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California Resources: Still Cashless EBITDAX


  • Cash flow at the parent company level dropped.
  • The consolidated statements overstate the cash resources available to the parent company to service debt.
  • Mezzanine Equity balance is still growing which implies larger future cash obligations for this preferred stock.
  • A thorough capital structure overhaul is probably necessary due to the lack of parent company cash flow from operating activities.
  • At best, common shareholders can expect a lot more shareholder dilution ahead.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

California Resources (CRC) management ballyhooed some accomplishments with key ratios. Everything that management was stated was true. It is always what is left unstated which is at least as important. Usually, that is in the details of the 10-K for investors to find on their own. This article will attempt to dig out some of those details for investors to make up their own minds about this investment. It was particularly interesting that cash flow at the parent company level declined as consolidated EBITDAX climbed.

Joint Ventures

The joint ventures have commitments to the partners that do not show as company expenses. Yet, these commitments result in less cash available for California Resources to use for debt reduction.

Source: California Resources Corporation 10-K For Fiscal Year 2019

It should be especially noted that the mezzanine equity, which common shareholders should count as debt for their purposes, is still growing. There are a cash payment and an in-kind payment combination. It has a rather expensive after tax cost to shareholders that probably sops up any (or at least most and a significant amount) consolidated cash flow attributable to that joint venture at the current time.

Source: California Resources Corporation 10-K For Fiscal Year 2019

To further complete the overall picture, the joint ventures are shown above as the "Non-Guarantor Subsidiaries" and show relatively few assets. There is every possibility that this company has joint ventured the best prospects the company has. That may "shut" any possibility of the parent companies receiving cash flow from the more profitable parts of the company for the foreseeable future. Therefore, profits and cash flows will take a "hit" until such as time as management can recapture a greater interest in the partnership cash flows.

Given the growing Mezzanine Equity shown above, that recapture could be a

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This article was written by

Long Player profile picture

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.

He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

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Comments (205)

Long Player profile picture
Looks like the curtain is beginning to fall on this act.
Monsieur Greenbubbles profile picture
Thinking out loud- With California under a statewide shelter-in-place order, there will be a flood of business bankruptcies unseen in history. I would imagine the gov. is going to have to do something like pause them all in a sort of blanket force majeure. It could buy CRC some time if their situation gets dire. Criticism welcome.
Long Player profile picture
This is definitely a company that will be allowed to keep going. It provides a very necessary resource for living.
Raw Energy profile picture
Bankruptcies are governed by Federal law and subject to the jurisdiction of the US District Courts' BK division.. Force majeure applies to contracts only, so general conditions are not entitled to protection without a contract between two parties... and then the term is usually included in the contract and interpreted in accordance with what the contract says.

Remember, too, that BK courts are there primarily for the benefit of creditors, not owners. Cos. like CRC whose business can continue will do so ... just with a new shareholder base.
Monsieur Greenbubbles profile picture
That is another angle and I agree. My point is no bankruptcies are going to happen for a long while. A company like CRC who should go bankrupt at $25 oil, will not.
Very unusual action in CRC common today given the canceled bond tender and the overall macro event. CRC is the only green stock on my dashboard.

Anyone care to offer up a reason?

ArmchairHero profile picture
unwind pair trade I think
Structured Returns profile picture
Probably someone short getting margin called on their longs and having to cover a material position here.
Structured Returns profile picture
APRN also up massively, likely the same forces at work.
ArmchairHero profile picture
Correct me if I'm wrong, with respect to the SPR oil buys announcement... from what I gather, it seems the type of crude oil that SPR buys matches with what CRC produces? Not typical shale oil...
Long Player profile picture
CRC produces different types of oil
Crashbuyer profile picture
IMO the success or failure of CRC's swap offer now on the table determines the timing sooner or later of CRC's filing by pre-pack or otherwise Hard to get success on a swap offer if there is perception filing is inevitable and there is such a perception (now) due to oil price alone Hard to get a pre-pack on such a nominally large and complicated company with this number of stakeholders and with so many different opinions on when and how oil prices (will) recover Massively dilutive merger can be salvation in theory (only) but who is the savior (for real)?
Why would swap be harder if expectation is of a near-term CH-11?

I'd think the opposite - if expecting a CH-11, everyone would want to jump ahead of the line.
Truly remarkable. There is a really strange scenario where this meltdown (if and only if temporary) is the best thing that could have happened.
Don't think so. Hard decisions were made (by Russia & Saudis) that won't be easily or quickly reversed.

