Occidental Petroleum Corp.: Contract Dispute Hurts Profits

Sept. 6, 2006
Oil giant tries to bounce back from a disappointing second-quarter performance.

Bucking the oil industry's trend of record-high earnings, oil and gas producer Occidental Petroleum Corp. reported a profit decline for the second quarter. Net income fell to $857 million, or $1.97 per share, compared with earnings of $1.536 billion, or $3.77 per share, during the year-ago period.

The Los Angeles-based company -- one of IndustryWeek's IW 50 Best Manufacturers for 2006 -- attributes part of its second-quarter income decline to a $347 million after-tax loss incurred from assets seized by Ecuador. In May Ecuador's government revoked Occidental's operating contract after accusations that the company transferred assets to Canadian oil company EnCana Corp. without state permission -- a claim Occidental denies. On May 17, the company filed an arbitration suit against Ecuador's government with the World Bank's Center for Investment Disputes in Washington, D.C.

Losses from the pullout offset core earnings gains of 50% from higher production and oil and gas prices. Daily production rose to 609,000 barrels of oil, an 18% increase over second-quarter 2005 results, according to Ray Irani, chairman, president and CEO of Occidental. Worldwide daily production in the second quarter averaged 601,000 barrels compared with 519,000 barrels during the year-ago period.

According to some analysts, another potential setback for Occidental and other oil companies with interests in South America is Bolivia's decision to nationalize its oil and gas reserves. Occidental, which produces about 3,000 barrels of oil per day in Bolivia, said it has not yet been affected by the move, according to the Associated Press.

In an effort to increase U.S. production, Occidental in August acquired assets from Plains Exploration and Production Co. in California and Texas for $865 million. The acquisition is expected to add about 56 million barrels of oil to the company's reserves.

Occidental Petroleum Corp.
At A Glance
Occidental Petroleum Corp.Los Angeles, Calif.Primary Industry: ChemicalsNumber of employees: 8,0172005 In ReviewRevenue: $16.3 billionProfit Margin: 32.48%Sales Turnover: .62Inventory Turnover: 8.65Revenue Growth: 41.22%Return On Assets: 24.69%Return On Equity: 50.06%

"This transaction is consistent with our U.S. strategy of focusing on our core geographic areas," said Irani in an Aug. 7 statement. "We plan to apply the techniques we have used successfully to enhance production in our U.S. operations. We expect to substantially increase the current production rate of 8,900 net barrels of oil equivalent per day within the next few years."

In other recent news, Occidental's wholly owned subsidiary OxyVinyls LP -- a manufacturer of PVC resins, agreed to reduce vinyl chloride emissions from its four manufacturing facilities nearly 50%. The agreement stems from several violations alleged by the Environmental Protection Agency, the State of New Jersey and the Louisville, Ky., Metropolitan Air Pollution Control District. Under the agreement, OxyVinyls will undertake emission reduction projects that will cost the company $1.1 million. The company says it has paid about $340,000 in fines to resolve alleged violations not related to vinyl chloride emissions.

Also, in August a report by United for a Fair Economy and the Institute for Policy Studies shows that Occidental's Irani is the second-highest-paid oil industry CEO. Irani made $84 million in 2005. The report came a few months after the investment firm A.G. Edwards & Sons Inc. arrived at similar findings about oil executive pay, according to Dow Jones Newswires.

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