Overview

California Resources Corporation (CRC) is an independent oil and gas exploration and production company focused on assets in California. CRC also has a carbon management business called Carbon TerraVault that is pursuing carbon capture and storage (CCS) projects in the state.

Key Highlights

• Pending merger agreement with Aera Energy to combine operations. Expects to close mid-2024.
• Lower revenue and higher net loss in Q1 2024 compared to Q4 2023 primarily due to lower production volumes and commodity prices.
• Well permitting delays continue to constrain drilling operations pending completion of CalGEM review process. Some permits approved for workovers.
• Capital investments for 2024 revised to $200-240 million range based on current permitting. Focus on oil production and maximizing free cash flow.

Financial Performance

Revenue and Profit Trends

• Total revenue decreased 37% from $726 million in Q4 2023 to $454 million in Q1 2024.
• Net loss was $10 million in Q1 2024 compared to net income of $188 million in Q4 2023.
• Lower realized prices for oil, natural gas and NGLs combined with decreased production volumes drove decline in sales.

Production and Prices

• Total production decreased 8% from Q4 2023 to Q1 2024 largely due to scheduled plant downtime and natural decline.
• Realized oil prices with derivatives were 94% of Brent index in Q1 2024 compared to 86% in Q4 2023.
• Natural gas prices fell 24% from Q4 2023 based on lower Henry Hub benchmark pricing and mild winter weather.
  

Merger Agreement with Aera Energy

• All-stock transaction to combine operations. CRC shareholders expected to own 77% of merged company.
• Aera’s debt will become due at closing per change in control provisions. CRC plans to repay portion with cash and borrowings.
  
• Received commitments from lenders to increase CRC’s borrowing capacity and expand credit facility if deal closes.
• Anticipate transaction will close around mid-year 2024 following receipt of remaining regulatory approvals.

Business Environment

Commodity Prices and Outlook

• Brent oil prices relatively flat from Q4 2023 to Q1 2024. Developing concerns over China’s economy weighing on crude demand.
  
• NGL prices increased slightly based on tighter butane supply/demand balance and outlet development.
• Natural gas prices fell 16% with higher domestic production and storage inventories.

Regulatory Updates

• Well permitting delays continue pending completion of CalGEM review process.
  
• Some permits for workovers in Wilmington field received but new drilling permits remain constrained.
• Timeline extended for Kern County permitting process due to further environmental study requirements.
  

Financial Position

Liquidity and Cash Flow

• Cash and liquidity totaled $880 million at March 31, 2024. Cash from operations lower than prior year mostly due to reduced natural gas prices.
• Capital investments expected to range from $200-240 million for 2024 inclusive of oil and gas development, carbon management projects and maintenance.
• Plan to finance portion of Aera’s debt at merger closing using cash, borrowings and new debt issuances. Pursuing financing options for carbon management business separate from rest of CRC.
• At current commodity prices, expect to generate sufficient operating cash flow to fund capital plan and shareholder returns in 2024.

Hedging Strategy

• Use of derivative instruments seeks to mitigate exposure to volatile commodity prices and protect cash flows.
  
• Will continue to evaluate hedging approach based on market dynamics. No accounting hedge designations in place during Q1 2024.

Conclusion

CRC delivered lower financial results in Q1 2024 compared to the previous quarter driven predominantly by scheduled downtime, production decline and weaker pricing. The company maintains a strong liquidity position and continues working towards closing the transformative merger with Aera Energy around mid-year. Approvals have been progressing with the majority of required regulatory sign-offs completed. Once combined, the merged entity will be the largest California-focused oil and gas producer and is expected to drive significant synergies.