California Resources Corporation — Q2 2016 Form 10-Q
Business and period: California-focused oil and natural gas exploration and production company. This unaudited quarterly filing covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars.
Financial and operating results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Oil and gas net sales | $404 million | $621 million | $733 million | $1.167 billion |
| Total revenues and other, including net derivative losses | $317 million | $634 million | $639 million | $1.211 billion |
| Net loss | $140 million | $68 million | $190 million | $168 million |
| Adjusted net loss, non-GAAP | $72 million | $51 million | $172 million | $148 million |
| Adjusted EBITDAX, non-GAAP | $160 million | $270 million | $284 million | $468 million |
| Cash from operating activities | Not separately provided | Not separately provided | $44 million | $232 million |
- Q2 net loss per diluted share was $3.51, versus $1.78 a year earlier; first-half loss per diluted share was $4.85, versus $4.40.
- Q2 production averaged 140,000 Boe/day, down 13% year over year; first-half production averaged 144,000 Boe/day, down 12%. Q2 oil production was 90,000 barrels/day.
- Q2 realized oil price including settled hedges was $43.70/barrel, down 23%; NGL price was $22.54/barrel, up 10%; natural gas price was $1.66/Mcf, down 33%. First-half realized oil price including hedges fell 23% to $39.90/barrel.
- Production costs fell to $14.76/Boe in Q2 from $16.59, and to $14.21/Boe for the first half from $16.39. G&A and DD&A also declined; lower DD&A reflected prior-year asset impairments as well as lower production.
- Capital investments were $26 million for the first half, versus $228 million in the prior-year period. Operating cash flow fell to $44 million from $232 million; investing cash use was $18 million versus $440 million.
Balance sheet, liquidity, and debt
- At June 30, 2016, cash was $2 million, current assets $386 million, and current liabilities $592 million. Equity was negative $1.045 billion.
- Debt principal was $5.942 billion, down from $6.143 billion at year-end 2015. Long-term debt principal was $5.843 billion. Reported debt fair value was approximately $4.3 billion, versus carrying value of approximately $5.9 billion.
- The $1.6 billion revolving facility had $781 million drawn; CRC reported approximately $460 million of available borrowing capacity. The borrowing base was reaffirmed at $2.3 billion. The company was in covenant compliance at June 30.
- Interest and debt expense was $74 million in Q2 and $148 million for the first half. Cash interest paid in the first half was approximately $180 million.
- No common dividends were paid in 2016. Credit agreement restrictions prohibit dividends and cap 2016 capital investments at $100 million.
Changes, outlook, and material matters
- Year-over-year revenue declines reflected lower commodity prices and sales volumes. Management attributed production declines principally to withheld development capital and deferred workovers; temporary California pipeline disruptions also delayed some Q2 oil sales. CRC expected the affected inventory to be sold in Q3.
- Cost reductions included lower production and G&A expenses; the workforce was below 1,500 employees by June. Management began gradually increasing activity late in Q2.
- The 2016 capital program was $50 million, with $26 million invested in the first half. Management planned to increase second-half activity to bring full-year investment toward that budget and expected this to reduce the production decline rate. It cautioned that increased investment might not quickly reverse production trends. No specific numerical production guidance is stated in the filing text.
- Management said significantly higher oil prices would be needed to meet the leverage covenant beginning in Q1 2017. Without a significant commodity-price increase, CRC expected to need covenant amendments before the end of March 2017; lender agreement was not assured, and a breach could trigger acceleration of debt and foreclosure on collateral.
- After quarter-end, CRC announced tender offers using up to $525 million in cash to repurchase notes at discounts to par, conditional on financing and other requirements. It also sought a syndicated facility of at least $700 million and credit-facility amendments, including proposed covenant relief through Q1 2018. These transactions were proposed, not reported as completed.
- Unusual Q2 items included $137 million of non-cash derivative losses, a $44 million gain on retirement of notes, and a $31 million gain on non-core asset sales. First-half amounts included $218 million of non-cash derivative losses and $133 million of gains on note retirements. A full valuation allowance was recorded against deferred tax assets arising from current-period tax losses in Q2.
- A purported class action challenged the December 2015 debt exchange, alleging violations of the Trust Indenture Act and seeking to void the exchange and related liens, among other relief. CRC said it would vigorously defend the case; recorded litigation reserves were not material.
Key facts for investors to verify
- Whether proposed financing, tender offers, and covenant amendments were completed on acceptable terms, and how they affect liquidity, debt service, and collateral.
- Future covenant compliance and available revolver capacity, particularly if commodity prices remain weak or the borrowing base is reduced.
- Whether planned capital spending stabilizes production and whether delayed Q2 oil sales were realized in Q3.
- The cash-flow impact of commodity prices, derivative settlements and mark-to-market losses, and ongoing debt-reduction transactions.
- The status and potential consequences of the bondholder lawsuit challenging the 2015 exchange.