California Resources Corporation — Q2 2015 Form 10-Q
Business and period: Independent California-focused oil and natural gas exploration and production company. This filing covers the quarter and six months ended June 30, 2015. Comparisons with 2014 require caution: 2015 reflects CRC as a standalone company following its November 2014 spin-off, while 2014 results are for the pre-spin-off California business and include Occidental-related arrangements and expense allocations.
Financial and operating results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $634 million | $1,140 million | $1,211 million | $2,261 million |
| Net income (loss) | $(68) million | $246 million | $(168) million | $469 million |
| Diluted EPS | $(0.18) | $0.63 | $(0.44) | $1.21 |
| Adjusted EBITDAX | $270 million | $727 million | $468 million | $1,432 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $232 million | $1,236 million |
Oil and gas net sales fell 45% in Q2 and 47% in the first half. Lower commodity prices were the main driver, partly offset by higher oil volumes. Q2 daily production averaged 161,000 BOE, up from 156,000; first-half production averaged 163,000 BOE, up from 155,000. Oil production rose 7% in Q2 and 10% in the first half. Q2 realized prices fell year over year to $56.73/bbl for oil, $20.47/bbl for NGLs and $2.49/Mcf for gas.
Production costs declined to $16.59/BOE in Q2 from $19.03 and to $16.39/BOE in the first half from $19.02. DD&A also declined, partly because of fourth-quarter 2014 asset impairments lowering the DD&A rate. Interest and debt expense was $83 million in Q2 and $162 million in the first half, reflecting CRC’s post-spin-off debt structure. The reported income-tax benefits were $46 million for Q2 and $115 million for the first half.
For the six months, investing cash outflow was $440 million, including $228 million of capital investments and $203 million of changes in capital investment accruals. Financing cash inflow was $231 million; cash increased by $23 million to $37 million. At June 30, current assets were $656 million and current liabilities were $685 million.
Balance sheet, liquidity and capital structure
Total debt was $6.59 billion, including $590 million outstanding on the revolving facility and a $1.0 billion term loan; net long-term debt carrying value was $6.476 billion, with $50 million classified as current maturities. Cash was $37 million. CRC reported up to $697 million of additional revolving-facility borrowing availability after considering cash. Debt increased from $6.36 billion at year-end 2014. Senior notes total $5.0 billion, bearing 5%–6% interest and maturing in 2020, 2021 and 2024.
The credit agreement was amended in February 2015 to provide a temporary covenant period through December 31, 2016, with stepped leverage limits and a minimum asset coverage ratio of 1.05:1. Cash above $250 million must be applied to specified revolver repayments during that period. A covenant breach could permit acceleration of facility debt and trigger a default under the notes. The filing does not provide a clear measure of covenant headroom.
Outlook, commentary and risks
- CRC reduced its 2015 capital investment budget to $440 million from $2.1 billion in 2014, aiming to align spending with operating cash flow and prioritize higher-return, lower-decline projects. It reported $228 million of capital investments in the first half.
- Management said it expects operating cash flow and borrowings when needed to fund capital needs and dividends over at least the next 12 months. If weak commodity conditions persist, it intends to limit capital spending to expected operating cash flow and does not plan to accelerate production in that environment.
- Management is exploring asset monetizations, joint ventures and other options to reduce leverage, but gave no assurance that a transaction can be completed, or as to its timing, terms or size.
- Hedges covered portions of expected 2015 oil and gas production, including Q3 oil floors of $52.14/bbl for 70,000 barrels per day and Q4 oil collars with $61.25/bbl floors and $73.88/bbl ceilings for 40,000 barrels per day. Q2 and first-half results included $17 million and $20 million, respectively, of net derivative losses.
- Unusual items included $10 million of early-retirement and severance costs in the first half, plus hedge-related activity and rig-termination and other items in adjusted net loss reconciliations. GAAP net loss was $68 million for Q2 and $168 million for the first half; adjusted net loss was $51 million and $148 million, respectively.
- Key exposures include commodity prices and differentials, high leverage and refinancing/covenant risk, cash-flow sufficiency, California-focused operating and regulatory risks, water and well-stimulation restrictions, production and project execution, and the ability to monetize assets. CRC said accrued litigation and claim reserves were not material and reasonably possible losses above reserves were not expected to be material.
Most important facts for investors to verify
- Whether commodity prices and California crude differentials recover, and how these affect realized prices, cash flow and production economics.
- Actual covenant compliance and headroom, available revolver capacity, and the company’s ability to meet debt service and future term-loan installments.
- Whether the $440 million capital plan remains aligned with operating cash generation and whether lower investment affects production or reserves.
- Progress, if any, on asset sales, joint ventures or other deleveraging measures, including proceeds and effects on operations.
- Comparability of 2015 standalone results with 2014 pre-spin-off combined results, including changes in marketing channels, corporate costs and related-party activity.