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Thursday, May 19, 2022

California Oilman

 West Point graduate and former Army officer Todd Stevens became the first chief executive of California Resources Corp. in 2015 when the company spun off from Houston-based Occidental Petroleum. As a former executive at Occidental, Stevens helped build the company through a series of high-profile acquisitions. With properties stretching from north of Sacramento to Huntington Beach, including the enormous Elk Hills field outside of Bakersfield, CRC immediately became the largest holder of mineral rights acreage and one of the largest oil producers in the state. But from the very beginning, its balance sheet was plagued by nearly $7 billion of debt and bills accrued by Oxy. For six years, Stevens, the son of a petroleum geologist, maneuvered to shrink the debt by cutting drilling and negotiating financial deals with equity partners. His progress was interrupted last spring when the coronavirus pandemic crippled oil prices and forced the company to restructure under Chapter 11. It emerged in October having equitized $4.4 billion of loans and outstanding notes and with a new $1.2 billion revolving credit facility. In December, Stevens announced his impending departure. The former chief executive, 53, spoke to the Business Journal about the reorganization, his legacy at CRC and the sensitive state of the oil industry.Question: Why are you leaving CRC?Answer: It’s not my choice. We fought really hard for six years to preserve and protect shareholders’ value. We were spun off with quite a millstone of debt. Earlier this year, the Russia-Saudi oil price war and COVID-19 forced us to file for Chapter 11. When you come out of Chapter 11, you have new owners. They appointed an all-new board. I serve at the pleasure of the board, and they wanted to do something different. That’s the life of a public company CEO.

How are you feeling about the transition?I’m highly saddened. Going back to the (Occidental Petroleum) days, I was involved in buying every single asset here in California except for Kern Front in the Bakersfield area. It saddens me. I miss the men and women of CRC. It’s a special place to work.

Will you stay in Santa Clarita or relocate? I don’t know. I tell everyone I’m testing free agency. Unfortunately, most of the opportunities afforded to me probably won’t be in the Golden State. Some will be out of state but might enable me to continue to live here. I love it here. I love the community. But you need to do what’s best for the next chapter of your life.

What was it like to lead a company with a huge debt load constantly looming over you?If you talked to the employees of CRC, they’d tell you my most commonly used phrase is, “control the controllable.” We were spun off December 1, 2014, with debt for a much higher oil price environment, and the Friday before, which was the Friday after Thanksgiving, OPEC had decided not to cut production and everything started going into freefall. We focused on things we could control, kept everyone understanding what our mission and our goal was. We were trying to provide affordable, reliable, secure, critically important energy to California and the local economy.Did you learn any lessons that could be applicable for other companies struggling with debt problems?Use every tool you can and put your shareholders first. Try to bring down your debt any way you can. You have to balance that out with trying to keep the company as a going concern. Maybe you have to dial back some of your initiatives to focus on what’s creating cashflow, what’s giving you the license to operate.

When you look back on the last six years, what are you most proud of? At Oxy it was working with Steve Chazen to transition the company from the post-Armand Hammer era through a lot of transactions. We did a lot of different things there to try to reshape that company. With CRC, I’m really proud of our culture of safety and focus on the environment. (Another thing is) providing careers to folks who might only have a high school education. I won’t say jobs, these are real careers that enable them to achieve the upper-middle class American dream. That makes me very proud.

Why did you push so hard to grow Occidental’s business in California?The geology was tremendous. The tectonics and all the faulting that occurs in the state had created all these micro-basins.And to be honest, the Permian Basin (in Texas) at the time, even though it’s the hottest place to be, it was way out of favor. Most of the industry is in Houston. They don’t think of California as an oil and gas province, but it’s a very prolific oil and gas province. Oil made L.A. before it was L.A. The Central Valley is still an oil and agriculture-driven economy. The very first commercial oil well West of the Rocky Mountains was in Santa Clarita and Pico Canyon. People don’t realize you can hike out to it.Was there much competition out West?California had been historically controlled by most of the super-majors, the largest companies in the world – Chevron, Exxon, Shell, Mobil, Arco. In the 70s and 80s, they started investing more elsewhere. No one came along and drilled deeper or tried to do different things. We saw at Oxy an opportunity to buy some of these assets and build a position that would be best-in-class but also grow the production in an area that desperately needs it. Oil production in the state has been declining since the 1980s. They continue to import more and more oil. Why would you want to import more and more oil? Produce it here, pay taxes here, have jobs here and do it in the most responsible manner in the entire planet.What is the benefit of producing oil locally?Over 70 percent of the oil, over 90 percent of the natural gas and almost a third of the electricity is imported into the state. Every time you don’t produce it here, you’re effectively exporting jobs elsewhere. Over 50 percent of that imported oil typically comes from Saudi Arabia. They don’t exactly share the same value systems we have here in California with regard to environmental stewardship. You could argue someone is abdicating that to foreign countries when you start looking at importing versus producing locally. The oil and natural gas produced here, which is all used locally, is the cleanest and greenest you’ll find in the world.Can you share any particularly memorable experiences during your tenure? Our restructuring was extremely intense. I will say I’m proud it was quick. When you go into those things, the amount of fees that get paid are just ridiculous, so the quicker you can do it the better.

