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California Resources (CRC) to Snap Up Aera, Boost Portfolio

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California Resources Corporation (CRC - Free Report) , an oil exploration and production company, announced a merger agreement with Aera Energy, LLC, in an all-stock deal valued at $2.1 billion.

Details of the Transaction

The transaction includes Aera’s net debt and other obligations. Per the terms of the agreement, Aera’s owners will receive 21.2 million shares of CRC’s common stock at closing, which is equivalent to approximately 22.9% of CRC’s fully diluted shares. To facilitate the deal’s closure, expected in the second half of 2024, CRC has secured a firm commitment for a $500 million bridge loan facility.

Aera is jointly owned by entities managed by IKAV (51%) and Canada Pension Plan Investment Board (CPP Investments) (49%), which will hold 22.9% of CRC’s common stock upon the deal’s closure.

Significant Addition to Scale & Cash Flows 

The merger is expected to be immediately accretive to 2024 key financial metrics, along with a 45% improvement in operating cash flow per share and a 90% accretion to free cash flow per share.

The deal will also add large, conventional, low decline, oil-weighted, proved developed producing reserves to CRC’s asset bases and sustainable cash flow. In the third quarter of 2023, Aera’s average production was 76,000 barrels of oil equivalent per day (boe/d), including 95% oil. At the end of 2022, Aera’s estimated proved reserves were 262 million barrels of oil.

On a pro forma basis, CRC will have an estimated production of 150,000 boe/d with 76% oil and proved reserves of 680 million boe (90% proved developed) in 2024E. After the merger, the combined company is touted to be California’s largest oil and gas company, with interests in five of the state’s largest oil fields with opportunities for oil recovery.

The transaction is expected to more than double this year’s free cash flow to $689 million. The cumulative free cash flow is expected to reach nearly $3 billion through 2028, which will be utilized by the company to enhance shareholder returns, reduce debt and finance the expansion of its carbon management business.

California Resources’ board of directors has approved a 23% increase of the Share Repurchase Program to $1.35 billion. The program has been extended till the end of 2025. The company anticipates an increase in its fixed quarterly dividend, subject to the board’s approval once the deal closes.

The transaction is expected to generate synergies worth up to $150 million annually, realized within 15 months of closure. Over the next 10 years, cumulative synergies are expected to have a PV-10 value of $1 billion.

Pro forma, California Resources expects to maintain a strong balance sheet and enhanced liquidity. Within one year of closing, the company anticipates the leverage ratio to be less than 0.5x and $800 million in liquidity, providing enhanced access to capital.

Green Initiatives

The merger between CRC and Aera will enable the expansion of the former’s carbon management business. The expansion will be supported by acquiring additional surface acreage and rights, along with significant new carbon dioxide pore space. This will enable future carbon capture and sequestration development.

CRC will also acquire interests in approximately 220,000 net mineral acres, with nearly 80% of the acreage within field boundaries held in mineral fee and an additional 100,000 fee surface acres. After accounting for these acquisitions, CRC will have more than 1.9 million net mineral acres.

Post completion of the merger, the company will obtain 1 pending EPA Class VI permit application for 27 million metric tons (MMT) of storage capacity in the Belridge Field. It also plans to submit a Class VI permit for approximately 27 MMT of storage at the Coles Levee Field. The closure will also enable CRC to double its injection rate capacity near CTV I, facilitating the creation of a premier decarbonization hub for CO2 storage.

The merger will also allow CRC’s Carbon TerraVault platform and Aera’s Low Carbon Solutions to complement each other and facilitate further expansion to a variety of energy transition technologies.  The technologies in development include Direct Air Capture (DAC), geothermal energy, solar power and advanced water treatment. The merger will also garner opportunities for additional clean tech partnerships, with a goal to decarbonize California.

California’s Energy Transition

California’s business environment has not been favorable for many oil and gas giants in recent years, owing to stringent environmental policies in place. Output in California has been dwindling, even though other U.S. basins are still growing.

According to CPP, the merger comes with the opportunity to scale up investment in California’s energy transition. The deal comes as a promising source of long-term risk-adjusted returns for CPP Funds.  CPP Investments’ Sustainable Energies Group capitalizes on growth opportunities in the evolving energy market, focusing on low-carbon energy alternatives, especially as global power demand is on the rise.

IKAV added that the merger combines the strength of both companies, which will be operating together as the largest oil and gas company in California.

Zacks Rank and Key Picks

Currently, CRC carries a Zacks Rank #5 (Strong Sell).

Investors might want to look at some better-ranked stocks in the energy sector, such as Oceaneering International (OII - Free Report) , Repsol (REPYY - Free Report) and Harbour Energy (HBRIY - Free Report) . While both Oceaneering International currently sports a Zacks Rank #1 (Strong Buy), Harbour Energy and Repsol hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Oceaneering International is a market-leading supplier of offshore equipment and technology solutions to the energy industry. The company has projected an increase in free cash flows for 2024. The bright outlook is supported by the growing market demand for its mobile robotic forklifts and underride vehicles.

Repsol is a global multi-energy company, involved in exploration and production activities as well as refining and marketing petroleum products. The company is also actively involved in transitioning toward cleaner and more sustainable energy solutions. Recently, it announced the expansion of its network of renewable fuel refilling stations in Europe, demonstrating its commitment to a sustainable energy model.

Harbour Energy is a leading independent oil and gas company, primarily involved in upstream operations. The recently announced acquisition of Wintershall Dea asset portfolio is expected to increase HBRIY's estimated production. The company has also done well in reducing its debt in the past year.

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