EUR 850.00 For Business Accounts Only

Morningstar | California Resources Still Conserving Capital; Small Sell-Down to Generate $168 Million

After incorporating California Resources' first-quarter operating and financial results, we have slightly reduced our fair estimate to $15 per share. Our no-moat rating is unchanged.

As a reminder, the firm delivered production of 133 thousand barrels of oil equivalent per day in the first quarter, which was 8% higher year over year but 2% lower sequentially. This compares with our forecast of 136 mboe/d and is within the previous guidance range of 132-137 mboe/d, albeit at the lower end. The decline reflects a cautious start to the year, with internally funded capital deployment falling 40% sequentially to $104 million. The firm set out to keep its production flat this year with a budget of $300 million-$385 million, which is half of what it spent in the prior year. So far, that goal hasn’t changed, even though crude prices are about $15 a barrel higher than they were at the start of the year. Management is planning for further declines in the second quarter, as the first-quarter output level matches the high end of new guidance. However, California Resources tends to respond very dynamically to changes in commodity prices, and we would not rule out an uptick in spending (and production) if Brent crude stays above $70/bbl.

The firm also announced that is has sold a 50% working interest in its Lost Hills field for $168 million in cash, with a carry on a 200-well development program there. This arrangement provides cash to help repair California Resources’ balance sheet but leaves the firm with a sizable stake in the asset, with a third party paying the initial development costs. Management is establishing a record of bite-size deals that downsize the portfolio, generating cash and incremental production. The strategy works, and we expect to see more deals. The firm’s financial health remains precarious, though, and it will be several years before its leverage is aligned with peers.