| | | | | |
Notes to Consolidated Condensed Financial Statements | Occidental Petroleum Corporation and Subsidiaries |
NATURE OF OPERATIONS
Occidental conducts its operations through various subsidiaries and affiliates. Occidental has made its disclosures in accordance with United States generally accepted accounting principles as they apply to interim reporting, and condensed or omitted, as permitted by the U.S. Securities and Exchange Commission’s rules and regulations, certain information and disclosures normally included in Consolidated Financial Statements and the notes thereto. 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, 2021.
In the opinion of Occidental’s management, the accompanying unaudited Consolidated Condensed Financial Statements in this report reflect all adjustments (consisting of normal recurring adjustments) that are necessary to fairly present Occidental’s results of operations and cash flows for the three and nine months ended September 30, 2022 and 2021 and Occidental’s financial position as of September 30, 2022 and December 31, 2021. Certain data in the Consolidated Condensed Financial Statements and notes for prior periods have been reclassified to conform to the current presentation. The income and cash flows for the periods ended September 30, 2022 and 2021 are not necessarily indicative of the income or cash flows to be expected for the full year.
CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS
Occidental considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents or restricted cash equivalents. The cash equivalents and restricted cash equivalents balances for the periods presented included investments in government money market funds in which the carrying value approximates fair value.
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as reported in the Consolidated Condensed Statements of Cash Flows as of September 30, 2022 and 2021:
| | | | | | | | | | | | | | |
millions | | 2022 | | 2021 |
Cash and cash equivalents | | $ | 1,233 | | | $ | 2,059 | |
Restricted cash and restricted cash equivalents included in other current assets | | 31 | | | 220 | |
Restricted cash and restricted cash equivalents included in long-term receivables and other assets, net | | 15 | | | 15 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 1,279 | | | $ | 2,294 | |
SUPPLEMENTAL CASH FLOW INFORMATION
The following table represents U.S. federal, domestic, state and international income taxes paid, tax refunds received and interest paid related to continuing operations during the nine months ended September 30, 2022 and 2021, respectively:
| | | | | | | | | | | | | | |
millions | | 2022 | | 2021 |
Income tax payments | | $ | 1,885 | | | $ | 502 | |
Income tax refunds received | | $ | 89 | | | $ | 70 | |
Interest paid (a) | | $ | 1,236 | | | $ | 1,432 | |
(a) Net of capitalized interest of $50 million and $46 million for the nine months ended September 30, 2022 and 2021, respectively.
BERKSHIRE HATHAWAY OWNERSHIP
Berkshire Hathaway is a related party of Occidental due to its ownership of Occidental's common stock. During the third quarter of 2022, Berkshire Hathaway increased its ownership in Occidental to approximately 194 million shares of common stock. Occidental has, from time to time, contracted with Berkshire Hathaway for the provision of electricity, rail and insurance. In addition, certain Berkshire Hathaway subsidiaries purchase various chemicals from our chemical segment. While these types of transactions between Berkshire Hathaway and Occidental have not been significant, Occidental will continue to assess the financial significance of our transactions with Berkshire Hathaway and its subsidiaries.
WES INVESTMENT
In July 2022, Occidental sold 10.0 million limited partner units of WES for proceeds of $253 million, resulting in a gain of $62 million. As of September 30, 2022, Occidental owned all of the 2.3% non-voting general partner interest and 49.4% of the limited partner units in WES. On a combined basis, with its 2% non-voting limited partner interest in WES Operating, Occidental's total effective economic interest in WES and its subsidiaries was 51.5%.
DISCONTINUED OPERATIONS
The nine months ended 2021 included a $412 million after-tax loss contingency in discontinued operations associated with its former operations in Ecuador, which was primarily recorded in the first quarter of 2021. See Note 9 - Lawsuits, Claims, Commitments and Contingencies. In addition, the results of operations for Ghana for the nine months ended September 30, 2021, an after-tax loss of $32 million, are presented as discontinued operations. The Ghana assets were sold in October 2021.
Revenue from customers is recognized when obligations under the terms of a contract with our customers are satisfied; this generally occurs with the delivery of oil, NGL, gas, chemicals or services, such as transportation. As of September 30, 2022, trade receivables, net, of $4.0 billion represent rights to payment for which Occidental has satisfied its obligations under a contract and its right to payment is conditioned only on the passage of time.
The following table shows a reconciliation of revenue from customers to total net sales for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
millions | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Revenue from customers | | $ | 9,359 | | | $ | 6,880 | | | $ | 27,923 | | | $ | 18,166 | |
All other revenues (a) | | 31 | | | (88) | | | 492 | | | (123) | |
Net sales | | $ | 9,390 | | | $ | 6,792 | | | $ | 28,415 | | | $ | 18,043 | |
(a) Includes net marketing derivatives, collars and calls and chemical exchange contracts in 2021 and the same in 2022 with the exception of the collars and calls which expired on or before December 31, 2021.
