, field developments, expansion projects, capital expenditures, efficiency projects, acquisitions or dispositions; uncertainties about the estimated quantities of oil and natural gas reserves; 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; reorganization or restructuring of Occidental’s operations; 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 Occidental's Annual Report on Form 10-K for the year ended December 31, 2016 (the 2016 Form 10-K).

Consolidated Results of Operations
 
Occidental reported net income from continuing operations of $507 million for the second quarter of 2017 on net sales of $3.1 billion, compared to a net loss from continuing operations of $136 million on net sales of $2.5 billion for the second quarter of 2016. Diluted earnings per share from continuing operations was $0.66 for the second quarter of 2017, compared to a diluted loss of $0.18 per share for the second quarter of 2016.

Occidental reported net income from continuing operations of $624 million for the first six months of 2017 on net sales of $6.0 billion, compared to a net loss of $496 million on net sales of $4.7 billion for the same period in 2016. Diluted earnings per share from continuing operations was $0.81 per share for the first six months of 2017, compared to a diluted loss per share of $0.65 for the same period of 2016. There was no income from discontinued operations for the first six months of 2017, compared with income of $435 million or $0.57 per share for the same period of 2016.

Net income from continuing operations for the three and six months ended June 30, 2017, reflected: from the oil and gas segment, higher commodity prices across all products, lower depreciation, depletion and amortization (DD&A) rates and asset sale gains; from the chemicals segment, higher realized caustic soda prices, improved sales volumes on most product lines and additional equity income from the Ingleside ethylene cracker; and from the midstream and marketing segment, higher marketing margins due to improved Midland to Gulf Coast spreads and increased sales volumes at the Ingleside Crude Terminal.

Selected Statements of Operations Items

Net sales increased for the three and six months ended June 30, 2017, compared to the same periods in 2016, due to higher realized commodity prices for both oil and gas and chemical segments. Gain on sale of assets, net, totaling $512 million for the three and six months ended June 30, 2017, primarily reflected gains on the sale of the South Texas operations. Gain on sale of assets, net, for the six months ended June 30, 2016, primarily reflected the sale of the Piceance Basin operations in Colorado for a gain of $121 million and the Occidental Tower building in Dallas for a gain of $57 million.

Compared to the same periods of 2016, cost of sales for the three and six months ended June 30, 2017, reflected higher raw materials and energy costs in the chemical segment and higher purchase injectant costs in the oil and gas segment. Compared to the same periods of 2016, DD&A expense for the three and six months ended June 30, 2017, reflected improved DD&A rates and the sale of oil and gas assets.

17



The increases in domestic and foreign income tax provisions for the three and six months ended June 30, 2017, compared to the income tax benefits for same periods of 2016, are due to higher pre-tax operating income in 2017 compared to a pre-tax operating loss in 2016.

Higher income from equity investments for the three and six months ended June 30, 2017, reflected a non-cash fair value gain on the Plains equity investment and equity income from the Ingleside ethylene cracker, which commenced operations in February 2017.

Selected Analysis of Financial Position
 
See “Liquidity and Capital Resources” for a discussion about the changes in cash and cash equivalents and restricted cash.
 
The increase in inventories at June 30, 2017, compared to December 31, 2016, reflected higher crude oil storage. The increase in assets held for sale relates to a sales agreement to sell non-strategic acreage in Andrews and Martin Counties, Texas. The decrease in other current assets is primarily related to receipt of a federal tax refund relating to the 2016 net operating loss carryback. The decrease in property, plant and equipment, net, is primarily the result of the reclassification of non-strategic acreage in Andrews and Martin Counties, Texas, to assets held for sale, and DD&A, partially offset by Occidental's capital spending of $1.5 billion in the first half of 2017.

Current maturities of long-term debt at June 30, 2017 reflected the reclassification of 1.5-percent senior notes due February 2018 out of long-term debt. The decrease in accrued liabilities at June 30, 2017, is mainly due to bonus payments for the extension of Oman Block 9 and first quarter payments of ad valorem taxes.

The decrease in deferred credits and other liabilities - other at June 30, 2017, is mainly due to the decrease in asset retirement obligations for the South Texas assets that were sold in April.

Segment Operations
 
Occidental conducts its operations through three segments: (1) oil and gas; (2) chemical; and (3) 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. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.


18



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, 2017, and 2016 (in millions):
 
 
Three months ended June 30
 
Six months ended June 30
 
 
 
2017
 
2016
 
2017
 
2016
 
Net Sales (a)
 
 
 
 
 
 
 
 
 
Oil and Gas
 
$
1,848

 
$
1,625

 
$
3,742

 
$
2,900

 
Chemical
 
1,156

 
908

 
2,224

 
1,798

 
Midstream and Marketing
 
270

 
141

 
481

 
274

 
Eliminations
 
(214
)
 
(143
)
 
(430
)
 
(318
)
 
 
 
$
3,060

 
$
2,531

 
$
6,017

 
$
4,654

 
Segment Results (b)
 
 
 
 
 
 
 
 
 
Oil and Gas
 
$
627

 
$
(117
)
 
