California Resources Corp (CRC) 2014 Q3 法說會逐字稿

Good day and welcome to the California Resources Corporation Third Quarter Earnings conference call. All participants will be in listen-only mode.

(Operator Instructions).

Please note, this event is being recorded. At this time, I'd like to turn the conference call over to management. Please go ahead.

Welcome. I'm Scott Espenshade, Vice President of Investor Relations and I welcome you to the California Resources Corporation Third Quarter conference call. Currently CRC remains a subsidiary of Occidental Petroleum. We will be focusing our comments today specifically on our California assets and financial results.

As a reminder, Occidental will host their third quarter conference call tomorrow morning.

Participating on today's call are Todd Stevens, President and Chief Executive Officer; Mark Smith, Senior Executive Vice President and Chief Financial Officer; and several members of the CRC Executive Team.

As a reminder, today's conference call contains certain projections and other forward-looking statements within the meanings of the Federal Securities laws. These statements are subject to risk and uncertainties, that may cause actual results differ from those expressed or implied in these statements.

Additional information on factors that could cause results to differ is available on the company's recently effective Form 10. We would ask that you review it and the cautionary statement in our earnings release. Our Third Quarter 2014 earnings press release and any interim disclosures have been posted on the Occidental investor relations page, which can be found at www.occidental.com.

No later than the distribution of CRC's common stock, CRC disclosures will be available to be downloaded from our website at www.CRC.com.

We have allotted ample time for Q&A at the end of the call and we would ask that participants limit their question to a primary question and one follow-up.

I will now turn the call over to Todd.

Thank you, Scott, and thank you, everyone, for attending the first ever earnings call for California Resources Corporation. We're excited about the future of CRC, which has an underexploited world-class California resource base with excellent growth prospects.

First, I would like to provide an update on our planned spin-off from Occidental Petroleum. The spin-off is expected to be completed on November 30, 2014, and is proceeding as planned. In preparation for the spin-off, we raised $5 billion through senior notes and obtained a term loan of $1 billion and a revolving credit facility of up to $2 billion.

This month, we made a cash distribution to Occidental Petroleum of almost $5 billion,and we will make another distribution of approximately $1 billion prior to the spin-off. Initially, Occidental will distribute to its shareholders at least 80.1% of our common stock and California Resources will become a independent, publicly traded company trading under the symbol CRC on the New York Stock Exchange.

Occidental will dispose of the remaining up to 19.9% of CRC common stock within 18 months following the spin-off. Immediately following the spin-off, we expect to have no more than 387 million shares of our common stock outstanding.

As I have said, the spin-off is proceeding as planned and we do not foresee any issues or delays with the plan. Over the last several months as we prepared for the launch of our company, we formed strong leadership and technical teams with proven management and technical expertise to develop our prolific resource base.

Many of the key executives on the team are those who built our current position in California and have extensive experience operating here. While CRC is a new company, we have retained Occidental's long and rich operating experience in California.

We have accumulated extensive proprietary knowledge in the state and built a 3-D seismic library, which covers over 4,250 square miles representing approximately 90% of the 3-D seismic data available in California.

To grow our production and net asset value, our strategic plan is to reinvest substantially all of our operating cash flows after debt service in our high growth, high return assets including unconventional opportunities and lower-risk conventional projects, mostly concentrating on high margin oil-producing projects.

We believe this will enhance the value of our assets and maximize shareholder value over time. We currently have an inventory of over 24,000 gross identified drilling locations with over 13,000 in low-risk conventional assets.

With our mix of conventional and unconventional-IOR, EOR, tight sands and shale - opportunities, we are targeting near-term production growth of between 6 and 9% and longer term production growth of over 10%.

We are, however, closely monitoring market conditions and developing plans to rapidly address sustained changes in market fundamentals. As we have stated before, we will be responsible stewards of the capital entrusted to us and intend to limit our capital investments and other expenditures to a level that can be funded by our operating cash flow.

As a result of the recent sharp drop in oil prices, we may moderate our investment program and therefore, our near-term growth targets may need to be somewhat lower than we previously anticipated.

This would be in line with our stated objective of funding our growth through our operating cash flow. That said, we will continue to focus our capital investment program on building our underlying net asset value.

We also have an enviable natural gas position with over 1,000 gross identified drilling locations in the Sacramento Basin, which could provide additional substantial and rapid production growth in a more favorable gas price environment.

At its inception, California Resources Corporation will be the largest producer in the State of California on a combined gross operated basis and will hold the largest privately held mineral acreage position in the state with operations in land holdings in all four of California's major oil and gas basins: the San Joaquin, Los Angeles, Ventura and Sacramento Basins.

