California Resources Corp quarterly report, Q1 FY2018

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California Resources Corporation — Q1 2018 Form 10-Q

Business context and reporting period

CRC is an independent oil and natural gas exploration and production company operating in California. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017; balance sheet figures are compared with December 31, 2017. Unless noted, amounts are in millions of dollars.

Financial and operating performance

  • Revenue: Total revenues and other were $609, up 3% from $590. Oil and gas sales rose 18% to $575, largely due to higher realized oil and NGL prices; net derivative results swung to a $38 loss from a $73 gain.
  • Profit: Operating income was $108 versus $115. Net income was $9 versus $52, while net loss attributable to common stock was $2, or $0.05 per diluted share, versus common-stock income of $53, or $1.22 per diluted share. Adjusted EBITDAX, a non-GAAP measure, increased to $250 from $200; adjusted net income was $8 versus an adjusted loss of $43.
  • Costs and margins: Production costs were $212, approximately unchanged in total, but increased to $19.08 per Boe from $17.70 as production declined. Operating margin on reported revenues was approximately 17.7%, versus 19.5% a year earlier. Interest and debt expense rose to $92 from $84.
  • Production and prices: Total production fell 7% to 123 MBoe/d; oil production declined 10% to 77 MBbl/d, while natural gas production edged up 1% to 182 MMcf/d and NGL production remained 16 MBbl/d. Realized oil price including hedges rose to $62.77/Bbl from $50.24; NGL price rose to $43.13/Bbl from $34.33. Realized gas price was $2.81/Mcf, but the filing says ASC 606 presentation affected it; under prior rules it would have been $2.53/Mcf.
  • Cash flow: Operating cash flow was $200 versus $133. Investing cash outflow was $138, including approximately $134 of capital investment net of capital accrual changes. Financing cash inflow was $412. Cash increased to $494 from $20, substantially reflecting Ares JV proceeds and the associated financing transactions.
  • Debt and liquidity: Long-term debt was $4,941, down from $5,306. The company had approximately $846 of revolver borrowing capacity, subject to a $150 minimum-liquidity requirement, and reported covenant compliance. Current assets were $949 and current liabilities $806; common-stockholders’ equity remained negative at $763. A $724 redeemable noncontrolling interest was classified as mezzanine equity.

Material changes and transactions

  • CRC formed a midstream JV with an Ares affiliate in February, receiving $750 gross proceeds ($747 net). The JV holds the Elk Hills power plant and gas-processing plant. CRC used proceeds in part to repay $297 of its 2014 revolving facility; it also raised $50 through a private placement of common stock to an Ares-led investor group. The JV’s redeemable interest and required preferred distributions are important financing obligations.
  • On April 9, after quarter-end, CRC acquired the remaining Elk Hills interests from Chevron for approximately $510, comprising $460 cash and 2.85 million CRC shares. CRC stated the deal gives it 100% working and net revenue interests and expects approximately $100 annual operating cash flow at flat $65 Brent, $5 of near-term annual operating savings, and approximately $15 of additional synergies within 18 months. These are management expectations, not reported results.
  • CRC also acquired a Bakersfield office building on April 2 for $48.4. It expects approximately $4 of rental income in 2018 from the former owner, who will initially lease space.
  • During April, CRC repurchased $95 principal amount of second-lien notes for $79 cash. The first-quarter repurchase was $2 principal amount for $1.6 cash.
  • Adoption of ASC 606 increased reported first-quarter revenue and other expense by equal amounts—$42 in total—without changing operating income or net income. Prior-period figures were not restated.

Outlook, risks and contingencies

  • CRC increased its planned 2018 capital program to $550–$600, including approximately $100–$150 funded by JV partners. It expects oil production growth in the second half of 2018, excluding acquisitions, and intends to exit the year above beginning-of-year production.
  • Management said that, if commodity prices remain around then-current levels, operating cash flow should fund 2018 operations and the capital program; the company can adjust capital spending to preserve liquidity. It expects no cash income taxes for the foreseeable future due to tax-loss carryforwards.
  • Hedging is intended to protect cash flow and support the capital program. CRC reported a $126 net derivative liability at March 31 and noted that derivative results can be volatile; hedges may not achieve their objectives and may limit some upside. May 2018 interest-rate caps covered $1.3 billion of variable-rate debt, with a 2.75% one-month LIBOR threshold.
  • Key risks include volatile commodity prices, substantial debt and refinancing/covenant constraints, production declines and reserve replacement, regulatory and environmental requirements, California operating concentration, drilling and acquisition execution, and service, labor, infrastructure or transportation constraints.
  • Legal and environmental matters were described as ordinary-course; recorded reserves and reasonably possible losses beyond reserves were not material, according to CRC. Chevron and CRC released their pending Elk Hills claims as part of the April acquisition. The filing reports no material indemnity claims pending or threatened.

Most important facts for investors to verify

  1. Whether the Elk Hills acquisition delivers the stated production, cash-flow and synergy expectations, and how its cash and share consideration affects leverage and dilution.
  2. The terms, distributions, redemption economics and cash-flow priority of the Ares JV’s preferred and redeemable interests.
  3. Whether production stabilizes and grows as planned, given the 7% year-over-year Q1 decline and the increased capital program.
  4. Debt maturities, borrowing-base availability, covenant headroom and the company’s capacity to service debt under lower commodity-price scenarios.
  5. Hedge positions and realized effects, including the $126 derivative liability, potential upside constraints and counterparty exposure.