California Resources Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. CRC is a California-only oil and natural gas exploration and production company, also developing carbon capture and storage projects.
Key financial and operating metrics
| Metric | Q3 2022 | Prior comparable period | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total operating revenues | $1,125 | $588 | $2,025 | $1,255 |
| Operating income (loss) | $591 | $122 | $680 | $(39) |
| Net income (loss) attributable to common stock | $426 | $103 | $441 | $(102) |
| Diluted EPS | $5.58 | $1.25 | $5.62 | $(1.23) |
| Operating cash flow | $235 | $182 | $576 | $456 |
| Capital investments | $107 | $51 | $304 | $128 |
The Q3 comparison above is year over year; management’s discussion also compares Q3 with Q2 2022. Q3 revenue included a $243 commodity-derivative gain, versus a $125 loss in Q3 2021. For the first nine months, derivative losses were $419 versus $603 in 2021. Cash settlements on derivatives were payments of $604 in the 2022 nine-month period, versus $220 in 2021; therefore, reported derivative gains and losses do not by themselves indicate cash realized from hedging.
- Production: Q3 net production averaged 92 MBoe/d, up from 91 MBoe/d in Q2. Nine-month average production was 91 MBoe/d, down 10% from 101 MBoe/d in 2021, primarily reflecting divestitures, maintenance and natural decline.
- Prices: Nine-month realized oil price before derivative settlements was $102.01/Bbl, compared with $67.62/Bbl in 2021; after settlements, it was $61.96/Bbl versus $54.43/Bbl. Natural gas realized price after settlements was $7.21/Mcf versus $3.64/Mcf.
- Costs and margins: Nine-month operating costs were $23.71/Boe versus $19.04/Boe in 2021. Higher purchased gas and electricity prices, maintenance costs and lower production contributed to cost pressure. Total operating expenses were $1,405 for nine months.
- Cash and liquidity: Cash was $358 at September 30, compared with $305 at year-end 2021. Reported liquidity was $819, comprising cash and $461 of revolver availability after letters of credit.
- Debt: Long-term debt, net, was $591, consisting principally of $600 of 7.125% Senior Notes due February 2026. No revolver borrowings or variable-rate debt were outstanding. CRC reported compliance with debt covenants.
- Balance sheet and capital returns: Total assets were $3,986 and stockholders’ equity was $1,855. CRC repurchased $247 of shares and paid $39 of dividends during the first nine months; 73.5 million common shares were outstanding at September 30.
Material changes, outlook and risks
- Nine-month oil, natural gas and NGL sales increased to $2,026 from $1,459, largely on higher realized prices; lower production offset part of the increase. Operating cash flow rose 26% to $576. The company recorded $60 of divestiture gains, mainly from the Lost Hills sale and Ventura assets.
- CRC expected 2022 capital spending of $380–$400, including $20–$30 for carbon management. It cited inflation in services, labor, materials and energy costs, and anticipated continued cost increases into 2023. Management said available liquidity was sufficient for obligations over the next 12 months, subject to commodity prices and execution.
- Commodity prices remain volatile. Hedging reduces some downside exposure but also limits participation in price increases; net derivative liabilities were $191 at September 30. CRC cited geopolitical uncertainty, inflation, potential recession and supply constraints as factors affecting prices and results.
- California permitting and regulatory changes are material uncertainties. A court lifted the Kern County local-permitting restriction in November 2022, subject to potential appeal. Senate Bill 1137 establishes well setback and operating requirements; management expected changes to development plans but did not expect a material effect on current production or overall development pace.
- CRC formed a 51%-owned Carbon TerraVault JV with Brookfield. Brookfield’s initial $137 commitment is milestone-dependent; a $46 first installment was funded, with related put/call rights and a $46 contingent liability recorded. CCS projects remain early-stage and depend on permitting, regulation, infrastructure and commercial execution. California SB 905 also led CRC to shift its CalCapture project from an EOR-linked approach toward CCS.
- Other contingencies include ordinary-course litigation and environmental claims, for which recorded reserves were not material; the company said reasonably possible losses above reserves could not be accurately determined. CRC is also challenging a BSEE decommissioning order involving offshore platforms associated with a former parent’s indemnification claim.
- Subsequent events: On November 2, 2022, the board increased the anticipated annual dividend to $1.13 per share and expanded the repurchase authorization to $850, extending it through December 31, 2023. These actions occurred after quarter-end and future dividends remain subject to board approval.
Investor verification points
- Separate cash derivative settlements from noncash fair-value gains and losses when assessing earnings, realized prices and cash flow.
- Track production trends, realized commodity prices and the effect of divestitures and production-sharing contracts on reported volumes and costs.
- Compare actual capital spending and operating costs with the $380–$400 2022 capital plan and inflation assumptions.
- Assess the availability and conditions attached to revolver capacity, covenant compliance, hedging requirements and planned shareholder returns.
- Monitor permitting, appeals and the implementation of California setback, CCS and emissions rules, as well as Brookfield JV milestone funding and project execution.
- Review deferred-tax-asset recoverability: management noted realization depends on future taxable income, and the Lost Hills sale resulted in a $31 valuation-allowance charge.