EUR 850.00 For Business Accounts Only

Morningstar | California Resources Produces Oil and Natural Gas in California

California Resources spun off from Occidental Petroleum in 2014. The company received all of its parent's assets in California, including property in the San Joaquin, Los Angeles, Ventura, and Sacramento basins. That mix includes significant exposure to both conventional and unconventional resources, but the unconventional part of the portfolio is less attractive at lower oil prices and activity is on hold for now.The firm's heavy reliance on enhanced oil recovery methods, such as waterfloods and steamfloods, is a boon during tough times because the associated production declines at a very moderate pace. California Resources' base decline rate is 10%-15% per year, which is much less than what shale-focused peers must contend with. As a result, it can make dramatic spending cuts without severely crimping its production, which is how it survived the 2015-16 downturn. However, production costs are typically much higher. Even after factoring in strong unit revenue due to its high oil mix, the company's margins are middling at best.The main rationale for separating from Occidental was to allow California Resources to reinvest its cash flows and accelerate its operations. But the firm also inherited a substantial chunk of the parent's debt, driving its leverage to exorbitant levels and reducing its tolerance for commodity price fluctuations. Though considerable progress has already been made, deleveraging will be a long and painful process. In the meantime, investors must contend with extreme volatility and sensitivity to shifting commodity prices.