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OCCIDENTAL PETROLEUM CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 5, 2014

Consolidated Results of Operations

In this report, "Occidental" means Occidental Petroleum Corporation (OPC), or OPC and one or more entities in which it owns a controlling interest (subsidiaries). Occidental reported net income of $1.4 billion for the first quarter of 2014 on net sales of $6.1 billion, compared to net income of $1.4 billion on net sales of $5.9 billion for the same period of 2013. Diluted earnings per share (EPS) were $1.75 and $1.68 for the first quarters of 2014 and 2013, respectively.

Net income for the three months ended March 31, 2014, compared to the same period of 2013, reflected higher domestic prices for oil, gas and natural gas liquids (NGL) and higher worldwide oil volumes, partially offset by lower international oil prices, higher domestic operating costs, higher DD&A rates, lower chemical earnings and a decline in marketing and trading performance.

Selected Income Statement Items

Net sales for the three months ended March 31, 2014, of $6.1 billion, compared to $5.9 billion for the same period of 2013, reflected higher domestic prices for oil, gas and NGLs and higher worldwide oil volumes, partially offset by lower international oil prices, lower caustic soda prices and a decline in marketing and trading performance.

Cost of sales for the three months ended March 31, 2014, compared to the same period in 2013, reflected higher domestic oil and gas operating expenses, in particular the cost of injectants, such as CO2 and steam, and energy, as well as higher raw material and manufacturing costs for the chemical segment, partially offset by lower international oil and gas operating expenses resulting from the timing of liftings and planned maintenance costs in the prior year. The increase in the provision for domestic and foreign income taxes for the three months ended March 31, 2014, compared to the same period of 2013, was due to a higher effective tax rate in 2014, compared to the 2013 rate, which included a benefit resulting from the relinquishment of an international exploration block.

Selected Analysis of Financial Position

See "Liquidity and Capital Resources" for discussion about the changes in cash and cash equivalents. Additionally, during the first quarter of 2014, the assets and liabilities related to Occidental's operations in the Hugoton Field were classified as held for sale.

The decrease in trade receivables, net, was due to higher lifting volumes at the end of December 2013, compared to the end of March 2014. The increase in inventories was due to higher oil inventories at March 31, 2014, compared to December 31, 2013. The increase in other current assets reflected the timing of oil and gas joint venture and partner receivables. The increase in property, plant and equipment, net, reflected capital expenditures of $2.3 billion, partially offset by DD&A. The decrease in accrued liabilities reflected the first quarter 2014 payments of compensation-related costs and ad valorem taxes. The increase in deferred domestic and foreign income taxes was mainly due to faster tax depreciation on capital expenditures. The slight decrease in stockholders' equity was due to stock repurchases and dividends, mostly offset by net income and contributions from a noncontrolling interest in the first three months of 2014. Segment Operations

Occidental conducts its operations through three segments: (1) oil and gas; (2) chemical; and (3) midstream, marketing and other (midstream and marketing). The oil and gas segment explores for, develops and produces oil and condensate, NGLs and natural gas. The chemical segment mainly manufactures and markets basic chemicals and vinyls. The midstream and marketing segment gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power. It also trades around its assets, including transportation and storage capacity, and trades oil, NGLs, gas and other commodities. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.

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The following table sets forth the sales and earnings of each operating segment and corporate items for the three months ended March 31, 2014 and 2013 (in millions): 2014 2013 Net Sales (a) Oil and Gas $ 4,676$ 4,440 Chemical 1,220 1,175 Midstream and Marketing 435 453 Eliminations (243 ) (196 ) $ 6,088$ 5,872 Segment Earnings (b) Oil and Gas $ 2,104$ 1,920 Chemical 136 159 Midstream and Marketing (c) 170 215 2,410 2,294 Unallocated Corporate Items (b) Interest expense, net (19 ) (30 ) Income taxes (932 ) (844 ) Other expense, net (72 ) (61 ) Income from continuing operations (c) 1,387 1,359 Discontinued operations, net 3 (4 )



Net income attributable to common stock (c) $ 1,390$ 1,355

(a) 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.

