California Resources Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. CRC was formed as an Occidental Petroleum subsidiary and was preparing for its planned spin-off; the statements reflect the historical California business, not a fully standalone company.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.092 billion | $1.107 billion | $3.353 billion | $3.205 billion |
| Income before taxes | $319 million | $392 million | $1.101 billion | $1.095 billion |
| Net income | $188 million | $235 million | $657 million | $657 million |
| EBITDAX, non-GAAP | $648 million | $721 million | $2.058 billion | $2.029 billion |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.891 billion | $1.903 billion |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $1.569 billion | $1.180 billion |
Q3 oil and gas net sales were $1.051 billion versus $1.060 billion; other revenue was $41 million versus $47 million. Q3 average production was 160,000 BOE/day, up from 153,000; oil production rose 12% to 100,000 barrels/day. Realized oil price fell to $96.27/barrel from $107.20, while realized gas price increased to $4.24/Mcf from $3.61.
For the first nine months, oil and gas net sales rose 5% to $3.238 billion. Production averaged 157,000 BOE/day versus 153,000, with oil output up 10% to 97,000 barrels/day. Q3 production costs were $262 million and DD&A $304 million; per-BOE production costs rose to $17.74 from $17.25. The filing does not provide a stated GAAP operating margin.
At September 30, cash was $105 million, current assets $897 million, current liabilities $852 million, total assets $15.657 billion, and net investment $10.869 billion. CRC had no debt outstanding at that date. The pro forma adjusted balance sheet includes a $6 billion dividend payable to Occidental, reducing pro forma net investment to $4.869 billion.
Changes, financing and outlook
- Q3 net income declined $47 million year over year, while nine-month net income was unchanged. In Q3, higher oil volumes and gas prices were outweighed by lower oil prices and increased production costs. Nine-month results benefited from higher oil volumes and gas/NGL prices, offset by lower oil prices and higher costs, DD&A, taxes and SG&A.
- Operating cash flow was nearly flat year over year. Investing cash use increased $423 million, mainly from higher development and exploration spending; financing cash use decreased $540 million as distributions to Occidental declined.
- CRC reported a 2014 capital budget of $2.1 billion, versus $1.7 billion in 2013; $1.569 billion had been spent through September. It agreed to acquire Ventura Basin properties for approximately $200 million; the transaction closed in Q4.
- After quarter-end, CRC issued $5 billion of senior notes on October 1, with coupons of 5%, 5.5% and 6%, due 2020, 2021 and 2024. Proceeds funded a $4.95 billion distribution to Occidental. The company also described a $1 billion term loan and $2 billion revolving facility, with expected additional revolver borrowings for property acquisition and working capital. The filing’s pro forma capitalization shows $6.065 billion of debt; this is not quarter-end reported debt.
- Management expected Q4 2014 income to be significantly below Q3, citing deteriorating oil prices and new interest expense. It expected operating cash flow and borrowing capacity to fund capital spending and acquisitions over at least the next 12 months; results remain sensitive to commodity prices, costs and sales volumes. CRC said it rarely hedges and did not expect a significant hedging program.
Risks, contingencies and other notable matters
The spin-off was subject to conditions and was intended to distribute at least 80.1% of CRC shares to Occidental shareholders. Debt documents provided for mandatory redemption or repayment if the spin-off was not completed by January 31, 2015. Credit facilities include quarterly covenants: leverage no greater than 4.50:1 and interest coverage at least 2.50:1. CRC also accepted specified tax-related indemnification obligations connected with the spin-off.
Management cited exposure to oil, NGL and gas prices, California concentration, drilling and acquisition risks, regulation and permitting, environmental and water constraints, infrastructure access, debt and capital-program funding, potential impairments, climate and air-quality issues, and spin-off execution. Ordinary-course legal and environmental reserves were not material. A Ventura County civil claim sought $200,000 in penalties over alleged oil or produced-water releases; the subsidiary was evaluating it. Off-balance-sheet contractual obligations rose approximately $92 million, or 13%, since year-end, primarily for drilling, services and transportation.
Historical results include Occidental allocations for corporate and shared services and may not represent standalone costs. CRC reported effective disclosure controls at September 30, 2014.
Investor verification priorities
- Confirm completion and final terms of the spin-off, share distribution, and settlement of amounts owed to Occidental.
- Verify post-spin-off debt outstanding, borrowing costs, covenant headroom, and cash available after distributions and working-capital funding.
- Track oil-price realizations and differentials, production trends, energy-related production costs, and management’s stated Q4 earnings pressure.
- Assess delivery against the $2.1 billion capital budget, returns on drilling and the Ventura acquisition, and operating cash flow relative to investment needs.
- Review standalone corporate costs, tax-indemnity exposure, environmental/legal developments, and the status of the Ventura County claim.