DISAGGREGATION OF REVENUE FROM CONTRACTS WITH CUSTOMERS
The table below presents Occidental's revenue from customers by segment, product and geographical area. The oil and gas segment typically sells its oil, NGL and gas at the lease or concession area. Chemical segment revenues are shown by geographic area based on the location of the sale. Excluding net marketing revenue, midstream and marketing segment revenues are shown by the location of sale:
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millions | | United States | | International | | Eliminations | | Total |
| | | | | | | | |
Three months ended September 30, 2022 | | | | | | | | |
Oil and gas | | | | | | | | |
Oil | | $ | 4,369 | | | $ | 1,061 | | | $ | — | | | $ | 5,430 | |
NGL | | 658 | | | 127 | | | — | | | 785 | |
Gas | | 786 | | | 88 | | | — | | | 874 | |
Other | | 8 | | | 1 | | | — | | | 9 | |
Segment total | | $ | 5,821 | | | $ | 1,277 | | | $ | — | | | $ | 7,098 | |
Chemical | | $ | 1,572 | | | $ | 102 | | | $ | — | | | $ | 1,674 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Midstream and marketing | | $ | 859 | | | $ | 132 | | | $ | — | | | $ | 991 | |
Eliminations | | $ | — | | | $ | — | | | $ | (404) | | | $ | (404) | |
Consolidated | | $ | 8,252 | | | $ | 1,511 | | | $ | (404) | | | $ | 9,359 | |
| | | | | | | | |
millions | | United States | | International | | Eliminations | | Total |
| | | | | | | | |
Three months ended September 30, 2021 | | | | | | | | |
Oil and gas | | | | | | | | |
Oil | | $ | 3,056 | | | $ | 766 | | | $ | — | | | $ | 3,822 | |
NGL | | 642 | | | 90 | | | — | | | 732 | |
Gas | | 399 | | | 76 | | | — | | | 475 | |
Other | | 26 | | | 1 | | | — | | | 27 | |
Segment total | | $ | 4,123 | | | $ | 933 | | | $ | — | | | $ | 5,056 | |
Chemical | | $ | 1,329 | | | $ | 66 | | | $ | — | | | $ | 1,395 | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Midstream and marketing | | $ | 543 | | | $ | 147 | | | $ | — | | | $ | 690 | |
Eliminations | | $ | — | | | $ | — | | | $ | (261) | | | $ | (261) | |
Consolidated | | $ | 5,995 | | | $ | 1,146 | | | $ | (261) | | | $ | 6,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
millions | | United States | | International | | Eliminations | | Total |
| | | | | | | | |
Nine months ended September 30, 2022 | | | | | | | | |
Oil and gas | | | | | | | | |
Oil | | $ | 13,311 | | | $ | 2,958 | | | $ | — | | | $ | 16,269 | |
NGL | | 2,139 | | | 302 | | | — | | | 2,441 | |
Gas | | 1,916 | | | 225 | | | — | | | 2,141 | |
Other | | 15 | | | 3 | | | — | | | 18 | |
Segment total | | $ | 17,381 | | | $ | 3,488 | | | $ | — | | | $ | 20,869 | |
Chemical | | $ | 4,984 | | | $ | 281 | | | $ | — | | | $ | 5,265 | |
Midstream and marketing | | $ | 2,410 | | | $ | 478 | | | $ | — | | | $ | 2,888 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Eliminations | | $ | — | | | $ | — | | | $ | (1,099) | | | $ | (1,099) | |
Consolidated | | $ | 24,775 | | | $ | 4,247 | | | $ | (1,099) | | | $ | 27,923 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
millions | | United States | | International | | Eliminations | | Total |
| | | | | | | | |
Nine months ended September 30, 2021 | | | | | | | | |
Oil and gas | | | | | | | | |
Oil | | $ | 8,548 | | | $ | 1,998 | | | $ | — | | | $ | 10,546 | |
NGL | | 1,498 | | | 220 | | | — | | | 1,718 | |
Gas | | 963 | | | 216 | | | — | | | 1,179 | |
Other | | 18 | | | 2 | | | — | | | 20 | |
Segment total | | $ | 11,027 | | | $ | 2,436 | | | $ | — | | | $ | 13,463 | |
Chemical | | $ | 3,494 | | | $ | 175 | | | $ | — | | | $ | 3,669 | |
Midstream and marketing | | $ | 1,362 | | | $ | 430 | | | $ | — | | | $ | 1,792 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Eliminations | | $ | — | | | $ | — | | | $ | (758) | | | $ | (758) | |
Consolidated | | $ | 15,883 | | | $ | 3,041 | | | $ | (758) | | | $ | 18,166 | |
Finished goods primarily represent oil, which is carried at the lower of weighted-average cost or net realizable value, and caustic soda and chlorine, which are valued under the LIFO method. Inventories consisted of the following:
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millions | | September 30, 2022 | | December 31, 2021 |
| | | | |
Raw materials | | $ | 110 | | | $ | 96 | |
Materials and supplies | | 882 | | | 783 | |
Commodity inventory and finished goods | | 1,044 | | | 1,066 | |
| | 2,036 | | | 1,945 | |
Revaluation to LIFO | | (99) | | | (99) | |
Total | | $ | 1,937 | | | $ | 1,846 | |
| | |
NOTE 4 - DIVESTITURES AND OTHER TRANSACTIONS |
In November 2021, Occidental entered into an agreement to sell certain non-strategic assets in the Permian Basin. The transaction closed in January 2022 for net cash proceeds of approximately $190 million. The difference in the proved assets' net book value and adjusted purchase price was treated as a normal retirement, which resulted in no gain or loss being recognized. The difference in the unproved assets' net book value and adjusted purchase price resulted in a gain on sale of approximately $123 million. The gain has been presented within gains on sales of assets and equity investments, net in the Consolidated Condensed Statements of Operations.
