California Resources Corp quarterly report, Q2 FY2023

California Resources Corporation — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated financial statements. CRC is a California-focused oil and gas producer expanding into carbon management and carbon capture and storage (CCS).

Financial performance and operating metrics

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total operating revenues	$591 million	$747 million	$1,615 million	$900 million
Operating income	$147 million	$278 million	$540 million	$89 million
Net income	$97 million	$190 million	$398 million	$15 million
Diluted EPS	$1.35	$2.41	$5.47	$0.19
Operating cash flow	$108 million	$181 million	$418 million	$341 million
Capital investments	$39 million	$98 million	$86 million	$197 million

Q2 operating and net income margins were approximately 25% and 16%, respectively, based on reported revenue. Six-month margins were approximately 33% and 25%. These are simple calculations from reported amounts, not company-presented non-GAAP measures.

Q2 oil, natural gas and NGL sales were $447 million, down from $718 million a year earlier. The company reported a $31 million derivative gain in Q2 2023 versus a $100 million derivative loss in Q2 2022.
For the first half, commodity derivative results swung to a $73 million gain from a $662 million loss in 2022. The 2023 gain included $201 million of non-cash fair-value gains, partly offset by $128 million of net cash settlement payments.
Average net production was 86 thousand Boe/d in Q2, versus 90 thousand Boe/d in Q2 2022; first-half average production was 88 thousand Boe/d, down from 90 thousand Boe/d.
First-half realized oil price including derivative settlements was $63.35/Bbl, versus $61.71/Bbl in 2022; realized NGL price was $50.88/Bbl, versus $72.57/Bbl. First-half natural gas realized price was $12.44/Mcf, versus $6.51/Mcf including settlements.

Balance sheet, liquidity and capital returns

At June 30, 2023, cash was $448 million, total current assets $867 million and current liabilities $582 million. Working capital was approximately $285 million.
Long-term debt, net, was $593 million, consisting of $600 million of 7.125% senior notes due February 2026, net of issuance costs. No revolving-facility borrowings or variable-rate debt were outstanding.
The amended revolving credit facility has a $627 million commitment, with $148 million of letters of credit and $479 million available. Reported total liquidity was $927 million. Its borrowing base was reaffirmed at $1.2 billion; the facility matures July 2027, subject to a springing maturity in August 2025 if senior notes remain outstanding.
Operating cash flow for the first half was $418 million. Cash used in investing was $105 million and cash used in financing was $172 million. Cash increased $141 million from year-end 2022 to $448 million.
CRC spent $123 million on share repurchases and $40 million on dividends in the first half. It had $517 million remaining under the $1.1 billion repurchase authorization through June 30, 2024. The quarterly dividend was $0.2825 per share; a further dividend at that rate was declared July 28, 2023.

Material changes and management commentary

Compared with Q2 2022, revenue fell 21% and net income fell 49%, primarily amid lower oil and NGL sales and weaker commodity pricing; derivative results also differed materially year over year. First-half net income rose to $398 million from $15 million, substantially reflecting the derivative-result swing and the release of a Lost Hills tax valuation allowance.
First-half operating cash flow increased $77 million year over year, which management attributed mainly to higher realized natural gas prices and stronger marketing margins, partly offset by lower production and higher operating input costs.
First-half operating costs were $440 million versus $372 million. Management cited higher energy costs, downhole maintenance and lower production volumes; G&A rose to $136 million from $104 million, reflecting compensation, certain accelerated vesting, stock awards and higher IT spending.
The amended credit facility extended maturity, increased permitted restricted payments and certain investments, expanded letter-of-credit capacity and released liens on certain assets, including the Elk Hills power plant.
Management expects 2023 capital investment of $200–$245 million, weighted toward the second half. It expects operating cash flow at current commodity prices to support the plan and says liquidity is sufficient for obligations over the next 12 months. CRC continues to evaluate refinancing its senior notes and separate financing for carbon management.

Outlook, risks and contingencies

Commodity prices and production are key uncertainties. CRC’s oil hedges reduce some price exposure but can limit realized upside; at June 30, derivative positions had a net fair-value liability of $18 million.
California permitting remains a constraint: CalGEM had issued only a limited number of new production-well permits since December 2022, and CRC said existing permits would allow a modified program but likely not offset projected oil declines.
CRC is discussing Wilmington Field water-injection pressure requirements with CalGEM and the City of Long Beach. If pressure reductions are required and upheld, CRC expects a material reduction could decrease field production and reserves.
Management reported relatively flat input pricing in 2023, but labor and electricity costs rose and vendors had not reduced prices for certain materials. Moderate price increases were expected for some contracts to be renegotiated in the second half.
CCS and carbon-management projects remain at early stages and require development, financing, regulatory approvals and commercial agreements. CRC holds a 51% equity-method interest in the Carbon TerraVault JV with Brookfield; Brookfield committed an initial $500 million for jointly approved CCS projects, subject to the JV terms and milestones.
Routine legal and environmental claims had reserves that were not material; possible losses beyond reserves could not be accurately determined. CRC is also challenging a BSEE order concerning offshore-platform decommissioning obligations associated with former lessee Oxy; cost-sharing arrangements may require ongoing maintenance payments.

Important facts for investors to verify

How much reported earnings and cash flow reflect commodity-derivative fair-value movements, settlements and unusually high California natural gas realizations.
Whether production declines, California permit availability and the Wilmington injection-pressure outcome alter the capital plan, reserves or production outlook.
Whether CRC achieves its $200–$245 million capital-investment plan while funding dividends, buybacks, debt refinancing and CCS development.
The timing, conditions and financing needs for Carbon TerraVault projects, including Brookfield funding milestones and the JV’s contingent put/call liability.
The status and potential financial impact of the offshore decommissioning dispute and other claims for which reasonably possible excess losses are not quantified.