How did it go?You’d like to end up in what they call a (pre-packaged restructure), which is the absolute quickest. A lot of the hard work was done by us, our advisors, the counterparties, the debtholders, prior to the official filing. You had a lot of hard work and late nights for months as they gave us forebearances. We filed in late July and came out in October, but we were certified before then. You just have to do what you think is right. I made it akin to infantry soldiers. When you go to combat, you tell people, “assume you’re dead already and you’ll make the right decisions.” I actually told our management team the same thing: “Assume you’re going to get fired, but you’ll make the right decision every time.”Were you pleased with the outcome?The company is well positioned with the new balance sheet and new owners. They have a balance sheet that’s appropriate for the price environment and if prices continue to rise, as they have, they should be able to do well as a company and generate a lot of free cashflow.

What about this spring when oil prices dropped to the negatives? That never has happened before. What actually happened is the (West Texas Intermediate) contract went negative. If you hold the WTI futures contract until expiration, you have to take physical delivery in Cushing, Okla. This is oversimplifying it, but as you got to contract expirations, too many people were left holding the bag and had to sell at all costs because they couldn’t take physical delivery. There was no space to rent in Cushing at the time to put the oil. All the storage was filling up. Tankers on the ocean were being used as storage.

How did it get resolved?Eventually, once the contracts expired, that dynamic went away. They just got caught. Once they got caught, they had to get out, and people on the other side of the trade knew they had to get out. So, guess what happens? In the financial world, they’re going to put the screws to you and extract every pound of flesh they can.

What other ways has the pandemic affected the oil industry? Primarily in a positive way for the long term. The rest of the country is undergoing this, I’ll say, “shale revolution.” They’re hydraulically fracturing these wells, and it produces a lot of production, but it has caused a lot of discipline to happen on both the cashflow side and the debt-equity side. It’s good for our industry to have that kind of discipline as you look to balance supply and demand of the world.What do you think are some of the biggest misconceptions about the oil industry and companies like CRC?Everyone thinks oil and gas production in the U.S. is done with fracking. I don’t think there’s been a well fracked hydraulically in California, particularly by CRC, in years. Mother Nature, through tectonics, has already fractured most of the rocks in this state. The fracking we would do would be much smaller and much less intensive than anything else, if we ever did it. Also, when you realize all the products it turns into for our way of life, it wakens people’s eyes. Basically, if clothing isn’t pure cotton, wool or silk, it’s got hydrocarbons in it. There are so many things you could go into. During COVID, every single piece of personal protective equipment including hand sanitizer comes from hydrocarbons. Someone told me a Tesla vehicle is, by weight, 15 percent plastic, and by content 50 percent plastic. Plastic makes it light enough so the battery has range. People don’t think about all those different aspects.

How do you respond when people criticize you and your work with regard to the industry’s environmental impact? It’s frustrating because the debate about it, particularly in California, is dominated by people with torches and pitchforks as opposed to honest discussions. When you think about energy transition, people don’t think about the amount of mining around the world that has to happen and the minerals needed to build all those things. Where do those come from? We’ll be at the whim of China and other countries because we don’t produce cobalt and a lot of those rare Earth minerals we need.Is there an economic element to that too?You already see how electrical rates are so high here in California because of the way they aggressively pursued some renewables. Over 30 percent of our population in the state spends over 50 percent of their income on rent and energy. You’re creating energy poverty, which is terrible for working people. I don’t know if you’ve seen the lawsuit by Jennifer Hernandez (an attorney at Holland & Knight and officer at lobbying group BizFed) about this. It’s a civil lawsuit saying the pursuit of renewables at all costs is causing energy poverty and adversely affecting minorities.Do you think demand for oil will stay strong enough for big producers to keep operating?Oil is depleting every single day. You’re going out of business every single day. In California, you might have a 15 percent decline rate year-over-year just from natural pressure in the well. You have to reinvest significant amounts of capital in the business. Typically, you have these huge oil companies around the world investing billions of dollars in long lead-time projects that bring out a lot of supply over time, but a lot of those investments just haven’t happened. If you’re not careful and you pull back too quickly, you’re going to have issues. There are a billion people in the world who still burn wood or dung to boil water and for heat. Getting affordable energy to people in these countries is so important for human life span issues. All those big companies will start working on generating energy in the way it’s going to be generated in the future, whether its through solar, wind, nuclear, geothermal or natural gas. But this is a decades-long thing that occurs. It’s not like you snap your fingers and do it overnight without causing tremendous economic harm.

Did you take any action to reduce CRC’s environmental impact in the meantime?We were investing in solar that would be complementary to our electricity usage out of some of our oil facilities. Producing energy, whether it’s oil or natural gas, is intensive from an electricity standpoint. You talk about carbon capture and sequestration. We are a net water supplier. We’re in a state that has boom-bust cycle on droughts. In 2017, almost 5 billion gallons of water were reclaimed and used for agricultural use. It’s that kind of stuff – being cognizant of the issues and working with the different communities you live and work in.Is there anything you’d do differently in retrospect? If you went and analyzed the situations and you realize the circumstances at the time, I felt pretty good. Did we make absolute right decisions every time? No. But probably 95-plus percent of the time, we did what was best for our shareholders and the company. I sleep well at night. It’s a tribute to the men and women of CRC that we lasted this long before we had to restructure.

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