(b) Refer to "Significant Transactions and Events Affecting Earnings," "Oil and

Gas Segment," "Chemical Segment," "Midstream and Marketing Segment" and

"Corporate" discussions that follow.

(c) Represents amounts attributable to common stock shown after deducting a

noncontrolling interest amount of $2 million for the three months ended March 31, 2014. 19



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Significant Transactions and Events Affecting Earnings

The following table sets forth, for the three months ended March 31, 2014 and 2013, significant transactions and events affecting Occidental's earnings that vary widely and unpredictably in nature, timing and amount (in millions):

2014 2013



Oil & Gas No significant items affecting earnings $ - $ - Total Oil and Gas

$ - $ -



Chemical

No significant items affecting earnings $ - $ - Total Chemical

$ - $ -



Midstream and Marketing No significant items affecting earnings $ - $ - Total Midstream and Marketing

$ - $ -



Corporate

Discontinued operations, net* $ 3$ (4 ) Total Corporate $ 3$ (4 ) Total $ 3$ (4 ) *Amounts shown after tax.



Worldwide Effective Tax Rate

The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations for the three months ended March 31, 2014 and 2013 ($ in millions):

2014 2013 Oil & Gas earnings $ 2,104$ 1,920 Chemical earnings 136 159 Midstream and Marketing earnings 170 215 Unallocated corporate items (91 ) (91 ) Pre-tax income 2,319 2,203 Income tax expense Federal and state 379 292 Foreign 553 552 Total 932 844



Income from continuing operations $ 1,387$ 1,359

Worldwide effective tax rate (a) 40% 38%

(a) The 2013 amount includes the benefit from the relinquishment of an

international exploration block. 20



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Oil and Gas Segment

The following tables set forth the production and sales volumes of oil, NGLs and natural gas per day for the three months ended March 31, 2014 and 2013. The differences between the production and sales volumes per day are generally due to the timing of shipments at Occidental's international locations where product is loaded onto tankers. Production per Day 2014 2013 Oil (MBBL) United States 274 264 Middle East/North Africa 167 175 Latin America 29 29 NGLs (MBBL) United States 75 78 Middle East/North Africa 6 7 Natural Gas (MMCF) United States 752 817 Middle East/North Africa 402 432 Latin America 12 13 Total production (MBOE) (a) 745 763 Sales Volumes per Day Oil (MBBL) United States 274 264 Middle East/North Africa 153 156 Latin America 32 30 NGLs (MBBL) United States 75 78 Middle East/North Africa 6 7 Natural Gas (MMCF) United States 756 819 Middle East/North Africa 402 432 Latin America 12 13



Total sales volumes (MBOE) (a) 735 746

Note: MBBL represents thousand barrels. MMCF represents million cubic feet. MBOE represents thousand barrels of oil equivalent. (a) Natural gas volumes have been converted to barrels of oil equivalent (BOE)

based on energy content of six thousand cubic feet (Mcf) of gas to one barrel of oil. Barrels of oil equivalence does not necessarily result in price equivalence. The price of natural gas on a BOE basis is currently substantially lower than the corresponding price for oil and has been similarly lower for a number of years. For example, for the first quarter of 2014, the average prices of West Texas Intermediate (WTI) oil and New York Mercantile Exchange (NYMEX) natural gas were $98.68 per barrel and $4.66 per Mcf, respectively, resulting in an oil-to-gas ratio of over 20. 21



