California Resources Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016. CRC is an independent oil and gas exploration and production company operating in California. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenues and other | $590 | $322 |
| Oil and gas net sales | $487 | $329 |
| Net derivative gains (losses) | $73 | $(25) |
| Operating income (loss) | $111 | $(143) |
| Net income (loss) attributable to common stock | $53 | $(50) |
| Diluted EPS | $1.22 | $(1.30) |
| Adjusted net loss | $(43) | $(100) |
| Adjusted EBITDAX | $200 | $124 |
| Cash from operating activities | $133 | $115 |
| Capital investments | $50 | $21 |
Revenue and earnings improved year over year, principally reflecting higher commodity prices, better oil price differentials and improved derivative results. Q1 2017 included $75 million of noncash derivative gains (excluding the noncontrolling interest), a $21 million gain on non-core asset sales, and a $4 million gain on debt repurchases. Adjusted net loss excludes these and other unusual items. CRC recorded no income tax provision on $52 million of pretax income because of a full valuation allowance against net deferred tax assets.
Average production fell about 11% to 132,000 Boe/d from 148,000 Boe/d. Oil production declined 12% to 86,000 barrels/day; NGLs declined 6% to 16,000 barrels/day; and natural gas declined 8% to 181 MMcf/day. Management said the overall decline was at the low end of its estimated annual base decline rate. Average realized oil price including hedges rose to $50.24/barrel from $36.39; NGL price rose to $34.33/barrel from $16.39; and unhedged gas price rose to $2.90/Mcf from $2.05. Production costs increased to $211 million, or $17.70/Boe, from $184 million, or $13.69/Boe, primarily due to higher gas prices and resumed workover and maintenance activity.
Balance sheet, debt and liquidity
At March 31, 2017, cash was $50 million, including $47 million designated for BSP joint-venture capital investments. Total debt principal was $5.121 billion, down from $5.268 billion at year-end 2016; debt included $100 million of current maturities. Total equity was negative $447 million. Current assets were $409 million and current liabilities were $688 million.
Cash increased by $38 million during the quarter. Operating cash flow of $133 million and $49 million of net noncontrolling-interest contributions were offset by $95 million of financing cash outflow; investing cash flow was approximately zero, reflecting $50 million of capital investments, $33 million of divestiture proceeds and a $17 million change in capital investment accruals. CRC reported approximately $500 million of available borrowing capacity under its revolving facilities, subject to its minimum-liquidity requirement. The borrowing base was reaffirmed at $2.3 billion effective May 1, 2017. CRC said it was in compliance with credit-facility covenants at quarter-end.
Interest and debt expense rose to $84 million from $74 million, reflecting higher blended interest rates, partly offset by lower debt balances. The $1 billion second-out credit agreement carries a floating rate of LIBOR plus 10.375% (subject to a 1% LIBOR floor). The first-out facilities require minimum monthly liquidity of $250 million and include leverage and interest-coverage tests. CRC repurchased $28 million principal amount of 2020 notes for $24 million in Q1.
Material developments, outlook and risks
- Capital program: CRC increased its 2017 capital plan from an initial $300 million base to $400–$425 million gross, including up to $150 million of joint-venture drilling and completions. It expected to grow from an average of three rigs in Q1 to eight rigs by year-end. The plan is adjustable with commodity prices; management said it intended to keep internally funded capital within operating cash flow.
- Joint ventures and asset sale: BSP contributed an initial $50 million under an arrangement allowing investment of up to $250 million, subject to agreement, for development of certain properties. In April, MIRA committed an initial $160 million, intended to be invested over two years, under a development venture. February non-core asset sales generated $32 million of proceeds and a $21 million gain.
- Commodity exposure and hedging: CRC sells crude oil into California refining markets and uses derivatives to protect cash flow and covenant capacity; derivatives are not designated as accounting hedges. The company reported a $20 million net derivative liability at quarter-end. Management cautioned that hedges may not be adequate and that results remain highly sensitive to oil and gas prices, production, differentials and operating costs.
- Funding and covenant risk: Management expected operations and the capital budget to be fundable from operating cash flow if prices remained around then-current levels, but warned that a sustained price decline could impair liquidity, production, reserves, asset values and borrowing capacity. A covenant breach could permit acceleration of debt and foreclosure on collateral. CRC also cited substantial debt and refinancing-related maturity triggers tied to its 2020 and 2021 notes.
- Contingencies: The company reported ordinary-course litigation and claims, with reserves and estimated reasonably possible losses not material. A previously disclosed Trust Indenture Act class action was dismissed in April 2017. An air-quality regulator’s notices concerning alleged permit exceedances at a Huntington Beach facility were expected to result in sanctions exceeding $100,000, but CRC did not expect a material financial-statement impact. Federal tax examinations for 2014–2015 had raised no significant issues to date.
Most important facts for investors to verify
- Whether production decline, the higher capital program and planned rig additions translate into sustainable production and operating cash flow.
- Liquidity headroom after the $47 million BSP-designated cash balance, borrowing-base limits, letters of credit and the $250 million minimum-liquidity covenant.
- Ability to meet leverage and interest-coverage covenants and refinance debt ahead of the facilities’ maturity triggers linked to the 2020 and 2021 notes.
- Actual funding, development terms and returns from the BSP and MIRA ventures, including the effect of partners’ interests on CRC’s production and cash flows.
- Exposure to commodity-price, derivative counterparty and hedge-volume risks, alongside the assumptions underlying management’s 2017 outlook.