Higher Oil Prices Inspire Share Buyback Program

Executives at California Resources Corp. were pleased with the company’s first quarter financial results as the company announced a $150 million stock repurchase program.Mark “Mac” McFarland, chief executive of the Valencia oil and natural gas producer, said that move could be made after the company realized $120 million in free cash flow for the quarter.Because California Resources shares didn’t fully participate in the most recent rebound in the energy sector, the stock offers a very attractive return for investors, McFarland said during a conference call with analysts to discuss first quarter earnings.“The $150 million share repurchase program provides us the flexibility to make good on our commitment to return capital to our shareholders, while also maintaining a healthy balance sheet with low leverage ratios and significant liquidity,” he said.

Pavel Molchanov, an analyst with Raymond James & Associates, said that share buybacks are a common strategy for many oil and gas companies in the post-COVID-19 economy.“Shareholders are pressuring management teams to remain highly disciplined with capital spending,” Molchanov said in an email to the Business Journal. “Now that oil prices have improved and cash flow has strengthened, share buyback is a very logical step to take, returning capital to investors in a flexible way.”The company reported on May 13 adjusted net income of $102 million ($1.22 a share) for the quarter ending March 31, compared with an adjusted net loss of $8 million (-16 cents) in the same period a year earlier. Revenue decreased 37 percent to $363 million.

California Resources went into Chapter 11 bankruptcy last summer and emerged about three months later in October.   Since returning to the New York Stock Exchange on Oct. 28, shares of California Resources have increased by 68 percent through May 17. The shares closed at $28.62 on May 19.McFarland was participating in his first earnings conference call since becoming the full-time chief executive in late March. He had been the interim head of the company since Dec. 31. California Resources also has a new board chairwoman, Tiffany Thom Cepak, who was appointed last month.

Regardless of the industry, when a company emerges from bankruptcy protection it is customary for them to change out their management team, Molchanov said.

“This explains why the CEO, CFO and board chair are all different versus a year ago,” he added in his email.

During the call, McFarland engaged the moves by Gov. Gavin Newsom to ban new fracking permits in the state by 2024 and to phase out all oil extraction by 2045.

“Regardless of whether or not such a ban is upheld, (California Resources) will see no material impact because less than 1 percent of our proved reserves require well stimulation, and our current long-term development plans do not include well stimulation,” McFarland said. “In fact, (the company’s) operations do not require high-pressure cyclic steam.” There is so little fracking done in California that Newsom’s ban is a moot point, Molchanov said.According to the Los Angeles Times, citing the Department of Conservation, the agency that regulates the state’s oil and gas industry, fracking accounts for just 2 percent of the oil production in the state.“As far as the policy to stop oil drilling by 2045 – that date is simply too far away for any oil company to realistically plan for it at this point,” Molchanov added.

Still, the company looked forward to working with state officials on the energy transition plans, McFarland said.

In the second half of the year, California Resources will provide additional clarity on several concrete proposals related to energy transition that will have the potential to benefit California’s future success, McFarland commented during the conference call.

“Our core operations will continue to deliver solid cash flow, while we work on these future steps,” he said.

Broadly speaking, all oil producers have been having a much better 2021 as compared to 2020, Molchanov said.

“This reflects the improvement in the global oil market as lockdowns have eased, enabling oil demand to improve and prices to recover,” he added in his email. “As prices continue to rise, California Resources should benefit in the sense of a rising tide lifts all boats.” From a very long-term perspective, however, the company will eventually need to deal with regulatory risks in California due to Newsom’s plan to end oil drilling by 2045, Molchanov concluded.