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The following tables present information about Occidental's average realized prices and index prices for the three months ended March 31, 2014 and 2013: Average Realized Prices 2014 2013 Oil ($/BBL) United States $ 95.94$ 91.57 Middle East/North Africa $ 104.65$ 107.52 Latin America $ 98.53$ 107.18 Total Worldwide $ 99.00$ 98.07 NGLs ($/BBL) United States $ 46.69$ 40.59 Middle East/North Africa $ 38.43$ 36.56 Total Worldwide $ 46.05$ 40.27 Natural Gas ($/MCF) United States $ 4.57$ 3.08 Latin America $ 10.81$ 11.60 Total Worldwide $ 3.32$ 2.37 Average Index Prices 2014 2013 WTI oil ($/BBL) $ 98.68$ 94.37 Brent oil ($/BBL) $ 107.90$ 112.64 NYMEX gas ($/MCF) $ 4.66$ 3.37 Average Realized Prices as Percentage of Average Index Prices 2014 2013 Worldwide oil as a percentage of average WTI 100 % 104% Worldwide oil as a percentage of average Brent 92 % 87% Worldwide NGLs as a percentage of average WTI 47 % 43%



Domestic natural gas as a percentage of average NYMEX 98 % 91%

Oil and gas segment earnings for the three months ended March 31, 2014 were $2.1 billion, compared to $1.9 billion for the same period of 2013. The year-over-year increase in these earnings resulted from higher domestic oil, NGL and gas prices and higher worldwide oil volumes, partially offset by lower international oil prices, higher domestic operating costs and higher DD&A rates. The increase in domestic operating costs was due to higher costs for injectants, such as CO2 and steam, and energy, as well as increased downhole maintenance activity levels. Excluding the impact of these increases, the domestic costs were $0.10 per BOE lower for the quarter ended March 31, 2014, compared to the same period of 2013.

Approximately 60 percent of Occidental's oil production tracks world oil prices, such as Brent, and 40 percent tracks WTI. For example, the pricing for Occidental's California oil production is typically linked to world prices. Price changes at current global prices and levels of production affect Occidental's quarterly pre-tax income by approximately $38 million for a $1.00 per barrel change in global oil prices and approximately $7 million for a $1.00 per barrel change in NGL prices. A change of $0.50 per Mcf in domestic gas prices affects quarterly pre-tax earnings by approximately $20 million. These price change sensitivities include the impact of volume changes from production-sharing and similar contracts. If production levels change in the future, the sensitivity of Occidental's results to oil, NGL and gas prices also would change. Oil and gas production in the first quarter of 2014 was 745,000 BOE per day, compared with 763,000 BOE per day for the same period of 2013. Domestic oil production increased by 10,000 barrels per day, but overall domestic production was lower 4,000 BOE per day mostly due to reduced domestic gas drilling. Middle East/North Africa production decreased by 14,000 BOE per day, mainly due to field and port strikes in Libya, insurgent activity in Yemen and the impact of full cost recovery and other adjustments under Occidental's production-sharing agreements, partially offset by an increase of 9,000 BOE per day in Qatar. Daily sales volumes were 735,000 BOE for the first quarter of

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2014 and 746,000 BOE for the same period of 2013. Sales volumes were lower than production volumes due to the timing of liftings in Occidental's international operations. Taxes other than on income, which are generally related to domestic product prices, were $2.94 per BOE for the first three months of 2014, compared with $2.57 per BOE for the total year 2013. In February 2014, Occidental entered into an agreement to sell its Hugoton Field operations in Kansas, Oklahoma and Colorado for $1.4 billion. The transaction was completed in April 2014, resulting in pre-tax proceeds of $1.3 billion, after taking into account purchase price adjustments. Occidental will record a gain on the sale in the second quarter of 2014. Also in February 2014, the Board of Directors authorized initiation of efforts to separate Occidental's California assets into an independent and separately traded public company. Additionally, Occidental decided to retain its interests in the Williston Basin.



Chemical Segment

Chemical segment earnings for the three months ended March 31, 2014 were $136 million, compared to $159 million for the same period of 2013. The decrease was primarily from lower caustic soda prices driven by new chlor-alkali capacity in the industry. Higher polyvinyl chloride and vinyl chloride margins, resulting from improvement in United States construction markets, along with higher volumes across all products, offset most of the decline.

