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California Resources Back In Growth Mode - Our Thoughts On The Acquisition


  • California Resources announced an acquisition to buy the remaining interest of the Elk Hills play from Chevron.
  • The acquisition was the least execution risk venue CRC could take, and because of the market's prior concern over potential capital allocation issues, this was a bullish deal.
  • CRC also increased capex, which saw us boost production average for 2018 higher.
  • This deal ultimately allows CRC to return into growth mode, and with the higher operating leverage now to movements in oil prices, the equity will reflect that.

20-Second Analysis

This boosted free cash flow by ~$60 million in 2018. This new flush production of ~13k boe/d will allow California Resources (CRC) to realize higher Brent pricing than the current hedge price of around ~$60/bbl. The acquisition was the least execution risk venue CRC could take, and because it boosts EBITDA and FCF, the deal increased the base case implied share price from $27.19 to $43.33 using $70/bbl Brent. Overall, the deal was positive.

Breakdown of the Deal

CRC bought ~13k boe/d of production, 55% of which was liquid, from acreages that CRC already owned a ~78% to ~80% interest in.

The deal price was $460 million in cash + 2.85 million shares in equity (~$51 million) for a total price tag of around ~$511 million.

This was probably the lowest risk deal CRC could have done using that cash. The deal metric is not out of whack with the price per flowing boe/d around ~$39.3k, which is slightly lower than where CRC trades today on a per flowing boe/d basis. The multiple paid was around ~5x cash flow.

On a pro-forma basis, using our $70/bbl price deck, the free cash flow increases from $159 million to $221 million or an increase of $62 million. In addition, the probability-weighted price target increases from $92 per share to $122 per share.

The reason why FCF didn't increase by the deal cash flow is that CRC revised higher capex plans for 2018 by ~$100 million. This has also raised our production guidance from ~126k boe/d to ~141k boe/d, or an increase of 15k boe/d (13k boe/d of that is from the deal).


The major positives of this deal are that it is a very low-risk deal in nature. A roll-up of your own assets will always be deemed much safer

This article was written by

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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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