Investing world knows this, and is why oil names are getting hammered, hard, across the board.

Unfortunately, CRC did not hedge enough of their production - they took the gamble that spot would improve, and will now pay the price.

I'd like to think this works out - I'd like to think the company is buying back oodles of 2L at 10% of par. But I doubt it. They had chances to buy back in the 20's, and mostly passed. I don't think they have the cash-flow, to be honest.

Meanwhile, now there's real risk of the RBL being reduced.

What are their options?
IMHO, they should cancel the exchanges, and file a pre-pack - 2L gets the equity. Unsecured & current equity wiped out.
I was thinking the samething...get a much higher % of 2L’s tendering...maybe use any cash they can get there hands on to buy as many as possible.

Need to sell assets asap or monetize the rest of Elks royalty

I would highly consider selling property across the entire portfolio not just Huntington, sell midstream, maybe a lease back on power plant...

Sell the entire LA Basin if they can

Yes they will sell at discount but so what - bonds are at discount and right now the only game in town is too sell assets to take out debt.

Yes they will incur P and L damage but at $30 oil who cares...

If they can swap assets for debt then CRC can live for another day cause they can reduce Cap Ex to practically nothing and wait till JV’s revert...smaller company for sure but if Shale is decimated they can survive and come out on the other side leaner and take advantage of the price swing back up.

SA and Russia ain’t gonna live on $30 oil for that long and virus will it last forever. There will another side just sell assets to get there...even at discount.
Several multi-million 2L bonds trades at less than 10% of par.

At that rate, CRC could buy-back all the remaining (non exchanged) 2L for under $75 million.

One has to hope some of those buys are by CRC.
Is this time different from the last price crash, only president Trump would know. I think President Trump was right, this covid-19 is a "...hoax". And HHS secretary just said on CNBC that "The fundamentals of this economy are 'unbelievable'". If even the secretary of HHS thinks the risk of this virus is low, then let dive in and buy, buy, buy, like Jim Cramer used to shout at CNBC.
So patience will pay off. At the same time, I am running out of bullets to buy.
Bizarre situation if you’re a 2L holder now. Three choices. 1. Hold and hope for a recovery down to 5th in capital stack (requires accepting 100% downside) 2. Sell in open market at pennies on the dollar. 3. Tender into and uptiered 1.75 that will likely immediately trade at a discount. If I was a 2L holder I’d sell and move on. But only buyers are likely those who will then uptier. The tender subscription should increase by a good amount. But then again maybe the best bet is just to hold and hope. Don’t see much possibility of credit markets holding up.
Best deal was the royalty swap.

Kicking myself for not trying to slide in.
ArmchairHero profile picture
Recovery is more likely at 1.75, although not much from 2L but definitely an improvement at least, 1L coverage will be ~3.6B. Just proved reserves maybe value ~3.4B at today's spot price. Swap is the better option than hold, if belief that this company has high quality of assets left.

Another hope would be a takeover from a steady major... Chevron? Merger with the other Cali firms?
I agree with all of that. If you’re CRC you have two options after tender closes. Sell real estate for what you can before may 1 and hope your borrowing base isn’t killed and supported by the banks in the tender. Or merge with berry or someone like that at $10 share or so. Tough pill to swallow for management to merge/be acquired but without doing one or the other they may be forced to file
Now what do they do?

Does it make sense to even proceed with the exchanges?

"Its not like we're in a $30's Brent market"....well, now we are.

Forget common. How to save some value for the 2L?
Alex Hardman profile picture
Drop there capital budget to nothing but necessary maintenance and reinvest the savings into the cheaper bonds/term loans. And sell that real estate or put it up as physical collateral if the RBLs aren't against it. It seems currently, RBLs use reserves mainly for the collateral?
Agree on all counts. I think land is likely not liened by RBL, but don't know.

However, they are likely to proceed with that plan. For whatever reason, oil companies just keep drilling - even at a loss.
ArmchairHero profile picture
gotta proceed, buys them a bit more time. every bit of haircut, less expense helps going forward.

hope for a merger, acquisition, and sell off assets to the bone

and dilute what's left of the common already... what a lost opp not doing so with a much higher SP, in the name of 'protecting shareholder value'... irony is by not doing so you've killed the shareholder as we see now.
Krypto profile picture
I suppose the price action in CRC makes it obvious but a fine company run by an excellent leader cannot overcome this unless the price of oil somehow recovers quickly.