The following table summarizes Occidental's outstanding debt, including finance lease liabilities:
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millions | | September 30, 2022 | | December 31, 2021 |
Total borrowings at face value | | $ | 19,089 | | | $ | 28,493 | |
Adjustments to book value: | | | | |
Unamortized premium, net | | 1,321 | | | 670 | |
Debt issuance costs | | (79) | | | (135) | |
Net book value of debt | | $ | 20,331 | | | $ | 29,028 | |
Long-term finance leases | | 552 | | | 504 | |
Current finance leases | | 141 | | | 85 | |
Total debt and finance leases | | $ | 21,024 | | | $ | 29,617 | |
Less: current maturities of financing leases | | (141) | | | (85) | |
Less: current maturities of long-term debt | | (405) | | | (101) | |
Long-term debt, net | | $ | 20,478 | | | $ | 29,431 | |
DEBT ACTIVITY
In the third quarter of 2022, Occidental repaid debt with maturities ranging from 2024 through 2048 and a face value of $1.3 billion.
For the nine months ended September 30, 2022, Occidental used $8.3 billion of cash to repay debt maturities ranging from 2022 through 2049 with a face value of $9.4 billion and a net book value of $8.7 billion, which resulted in a gain of $143 million. Subsequent to September 30, 2022, but before the date of this filing, Occidental repaid additional debt principal of $191 million with maturities ranging from 2024 to 2049. Following these repayments, the face value of Occidental's debt was $18.9 billion.
In October, Occidental exercised a par call for all $340 million of its 2.70% Senior Notes due February 2023. The 2.70% Senior Notes will be redeemed on November 15, 2022.
FAIR VALUE OF DEBT
The estimated fair value of Occidental’s debt as of September 30, 2022 and December 31, 2021, substantially all of which was classified as Level 1, was approximately $18.6 billion and $31.1 billion, respectively.
OBJECTIVE AND STRATEGY
Occidental uses a variety of derivative financial instruments and physical contracts to manage its exposure to commodity price fluctuations, interest rate risks and transportation commitments and to fix margins on the future sale of stored commodity volumes. Occidental also enters into derivative financial instruments for trading purposes. Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.
Occidental may elect normal purchases and normal sales exclusions when physically delivered commodities are purchased or sold to a customer. Occidental occasionally 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, such as to lock in rates on debt issuances. The value of cash flow hedges was insignificant for all periods presented.
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
As of September 30, 2022, Occidental’s derivatives not designated as hedges consisted of marketing derivatives and interest rate swaps.
Derivative instruments that are not designated as hedging instruments are required to be recorded on the balance sheet at fair value. Changes in fair value will impact Occidental’s earnings through mark-to-market adjustments until the physical commodity is delivered or the financial instrument is settled.
MARKETING DERIVATIVES
Occidental's marketing derivative instruments not designated as hedges are short-duration physical and financial forward contracts. As of September 30, 2022, the weighted-average settlement price of these forward contracts was $86.82 per barrel and $6.11 per Mcf for crude oil and natural gas, respectively. The weighted-average settlement price was $74.85 per barrel and $4.61 per Mcf for crude oil and natural gas, respectively, as of December 31, 2021. Net gains and losses associated with marketing derivative instruments not designated as hedging instruments are recognized currently in net sales.
The following table summarizes net short volumes associated with the outstanding marketing commodity derivatives not designated as hedging instruments:
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long (short) | | September 30, 2022 | | December 31, 2021 |
Oil commodity contracts | | | | |
Volume (MMbbl) | | (28) | | | (28) | |
Natural gas commodity contracts | | | | |
Volume (Bcf) | | (141) | | | (136) | |
INTEREST RATE SWAPS
Occidental's interest rate swap contracts lock in a fixed interest rate in exchange for a floating interest rate indexed to the three-month London InterBank Offered Rate throughout the reference period. Net gains and losses associated with interest rate swaps are recognized currently in gains (losses) on interest rate swaps, net in the Consolidated Condensed Statements of Operations.
