This week, Durig Capital looks for a third time at an oil and gas producer serving one of the biggest energy markets in the nation. California Resources Corp (NYSE:CRC) was reviewed in both June 2016 and May 2017. This California exploration and production company has continued to make strides in improving its balance sheet as well as enter into new, advantageous joint ventures. In addition, CRC recently closed on a deal where it acquired the remainder of the Elk Hills field, one of the most productive fields in the United States. The company’s first quarter results are also encouraging.
- Registered 25% year-over-year increase in adjusted EBITDAX.
- Generated cash flow from operations of $200 million, a 50% increase over Q1 2017.
- Q1 Production was above guidance midpoint range.
- Excellent interest coverage of 2.5x.
CRC was able to pay down an additional $95 million of principal on its second lien notes in early April. The company recently entered into a $750 million joint venture with Development Capital Resources / Ares Management (NYSE:ARES) that has added significant incremental capital with which the company has been able to further deleverage and put proceeds toward the Elk Hills acquisition. CRC’s 2021 bonds, couponed at 5.50%, are currently selling at a discount, giving them a competitive yield-to-maturity of 10.5%. Considering CRC’s recent developments, these 2021 bonds are ideal for additional weighting in Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio.
Latest CRC Developments
Durig Capital has reviewed California Resources Corporation on two different occasions, June 2016 and May 2017. Since the May 2017 review, CRC has continued to reduce debt, leverage its joint ventures and has completed two transactions in early 2018 that will help the company to turn the tide on the decreasing production from the past few years.
The company also recently released its quarterly results for the three months ending March 31, 2018. Some of the highlights of these results include:
- Generated adjusted EBITDAX of $250 million, an increase of 25% over Q1 2017, and an 8% sequential improvement over Q4 2017 Adjusted EBITDAX.
- Cash flow from operations for Q1 totaled $200 million compared to $133 million in Q1 2017, an increase of 50%.
- Adjusted EBITDAX margin increased from 39% to 41%. (If calculated under prior rules, Q1 2018 margin would have been 44%. New accounting rules now require transportation costs to be included as a cost item).
- Registered production of 123,000 BOE per day, which is above midpoint of guidance range.
Summary and Conclusion
California Resources Corporation continues to perform, now coming to a crossroads where the company’s production should begin to see meaningful increases, especially from its Elk Hills field. Deleveraging continues as CRC continues to pay down debt. Margins are improving and the company’s most recent joint venture with DCR / Ares Management has added significant incremental capital that CRC has used to pay down debt, as well as help fund the purchase of Elk Hills. With CRC providing energy to one of the biggest markets in the nation, the company’s products are certainly in demand. Interest coverage is also solid. With so many positives, and the 2021 bonds still selling at a discount, the, competitive 10.5% yield-to-maturity makes these notes an excellent candidate for additional weighting in Durig Capital’s Fixed Income Portfolio, FX2.
Issuer: California Resources Corporation
Ticker: NYSE:CRC
Bond Coupon: 5.5%
Maturity: 09/15/2021
Rating: Caa3 / CCC-
Pays: Semi-annually
Price: 86.31
Yield to Maturity: ~10.54%
Disclosure: Durig Capital and certain clients may hold positions in CRC’s September 2021 bonds.