California Resources Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. CRC is a California-focused oil and natural gas exploration and production company. Unless noted otherwise, financial amounts are in millions of dollars.
Financial performance and position
- Revenue and operations: Oil and gas sales were $601, up 5% from $575 in Q1 2018. Total revenues and other, including derivative losses, were $690 versus $609. Average production rose 8% to 133 MBoe/d from 123 MBoe/d.
- Profitability: Operating income was $57, down from $108; net loss was $44 versus net income of $9. Net loss attributable to common stock was $67, or $1.38 per diluted share, compared with a $2 million loss, or $0.05 per share. Adjusted net income, a non-GAAP measure, was $31 versus $8; adjusted EBITDAX was $301 versus $250. Operating margin calculated as operating income divided by total revenues and other was approximately 8% versus 18%.
- Costs: Production costs increased to $233 from $212; general and administrative expense rose to $83 from $63. Production cost was $19.46/Boe versus $19.08/Boe, or $18.01/Boe versus $17.47/Boe excluding the reporting effects of PSC-type contracts. DD&A was $118 versus $119.
- Cash flow and investment: Operating cash flow was $158, down from $200. Investing cash outflow was $182, including $131 of capital investments and a $47 million increase in capital investment accruals. Financing provided $50, including $49 of net BSP JV contributions. Cash ended at $43, of which approximately $26 was restricted.
- Debt and liquidity: Total debt was $5,269, including $100 of current maturities; long-term debt was $5,169. Cash was $43 and total equity was negative $289. Revolver availability was approximately $256 before a $150 million month-end minimum liquidity requirement. CRC reported compliance with debt covenants.
- Other balance-sheet items: ARO liabilities were $490, up from $402, including an $87 million increase associated with new idle-well regulations. Adoption of lease accounting added approximately $66 million of right-of-use assets and lease liabilities at January 1, 2019; reported lease liabilities were $54 at quarter-end.
Material changes and drivers
- Higher production and natural gas prices supported oil and gas sales, partly offset by lower realized oil prices and lower NGL production. Oil production increased to 84 MBbl/d from 77; natural gas production rose to 202 MMcf/d from 182, while NGL production fell to 15 MBbl/d from 16.
- Commodity derivative losses increased to $89 from $38. Q1 2019 included a $103 million non-cash loss partly offset by $14 million of settlement proceeds; Q1 2018 included $31 million of settlement payments.
- Other revenue rose to $178 from $72, largely due to increased marketing and trading activity; related other expenses also increased, to $148 from $61.
- Interest and debt expense rose to $100 from $92. CRC repurchased $18 million principal amount of 8% second-lien notes for $14 million, recording a $6 million pretax gain.
- Operating cash flow declined despite higher production, mainly because working-capital changes reduced cash flow by $24 million, versus a $68 million increase in Q1 2018.
Outlook, risks and unusual items
- CRC’s 2019 internally funded capital program was $300–$385 million, subject to commodity prices. With JV funding, the company discussed a potential program of approximately $500 million. Planned investment emphasizes oil projects, drilling, workovers, facilities, and safety and environmental projects.
- Management said its 2019–2020 hedges were intended to protect downside while retaining substantial upside exposure; it cautioned that hedges may not meet their objectives. Disclosed Brent-based puts and put spreads provide protection down to price ranges of approximately $55–$60/bbl, with terms varying by period.
- On May 1, 2019, after quarter-end, CRC sold a 50% working interest and transferred operatorship in certain Lost Hills zones for consideration exceeding $200 million: approximately $168 million in cash plus a carried 200-well program through 2023 with an estimated minimum value of $35 million. Cash proceeds were used to repay the revolver.
- New California idle-well regulations drove the recorded ARO increase. CRC said related annual incremental cash expenditures were not expected to be material. The filing also identifies commodity-price volatility, debt and funding constraints, regulation, permitting, operational disruptions, reserve uncertainty, and JV execution as risks.
- Routine litigation and claims were disclosed; recorded reserves and reasonably possible losses beyond reserves were described as not material. CRC had no income-tax provision or benefit and maintained a full valuation allowance against net deferred tax assets.
Most important facts for investors to verify
- Whether the Lost Hills transaction and carried drilling program deliver the stated value, and how much revolver debt was repaid.
- Liquidity after the minimum-liquidity requirement, near-term debt maturities, and the large second-lien principal repayments scheduled for 2021–2022.
- Whether production growth and the proposed capital program can be funded while operating cash flow remains sensitive to oil prices and working capital.
- Hedge volumes, price floors and potential effects on realized prices and cash flow; management notes hedging protection is not assured.
- Future ARO estimates and costs as idle-well rules take effect, alongside the effect of the $87 million recorded increase.
- The sustainability and comparability of trading-related revenue and expenses, derivative-driven GAAP results, and non-GAAP adjusted measures.