In a difficult quarter for the energy industry, Occidental Petroleum Corporation (NYSE:OXY), the largest onshore crude producer in the U.S., reported profitsthat beat analysts’ consensus estimates. Excluding a $1.1 billion write-down for the impairment in value of natural gas assets, fourth-quarter EPS was $1.83 a share, which exceeded the average of 23 analyst estimates compiled by Bloomberg.
This article examines how the company was able to achieve this on the back of record domestic production for the ninth consecutive quarter, as well as a cost reduction of over $1 a barrel compared to the third quarter. According to the fourth-quarter earnings release, the company has achieved around half its target of slashing drilling costs by 15% this year.
Fourth Quarter Financials
Occidental Petroleumannouncedcore income of $1.5 billion (EPS of $1.83 per diluted share) for the fourth quarter of 2012, compared with $1.6 billion (EPS of $2.02 per diluted share) for the same quarter in the previous year. In the fourth quarter of 2012 the company recorded after-tax charges of $1.1 billion, or EPS of $1.41 per diluted share, which was principally related to the impairment of gas assets. Net income for the quarter after this charge was $336 million (EPS of $0.42 per diluted share), compared with $1.6 billion (EPS of $2.01 per diluted share) for the corresponding period of 2011.
Core income was $5.8 billion ($7.09 per diluted share) for 2012, compared to $6.8 billion ($8.39 per diluted share) for the previous year. Net income for 2012 was $4.6 billion ( EPS of $5.67 per diluted share), compared with $6.8 billion ( EPS of $8.32 per diluted share) in the previous year. Stephen I. Chazen, President and Chief Executive Officer, said that fourth quarter domestic production of 475,000 barrels of oil equivalent per day, of which 342,000 barrels per day were liquids, was a record for the ninth consecutive quarter. The total company production for the year was 766,000 barrels of oil equivalent per day, which was 5% more than in 2011. Domestic oil production grew by 11% for 2012 to 255,000 barrels per day from 230,000 barrels in 2011.
Fourth quarter core income amounted to $1.5 billion, or an EPS of $1.83 per diluted share. The EPS was $0.13 higher than the preceding quarter because of higher liquids volumes, higher realized prices, and lower operating costs. In the fourth quarter, production costs were $1.04 a barrel lower than the third quarter, with improvements in most units. The cost reductions were a result of efficiencies such as savings in surface operations, reductions in expenses on outside contractors, and curtailment of uneconomic down-hole maintenance. Cash flow generated from continuing operations before working capital changes was $12.1 billion for 2012, and capital expenditure was $10.2 billion.
Oil and gas core earnings for the fourth quarter were $2.3 billion, compared to $2.5 billion for the same quarter of the previous year. Lower earnings were a reflection of lower year-over-year prices for all products in the fourth quarter of 2012 and higher DD&A rates, which were partially offset by higher liquids volumes. After including the gas asset impairment charges, segment earnings were $522 million. For the quarter, daily oil and gas production volumes averaged 779,000 barrels of oil equivalent (BOE), compared to 748,000 BOE in the corresponding quarter of the previous year. The production increase can be attributed to higher volumes of 26,000 BOE per day from domestic operations and 5,000 BOE per day from international production. The international increase included higher production in Libya, Iraq, and Bahrain, which was offset by lower volumes from Dolphin and in Yemen due to the expiry of the Masila field contract.