California Resources Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. CRC became independent in a November 30, 2014 spin-off from Occidental Petroleum (Oxy); full-year 2014 results combine pre-spin-off California business results with CRC’s post-spin-off results. Q4 included the major impairment described below. Comparisons with prior years are therefore not fully like-for-like.
Business context and key metrics
CRC is an oil and natural gas exploration and production company operating exclusively in California. It reported 2014 average production of 159,000 Boe/d and year-end proved reserves of 768 MMBoe; 72% of reserves were oil and 72% were proved developed. Approximately 56% of production came from Elk Hills and Wilmington.
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $4.173 billion | $4.284 billion |
| Net income (loss) | $(1.434) billion | $869 million |
| Core income, non-GAAP | $650 million | $869 million |
| Cash from operations | $2.371 billion | $2.476 billion |
| Cash capital investments | $2.020 billion | $1.669 billion |
| Average production | 159,000 Boe/d | 154,000 Boe/d |
| Average realized oil price | $92.30/Bbl | $104.16/Bbl |
| Production cost | $17.64/Boe | $17.10/Boe |
Fourth-quarter revenue was $820 million and net loss was $2.091 billion, including $2.0 billion of after-tax non-cash impairment charges and after-tax rig termination, price-related, spin-off and transition costs. For full-year 2014, the pre-tax impairment charge was $3.402 billion, including approximately $650 million related to unproved acreage. The filing states that some impaired assets could become economic if prices recover.
Year-end assets were $12.497 billion, including $701 million in current assets and $14 million in cash; current liabilities were $906 million. Debt was $6.360 billion, comprising $5.0 billion of senior notes, $1.0 billion of term loans and $360 million drawn on the revolving facility. PV-10 of proved reserves was $16.091 billion; the standardized measure was $10.828 billion.
Changes versus prior periods
- Production rose 3% to 159,000 Boe/d, with oil production up 10% to 99,000 Bbl/d. NGL and natural gas volumes declined as capital shifted toward oil-weighted projects.
- Revenue fell 3%. Lower oil prices were the principal headwind; higher oil volumes and natural gas prices partly offset the decline. Average Brent fell from $108.76/Bbl in 2013 to $99.51/Bbl in 2014 and ended 2014 at $57.33/Bbl.
- Operating cash flow decreased $105 million. Cash capital investment increased; reported cash flow from investing activities was $(2.312) billion, including acquisitions and other investing outflows.
- Proved reserves increased to 768 MMBoe from 744 MMBoe. Additions of 118 MMBoe from the capital program and 6 MMBoe from acquisitions were partly offset by 42 MMBoe of revisions, mainly performance-related in legacy San Joaquin projects.
- Production costs rose to $17.64/Boe from $17.10/Boe, reflecting higher energy, surface-operation and maintenance costs. Management said a cost-containment effort began in Q4 and costs started to decline in December.
Outlook, risks and unusual items
- Capital plan: The 2015 capital budget was reduced to $440 million from approximately $2.1 billion in 2014, in response to commodity prices and a stated aim to fund investment from operating cash flow. The plan emphasizes steamfloods, waterfloods, workovers and oil-weighted projects.
- Hedging: CRC purchased Brent put options at $50/Bbl covering 100,000 Bbl/d for January–June 2015, and later disclosed Q3 collars and puts covering almost two-thirds of expected Q3 oil production. It also sold $75/Bbl calls on 30,000 Bbl/d for March–June. These arrangements limit some downside but can also limit upside.
- Debt and covenants: A February 2015 credit amendment changed covenants through December 2016 or earlier upon qualifying compliance. During the interim period, the leverage covenant can rise to 8.25x, an asset-coverage test applies, and cash above $250 million must be used to repay specified revolver borrowings. A breach could permit acceleration of debt.
- Commodity and reserve exposure: Results, cash flow and reserve economics are sensitive to oil and gas prices. Management warned that sustained low prices could reduce year-end 2015 proved reserves, particularly undeveloped reserves, and affect funding and debt-service capacity.
- Regulatory and operating exposure: California well-stimulation rules, permitting, water availability and disposal, environmental and greenhouse-gas requirements, and possible local restrictions may increase costs or delay operations. CRC reported $33 million of 2014 California greenhouse-gas allowance costs.
- Separation and comparability: Historical results include Oxy cost allocations and treasury arrangements; stand-alone costs and financing may differ. CRC reported $72 million of 2014 interest expense, but estimated $314 million pre-tax interest expense on a pro forma full-year basis at its year-end debt level.
- Contingencies: The company reported no material accrued loss reserves and did not expect reasonably possible losses above reserves to be material. A subsidiary paid a $200,000 penalty in January 2015 to settle a Ventura County claim concerning seven oil or produced-water releases.
Investor verification priorities
- Review the impairment assumptions, including commodity-price curves, affected properties and the distinction between proved and unproved acreage.
- Assess liquidity and covenant headroom using the amended credit agreement, debt maturities, cash-sweep requirement and current commodity prices.
- Compare the $440 million 2015 capital plan with actual spending, operating cash flow, production and reserve additions.
- Check realized oil differentials, hedge volumes and settlement terms against production and cash-flow performance.
- Evaluate reserve revisions and the basis for management’s estimate that some impaired assets may become economic at higher prices.
- Account for stand-alone costs and the Oxy separation, tax-sharing, indemnity and ownership arrangements when comparing periods.