California Resources Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. CRC is an independent oil and natural gas exploration and production company operating exclusively in California.
Financial and operating results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenues and other | $456 million | $626 million | $1,095 million | $1,837 million |
| Net income (loss) | $546 million | $(104) million | $356 million | $(272) million |
| Adjusted net loss (non-GAAP) | $(71) million | $(86) million | $(243) million | $(234) million |
| Adjusted EBITDAX (non-GAAP) | $164 million | $212 million | $448 million | $680 million |
| Operating cash flow | — | — | $145 million | $412 million |
| Capital investments in cash flow statement | — | — | $45 million | $323 million |
- Q3 and nine-month GAAP net income included pre-tax gains on early debt extinguishment of $660 million and $793 million, respectively. Excluding unusual and other specified items, the company reported adjusted net losses in both periods.
- Oil and gas net sales declined 18% in Q3 and 31% year over year for the first nine months. Average production fell 13% in Q3 to 138,000 Boe/day and 12% for the nine months to 142,000 Boe/day.
- Realized oil prices, including settled hedges, declined 10% in Q3 to $43.03/barrel and 19% for the nine months to $40.91/barrel. Production costs fell 14% in Q3 and 20% for the nine months; cost per Boe was $16.63 and $15.01, respectively.
- Interest and debt expense was $95 million in Q3 and $243 million for the nine months. The company recorded a $78 million income tax benefit for the nine months, primarily reflecting a change in the valuation allowance on deferred tax assets; it said it expected a tax loss for 2016 and had not recognized a tax benefit for that expected loss.
Balance sheet, debt and liquidity
- At September 30, cash was $10 million; current assets were $356 million and current liabilities $658 million. Equity was negative $493 million.
- Total debt principal was $5.247 billion, down from $6.143 billion at December 31, 2015. Debt fair value was estimated at $4.3 billion. The company reported $506 million of available revolving-credit capacity and was in compliance with credit-facility covenants at quarter-end.
- August transactions included a new $1 billion second-out term loan and repurchases of $1.415 billion principal amount of unsecured notes for $750 million. The repurchases produced a $660 million pre-tax gain and a stated net debt reduction of $625 million. The new loan bears floating interest at 10.375% plus LIBOR, subject to a 1% LIBOR floor.
- Operating cash flow for the first nine months fell to $145 million from $412 million, mainly due to lower commodity revenues and production, partly offset by lower costs. Cash used in investing was $31 million, compared with $542 million in the prior-year period. Financing activities used $116 million.
Changes, outlook and risks
- Management planned 2016 capital investment of approximately $75–$80 million, raised from an initial $50 million budget as prices improved. It said increased activity began contributing to production late in Q3 and expected further benefit in Q4, but cautioned that the program might not quickly reverse production declines. Estimated annual base decline was 10%–15%.
- Management said it did not expect to draw on the revolver for annual cash needs if commodity prices remained around then-current levels. If forward-strip prices and costs held, it expected to comply with senior bank covenants through at least Q1 2018. Lower prices, lower production, reduced borrowing capacity or covenant breaches could materially impair liquidity and debt repayment capacity.
- Commodity prices remained below prior-year levels despite a modest recovery. CRC cited price volatility, California operating concentration, production and reserve decline, regulatory and permitting exposure, market-access constraints and its substantial debt load as risks. It used commodity derivatives to support cash flow and covenant compliance; derivatives were not designated as accounting hedges, and the reported net derivative fair value was a $97 million liability.
- A purported class action by unsecured-note holders challenges the 2015 debt exchange and related liens, seeking declaratory relief and damages. CRC said it would defend the case; recorded reserves for lawsuits and claims were not material. CRC also reported that the IRS was examining its federal tax return for December 2014.
- The revolving-credit agreement restricts dividends and limits capital investment, requires application of certain asset-sale proceeds to debt, and includes financial and asset-coverage covenants. A portion of the second-out loan’s maturity may accelerate if specified 2020 or 2021 notes remain above $100 million before their maturities.
Important facts for investors to verify
- Whether operating cash flow and available borrowing capacity can support debt service and the planned capital program under weaker commodity-price scenarios.
- Progress against covenant tests, borrowing-base redeterminations and note balances relevant to the second-out loan’s potential accelerated maturity.
- Whether production trends improve following increased activity, and the effects of lower investment on reserves and future cash flows.
- Actual hedge coverage, settlement results and derivative counterparty exposure; hedge positions may change after quarter-end.
- Developments in the noteholder lawsuit and any material outcomes from tax examinations or other contingencies.
- The extent to which reported GAAP earnings depend on debt-repurchase gains and other unusual items; adjusted net loss and adjusted EBITDAX are non-GAAP measures.