California Resources Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. CRC is an independent oil and natural gas exploration and production company operating exclusively in California. Financial amounts below are in millions unless otherwise stated.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenues and other | $681 | $828 | $2,024 | $1,986 |
| Operating income | $148 | $185 | $327 | $304 |
| Net income | $127 | $91 | $124 | $37 |
| Net income (loss) attributable to common stock | $94 | $66 | $39 | $(18) |
| Adjusted net income | $17 | $41 | $34 | $35 |
| Adjusted EBITDAX | $278 | $308 | $834 | $803 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $540 | $393 |
Q3 oil and gas sales were $541, down from $700 a year earlier. Q3 net income included an $82 gain on early extinguishment of debt; adjusted net income, which excludes specified unusual items, was $17. For the first nine months, operating cash flow was $540, capital investments were $393, and cash ended at $22, compared with $17 at year-end 2018. Interest paid, net of capitalized amounts, was $290 for the nine-month period.
At September 30, total debt was $4,996, including $100 classified as current; long-term debt was $4,896. Debt declined from $5,251 at December 31, 2018. Total assets were $7,035 and total equity was negative $208. CRC reported $320 of available capacity under its revolving credit facility before a $150 minimum-liquidity requirement; the borrowing base was reaffirmed at $2.3 billion effective November 1, 2019. CRC reported compliance with all debt covenants.
Changes versus comparable periods
- Q3 total revenues and other declined 18%; oil and gas sales fell 23% before settled hedge effects. Lower realized prices and production contributed, while hedge settlements improved Q3 realized oil revenue versus the prior year.
- Q3 operating income declined to $148 from $185, while common-stock income increased to $94 from $66, primarily reflecting the larger gain on debt repurchases.
- Nine-month total revenues and other increased modestly to $2,024 from $1,986. Common-stock income improved to $39 from a loss of $18, and operating cash flow rose 37% to $540.
- Average Q3 production was 128 thousand Boe per day, down 6% year over year. CRC attributed more than 2 thousand Boe per day of the decline to the Lost Hills divestiture; excluding that transaction, the decline was 4%.
- Average Brent crude prices were lower year over year in both the quarter and nine-month period. NGL realizations weakened substantially; nine-month oil and gas sales excluding settled hedges declined 11%.
Outlook, management commentary, risks and unusual items
- CRC expected 2019 internally funded capital investment of $385–$400, with $345 invested through Q3. It forecast an additional $200–$225 of JV investment and total capital investment of $585–$625. Management said operating cash flow was expected to fund the internally funded program.
- Management expected annual cost savings of approximately $50 beginning in Q4 2019 from organizational and operational efficiencies. CRC had reduced headcount to approximately 1,250 and expected a $35–$40 Q4 charge.
- The July Alpine development JV committed $320, potentially increasing to $500 by mutual agreement, for a planned 275-well program over approximately three years. Alpine funds 100% of development wells and initially earns a 90% working interest; CRC’s interest may increase to 82.5% after Alpine receives an agreed return. CRC also reported BSP and MIRA JV funding arrangements.
- CRC sold half its working interest and transferred operatorship in certain Lost Hills zones for consideration exceeding $200, including cash proceeds of $165 and a carried development program. Cash proceeds were used to reduce revolver borrowings.
- CRC repurchased approximately $229 face value of 8% Second Lien Notes for $149 cash during the first nine months, recording a $108 pretax gain. The notes require substantial principal payments, including $1,429 in December 2022. CRC also had $100 of 5% notes due January 2020.
- Commodity-price exposure remains significant. CRC used Brent-based put spreads and a swap to mitigate downside price risk and cautioned that hedges may not achieve their objectives. The company also noted variable-rate debt exposure and dependence on cash flow, borrowing capacity and JV capital.
- CRC reported no income tax provision for the periods, citing a full valuation allowance on deferred tax assets; any future release depends on achieving sufficient profitability. It reported increased asset-retirement obligations associated primarily with new idle-well regulations, while saying related incremental cash expenditures were not expected to be material in the foreseeable future.
- Legal reserves were not material, and management said reasonably possible losses above reserves were not expected to be material. CRC disclosed an October 2019 settlement of a previously reported waste-characterization investigation, with civil penalties totaling $400,000.
Important facts for investors to verify
- Whether operating cash flow and available revolver capacity can support planned capital spending, debt service and liquidity needs under lower commodity prices.
- The refinancing or repayment plan for the January 2020 notes and the large scheduled Second Lien Note payments through 2022.
- Actual cost savings and restructuring charges compared with management’s stated $50 annual savings and $35–$40 Q4 charge.
- Production trends and realized oil, NGL and gas prices, including the effect of hedges and the Lost Hills divestiture.
- Funding, drilling pace and economic terms of the Alpine, BSP and MIRA development arrangements, as well as future ARO and regulatory costs.