10-K: California Resources Corporation Reports Full-Year 2023 Results, Announces Merger with Aera Energy

California Resources Corporation (CRC) reported its full-year 2023 financial results and announced a merger with Aera Energy, LLC, in an all-stock transaction.

Summary

• California Resources Corporation (CRC) reported its full-year 2023 results, highlighting operations exclusively within California.
• CRC is an independent oil and natural gas exploration and production company, and is also focused on carbon management through its Carbon TerraVault business.
• In 2023, CRC's average net production was 86 thousand barrels of oil equivalent per day (MBoe/d), with proved reserves totaling 377 MMBoe.
• The company faced challenges in obtaining new well permits from the California Geologic Energy Management Division (CalGEM) throughout 2023, impacting its development plans.
• CRC entered into a definitive agreement to merge with Aera Energy, LLC, in an all-stock transaction valued at approximately $2.1 billion, expected to close in the second half of 2024.
• The merger aims to create a larger-scale operation in California's energy sector, with CRC's existing stockholders expected to own approximately 77.1% of the combined company.
• CRC's financial results for 2023 included total operating revenues of $2.801 billion and a net income of $564 million.
• The company's carbon management business, Carbon TerraVault, is developing carbon capture and storage (CCS) projects, with draft permits received for a project at the Elk Hills field.
• CRC is also evaluating the feasibility of developing a carbon capture system for its 550-megawatt Elk Hills power plant (CalCapture).
• CRC's 2024 capital program ranges between $300 million and $340 million, focusing on oil and natural gas development, maintenance, carbon management projects, and corporate activities.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While the merger with Aera Energy and the focus on carbon management are positive developments, the permitting challenges, lower production volumes, and regulatory uncertainties in California create significant headwinds. The overall sentiment is cautiously optimistic, but with notable concerns.

Positives

• The merger with Aera Energy is expected to enhance CRC's scale and operational footprint in California.
• CRC has a strong focus on carbon management and is actively developing CCS projects, aligning with the global energy transition trend.
• The company has a large mineral acreage position in California, providing a significant resource base.
• CRC's proximity to California refineries gives it a competitive advantage in transportation costs.
• The company has a diversified portfolio of assets across multiple basins in California.
• CRC has a joint venture with Brookfield, providing financial support for carbon management projects.
• The company has a share repurchase program in place, with $747 million of remaining authorized capacity as of February 6, 2024.
• CRC has a dividend policy, with a total annual dividend of $1.24 per share, payable quarterly.
• The company has a strong focus on employee development, diversity, equity, and inclusion.
• CRC achieved exemplary safety performance in 2023, with a 99.9999% oil spill prevention rate and a workforce TRIR of 0.31.

Negatives

• CRC faced significant delays in obtaining new well permits from CalGEM in 2023, impacting its development plans and potentially reducing future production.
• The company experienced lower production volumes in 2023 compared to 2022, primarily due to natural decline and permitting delays.
• Realized prices for oil, NGLs, and natural gas were lower in 2023 compared to 2022, impacting revenue.
• CRC incurred a net loss from commodity derivatives of $12 million in 2023.
• The company's operations are concentrated exclusively in California, making it vulnerable to regional risks, including regulatory changes and natural disasters.
• CRC faces increasing activism against the oil and gas industry, which could lead to additional costs and operational restrictions.
• The company's carbon management business is in the early stages of development and faces operational, technological, and regulatory risks.
• CRC is subject to extensive government regulation, which could increase costs, restrict operations, and delay business plans.
• The company's ability to pay dividends and repurchase shares is subject to risks, including financial performance, liquidity, and restrictions under its debt agreements.

Risks

• Volatility in oil, natural gas, and NGL prices could materially and adversely affect CRC's financial condition, results of operations, cash flow, and ability to invest in its assets.
• The company's exclusive focus on California exposes it to risks associated with having operations concentrated in this geographic area, including regulatory changes, natural disasters, and regional market conditions.
• Delays or inability to obtain necessary permits for operations could materially and adversely affect CRC's business, operations, properties, results of operations, and financial condition.
• Recent and future actions by the State of California could reduce both the demand for and supply of oil and natural gas within the state, materially and adversely affecting CRC's business, results of operations, and financial condition.
• The development of CRC's carbon management business and CCS projects is subject to extensive government regulation, much of which is still being developed, and failure to comply with these requirements or obtain necessary permits could adversely affect the business.
• The Inflation Reduction Act could accelerate the transition to a low-carbon economy and impose new costs on CRC's operations.
• Changes in tax laws could adversely affect CRC's financial condition, results of operations, and cash flows.
• CRC's existing and future indebtedness may adversely affect its business and limit its financial flexibility.
• The company may not be able to generate sufficient cash to service all of its indebtedness and may be forced to take other actions to satisfy its obligations, which may not be successful.
• The trading price of CRC's common stock may decline, and investors may not be able to resell shares at prices equal to or greater than the price paid.
• The ownership position of certain stockholders limits other stockholders' ability to influence corporate matters and could affect the price of CRC's common stock.

