Message from the CEO
California Resources Corporation accomplished a great deal in our first full year as a standalone company. We demonstrated the quality of our asset base, the commitment of our management team and operational excellence over the items that were under our control.
Despite the most severe commodity price downturn in nearly 30 years, our focus has not wavered. We remain committed as always to maximize shareholder returns by safely and responsibly developing conventional and unconventional assets exclusively in California while serving as responsible stewards and valued neighbors in the communities in which we operate.
We believe that the competitive advantages of our large underdeveloped resource base, in conjunction with our financial discipline, will reward investors over time. CRC’s diverse and low-decline assets provide a stable base and flexibility to manage effectively through short term events while maintaining and enhancing long term value. Lastly, we believe our management team’s extensive experience and knowledge of our assets has served stockholders well in this commodity price downturn.
In 2015, our priorities were to deleverage our balance sheet, protect our base production, and protect our profit margins amid falling prices. To pursue these goals we held fast to our key tenet of living within our means and focused our capital investments on CRC’s highest value projects as determined by our VCI metric. Starting immediately at the Spin-off, we asked our entire workforce to serve and focus on our operations, which generated exceptional results, including growing our crude oil production by five percent in 2015 and replacing more than the reserves we produced at a low replacement cost, excluding the effects of price changes.
We made excellent progress in 2015 on all items under our control, and intend to extend our success in these items into 2016. Below we review our 2015 accomplishments in more detail, then highlight the competitive strengths that our assets provide along with our 2016 plan to weather the downturn.
Fiscal Discipline—Living within our Means
Our top priority remains reducing the debt we have carried since the Spin-off. A key tenet for CRC is to live within our cash flow. This has been a rare quality in our sector, but living by this principle has served us well. In 2015, we generated operating cash flow over $400 million, which covered our capital program, and, excluding residual fourth quarter 2014 capital, allowed us to be free cash flow positive for the year. We also executed a bond exchange in 2015 that reduced the outstanding principal on our bonds by about $560 million.
In late 2014, seeing the early phases of the commodity price drop, we swiftly made the decision to reduce our drilling activity and went from 27 drilling rigs to 3 rigs in January of 2015. Similarly, we reduced our capital program from $2.1 billion to a $440 million budget for 2015, an 80-percent reduction and deeper than all our industry peers. Our 2015 actual capital investment totaled $400 million, showing a 10-percent improvement over our plan. This improvement resulted from process efficiencies identified by our resourceful workforce and deflationary pressures within the industry generally. Even with lower-than-planned capital, we drilled more wells than were contemplated in our capital plan. We focused our capital investments on crude oil projects, mainly steamfloods and waterfloods, and grew our average daily oil production by five percent over 2014. We increased our overall production by one percent and achieved a 140-percent organic reserves replacement rate at a low replacement cost.
We suspended our dividend in 2015 due to the continuing downturn in the commodity prices. Both the Board of Directors and I feel that it is prudent to do so in the current commodity environment. We will review this decision when we feel that we can distribute a meaningful and sustainable dividend. This downturn calls for our management team to focus on near-term liquidity decisions and weigh our deleveraging opportunities while preserving CRC’s evident long-term value.
Enhance our Margins
Our operation teams have been successful in reducing our operating costs and improving efficiencies across our operations in 2015. Overall, we were able to reduce our per barrel cash costs by 13 percent, excluding interest, in 2015. Production costs were reduced by 11 percent to $16.30 per barrel. These cost reductions are not attributable to any one item; rather, they reflect the hard work and ingenuity of our dedicated employee base that generated numerous ideas during 2015. We have begun 2016 with a similar focus on costs and expect to reduce our cash costs even further.
To protect our cash flow stream, margins and capital investment program, we launched a hedging program immediately after our spin-off. We instituted a program utilizing a combination of floors, swaps and costless collars. We currently have approximately 30 percent of our expected 2016 crude oil volumes protected at above $50 Brent on average. To provide a predictable cash flow stream, we will continue to add hedges opportunistically and attempt to protect approximately 50 percent of the value of our quarterly production as we move through the year.
Protect our Base
CRC owns and operates an exceptional portfolio of resources and we took great care in 2015 to protect the value of those assets for the long term. CRC is the largest independent producer in the state on a gross operated basis. California has five of the top 12 fields in the lower 48 states as ranked by total production. We operate in four of these fields and all four major basins in the state. Two of them, the Elk Hills and Wilmington fields, serve as our flagship operations.
Elk Hills serves as a classic example of the characteristics that make our asset base unique and compelling. It is a large field diversified across many different producing strata and production types. It is fully integrated with substantial midstream infrastructure, a 550-megawatt power plant and a state-of-the-art Central Control facility. The field was purchased from the U.S. government and has been in production for 100 years, yet we continue to find new opportunities. 2015 marked the first year in its history that Elk Hills did not have a single drilling rig operating—as a result we witnessed first-hand the field’s modest production decline with no added drilling capital. Elk Hills’ production response was impressive and exhibited a decline rate that was better than our expectations.
CRC’s Wilmington field in the Los Angeles basin has a long history as well; the THUMS islands are part of the landscape in Long Beach, and celebrated their 50th anniversary in 2015. CRC has a unique production sharing contract that benefits the City of Long Beach, the State of California and CRC through continued field development. Since we started operating the field in 2000, our technical teams have continued to find new oil resources. As a result, we typically end each year with a larger inventory of drill locations than we started with, even after the drilling program is complete. We continue to see evidence that big fields really do get bigger.