Midstream and Marketing Segment

Midstream and marketing segment earnings for the three months ended March 31, 2014 and 2013 were $170 million and $215 million, respectively. The decrease reflected lower marketing and trading performance due to the timing of mark-to-market adjustments on trading contracts.

Liquidity and Capital Resources

At March 31, 2014, Occidental had approximately $2.3 billion in cash on hand. In addition, Occidental has a bank credit facility (Credit Facility) with a $2.0 billion commitment expiring in 2016. No amounts have been drawn under this Credit Facility. Income and cash flows are largely dependent on the oil and gas segment's prices, sales volumes and costs. Occidental believes that cash on hand and cash generated from operations will be sufficient to fund its operating needs and planned capital expenditures, dividends and any debt payments. Occidental, from time to time, may access and has accessed debt markets for general corporate purposes, including acquisitions.

With net income unchanged at $1.4 billion for each of the three month periods ended March 31, 2014 and 2013, net cash provided by operating activities was also comparable at $2.7 billion for each period. Cash flow from operations in the first three months of 2014, compared to the same period of 2013, reflected higher worldwide oil volumes, 48-percent higher average domestic gas prices, 5-percent higher domestic oil prices and 15-percent higher domestic NGL prices, partially offset by lower international oil prices. The impact of the chemical and the midstream and marketing segments on overall cash flows is typically less significant than the impact of the oil and gas segment because the chemical and midstream and marketing segments are significantly smaller.

Occidental's net cash used by investing activities was $2.4 billion for the first three months of 2014, compared to $2.2 billion for the same period of 2013. Capital expenditures for the first three months of 2014 were $2.3 billion, of which $1.8 billion and $0.4 billion were for the oil and gas and the midstream and marketing segments, respectively. Capital expenditures for the first three months of 2013 were $2.1 billion, including $1.7 billion and $0.3 billion for the oil and gas and the midstream and marketing segments, respectively. Occidental's net cash used by financing activities was approximately $1.4 billion for the first three months of 2014, compared to net cash provided by financing activities of approximately $31 million for the same period of 2013. The 2014 amount included repurchases of treasury stock of $0.9 billion and $61 million used to retire debt, partly offset by $123 million of contributions received from a noncontrolling interest. Additionally, the first quarter of 2014 included dividend payments of $0.5 billion, while the first quarter of 2013 did not, due to the accelerated payment in 2012 of that year's fourth quarter dividend. As of March 31, 2014, under the most restrictive covenants of its financing agreements, Occidental had substantial capacity for additional unsecured borrowings, the payment of cash dividends and other distributions on, or acquisitions of, Occidental stock. 23



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Environmental Liabilities and Expenditures

Occidental's operations are subject to stringent federal, state, local and foreign laws and regulations related to improving or maintaining environmental quality. Occidental's environmental compliance costs have generally increased over time and are expected to rise in the future. Occidental factors environmental expenditures for its operations into its business planning process as an integral part of producing quality products responsive to market demand.

The laws that require or address environmental remediation, including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar federal, state, local and foreign laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites. OPC 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.

As of March 31, 2014, Occidental participated in or monitored remedial activities or proceedings at 156 sites. The following table presents Occidental's environmental remediation reserves as of March 31, 2014, grouped as environmental remediation sites listed or proposed for listing by the United States Environmental Protection Agency on the CERCLA National Priorities List (NPL sites) and three categories of non-NPL sites - third-party sites, Occidental-operated sites and closed or non-operated Occidental sites.

Reserve Balance Number of Sites (in millions) NPL sites 31 $ 25 Third-party sites 73 84 Occidental-operated sites 20 114 Closed or non-operated Occidental sites 32 99 Total 156 $ 322



As of March 31, 2014, Occidental's environmental reserves exceeded $10 million each at 10 of the 156 sites described above, and 108 of the sites had reserves from $0 to $1 million each. Based on current estimates, Occidental expects to expend funds corresponding to approximately half of the current environmental reserves at the sites described above over the next three to four years and the 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 $395 million. The status of Occidental's involvement with the sites and related significant assumptions have not changed materially since December 31, 2013.

