Occidental Beats EPS Est, Lags Rev

Zacks

Occidental Petroleum Corporation (OXY) reported second quarter 2012 operating earnings of $1.64 per share, down 26.5% year over year from $2.23 per share in the year-ago quarter. This decline was primarily due to lower product pricing. Quarterly earnings, however, surpassed the Zacks Consensus Estimate of $1.60 per share.

Total Revenue

Occidental's quarterly revenue decreased 6.6% to $5,768 million from $6,173 million in the year-ago quarter. Revenue decreased due to lower contribution from the Oil and Gas, Chemical and Midstream, Marketing and Other segments. The top line fell short of the Zacks Consensus Estimate of $5,958 million.

Quarterly Production, Sales and Realized Price

Occidental's average daily production volumes touched 766 thousand barrels of oil equivalents (“MBOE”) in second quarter 2012, up 7% year over year. The steady volume growth was driven by strong production from domestic operations and increase in production from North African and Middle Eastern operations.

Occidental’s daily oil and gas sales volumes during the quarter were 759 MBOE, up 7.7% from 705 MBOE in the year-ago period.

Occidental’s realized price for crude oil decreased 3.7% to $99.34 per barrel from the prior-year level of $103.12 per barrel. Realized natural gas liquids (“NGL”) prices were down 27% to $42.06 per barrel from the prior-year quarter level of $57.67 per barrel. In the quarter under review, domestic gas prices also declined 51% to $2.09 per thousand cubic feet (“MCF”) from $4.27 per MCF in the year-ago quarter.

Segment Earnings

In second quarter 2012, consolidated segment earnings were $2,314 million versus $3,064 million in the year-ago quarter. Earnings declined due to weak performance across all the segments.

Oil & Gas: Quarterly earnings from this segment were $2,043 million, down 22.1% from $2,624 million reported in the year-ago quarter. This was due to a decline in oil and gas prices, higher operating costs and rise in depreciation, depletion and amortization (“DD&A”) rates. These negatives were partially offset by growth in volumes.

Chemicals: Segment earnings were $194 million versus $253 million in the second quarter 2011. The year-over-year decline was due to decrease in domestic and export caustic volumes, weak export-demand of vinyl chloride monomer (“VCM”), and lower VCM and polyvinyl chloride export prices. These were partially offset by lower cost of ethylene and natural gas.

Midstream, Marketing and Other: Quarterly segment earnings were $77 million compared with $187 million in the year-ago quarter. The significant decline in earnings was primarily due to lower margins in the marketing and trading businesses and the gas processing businesses. However, these were partially offset by higher income from pipeline operations.

Financial Update

Cash from operations during the first half of 2012 totaled $6 billion, up 7.1% from year ago period of $5.6 billion.

Occidental’s capital expenditure for second quarter 2012 was $2,713 million, compared with $1,633 million in the year-ago quarter. The rise in capital expenditure was due to growth in development expenses at its Oil & Gas, Chemicals and Midstream, marketing and other segments.

Total debt as of June 30, 2012 was $7,620 million compared with $5,871 million as of December 31, 2011. The company’s total debt-to-capitalization ratio at quarter end was 16% compared with 13% at the end of fiscal 2011.

Peer Update

Occidental Petroleum’s competitor ConocoPhillips (COP) announced second quarter 2012 adjusted earnings of $1.22 per share compared with $1.64 per share in the year-ago quarter. Quarterly earnings surpassed the Zacks Consensus Estimate of $1.17 per share.

ConocoPhillips’ second quarter 2012 revenue was $15,166 million versus $17,668 million in the prior-year quarter. The reported revenue beat the Zacks Consensus Estimate of $9,883 million.

Our Take

Occidental’s second quarter earnings beat the Zacks Consensus Estimate though revenues fell short of the mark. The company also failed to surpass the year-ago numbers. Lower pricing of natural gas, NGL and oil prices pulled back the company’s reported result.

We have, however, observed a few offsetting factors, which might fuel Occidental’s near-term growth. The company’s strong presence in the Middle East along with its mature domestic properties is expected to act as near-term positive catalysts.

We are mainly concerned about pricing pressure across the product line. In addition, political instability and natural calamities always pose challenges for Occidental’s international operations primarily in Latin America and Libya.

These factors hamper oil exploration activities and cause damage to production infrastructure. The company also faces cost overruns, interruption in development activities and equipment failures.

Occidental Petroleum Corporation currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

Los Angeles-based Occidental Petroleum Corporation along with its subsidiaries engages in the exploration, development, production and marketing of crude oil, natural gas liquids and natural gas. The company has operations in the United States, Middle East/North Africa and Latin America.

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