CALIFORNIA RESOURCES CORP CRC S
May 02, 2020 - 10:44pm EST by
jcoviedo
2020 2021
Price: 2.29 EPS -15.80 -18.25
Shares Out. (in M): 49 P/E 0 0
Market Cap (in $M): 113 P/FCF 0 0
Net Debt (in $M): 4,884 EBIT 76 72
TEV ($): 4,997 TEV/EBIT 65.75 69.40
Borrow Cost: Hard to Impossible 50%+ cost

Sign up for free guest access to view investment idea with a 45 days delay.

Description

Thesis

California Resources Corporation is insolvent, seriously low on liquidity, and highly likely to file for bankruptcy in the next 3 months. The company will almost certainly skip a ~$73MM interest payment due on June 15th for its second lien notes given the company’s precarious liquidity position. Earlier this year, CRC attempted an exchange offering to push out its 2021 maturities. In March, the exchange offer failed, making a restructuring inevitable. Levered over 10x on stale consensus estimates for 2020 EBITDA (more like 20x leverage on strip pricing), CRC equity is clearly worthless in a restructuring. Bizarrely, CRC equity is up 134% since April 1st providing investors with an attractive short opportunity into the company’s restructuring. Interestingly, CRC’s bonds did not experience the same rebound as its equity did in April. CRC’s first lien debt trades around 50% of par implying an enterprise value of $1.4 billion versus the $5.0 billion enterprise value priced into the equity. CRC second lien bonds and unsecured bonds currently trade at or below 5% of par implying that CRC’s equity and its unsecured and second lien debt are unlikely to receive much if any value in the inevitable restructuring. While CRC stock borrow is difficult (and the stock is a very attractive short if you can get borrow), the company also has a reasonably liquid options market. I recommend buying August put options or selling call options if you can’t secure borrow. 

 

Overview

A capital structure arbitrage trade in CRC was written up by surf1680 6 months ago. That write up did a good job in outlining the situation that existed before the collapse of the oil market caused by COVID-19 and the Saudi-Russia price war. 

 

https://www.valueinvestorsclub.com/idea/CALIFORNIA_RESOURCES_CORP/8369117020#description 



CRC is the largest oil producer in California. 

 

 

The company has F&D costs of around $8.75/barrel and has grown. The company’s cash operating costs per barrel (before overhead costs) are around $19/barrel.

 

 

The company was overlevered at the time of its spinoff from Occidental Petroleum (which occurred at the beginning of the 2014 oil price crash) and the company has spent the last 5.5 years trying to delever. Management has done a good job keeping the equity dream alive throughout the last 5.5 years through aggressive balance sheet restructuring actions. 

 

 

In the 2017-2019 time period the company did several joint ventures with capital providers in order to accelerate development of the company’s reserves.

 

 

That said, management has been pretty deceptive in its communications with investors. For example, in its March 2020 presentation (when Brent prices were already in the low $50s) the company was using $55 brent prices as the “low case” for its reserve values it was showing shareholders. 

 

 

In reality, at current oil prices below $20/barrel, the company has few economic drilling opportunities.

 



Capital Structure



Cash

93

   

Revolver

618

Term Loan

1300

   

2nd out First lien term loan

1000

   

8% second lien bonds due 2022

1815

   

5.5% unsecured bonds due 2021

100

6.0% unsecured bonds due 2024

144

   
   

Total Debt

4977

Net Debt

4884

   
   

Share Price

2.29

Shares Outstanding

49.2

Market Cap

113

   

EV

4997

 

Note: In addition, the company has a $517MM Asset Retirement Obligation

 

These numbers are adjusted to include the complete monetization of the hedge book for $76MM as well as the use of the revolver to pay off the $100MM of unsecured bonds that matured in January 2020. CRC’s debt maturities are heavily concentrated in 2021 and 2022.

 

 

Note: CRC’s first lien debt trades around 50% of par implying an enterprise value of around $1.4 billion versus the equity which implies an enterprise value of around $5 billion. 

 

CRC’s second lien bonds currently trade at under 5% of par.

 

 

CRC’s unsecured bonds likewise trade around 5% of par value