Fitch Ratings has assigned a 'B+' First-Time Long-Term Issuer Default Rating (IDR) to
Fitch has also assigned a 'BB+'/'RR1' rating to the company's secured reserve-based lending credit facility (RBL) and a 'BB-'/'RR3' rating to the company's senior unsecured notes. The Rating Outlook is Stable.
CRC's ratings reflect its large, low-decline asset base with exposure to Brent pricing, conservative capital structure, forecast sub-1.5x leverage, expectations of positive FCF through the rating horizon, strong liquidity and proactive hedging program that limits downside risks. These factors are partially offset by the company's high cost structure, which limits economic drilling prospects and exposure to California's stringent regulatory environment that could disrupt permitting, drilling and financing options in the medium and long term.
Key Rating Drivers
Large, Low Decline Asset Base: CRC operates exclusively in
Modest Near-Term Production Declines: Management's
Fitch expects the company could return back to a three-rig program by mid-2024 and believes it also has the ability to secure individual field-level permits, although the process can be slower and more burdensome. Fitch believes the company's large, multi-play asset base does provide capital and operational optionality to navigate regulatory disruptions.
Strong Correlation to Brent: Demand for oil is strong in
High Cost, Low Netback Producer: CRC's cost structure is higher than most Fitch-rated
Near-Term Hedging Protection: Fitch believes CRC is likely to reduce its hedge coverage in the medium-term given its low leverage metrics and continued FCF generation. The company is currently hedging approximately 65% of its 2023 oil production with a total weighted average effective price of approximately
Fitch believes the company will still hedge its future production, albeit at lower levels, given forecast sub-1.5x leverage metrics, which could leave the company susceptible to weakened commodity prices.
Positive FCF; Sub-1.5x Leverage: Fitch forecasts positive post-dividend FCF generation of approximately
Fitch-calculated gross debt/EBITDA is forecast to remain below 1.0x in 2023 and 1.5x through the remainder of the forecast given the company's conservative capital structure. Fitch does not expect incremental draws on the RBL and believes FCF will be allocated towards the company's Carbon Management (CM) initiatives, shareholders via dividends and incremental share repurchases.
Carbon Management Initiatives: CRC continues to advance its Carbon Management businesses, driving management's goal of reliable, safe and ESG-driven operations. The company's strategic JV with Brookfield Renewable helps advance CRC's energy transition strategy, substantially de-risks its CM funding needs and should help reach the JV's goals of first CO2 injection by the end of 2025 and five million metric tons of CO2 storage per annum (200 million metric tons of total CO2 storage capacity) by the end of 2027.
Fitch views the JV favorably given its focus on reducing carbon emissions, Brookfield's significant expertise and investment with CM projects, and the potential cash flow streams and tax credits the segment could provide in the medium and long term. Fitch's base case scenario includes the company's expected capital investments, but does not include any revenues from CRC's CM businesses given the uncertainty around timing and magnitude of cash flows along with the potential for separation of the E&P and CM businesses.
California Regulatory Considerations:
Derivation Summary
CRC is a mid-sized operator with 1Q23 average daily production of 89 Mboepd (62% oil). The company is of similar size to Canadian producer
CRC's realized prices are typically higher than peers given the exposure to premium Brent pricing and the low-decline asset base leads to lower capital intensity versus peers. This is partially offset by the company's high cost structure which results in lower Fitch-calculated unhedged cash netbacks compared to Fitch's aggregate peer average.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
Brent oil prices of
Average production of 88 Mboepd in 2023, followed by relatively flat growth thereafter;
Upstream Capex of
Measured increases to shareholder returns;
No material M&A activity.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Diversification through meaningful EBITDA generation from Carbon Management or other non-E&P business lines;
E&P diversification outside of
FCF generation that supports the liquidity profile and limited borrowings under the RBL;
Commitment to conservative financial policy resulting in mid-cycle EBITDA leverage sustained below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unfavorable regulatory actions that reduce permitting availability and/or drilling prospects leading to production sustained below 75 Mboepd;
Deteriorating liquidity profile, including material revolver borrowings and inability to generate positive FCF;
Mid-cycle EBITDA leverage sustained above 2.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: As of
Clear Maturity Profile: CRC's maturity schedule remains light with no maturities until the senior unsecured notes and recently amended and restated RBL come due in 2026 and 2027, respectively.
RECOVERY ANALYSIS
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that CRC would be reorganized as a going-concern in bankruptcy rather than liquidated;
Fitch has assumed a 10% administrative claim.
Going-Concern (GC) Approach
Fitch's projections under a stressed case price desk, which assumes Brent oil prices of
The GC EBITDA assumption reflects Fitch's view of a sustainable, post-reorganization EBITDA level, upon which the agency bases the enterprise valuation, which reflects the decline from current pricing levels to stressed levels and then a partial recovery coming out of a troughed pricing environment. Fitch believes a weakened pricing environment would lead to production declines and materially erode the liquidity profile.
An EV multiple of 3.25x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:
The historical bankruptcy case study exit-multiples for peer companies ranged from 2.8x-7.0x, with an average of 5.2 and a median of 5.4x;
The multiple reflects the expectation that the value of CRC's oil producing properties will decline given the company's high cost structure and reduction in capex to preserve liquidity. The multiple considers the stringent
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
The RBL is assumed to be fully drawn upon default. The allocation of value in the liability waterfall results in recovery corresponding to 'RR1' recovery for the first-lien RBL credit facility and a recovery corresponding to 'RR3' for the senior unsecured notes.
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
CRC has an ESG Relevance Score of '4' for Exposure to Social Impacts due to the oil and gas sector regulatory environment in
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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