10-Q
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, 2015
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, 2015
 
 
Common stock $.20 par value
 
763,735,871
 



OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES


TABLE OF CONTENTS




 
 
 
 
PAGE
 
 
 
 
 
Part I
Financial Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015 and December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Three and nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
Three and nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
Item 4.
 
 
 
 
 
Part II
Other Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
Item 6.


1


PART I    FINANCIAL INFORMATION
 

Item 1.
Financial Statements (unaudited)

OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2015 AND DECEMBER 31, 2014
(Amounts in millions)

 
 
2015
 
2014
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,547

 
$
3,789

 
 
 
 
 
 
 
Restricted cash
 
1,765

 
4,019

 
 
 
 
 
 
 
Trade receivables, net
 
3,507

 
4,206

 
 
 
 
 
 
 
Inventories
 
1,122

 
1,052

 
 
 
 
 
 
 
Assets held for sale
 
709

 
—

 
 
 
 
 
 
 
Other current assets
 
890

 
807

 
 
 
 
 
 
 
Total current assets
 
10,540


13,873

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENTS
 
 
 
 
 
 
 
 
 
 
 
Investment in unconsolidated entities
 
1,428

 
1,171

 
 
 
 
 
 
 
Available for sale investment
 
186

 
394

 
 
 
 
 
 
 
Total investments
 
1,614


1,565

 
 
 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation, depletion and amortization of $36,612 at September 30, 2015 and $34,785 at December 31, 2014
 
36,835

 
39,730

 
 
 
 
 
 
 
LONG-TERM RECEIVABLES AND OTHER ASSETS, NET
 
1,100

 
1,091

 
 
 
 
 
 
 
TOTAL ASSETS
 
$
50,089

 
$
56,259

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


2


OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2015 AND DECEMBER 31, 2014
(Amounts in millions except share amounts)

 
 
2015
 
2014
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Current maturities of long-term debt
 
$
1,450

 
$
—

 
Accounts payable
 
3,727

 
5,229

 
Accrued liabilities
 
2,202

 
2,601

 
Domestic and foreign income taxes
 
25

 
414

 
Liabilities of assets held for sale
 
29

 
—

 
Total current liabilities
 
7,433

 
8,244

 
 
 
 
 
 
 
LONG-TERM DEBT, NET
 
6,882

 
6,838

 
 
 
 
 
 
 
DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
 
 
Deferred domestic and foreign income taxes
 
2,579

 
3,015

 
Other
 
3,313

 
3,203

 
 
 
5,892

 
6,218

 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Common stock, at par value (891,312,915 shares at September 30, 2015 and 890,557,537 shares at December 31, 2014)
 
178

 
178

 
Treasury stock (127,577,044 shares at September 30, 2015 and 119,951,199 shares at December 31, 2014)
 
(9,113
)
 
(8,528
)
 
Additional paid-in capital
 
7,664

 
7,599

 
Retained earnings
 
31,712

 
36,067

 
Accumulated other comprehensive loss
 
(559
)
 
(357
)
 
Total stockholders’ equity
 
29,882


34,959

 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
50,089

 
$
56,259

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

3


OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(Amounts in millions, except per-share amounts)

 
 
Three months ended September 30
 
 Nine months ended September 30
 
 
 
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
REVENUES AND OTHER INCOME
 
 
 
 
 
 

 
 
Net sales
 
$
3,116

 
$
4,904

 
$
9,674

 
$
15,005

Interest, dividends and other income
 
31

 
31

 
88

 
108

Gain (loss) on sale of assets, net
 
99

 
(5
)
 
94

 
520

 
 
3,246

 
4,930

 
9,856

 
15,633

COSTS AND OTHER DEDUCTIONS
 
 
 
 
 
 
 
 
Cost of sales
 
1,413

 
1,736

 
4,450

 
5,070

Selling, general and administrative and other operating
expenses
 
292

 
355

 
950

 
1,101

Depreciation, depletion and amortization
 
1,123

 
1,056

 
3,268

 
3,057

Asset impairments and related items
 
3,397

 
—

 
3,721

 
471

Taxes other than on income
 
79

 
135

 
293

 
430

Exploration expense
 
5

 
28

 
23

 
91

Interest and debt expense, net
 
48

 
16

 
86

 
58

 
 
6,357

 
3,326

 
12,791

 
10,278

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and other items
 
(3,111
)
 
1,604


(2,935
)
 
5,355

Benefit (provision) for domestic and foreign income taxes
 
445

 
(699
)
 
140

 
(2,302
)
Income from equity investments
 
60

 
93

 
154

 
243

Income (loss) from continuing operations
 
(2,606
)
 
998


(2,641
)

3,296

Discontinued operations, net
 
(3
)
 
213

 
(10
)
 
741

Net income (loss)
 
(2,609
)
 
1,211

 
(2,651
)
 
4,037

Less: Net income attributable to noncontrolling interest
 
—

 
(3
)
 
—

 
(8
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK
 
$
(2,609
)
 
$
1,208

 
$
(2,651
)
 
$
4,029

 
 
 
 
 
 