Occidental had the following outstanding interest rate swaps as of September 30, 2022:
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millions, except percentages | | | | Mandatory | | Weighted-Average |
Notional Principal Amount | | Reference Period | | Termination Date | | Interest Rate |
$ | 450 | | | | September 2017 - 2047 | | September 2023 | | 6.445 | % |
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Depending on market conditions, liability management actions or other factors, Occidental may enter into offsetting interest rate swap positions as well as amend or settle certain or all of the currently outstanding interest rate swaps.
Derivative settlements and collateralization are classified as cash flow from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization are classified as cash flows from financing activities. Net cash receipts for the nine months ended September 30, 2022 related to interest rate
swap agreements were $61 million, which included $86 million paid to settle interest rate swaps, periodic interest settlements of $34 million and the return of $181 million of collateral.
FAIR VALUE OF DERIVATIVES
The following tables present the fair values of Occidental’s outstanding derivatives. Fair values are presented at gross amounts below, including when the derivatives are subject to netting arrangements, and are presented on a net basis in the Consolidated Condensed Balance Sheets:
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millions | Fair Value Measurements Using | | Netting (a) | | Total Fair Value |
Balance Sheet Classifications | Level 1 | | Level 2 | | Level 3 | | |
| | | | | | | | | |
September 30, 2022 | | | | | | | | | |
Marketing Derivatives | | | | | | | | | |
Other current assets | $ | 1,921 | | | $ | 210 | | | $ | — | | | $ | (1,970) | | | $ | 161 | |
Long-term receivables and other assets, net | 84 | | | 1 | | | — | | | (84) | | | 1 | |
Accrued liabilities | (1,828) | | | (159) | | | — | | | 1,970 | | | (17) | |
Deferred credits and other liabilities - other | (84) | | | — | | | — | | | 84 | | | — | |
Interest Rate Swaps | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Accrued liabilities | — | | | (221) | | | — | | | — | | | (221) | |
| | | | | | | | | |
| | | | | | | | | |
December 31, 2021 | | | | | | | | | |
Marketing Derivatives | | | | | | | | | |
Other current assets | $ | 1,516 | | | $ | 173 | | | $ | — | | | $ | (1,645) | | | $ | 44 | |
Long-term receivables and other assets, net | 4 | | | 1 | | | — | | | (4) | | | 1 | |
Accrued liabilities | (1,608) | | | (196) | | | — | | | 1,645 | | | (159) | |
Deferred credits and other liabilities - other | (4) | | | — | | | — | | | 4 | | | — | |
Interest Rate Swaps | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Accrued liabilities | — | | | (315) | | | — | | | — | | | (315) | |
Deferred credits and other liabilities - other | — | | | (436) | | | — | | | — | | | (436) | |
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(a)These amounts do not include collateral. As of September 30, 2022 and December 31, 2021, $64 million and $323 million of collateral related to interest rate swaps had been netted against derivative liabilities, respectively. Occidental netted $16 million of collateral received from brokers against derivative assets related to marketing derivatives as of September 30, 2022 and netted $110 million of collateral deposited with brokers against derivative liabilities related to marketing derivatives as of December 31, 2021.
GAINS AND LOSSES ON DERIVATIVES
The following table presents gains and (losses) related to Occidental's derivative instruments on the Consolidated Condensed Statements of Operations:
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millions | | Three months ended September 30, | | Nine months ended September 30, |
Income Statement Classification | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Interest Rate Swaps | | | | | | | | |
Gains (losses) on interest rate swaps, net | | $ | 70 | | | $ | (26) | | | $ | 332 | | | $ | 150 | |
Marketing Derivatives | | | | | | | | |
Net sales (a) | | $ | 14 | | | $ | 12 | | | $ | 473 | | | $ | 214 | |
Collars and Calls | | | | | | | | |
Net sales (b) | | $ | — | | | $ | (101) | | | $ | — | | | $ | (339) | |
| | | | | | | | |
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(a) Includes derivative and non-derivative marketing activity.
(b) All of Occidental's calls and collars expired on or before December 31, 2021.
CREDIT RISK
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 party would need to post. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed as of September 30, 2022 was $21 million (net of $64 million of collateral), which was primarily related to interest rate swaps. The aggregate fair value of derivative instruments with credit-risk-contingent features for which a net liability position existed as of December 31, 2021 was $107 million (net of $323 million of collateral), which was primarily related to interest rate swaps.
LEGAL ENTITY REORGANIZATION
To align Occidental’s legal entity structure with the nature of its business activities after completing the acquisition of Anadarko and subsequent large scale post-acquisition divestiture program, management undertook a legal entity reorganization that was completed in the first quarter of 2022.
