Elk Hills Buyout to Enhance CRC’s Profitability

Earlier this month, California Resources Corp. bought out the remaining surface and mineral rights to Elk Hills, California’s largest natural gas-producing oil field from Chevron Corp. As a result, CRC’s shares have moved higher by 42 percent. On April 1, the Chatsworth oil and gas producer completed its purchase of the 47,000-acre Elk Hills Oil Field in exchange for $460 million and 2.85 million in its common shares. Last year, the Kern County asset produced about 48,000 barrels of oil equivalent (BOE) daily. Jason Wangler, managing director and senior research analyst at Imperial Capital, said although he only started following CRC nine months ago, he recently included the company on his list of hot stocks. Wangler had been bullish about the company long before this deal materialized, but the purchase of Elk Hills, one of the most productive fields in the country and the fifth largest oil field in California, adds more upside exposure to the same site California Resources had been already working on. “It’s a very economic, productive asset,” Wangler said. “What it basically does in rough numbers is add another $100 million of cash flow a year to the business.” With Elk Hills now completely in its control, California Resources is posited to achieve stability and generate profits, Wangler said. “You’re working on a project and you’re getting 80 percent of the benefit. Now you’re making 100 percent,” he explained. CRC has made great progress toward paying down its debt, recently monetizing some $750 million worth of assets. In November, the company secured a five-year, $1.3 billion loan to address its outstanding debt under a 2014 credit facility. The new loan has a five-year term and bears interest at a rate of LIBOR plus 4.75 percent. “This new term loan and the amendment of our 2014 credit facility extend the maturity of that facility, provide additional liquidity for CRC and relax certain financial covenants. Combined, these transactions provide a pathway to further delever our balance sheet,” Chief Executive Todd Stevens said in a statement at the time. Starting as a spin-off from Houston-based Occidental Petroleum in late 2014 and straddled with a monumental debt burden, Wangler said the company has been fiscally disciplined about paying down what it owes while keeping production stable and operations in the black during the last two years. “The debt level is still high,” Wangler said. “That being said, this balance sheet was much worse at the beginning – $6.8 billion (in debt) when it started to now, a little under $5 billion.” With the company’s debt abating while oil barrel prices continue to climb, almost doubling in value since last year, Wangler believes CRC is a good horse to bet on moving forward. “As oil prices move up, they become a more financially secure company,” he said. The trading day before the Elk Hills deal was announced, CRC shares closed at $17.96. On April 25, they closed at $25.54 on the New York Stock Exchange.