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Friday, Mar 29, 2024

Oil Slump Survivor

Left on his own to lead oil and gas producer California Resources Corp., Chief Executive Todd Stevens has kept the new company afloat despite a minefield of circumstances that have destroyed larger and more established energy companies. But through a series of complex financial deals available to public companies, drastically cutting oil drilling activity and headcount, and partnering with private equity firms to help fund new wells, Stevens has navigated a path to survival, and hopefully profitability. Stevens took over Chatsworth-based California Resources after former parent company, energy giant Occidental Petroleum Corp. spun it off to focus all its resources on its Texas oilfields when it relocated from Westwood to Houston. “Occidental had made the decision – there was no turning back,” Stevens said. “We were spun off on the Monday after the Friday OPEC meeting – the Friday after Thanksgiving of 2014. They (OPEC) decided not to cut production. So, on the following Monday when the market opened, we were spun off. And I think Jim Cramer (host of “Mad Money”) on CNBC said it was one of the most ill-timed spinoffs you could have. We were given the balance sheet for a much higher oil and natural gas price environment.” That balance sheet included Occidental’s parting gift of nearly $7 billion of debt and bills, including rent on more than half of 2 million acres of oil and gas land and payments for a $200 million land acquisition. But CRC also inherited all of Occidental’s oil wells and land leases in California. Now halfway through this year, California Resources reports debt has been lowered to just over $5 billion and it is drilling and producing again with a potential $550 million investment from private equity. There have been “some very tough times,” Stevens said. “The good news is we have great assets and great people,” he explained. “We took advantage of some of the opportunities given to us to try to continue to deleverage the company, because the one overhang on the company is the balance sheet. And that’s something we can focus on and work through.” Drowning in debt Oil prices in the summer before California Resources struck out on its own began slipping from highs of around $105 a barrel in June 2014 to about $80 at the time of the spinoff five months later. One of the first actions Stevens took was to cut drilling and related expenses, including the money for it, employees and contractors. Drilling spending was downsized to $50 million from the $2 billion when the company debuted. Employee count was slashed to 1,500 employees and 2,000 contractors from more than 2,000 employees and 8,000 contractors. The company had to manage itself within its cash flow, Stevens explained. By owning its wells, it could stop production itself, and not have to continue paying as it would have if partnered with others who kept drilling. “We were in decent shape (in terms of cash flow),” Stevens said. “What we had to do was dial down our activity and our investing right away to catch up with where we knew prices were going, or where we could see prices were going. We had 26 rigs, and went down to four rigs, and then down to effectively no rigs drawing in the state.” Reducing those expenses enabled California Resources to get its maintenance capital dollars down to about $300 million from $1 billion, minus the money from its new partners, said Evan Calio, an analyst who follows the company for Morgan Stanley in New York. “That’s one of the main elements he has done that allowed the company to continue despite the significant debt burden,” Calio said. “I think that’s number one.” Paying back debt has been critical for California Resources’ stock prices, Calio explained, and while it’s still substantial, Stevens has been able to get the debt volume down by renegotiating covenants with banks that hold that debt, a move which has also lowered costs significantly. In October 2015, for instance, that debt was costing California Resources $83 million a quarter in interest payments and $330 million annually. In November, the company reduced its principal debt in a debt exchange that also increased the interest it paid. It traded new notes to note holders with a much lower face value. The move lowered total debt to $2.2 billion from the prior $2.8 billion. It also bought the company more time to pay off its debt. Despite that, stock prices plummeted 22 percent three days after the results of the offer were announced. Another significant debt-lowering tactic, one in which California Resources bought debt back at a discount, was a cash tender for unsecured notes – which lowered debt by $625 million, the largest of its strategies. Smaller maneuvers – a corporate note buyback at deep discounts and an equity-for-debt exchange – also shrunk debt significantly. But that last action cost the company, said David Meats, an equity analyst with Morningstar Inc. of Chicago. By issuing stock to buy back debt at a lower price, the company’s equity, and therefore its value, took a hit, he explained. “The balance sheet is improving in terms of debt – there’s less debt, the cash position doesn’t change – but equity goes down,” Meats said. “The loser in the zero-sum argument is other stockholders. The stock is being diluted.” In early 2016, oil prices