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Lease Commitments

9 Months Ended

Sep. 30, 2019

On January 1, 2019, Occidental adopted ASC 842 using the modified retrospective approach, which provided a method for recording existing leases at adoption and did not require restatement of prior year amounts and disclosures, which continue to be reflected in accordance with ASC 840. Occidental elected certain practical expedients as follows:


•	Leases that commenced before the effective date carried forward their historical lease classification.


•	Existing or expired land easements as of December 31, 2018, were not reassessed to determine whether or not they contained a lease.


•	Leases with a lease term of 12 months or less from lease commencement date are considered short-term leases and not recorded on the Consolidated Condensed Balance Sheet; however, the lease expenditures recognized are captured and reported as incurred.

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For asset classes, except long-term drilling rigs, Occidental elected to account for the lease and non-lease components as a single lease component as the non-lease portions were not significant to separate in determining the lease liability. For long-term drilling rig contracts, Occidental bifurcated the lease and non-lease components using relative fair value as a stand-alone selling price between the asset rental and the services obtained.

ASC 842 requires lessees to recognize a ROU asset and lease liability for all long-term leases. A ROU asset represents Occidental’s right to use an underlying asset for the lease term and the associated lease liability represents the discounted obligation of future minimum lease payments. Occidental identifies leases through its accounts payable and contract monitoring process. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The ROU assets include the discounted obligation in addition to any upfront payments or costs incurred during the contract execution of the lease and amortized on a straight-line basis over the course of the lease term. Except for leases with explicitly defined contract terms, Occidental utilizes judgment to assess likelihood of renewals, terminations and purchase options, in order to determine the lease term. Occidental uses the incremental borrowing rate at commencement date to determine the present value of lease payments. The incremental borrowing rate equates to the rate of interest that Occidental would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain leases include variable lease payments which are over and above the minimum lease liability used to derive the ROU asset and lease liability and are based on the underlying asset’s operations. These variable lease costs are reported in the lease cost classification table.

Recognition, measurement, and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. The criteria for distinguishing between finance and operating leases are substantially similar to the criteria under ASC 840. For Occidental operations, adoption of ASC 842 resulted in recording of net lease assets and lease liabilities of $772 million as of January 1, 2019. There was no material impact to net income, cash flows, or stockholders’ equity.

Merger Impact

ASC 805 Business Combinations requires lease-related assets and liabilities acquired to be measured as if the lease were new at the merger date. Occidental measured the Anadarko legacy lease agreements using an updated incremental borrowing rate curve. This resulted in legacy Anadarko assets and liabilities of $498 million and $574 million, respectively, excluding the Africa Assets at the Merger date. These agreements are still under further review for above-or below-market impacts.

The following table reconciles the undiscounted cash flows related to the operating and finance lease liabilities assumed in the Merger and recorded on the Consolidated Condensed Balance Sheet at the Merger date:



millions	Operating Leases			Finance Leases			Total
Remainder of 2019	$	90		$	7		$	97
2020	172			25			197
2021	64			15			79
2022	42			12			54
2023	28			7			35
Thereafter	136			42			178
Total lease payments	532			108			640
Less: Interest	(44		)	(22		)	(66		)
Total lease liabilities	$	488		$	86		$	574

Additionally, Occidental has elected short-term lease treatment for those acquired lease contracts which, at the Merger date, have a remaining lease term of 12 months or less. For the leases acquired through the Merger, Occidental will retain the previous lease classification.

Nature of Leases

Occidental’s operating lease agreements include leases for oil and gas exploration and development equipment, including offshore and onshore drilling rigs of $186 million, compressors of $174 million and other field equipment of $97 million, which are recorded gross on the Consolidated Condensed Balance Sheet and in the lease cost disclosures below. Contract expiration terms generally range from two to seven years. Further, actual expenditures are netted against joint-interest recoveries on the income statement through the normal joint-interest billing process. Occidental’s leases also include pipelines, rail cars, storage facilities, easements and real estate of $682 million, which typically are not associated with joint-interest recoveries. Real estate leases have contract expiration terms ranging from 1 to 16 years.

Occidental’s finance lease agreements include leases for oil and gas exploration and development equipment, as well as real estate offices, compressors, and field equipment of approximately $100 million.

The following table presents lease balances and their location on the Consolidated Condensed Balance Sheet at September 30, 2019:



millions	Balance sheet location	2019
Assets:
Operating	Operating lease assets	$	1,078
Finance	Property, plant and equipment	97
Total lease assets		$	1,175

Liabilities:
Current
Operating	Current operating lease liabilities	$	463
Finance	Current maturities of long-term debt	31
Non-current
Operating	Deferred credits and other liabilities - Operating lease liabilities	676
Finance	Long-term debt, net - Occidental	69
Total lease liabilities		$	1,239

At September 30, 2019, Occidental's leases expire based on the following schedule:



	Operating			Finance
millions	Leases ^(a)			Leases ^(b)			Total
Remainder of 2019	$	119		$	8		$	127
2020	390			38			428
2021	197			15			212
2022	129			12			141
2023	94			7			101
Thereafter	311			42			353
Total lease payments	1,240			122			1,362
Less: Interest	(101		)	(22		)	(123		)
Total lease liabilities	$	1,139		$	100		$	1,239

(a) The weighted-average remaining lease term is 5.3 years and the weighted-average discount rate is 2.79%.

(b) The weighted-average remaining lease term is 6.4 years and the weighted-average discount rate is 4.92%.

At December 31, 2018, future undiscounted net minimum fixed lease payments for non-cancellable operating leases, prepared in accordance with accounting standards prior to the adoption of ASC 842, were as follows:



	Operating
millions	Leases
2019	$	186
2020	147
2021	96
2022	68
2023	49
Thereafter	158
Total minimum lease payments^(a)	$	704

(a) The amount represents the future undiscounted cash flows at December 31, 2018, excluding any amount associated with the Merger.

The following tables present Occidental's total lease cost and classifications, as well as cash paid for amounts included in the measurement of operating and finance lease liabilities.



Lease cost classification^(a)	Three months ended September 30, 2019		Nine months ended September 30, 2019
millions	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease costs^(b)
Property, plant and equipment, net	$	139	$	321
Cost of sales	133		271
Selling, general and administrative expenses	26		61
Finance lease cost
Amortization of ROU assets	5		11
Interest on lease liabilities	1		1
	$	304	$	665
(a) Amounts reflected are gross before joint-interest recoveries.
(b) Includes short-term lease cost of $139 million and $295 million for the three and nine months ended September 30, 2019, respectively, and variable lease cost of $55 million and $115 million for the three and nine months ended September 30, 2019, respectively.



millions	Nine months ended September 30, 2019
Operating cash flows	$	162
Investing cash flows	83
Financing cash flows	11

Lease Commitments


•	Leases that commenced before the effective date carried forward their historical lease classification.


•	Existing or expired land easements as of December 31, 2018, were not reassessed to determine whether or not they contained a lease.


•	Leases with a lease term of 12 months or less from lease commencement date are considered short-term leases and not recorded on the Consolidated Condensed Balance Sheet; however, the lease expenditures recognized are captured and reported as incurred.

•