As a result of this legal entity reorganization, management made an adjustment to the tax basis in a portion of its operating assets, thus reducing Occidental’s deferred tax liabilities. Accordingly, in the first quarter of 2022, Occidental recorded an estimated non-cash tax benefit of $2.6 billion in connection with this reorganization. The timing of any reduction in Occidental’s future cash taxes as a result of this legal entity reorganization will be dependent on a number of factors, including prevailing commodity prices, capital activity level and production mix. Further refinement of the non-cash tax benefit may be necessary as Occidental finalizes its tax basis calculations, its 2022 tax returns and other information.
INFLATION REDUCTION ACT
In August 2022, Congress passed the Inflation Reduction Act which contains, among other provisions, a corporate book minimum tax on financial statement income, an excise tax on stock buybacks and certain tax incentives related to climate change and clean energy. Occidental is currently evaluating the provisions of this act. The ultimate impact of the Inflation Reduction Act to Occidental will depend on a number of factors including future commodity prices, interpretations and assumptions as well as additional regulatory guidance.
The following summarizes components of income tax expense on continuing operations for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
millions | 2022 | | 2021 | | 2022 | | 2021 |
Income from continuing operations before income taxes | $ | 3,648 | | | $ | 1,217 | | | $ | 11,717 | | | $ | 1,675 | |
Current | | | | | | | |
Federal | $ | (297) | | | $ | (170) | | | $ | (1,152) | | | $ | (170) | |
State and Local | (43) | | | (23) | | | (127) | | | (12) | |
Foreign | (290) | | | (174) | | | (826) | | | (456) | |
Total current tax expense | $ | (630) | | | $ | (367) | | | $ | (2,105) | | | $ | (638) | |
Deferred | | | | | | | |
Federal | (264) | | | 19 | | | 1,718 | | | 35 | |
State and Local | 5 | | | 23 | | | 83 | | | 106 | |
Foreign | (13) | | | (62) | | | (36) | | | 51 | |
Total deferred tax benefit (expense) | $ | (272) | | | $ | (20) | | | $ | 1,765 | | | $ | 192 | |
Total income tax expense | $ | (902) | | | $ | (387) | | | $ | (340) | | | $ | (446) | |
Income from continuing operations | $ | 2,746 | | | $ | 830 | | | $ | 11,377 | | | $ | 1,229 | |
Worldwide effective tax rate | 25 | % | | 32 | % | | 3 | % | | 27 | % |
The 25% and 32% worldwide effective tax rates for the three months ended September 30, 2022 and 2021, respectively, and 27% for the nine months ended September 30, 2021, were primarily driven by Occidental's jurisdictional mix of income. U.S. income is taxed at a U.S. federal statutory rate of 21%, while international income is subject to tax at statutory rates as high as 55%. These effective rates differ from the 3% tax rate for income from continuing operations for the nine months ended September 30, 2022, which was impacted by a non-cash tax benefit associated with Occidental's legal entity reorganization as described above.
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NOTE 8 - ENVIRONMENTAL LIABILITIES AND EXPENDITURES |
Occidental’s operations are subject to stringent federal, regional, state, provincial, tribal, local and international laws and regulations related to improving or maintaining environmental quality. The laws that require or address environmental remediation, including CERCLA and similar federal, regional, state, provincial, tribal, local and international laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites. Occidental 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; or operation and maintenance of remedial systems. The 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.
ENVIRONMENTAL REMEDIATION
As of September 30, 2022, Occidental participated in or monitored remedial activities or proceedings at 166 sites. The following table presents Occidental’s current and non-current environmental remediation liabilities as of September 30, 2022. The current portion, $155 million, is included in accrued liabilities and the non-current portion, $893 million, in deferred credits and other liabilities-environmental remediation liabilities.
Occidental’s environmental remediation sites are grouped into four categories: sites listed or proposed for listing by the U.S. EPA on the CERCLA NPL and three categories of non-NPL sites—third-party sites, Occidental-operated sites and closed or non-operated Occidental sites.
| | | | | | | | | | | | | | |
millions, except number of sites | | Number of Sites | | Remediation Balance |
NPL sites | | 30 | | | $ | 445 | |
Third-party sites | | 71 | | | 237 | |
Occidental-operated sites | | 13 | | | 105 | |
Closed or non-operated Occidental sites | | 52 | | | 261 | |
Total | | 166 | | | $ | 1,048 | |
As of September 30, 2022, Occidental’s environmental liabilities exceeded $10 million each at 16 of the 166 sites described above and 99 of the sites had liabilities from zero to $1 million each. Based on current estimates, Occidental expects to expend funds corresponding to approximately 40% of the period-end remediation balance at the sites described above over the next three years to four years and the remaining 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 $1.2 billion. The status of Occidental's involvement with the sites and related significant assumptions, including those sites indemnified by Maxus, has not changed materially since December 31, 2021.
