Fitch Rating has affirmed
The Rating Outlook remains Stable. Fitch has also affirmed the issue-level ratings for the company's secured reserve-based lending credit facility (RBL) at 'BB+'/'RR1' and senior unsecured notes at 'BB-'/'RR3'.
Under the terms of the agreement, CRC will merge with Aera in an all-stock transaction valued at approximately
CRC's ratings reflect its large, low-decline asset base with exposure to Brent pricing, conservative capital structure, forecast sub-1.5x mid-cycle leverage, expectations of positive FCF through the rating horizon and proactive hedging program that limits downside price 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 which could disrupt permitting, drilling and financing options and will still persist following the transaction's close expected in 2H24.
Key Rating Drivers
Credit-Neutral, Scale-Enhancing Transaction: Fitch believes CRC's all-stock merger with Aera is neutral to the credit profile. The transaction is attractively priced at a 2.6x EV/EBITDAX multiple and will materially increase scale with approximately 76 thousand barrels of oil equivalent per day (Mboepd) of oil-weighted, low-decline production in
Enhanced FCF; Synergy Opportunities: Fitch expects the merger will nearly double the company's FCF generation and the complementary nature of the assets provides achievable synergy opportunities. Management projects pro forma FCF generation of approximately
Near-Term Hedging Protection: Fitch views the pro forma company's strong near-term hedges positively and will help solidify FCF generation. Approximately 80% of the pro forma company's oil production will be hedged at attractive Brent prices at around
High Cost, Low Netback Producer: CRC's cost structure is higher than most Fitch-rated
Sub-1.5x Mid-Cycle Leverage: Fitch-calculated gross debt/EBITDA is forecast to remain below 1.0x in 2024 and 1.5x through the remainder of the forecast given the company's conservative capital structure. Fitch believes management could look to refinance a portion of Aera's debt in the near term through the capital markets and could use cash on hand for additional debt reduction.
Merger Accelerates Carbon Management Initiatives: Fitch believes the merger will accelerate the company's CM initiatives through the addition of surface rights and pore space. CRC continues to advance its CM businesses, driving management's goal of reliable, safe and ESG-driven operations. The company's strategic joint venture (JV) with Brookfield Renewable also 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
Pro forma the merger, CRC will produce approximately 150 Mboepd (76% oil). The company will be larger than 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
Brent oil prices of
Pro forma production of 150 Mboepd followed by flat growth thereafter;
Capex of
Measured increases to shareholder returns;
Announced Aera merger closes in 2H24.
Recovery Analysis
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that CRC would be reorganized as a going-concern in bankruptcy rather than liquidated.
We have 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 was increased to
An EV multiple of 3.00x 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 5.2x 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 also 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 revolver is assumed to be 90% drawn upon default with the expectation that commitments would be reduced during a redetermination.
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.
The RBL is assumed to be fully drawn upon default.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Diversification through meaningful EBITDA generation from CM or other non-E&P business lines;
Material 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 result in material production declines and/or weakened profitability;
Deteriorating liquidity profile, including material revolver borrowings and inability to generate positive FCF;
Mid-cycle EBITDA leverage sustained above 2.0x.
Liquidity and Debt Structure
Strong Liquidity: Pro forma the merger, Fitch expects CRC to maintain strong liquidity through meaningful availability under its RBL facility, cash on hand and forecast strong FCF generation. Management intends to refinance Aera's outstanding debt in the near term and has also secured a firm commitment for a
Issuer Profile
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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