EUR 850.00 For Business Accounts Only

Morningstar | California Resources Aims for Flat Volumes With 50% Less Capital Expenditures in 2019

We are raising our fair value estimate to $19 per share after the digesting California Resources' fourth-quarter financial and operating results. The firm is back on defense after the recent slide in commodity prices and is targeting internally funded capital expenditures of $300 million-$385 million in 2019 (about 50% below last year’s budget). But management is confident that it can keep volumes flat despite this steep cut, due to the low decline rates associated with the firm’s conventional and enhanced recovery assets. In fact, at current prices we think the firm’s operating cash flows will support further investment and see the potential for increased activity as the year goes on. In addition, there’s scope for further capital from joint ventures along similar lines to the deals with Benefit Street and Macquarie that the firm has already done. In short, we think the firm has the potential to do rather better than keeping production flat.

We still see the firm’s very high production costs as a huge disadvantage. Even after accounting for the firm’s very high oil mix, its margins are middling at best. But our primary concern over the past few years--the firm’s ability to withstand a downward price shock--has abated slightly. Since 2014 it has shaved off around $1 billion in net debt, materially improving its leverage ratios. These remain high, but we expect them to improve over time, even if crude prices do not recover from the current level (in our framework, further shale growth, coupled with OPEC’s reluctance to cut further than it already has, should keep a lid on global crude prices going forward). That’s because the aforementioned decline rate advantage makes it easier for management to balance cash flows with spending. In 2019, 10%-15% of the firm’s discretionary cash flow has been earmarked for further balance sheet improvements.