California Resources Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. CRC is a California-focused oil and natural gas exploration and production company. Figures are in millions of dollars unless otherwise stated.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Oil and gas sales | $657 | $439 | $1,232 | $926 |
| Total revenues and other, including derivatives | $549 | $516 | $1,158 | $1,106 |
| Operating income | $11 | $41 | $119 | $156 |
| Net income (loss) attributable to common stock | $(82) | $(48) | $(84) | $5 |
| Diluted EPS | $(1.70) | $(1.13) | $(1.81) | $0.12 |
| Adjusted EBITDAX, non-GAAP | $245 | $161 | $495 | $361 |
| Operating cash flow | Not stated separately | Not stated separately | $234 | $120 |
- Operating margin, calculated as operating income divided by total revenues and other, was approximately 2.0% in Q2 versus 7.9% a year earlier; for the first half it was approximately 10.3% versus 14.1%.
- Q2 oil and gas sales rose 50%, principally on higher oil and NGL prices. Average production was 134 Mboe/day versus 129; first-half production averaged 129 Mboe/day versus 131.
- Reported results included commodity derivative losses of $167 in Q2 and $205 for the first half, compared with gains of $43 and $116 in the respective prior-year periods. First-half settled derivative payments were $99.
- Cash at June 30 was $42, including $23 restricted under JV agreements. Current assets were $559 versus current liabilities of $893.
- Long-term debt was $5,075, down from $5,306 at year-end 2017. The company reported approximately $550 of revolver availability before a $150 minimum-liquidity requirement, and compliance with debt covenants.
- Net cash used in investing was $807, including $327 of capital investments and $512 of acquisitions. Financing provided $595; cash increased by $22 to $42.
Material changes and significant transactions
- CRC acquired the remaining interests in the 47,000-acre Elk Hills unit from Chevron for approximately $518, comprising $462 cash, 2.85 million shares valued at $51, and assumed liabilities and adjustments. CRC now owns all interests in the unit. Management reported approximately $15 of annualized synergies implemented and expected to exceed its $20 target over 18 months.
- CRC formed the Ares midstream JV, contributing the Elk Hills power plant and gas-processing plant and receiving $750 gross proceeds ($747 net). ECR’s interests include redeemable preferred and common interests; CRC may have to fund a future redemption at specified amounts, plus accrued distributions and potentially a make-whole payment.
- CRC purchased a Bakersfield office building for $48.4. It expected approximately $4 of rental income in 2018 while the former owner remained a tenant.
- Debt repurchases reduced outstanding principal. CRC repurchased $143 principal of second-lien and 2024 notes in Q2 for $118 cash, recognizing a $24 gain; total first-half debt repurchases were $119 cash.
- Cash-settled stock compensation rose sharply with the share price: total company stock-based compensation was $29 in Q2 and $37 for the first half, versus $5 and $10 in the prior periods.
Outlook, risks and unusual items
- CRC raised its planned 2018 capital program to $650–$700, including approximately $100 or more of JV capital; its detailed current allocation totaled $675, including $575 internally funded. Plans remain subject to commodity prices and other developments.
- Management expected production growth in the second half and to exit 2018 above beginning-of-year levels, citing well performance, workovers and Elk Hills. It expected the Elk Hills acquisition to add over $100 of annual operating cash flow at then-current prices.
- Management said it was building 2019 hedges to protect downside without significantly limiting upside, but gave no assurance the hedges would be adequate. At June 30, commodity derivatives had a net fair-value liability of $200. In May, CRC entered interest-rate contracts covering $1.3 billion of variable-rate debt if one-month LIBOR exceeded 2.75% through May 2021.
- Key exposures include commodity-price volatility, high debt and interest costs, production and reserve uncertainty, California regulatory and environmental requirements, JV funding and redemption terms, and the ability to realize acquisition synergies. A 0.125 percentage-point change in variable rates would change annual interest expense by about $3, excluding rate derivatives.
- Management reported no material accrued litigation reserves and believed reasonably possible losses beyond reserves would not be material. It also reported no known material pending or threatened indemnity claims.
- ASC 606 adoption changed presentation of certain sales-related costs and increased reported revenue and expenses, but did not affect net income. CRC recorded no income-tax provision or benefit and maintained a full valuation allowance on net deferred tax assets.
Important facts for investors to verify
- Whether Elk Hills delivers the projected cash flow and synergies, and how much of the acquisition’s contribution is reflected in subsequent production and costs.
- Available revolver capacity after the minimum-liquidity requirement, covenant headroom, and the timing and terms of debt maturities and required principal repayments.
- The cash and economic effects of commodity and interest-rate derivatives, including settlement exposure and the balance between downside protection and surrendered upside.
- The timing, distributions, and potential redemption obligations associated with the Ares JV, as well as expected funding from BSP and MIRA.
- Execution of the $650–$700 capital program and whether production growth and operating cash flow can support it without increased borrowing or additional financing.