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California Resources: The Best House In An Ugly Energy Neighborhood


California Resources Corporation has an interesting story.

This interesting story emerges from its origins, as well as the way it was managed throughout the energy crash.

California Resources Corporation might actually be an exception in the shale E&P sector. It looks to have been well managed through the energy crash.

The stock I am about to cover in this article was mentioned in the comments stream of a previous article of mine, titled "This Is Probably Your Last Chance To Sell Chesapeake Energy". I am writing about California Resources Corporation (NYSE:CRC).

Initially, I thought that CRC was just another stock like Chesapeake Energy (NYSE:CHK), taken wildly higher in the last couple of weeks on a wave of speculation. Some of it might have been just that, but what I found after doing more research on it was very interesting, prompting me to write this article.

The Origins

CRC came to be as a spin-off from Occidental Petroleum (NYSE:OXY). This spin-off was effective on November 30, 2014. The spin-off was interesting because it seemed to indicate Occidental Petroleum was fully aware of the coming energy market carnage, and thought it intelligent to separate ways with the least attractive assets it held. This option was especially enticing when, at the time, the market actually liked these unattractive assets (given the valuations placed on them).

Two things lead me to have this opinion:

  • First, OXY found it to be an opportunity to unload CRC while loading it up with $6 billion in debt (since the market seemed willing to have its shale companies be levered to the hilt).
  • Second, evidence that OXY/CRC knew what was coming. We can say this because right after the spin-off, CRC immediately started cutting capex heavily. From nearly $2.1 billion in capex during 2014, CRC cut capex to just $401 million in 2015. And now, it's guiding for just $50 million in capex for 2016.

You'll remember that I once wrote, in my article titled "Many Energy Companies Seem A Bit Foolish", that I was finding no E&P company which had cut its capex real hard so as to produce FCF (Free Cash Flow). Well, CRC was one such company. It did cut capex aggressively. This takes me to my next section…

CRC Seems To Have Been Well...