 
 
 
BASIC EARNINGS PER COMMON SHARE (attributable to common stock)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(3.41
)

$
1.28


$
(3.45
)

$
4.18

Discontinued operations, net
 
(0.01
)
 
0.27

 
(0.01
)
 
0.95

BASIC EARNINGS PER COMMON SHARE
 
$
(3.42
)
 
$
1.55

 
$
(3.46
)
 
$
5.13

 
 
 
 
 
 
 
 
 
DILUTED EARNINGS PER COMMON SHARE (attributable to common stock)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(3.41
)
 
$
1.28

 
$
(3.45
)
 
$
4.18

Discontinued operations, net
 
(0.01
)
 
0.27

 
(0.01
)
 
0.95

DILUTED EARNINGS PER COMMON SHARE
 
$
(3.42
)
 
$
1.55

 
$
(3.46
)
 
$
5.13

 
 
 
 
 
 
 
 
 
DIVIDENDS PER COMMON SHARE
 
$
0.75

 
$
0.72

 
$
2.22

 
$
2.16

 
 
 
 
 
 
 
 
 
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, 2015 AND 2014
(Amounts in millions)

 
 
Three months ended September 30
 
 Nine months ended September 30
 
 
 
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stock
 
$
(2,609
)
 
$
1,208

 
$
(2,651
)
 
$
4,029

Other comprehensive (loss) income items:
 
 
 
 
 
 
 
 
Foreign currency translation loss
 
(1
)
 
(1
)
 
(2
)
 
(1
)
Unrealized loss on available for sale investment
 
(246
)
 
—

 
(208
)
 
—

Unrealized gains (losses) on derivatives (a)
 
2

 
—

 
2

 
(5
)
Pension and postretirement gain (b)
 
1

 
3

 
5

 
12

Reclassification to income of realized loss on derivatives (c)
 
1

 
—

 
1

 
8

Other comprehensive income (loss), net of tax (d)
 
(243
)

2

 
(202
)
 
14

Comprehensive income (loss)
 
$
(2,852
)
 
$
1,210

 
$
(2,853
)
 
$
4,043


(a)
Net of tax of $(1) and zero for the three months ended September 30, 2015 and 2014, and $(1) and $3 for the nine months ended September 30, 2015 and 2014.
(b)
Net of tax of $(1) and $(2) for the three months ended September 30, 2015 and 2014, respectively, and $(3) and $(7) for the nine months ended September 30, 2015 and 2014.
(c)
Net of tax of zero for the three months ended September 30, 2015 and 2014. Net of tax of zero and $(5) for the nine months ended September 30, 2015 and 2014, respectively.
(d)
There were no other comprehensive income (loss) items related to noncontrolling interests in the three and nine months ended 2015 and 2014, respectively.

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, 2015 AND 2014
(Amounts in millions)
 
 
2015
 
2014
 
CASH FLOW FROM OPERATING ACTIVITIES
 
 
 
 
 
Net income (loss)
 
$
(2,651
)
 
$
4,037

 
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
 
 
 
 
 
Discontinued operations, net
 
10

 
(741
)
 
Depreciation, depletion and amortization of assets
 
3,268

 
3,057

 
Deferred income tax (benefit) provision
 
(417
)
 
220

 
Other noncash charges to income
 
359

 
111

 
Gain on sale of assets, net
 
(94
)
 
(520
)
 
Undistributed earnings from affiliates
 
(3
)
 
22

 
Asset impairments
 
3,364

 
471

 
Dry hole expenses
 
4

 
48

 
Changes in operating assets and liabilities, net
 
(938
)
 
(315
)
 
Other operating, net
 
(499
)
 
—

 
Operating cash flow from continuing operations
 
2,403

 
6,390

 
Operating cash flow from discontinued operations
 
(17
)
 
1,812

 
Net cash provided by operating activities
 
2,386

 
8,202

 
 
 
 
 
 
 
CASH FLOW FROM INVESTING ACTIVITIES
 
 
 
 
 
Capital expenditures
 
(4,192
)
 
(5,959
)
 
Change in capital accrual
 
(652
)
 
—

 
Proceeds from sale of assets and equity investments, net
 
151

 
1,387

 
Purchase of businesses and other assets, net
 
(52
)
 
(352
)
 
Equity investments and other, net
 
(373
)
 
(245
)
 
Investing cash flow from continuing operations
 
(5,118
)
 
(5,169
)
 
Investing cash flow from discontinued operations
 
—

 
(1,661
)
 
Net cash used by investing activities
 
(5,118
)

(6,830
)
 
 
 
 
 
 
 
CASH FLOW FROM FINANCING ACTIVITIES
 
 
 
 
 
Change in restricted cash
 
2,254

 
—

 
Proceeds from long-term debt
 
1,478

 
—

 
Payment of long-term debt
 
—

 
(107
)
 
Proceeds from short-term borrowings
 
—

 
1,599

 
Proceeds from issuance of common stock
 
34

 
20

 
Purchases of treasury stock
 
(586
)
 
(2,083
)
 
Cash dividends paid
 
(1,690
)
 
(1,649
)
 
Contributions from noncontrolling interest
 
—

 
351

 
Other, net
 
—

 
1

 
Net cash provided (used) by financing activities
 
1,490

 
(1,868
)
 
Decrease in cash and cash equivalents
 
(1,242
)
 
(496
)
 
Cash and cash equivalents — beginning of period
 
3,789

 
3,393

 
Cash and cash equivalents — end of period
 
$
2,547

 
$
2,897

 
 
 
 
 
 
 
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, 2015

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, 2014.

