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After The Q4 Disappointment, California Resources Remains A Buy If You Believe In Higher Oil Prices


  • CRC continues to be a buy only if you believe oil prices will be higher going forward.
  • We break down the bear, base, and bull case price targets.
  • While the quarter was a disappointment with the lack of clarity on production guidance, we estimate that more than 85% of the future value creation will come from higher oil.
  • CRC continues to be a high risk, high reward play on oil prices.

After California Resources' (CRC) Q4 earnings announcement, our big takeaway was that production guidance came in below what analysts expected. The 120k to 125k boe/d production guidance for Q1 was much lower than what everyone expected, and while given multiple opportunities to explain on the conference call, CEO Todd Stevens did a terrible job explaining why the guidance was so low.

We followed up our Q4 analysis with an article titled, "Everyone Has A Plan 'Till They Get Punched In The Mouth." The CEO could have said these 19 words, and the market might not have punished the stock as much:

We will increase production in the second half, we just want to be more comfortable with where prices are.

But things that are obvious to us may not be obvious to many, and while the lesson cost CRC $270 million in loss of market cap, we think the underlying fundamentals and premise for why we bought CRC have not changed.

CRC remains a highly levered bet on oil prices

The key thesis for why we bought CRC is our thesis that oil prices will move higher. And like all energy stocks, there's an inflection point where CRC shifts from bankruptcy to stable to thriving.

For equity investors, the bulk of the gains do not come in the "stable" phase. For debt investors, the bulk of the gains come from the stable phase.

Buying CRC's stock then is akin to having a call option on the "thriving" phase. For us, $25 per share, where CRC traded a month ago, was still in the stable phase. The ramp up in share price from $7 (when we wrote about it in September) to $25 was the inflection shift from bankruptcy to stable.

We said in our original write-up that Brent needs to

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This article was written by

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The largest oil and natural gas research service on Seeking Alpha.

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Analyst’s Disclosure: I am/we are long CRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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