This substantial base gives us the opportunity to grow free cash flow to fund our capital programs. I will now turn the call over to Mark who will provide an update on our third quarter results.

Thanks, Todd. In the third quarter of 2014, we generated net income of $188 million compared with $235 million for the third quarter of 2013. Our EBITDAX was $648 million for the third quarter of 2014 and $720 million for the third quarter of 2013.

On a year-over-year basis, our quarterly results benefitted from higher oil volumes and higher natural gas prices, which were offset by lower oil prices and increased production costs and property taxes.

Overall, our third quarter results reflect the softening of oil prices that started in mid-summer, along with the recent widening of the differentials against Brent in California. We don't expect this environment to have a significant effect on our plans for the fourth quarter of 2014.

For 2015, we're developing a range of capital and operating plans as Todd indicated under different price scenarios that will maintain our commitment to operate within our cash flows. Oil production for the quarter averaged a record hundred thousand barrels per day and increased by 11,000 barrels per day or 12% from the third quarter of 2013.

This is consistent with our strategic focus on drilling for high margin oil, our Lost Hills and Kern Front steam flood operations in the San Joaquin Basin accounted for 6,000 barrels per day of the oil increase reflecting our continued investments in steam floods in the current high oil to gas price ratio environment.

Our other San Joaquin Basin and Los Angeles Basin assets contributed another 5,000 barrels per day of the oil increase. Natural gas and NGL production both declined from a year ago as we continued to focus our drilling programs on oil.

Total oil and gas production averaged 160,000 barrels of oil equivalent per day for the quarter, an increase of 7,000 BOE per day compared with the third quarter of 2013. We sell all of our crude oil into the California markets, which typically reflect international waterborne based prices because the structural energy deficit in the state results in most of its oil being imported.

Over the last several years, these prices have exceeded and continue to exceed WTI based prices for comparable grades. Our realized crude oil prices decreased in the quarter compared with a year ago quarter, reflecting a decline in the benchmarks as well as widening differentials.

Realized crude oil prices were $96.27 per barrel in the third quarter of 2014 and $107.20 per barrel in the third quarter of 2013. NGL prices remained relatively flat compared to the prior year while realized natural gas prices increased 17% to $4.24 per MCF from $3.61 per MCF in the third quarter of 2013.

Production costs for the quarter were $262 million or $17.74 per unit, which was 3% higher than the same period of the prior year. The higher costs reflect the increase in production, as well as higher per unit cost of approximately 49 cents.

This is mostly due to higher prices for natural gas used in our steam flood operations and other higher energy costs. While our steam flood investments continue to provide attractive returns in the current high oil to gas price environment, the modest strengthening of natural gas prices used in those operations is putting some upward pressure on our production costs.

However, we have been successful in holding our controllable costs relatively flat after the significant improvements we made on our production costs during 2013. Taxes other than on income increased from $32 million in the third quarter of 2013 to $56 million in the third quarter of 2014.

Last year's lower property tax expense reflected a property tax refund for prior years. We generated about $660 million of cash flow from operations in the quarter and $1.9 billion for the first 9 months of 2014.

Capital investment for the quarter was $566 million and $1.6 billion for the first 9 months. Our overall effective tax rate for the 9 months was 40% and our cash tax rate was 16.5%. We provided key fourth quarter guidance information in the attachments to our earnings release. I'll be happy to take any questions you may have on that information and on other aspects of our results during the Q&A portion of the call.

I'd also like to point out that our Analyst Day is scheduled for October 31st when we'll discuss our long-term plans and strategy in greater detail. I'll now turn the call back over to Todd who will discuss the key elements of our philosophy to grow and develop our asset base in order to maximize shareholder value.

Thank you, Mark. We provided an extensive amount of detail in our Form 10 about our assets, our operations and our future growth plans that I briefly summarized in my earlier remarks. I will now discuss our philosophy, which we believe will enable us to maximize the value of our assets, achieve profitable growth and enhance shareholder value.

First, we will take a disciplined approach to all of our spending and investing decisions, in particular, our capital allocation process. Our goal is to deploy every dollar in a manner that we believe will create value for our shareholders.

For example, we will evaluate and scrutinize our projects on a life-of-project basis to ensure that they will create value. This approach will also enable us to navigate efficiently through different market conditions such as the changing price environment our industry is currently experiencing.

As we develop our plan for 2015 and beyond, our disciplined approach will allow us to adjust our spending plans in a manner that is consistent with our stated goal of living within our cash flow while minimizing the impact on production.

Even at currently prevailing prices, our key anchor assets, the Elk Hills and Wilmington Fields, as well as our steam flood and most of our water flood operations provide significant free cash flow.

