When oil giant Occidental Petroleum Corp. announced it would spin off its California operations, it was supposed to be a gusher of good news for investors. Oxy would become smaller and more focused, while the spinoff would be freed to expand its operations in California.
But at least for the spinoff, the gusher has turned into a sinkhole: Shares of the new California Resources Corp. started trading last week and were down 13 percent after just three days – and down even more from where analysts just months ago expected the stock to trade.
The timing of the spinoff couldn’t have been worse, coming amid the biggest downturn in the oil market in more than four years.
“It’s obviously a very unhelpful backdrop for any oil stock, particularly a brand-new one,” said Pavel Molchanov, energy analyst in the Houston office of Raymond James and Associates of St. Petersburg, Fla.
Combine that with $6 billion in debt from the spinoff, increasing uncertainty over California Resources’ ability to drill for more oil in the state and some skittish investors who wanted nothing to do with the new company’s shares, and the ingredients were there for a major selloff.
Shares had been trading off-market since the middle of last month but started official trading on the New York Stock Exchange, under the ticker CRC, on Dec. 1. In their first three days on the market, shares fell $1.03, or 13 percent, to $7.02 – nearly 30 percent below the $10 price range where analysts just months ago had predicted shares would trade.
Most of the blame for California Resources’ poor debut goes to falling oil prices. Last week, a barrel of West Texas Intermediate benchmark crude oil sold for $67.82 a barrel, 35 percent below its June peak. The drop has hit all oil companies, but it’s especially bad news for California Resources.
Though it’s a new company, California Resources came out of the gate with a huge debt load. Under terms of the spinoff, the new company had to pay a $6 billion one-time dividend to Occidental. To pay this off and raise some money for ongoing operations, the company took out $8 billion in debt. For a company its size, that’s a larger-than-average debt load – one that will be especially difficult to pay off when oil prices are low, and falling.
“There is no escaping the fact that the $6 billion payment to the parent company required taking on that entire amount as debt, creating the pressure of high leverage, particularly against the backdrop of depressed oil prices,” Molchanov said.
Investors might also be skittish about the state’s notoriously strict regulatory environment for oil producers. Not only do oil companies have to spend much more money to comply with the regulations here, but they also face long delays in getting drilling projects approved in the state. With California Resources only producing in this state, its operating costs are considerably higher than rivals that drill in other states.
On top of this, many of California Resources’ operations rely on “nontraditional” drilling methods, including hydraulic fracturing, or fracking, a practice that’s drawn growing opposition from critics who claim it contaminates groundwater and could lead to earthquakes. Last month, voters in San Benito and Mendocino counties approved fracking bans. Los Angeles and other communities are considering bans of their own.
All this was noted in Moody’s Investors Service’s rating of California Resources’ $8 billion debt offering last month. The New York bond rating agency said the company is “uniquely exposed” to California regulations.
Molchanov said this might have turned off some investors. Under terms of the spinoff, Occidental shareholders received four-tenths of a share of California Resources for each of their Oxy shares. Many of those shareholders originally bought into Occidental for its diverse global oil-producing portfolio and had little interest in holding their new California Resources shares, Mochanov said.
“Just about everyone understands West Texas and North Dakota,” Molchanov said. “But California drilling has its own idiosyncratic attributes, including a complex regulatory landscape. With this in mind, many Occidental shareholders that received CRC shares seem to be opting to take the easy way out and just sell.”
Despite its falling price, California Resources debuts as one of L.A.’s major public companies, with its market capitalization of $2.7 billion placing it 37th on the LABJ Index of local public companies. (It does not appear on this week’s index because it has not traded for a full week.)
Last year, the company had earnings before income, taxes, depreciation and amortization of about $2.6 billion, according to figures released by Occidental when it announced the spinoff in February.
California Resources is also the largest natural gas producer in the state and the second largest oil producer; Chevron Corp. of San Ramon is No.1. It’s the largest oil and gas mineral acreage holder in the state.
The company, which is headed by Chief Executive Todd Stevens, has roughly 2,000 employees and 6,000 contract workers.
The company, for now, is headquartered in Occidental’s former home on Wilshire Boulevard in Westwood, but that building is on the market and expected to be vacant by the middle of next year. Initial expectations were that California Resources would pick a new site by the end of this year. But last week, spokeswoman Margita Thompson said a decision is now expected by the end of March.
California Resources has considered sites elsewhere in Los Angeles, Long Beach, Santa Clarita and Bakersfield, and this fall expanded a lease in Long Beach.
While the company said the expansion was to accommodate its Southern California operations, Long Beach officials are hoping it’s a prelude to a decision to locate its corporate headquarters there.
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