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 September 30, 2015, and the consolidated statements of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2015 and 2014, as applicable. The income and cash flows for the periods ended September 30, 2015 and 2014 are not necessarily indicative of the income or cash flows to be expected for the full year.

As a result of the spin-off of California Resources Corporation (California Resources), the statements of operations and cash flows related to California Resources have been treated as discontinued operations for the three and nine months ended September 30, 2014. The assets and liabilities of California Resources were removed from Occidental's consolidated balance sheet as of November 30, 2014. See Note 2, Asset Acquisitions, Dispositions and Other, for additional information.

2. Asset Acquisitions, Dispositions and Other

In October 2015, Occidental completed the sale of its Westwood building in Los Angeles, California for net proceeds of $65 million. As of September 30, 2015, the Westwood building has been classified as held for sale.

In September 2015, Occidental entered into a sales agreement to sell its Williston operations in North Dakota. Occidental recorded a pre-tax impairment charge for $763 million to write down the value of the Williston operations to the sales price and has classified the Williston assets and liabilities as held for sale. The transaction is expected to be completed in November 2015.

In June 2015, Occidental issued $1.5 billion of debt that was comprised of $750 million of 3.50-percent senior unsecured notes due 2025 and $750 million of 4.625-percent senior unsecured notes due 2045. Occidental received net proceeds of approximately $1.48 billion. Interest on the notes will be payable semi-annually in arrears in June and December of each year for both series of notes, beginning on December 15, 2015.

On November 30, 2014, the spin-off of Occidental's California oil and gas operations and related assets was completed through the distribution of 81.3 percent of the outstanding shares of common stock of California Resources to holders of Occidental common stock, creating an independent, publicly traded company. In connection with the spin-off, California Resources distributed to Occidental $4.95 billion in restricted cash and $1.15 billion in unrestricted cash. Occidental retained 71.5 million shares of California Resources. See Note 9, Fair Value Measurements, for additional information. In order to maintain the tax-free nature of the spin-off, the $4.95 billion in restricted cash must be used solely to pay dividends, repurchase common stock, repay debt, or a combination of the foregoing within 18 months following the distribution. The retained California Resources shares must be exchanged for Occidental shares or distributed by June 1, 2016. At September 30, 2015, the remaining balance of the restricted cash distribution was $1.8 billion and was presented as "Restricted cash" on the consolidated balance sheet.


7


Sales and other operating revenues and income from discontinued operations related to California Resources for the three and nine months ended September 30, 2014 were as follows (in millions):
 
 
Three months ended
September 30
 
Nine months ended
September 30
 
 
 
 
 
Sales and other operating revenue from discontinued operations
 
$
1,092

 
$
3,353

 
 
 
 
 
Income from discontinued operations before-tax
 
$
334

 
$
1,146

Income tax expense
 
(118
)
 
(404
)
Income from discontinued operations
 
$
216


$
742


3. Accounting and Disclosure Changes

In September 2015, the Financial Accounting Standards Board (FASB) issued rules removing the obligation for a business acquirer to retrospectively recognize adjustments to provisional amounts that were identified during the measurement period of a business combination. Under the new rules, the acquirer is required to record in the same period's financial statements the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The rules become effective for interim and annual periods beginning after December 15, 2015. The rules are not expected to have a significant impact on Occidental’s financial statements upon adoption.
     
In August 2015, the FASB issued rules to defer the effective date of the new revenue recognition standard to interim and annual periods beginning after December 15, 2017. 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 and services. The new rules also require more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The rules are not expected to have a significant impact on Occidental's financial statements upon adoption.

In May 2015, the FASB issued rules modifying how entities measure certain investments at net asset value as well as how they are categorized within the fair value hierarchy. The new rules remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. The update also removes the requirement for certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practice, and instead requires it for only those investments the entity elects to measure as such. The rules become effective for fiscal years, and for interim periods, beginning after December 15, 2015. The rules will not have a significant impact on Occidental’s financial statements.

In April 2015, the FASB issued rules simplifying the presentation of debt issuance costs. The new rules require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The rules become effective for fiscal years, and for interim periods, beginning after December 15, 2015. The rules will not have a significant impact on Occidental’s financial statements.

In February 2015, the FASB issued rules modifying how an entity should evaluate certain legal entities for consolidation. The modifications change how limited partnerships and similar legal entities are evaluated, eliminate the presumption that a general partner should consolidate limited partnerships, change the consolidation analysis for reporting entities that are involved with variable interest entities, and change the scope exception for certain legal entities, among other things. The rules become effective for fiscal years, and for interim periods, beginning after December 15, 2015. The rules are not expected to have an impact on Occidental's financial statements upon adoption.

