California Resources Corporation Faces Bankruptcy- Is It Occidental Death & Dismemberment?

California Resources Corporation (CRC) skipped an interest payment last month and seems headed towards a Chapter 11 filing. In the meantime, the company made one interest payment late and then successfully bought a few more weeks of additional time by negotiating a forbearance agreement with its lenders. June 30th is now its next big deadline, but it seems unlikely that the company will be able to generate enough cash to stave off bankruptcy. Although its prospects are improving as the economy further opens up, its most recent 10Q notes ‘that operating cash flow and expected available credit capacity will not be sufficient to meet our commitments over the next twelve months’. Of course, it could always work out a restructuring deal with its creditors. Tick, tick, tick…

This isn’t such a surprise. CRC is a 2014 spinoff from Occidental Petroleum (OXY) and the separation raised some eyebrows. It was an interesting transaction because the premise was that the new company would only contain OXY’s California assets. Most spinoffs involve the separation of a distinct business unit (often one ‘good’ and one ‘bad’), but CRC operates similar assets, albeit in a distinct geography (one might say ‘bad’). OXY hadn’t been investing in the region and the idea was that as a standalone entity the new company would somehow be able to focus and grow. Most people viewed it as a way to dump assets in a politically fraught area that generated solid cash flow, but didn’t have a bright future. CRC was also ‘gifted’ over $6B of debt at its birth which didn’t help. Additionally, the company had restrictions on its ability to expand beyond California within its first few years of existence. Few were bullish on its prospects at the time and although the stock has had its moments over the years, its chart is not pretty.

The company continued to trudge along though, but the combination of a global pandemic and sustained low oil prices seem to have been too much. California was an early state to enact shelter in place orders and that really handicapped demand for the company’s product. Refinery outputs continue to climb though so perhaps there is hope on the horizon. The stock price is sitting at $1.28 so some people out there have hope. Then again Hertz (HTZ) almost raised $1B in stock while bankrupt so that doesn’t mean much these days.

In addition to Covid, the recent 10Q also blames Occidental and the crushing debt load it inherited for its current situation. That sounds like it could be a precursor to a shareholder lawsuit and it will be interesting to see if OXY will ultimately shoulder some responsibility for its demise. The good news is that the company’s operations are expected to continue during a restructuring. Hopefully, if California Resources does end up in Chapter 11, the company ultimately emerges as a stronger company capable of fulfilling its initial promise.

Disclosure: Author holds no position in any stock mentioned