CRC Consolidates Elk Hills Field

In April, California Resources Corp. purchased portions of the Elk Hills oil field from Chevron Corp. for $460 million and 2.85 million shares of the company’s stock. For CRC Chief Executive Todd Stevens, it represented a major land grab. “Consolidating full ownership of our flagship Elk Hills field has been a long-term objective and will maximize the value of Elk Hills and its integrated infrastructure together with surrounding fields,” he said in a conference call on May 3. “The acquisition allows us to bring the full weight of our expertise to bear with deep experience cultivated over the last 20 years of operating Elk Hills. We’ve already begun centralizing facilities and streamlining operations to reduce cost, expand margins, and most importantly increase cash flow.” CRC already owned most of the gigantic field, which accounts for more than half of California’s natural gas production. It’s located about 20 miles west of Bakersfield in Kern County. The total field covers 75 square miles. Last year, CRC produced about 53,000 barrels of oil equivalent per day from 3,000 wells at Elk Hills. The new portion CRC acquired in April produced 13,300 barrels of oil equivalent per day for Chevron. During the conference call, Steven estimated the acquisition would give CRC added cash flow of $100 million annually, assuming a price of $65 a barrel for benchmark Brent crude. However, since the spring prices have deteriorated to about $61 a barrel. But with oil prices always in flux, the Elk Hills acquisition makes sense for CRC from a logistical, operational and financial perspective. “This isn’t a transformative M&A, but it’s a smart transaction, and one where if presented with the opportunity to tie up 100 percent of your best asset, almost any smart company should and would do,” wrote Open Square Capital, an asset management firm based in Orange County, in a Seeking Alpha post. Economies of scale The Elk Hills acquisition fits nicely with several other CRC deals. In February, the company formed a joint venture with L.A.-based Ares Management to own the Elk Hills power plant near Bakersfield. An Ares-led group of investors put $750 million into the joint venture and purchased $50 million worth of CRC stock. Under a long-term commercial agreement, CRC will purchase electricity and gas processing services from the power plant. In a statement, CRC said joint venture would provide an opportunity for the company “to prudently build on its solid track record of performance and accelerate sustainably profitable initiatives.” Operating costs at Elk Hills are some of the CRC’s lowest, running in a low teens per barrel of oil, according to Stevens on the May 3 conference call. With the acquisition, the company hoped that economies of scale and streamlining could drive the costs even lower, which apparently happened. “Synergies at Elk Hills have far surpassed initial estimates and continue to materialize,” Stevens said on a Nov. 1 conference call. “We estimate that we have recognized approximately $16 million in cost savings and revenue enhancements this year-to-date by streamlining operations and consolidating infrastructure. On an annualized basis, these synergies amount to approximately $34 million, which is well ahead of our initial targeted $20 million over 24 months.” New address Also, at the time of the Elk Hills purchase, CRC also bought an office building in Bakersfield for $48.4 million. “We currently have approximately 500 employees using eight different locations in Bakersfield across multiple leases,” the company stated in its second-quarter filing with the Securities and Exchange Commission. “We expect that the new building will create significant value by bringing our Bakersfield employees together into a single location over the next 12 to 15 months, which will increase the efficiency, effectiveness and collaboration of these employees. This building was the only available office space in the Bakersfield area large enough to allow us to consolidate our workforce in a single location.” The building, located at 900 Old River Road, also houses an operations center for insurance company State Farm. CRC plans to continue to lease part of the building to other State Farm and other tenants, according to the filings. On the trading day prior to the Elk Hills announcement on April 9, CRC stock closed at $17.96. It closed Dec. 4 at $23.59. While that’s a 31 percent uptick, CRC shares follow the rises and falls of oil prices. Still, given the size of the Elk Hills deal in combination with CRC’s efforts to pay down its debt and drill new wells, Stevens believes the shares are more valuable than the market price. “As we work to capture the full value of our portfolio and strengthen our balance sheet, we believe that our valuation should be more reflective of our net asset value,” he said on the Nov. 1 conference call. For the long term, Elk Hills has estimated reserves of 8.5 billion barrels of oil equivalent. Considering that 2 billion barrels have been extracted since the field was discovered more than 100 years ago, the Elk Hills payoff will continue for decades.