In January 2015, the FASB issued rules that eliminate from GAAP the concept of an extraordinary item. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and expanded to include items that are both unusual in nature and infrequently occurring. The rules do not impact Occidental’s financial statements upon adoption.


8


4. Supplemental Cash Flow Information

Occidental paid United States federal, state and foreign income taxes of $0.8 billion and $2.6 billion during the nine months ended September 30, 2015 and 2014, respectively. Interest paid totaled $0.2 billion in each of the nine months ended September 30, 2015 and 2014.

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, 2015 and December 31, 2014 consisted of the following (in millions):
 
 
2015
 
2014
 
 
 
 
 
 
 
Raw materials
 
$
69

 
$
71

 
Materials and supplies
 
601

 
585

 
Finished goods
 
541

 
485

 
 
 
1,211

 
1,141

 
 
 
 
 
 
 
Revaluation to LIFO
 
(89
)
 
(89
)
 
Total
 
$
1,122

 
$
1,052

 

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, 2015, Occidental participated in or monitored remedial activities or proceedings at 148 sites.  The following table presents Occidental’s environmental remediation reserves as of September 30, 2015, the current portion of which is included in accrued liabilities ($79 million) and the remainder in deferred credits and other liabilities — other ($236 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
 
33

 
$
21

 
Third-party sites
 
66

 
101

 
Occidental-operated sites
 
18

 
102

 
Closed or non-operated Occidental sites
 
31

 
91

 
Total
 
148

 
$
315

 


9


As of September 30, 2015, Occidental’s environmental reserves exceeded $10 million each at 10 of the 148 sites described above, and 104 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 range of reasonably possible additional losses beyond those liabilities recorded for environmental remediation at these sites could be up to $395 million.  The status of Occidental’s involvement with the sites and related significant assumptions has not changed materially since December 31, 2014.  For additional information regarding environmental matters, refer to Note 7, Lawsuits, Claims, Commitments and Contingencies.

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.

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.  Occidental has disclosed its reserve balances for environmental matters.  Reserve balances for other matters as of September 30, 2015 and December 31, 2014 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 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, 2015, 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.

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 nine months ended September 30, 2015 and 2014 (in millions):
Three months ended September 30
 
2015
 
2014
Net Periodic Benefit Costs
 
Pension Benefit
 
Post-retirement Benefit
 
Pension Benefit
 
Post-retirement Benefit
Service cost
 
$
2

 
$
7

 
$
3

 
$
7

Interest cost
 
5

 
10

 
6

 
10

Expected return on plan assets
 
(7
)
 
—

 
(8
)
 
—

Recognized actuarial loss
 
3

 
6

 
1

 
4

Total
 
$
3

 
$
23

 
$
2

 
$
21


Nine months ended September 30
 
2015
 
2014
Net Periodic Benefit Costs
 
Pension Benefit
 
Post-retirement Benefit
 
Pension Benefit
 
Post-retirement Benefit
Service cost
 
$
6

 
$
21

 
$
9

 
$
19

Interest cost
 
15

 
30

 
18

 
34

Expected return on plan assets
 
(21
)
 
—

 
(25
)
 
—

Recognized actuarial loss
 
7

 
20

 
4

 
16

Total
 
$
7

 
$
71

 
$
6

 
$
69


Occidental contributed approximately $2 million and $1 million to its defined benefit pension plans in the three-months ended September 30, 2015 and 2014, respectively. Occidental contributed approximately $7 million and $4 million in the nine months ended September 30, 2015 and 2014, respectively.


10


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.

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
Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date. Those 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 classified as Level 2 and 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.
Ø
Occidental values 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 generally unobservable in the marketplace, or are observable but have been adjusted based upon various assumptions and the fair value is designated as Level 3 within the valuation hierarchy.
Ø
Occidental values its available for sale investment in California Resources based on the closing share price of California Resources' common stock as of the balance sheet date. This investment is classified as Level 1. At September 30, 2015, Occidental had approximately 71.5 million shares of common stock of California Resources, which are recorded as a $186 million available for sale investment. As a result of a declining trading price in the third quarter of 2015, Occidental has recorded unrealized losses of $208 million in accumulated other comprehensive income for this available for sale investment. Occidental considers available evidence including the results of California Resources, the volatility of oil prices, recent unrealized gains and losses resulting from share price fluctuation, and other factors to determine whether the decline in value is other than temporary. Occidental has concluded the investment is not impaired at September 30, 2015.

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.


