California Resources Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. CRC is an independent oil and natural gas producer operating exclusively in California.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue and other | $653 million | $549 million | $1.343 billion | $1.158 billion |
| Oil and gas sales | $578 million | $657 million | $1.179 billion | $1.232 billion |
| Operating income | $122 million | $11 million | $179 million | $119 million |
| Net income (loss) | $41 million | $(63) million | $(3) million | $(54) million |
| Net income (loss) attributable to common stock | $12 million | $(82) million | $(55) million | $(84) million |
| Adjusted EBITDAX (non-GAAP) | $255 million | $245 million | $556 million | $495 million |
Q2 operating margin was approximately 18.7% of total revenue, versus approximately 2.0% in Q2 2018. This comparison reflects a substantial swing in derivative results: Q2 recorded a $21 million commodity derivative gain versus a $167 million loss a year earlier. For the first half, commodity derivatives remained a $68 million loss, but improved from a $205 million loss in 2018. First-half oil and gas sales fell 4%; other revenue increased $101 million, largely from higher trading activity. Adjusted EBITDAX is a company-defined non-GAAP measure.
Average production was 129 thousand Boe/d in Q2, down 4% year over year; first-half production was 131 thousand Boe/d, up 2%. First-half production costs were $19.54/Boe versus $19.01/Boe in 2018. Q2 oil production was 79 thousand barrels/day, and realized oil price including settled hedges was $70.66/barrel.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $272 million, compared with $234 million in 2018. Investing cash outflow was $170 million, including $271 million of capital investments and $165 million of net cash proceeds from the Lost Hills sale. Financing cash outflow was $92 million.
- Cash was $27 million at June 30, 2019, including $12 million restricted for JV-related uses. Current assets were $522 million and current liabilities $610 million.
- Total debt was $5.160 billion, including $100 million of notes due January 2020; long-term debt was $5.060 billion. Debt declined from $5.251 billion at December 31, 2018. Equity attributable to common stock was negative $408 million.
- CRC reported $309 million of available capacity under its $1 billion revolving facility, before a $150 million month-end minimum-liquidity requirement; letters of credit outstanding were $166 million. CRC stated it was in compliance with all debt covenants.
- Interest and debt expense was $198 million for the first half, up from $186 million. CRC repurchased $76 million face value of 8% second-lien notes during the first half for $59 million cash, recording a $26 million gain on extinguishment.
Changes, outlook and risks
- First-half operating cash flow increased 16%, which management attributed mainly to higher realized prices, including hedge settlements, and higher volumes. Management expected operating cash flow to fully fund the internally funded portion of its 2019 capital program.
- CRC projected 2019 internally funded capital of $350–$385 million and JV-funded investment of $175–$225 million, for a total program of $525–$610 million. By June 30, it had invested $228 million internally and received $50 million of JV investment.
- On May 1, CRC sold half its working interest and transferred operatorship in certain Lost Hills zones for consideration exceeding $200 million, including $165 million net cash proceeds and a carried 200-well program. Cash proceeds were used to repay revolving-facility borrowings.
- In July 2019, CRC agreed to a Colony Capital JV: $320 million committed investment, potentially increasing to $500 million by mutual agreement, for a planned 275-well Elk Hills program over about three years. Colony funds 100% of development wells for a 90% working interest; CRC’s interest could increase from 10% to 82.5% after Colony achieves an agreed return. Colony also received warrants for up to 1.25 million shares at $40 per share.
- Oil and gas results remain sensitive to commodity prices, production, California market conditions, hedging and operating costs. CRC cited lower NGL prices from excess supply and weaker demand. It also identified debt limitations, capital availability, regulatory and permitting changes, operational disruptions, reserve uncertainty and JV execution among forward-looking risks.
- CRC reported no material accrued reserves for lawsuits and claims and did not expect reasonably possible losses above reserves to be material. A Ventura County civil investigation concerns characterization of certain waste sent to a licensed third-party facility; CRC did not expect a material adverse financial effect.
- CRC adopted lease accounting rules in 2019, recognizing $66 million of lease assets and liabilities at adoption. It also recorded $3 million of lease impairment in the first half. Income tax expense or benefit was zero; CRC maintained a full valuation allowance on net deferred tax assets and said a release could depend on achieving profitability.
Important facts for investors to verify
- How current liquidity, the revolving facility’s minimum-liquidity requirement and the $100 million January 2020 maturity interact; also monitor the larger scheduled second-lien repayments in 2021–2022.
- Whether forecast capital spending and JV funding are delivered as planned, and the economic terms and milestones governing the Colony and existing JV programs.
- How much earnings and cash flow depend on commodity prices, hedge settlements and non-cash derivative fair-value changes; assess non-GAAP adjusted EBITDAX alongside GAAP results.
- Whether production trends, NGL realizations, trading activity and per-Boe costs support management’s outlook, including the impact of the Lost Hills divestiture and operating interruptions.
- Potential developments in California regulation, idle-well asset-retirement obligations, the waste investigation and realizability of deferred tax assets.