We will use this cash to fund projects that create value and have attractive returns over their lives. We will look to invest in key conventional and unconventional projects that will give us the knowledge and resource base to help us achieve our long-term growth objectives.

Second, we will apply modern technology including seismic drilling and completion techniques that have been used very effectively in other parts of the country but only on a limited basis here in California.

I sometimes refer to California as "the land that time forgot" in terms of the application in newer technologies in the industry. Years of underinvestment in the state by the industry in programs other than steam floods have led to premature abandonment of many oil and gas fields and a limited understanding of the subsurface or the true potential for hydrocarbon production here.

As I mentioned earlier, we have already made a substantial investment in seismic data in the state. We are devoting significant resources to analyzing and interpreting this data and we are rapidly advancing our understanding of California's geology, particularly the nature of unconventional opportunities.

Already about one-third of our production comes from unconventional resources. We believe this knowledge base that we are accumulating will enable us to unlock the vast unconventional resource potential we have in an accretive manner to enhance shareholder value.

We also are committing significant resources to applying modern techniques in our operations. We believe these efforts will create substantial value for our shareholders over time. Finally, we will take a proactive approach to engaging with our stakeholders throughout the state including regulators, communities in which we live and operate, our work force and labor, business and non-profit organizations.

At the local level, this dialogue has helped us to solicit and act constructively on community input. Statewide, we have identified Californians' common interest in enjoying the benefits of developing local energy resources and reducing the state's chronic dependence on imported energy.

Weare actively implementing new ways of successfully operating within the state's regulatory environment and working to proactively address the interests of our fellow Californians. We are confident that this outreach strategy will continue to expand our opportunities to thrive and grow in California while providing significant benefits to the state and the communities where we live and work.

As we get closer to the formal spin-off date, we are essentially operating as a standalone company. We now market our own products, conduct business as CRC and have our operating and support teams in place to manage the company.

We are excited about becoming an independent company that provides energy for California by Californians and our team is united with a focus on delivering shareholder value. We are looking forward to seeing you on our Analyst Day on October 31st in New York City where we are planning to provide more detail on many of the points we mentioned today and our strategy.

We're now ready to take your questions on the quarterly results.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then one on a touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key.

If at any time your question has been addressed and you'd like to withdraw your question, please press star, then two. Again, it is star, then one to ask a question. At this time, we will just pause momentarily to assemble our roster.

The first question we have comes from Doug Leggate of Bank of America. Please go ahead, sir.

Hi. Good afternoon, everybody. And congratulations on the launch, guys, and I'm very much looking forward to hearing the details next Friday. I'm guessing that a lot of the detail will be provided at the analyst update, so I'm going to keep it to two high level questions, if I may.

Todd, on your comments related to spending and monitoring the commodity environment and so on, if I look back at legacy Occidental, you spent substantially less than this year's budget and you still managed to grow around 6% and generate free cash flow.

So I'm just -- I'm just wondering if you could give some order of magnitude as to the sensitivity of growth relative to spending given the scale of long life assets, I guess, if you've got it in the portfolio, and I have a follow-up, please.

OK. Thanks, Doug. Thanks for the -- and we'll see you next Friday. With regards to spending, we're in our investments going forward, we're in the process of developing scenarios looking at all the different residential commodity prices, and we do have a program in place this year and actually the prior year where we spent a lot of money on investments involving infrastructure whether it be their gas plant or steam flood facilities and in different areas.

So I think that might've been a little misleading the last few years, but right now, I think our investment profile we're going to look to ratchet back given the commodity price change of over $10 at this point in time, $15 in some cases if you think about Brent, and look at the different scenarios going forward, but we're going to live within our cash flow.

And what's your second one?

So I guess we'll get more detail next week. But my second one's kind more of a philosophical question, Todd, because I -- because there aren't really going to be any peers for you guys and there -- I guess there's some skepticism over how operating in California is going to go down relative to, let's say, operators in West Texas for example.

So I think there seems to be an expectation that that might weigh on the -- at least on the -- on the -- you know, the initial run of the stock, I guess. So I guess what I'm kind of curious about is how do you guys think?

Is it a threshold where the free cash flow that the stability of your business would allow might be redeployed to the likes of share buybacks or paying down debt as opposed to chasing after growth? Because at the end of the day, it's about growth in a per share basis that the market will pay for.

So I'm just kind of curious as to how you think about top line growth relative to growth per share and redeploying back to the -- you know, to the -- to the stock.

Well, I think where -- you're right. I mean, California basically -- 5 companies have 85% of the production in the state and there's no other major producing state in the -- in the country that has that kind of concentration of assets.

