California Resources Corp. filed for Chapter 11 bankruptcy late July 15, a move the company said “finally resolves [the] leveraged capital structure inherited from [its] 2014 spinoff” from Occidental Petroleum Corp.

After calling Los Angeles home for nearly a century, Occidental Petroleum announced plans in 2014 to move its headquarters to Houston and spin off its California assets into a separate company. The spinoff, which closed at the onset of the 2014-16 downturn, not only created the largest oil and gas producer in the Golden State, but also included the transfer of $6 billion of debt to the newly formed California Resources. 

By 2017, the company had reduced that debt by $1.5 billion, said Todd Stevens, president and CEO of California Resources, in an interview with Hart Energy’s Oil and Gas Investor at the time.

However, when the coronavirus pandemic hit, the company had “simply exhausted options,” said Sharon Bonelli, a senior director with Fitch Ratings.

“The company had significantly cut production to conserve capital and lacked hedging, which led to declining cash flows when oil prices plunged earlier this year,” she said in an emailed statement. “Moreover, there were looming revolving credit facility and first lien term loan maturities in 2021 and 2022.”

The company had attempted out of court debt exchanges of its second lien notes due 2022 and various senior notes, Bonelli also noted. The unsuccessful offer was terminated in March.

In a statement on July 15 commenting on the bankruptcy, Stevens said: “We have consistently operated within cash flow, significantly reducing the outsized debt burden we inherited from Occidental Petroleum at our December 2014 spinoff. However, today’s unprecedented market conditions, including oversupply and reduced demand due to COVID-19, require that we further reduce our debt through a Chapter 11 process.”

In a release, California Resources said it entered a restructuring support agreement with “key creditors” that will eliminate over $5 billion of debt and mezzanine equity interest and consolidate the company’s ownership of the Elk Hills power plant and cryogenic gas plant upon court approval.

Creditors include approximately 84% of the company’s 2017 term loans, 51% of the company’s 2016 term loans and its Elk Hills midstream joint venture partner, Ares Management LP, according to the company release.

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California Resources plans to continue operations through the Chapter 11 process, supported by a commitment of over $1 billion in debtor-in-possession (DIP) financing from certain creditors. The company said the DIP financing will also be used to refinance its 2014 revolving credit facility.

“We have a track record of disciplined financial and operational decisions and, with our strong balance sheet, we won’t need to rely on higher commodity prices to be successful,” Stevens continued in his statement.

The company’s Chapter 11 cases have been filed in the Southern District of Texas (Houston Division).

In connection with the restructuring, Sullivan & Cromwell LLP is legal adviser, Alvarez & Marsal is financial adviser and Perella Weinberg Partners is serving as investment banker.

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