California Resources Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. CRC is a California-focused oil and gas producer expanding into carbon capture and storage (CCS) and carbon management. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total operating revenues | $460 | $1,125 | $2,075 | $2,025 |
| Operating income (loss) | $(15) | $591 | $525 | $680 |
| Net income (loss) | $(22) | $426 | $376 | $441 |
| Diluted EPS | $(0.32) | $5.58 | $5.18 | $5.62 |
| Cash from operating activities | $104 | $235 | $522 | $576 |
| Capital investments | $33 | $107 | $119 | $304 |
- Revenue and earnings: Q3 oil, natural gas and NGL sales were $510, up from $447 in Q2 2023, reflecting improved realized prices. However, a $204 derivative loss (including fair-value changes and cash settlements) drove the Q3 operating loss. For the nine-month period, operating revenue rose modestly despite lower oil and NGL sales, principally because derivative losses narrowed versus 2022 and purchased-gas marketing revenue increased.
- Cash flow: Nine-month operating cash flow declined $54 year over year, primarily due to lower realized oil prices and production. Nine-month investing cash use was $133, and financing cash use was $217, including $143 of share repurchases and $59 of dividends.
- Production and costs: Average net production was 85 MBoe/d in Q3, versus 91 MBoe/d in Q3 2022. Nine-month production averaged 87 MBoe/d, down 4 MBoe/d year over year. Operating costs were $26.80/Boe for the nine months, compared with $23.71/Boe, reflecting higher energy and maintenance costs and lower volumes.
- Balance sheet and liquidity: Cash was $479 at September 30. Long-term debt, net, was $589; the $595 face amount of senior notes bears 7.125% interest and matures February 2026. The revolving facility had no borrowings; $148 of letters of credit left $479 available. Reported liquidity was $958. Current assets of $929 exceeded current liabilities of $694. CRC reported compliance with debt covenants and no variable-rate debt outstanding.
- Derivatives: Commodity derivatives had a net fair-value liability of $138 at quarter-end. The program is intended to mitigate commodity-price volatility, but derivative results can create substantial earnings swings.
Changes, outlook and management commentary
- Compared with Q3 2022, Q3 2023 oil and gas sales were lower and derivative results shifted from a $243 gain to a $204 loss. The prior-year quarter’s results were also affected by unusually favorable derivative gains. Nine-month oil benchmark prices and production were lower than in 2022.
- CRC reduced headcount by 75 in August 2023 and recorded $10 of severance charges over the first nine months. Management expects the restructuring and related efficiency initiatives to generate at least $55 of annualized operating and overhead savings.
- Management forecast 2023 capital investment of $185–$210, including $155–$170 for oil and gas operations and $5–$10 for carbon management. It described the program as responsive to commodity prices and focused on high-return workovers and facilities projects. No specific earnings or production guidance is provided in the supplied filing text.
- Management said current liquidity should be sufficient for obligations over the next 12 months and expects operating cash flow, at current commodity prices and planned spending, to support core assets and financial flexibility. It is evaluating refinancing options for the 2026 notes and separate financing for carbon management.
- After quarter-end, the revolver commitment increased to $630 and its borrowing base was reaffirmed at $1.2 billion. CRC repurchased $30 of senior notes in October; management reported $565 of principal remaining after those repurchases. On November 1, the board increased the anticipated annual dividend to $1.24 per share, with a $0.31 quarterly dividend declared, subject to the stated payment terms and future board determinations.
- CCS projects remain in early development. Brookfield committed an initial $500 to jointly approved CCS projects through the Carbon TerraVault JV, in which CRC holds 51%; project execution, financing, permits, incentives and commercial agreements remain important uncertainties.
Risks, contingencies and unusual items
- Commodity prices, hedge settlements and fair-value movements can materially affect cash flow and earnings. Natural gas prices also affect CRC’s power generation and operating costs.
- CRC is discussing water-injection pressure requirements with CalGEM and the City of Long Beach. A final requirement to reduce pressure could lower Wilmington Field production and reserves.
- A September 2023 CEQA petition challenges approvals for Long Beach plans and seeks to halt covered activities pending environmental review. CRC intends to defend the matter; the outcome is uncertain.
- California AB 1167, signed in October 2023, imposes additional financial-assurance requirements on certain well and facility acquisitions. CRC was assessing the impact; the law could delay or increase the cost of acquisitions or dispositions.
- CRC recorded a $12 liability for ongoing maintenance associated with a dispute over decommissioning obligations for offshore platforms. The filing says reserves for other outstanding claims were not material, but reasonably possible losses beyond reserves could not be accurately determined.
- California climate-disclosure laws enacted in October 2023 require emissions and climate-risk disclosures on future schedules. CRC also cites regulatory, environmental, operational, financing and CCS-development risks.
Important facts for investors to verify
- How much of the Q3 derivative loss was noncash fair-value movement versus cash settlement, and how hedge positions affect forward-period realizations.
- Whether production stabilizes and operating costs per Boe moderate amid natural declines, maintenance spending and California energy costs.
- Progress toward the forecast $55 annualized savings and delivery of the $185–$210 2023 capital program.
- Plans and financing terms for refinancing the remaining senior notes due in 2026, and the effect of dividends and repurchases on liquidity.
- Regulatory and litigation outcomes affecting Wilmington injection operations, Long Beach plans and California asset transactions, including AB 1167 implementation.
- CCS project milestones, Brookfield funding conditions, required permits, customer agreements and the ability to obtain separate project financing.