California Resources Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. CRC is a California-focused oil and gas producer expanding into carbon management, including carbon capture and storage projects through its Carbon TerraVault joint venture with Brookfield.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total operating revenues | $1.024 billion | $153 million |
| Oil, natural gas and NGL sales | $715 million | $628 million |
| Net gain (loss) on commodity derivatives | $42 million | $(562) million |
| Operating income (loss) | $393 million | $(189) million |
| Net income (loss) | $301 million | $(175) million |
| Diluted earnings (loss) per share | $4.09 | $(2.23) |
| Cash from operating activities | $310 million | $160 million |
| Capital investments | $47 million | $99 million |
Revenue and earnings comparisons were substantially affected by commodity derivatives: the Q1 2023 derivative gain included a $107 million non-cash fair-value gain, partly offset by $65 million of cash settlement payments. In Q1 2022, CRC recorded a $562 million derivative loss. Oil, gas and NGL sales increased 14% year over year; produced natural gas revenue rose to $263 million from $80 million, while oil revenue fell to $390 million from $486 million. Purchased natural gas sales and related expenses were $184 million and $124 million, respectively.
Average net production was 89 MBoe/d, down 2% from 91 MBoe/d in Q4 2022; the filing does not provide a directly comparable Q1 2022 production figure in the presented MD&A table. Management attributed the sequential decline mainly to rain-related and seasonal-weather downtime. Operating costs were $254 million, or $31.61/Boe, versus $199 million, or $23.86/Boe, in Q4 2022, reflecting higher energy costs and lower production per unit.
Balance sheet, liquidity and shareholder returns
- Cash was $477 million at March 31, 2023, versus $307 million at year-end 2022. Current assets were $972 million and current liabilities $717 million.
- Long-term debt, net, was $592 million, representing $600 million principal of 7.125% Senior Notes due February 2026; no revolving-credit borrowings were outstanding. CRC reported covenant compliance.
- Quarter-end liquidity was $931 million: $477 million cash plus $454 million revolving-credit availability after $148 million of letters of credit.
- Operating cash flow of $310 million less capital investments of $47 million implies $263 million before other investing and financing items. Cash increased $170 million during the quarter.
- CRC repurchased 1.42 million shares for $59 million and paid $20 million in dividends. The board declared a further $0.2825-per-share quarterly dividend in April. The repurchase authorization extended through June 30, 2024; $581 million remained available at quarter-end.
Changes, outlook and material developments
- Versus Q1 2022, CRC moved from a net loss to net income and operating cash flow increased by $150 million. The comparison reflects markedly different derivative results as well as higher produced-product sales; Q1 2022 also included $54 million of asset-divestiture gains, compared with $7 million in Q1 2023.
- Management forecast 2023 capital investment of $200–$245 million, including $165–$195 million for oil and gas operations and $5–$15 million for carbon management. It expected operating cash flow at then-current commodity prices to support the program and stated that liquidity should meet obligations for the next 12 months.
- On April 26, 2023, CRC amended its revolving facility: the initial commitment became $592 million, the $1.2 billion borrowing base was reaffirmed, and stated maturity was extended to July 31, 2027, subject to a springing maturity provision tied to the Senior Notes. The amendment also changed pricing and permitted certain additional restricted payments and investments.
- CRC was evaluating refinancing options for its Senior Notes and separate financing for its carbon management business. CCS projects remain at an early stage; Brookfield committed an initial $500 million to jointly approved projects, subject to the arrangement’s terms.
- CEO transition was announced: CFO Francisco J. Leon was to become CEO and join the board; Manuela Molina was appointed CFO effective May 8, 2023.
Risks, contingencies and unusual items
- California permitting is a significant operating risk. CalGEM had issued no permits for new production wells to any operators since December 2022; beginning in February 2023 it also returned CRC applications for Wilmington Field work. CRC said its existing permits could support its planned 2023 Wilmington program, subject to no further changes.
- CRC does not currently plan to drill and complete additional Kern County wells until permitting resumes, which it said may be later in 2024, with no assurance of timing. Approximately 71% of proved undeveloped reserves, or 9% of total proved reserves, related to Kern County wells planned from 2024 that require permits.
- Senate Bill 1137 setback requirements were stayed pending a November 2024 voter referendum, but legal, regulatory and legislative uncertainty remains. CRC cited potential impacts on permitting, reserves, operations and liability.
- Commodity-price volatility affects revenue and cash flow. At quarter-end, commodity derivatives had a net fair-value liability of $111 million. Higher natural gas prices also increase operating and electricity-generation costs.
- Routine litigation and claims reserves were not material, but reasonably possible losses above reserves could not be accurately determined. CRC is challenging a BSEE order concerning offshore decommissioning obligations for which it accepted an indemnification claim from former parent Occidental.
- Q1 2023 included a $3 million impairment on acquired carbon-management-related assets held for sale. The company also released a $35 million valuation allowance established in Q1 2022 related to the Lost Hills transaction, after agreeing with the buyer to amend the tax treatment.
Important facts for investors to verify
- Whether California permitting delays, particularly in Kern County and Wilmington, affect production plans, reserve development or the 2023 capital program.
- How much reported earnings and revenue depend on derivative fair-value movements, settlement payments, and volatile California natural gas prices.
- Whether the amended credit facility, Senior Notes refinancing plans and capital allocation support the stated liquidity outlook and shareholder returns.
- Progress, funding requirements and commercial milestones for Carbon TerraVault projects, including Brookfield’s conditional investment commitments.
- Any developments in the offshore decommissioning dispute, other claims, and the risks associated with reserve estimates and future tax-asset realization.