Shares of independent oil and gas producer California Resources (NYSE:CRC) were up 12% as of 11 a.m. EST today after the company reported earnings after the market closed yesterday. The company's fourth-quarter results were much higher than analyst estimates, which has the stock soaring today.
California Resources reported adjusted net income per share of $0.53, which was well above analyst estimates of $0.02 per share for the quarter. Those adjusted results exclude any one-time noncash gains related to the value of its futures contracts. This is a common fair-value accounting adjustment with companies that either hold large amounts of crude oil or refined product in inventory or have futures contracts in place to sell future crude oil production at fixed prices.
Operationally, this quarter was rather successful as well. The company reported that total production volumes were up 8% versus this time last year, while the average production cost declined to $18.61 per barrel of oil equivalent. These better productivity numbers are largely related to acquiring mineral rights from Chevron for its 47,000-acre Elk Hills field in the San Joaquin Basin of California. That acquisition also resulted in a reserve replacement ratio of 296%.
If there is one bad spot on this earnings report, it's the lack of cash flow coming in the door. Total cash from operations in 2018 was $461 million, while its capital spending came in at $690 million. A large chunk of that was related to the Elk Hills acquisition, but balance-sheet preservation has been a hot-button topic for California Resources' investors. Management thinks that with the additional Elk Hills barrels and its futures-contract-protected production, the company will be able to get to a target leverage ratio of debt to adjusted EBITDA of 2 to 3 times (at the end of 2018, leverage stood around 5 times).
Shares of California Resources have been extremely volatile over the past several years, and despite its portfolio of futures contracts to protect cash flows, its stock is sensitive to commodity prices. The numbers it recently posted are encouraging, but the company's debt-to-EBITDA numbers are still uncomfortably high. If commodity prices are low for long enough to exhaust its futures contracts -- much like we saw during the last downturn -- then California Resources could find itself in trouble again. Until we see some significant strides to lower its debt load and improve cash flow, it's best to avoid this stock despite the recent success.