If the corona virus is contained in the mind of the public the rest of the market should benefit from low oil prices.
07 Mar. 2020
I must be crazy--But I feel that oil price has just hit the bottom.
Long Player profile picture
It is definitely overreacting to the situation. Generally a bug like this one has effects that last a month or two and then it is over with. This economic disruption business is just plain baloney.
The economic disruption isn't coming from direct impacts of the virus - but from the fear its inspiring.

Trust me - fighting with the wife furiously, who is convinced certain death awaits us. She's not alone. Fear is running rampant - grocery stores having to ration sales of water, soap, and toilet paper.

Fear feeds upon itself.

And plan a summer trip? My wife would smack me if I gave any suggestion of a flight, anywhere, in the next 3 months.

This will run its course, but the economic damage is real.
Long Player profile picture
What people have to realize is that this is basically a flu bug and like any flu bug the young and old are basically at risk. Sometimes other atypical at risk groups happen but that does not appear to be the case.
Krypto profile picture
Well, this is why I listen to @LongPlayer concerning CRC.

It is down over 13% after his negative article.

Now, I know there is no connection but he has consistently identified the dangers.
Flipper2058 profile picture

CRC stock is directly tied to its bonds. No serious investor (vs trader) is going to buy equity in a firm when its 2nd lien debt trades at $20. This debt HAS to rally for the common to. All the prayer and hopes for deals has to benefit the debt considerably or the common is dead. Those saying 6 months ago this was garbage are wishing they hadn’t.
Well the 2nd lien debt will mostly be gone after the tender exchange, and the stub that'll be leftover [~$350MM?] will then be primed and likely taken out at more than 80% discount. Will that help the equity?
Long Player profile picture
It did rally almost 80% and then along came the comments. But it fell right back. This thing is a traders paradise. The small float makes for a whole lot of fun for the crowd that knows what they are doing.
ArmchairHero profile picture
With the OPEC colossal failure I think the fat lady is about to sing for CRC, and many others in the oil space. There's just no way these dying companies can overcome this OPEC disaster PLUS coronavirus demand killer.
Flipper2058 profile picture
Long Player

“Mezzanine equity counted as debt”
Yes the accrual from the 13.75% preferred dividend causes the mezzanine equity to grow. The $750m deferred preferred is a senior claim on that asset which must be paid back. Crc 50% holding in common A only worth is above the mezzanine equity level, which likely is zero at $800m due. This is my understanding too.
Dudes like Seth Lowery claiming this can be monetized just ain’t getting it.

I read one of your posts that said Todd mentioning an asset sale or another deleveraging event before March 20th...when did he say that...cant seem to find that.

Also, you made a comment about Zell and I watched his interview and he was being very coy but it sure did seem like he was talking about CRC - I will bet he is investing in the stock, bonds and assets (he already did through a third part)

Flipper2058 profile picture

I misread (again ;-/) the asset sale comment, this is incorrect. It makes more sense they don't sell anything this year and wait for 2021 while trying to take out more junior debt cashless via tenders.
ArmchairHero profile picture
His JV is his investment... doubtful a smart money like Zell would touch the stock or even the bonds, unless as a pair trade maybe.
Flipper2058 profile picture
At $50 Brent negative gamma kicks in, where dealers that bought sold puts need to rehedge with futures.
CRC sold lots of puts in the $52-$53 area. They eat each $1 loss below that.
The hedge book is done hedging and not designed for this type fall. Sell fat premium puts is great until they are not.
Flipper2058 profile picture
Yes, last year out of 104 new drills, 15 were done internally. JVs rule more and more. Expect non-controlling (JVs) outflows to move way higher.
Commingled books and complete lack of Visibility separating them a true sign they are hiding the cash flow collapse internally.
The tender being a reasonable success is actually a poor sign for the firm. 2nd lien holders are willing to take 35% permanent haircuts to get into paper probably worth half that again when traded . Just to uptier .25 from 2nd to 1.75 lien. Wow.
The $750m preferred owned by Ares has a 3 year deferred feature. The rate in 13,75%. The common equity CRC owns and calls mezzanine equity looks like accounting gimmicks. Clearly the senior preferred claims owns the power plant at $750m.....unless someone (Lowery) assumes that power plant is worth well over $1b. Chances are it’s not worth the $750m other than Ares paid up for exclusive business.
Not that I expect they are doing so, but is there anything preventing the company from buying back more 2L right now? Like, can't do so while tender underway?

