California Resources Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CRC is a California-focused oil and natural gas exploration and production company. The unaudited financial statements are presented on a going-concern basis, but the company reported substantial doubt about continuing as a going concern absent a successful restructuring.
Financial and operating results
| Metric | Q2 2020 | Six months 2020 |
|---|---|---|
| Total revenue | $276 million, down 58% from $653 million | $849 million, down 37% from $1.343 billion |
| Operating income (loss) | $(115) million | $(1.764) billion, including $1.736 billion of impairments |
| Net income (loss) attributable to common stock | $(271) million; $(5.47) per share | $(2.067) billion; $(41.84) per share |
| Adjusted EBITDAX, non-GAAP | $19 million, versus $255 million | $270 million, versus $556 million |
| Operating cash flow | Not separately stated for the quarter | $93 million, versus $272 million |
| Capital investment | $3 million of internally funded capital | $33 million, versus $271 million total consolidated investment |
Q2 oil and natural gas sales were $245 million versus $578 million a year earlier. Lower realized prices were the principal driver of the decline, with lower production also contributing. Average daily net production was 112 thousand Boe, down 13% year over year. Q2 production costs fell to $127 million from $230 million; reported production cost was $12.42 per Boe, compared with $19.62.
At June 30, cash was $126 million, including $21 million restricted; management described $105 million as available cash. Total debt was $5.083 billion, all classified as current, and total equity was negative $2.376 billion. Current assets were $403 million and current liabilities $5.759 billion. Debt’s estimated fair value was $1.2 billion against a $5.1 billion carrying value.
Changes, outlook and material developments
- Results were sharply affected by the COVID-19 demand shock and the oil supply surge associated with the Saudi Arabia-Russia price dispute. Average Q2 Brent was $33.27 per barrel versus $68.32 in Q2 2019.
- CRC recorded a $1.736 billion first-quarter impairment, primarily on proved oil and gas properties and unproved acreage. The charge reflected lower commodity-price assumptions and constrained development plans.
- Management cut internally funded capital spending to preserve facility integrity and safety. It expected to invest up to a further $20 million through year-end 2020 and anticipated production to decline at a moderate pace for the rest of the year at the reduced investment level.
- Cost reductions, shut-ins and reduced activity lowered the operating expense run rate to below $45 million per month, from a first-quarter average of $64 million. CRC reported that shut-ins reduced Q2 net production by about 5 thousand Boe per day.
- On July 15, 2020, after quarter-end, CRC filed for Chapter 11 protection and entered a Restructuring Support Agreement, amended July 24. The proposed restructuring includes up to approximately $483 million of senior DIP financing, a $650 million junior DIP facility, new financing upon emergence, new common stock and a $450 million equity rights offering. The proposed plan would provide no distribution to existing common stockholders; court approval was not assured.
- Both DIP facilities mature January 15, 2021 and impose liquidity covenants, including minimum liquidity requirements of $35 million at all times and $50 million over a rolling four-week period. CRC stated that cash, operating cash flow and DIP financing were expected to fund operations during the Chapter 11 cases, while warning of significant uncertainty.
- CRC missed interest payments on certain debt in May and June. The bankruptcy filing accelerated debt obligations, with creditor enforcement stayed under the Bankruptcy Code. CRC had also missed property tax payments in April.
- CRC’s NYSE-listed shares were delisted in July 2020 and began trading on the OTC Pink Market as CRCQQ. The company warned of reduced market liquidity.
Risks, contingencies and unusual items
- Key risks include failure to confirm or complete the proposed reorganization, inadequate liquidity, DIP covenant or milestone defaults, further commodity-price weakness, declining production and reserves, and disruption to customers, suppliers or employee retention.
- CRC monetized most crude oil hedges in March for approximately $63 million and had no company production hedges at June 30. It subsequently entered hedges through July 2021 to meet a DIP requirement covering at least 25% of expected crude production.
- Alpine suspended its development-JV funding after oil prices fell below a contractual threshold. CRC also reported a $20 million one-time pipeline deficiency payment in April.
- Ordinary-course litigation and claims were not material based on recorded reserves and management’s assessment; most pre-petition proceedings were subject to the bankruptcy stay, subject to exceptions.
Most important facts for investors to verify
- Bankruptcy Court approval, milestones and implementation of the restructuring plan, including the treatment of existing common stock and any alternative plan.
- Availability and compliance terms of DIP funding, actual liquidity, and the company’s ability to meet operating and bankruptcy-related cash needs.
- Commodity prices, hedge settlements and the effect of reduced capital spending and shut-ins on production, reserves and cash flow.
- Post-restructuring capital structure, debt recovery values and any accounting changes, including potential fresh-start accounting.
- Trading liquidity and market status of CRCQQ, and the status of the Ares JV settlement and Alpine JV funding.