California Resources Corp annual report, FY2017

California Resources Corporation — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. CRC is a California-focused oil and natural gas producer; it reported average production of 129 thousand barrels of oil equivalent per day (MBoe/d) and 618 million barrels of oil equivalent (MMBoe) of proved reserves at year-end.

Financial and operating performance

Metric	2017	2016
Revenue and other	$2.006 billion	$1.547 billion
Operating income (loss)	$63 million	$(306) million
Net income (loss) attributable to common stock	$(266) million	$279 million
Net cash from operating activities	$248 million	$130 million
Capital investments	$371 million	$75 million
Production	129 MBoe/d	140 MBoe/d

• Revenue increased 30%, primarily reflecting higher realized commodity prices, partly offset by lower volumes. Operating margin was approximately 3.1% of revenue; net loss margin was approximately 13.3%.
• Oil production averaged 83 thousand barrels per day, down 9%; NGL production was 16 thousand barrels per day; natural gas production was 182 million cubic feet per day. Total production declined 8% year over year.
• Average realized oil price was $51.47 per barrel before hedge effects and $51.24 with hedges; Brent averaged $54.82. Realized NGL and gas prices were $35.76 per barrel and $2.67 per Mcf, respectively.
• Production costs rose to $876 million, or $18.64/Boe, from $800 million, or $15.61/Boe, amid increased maintenance activity and higher gas and electricity costs. Net derivative losses were $90 million, versus $206 million in 2016. Interest and debt expense was $343 million.
• Year-end cash was $20 million; current assets were $483 million versus current liabilities of $732 million. Long-term debt principal was $5.306 billion and equity attributable to common stock was negative $814 million. CRC reported compliance with debt covenants at year-end.
• Proved reserves increased to 618 MMBoe from 568 MMBoe, including 49 MMBoe of positive price revisions, 22 MMBoe of positive performance revisions and 34 MMBoe from extensions and discoveries; production was 47 MMBoe. Organic reserves replacement was 119%. Standardized measure was $3.765 billion and PV-10 was $4.545 billion.

Material changes versus prior period

• Higher commodity prices drove oil and gas net sales up 19% to $1.936 billion. Production declined as lower capital spending in prior years continued to affect output, although management said oil production flattened in the second half of 2017.
• Operating results improved from a $306 million loss to $63 million of operating income, but the company moved from $279 million of net income to a $266 million net loss. The 2016 result included an $805 million gain on early debt extinguishment; 2017 included higher interest expense and no tax benefit on the pretax loss.
• Operating cash flow rose $118 million, while capital investment increased substantially. CRC issued a $1.3 billion term loan, repaid its 2014 Term Loan, and reduced the 2014 revolver balance during 2017.
• At year-end, CRC had 2.3 million net mineral acres and 25,080 net identified drilling locations. Its reported 2017 program included 109 net development wells and five net exploration wells.

Outlook, commentary and risks

• CRC forecast a 2018 capital program of $425 million to $450 million, including approximately $100 million to $150 million of JV capital. It targeted oil-weighted projects and expected production to return to growth, subject to commodity prices, cash flow and JV funding.
• The 2018 plan included approximately 130 conventional wells and 20 unconventional wells, with focus on Elk Hills, Wilmington, Kern Front, Huntington Beach, Kettleman North Dome and Buena Vista. Management stated it expected to fund operations and the program from operating cash flow at then-current commodity prices without a net revolver draw.
• In February 2018, CRC formed a midstream JV involving the Elk Hills power plant and gas processing plant, receiving $747 million in net proceeds; $297 million was used to repay the revolver. An Ares-led investor group also bought approximately 2.3 million shares for $50 million. These are post-year-end developments.
• Key risks include volatile oil and gas prices, high leverage and interest costs, borrowing-base and covenant limits, capital availability, reserves-estimation uncertainty, California permitting and environmental rules, water and injection regulation, climate-related costs, and the concentration of operations in California. CRC reported approximately $27 million of California greenhouse-gas allowance costs in 2017.
• Chevron initiated a dispute alleging approximately $200 million of NGL underallocation and $50 million of excess power charges at Elk Hills. CRC said it believes the claims lack merit and intends to seek adjustments in its favor. A separate Huntington Beach air-permit matter was settled for a $500,000 penalty and $1 million for an environmental project.
• CRC disclosed $215 million of purchase obligations, including an $84 million investment commitment due before the end of 2018, and $422 million of asset-retirement obligations. It reported no material accrued legal reserves.

Important facts for investors to verify

• Whether the 2018 capital plan, production-growth target and expected internal funding remain achievable under actual commodity prices, costs and JV contributions.
• Debt service, liquidity and covenant headroom after the February 2018 midstream JV, including the transaction’s distribution priorities and effect on consolidated financial statements.
• Progress and outcome of the Chevron Elk Hills dispute and any resulting adjustment to revenue, costs or obligations.
• Whether proved undeveloped reserves can be developed on schedule and under the price assumptions used by management; prolonged lower prices could affect their timing or quantity.
• The unaudited quarterly data lists a fourth-quarter 2017 common-stock net loss of $138 million but earnings per share of positive $3.23. Verify this apparent inconsistency against the original filing and subsequent corrections or disclosures.