MAXUS ENVIRONMENTAL SITES
When Occidental acquired Diamond Shamrock Chemicals Company in 1986, Maxus, a subsidiary of YPF, agreed to indemnify Occidental for a number of environmental sites, including the Diamond Alkali Superfund 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 Diamond Alkali Superfund Site.
In March 2016, the EPA issued a ROD specifying remedial actions required for the lower 8.3 miles of the Lower Passaic River (OU-2 ROD). This ROD did 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, OxyChem and the EPA entered into an 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 would 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 remediation called for in the AOC and the OU-2 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 and the OU-2 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 2018, OxyChem filed a complaint under CERCLA in Federal District Court in the State of New Jersey against numerous potentially responsible parties for reimbursement of amounts incurred or to be incurred to comply with the AOC and the OU-2 ROD, or to perform other remediation activities at the Diamond Alkali Superfund Site.
In September 2021, the EPA issued a ROD with an estimated cost of $441 million for an interim remedy plan for the upper nine miles of the Lower Passaic River (OU-4 ROD). At this time, Occidental's role or responsibilities under the OU-4 ROD, and those of other potentially responsible parties, have not been determined with the EPA. In January 2022, OxyChem offered to design and implement the interim remedy for OU-4 subject to certain conditions. In March 2022, the EPA sent a notice letter to OxyChem and other parties requesting good faith offers to implement the selected remedies at OU-2 and OU-4. OxyChem responded to the EPA's letter in June 2022, reaffirming the offer to design the remedy for OU-4 and offering to enter into additional sequential agreements to remediate OU-2 and OU-4, subject to certain conditions. The EPA has not responded to OxyChem's June 2022 response.
In June 2017, the court overseeing the Maxus bankruptcy approved a Plan of Liquidation to liquidate Maxus and create a trust to pursue claims against current and former parents and certain of their respective subsidiaries and affiliates of YPF and Repsol, as well as others to satisfy claims by Occidental and other creditors for past and future cleanup and other costs. In July 2017, the court-approved Plan of Liquidation became final and the trust became effective. The trust is pursuing claims against YPF, Repsol and others and is expected to distribute assets to Maxus' creditors in accordance with the trust agreement and Plan. In June 2018, the trust filed its complaint against YPF and Repsol in Delaware bankruptcy court asserting claims based upon, among other things, fraudulent transfer and alter ego. During 2019, the bankruptcy court denied Repsol's and YPF's motions to dismiss the complaint as well as their motions to move the case away from the bankruptcy court. The trust, YPF, and Repsol each filed motions for summary judgment, and the bankruptcy court denied all but one motion in the second quarter of 2022. Trial is set for March 2023.
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NOTE 9 - LAWSUITS, CLAIMS, COMMITMENTS AND CONTINGENCIES |
LEGAL MATTERS
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, regional, state, provincial, tribal, local and international 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. Reserves for matters, other than for environmental remediation and the arbitration award disclosed below, that satisfy this criteria as of September 30, 2022 and 2021 were not material to Occidental’s Consolidated Condensed Balance Sheets.
In 2016, Occidental received payments from the Republic of Ecuador of approximately $1.0 billion pursuant to a November 2015 arbitration award for Ecuador’s 2006 expropriation of Occidental’s Participation Contract for Block 15. The awarded amount represented a recovery of Occidental's 60% of the value of Block 15. In 2017, Andes filed a demand for arbitration, claiming it is entitled to a 40% share of the judgment amount obtained by Occidental. Occidental contends that Andes is not entitled to any of the amounts paid under the 2015 arbitration award because Occidental’s recovery was limited to Occidental’s own 60% economic interest in the block. On March 26, 2021, the arbitration tribunal issued an award in favor of Andes and against OEPC in the amount of $391 million plus interest. In June 2021, OEPC filed a motion to vacate the award due to concerns regarding the validity of the award. In addition, OEPC has made a demand for significant additional claims not addressed by the arbitration tribunal that OEPC has against Andes relating to Andes' 40% share of costs, liabilities, losses and expenses due under the farmout agreement and joint operating agreement to which Andes and OEPC are parties. In December 2021, the U.S. District Court Southern District of New York confirmed the arbitration award, plus prejudgment interest, in the aggregate amount of $558 million. OEPC has appealed the judgment.
If unfavorable outcomes of these matters were to occur, future results of operations or cash flows for any particular quarterly or annual period could be materially adversely affected. Occidental’s estimates are based on information known about the legal matters and its experience in contesting, litigating and settling similar matters. 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 international tax jurisdictions. Tax years through 2020 for U.S. federal income tax purposes have been audited by the IRS pursuant to its Compliance Assurance Program and subsequent taxable years are currently under review. Tax years through 2014 have been audited for state income tax purposes. Significant audit matters in international jurisdictions have been resolved through 2010. During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law.
