Chatsworth oil and natural gas producer California Resources Corp. has entered into a joint venture with New York asset management firm Benefit Street Partners to develop the company’s properties, beginning with its crown jewel in the San Joaquin Valley. The deal calls for Benefit Street Partners to invest up to $250 million, starting with an initial $50 million that will be used “to accelerate development in the San Joaquin basin through the summer,” said Todd Stevens, chief executive of California Resources, during the company’s Feb. 16 conference call. Both companies expected the first investment to fund in early March. During the call, Stevens said initial activity associated with the joint venture will include one immediate drilling rig and potentially two more in the second half of 2017. After the initial $50 million, Benefit Street Partners is set to make subsequent investments in four potential tranches up to $50 million each over a two-year period. California Resources will operate the assets, and the wells drilled as a result of the deal will revert to California Resources once Benefit Street Partners realizes a rate of return somewhere in the “lower teens.” After reversion, the financial firm will retain a small net profit interest. “This joint venture is an excellent opportunity for CRC to accelerate development of CRC’s vast underdeveloped resource base and advance our long-term deleveraging efforts,” Stevens said in a prepared statement. During the conference call, Stevens added that the joint venture will be “modestly cash flow positive” for the company in the second half of 2017 but said California Resources won’t realize the full benefit of cash flow until 2018. The company declined to comment on the venture. California oil fields California Resources is one of three major oil producers in the state in addition to Chevron Corp. of San Ramon and Aera Energy of Bakersfield, a subsidiary of Anchorage, Ala.-based Shell Exploration & Production Co. Inc. All three companies were hit hard when crude oil prices – which were well over $100 a barrel – plummeted in 2015 due to the high supply of foreign oil driving down prices. In response, companies slashed production and labor costs to weather the storm. Prices bottomed out at $26 a barrel in February 2016 and now hover around $55 a barrel. However, California Resources disproportionately felt the effects of the downturn as the company only produces oil and natural gas in California. Other companies, like Chevron, have more field diversity geographically and operationally. Chevron not only produces oil but also refines it, providing additional revenue streams. In addition, the company is a global business, meaning it drills and refines all over the world and is not beholden to the California business and political climate. Catherine Reheis-Boyd, president of trade association Western States Petroleum Association, said California is especially difficult for oil producers for two reasons: the tough state regulations and high taxes placed on the industry as well as the difficult geology that requires alternative extraction methods such as hydraulic fracturing, or fracking. “We (California) have the most stringent regulations in the world,” she said. “If you make it too difficult to do work here, there are other opportunities for our industry in more economic environments.” In the San Juaquin Basin alone, California Resources actively operates 45 fields and holds approximately 1.6 million net acres, according to the company’s website. The basin’s geography consists of an oil-rich sedimentary rock known as the Monterey Shale Formation, which is extremely hard and very difficult to drill, making it an ideal candidate for fracking. As of the end of 2015, approximately 70 percent of the company’s estimated reserves were located in this region, according to the website. During the price slump, California Resources kept its head above water by drastically reducing overhead and spending on drilling projects. “In total, 2016 capital spending of $75 million was down 80 percent year-over-year and an even more stunning 96 percent from 2014 levels,” according to brokerage Raymond James & Associates Inc.’s Feb. 16 note on California Resources. In addition, California Resources reduced its operating costs to $800 million in 2016, down from $951 million in 2015 and more than $1 billion in 2014. For 2017, the company has increased its annual investment plan for the first time since the slump and is starting off the year with a $300 million budget. Reducing its long-term debt load, which currently sits above $5 billion, remains a priority for the company, and its partnership with Benefit Street Partners should aid in that effort. According to a 2014 report from the California Policy Center, the average cost for drilling and completing a well in the Monterey Shale field in the San Joaquin Valley is $6 million, so Benefit Street’s initial investment could finance several wells, depending on variable costs. The report cites estimates that the average well yields 250,000 barrels during its productive lifespan. “The joint venture is likely a positive data point for the company and its shareholders as it is an important step in the company reducing its leverage,” Muhammed Ghulam, a Raymond James analyst who covers California Resources, wrote in an email to the Business Journal. “As for potential future joint ventures, management has indicated that they are in talks with several potential partners, who recognize the exploration and development value proposition of the company’s resource base.” 2017 outlook A light at the end of the tunnel may be ahead for the oil industry; Ghulam has high hopes for the sector in 2017. He expects barrel prices to have an annual average price of approximately $70 this year. “We believe that the worst is over for most companies operating in the E&P (exploration and production) space – including CRC – as rising crude prices are set to result in a significant increase in cash flows for companies,” Ghulam added. “However, our preference is for E&Ps with better visibility on organic growth and for the time being, we believe that there are companies in the space that are relatively better positioned to take advantage of the rising commodity price environment.” Saddled with a large debt load and a limited geographic region, California Resources can’t realize some of the same synergies as its competitors. During the Feb. 16 conference call, Stevens said he believed the company’s “equity is still significantly undervalued” and expects to show full value as oil production ramps up. Shares closed March 1 at $18.85. The company anticipates a strong year by way of its capital plan and joint venture approach. “Under this plan, we project we will arrest our oil production decline by roughly mid-year and start growing in the second half,” Stevens said during the conference call. “Our planning scenarios show that at about current or higher oil prices, we can strengthen our financial position faster by redeploying our cash flows into operations rather than paying down debt.”
