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Oxy's Ex-California Unit Left High and Dry in Downturn

Copyright © 2021 Energy Intelligence Group

Frankly put, the spinoff of California Resources Corporation (CRC) from Occidental Petroleum at the end of 2014 could not have been more poorly timed. Executives with CRC have admitted as much, saying frequently that their business is built for a "$100 [oil] price world." Oxy initially toyed with the spinoff under just such a price scenario as a way to meet investor demands for more focused investments in the US Permian Basin, but it pressed ahead with those plans as oil prices faded in the second half of 2014 (EIF Dec.3'14). Oxy and CRC ultimately parted ways just as Opec dealt a crushing blow to global oil prices one year ago, and the California unit began life in an ominous environment saddled with more than $6 billion in debt. That debt was taken to pay Oxy a special one-time dividend and could have been reduced steadily from growing operating cash flows at $100 oil. But benchmark Brent crude instead continues to struggle to get back to $50 per barrel, leaving CRC with an epic trek ahead. Despite these myriad hurdles, the company has ratcheted down the spending to become free cash flow positive over the past two quarters, leaning on a portfolio dominated by steady, low-decline oil assets. This has allowed CRC to pare back its growing debt, but more drastic steps are required. Fortunately for CRC, the company's portfolio features a diversified set of conventional and unconventional oil and gas operations across 2.2 million net acres across California, as well as valuable midstream and power-generation assets. Management says it is open to a variety of moves that will allow it to de-lever, including joint ventures, upstream asset sales, the formation of a midstream master limited partnership or a midstream divestment. The company's natural gas-fired power plant, Elk Hills Power, could also be divested. "No. 1 on our list of priorities is our de-leveraging. We came out with a balance sheet that was built for a different price environment. We're proactively managing that, looking for opportunities to de-lever through our assets," Scott Espenshade, CRC's vice president of investor relations, told the recent IPAA investor conference in San Francisco. He added that the firm is targeting two major divestments in the near-term, with one expected by year end. By end-2016, the company is hoping to have culled $1.6 billion in proceeds, which it will use to pay down debt. The company has meanwhile suspended its 1¢ per share dividend -- a move that looks minor on the surface, but in an environment where every dollar is precious, the estimated $16 million in annual savings are coveted, says Wolfe Research analyst Paul Sankey. CRC has also slashed its workforce by about 15% compared to end-2014 to 1,700 employees, primarily through a voluntary retirement program. This year has forced Chief Executive Todd Stevens and the CRC management team to grapple with dramatically reduced cash flows and a $440 million capital expenditure budget that's just a fifth of its initial spending plans for 2015. CRC entered this year running 26 rigs but was down to three by end- September -- a level that will likely hold steady next year. On a positive note, Stevens said earlier this month that his firm will likely come in under its capex target for this year, but drill more wells and achieve higher production than originally expected. That's not to say, though, the reduced investment hasn't had an impact on output -- just as lower capex has had across the US oil patch (EIF Nov.4'15). CRC's output declined 2%, or 3,000 barrels of oil equivalent per day, between the second and third quarters of 2015, averaging 158,000 boe/d in the July-September period. Natural gas made up two-thirds of that decline. Fourth-quarter production should slide further, to 151,000-156,000 boe/d. The outlook for 2016 remains somewhat murky. Although the firm has yet to provide capex or production guidance for the year, management estimates it could keep production flat with a $500 million capex plan next year. One analyst with a US-based investment bank does not envision spending in 2016 rising that much next year, however, and with debt reduction a priority, production levels could decline further. So was the CRC spinoff a first-rate disaster? At this point, no. Even with the pummeling dealt to CRC's New York-listed shares over the past year, their 58% decline pales compared to the 80%-plus freefalls incurred at other debt-laden, small-cap US E&Ps. What's more, the combined market capitalization of Oxy and CRC, at $57.9 billion, is down just 12% one year out. Even Oxy's other cashed-up, diversified independent peers have been dealt declines closer to 30%-35% over that period. "CRC was the weak link and Oxy was glad it is out of its asset portfolio," Oppenheimer & Co. analyst Fadel Gheit tells EI Finance. Of course, surviving as a junk-rated, debt-riddled, oil-weighted US producer is hardly guaranteed, particularly as access to capital is expected to shrink next year (related). Ratings agency Standard & Poor's recently downgraded CRC further into junk territory to BB- and maintained a negative outlook. Stevens and his team have a long few months -- if not years -- ahead. California Resources Corp. by the Numbers ($ million) Q3'15 Q3'14 %Chg. Revenue $626 $1,092 -43% Net Income -104 188 -- Adjusted Net Income 212 662 -68 Cash, Cash Equivalents 4 -- -- Total Debt $6,345 $6,065 5 Oil Output ('000 b/d) 103 100 3 Gas Output (MMcf/d) 226 249 -9 Total Output ('000 boe/d) 158 160 -1% Source: CRC earnings report Click for larger version

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