Occidental Petroleum 2006 Annual Report Download - page 30

In 2005, Occidental redeemed all of its 5.875-percent senior notes due 2007, all of its 4.101-percent medium-term senior notes due 2007, all of
its 7.65-percent senior notes due 2006 and three of its unsecured subsidiary notes due 2028 through 2030. In addition, Occidental purchased and
retired a total of $213 million of its 6.75-percent senior notes due 2012, its 10.125-percent senior notes due 2009, its 4-percent medium-term senior
notes due 2007 and its 4.25-percent medium-term senior notes due 2010.
In July 2005, Dolphin Energy entered into a bridge loan in an amount of $2.45 billion. The proceeds of the new bridge loan were used to pay
off amounts outstanding on a previous bridge loan and are being used to fund the construction of the Dolphin Project. The new bridge loan has a
term of four years, is a revolving credit facility for the first two years and may be converted to a term loan thereafter. In September 2005, Dolphin
Energy entered into an agreement with banks to provide a $1.0 billion Islamic-law-compliant facility to fund the construction of a certain portion of
the Dolphin Project. This four-year financing facility is structured as a transaction in which Dolphin Energy constructs part of the midstream
portion of the Dolphin Project on behalf of a group of Islamic investors and enters into a lease to use such assets upon construction completion.
Occidental guarantees 24.5 percent of both of these obligations of Dolphin Energy. At December 31, 2006, Occidental’s portion of the bridge loan
and Islamic-law-compliant facility draw downs were $469 million and $184 million, respectively. Occidental had recorded $473 million on the
balance sheet at December 31, 2006, for the combined bridge loan and Islamic-law-compliant facility. The remaining amounts of the bridge loan
and Islamic-law-compliant facility draw downs are included in guarantees discussed in “Off-Balance-Sheet Arrangements – Guarantees” below.
In the first quarter of 2005, Occidental filed a shelf registration statement for up to $1.5 billion of various securities. As of December 31, 2006,
no securities had been issued under this shelf.
In January 2007, Occidental completed a cash tender offer for its 10.125-percent senior debentures due 2009, 9.25-percent senior debentures
due 2019, 8.75-percent senior notes due 2023, 7.2-percent senior debentures due 2028 and 8.45-percent senior notes due 2029, resulting in the
repurchase of a portion of these debt instruments totaling $659 million. The repurchases were funded with Occidental’s cash on hand and resulted
in debt repurchase expenses of $165 million.
Cash Flow Analysis
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The significant increase in operating cash flow in 2006, compared to 2005, resulted from several factors. The most important drivers were
higher crude oil prices, higher oil and gas production and, to a much lesser extent, higher chemical margins, partially offset by the effects of lower
gas prices and reduced cash flow from discontinued operations. In 2006, Occidental’s realized crude oil prices increased by 15 percent and its oil
and gas production increased by over 14 percent compared to 2005. The increase in production was mainly due to the 11 months of production from
the Vintage acquisition.
Increases in the costs of producing oil and gas, such as purchased goods and services, and higher utility costs, gas plant costs and ad valorem
and export taxes, partially offset the effect of oil price increases. Other cost elements, such as labor costs and overheads, are not significant drivers
of cash flow because they are mainly fixed within a narrow range over the short to intermediate term. The cost increases had a smaller effect on
cash flow than the higher crude oil prices and the higher crude oil and natural gas production.
Most major chemical prices increased in 2006, compared to 2005, at a higher rate than ethylene costs, thereby improving chemical margins.
The overall impact of the chemical price changes on cash flow was much less than for oil and gas price changes because the chemical segment
earnings and cash flow are significantly smaller than those for the oil and gas segment. Sales volumes for certain chemical products were slightly
lower in 2006, however, this did not have a significant effect on Occidental’s earnings and cash flow.
The significant increase in operating cash flow in 2005, compared to 2004, resulted from several factors. The most important drivers were the
significantly higher oil and natural gas prices and, to a much lesser extent, chemical prices. Although the changes in realized prices varied
among the regions in which Occidental operates, in 2005, Occidental's realized oil prices were higher overall by 37 percent. Occidental’s realized
natural gas price increased over 33 percent in the United States, where approximately 80 percent of Occidental’s natural gas was produced in
2005.
Increases in the costs of producing oil and gas, such as purchased goods and services, and higher utility, gas plant and production taxes,
partially offset oil and gas sales price increases, but such cost increases had a much lower effect on cash flow than the realized price increases.
Other cost elements, such as labor costs and overheads, are not significant drivers of cash flow because they are mainly fixed within a narrow
range over the short to intermediate term.
Most major chemical prices increased in 2005 at a higher rate than the energy-driven increase in feedstock and power costs, thereby
improving profits and cash flow. The overall impact of the chemical price changes on cash flow was much less than for oil and gas price changes,
not only because the chemical segment earnings and cash flow are significantly smaller than those for the oil and gas segment, but also because
of increases in energy price-driven feedstock and electric power costs, which are major elements of manufacturing cost for the chemical segment's
products. Sales volumes for chemical products generally were higher in 2005, but this did not have a significant effect on Occidental's earnings
and cash flow.
Other non-cash charges to income in 2006 included stock incentive plan amortization, deferred compensation and environmental remediation
accruals. Other non-cash charges to income in 2005 included chemical asset write-downs, deferred compensation, stock incentive plan
amortization and environmental remediation accruals. Other non-cash charges in 2004 included deferred compensation, stock incentive plan
amortization, environmental remediation accruals and a chemical asset write-down.
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