California Resources Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. CRC is a California-focused oil and natural gas exploration and production company. Financial amounts are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenues and other | $828 | $445 | $1,986 | $1,551 |
| Operating income (loss) | $185 | $(45) | $304 | $111 |
| Net income (loss) attributable to common stock | $66 | $(133) | $(18) | $(128) |
| Diluted EPS | $1.32 | $(3.11) | $(0.38) | $(3.01) |
| Adjusted EBITDAX | $308 | $187 | $803 | $548 |
| Adjusted net income (loss) | $41 | $(52) | $35 | $(173) |
Q3 operating margin was approximately 22% of total revenues and other, versus a loss in the prior-year quarter. Reported revenue includes commodity derivative losses of $54 million in Q3 and $259 million for the first nine months; the comparable 2017 nine-month period included a $51 million derivative gain. Q3 common-stockholder income was $66 million, while the company remained loss-making for the nine-month period.
- Oil and gas sales were $700 million in Q3 and $1.932 billion for nine months. Q3 oil and gas sales increased 52% year over year, primarily reflecting higher realized oil prices and production.
- Average production was 136 thousand Boe per day in Q3, up 6% year over year; nine-month average production was 131 thousand Boe per day, up 1%. Q3 production included approximately 12 thousand Boe per day from the Elk Hills acquisition.
- Q3 realized oil price was $63.63/Bbl including hedges and $73.73/Bbl without hedges. Q3 production costs were $236 million, or $18.92/Boe; G&A was $81 million and DD&A was $128 million.
- Net interest and debt expense was $95 million in Q3 and $281 million for nine months. No income tax provision or benefit was recorded; the company maintained a full valuation allowance on deferred tax assets.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $393 million, up from $225 million. Investing cash use was $965 million, including $504 million of capital investments and $514 million of acquisitions. Financing provided $583 million. Cash increased to $31 million from $20 million at year-end 2017; $13 million was restricted under a joint venture agreement.
- At September 30, total assets were $6.984 billion, current assets $546 million, current liabilities $871 million, and total equity was negative $605 million. Long-term debt was $5.108 billion, down from $5.306 billion at year-end 2017.
- Debt comprised $342 million on the revolving facility, $1.3 billion under the 2017 Credit Agreement, $1.0 billion under the 2016 Credit Agreement, $2.122 billion of 8% second-lien notes and $344 million of senior notes. CRC repurchased $177 million principal of notes for $149 million cash during the first nine months, recording a $26 million pretax gain.
- Available revolving capacity was approximately $490 million, subject to a $150 million month-end minimum liquidity requirement. The borrowing base was reaffirmed at $2.3 billion in October 2018. CRC reported compliance with all debt covenants at quarter-end.
Material changes and management commentary
- CRC acquired the remaining interests in the 47,000-acre Elk Hills unit from Chevron for approximately $518 million, including $462 million cash and 2.85 million shares. Management reported $16 million of estimated cost savings and revenue enhancements since acquisition, or about $34 million annualized, above its initial $20 million target over 24 months; it also reported $15 million of nonrecurring capital savings through September.
- CRC formed the Ares midstream joint venture in February, receiving $750 million before transaction costs for partner interests in the Elk Hills power plant and gas processing plant. The partner’s redeemable interests were reported as $745 million of mezzanine equity at September 30. Redemption may require $750 million for the preferred interest and $60 million or $80 million for the common interest, plus accrued distributions and, in specified cases, a make-whole payment.
- CRC acquired a Bakersfield office building for $48.4 million and expected to consolidate employees at the location over 12 to 15 months. The company expected approximately $4 million of rental income in 2018 under the existing tenant arrangement.
- The 2018 capital program was projected at $720 million to $750 million, including approximately $100 million of JV capital. Through September, total capital including JV funding was $550 million, of which $467 million was internally funded. CRC expected to fund the remainder of the program with operating cash flow and, as needed, revolver borrowings.
- Management expected higher average production exiting 2018 than in Q4 2017, citing investment, Elk Hills contributions and synergies. It said the company did not expect to pay cash taxes in the foreseeable future, based on tax attributes and anticipated qualifying capital spending.
Outlook, risks and unusual items
- Results remain sensitive to oil and gas prices, differentials, production and hedging. Higher commodity prices lifted sales, but also contributed to substantial cash settlements on derivatives: $79 million paid in Q3 and $178 million paid in the first nine months of 2018. The quarter-end commodity derivative position was a net liability of $153 million.
- CRC stated that its hedging may not adequately protect cash flow. Its contracts include puts, sold puts, calls and swaps; some sold puts expose the company to settlement payments if prices fall below contract levels. Interest-rate contracts cover $1.3 billion of variable-rate debt when one-month LIBOR exceeds 2.75%, through May 2021.
- Variable-rate debt, high leverage, limited liquidity, debt restrictions and future maturities are material financial considerations. A 0.125 percentage-point change in variable interest rates would change annual interest expense by an estimated $3 million.
- Cash-settled stock compensation increased with CRC’s share price, which rose from $10.46 to $48.53 year over year. Total stock-based compensation was $16 million in Q3 and $54 million for nine months, contributing to higher reported costs.
- ASC 606 adoption changed revenue and expense presentation but did not affect net income. Higher gas trading activity also raised both other revenue and other expense. These presentation and trading changes complicate comparisons of reported revenue and expenses.
- CRC reported no material accrued lawsuit or claim reserves and believed reasonably possible losses above reserves would not be material. It remained subject to IRS examination for 2016–2017 and California tax examinations for post-spin-off periods. The 2014–2015 IRS examination was settled in October 2018 with no changes to tax filings.
- Management cited risks including commodity-price volatility, regulatory and environmental requirements, permit availability, operating disruptions, reserve and production uncertainty, JV and acquisition execution, and access to capital. The filing provides no formal earnings or production guidance beyond the capital program and stated production expectations.
Most important facts for investors to verify
- Whether Elk Hills delivers the projected annualized synergies and incremental operating cash flow, and whether production trends meet management’s expectations.
- Available liquidity after considering the revolver’s minimum-liquidity condition, restricted cash, capital spending and JV distribution or redemption obligations.
- Debt repayment and refinancing capacity, including the 2021–2022 maturities and the 2017 Credit Agreement’s springing-maturity provision.
- How commodity prices, hedge settlements and sold-put exposure affect realized prices and operating cash flow.
- Whether the remaining 2018 capital program stays within the $720–$750 million range and is funded without materially increasing debt.