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Occidental Beats Estimates

Zacks Equity Research

Occidental Petroleum Corporation (OXY) reported third-quarter 2012 pro forma earnings per share of $1.70, beating the Zacks Consensus Estimate of $1.63. However, quarterly earnings were down from the year-ago figure of $2.18. The year-over-year decline was due to higher interest expenses.

In the third quarter of 2012, Occidental’s GAAP earnings per share were $1.69 compared with $2.17 in the prior-year quarter. The variance of a penny between pro forma and GAAP earnings were due to a cent charge for net discontinued operations.

Total Revenue

Occidental's third-quarter 2012 revenue marginally decreased to $5,965.0 million from $6,006.0 million in the year-ago quarter. Quarterly revenue decreased due to lower contribution from the Oil and Gas, and Chemical segments; partially offset higher revenue from Midstream, Marketing and Other segment. However, the top line beats the Zacks Consensus Estimate of $5,761.0 million.

Quarterly Production, Sales and Realized Price

Occidental's average daily production volumes touched 766 thousand barrels of oil equivalents (“Mboe”) in third-quarter 2012, up from 739 Mboe in the year-ago quarter. Volume growth was driven by strong production from the company’s domestic operations; partially offset by lower production from North Africa and Middle East operations.

Occidental’s daily oil and gas sales volumes during the quarter were 765 Mboe, up from 743 Mboe in the year-ago period.

In the quarter under review, Occidental’s realized price for crude oil decreased to $96.62 per barrel from the prior-year level of $97.24 per barrel. Realized worldwide natural gas liquids (“NGL”) prices were down 27.5% to $40.65 per barrel from the prior-year quarter level of $56.06 per barrel. In third-quarter 2012, domestic gas prices also declined 41% to $2.48 per thousand cubic feet (“Mcf”) from $4.23 per Mcf in the year-ago quarter.

Segment Earnings

In third-quarter 2012, consolidated segment earnings were $2.3 billion versus $2.9 billion in the year-ago quarter.

Oil & Gas: Quarterly earnings from this segment were $2.0 billion, down from $2.6 billion reported in the year-ago quarter. This earnings decline was due to higher costs and reduced product prices; partially offset by increase in oil volumes.

Chemicals: Segment earnings were $162.0 million in third-quarter 2012 versus $245.0 million in the prior-year quarter. The year-over-year decline was due to lower prices across most of the product lines, primarily vinyl chloride monomer (“VCM”) and polyvinyl chloride (“PVC”); partially offset by lower cost of ethylene and natural gas.

Midstream, Marketing and Other: Quarterly segment earnings were $156.0 million compared with $77.0 million in the year-ago quarter. The significant rise in earnings was primarily driven by higher margins in the marketing and trading businesses.  However, this was partially offset by lower income from the company’s gas processing and pipeline businesses.

Financial Update

Occidental’s cash from operations during the first nine months of 2012 totaled $8.5 billion compared with $8.6 billion in the year-ago comparable period.

The company’s capital expenditure for third-quarter 2012 was $2.6 billion, up from $2.0 billion in the year-ago quarter. The rise in capital expenditure was due to increase in development expenses at its Oil & Gas, Chemicals and Midstream, marketing and other segments.

Total debt as of September 30, 2012 was $7.6 billion compared with $5.9 billion 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 full-year 2011.

Peer Update

Occidental Petroleum’s competitor Exxon Mobil Corporation (XOM) is expected to release its third-quarter 2012 earnings results on November 1, 2012. The Zacks Consensus Estimate for the company’s third-quarter and full-year 2012 are $1.97 per share and $7.73 per share, respectively.

Our Take

Occidental Petroleum’s third-quarter 2012 earnings and revenue beat the Zacks Consensus Estimate due to higher revenue from Midstream, Marketing and Other segment and decline in income tax charges.

We view Occidental Petroleum as an organization with a strong balance sheet and liquidity position along with a steady capital investment program. We believe that the company will generate steady production growth in the forthcoming quarters with its well-diversified asset base, which is located in different geographical territories, particularly the Middle East.

In addition, Occidental Petroleum continues to take several cost-cutting measures like production curtailment and planned shutdowns of few plants, which may improve its operating as well as financial performance in the forthcoming quarters.

However, Occidental Petroleum’s over-reliance on crude oil prices movement is a threat for its future financial performance. We are also skeptical about natural calamities, political instability and risks related to oil exploration and production infrastructure damages, which might obstruct the company’s operations.

Occidental Petroleum Corporation currently has short-term Zacks #3 Rank (Hold rating).

Los Angeles, California-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. With a market capitalization of $65.35 billion, Occidental has 11,300 full time employees.

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