For Anadarko, its taxable years through 2014 and tax year 2016 for U.S. federal tax purposes have been audited by the IRS. Tax years through 2008 have been audited for state income tax purposes. There is one outstanding significant tax matter in an international jurisdiction related to a discontinued operation. As stated above, during the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law.
Other than the matter discussed below, Occidental believes that the resolution of these outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations.
Anadarko received an $881 million tentative refund in 2016 related to its $5.2 billion Tronox Adversary Proceeding settlement payment in 2015. In September 2018, Anadarko received a statutory notice of deficiency from the IRS disallowing the net operating loss carryback and rejecting Anadarko’s refund claim. As a result, Anadarko filed a petition with the U.S. Tax Court to dispute the disallowances in November 2018. The case was in the IRS appeals process until the second quarter of 2020, however it has since been returned to the U.S. Tax Court, where a trial date has been set for May 2023 and Occidental expects to continue pursuing resolution.
In accordance with ASC 740’s guidance on the accounting for uncertain tax positions, Occidental has recorded no tax benefit on the tentative cash tax refund of $881 million. As a result, should Occidental not ultimately prevail on the issue, there would be no additional tax expense recorded relative to this position for financial statement purposes other than future interest. However, in that event, Occidental would be required to repay approximately $1.3 billion in federal taxes, $28 million in state taxes and accrued interest of $369 million. A liability for this amount plus interest is included in deferred credits and other liabilities-other.
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 September 30, 2022, 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.
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NOTE 10 - EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY |
The following table presents the effects of Occidental's share repurchases as part of the $3.0 billion stock repurchase plan announced in February 2022, along with other transactions in Occidental's stock:
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Period | | Exercise of Warrants and Options | (a) | Other | (b) | Treasury Stock Purchases | (c) | Common Stock Outstanding | (d) |
December 31, 2021 | | | | | | | | 934,074,700 | | |
First Quarter 2022 | | 1,082,282 | | | 2,764,746 | | | (730,746) | | | 937,190,982 | | |
Second Quarter 2022 | | 3,409,920 | | | 42,342 | | | (11,679,732) | | | 928,963,512 | | |
Third Quarter 2022 | | 7,667,545 | | | 18,280 | | | (28,571,576) | | | 908,077,761 | | |
Total 2022 | | 12,159,747 | | | 2,825,368 | | | (40,982,054) | | | 908,077,761 | | |
(a) Approximately $280 million of cash was received as a result of the exercise of common stock warrants and options.
(b) Consists of issuances from the 2015 long-term incentive plan, the OPC savings plan, dividend reinvestment plan and Anadarko restricted stock awards.
(c) In addition to the 39.6 million shares that Occidental repurchased under its share repurchase plan during the nine months ended September 30, 2022, Occidental subsequently repurchased an additional 2.2 million shares under its share repurchase plan in the period from October 1, 2022, through November 7, 2022.
(d) As of September 30, 2022, Occidental has 104.1 million outstanding warrants with a strike of $22 per share and 83.9 million of warrants with a strike of $59.62 per share.
The following table presents the calculation of basic and diluted EPS attributable to common stockholders:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
millions except per-share amounts | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Income from continuing operations | | $ | 2,746 | | | $ | 830 | | | $ | 11,377 | | | $ | 1,229 | |
Loss from discontinued operations | | — | | | (2) | | | — | | | (444) | |
Net income | | $ | 2,746 | | | $ | 828 | | | $ | 11,377 | | | $ | 785 | |
Less: Preferred stock dividends | | (200) | | | (200) | | | (600) | | | (600) | |
Net income attributable to common stock | | $ | 2,546 | | | $ | 628 | | | $ | 10,777 | | | $ | 185 | |
Less: Net income allocated to participating securities | | (18) | | | (5) | | | (76) | | | (1) | |
Net income, net of participating securities | | $ | 2,528 | | | $ | 623 | | | $ | 10,701 | | | $ | 184 | |
Weighted-average number of basic shares | | 922.0 | | 935.4 | | 933.0 | | 934.4 |
Basic income per common share | | $ | 2.74 | | | $ | 0.67 | | | $ | 11.47 | | | $ | 0.20 | |
| | | | | | | | |
Net income attributable to common stock | | $ | 2,546 | | | $ | 628 | | | $ | 10,777 | | | $ | 185 | |
Less: Net income allocated to participating securities | | (17) | | | (5) | | | (70) | | | (1) | |
Net income, net of participating securities | | 2,529 | | | 623 | | | 10,707 | | | 184 | |
Weighted-average number of basic shares | | 922.0 | | | 935.4 | | | 933.0 | | | 934.4 | |
Dilutive securities | | 80.5 | | | 22.3 | | | 72.9 | | | 19.8 | |
Dilutive effect of potentially dilutive securities | | 1,002.5 | | | 957.7 | | | 1,005.9 | | | 954.2 | |
Diluted income per common share | | $ | 2.52 | | | $ | 0.65 | | | $ | 10.64 | | | $ | 0.19 | |
For the three and nine months ended 2022, there were no Occidental common stock warrants nor options that were excluded from diluted shares. For the three and nine months ended 2021, warrants and options covering approximately 87 million shares of Occidental common stock were excluded from diluted shares as their effect would have been anti-dilutive.