Future Outlook

CRC anticipates generating sufficient operating cash flow to support its 2024 capital program, invest in core assets, and maintain financial flexibility. The company will continue to evaluate its financial position and consider adjusting its drilling program, returning cash to shareholders, repurchasing debt, advancing carbon management activities, or maintaining cash reserves. The Aera merger is expected to close in the second half of 2024, and CRC plans to increase its quarterly dividend post-closing, subject to Board approval.

Management Comments

• The document does not include specific quotes from management, but it references management's responsibility for establishing and maintaining internal control over financial reporting and evaluating the effectiveness of disclosure controls and procedures.

Industry Context

CRC's announcement is significant in the context of the ongoing energy transition and increasing regulatory scrutiny in California. The merger with Aera Energy positions CRC as a major player in the California oil and gas sector, while its focus on carbon management aligns with broader industry trends towards decarbonization. The challenges faced in obtaining permits highlight the complex regulatory environment in California, which is impacting the operations of oil and gas companies in the state.

Comparison to Industry Standards

• CRC's oil spill prevention rate of 99.9999% in 2023 is indicative of strong operational performance compared to industry standards.
• CRC's TRIR of 0.31 in 2023 suggests a commitment to safety that compares favorably with industry benchmarks.
• Compared to other major operators in California, such as Chevron, CRC's focus on carbon capture and storage (CCS) is relatively unique and positions it at the forefront of the energy transition within the state.
• The merger with Aera Energy will create a combined entity with a significant presence in California, comparable in scale to other large independent producers in the region.
• CRC's financial metrics, such as its debt-to-EBITDAX ratio and liquidity position, are generally in line with industry standards for independent exploration and production companies.
• Compared to other companies with CCS projects, such as ExxonMobil's LaBarge project in Wyoming or Occidental's Permian Basin projects, CRC's Carbon TerraVault is unique in its focus on California and its partnership model with Brookfield.
• CRC's dividend yield and share repurchase program are competitive within the industry, demonstrating a commitment to returning value to shareholders.

Management Changes

Legal Proceedings

• CRC is involved in ongoing litigation related to the Kern County EIR, which has impacted its ability to obtain permits in the county.
• The company is also involved in discussions with the City of Long Beach and CalGEM regarding injection well pressure gradients in the Wilmington Oil Field.
• CRC is appealing an order from the Bureau of Safety and Environmental Enforcement (BSEE) related to decommissioning obligations associated with two offshore platforms formerly owned by Occidental Petroleum Corporation (Oxy).

Related Party Transactions

• CRC entered into a joint venture with Brookfield for the development of its carbon management business (Carbon TerraVault JV).
• Brookfield has committed an initial $500 million to invest in CCS projects approved through the joint venture.
• CRC contributed rights to inject CO2 into the 26R reservoir in the Elk Hills field to the joint venture.
• CRC entered into a Management Services Agreement (MSA) with the Carbon TerraVault JV to provide administrative, operational, and commercial services.

Stakeholder Impact

• Shareholders: The Aera merger and CRC's financial performance will impact shareholder value. The company's dividend policy and share repurchase program are also relevant to shareholders.
• Employees: The document mentions a headcount reduction of approximately 75 employees in 2023 as part of organizational changes. The merger with Aera may have further implications for employees.
• Customers: CRC sells its products to marketers, California refineries, and other purchasers. Changes in production levels and commodity prices could impact customers.
• Suppliers: The company has relationships with various suppliers for goods and services. Inflation and supply chain disruptions could affect these relationships.
• Creditors: CRC has debt obligations, and its financial performance and ability to generate cash flow are important to creditors.

Next Steps

• CRC will continue to work towards closing the Aera Energy merger in the second half of 2024.
• The company will focus on obtaining necessary permits for its drilling program in Kern County and the Wilmington Oil Field.
• CRC will advance its carbon management projects, including seeking final Class VI permits for the CTV I 26R CCS project.
• The company will continue to evaluate its hedging strategy and capital allocation plans.
• CRC will monitor the progress of the referendum on Senate Bill No. 1137 and adapt its operations accordingly.
• The company will work to address CalGEM's concerns regarding CEQA compliance for permits in the Wilmington Oil Field.
• CRC will continue to engage with stakeholders on its sustainability initiatives and progress towards its 2045 Full-Scope Net Zero target.

Key Dates

Keywords

oil and natural gas exploration, production, carbon management, carbon capture and storage, CCS, energy transition, California operations, Aera Energy merger, joint venture, Carbon TerraVault, Elk Hills, San Joaquin Basin, Los Angeles Basin, Sacramento Basin, Ventura Basin, proved reserves, drilling permits, CalGEM, EPA Class VI permits, commodity prices, hedging, share repurchase program, dividend policy, sustainability, ESG