11


The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of September 30, 2015 and December 31, 2014 (in millions):
Fair Value Measurements at September 30, 2015:
 
 
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
235

 
$
51

 
$
—

 
$
(223
)
 
$
63

Available for sale investment
 
$
186

 
$
—

 
$
—

 
$
—

 
$
186

Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
251

 
$
293

 
$
—

 
$
(240
)
 
$
304


Fair Value Measurements at December 31, 2014:
 
 
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
712

 
$
127

 
$
—

 
$
(742
)
 
$
97

Available for sale investment
 
$
394

 
$
—

 
$
—

 
$
—

 
$
394

Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
750

 
$
246

 
$
—

 
$
(756
)
 
$
240


Fair Values — Nonrecurring

The following table provides fair value measurement for such proved domestic and international oil and gas properties that are measured on a nonrecurring basis as of September 30, 2015. Occidental considers the sales agreement to sell its Williston operations as Level 3 in the fair value hierarchy. The following table also includes those proved properties measured for impairment based on an income approach. The impairment tests, including the fair value estimation, incorporated a number of assumptions involving expectations of future cash flows. These assumptions included estimates of future product prices, which Occidental based on forward price curves and, where applicable, contractual prices, estimates of oil and gas reserves, estimates of future expected operating and development costs and a risk adjusted discount rate. These inputs are categorized as Level 3 in the fair value hierarchy. See Note 11, Industry Segments, for additional information.
 
 
Fair Value Measurements at
 
 
 
 
 
 
September 30, 2015 Using
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Net Book Value
(a) 
Total Pre-tax (Non-cash) Impairment Loss
Assets:
 
 
 
 
 
 
 
 
 
 
Impaired proved oil and gas assets - domestic
 
$
—

 
$
—

 
$
1,071

 
$
2,654

 
$
1,583

Impaired proved oil and gas assets - international
 
$
—

 
$
—

 
$
466

 
$
1,767

 
$
1,301

 
 
 
 
 
 
 
 
 
 
 
(a) Amount represents net book value at date of assessment.

12



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 September 30, 2015 and December 31, 2014 was $8.7 billion and $7.0 billion, respectively, and its carrying value net of unamortized discount as of September 30, 2015 and December 31, 2014 was $8.3 billion and $6.8 billion, respectively. The majority of Occidental's debt is classified as Level 1, with $68 million classified as Level 2.

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.

Cash-Flow Hedges

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 are used to fix margins on the future sales of the stored volumes through March 2016. As of September 30, 2015, Occidental had approximately 13 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 6 billion cubic feet of stored natural gas. As of December 31, 2014, Occidental did not have any cash-flow hedges.

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, 2015 and 2014, and the ending AOCI balances for each period, were not material. 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, 2015 and 2014.

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, 2015 and December 31, 2014:
 
 
Net Outstanding Position
 
 
 
Long / (Short)
 
Commodity
 
2015
 
2014
 
Oil (million barrels)
 
81

 
(9
)
 
Natural gas (billion cubic feet)
 
(54
)
 
(32
)
 
Carbon dioxide (billion cubic feet)
 
607

 
621

 

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.
 

13


Occidental fulfills short positions through its own production or by third-party purchase contracts. Subsequent to September 30, 2015, 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 $119 million of net losses from derivatives not designated as hedging instruments and $72 million of net losses were recognized in net sales for the three months ended September 30, 2015 and 2014, respectively. Approximately $163 million of net losses from derivatives not designated as hedging instruments and $12 million of net gains were recognized in net sales for the nine months ended September 30, 2015 and 2014, respectively.

Fair Value of Derivatives
The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of September 30, 2015 and December 31, 2014 (in millions):
 
 
Asset Derivatives
 
 
 
Liability Derivatives
 
 
September 30, 2015
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Cash-flow hedges(a)
 
 
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
3

 
Accrued liabilities
 
—

 
 
 
 
3

 
 
 
—

Derivatives not designated as hedging instruments (a)
 
 
 
 
 
 
 

Commodity contracts
 
Other current assets
 
274

 
Accrued liabilities
 
309

Long-term receivables and other assets, net
 
9

 
Deferred credits and other liabilities
 
235

 
 
 
 
283

 
 
 
544

Total gross fair value
 
 
 
286

 
 
 
544

Less: counterparty netting and cash collateral (b,d)
 
 
 
(223
)
 
 
 
(240
)
Total net fair value of derivatives
 
 
 
$
63

 
 
 
$
304

 
 
 
Asset Derivatives
 
 
 
Liability Derivatives
 
 
December 31, 2014
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives not designated as hedging instruments (a)
 
 
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
828

 
Accrued liabilities
 
886

Long-term receivables and other assets, net
 
11

 
Deferred credits and other liabilities
 
110

 
 
 
 
839

 
 
 
996

Total gross fair value
 
 
 
839

 
 
 
996

Less: counterparty netting and cash collateral (c,d)
 
 
 
(742
)
 
 
 
(756
)
Total net fair value of derivatives
 
 
 
$
97

 
 
 
$
240


(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, 2015, collateral received of $1 million has been netted against the derivative assets and collateral paid of $17 million has been netted against derivative liabilities.
(c)
As of December 31, 2014, no collateral was received against the derivative assets and collateral paid of $8 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 $35 million and $44 million deposited by Occidental has not been reflected in these derivative fair value tables as of September 30, 2015 and December 31, 2014, respectively. This collateral is included in other current assets in the consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.

See Note 9, Fair Value Measurements, for fair value measurement disclosures on derivatives.

