California Resources Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. CRC is a California-focused oil and natural gas producer. Unless stated otherwise, financial amounts are in millions of dollars.
Financial performance and position
| Metric | Q2 2022 | Comparison |
|---|---|---|
| Total operating revenues | $747 | $304 in Q2 2021; $153 in Q1 2022 |
| Operating income (loss) | $278 | $(90) in Q2 2021; $(189) in Q1 2022 |
| Net income (loss) attributable to common stock | $190; $2.48 per diluted share | $(111) in Q2 2021; $(175) in Q1 2022 |
| Operating cash flow | $181 | $127 in Q2 2021 |
| Capital investments | $98 | $50 in Q2 2021 |
- Oil, natural gas and NGL sales before derivative settlements were $718 in Q2 and $1,346 for the first half, versus $478 and $910, respectively, in 2021. Q2 oil and gas benchmarks were higher year over year, while production was lower.
- Commodity derivatives reduced reported revenue by $100 in Q2 and $662 for the first half. Cash settlement payments were $241 and $422, respectively. The first-half derivative loss included a $240 non-cash loss; Q2 included a $141 non-cash gain.
- For the six months, operating income was $89 versus a $163 operating loss in 2021; net income attributable to common stock was $15 versus a $205 loss. Results included a $58 gain on asset divestitures, principally the Lost Hills sale, and a $50 income-tax provision, including a valuation allowance related to that sale.
- Six-month operating cash flow rose to $341 from $274. Net cash used in investing was $129, including $197 of capital investments, $76 of divestiture proceeds and $17 of carbon-management property and easement acquisitions. Net cash used in financing was $193, including $167 of share repurchases and $26 of dividends.
- At June 30, cash was $324; current assets were $851 and current liabilities $1,208. Long-term debt, net, was $591, representing $600 of 7.125% Senior Notes due 2026; no revolving-credit borrowings were outstanding. Revolver availability was $416 after $136 of letters of credit, for reported total liquidity of $740. CRC reported compliance with debt covenants.
- Current derivative liabilities were $514 and noncurrent derivative liabilities $133, partly offset by derivative assets. Total net derivative liability was $596, a material mark-to-market exposure.
- Net production averaged 91 MBoe/d in Q2, versus 100 MBoe/d in Q2 2021; first-half production averaged 90 MBoe/d, down 10% year over year. Q2 diluted EPS included a reduced weighted-average share count following buybacks.
Changes, outlook and material developments
- Q2 operating revenue and profit improved sharply from Q1, reflecting higher realized prices and resumed production at a gas-processing facility. Q1 included a $562 derivative loss and a $54 asset-divestiture gain; Q2 derivative loss was $100 and divestiture gain $4.
- Against first-half 2021, commodity sales increased with higher prices, but lower production and larger derivative settlement payments offset much of the benefit. CRC cited natural decline, the Lost Hills and Ventura divestitures, and Q1 facility maintenance as production factors.
- Management raised its 2022 capital program to $380–$410 from $340–$385, including $360–$380 for oil and gas, corporate and other spending and $20–$30 for carbon management. CRC planned five drilling rigs in the second half and expected higher costs from inflation, labor, services and materials.
- Management said current commodity prices and planned spending were expected to support operations and financial flexibility, and that available liquidity was sufficient for obligations over the next 12 months. This outlook is subject to commodity-price and operating uncertainty; the filing does not provide earnings or production guidance.
- In August 2022, CRC formed a Carbon TerraVault joint venture with Brookfield. CRC holds 51%; Brookfield holds 49% and committed an initial $500 to jointly approved CCS projects, including a $137 initial investment payable upon milestones. The first $46 installment was funded August 3. These are post-quarter-end events.
- CRC’s $650 share-repurchase authorization runs through June 30, 2023. It repurchased $167 in the first half and reported $335 remaining at June 30; July repurchases were a further $45. The board declared a $0.17-per-share quarterly dividend for September, but future dividends remain subject to board approval.
Risks, contingencies and unusual items
- Commodity volatility affects revenue, cash flow and derivative values. The hedge portfolio can limit benefits from rising prices; net derivative liabilities totaled $596 at quarter-end.
- Inflation and supply-chain constraints were raising operating and capital costs, with management anticipating further increases in the second half of 2022 and possible effects into 2023.
- A court ruling halted Kern County’s local permitting system pending further review. CRC said it had sufficient drilling permits for anticipated 2022 operations and CEQA coverage at Elk Hills and Wilmington; the next hearing was scheduled for September 28, 2022.
- CRC disclosed ordinary-course litigation and claims, with recorded reserves not material; it said possible losses beyond reserves could not be accurately determined. It is also challenging a BSEE order concerning offshore platform decommissioning obligations after accepting an indemnification claim from former parent Occidental Petroleum.
- CCS projects remain at an early stage and depend on permits, project approvals, execution, financing and third-party arrangements. CRC also cited the risk that deferred tax assets may not be realized.
Important facts for investors to verify
- How much of future cash generation will be consumed by derivative settlements, and how the hedge portfolio changes as facility requirements evolve.
- Whether production stabilizes and the higher 2022 capital budget delivers expected operating results amid cost inflation.
- Progress on Kern County permitting litigation, Ventura asset divestiture approvals and the timing and economics of the Brookfield CCS partnership.
- Remaining share-repurchase capacity, future board decisions on dividends, and compliance with revolver covenants and minimum-hedging requirements.
- The sustainability of reported earnings: first-half results included material divestiture gains, derivative losses and a tax valuation allowance.