Both of these fields, as well as many of our other steamfloods and waterfloods, contribute to the low-decline nature of our asset base. CRC’s technical teams did an excellent job of maintaining our base production in 2015 despite the low capital investment. We believe our current corporate decline is a modest 10-15 percent, closer to the higher end during periods of low capital investment due to increased downtime. We believe this is a key source of differentiation from our peers in the industry. We believe that our future investments in steamflood and waterflood fields in our portfolio will help further moderate our base decline, underpinning our value proposition.
Building a deep inventory
Although our drilling and workover activity is being further reduced for 2016, we are continuing to build value for the future. Our ongoing geotechnical analysis has produced results on both the development and exploration fronts. As an example, in 2015 we had a team of geoscientists and engineers review a small field for opportunities and their work produced a 5-fold increase in reserves and economic drilling opportunities. This result is indicative of the under-developed nature of California’s oil and gas resources. We are taking this same approach and applying it across our 137 fields in the state. We are refining and enhancing our life-of-field plans to capture the full potential of the approximately 40 billion barrels of original oil in place1 across our 2.4 million net acres. California truly is a world-class hydrocarbon province, and the data supports that conclusion. Today’s technology will allow CRC to better image, develop, and more efficiently extract value from our portfolio.
In our 2015 exploration program, we further delineated several prospects and continued to see success from a 2014 well. The well was in a structural play that was originally completed in the deepest reservoir interval in the field and delivered production of several hundred barrels of oil per day. During the year, we moved up to a second reservoir interval and saw flow rates in excess of 750 barrels of oil per day. This well was completed in a naturally flowing conventional reservoir that has further behind pipe potential. This example also illustrates the underexplored nature of California.
Our portfolio has over 125 independent oil and gas prospects, most of which have stacked pay potential and are directly analogous to either producing fields or some of CRC’s key discoveries. We have also made discoveries within the California shale reservoirs that provide numerous drilling opportunities for long-term growth. We believe we hold one of the largest and most diverse sets of exploration opportunities in the lower 48 states.
We live and work in California and know the needs of our communities first hand. We strive to serve as responsible citizens who promote the economic well-being of the state in a responsible manner. Our Board, management team and employees share three core values—Character, Responsibility and Commitment—that define how we conduct business and interact with our stakeholders.
As you may have heard me say, there are ‘‘hard rights’’ and ‘‘easy wrongs’’ in decision making. We believe that we have made the hard right decisions that were needed to successfully meet the challenges of this period. We are following through with a commitment to protecting long-term value. We continue to focus our efforts on the deleveraging process and steering through this price downturn toward the value that lies ahead for our shareholders. We continue to receive the support of our 21-firm bank group in 2016 to weather this cyclical bottom on crude oil.
All Californians have seen the effects of the multi-year drought, and CRC has worked diligently with state and local agencies to aid California by increasing our water recycling efforts, reducing our fresh water usage and supplying surplus non-potable water for irrigation and groundwater recharge. We have made significant investments in each of these areas. In 2015, we recycled approximately 77 percent of our produced water to meet our operational needs. In addition, we supplied more than 2.6 billion gallons of treated reclaimed water for agricultural needs in 2015, setting a company record at the height of California’s drought. We are working to increase this important water supply over the coming years.
Our commitment to California is to provide the state with a safe, secure and reliable supply of energy. California continues to import the majority of its energy needs, often from places that do not meet California’s high standards of safety and environmental protection. In 2015, CRC supplied 58 million barrels of oil equivalent, which equates to 122 thousand barrels per day of crude oil and natural gas liquids and 229 million cubic feet per day of natural gas. We also supplied 462 gross megawatts of electricity per day through our power plant in Elk Hills, which is enough to power Anaheim for a year.
Character is shown best by the choices you make in trying times. Given the erosion in crude oil prices that weighed heavily on our entire industry, we at CRC also have had to make tough choices. These decisions should position CRC to emerge from this trough in a stronger position to build long-term value for our investors, employees, suppliers and communities in which we operate.
We recognize that working our way through this challenging period calls for everyone in the company to make appropriate sacrifices. Therefore, in accordance with our core values, CRC’s executives have chosen to take a reduction in salary. Unfortunately, we also had to reduce our staffing levels to match the current low price environment.
We believe that the company’s strong, diverse and low-decline asset base serves us well in our efforts to navigate through this period. We will continue to build inventory for when we can ramp up our activity level in a continued fiscally responsible manner that will provide long-term stockholder value. Our leadership team has been through commodity cycle ups and downs before. We fully expect the significant reduction in industry-wide capital investment in 2015 and continuing into 2016 will ultimately lead to a rebound in commodity prices and we will be prepared to capitalize.
Todd A. Stevens
President and Chief Executive Officer
1 The United States Securities and Exchange Commission (SEC) guidelines strictly prohibit us from using the term ‘‘original oil in place’’ in our SEC filings. This term represents an estimate of the total volume of oil stored in a reservoir prior to production and is not intended to correspond to probable or possible reserves as defined by SEC regulations. By their nature these estimates are more speculative than proved, probable or possible reserves and subject to greater risk they will not be realized.