Refer to the "Environmental Liabilities and Expenditures" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Occidental's Annual Report on Form 10-K for the year ended December 31, 2013, for additional information regarding Occidental's environmental expenditures.

Lawsuits, Claims, Commitments and Contingencies

OPC 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. OPC or certain of its subsidiaries also are involved in proceedings under CERCLA and similar federal, state, local and foreign 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 OPC 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.

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Occidental accrues reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. Occidental has disclosed its reserve balances for environmental matters. Reserve balances for other matters as of March 31, 2014 and December 31, 2013 were not material to Occidental's consolidated balance sheets. Occidental also evaluates the amount of reasonably possible losses that it could incur as a result of the matters mentioned above. Occidental has disclosed its range of reasonably possible additional losses for sites where it is a participant in environmental remediation. Occidental believes that other reasonably possible losses that it could incur in excess of reserves accrued on the balance sheet would not be material to its consolidated financial position or results of operations.

During the course of its operations, Occidental is subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions. Although taxable years through 2009 for United States federal income tax purposes have been audited by the United States Internal Revenue Service (IRS) pursuant to its Compliance Assurance Program, subsequent taxable years are currently under review. Additionally, in December 2012, Occidental filed United States federal refund claims for tax years 2008 and 2009, which are subject to IRS review. Taxable years from 2000 through the current year remain subject to examination by foreign and state government tax authorities in certain jurisdictions. In certain of these jurisdictions, tax authorities are in various stages of auditing Occidental's income taxes. During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law. Occidental believes that the resolution of outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations.

OPC, 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 March 31, 2014, 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.

Recently Adopted Accounting and Disclosure Changes

In April 2014, the Financial Accounting Standards Board (FASB) issued rules changing the requirements for reporting discontinued operations to where only the disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results will be reported as discontinued operations in the financial statements. These rules are effective for the annual periods beginning on or after December 15, 2014. They are not expected to have a material impact on Occidental's financial statements upon adoption and will require assessment on an ongoing basis.

In July 2013, the FASB issued rules requiring net, rather than gross, presentation of a deferred tax asset for a net operating loss or other tax credit and any related liability for unrecognized tax benefits. These rules became effective on January 1, 2014, and did not have a material impact on Occidental's financial statements.

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Safe Harbor Statement Regarding Outlook and Forward-Looking Information

Portions of this report contain forward-looking statements and involve risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows and business prospects. Actual results may differ from anticipated results, sometimes materially, and reported results should not be considered an indication of future performance. Factors that could cause results to differ include, but are not limited to: global commodity pricing fluctuations; supply and demand considerations for Occidental's products; higher-than-expected costs; the regulatory approval environment; reorganization or restructuring of Occidental's operations; not successfully completing, or any material delay of, field developments, expansion projects, capital expenditures, efficiency projects, acquisitions or dispositions; lower-than-expected production from development projects or acquisitions; exploration risks; general economic slowdowns domestically or internationally; political conditions and events; liability under environmental regulations including remedial actions; litigation; disruption or interruption of production or manufacturing or facility damage due to accidents, chemical releases, labor unrest, weather, natural disasters, cyber attacks or insurgent activity; failure of risk management; changes in law or regulations; or changes in tax rates. Words such as "estimate," "project," "predict," "will," "would," "should," "could," "may," "might," "anticipate," "plan," "intend," "believe," "expect," "aim," "goal," "target," "objective," "likely" or similar expressions that convey the prospective nature of events or outcomes generally indicate forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Occidental does not undertake any obligation to update any forward-looking statements, as a result of new information, future events or otherwise. Material risks that may affect Occidental's results of operations and financial position appear in Part I, Item 1A "Risk Factors" of the 2013 Form 10-K.


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