14



Credit Risk

A large portion of Occidental’s derivative transaction volume is executed through the over-the-counter (OTC) market. Occidental is subject to counterparty credit risk to the extent the counterparty to the derivatives is unable to meet its settlement commitments.  Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by spreading the credit risk among many such counterparties, by entering into master netting arrangements with the counterparties and by requiring collateral, as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments to reflect counterparty risk, if necessary. Occidental executes the rest of its derivative transactions in the exchange-traded market, 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.  

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, 2015 and December 31, 2014, Occidental had a net liability of zero and $4 million, respectively, which is net of collateral posted of zero and $3 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, 2015 and December 31, 2014.

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, 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 power. 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 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.


15


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, 2015
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,054

 
$
1,008

 
$
231

 
$
(177
)
 
$
3,116

Pre-tax operating profit (loss)
 
$
(3,128
)
(a) 
$
272

(b) 
$
24

 
$
(219
)
(c) 
$
(3,051
)
Income taxes
 
—

 
—

 
—

 
445

(d) 
445

Discontinued operations, net
 
—

 
—

 
—

 
(3
)
 
(3
)
Net income (loss) attributable to
   common stock
 
$
(3,128
)
 
$
272

 
$
24

 
$
223

 
$
(2,609
)
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,586

 
$
1,232

 
$
261

 
$
(175
)
 
$
4,904

Pre-tax operating profit (loss)
 
$
1,568

 
$
140

 
$
108

 
$
(119
)
(c) 
$
1,697

Income taxes
 
—

 
—

 
—

 
(699
)
(d) 
(699
)
Discontinued operations, net
 
—

 
—

 
—

 
213

 
213

Net income attributable to
noncontrolling interest
 
—

 
—

 
(3
)
 
—

 
(3
)
Net income (loss) attributable to
   common stock
 
$
1,568


$
140


$
105


$
(605
)

$
1,208



 
 
Oil
 
 
 
Midstream
 
Corporate
 
 
 
 
and
 
 
 
and
 
and
 
 
 
 
Gas
 
Chemical
 
Marketing
 
Eliminations
 
Total
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
6,405

 
$
3,038

 
$
722

 
$
(491
)
 
$
9,674

Pre-tax operating profit (loss)
 
$
(3,039
)
(a) 
$
547

(b) 
$
96

 
$
(385
)
(c) 
$
(2,781
)
Income taxes
 
—

 
—

 
—

 
140

(d) 
140

Discontinued operations, net
 
—

 
—

 
—

 
(10
)
 
(10
)
Net income (loss) attributable to
   common stock
 
$
(3,039
)
 
$
547

 
$
96

 
$
(255
)
 
$
(2,651
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
10,891

 
$
3,694

 
$
1,041

 
$
(621
)
 
$
15,005

Pre-tax operating profit (loss)
 
$
5,054

 
$
409

 
$
483

 
$
(348
)
(c) 
$
5,598

Income taxes
 
—

 
—

 
—

 
(2,302
)
(d) 
(2,302
)
Discontinued operations, net
 
—

 
—

 
—

 
741

 
741

Net income attributable to
noncontrolling interest
 
—

 
—

 
(8
)
 
—

 
(8
)
Net income (loss) attributable to
   common stock
 
$
5,054

 
$
409

 
$
475

 
$
(1,909
)
 
$
4,029


(a) The three months ended September 30, 2015 includes pre-tax impairment charges of $3.1 billion. In September 2015, Occidental entered into a sales agreement to sell its Williston operations in North Dakota, and as such an impairment charge of $756 million was recorded to write down the net book value of the assets and liabilities held for sale to the sales price. Due to the significant decline in oil and gas futures prices, Occidental also recorded impairment charges on proved and unproved properties related to Occidental's domestic gas operations of $924 million, Iraq operations of $760 million and Libya operations of $676 million. The nine months ended September 30, 2015 also reflected first quarter impairment charges of $195 million for Occidental's South Texas Eagle Ford non-operated properties and $41 million to write-off the remaining investment in Yemen due to the collapse of the country's government.
(b) Includes gain on the sale of an idled chemical site for $98 million.
(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.

16


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 nine months ended September 30, 2015 and 2014 (in millions, except per-share amounts):
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
 
 
 
2015
 
2014
 
2015
 
2014
Basic EPS
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(2,606
)
 
$
998

 
$
(2,641
)
 
$
3,296

Less: Income from continuing operations attributable to noncontrolling interest
 
—

 
(3
)
 
—

 
(8
)
Income (loss) from continuing operations attributable to common stock
 
(2,606
)

995


(2,641
)

3,288

Discontinued operations, net
 
(3
)
 
213

 
(10
)
 
741

Net income (loss)
 
(2,609
)
 
1,208

 
(2,651
)
 
4,029

Less: Net income allocated to participating securities
 
—

 
(3
)
 
—

 
(8
)
Net income (loss), net of participating securities
 
(2,609
)
 
1,205

 
(2,651
)
 
4,021

 
 
 
 
 
 
 
 
 
Weighted average number of basic shares
 
763.3

 
777.4

 
766.4

 
783.7

Basic EPS
 
$
(3.42
)
 
$
1.55

 
$
(3.46
)
 
$
5.13

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Net income (loss), net of participating securities
 
$
(2,609
)
 
$
1,205

 
$
(2,651
)
 
$
4,021

Weighted average number of basic shares
 
763.3

 
777.4

 
766.4

 
783.7

Dilutive effect of potentially dilutive securities
 
—

 
0.3

 
—

 
0.4

Total diluted weighted average common shares
 
763.3

 
777.7

 
766.4

 
784.1

Diluted EPS
 
$
(3.42
)
 
$
1.55

 
$
(3.46
)
 
$
5.13



17


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; 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; 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, 2014 (the 2014 Form 10-K).