And there really are no look-through companies when you -- when you look at what we do. And in the regulatory environment out here, is very misunderstood. It is the most comprehensive environment you're going to find in the United States and arguably the world, but if you're here and you know how to operate here and you know how to function here and work in the communities, I think it's a much better environment than what people want to give it credit for.

But it is an area where, again, it's very concentrated in assets. And Occidental has dealt with this historically in a different fashion. It was a multi-national company and it could invest money where it suited itself over time.

Now, we are here in California and we're being much more proactive in engaging with the community and looking to invest.

To your other comment about, you know, creating value for shareholders, right now, we view that as the best avenue to creating value, investing our free cash flow in the business, and with the highest returns available.

If over time that didn't pan out, we would clearly look at other alternatives and other ways to return capital and create value for the shareholders.

All right. I'll see you next week. Thanks, fellas.

Thank you.

The next question we have is from Paul Sankey with Wolfe Research.

Hi. Good evening, guys. Todd, I think you've made it fairly clear that you're going to live within your cash flows and clearly the cash flows are going to be lower if we stay at this sort of commodity price environment.

What would then be the resulting growth that we would expect to see from you, for example, if we remained at this sort of level. And I assume that the plan will be essentially to reinvest all the free cash flow for growth as opposed to perhaps totally changing strategy if we stay on it in a sustained low price environment. Thanks.

Thanks, Paul. Yes, currently we're working those scenarios, but, like I said in my comments, I think we'd be modestly below our 6% to 9% if commodity prices held in this -- in this range. But we're working those scenarios and really trying to optimize how we spend our capital going forward to create the best, most value for shareholders.

Is the -- I guess I was driving at that. Then so is the modestly below 6% to 9%, does that take the whole range down to 4% to 6% or am I not thinking straight?

No, I wouldn't say that. I think right now with the scenarios we're planning, there are scenarios we see if it -- and we sustain this price environment, our growth would be more modestnext year, and I don't think that has anything to do with the other years. I mean, it would moderate down, but I still think the same opportunities present themselves because most of -- most of our assets still generate quite a bit of free cash flow, just not as much as in the higher price environment.

Yes, but I understand that. That's why I was just trying to kind of get a better sense for what you meant by just, you know -- whether we're talking about a -- shaving a couple of percents off the range or whether we were talking about a whole step down at these prices.

But then, I guess, you're obviously at the stage you're going to stick with the idea that we want to try and grow what you see as an underdeveloped opportunity set in California and that as a standalone company, you're going to be better positioned to manage the unique situation in California as regard politics?

I think that's clearly the case. Like I said before, Occidental is a multi-national company. They had issues or permitting problems and they were trying to invest the free cash flow that Occidental generated. They would clearly just spent it elsewhere whether it be the Permian, Oman or Colombia.

But here, we're investing in the state. We're being much more proactive in working in the communities and engaging in the communities to enable us to invest that cash flow.

Great. That's great. Thanks. I'll see you next week then. Thank you.

Thanks.

(Operator Instructions).

The next question we have comes from Sunny Sekhon of SunTrust. Please go ahead.

Hey, guys. Thanks for taking my question. Just simply I was just reading through the press release. It seems like you have dividended out another billion dollars to Oxy. So is that dividend now $6 billion versus $5 billion now?

The total dividend will be $6 billion. We haven't actually, I think, moved the last billion yet, but that will happen before the spin-off date.

And what's the -- what's the reasoning behind in the additional billion dollars of dividend and how are you funding that? Is that through the revolver or is there ...?

There's a term loan. When we did the bank facility we had a billion dollar term loan and a $2 billion credit facility.

Got it. And I think the original plan was to dividend out $5 billion; is that -- is that how I'm thinking about it right or?

No, I think over time as this has been discussed, Steve had talked about looking at ranges of potential dividends and $6 billion is where it landed.

OK. And in terms of your leverage targets or anything like that, are you -- are you comfortable that you're going to be staying within those targets with that additional billion dollars of dividend?

Mark Smith here. Our target -- our target debt levels are focused on range around 2, 2.2 times debt to EBITDAX. We'll be coming out of the box at about 2 times debt to EBITDAX.

We work to stay within free cash flow. As Todd's indicated, we'd see it as staying around that level as we march forward. Generating free cash flow, we would expect that to come down modestly over time.

OK. Thank you.

Again, as a final reminder, if you would like to ask a question, please press star, then one on the touchtone phone. Again, that is star, then one. Again, we will just pause momentarily. Well, at this time we're showing no further questions. We'll go ahead and conclude our question and answer session.

I would now like to turn the conference call back over to management for any closing remarks. Gentlemen?

Thank you. We look forward to seeing you in New York next week.

All right, sir. We thank you and the rest of the management team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day, everyone.