EUR 850.00 For Business Accounts Only

Morningstar | California Resources Misses 2Q Estimates on Weaker Differentials

California Resources delivered production of 134 thousand barrels of oil equivalent per day in the second quarter, which was 9% higher sequentially and 4% higher year over year. This compares with previous guidance of 133-138 mboe/d. But due to weaker price realizations, the firm’s financial results were weaker than expected, with adjusted EBITDA and adjusted earnings per share coming in at $239 million and negative $0.29 respectively (below consensus estimates of $261 million and negative $0.22).

Due to its high financial leverage, we continue to view California Resources as an option on crude (it has the highest beta to oil prices in our upstream coverage). And at current prices, we see more downside than upside. U.S. shale is still the marginal producer in our global framework, and there are currently more than 100 more light tight oil rigs in service currently than is required, over the next few years, to keep global markets well supplied. We therefore believe that prices must decline eventually to prevent a potential shale surge that could otherwise overwhelm the market. Our long-term forecast, based on the marginal cost of shale development, is still $60 for Brent (18% below the current level).

We plan to incorporate the firm’s operating and financial results in our model shortly, but after this first look, our fair value estimate and no-moat rating remain unchanged.

Our forecast for declining oil prices, and the disproportionate negative impact on California Resources, is outlined in "Coping With Frothy Oil Prices."