$
847

 
$
(602
)
 
Chemical
 
230

 
88

 
400

 
302

 
Midstream and Marketing
 
119

 
(58
)
 
72

 
(153
)
 
 
 
976


(87
)

1,319

 
(453
)
 
Unallocated Corporate Items (b)
 
 
 
 
 
 
 
 
 
Interest expense, net
 
(81
)
 
(84
)
 
(159
)
 
(141
)
 
Income tax benefit (provision)
 
(285
)
 
96

 
(363
)
 
299

 
Other expense, net
 
(103
)
 
(61
)
 
(173
)
 
(201
)
 
 
 
 
 
 
 


 


 
Income (loss) from continuing operations
 
507


(136
)

624


(496
)
 
Discontinued operations, net
 

 
(3
)
 

 
435

 
Net Income (loss)
 
$
507


$
(139
)

$
624

 
$
(61
)
 

(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.

Significant Transactions and Events Affecting Earnings

The following table sets forth significant transactions and events affecting Occidental’s earnings that vary widely and unpredictably in nature, timing and amount for the three and six months ended June 30, 2017, and 2016 (in millions):
 
 
Three months ended June 30
 
Six months ended June 30
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Oil and Gas
 
 
 
 
 
 
 
 
Asset sales gains and other
 
$
510

 
$

 
$
510

 
$
23

 
 
 
 
 
 
 
 
 
Chemical
 
 
 
 
 
 
 
 
Asset sales gains
 
$

 
$

 
$

 
$
88

 
 
 
 
 
 
 
 
 
Midstream and Marketing
 
 
 
 
 
 
 
 
Non-cash fair value gain on Plains equity investment
 
$
94

 
$

 
$
94

 
$

 
 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
 
Asset impairments and related items
 
$

 
$

 
$

 
$
(78
)
Tax effect of pre-tax adjustments (a)
 
(216
)
 

 
(216
)
 
33

Discontinued operations, net (b)
 

 
(3
)
 

 
435

Total Corporate
 
$
(216
)
 
$
(3
)

$
(216
)
 
$
390

 
 
 
 
 
 
 
 
 
Total
 
$
388

 
$
(3
)

$
388

 
$
501


(a) The 2016 amount included benefits for the relinquishment of foreign exploration blocks.
(b) Amounts shown after tax.

19



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, 2017, and 2016 (in millions):
 
 
Three months ended June 30
 
Six months ended June 30
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Oil and Gas results
 
$
627

 
$
(117
)
 
$
847

 
$
(602
)
 
Chemical results
 
230

 
88

 
400

 
302

 
Midstream and Marketing results
 
119

 
(58
)
 
72

 
(153
)
 
Unallocated corporate items
 
(184
)
 
(145
)
 
(332
)
 
(342
)
 
Pre-tax income (loss)
 
792


(232
)

987

 
(795
)
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit (provision)
 
 
 
 
 
 
 
 
 
Federal and state
 
(79
)
 
234

 
34

 
525

 
Foreign
 
(206
)
 
(138
)
 
(397
)
 
(226
)
 
Total
 
(285
)

96


(363
)
 
299

 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
507


$
(136
)

$
624

 
$
(496
)
 
 
 
 
 
 
 
 
 
 
 
Worldwide effective tax rate
 
36
%
 
41
%
 
37
%
 
38
%
 

Occidental's worldwide effective tax rate of 36 percent for the three months ended June 30, 2017, is lower than the comparative period of 2016 primarily due to a decrease in the effective foreign income tax rate due to the commodity price impact on production sharing agreements. 

Oil and Gas Segment
 
The following table summarizes the key factors impacting segment earnings for the three and six months ended June 30, 2017:
Oil and Gas segment results roll-forward
 
Three months ended June 30
 
Six months ended June 30
 
 
 
2017
 
2017
 
 
 
 
 
 
 
Oil and Gas prior year results(a)
 
$
(117
)
 
$
(625
)
 
Sales price
 
281

 
998

 
Sales volume / mix
 
(56
)
 
(71
)
 
Operating expenses
 
(57
)
 
(109
)
 
DD&A rate
 
88

 
174

 
Exploration expense
 
18

 
16

 
All others
 
(40
)
 
(46
)
 
 
 
 
 
 
 
Oil and Gas current year results
 
$
117

 
$
337

 
 
 
 
 
 
 
Significant transactions and events
 
 
 
 
 
Asset sales gains
 
$
510

 
$
510

 
 
 
 
 
 
 
Oil and Gas current year segment earnings
 
$
627

 
$
847

 
(a) Excludes Asset sales gains of $23 million for the six months ended June 30, 2016.

The three and six months ended June 30, 2017, included pre-tax gains of $510 million, primarily related to the sale of South Texas operations. Excluding the gains on sale, the increase in earnings for the three and six months ended June 30, 2017, compared to the same periods of 2016, was mainly due to higher commodity prices for all products and lower DD&A rates.


20



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, 2017, and 2016.  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 June 30
 
Six months ended June 30
 
Production Volumes per Day
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Oil (MBBL)
 
 
 
 
 
 
 
 
 
United States
 
195