On Monday, Roth/MKM adjusted its outlook on California Resources Corp (NYSE:CRC), reducing its price target from $58.00 to $56.00, while maintaining a Buy rating on the stock.
The decision comes in the wake of a recent ruling by a California appellate court, which overturned a lower court's approval of an existing environmental impact report (EIR) used for oil and gas well permitting in Kern County, CA. This report was previously considered sufficient for the issuance of new drilling permits in the area.
California Resources contends that it can still acquire drilling permits through alternative methods, despite the court's ruling. The company has indicated that it could pursue new environmental studies in other parts of Kern County to facilitate the permitting process. However, the timeline for obtaining these alternative permits is uncertain, with the possibility of extending into 2025 or beyond.
Reflecting on the court decision's impact, Roth/MKM anticipates that California Resources' alternative guidance scenario for 2024 will likely result in a 5-7% production decline from end of 2024 to end of 2024, accompanied by $100 million less in capital expenditures. The firm has also reduced its 2024 cash flow per share (CFPS) estimates by 4% due to the projected lower production. Despite this, Roth/MKM has increased its 2024 free cash flow (FCF) estimate for the company by $100 million.
Roth/MKM does not believe that the permitting challenges will affect California Resources' $2.1 billion Aera acquisition. The acquisition is expected to proceed as it is seen to enhance the company's free cash flow and offer substantial synergies. California Resources anticipates a mid-2024 decision on the final EPA Class VI and Kern County EIR permits for its CTV 26R project.
The firm also notes that California Resources is trading at a premium compared to its peers, with a 4.6x multiple on its 2024 debt-adjusted cash flow (DACF), based on a West Texas Intermediate (WTI) oil price of $77 per barrel. Additionally, the company has a projected 16% free cash flow yield for 2024, according to Roth/MKM's estimates.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.