California Resources (NYSE:CRC) became the latest oil and gas producer to file for Chapter 11 bankruptcy. The long-rumored and widely expected move will enable the company to further reduce its debt, which became an overwhelming burden following this year's crash in crude prices. 

California Resources and its key creditors have already agreed to a comprehensive balance street restructuring. The agreement will allow it to finally address the burdensome debt situation that it inherited following its spinoff from Occidental Petroleum (NYSE:OXY) in late 2014. The pre-arranged deal with certain creditors will:

  • Eliminate more than $5 billion of debt and mezzanine equity interest and consolidate its ownership of a key power plant and gas processing facility.
  • Bolster its liquidity by $1.1 billion via debtor-in-possession financing, which includes refinancing its current revolving loan facility.
  • Agreements with creditors to backstop a $450 million rights offering and a $200 million second lien financing facility.
A pencil erasing the word debt.

Image source: Getty Images.

This agreement, which the bankruptcy court must still approve, would enable California Resources to eliminate much of the debt Occidental Petroleum saddled it with following its spinoff in 2014. That debt proved to be a significant burden, given that oil prices plunged that year. While California Resources made it through that initial collapse by using free cash flow and debt exchanges to chip away at its debt, this year's crude oil plunge proved insurmountable.

By restructuring much of its debt via bankruptcy, California Resources will be able to eventually emerge with a much stronger financial profile. That will put it in a better position to successfully operate in the challenging oil market.