California Resources Corporation (CRC) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. CRC is an independent oil and natural gas producer operating exclusively in California.
Financial and operating results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenues and other | $3.064 billion | $2.006 billion |
| Operating income (loss) | $769 million | $73 million |
| Net income (loss) | $429 million | $(262) million |
| Net income (loss) attributable to common stock | $328 million; $6.77 per share | $(266) million; $(6.26) per share |
| Adjusted net income (loss), non-GAAP | $61 million | $(187) million |
| Adjusted EBITDAX, non-GAAP | $1.117 billion | $779 million |
| Cash provided by operating activities | $461 million | $248 million |
| Capital investments | $690 million | $371 million |
| Year-end cash | $17 million | $20 million |
| Year-end long-term debt | $5.251 billion | $5.306 billion |
- Production averaged 132 thousand Boe/d, up 2% from 129 thousand Boe/d. Oil averaged 82 thousand barrels/d, versus 83 thousand in 2017; natural gas production rose to 202 MMcf/d from 182 MMcf/d.
- Average realized oil price including hedges increased to $62.60/Bbl from $51.24/Bbl; realized NGL price rose to $43.67/Bbl from $35.76/Bbl. Realized natural gas price including hedges was $2.98/Mcf versus $2.67/Mcf.
- Production costs were $18.88/Boe versus $18.64/Boe; excluding the reported effect of Wilmington PSC-type contracts, costs were $17.47/Boe versus $17.48/Boe. The filing reports operating income of $769 million on revenues and other of $3.064 billion.
- Operating cash flow less capital investments was negative $229 million, before acquisitions and other investing activity. Investing cash flow was $(1.156) billion; financing cash flow was $692 million.
- At year-end, CRC reported $640 million of current assets and $607 million of current liabilities. Revolver availability was approximately $298 million, subject to a $150 million minimum-liquidity requirement. The company reported compliance with debt covenants.
- Proved reserves were 712 MMBoe, including 530 MMBoe proved developed and 182 MMBoe proved undeveloped. Standardized Measure was $7.3 billion and PV-10 was $9.4 billion; neither is presented as fair value.
Fourth-quarter snapshot and year-over-year changes
Unaudited Q4 2018 revenue and other was $1.078 billion, operating income was $465 million, and net income attributable to common stock was $346 million, or $7.00 per share. Comparatively, Q4 2017 revenue and other was $455 million, operating loss was $38 million, and common-stock net loss was $138 million, or $3.23 per share. Q4 2018 included a $295 million non-cash commodity-derivative gain; quarterly earnings therefore should be read alongside the full-year derivative settlements and adjusted results.
- Higher oil, NGL and gas prices, improved oil differentials, and the April 2018 acquisition of the remaining Elk Hills interests drove higher sales and earnings. Total oil and gas sales rose 34% to $2.590 billion.
- Operating cash flow increased 86%, primarily reflecting higher realized prices and, to a lesser extent, Elk Hills. Production increased modestly, including approximately 8 thousand Boe/d from the acquisition.
- Interest and debt expense rose to $379 million from $343 million, mainly due to higher rates on variable-rate debt. Debt declined modestly to $5.251 billion; CRC repurchased $183 million face value of second-lien notes and $49 million face value of senior notes during 2018.
- Net income included gains and other volatile items. The 2018 net derivative result was a $1 million gain, versus a $90 million loss in 2017; 2018 included $228 million of cash settlement payments. Adjusted net income was $61 million, materially below reported net income.
Transactions, outlook, risks, and other notable items
- CRC paid approximately $460 million cash and issued 2.85 million shares for Chevron’s remaining Elk Hills interests; total consideration including assumed liabilities was approximately $518 million. Management reported approximately $25 million of cost savings and revenue enhancements since closing and approximately $34 million annualized, plus $20 million of nonrecurring capital savings through year-end.
- The Ares midstream joint venture contributed $750 million gross proceeds before transaction costs for interests in the Elk Hills power plant and gas processing plant. ECR’s redeemable interests were recorded as $756 million of mezzanine equity at year-end; CRC may face significant redemption payments under the JV terms.
- Management set an internally funded 2019 capital program of $300–$385 million, adjustable with commodity prices. Discussions with JV partners could add $100–$150 million, supporting a program of approximately $500 million. Planned investment targets oil projects, production stabilization and a return to growth; this is not a production or earnings forecast.
- At February 27, 2019, hedges included puts and put spreads covering substantial volumes through 2019 and Q1 2020. CRC described weighted-average 2019 Brent protection around $71/Bbl, with additional protection below approximately $56/Bbl, while noting hedges may limit some upside and do not cover all production.
- Key risks include high leverage and interest expense, commodity-price volatility, limited liquidity and borrowing-base/covenant constraints, and dependence on California operations and customers. Two customers accounted for 43% of 2018 revenue.
- California permitting and environmental regulation, including rules affecting well stimulation, underground injection, water, pipelines and greenhouse-gas emissions, could delay or constrain operations and raise costs. CRC also cites drought and water availability, natural disasters, transportation constraints and climate-related demand or financing risks.
- Legal and environmental claims were described as ordinary-course matters; recorded reserves were not material, and management believed reasonably possible losses in excess of reserves would not be material. The filing reported no impairment charges in 2016–2018.
- CRC paid no common-stock dividends in 2016–2018 and did not anticipate dividends in the foreseeable future. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether operating cash flow can sustain planned capital investment, debt service and minimum-liquidity requirements, especially under lower oil prices.
- Debt maturities, variable-rate exposure, the $150 million liquidity covenant, borrowing-base redeterminations, and the 2016 Credit Agreement springing-maturity provisions.
- Realized prices and hedge settlements: 2018 hedge settlements reduced realized oil prices, while future hedge structures include sold puts that can create downside exposure below their strike levels.
- Elk Hills acquisition synergies and production contribution, and the future cash-distribution and redemption obligations associated with the Ares JV.
- Reserve estimates and PUD development assumptions: 21 MMBoe of PUDs were downgraded at management’s discretion, including 11 MMBoe expected to expire in 2019 at current oil prices.
- Effects of California permitting, injection and water rules, greenhouse-gas costs, and customer concentration on production, costs and market access.