Occidental conducts its operations through three segments: (1) oil and gas; (2) chemical; and (3) midstream and marketing. Income taxes, interest income, interest expense, environmental remediation expenses, Anadarko acquisition-related costs and unallocated corporate expenses are included under corporate and eliminations. 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 table presents Occidental’s industry segments:
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millions | | Oil and gas (a) | | Chemical | | Midstream and marketing (b) | | Corporate and eliminations (c) | | Total |
Three months ended September 30, 2022 | | | | | | | | | | |
Net sales | | $ | 7,098 | | | $ | 1,691 | | | $ | 1,005 | | | $ | (404) | | | $ | 9,390 | |
Income (loss) from continuing operations before income taxes | | $ | 3,345 | | | $ | 580 | | | $ | 104 | | | $ | (381) | | | $ | 3,648 | |
Income tax expense | | — | | | — | | | — | | | (902) | | | (902) | |
Income (loss) from continuing operations | | $ | 3,345 | | | $ | 580 | | | $ | 104 | | | $ | (1,283) | | | $ | 2,746 | |
| | | | | | | | | | |
Three months ended September 30, 2021 | | | | | | | | | | |
Net sales | | $ | 4,955 | | | $ | 1,396 | | | $ | 702 | | | $ | (261) | | | $ | 6,792 | |
Income (loss) from continuing operations before income taxes | | $ | 1,467 | | | $ | 407 | | | $ | 20 | | | $ | (677) | | | $ | 1,217 | |
Income tax expense | | — | | | — | | | — | | | (387) | | | (387) | |
Income (loss) from continuing operations | | $ | 1,467 | | | $ | 407 | | | $ | 20 | | | $ | (1,064) | | | $ | 830 | |
| | | | | | | | | | |
millions | | Oil and gas (a) | | Chemical | | Midstream and marketing (b) | | Corporate and eliminations (c) | | Total |
Nine months ended September 30, 2022 | | | | | | | | | | |
Net sales | | $ | 20,869 | | | $ | 5,284 | | | $ | 3,361 | | | $ | (1,099) | | | $ | 28,415 | |
Income (loss) from continuing operations before income taxes | | $ | 10,337 | | | $ | 2,051 | | | $ | 318 | | | $ | (989) | | | $ | 11,717 | |
Income tax expense | | — | | | — | | | — | | | (340) | | | (340) | |
Income (loss) from continuing operations | | $ | 10,337 | | | $ | 2,051 | | | $ | 318 | | | $ | (1,329) | | | $ | 11,377 | |
| | | | | | | | | | |
Nine months ended September 30, 2021 | | | | | | | | | | |
Net sales | | $ | 13,124 | | | $ | 3,671 | | | $ | 2,006 | | | $ | (758) | | | $ | 18,043 | |
Income (loss) from continuing operations before income taxes | | $ | 2,036 | | | $ | 970 | | | $ | 272 | | | $ | (1,603) | | | $ | 1,675 | |
Income tax expense | | — | | | — | | | — | | | (446) | | | (446) | |
Income (loss) from continuing operations | | $ | 2,036 | | | $ | 970 | | | $ | 272 | | | $ | (2,049) | | | $ | 1,229 | |
(a) The three months ended September 30, 2021 included $97 million of oil, gas and CO2 net derivative losses. The nine months ended September 30, 2022 included $147 million of gains, primarily related to the sale of certain non-strategic assets in the Permian Basin. The nine months ended September 30, 2021 included $277 million of oil, gas and CO2 net derivative losses and $173 million of asset impairments.
(b) The three and nine months ended September 30, 2022 included $84 million and $186 million of net derivative mark-to-market losses, respectively, and $62 million of gain on the sale of 10 million limited partner units in WES. The nine months ended September 30, 2021 included $124 million of gains on sales, primarily from the sale of 11.5 million limited partner units in WES, and $176 million in net derivative mark-to-market losses.
(c) The three months ended September 30, 2022 included a $70 million net gain on interest rate swaps. The nine months ended September 30, 2022 included a non-cash tax benefit of $2.6 billion in connection with Occidental's legal entity reorganization, which is further discussed in the Income Taxes section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Form 10-Q, as well as $332 million of net gains on interest rate swaps, $143 million of net gains on early debt extinguishment and $82 million of Anadarko acquisition-related costs. The three months ended September 30, 2021 included $88 million of losses on debt tenders. The nine months ended September 30, 2021 also included $150 million of net gains on interest rate swaps and $122 million of Anadarko acquisition-related costs.