Roughly $750 Million in 2L left - at current trading prices, they could buy them all back for under $200 million.
Flipper2058 profile picture
This Elk Hills deal sold $27m to outside investors, but fully subscribed to 2nd lien holders. Why use any any cash when existing 2nd lien holders will bite onto anything?
Raw Energy profile picture
@bondsmoker - "is there anything preventing the company from buying back more 2L right now?"

The Restricted Payments basket in the loan dox. The covenant on minimum liquidity, a possible upcoming borrowing base reduction, the added requirement CRC going forward to pay $120 mm to Ares to "correct" its unpaid PIK distributions to Ares, etc., etc.
The latest tender has them bringing down debt close to ~$4.0b by end of this quarter and that also gets them interest savings of ~$60m per year. For second quarter, an interest savings $15m is going to be realized from this tender and from efficiencies another $12.5m (annual$50m). So cash flow increases by $27.5m per quarter from q2 onwards. Also end of this year or early next year one of the JVs is gong to revert adding another $80m in cash flow to CRC. These three items will add $50m + $60m + $80m = $190m of addtional cash flow from 2021. Also CRC has further delevering transactions in the pipeline. Real estate transaction is estimated to get ~$400m and mid stream monetiziations that management has been talking will get more. I think CRC will get the 1L taken care off by end of 2021 and then rest of the debt can be refinanced or rolled over. Apart from all this, I would look for any FCF to be used to buy back the 2L bonds and others not tendered.. The game is still on. If WTI continues all year in mid 40s, imagine what will happen to shale companies.. CRC can reduce capex to $100m and stay afloat using JV's capex but not shale companies.. think about it. Purposefully the author has not mentioned any of this in the article.
"Real estate transaction is estimated to get ~$400m" Which real-estate? Where is the valuation in any company report? Does this land currently generate any revenue?
Flipper2058 profile picture
Strip away mezzanine equity and this firm has a -$1b negative net worth. Now only -$200m after tender.
1,000 acres of beachfront purportedly. Someone please correct if I’m wrong. They should have moved that before the power plant.
Tim.Dallinger profile picture
@Long Player failed to highlight the important details of the royalty-tender deal by previously focusing only on the dilution. According to the early tender results, CRC just wiped $832M off the balance sheet. On March 20, full results will be released. In the energy space, where management teams are notoriously poor stewards of investor capital, this was an extremely creative deal where essentially no one got screwed. Stubbed 2L holders who cannot or will not tender moved lower in the debt stack. But no one was forced to tender.

Claiming management is already down the strategy road to reorganization with no proof is negligent and borderline libelous.
Long Player profile picture
Before you use such strong wording, please read the S&P take on this. Nothing at all negligent about a coercive deal. As S&P pointed out, this is only the beginning. Should it be successful, then the company goes to a "D" classification. They now regard a filing as a near certainly with the appropriate exceptions listed. If S&P think management is going down that road, that is their expertise.
Long Player profile picture

Comments7370 | + Follow

SP downgrades CRC to CC. "We will raise our rating on CRC if we no longer expect default to be a virtual certainty".

LOL....have a good day Dave.
24 Feb 2020, 03:24 PM


Comments334 | + Follow
Quote it all:

"The negative outlook reflects the possibility of holders of existing notes
exchanging into new securities at what we consider to be lower value than
originally promised. Should this occur, we will lower the issuer credit rating
to 'SD'.

We would lower the issuer credit rating upon completion of the debt exchange
or conventional default.

We could raise our ratings on CRC if we no longer expect default to be a virtual certainty. This could occur if the company comprehensively addresses its over-levered capital structure and upcoming debt maturities without utilizing an exchange we view as distressed."

How is this a surprise? There is swap on the table. Call it distressed/coercive or whatever you want, but it is axiomatic that this would result in these comments from a credit rating agency.
24 Feb 2020, 04:03 PM
LP - the "virtual certainty" of a default is referring the fact that S&P views the exchange itself as a form of default. As it was basically certain the exchange was going to happen, it was "virtually certain" a default would happen.

This does NOT mean S&P views a default, in the sense of a Chapter-11 filing, as certain.

I say this as you mentioned S&P viewed a filing as a near certainty. That is incorrect.

To repeat - S&P only viewed the exchange to be a near certainty. As S&P considers the exchange a form of default, it follows they view a default as a near certainty.
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