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California Resources files for bankruptcy

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California Resources Corp, the state’s biggest oil and gas producer, has filed for bankruptcy, becoming the latest US energy group to buckle under a crash in crude prices triggered by the coronavirus pandemic.

Recent market ructions proved to be the final straw for a company that had struggled under the weight of its debt load since it was spun off from Occidental Petroleum six years ago. 

“We have consistently operated within cash flow, significantly reducing the outsized debt burden we inherited from Occidental Petroleum at our December 2014 spin-off,” said Todd Stevens, CRC chief executive. “However, today’s unprecedented market conditions, including oversupply and reduced demand due to Covid-19, require that we further reduce our debt through a Chapter 11 process.”

The Santa Clarita-based company is the fourth big name in the US energy sector — and the biggest conventional producer — to file for bankruptcy since the outbreak of coronavirus combined with a price war between Russia and Saudi Arabia sent oil prices plunging.

Shale pioneer Chesapeake Energy last month became the biggest casualty of the crash so far. Denver-based shale groups Whiting Petroleum and Extraction Oil and Gas have also already filed, along with a raft of smaller producers.

CRC was spun out of Occidental in 2014, inheriting a net debt of more than $6bn, just as oil prices were beginning to slide ahead of the last downturn. When the deal was conceived oil traded above $100 a barrel, but even as it closed prices had slipped to about $70. They fell to $30 by the end of 2015 and have never since returned to triple-digit levels.

“Going back to 2014 there has been the possibility of a restructuring through a bankruptcy arrangement,” said Pavel Molchanov, an analyst at Raymond James. “The company has been struggling with its balance sheet because the balance sheet was designed for $100 oil . . . the crash due to Covid was the last straw.”

The Financial Times reported in March that the company had recruited advisers to help it restructure its debt. Lenders gave it time to get its house in order ahead of the filing with a series of forbearance agreement extensions in recent months.

Under the restructuring programme, which analysts had been expecting for some time, CRC will eliminate more than $5bn of debt and be provided with over $1bn in debtor-in-possession financing to see it through the process.

Line chart of Share price ($) showing CRC's value has tumbled since its spin-off from Occidental

American oil producers have been hit hard by the price collapse, which saw the US benchmark, West Texas Intermediate, plunge into negative territory for the first time in April. Prices have since bounced off their lows but at about $40 a barrel, WTI remains down by a third since the beginning of the year.

Analysts expect the current spate of restructurings to continue to dog the sector over the coming months. Twenty-three companies had filed for bankruptcy by the end of last month, according to Texas law firm Haynes & Boone.

Unlike many other producers that have fallen into insolvency, CRC is not shale-focused. Analysts said its problems had been less related to poor governance and more to do with the fact that the scale of its debt was never manageable at lower prices.

“With CRC it’s a bit different,” said Denis Rudnev at S&P Global. “This is the hand they were dealt as a result of the spin-off. Other companies have been poorly managed or overleveraged generally.”

The company has cycled through a range of options to try to shake its debt load down the years, including asset sales, debt repurchases and exchanges. It managed to bring net debt below $5bn by the end of 2019 and had hoped to cut this by about another $1bn through a complex exchange with note holders this year, but the plan that was scuppered by price collapse.

“They’ve been creative on that front but ultimately it’s been difficult in this commodity price environment,” said Mr Rudnev.

The company produced 128,000 barrels of oil equivalent a day in 2019, two-thirds of which was oil. 

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