California Resources’ Bad Luck

Poor California Resources Corp. It just can’t seem to catch a break. The oil and gas producer, based in Chatsworth, has taken some vicious blows in its brief history. But about the time we thought maybe, just maybe, California Resources will be OK, along come new problems. One was Brexit. The decision by the United Kingdom a few weeks ago to exit the European Union kicked oil companies right in their derricks on the assumption that it may trigger a recession, and that means there’ll be less demand for oil. After the Brexit vote, no oil stock swooned more than California Resources. It slid 20 percent on June 27, probably because it is viewed as the weakest oil company. Prices rallied thereafter, but Brexit will do no favors, going forward, for California Resources. Then there was the mini-tender offer from a Canadian company a couple of weeks ago. Embarrassingly, the offering price was below the stock’s trading price at the time the offer was made. Management has recommended against this deal, but it’s a sign of corporate weakness when that kind of bid is made. Worse: Any takeover fight, if one ensues, will be a distraction for management and another unwanted expense. Just think back on what this company already has slogged through. In fact, right from the get-go it was troubled. That’s because it was saddled with $6 billion in debt when it was spun off from Occidental Petroleum Corp. in late 2014. You might recall that Occidental decamped from oil-hostile Los Angeles to energy-embracing Texas, rolling up its heavily regulated California oil assets into the new company and leaving it all behind – while sticking it with those billions of dollars in obligations. Back then, you could almost see a departing Oxy exec tug on his new, out-of-the-box rattlesnake-skin boots, and as he stands to take his final steps out of Westwood, he dons a cowboy hat and looks over his shoulder at the new California-marooned spin-off, laden with debt. “Good luck with all that, y’all,” he drawls. That troubled birth was quickly followed by true carnage in the oil market. The commodity that sold for more than $100 a barrel in the first half of 2014 plunged to less than half that amount through most of 2015 and continues at roughly $50 today. That roughed up all oil companies but particularly California Resources, which saw its stock fall 57 percent last year. Despite all that, California Resources’ managers have acquitted themselves well. For example, while most oil and gas producers trimmed their capital expenditures, California Resources made that expense shrivel like the Wicked Witch of the West. It went from $2.1 billion in 2014 to $401 million last year to a projected $50 million this year. While many observers might view this drastic cut as bad because it will diminish the company’s future prospects, you can argue that management made a wise decision to keep the company going now and worry about tomorrow tomorrow. And the dramatic reduction helped create a free cash flow of $87 million in the first quarter – pretty remarkable for a company under financial duress. Not only that, but the company has managed to reduce debt and chop other expenses as well. The cost of producing a barrel of oil equivalent, which was $18.23 in 2014, dropped to $16.30 last year and went down to $13.69 in the first quarter. Such a ratcheting-down in costs also implies the company could get by in an era of low oil prices. Like I said, you could look at those numbers and start to believe that California Resources might just emerge from the deep, dark woods, step into the light and be OK. Then along came Brexit. And the unwanted takeover offer. Can’t catch a break. Make no mistake, the company remains in peril. That debt is still a mountain and oil prices may stay low. Or go lower. Bankruptcy is a possibility. But at least management has done what it should in this circumstance. It’s given the company a chance to make it. Let’s hope it does make it. California Resources, as you can see on page 12 in this issue, is No. 21 on our list of Largest Public Companies in the Valley area. With a bit of good stewardship, it could become one of the Valley area’s top public companies. In fact, just a year ago, it was No. 8 on our list and had a market cap five times bigger than today. It’s not hard to imagine it could become a top 10 or even top five public company in the Valley area. But first, it’s going to need to catch a break. Charles Crumpley is editor and publisher of the San Fernando Valley Business Journal. He can be reached at [email protected].