California Resources Corporation — 2016 Form 10-K Summary
Business context and reporting period
CRC is an independent oil and natural gas exploration and production company operating in California. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone quarterly filing. CRC reported unaudited fourth-quarter results separately. Share and per-share figures reflect the May 2016 1-for-10 reverse stock split.
CRC produced an average of 140,000 Boe per day, down 12.5% from 2015, across its California operations. It reported 568 million Boe of proved reserves at year-end, 72% oil and 71% proved developed.
Financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue and other | $1.547 billion | $2.403 billion |
| Net income (loss) | $279 million | $(3.554) billion |
| Adjusted net income (loss), non-GAAP | $(317) million | $(311) million |
| Adjusted EBITDAX, non-GAAP | $616 million | $906 million |
| Cash provided by operating activities | $130 million | $403 million |
| Capital investments | $75 million | $401 million |
| Average daily production | 140,000 Boe | 160,000 Boe |
| Production costs per Boe | $15.61 | $16.30 |
Reported 2016 revenue and other includes $1.621 billion of oil and gas net sales, a $206 million net derivative loss and $132 million of other revenue. Net income included an $805 million gain on early extinguishment of debt and $283 million of non-cash derivative losses. Fourth-quarter 2016 unaudited revenue was $452 million, operating loss was $3 million, and net loss was $77 million.
At December 31, 2016, cash was $12 million, current assets were $425 million and current liabilities were $726 million. Principal debt was $5.268 billion, including $1 billion under the second-out credit agreement; interest and debt expense was $328 million and cash interest paid was $384 million. The company reported $486 million of available borrowing capacity at January 31, 2017, subject to a $250 million minimum-liquidity covenant. It was in compliance with its credit-facility covenants at year-end.
Material changes versus the prior comparable period
- Revenue and other fell 36% year over year, principally reflecting lower commodity prices and production. Realized oil price including settled hedges declined 15% to $42.01 per barrel.
- Production declined 12.5%, following a sharp reduction in drilling and workover activity. Capital investment was 81% lower than in 2015.
- Cost reductions partially offset weaker prices and volumes: production costs fell 16% in total, and adjusted G&A declined 20%.
- CRC recorded net income in 2016 after a $3.554 billion net loss in 2015. The comparison is affected by 2016 debt-extinguishment gains and 2015 asset impairment charges of $4.852 billion.
- Proved reserves ended at 568 million Boe. Capital-program additions and positive performance revisions totaled 36 million Boe, but negative price-related revisions of 60 million Boe contributed to a net reserve decline.
- Debt principal declined by approximately $875 million from year-end 2015 to 2016, through note repurchases and exchanges and term-loan repayments, alongside issuance of the $1 billion second-out facility.
Outlook, commentary, risks and unusual items
- CRC planned a 2017 base capital program of approximately $300 million, with the ability to reduce it below $100 million or increase it to as much as $500 million depending on prices and cash flow. The plan targets oil-weighted projects and aims to stabilize production and return to growth; these are forward-looking expectations, not guarantees.
- Management expected to fund investment principally from operating cash flow and emphasized covenant compliance and potential further deleveraging. It expected funding the 2017 plan at then-current price levels without a net draw on credit facilities, but noted that lower prices could materially harm liquidity.
- Year-end 2017 crude hedges included swaps covering 20,000 barrels per day at a weighted-average Brent price of $53.98, plus puts and calls. These instruments reduce some downside exposure but can limit gains and carry counterparty and basis risks; they were not designated for hedge accounting.
- Debt remains a central risk: variable-rate borrowings, secured collateral, restrictive covenants and maturity provisions can constrain operations. The $1 billion second-out facility bears interest at LIBOR plus 10.375%, subject to a 1% LIBOR floor. CRC also reported a springing-maturity risk tied to outstanding 2020 and 2021 notes.
- California regulation, water and injection restrictions, climate rules, commodity volatility, reserve-estimate uncertainty and geographic concentration are material business risks. The company incurred about $33 million in California greenhouse-gas allowance costs in 2016. Lower SEC oil prices drove the 60 million Boe of negative price revisions; management said a sustained five-year average price at then-current levels could require removal of about 45 million Boe of proved undeveloped reserves.
- Other notable items include $2.7 billion of cancellation-of-debt income from 2015 and 2016 debt transactions, excluded from taxable income under insolvency rules but requiring tax-basis reductions; a $577 million tax benefit from permanent tax-liability reduction; and a $780 million deferred-tax valuation allowance at year-end.
- A purported noteholder class action challenges the 2015 debt exchange and related liens. CRC intends to defend the case; recorded litigation reserves were not material, and management said reasonably possible excess losses were not expected to be material.
Important facts for investors to verify
- Whether operating cash flow can support the planned capital program, interest payments and minimum-liquidity requirements under different commodity-price scenarios.
- The company’s compliance with leverage, interest-coverage and asset-coverage covenants, and the effect of borrowing-base redeterminations and potential springing maturities.
- Whether production stabilizes or grows as drilling activity increases, and whether reserve additions offset production and price-related revisions.
- The sensitivity of results and cash flow to realized oil and gas prices, hedge volumes and terms, and California price differentials.
- Developments in the noteholder litigation, environmental and injection regulation, and the joint venture announced after year-end, including its funding and property-level economics.