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What happened

Shares of California Resources (OTC:CRC) jumped as much as 12% on Friday after reporting its third-quarter results.

So what

After months of bare-bones spending as the company worked to get both its costs and debt down, California Resources detailed a notable turn during the third quarter. Thanks to rising oil prices and a 14% year-over-year decline in production costs, the company generated $88 million in free cash flow during the quarter.

The company achieved that number even after investing incremental capital to begin ramping up its activity levels. This first step puts the company on a path to reach an inflection point by the middle of next year where its production will, once again, begin to rise.

The other highlight during the quarter was the progress the company made to improve its balance sheet. California Resources completed a tender offer that resulted in a net $625-million reduction in debt. That brought its total debt reduction to $1.5 billion from the peak when it was spun out. As a result of that debt reduction and improving market conditions, the company's banks reaffirmed its borrowing base at $2.3 billion, which gives it ample liquidity for what lies ahead.

With oil prices rising and debt levels falling, banks have left most oil company credit lines intact. Another example is Denbury Resources (NYSE:DNR), which recently had its credit line affirmed at $1.05 billion. That's due, in part, to Denbury's ability to cut its total debt balance by $562 million since the start of the year. As a result, Denbury, like California Resources, has plenty of liquidity as it heads into 2017, which gives both companies the flexibility to pursue opportunities to create shareholder value as the oil market begins to improve.

Now what

California Resources is in a much better spot than it was to start the year. The company has significantly reduced its debt and operating costs, which is what's allowing it to restart drilling activity now that the oil market is starting to improve. That said, the company is still well behind its shale-focused peers. Many of them are already planning on delivering double-digit production growth next year, even while living within their cash flow.

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