California Resources Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. CRC is an independent oil and gas exploration and production company operating exclusively in California. It was spun off from Occidental Petroleum on November 30, 2014. The 2014 comparison includes the California business for the full year, while 2015 reflects CRC as a stand-alone company; therefore, year-over-year comparisons are affected by different reporting bases and spin-off-related financing.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $2.403 billion | $4.173 billion |
| Net income (loss) | $(3.554) billion | $(1.434) billion |
| Adjusted net income (loss), non-GAAP | $(311) million | $650 million |
| Net cash from operating activities | $403 million | $2.371 billion |
| Capital investments | $401 million | $2.089 billion |
| EBITDAX, non-GAAP | $906 million | $2.548 billion |
| Total debt principal at year-end | $6.143 billion | $6.360 billion |
Cash was $12 million at year-end 2015; current assets were $497 million and current liabilities were $605 million. Total assets were $7.053 billion and equity was negative $916 million. The filing does not present a single comparable operating-margin figure.
- Prices and production: Average realized oil price including hedges fell to $49.19 per barrel from $92.30; NGL price fell to $19.62 from $47.84 per barrel, and natural gas price to $2.66 from $4.39 per Mcf. Average production was 160,000 Boe/d versus 159,000, with oil production rising 5% to 104,000 barrels per day.
- Costs: Production costs declined to $16.30 per Boe from $18.23. Adjusted G&A was $1.00 per Boe versus $1.47. These are per-unit cost measures, not profit margins.
- Cash flow: Operating cash flow less reported capital investments was approximately $2 million. Investing activities used $757 million; financing activities provided $352 million.
- Reserves: Proved reserves were 644 million Boe at year-end, 75% proved developed and 72% oil. PV-10 was $5.059 billion and the GAAP standardized measure was $4.024 billion. The 2015 organic reserves replacement ratio was 140%.
Material changes and unusual items
- Revenue fell 42% from 2014, principally because of lower oil prices; management attributed about $1.55 billion of the year-over-year sales decline to oil prices, partly offset by higher oil volumes and hedge gains.
- CRC recorded $4.852 billion of pre-tax impairment charges in 2015, compared with $3.402 billion in 2014. The 2015 charge followed lower commodity-price assumptions and included about $100 million related to unproved acreage.
- Operating cash flow declined by about $2.0 billion, reflecting lower sales and higher interest payments, partly offset by lower operating costs.
- Lower prices drove 153 million Boe of negative proved-reserve revisions. CRC also reclassified 69 million Boe of proved undeveloped reserves as unproved, while positive performance revisions added 45 million Boe.
- A December 2015 exchange of unsecured notes for $2.25 billion of 8% second-lien notes due 2022 generated $1.39 billion of cancellation-of-debt income, including $830 million of original issue discount, and a deferred accounting gain of about $560 million. CRC recorded a $294 million deferred-tax valuation allowance.
Outlook, liquidity, and principal risks
- The board approved a 2016 capital program of $50 million, down from $401 million in 2015; the amended credit facilities prohibit 2016 capital investment above $100 million. Management expects reduced investment to cause production and potentially reserves to decline.
- Management said the asset base, including hedging, had the potential to be cash-flow neutral after interest in 2016. This is an expectation, not a guarantee; the filing warns that prolonged low prices could leave cash and available credit insufficient to meet commitments over the next 12 months.
- After a February 2016 credit-facility amendment, the borrowing base was $2.3 billion and revolving commitments were $1.6 billion. At January 31, 2016, CRC reported approximately $1.7 billion of revolving and term-loan borrowings and about $560 million of borrowing-base availability, subject to covenants. Semiannual borrowing-base redeterminations begin May 2016.
- Amended 2016 covenants include cumulative minimum EBITDAX thresholds and quarterly interest-coverage tests. The filing cautions that compliance with covenants reverting in 2017 could require commodity prices significantly above then-current levels. A borrowing-base reduction or covenant breach could lead to repayment demands, acceleration, or foreclosure on secured assets.
- CRC was pursuing asset monetizations, joint ventures, and other debt-reduction alternatives, especially involving midstream and power assets, but gave no assurance these would close or provide sufficient liquidity. The dividend was suspended in November 2015; the credit amendment also restricts dividends.
- Hedges provide partial price protection but cap some upside and carry counterparty and volume risks. Regulatory, water-management, environmental, climate-policy, and California-specific operational risks may increase costs or constrain activity. Three customers accounted for 61% of 2015 revenue.
- The NYSE notified CRC that its share price failed the $1 minimum average closing-price standard. CRC planned to seek shareholder approval for a reverse stock split; failure to regain compliance could lead to delisting.
- Routine litigation and claims were described as not material. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Current liquidity, cash generation, hedge settlements, and the results of the May 2016 borrowing-base redetermination and subsequent covenant tests.
- Whether planned asset sales, joint ventures, debt exchanges, or other deleveraging actions close, and how proceeds are applied under the credit agreement.
- Actual 2016 production decline, cost savings, capital spending, and changes to proved reserves under realized prices and operating conditions.
- The scale and timing of debt-service obligations, including the 8% second-lien notes, and the company’s ability to meet 2017 covenant requirements.
- NYSE listing compliance and the outcome of any proposed reverse stock split; also verify Occidental’s stated plan to divest its retained 18.5% stake on March 24, 2016.