Consolidated Results of Operations
 
Occidental reported a net loss of $2.6 billion for the third quarter of 2015 on net sales of $3.1 billion, compared to net income of $1.2 billion on net sales of $4.9 billion for the same period of 2014. Diluted loss per share was $3.42 for the third quarter of 2015 compared to earnings per share of $1.55 for the third quarter of 2014. Occidental reported a net loss of $2.7 billion for the first nine months of 2015 on net sales of $9.7 billion, compared to net income of $4.0 billion on net sales of $15.0 billion for the same period of 2014. Diluted loss per share was $3.46 for the first nine months of 2015, compared to earnings per share of $5.13 for the same period of 2014.
 
The decrease in net income (loss) for the three and nine months ended September 30, 2015, from a year earlier reflect oil and gas asset impairment charges, significantly lower realized crude oil prices and to a lesser extent the impact of significantly lower realized NGLs and gas prices, partially offset by higher crude oil volumes.

Selected Statements of Operations Items

Net sales decreased for the three and nine months ended September 30, 2015, compared to the same periods of 2014, due to significantly lower realized prices for all oil and gas commodities, and to a lesser extent, lower sales prices on most products for the chemical business, which was partially offset by higher crude oil volumes. Gain (loss) on sale of assets, net, for the three and nine months ended September 30, 2015, reflected a gain on the sale of an idled chemical site for $98 million. Gain (loss) on sale of assets, net, for the nine months ended September 30, 2014, included a gain of $532 million from the sale of Occidental's operations in Hugoton Field.

Cost of sales for the three and nine months ended September 30, 2015, compared to the same periods in 2014, reflected lower raw material and energy costs for the chemical business. Asset impairments and related items in the Oil and Gas segment for the three and nine months ended September 30, 2015 reflected impairment charges of $3.1 billion. In September 2015, Occidental entered into a sales agreement to sell its Williston operations in North Dakota, and as such an impairment charge of $763 million was recorded to write down the net book value of the assets and liabilities held for sale to the sales price. Due to the significant decline in oil and gas futures prices, Occidental also recorded impairment charges on proved and unproved properties related to Occidental's domestic gas operations of $924 million, Iraq operations of $760 million and Libya operations of $676 million. The nine months ended September 30, 2015 also reflected first quarter impairment charges of $195 million for Occidental's South Texas Eagle Ford non-operated properties and $41 million to write-off the remaining investment in Yemen due to the collapse of the country's government. The decrease in selling, general and administrative and other operating expense for the three and nine months ended September 30, 2015, compared to the same periods of 2014, reflected

18


lower compensation related expenses. The increase in depreciation, depletion and amortization (DD&A) expense for the three and nine months ended September 30, 2015, compared to the same periods of 2014, reflected higher oil and gas sales volumes, partially offset by lower DD&A rates. Taxes other than on income for the three and nine months ended September 30, 2015, compared to the same periods of 2014, reflected lower production taxes, which are mostly tied to oil and gas prices.

The domestic and foreign income tax benefit for the three and nine months ended September 30, 2015, compared to domestic and foreign income tax provision for the same periods of 2014, is due to lower operating income in 2015 compared to 2014 resulting from lower oil and gas prices, asset impairments and related items.

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 decrease in trade receivables, net, at September 30, 2015, compared to December 31, 2014, was due to the significant decline in oil and gas realized prices for all products. Assets held for sale as of September 30, 2015 included the Williston assets and the Westwood building. The decrease in the available for sale investment reflected the decrease in fair value of the investment in California Resources as of September 30, 2015, compared to December 31, 2014. The increase in investments in unconsolidated entities is primarily a result of capital contributions associated with the joint venture for the ethylene cracker at the OxyChem Ingleside facility. The decrease in property, plant and equipment, net, reflected DD&A, impairments and the reclassification of the Williston assets and the Westwood building to assets held for sale, partially offset by capital expenditures of $4.2 billion.

Current maturities of long-term debt at September 30, 2015 is comprised of $700 million 2.5-percent senior notes due February 2016 and $750 million 4.125-percent senior notes due September 2016. The decrease in accounts payable at September 30, 2015, compared to December 31, 2014, was due to the payments on the higher capital and operating expenses accrued at year-end 2014, which was paid in the first half of 2015. The decrease in accrued liabilities at September 30, 2015 reflected the first half of the year payments for compensation-related costs and settlement payments related to the State of New Jersey litigation. The decrease in domestic and foreign income taxes payable at September 30, 2015 is primarily due to the current year domestic loss position. The decrease in stockholders' equity was mainly due to the current year net loss, dividend payments and treasury share purchases.