bottomed out below $30 a barrel. But by the end of 2016, oil prices recovered slightly and California Resources reported a profitable year. The energy producer narrowed its loss to $77 million from $3.3 billion in the fourth quarter of 2016 compared to the same year-ago period. And it turned a profit of $279 million for the year versus a $3.6 billion loss the year prior. “Given what he (Stevens) inherited, he has been successful,” Calio said. Slippery future As if debt wasn’t enough, other issues threatened the company’s comeback. California Resources had to fend off an unsolicited “mini-tender” offer from Canadian investment company TRC Capital Corp., which hoped to buy up to 1.5 million shares at a 5.1 percent discount from the stock’s closing price of $11.45 a share on the day before the tender offer. The offer appeared a few weeks after CRC underwent a reverse stock split that raised stock price. Then, as the company was discussing forming joint ventures with private equity investors to help it fund new well development, Brexit happened. Investors got cold feet, temporarily, Stevens said, about possible impacts. Once uncertainties went away, California Resources was able to announce joint ventures with two private equity firms to help develop wells on land in its most prolific field in the San Joaquin Basin, where most of its wells are located. It also owns wells in the Los Angeles Basin, Ventura County and near Sacramento. Macquarie Infrastructure and Real Assets, an asset management arm of the Australian global banking and financial advisory firm Macquarie Group Ltd., will contribute $160 million over two years, and potentially up to $300 million toward well development. A second partner, Benefit Street Partners, the credit investment division of Providence Equity Partners, will invest up to $250 million in California Resources’ activities, with an initial $50 million directed toward drilling, and subsequent tranches up to $50 million over two years. Drilling with that venture is already underway, and California Resources is in its second, $50 million phase, Stevens said. Both arrangements deliver large returns on oil production to the investors up to a certain threshold, and then the amounts switch so California Resources receives most of the returns. With Benefit Street, Stevens said in his first-quarter earnings call it could take 18 months to 4 years to reach that threshold, depending on performance, commodity prices and project selection. Stevens is pursuing more partnerships, he said, because they are critical to California Resources reaching its goals by providing cash flow to support all its assets – oil, a power plant, a processing plant and 20,000 miles of pipelines. “They’re very important because it helps us bring forward that inventory from a financial perspective, but also helps us manage the volatility in our business – flexing our cash flow that we invest – whether we want to invest in the business, whether we want to buy down debt, or pay down debt in the marketplace. It’s that kind of flexibility that’s going to be important.” Meats at Morningstar said the ventures make perfect sense at this time for California Resources because the company is asset-rich but cash-poor. It can’t afford to develop those wells and bump up oil production on its own. But in a way, California Resources is giving away part of itself, he added. In its first-quarter earnings presentation, the company estimated planning scenarios with adjusted annual earnings by 2020 of about $1.7 billion. But a footnote said those predictions assumed oil prices of $55 a barrel this year and $65 a barrel going forward. According to Meats, the industry expects about $50 a barrel. Other indicators show the company remains challenged, he explained. California Resources’ debt-to-earnings ratio is still extremely high – nine times – by the industry metric, Meats said, while for other companies it’s two to three times. “Their leverage is astronomical; it’s as bad as it gets in the oil and gas segments,” he said. “It’s difficult to see how they could turn it around.” Stevens, however, keeps an upbeat tone. In the company’s first-quarter earnings call, this year’s capital plan for drilling and well completions is set to increase to $425 million from $400 million, with $150 million of it from the joint ventures and $120 million internally funded. In the second quarter, the company will add two drilling rigs to bring its total count to six. “I want to underscore that we have positive momentum, and we will continue to build on it,” Stevens said during the call. Stevens learned about leadership as a graduate of West Point and a former Army officer. Together, those experiences shaped his leadership styles. Later he worked in acquisition at Occidental until he was tapped to spin off California Resources. Compared to his military experiences, his current job has been “a different kind of challenge,” he explained. “When I started to think (leading up to the spin-off) of what it (becoming chief executive) entailed, I said, ‘Maybe I want to be chief financial officer,’” Stevens joked. But, he added, “I think you have to be willing to do it. It’s not about you. It’s about the people you see every day. I thought, ‘Yes, I can do this, and I’m willing to be this leader.’ It’s on us to be the point person.”

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