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, and trades oil, NGLs, gas and other commodities. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.


19


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, 2015 and 2014 (in millions):
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
2015
 
2014
 
2015
 
2014
Net Sales (a)
 
 
 
 
 
 
 
 
Oil and Gas
 
$
2,054

 
$
3,586

 
$
6,405

 
$
10,891

Chemical
 
1,008

 
1,232

 
3,038

 
3,694

Midstream and Marketing
 
231

 
261

 
722

 
1,041

Eliminations
 
(177
)
 
(175
)
 
(491
)
 
(621
)
 
 
$
3,116

 
$
4,904

 
$
9,674

 
$
15,005

Segment Earnings (b)
 
 
 
 
 
 
 
 
Oil and Gas
 
$
(3,128
)
 
$
1,568

 
$
(3,039
)
 
$
5,054

Chemical
 
272

 
140

 
547

 
409

Midstream and Marketing (c)
 
24

 
105

 
96

 
475

 
 
(2,832
)

1,813


(2,396
)

5,938

Unallocated Corporate Items (b)
 
 
 
 
 
 
 
 
Interest expense, net
 
(47
)
 
(15
)
 
(82
)
 
(53
)
Income tax benefit (expense)
 
445

 
(699
)
 
140

 
(2,302
)
Other expense, net
 
(172
)
 
(104
)
 
(303
)
 
(295
)
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations (c)
 
(2,606
)

995


(2,641
)

3,288

Discontinued operations, net
 
(3
)
 
213

 
(10
)
 
741

Net income (loss) attributable to common stock (c)
 
$
(2,609
)

$
1,208


$
(2,651
)

$
4,029


(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.

20


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 nine months ended September 30, 2015 and 2014 (in millions):
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Oil and Gas
 
 
 
 
 
 
 
 
Asset sales (losses) gains
 
$
—

 
$
(3
)
 
$
5

 
$
532

Asset impairments and related items - Domestic
 
(1,852
)
 
—

 
(2,102
)
 
(471
)
Asset impairments and related items - International
 
(1,438
)
 
—

 
(1,485
)
 
—

Total Oil and Gas
 
$
(3,290
)
 
$
(3
)

$
(3,582
)
 
$
61

 
 
 
 
 
 
 
 
 
Chemical
 
 
 
 
 
 
 
 
Asset sale gain
 
$
98

 
$
—

 
$
98

 
$
—

Total Chemical
 
$
98

 
$
—

 
$
98

 
$
—

 
 
 
 
 
 
 
 
 
Midstream and Marketing
 
 
 
 
 
 
 
 
Asset impairments and related items
 
$
(7
)
 
$
(50
)
 
$
(14
)
 
$
94

Total Midstream and Marketing
 
$
(7
)
 
$
(50
)

$
(14
)

$
94

 
 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
 
Severance, spin-off costs and other items
 
$
(98
)
 
$
(21
)
 
$
(129
)
 
$
(37
)
Tax effect of pre-tax adjustments
 
667

 
23

 
766

 
(53
)
Discontinued operations, net*
 
(3
)
 
213

 
(10
)
 
741

Total Corporate
 
$
566

 
$
215


$
627


$
651

 
 
 
 
 
 
 
 
 
Total
 
$
(2,633
)
 
$
162


$
(2,871
)

$
806

*Amounts shown after tax.
 
Worldwide Effective Tax Rate

The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations for the three and nine months ended September 30, 2015 and 2014 (in millions):
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Oil and Gas earnings
 
$
(3,128
)
 
$
1,568

 
$
(3,039
)
 
$
5,054

Chemical earnings
 
272

 
140

 
547

 
409

Midstream and Marketing earnings
 
24

 
105

 
96

 
475

Unallocated corporate items
 
(219
)
 
(119
)
 
(385
)
 
(348
)
Pre-tax income (loss)
 
(3,051
)

1,694


(2,781
)
 
5,590

 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
 
 
 
 
 
 
 
 
Federal and state
 
(747
)
 
155

 
(919
)
 
674

Foreign
 
302

 
544

 
779

 
1,628

Total
 
(445
)

699


(140
)
 
2,302

 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations (a)
 
$
(2,606
)

$
995


$
(2,641
)
 
$
3,288

 
 
 
 
 
 
 
 
 
Worldwide effective tax rate
 
15
%
 
41
%
 
5
%
 
41
%

(a) Represents amounts attributed to income from continuing operations after deducting a noncontrolling interest amount of $3 million and $8 million for the three and nine months ended September 30, 2014, respectively.

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Occidental's worldwide effective tax rate of 5 percent for the nine months ended September 30, 2015 is lower than the comparative period of 2014 due to the mix of domestic operating losses and foreign operating income, domestic oil and gas asset impairments which are taxed at statutory rates and foreign oil and gas asset impairments which have no reported ta