California Resources Corp (CRC) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Consolidated Results of Operations
Year Ended December 31, 2021 vs. the Successor and Predecessor Periods of 2020
The following table presents our consolidated revenue for the year ended December 31, 2021 and the Successor and Predecessor periods of 2020 along with supplemental information for the combined year ended December 31, 2020 (in millions):
| Successor | Predecessor | Combined | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, | November 1, 2020 - December 31, 2020 | January 1, 2020 - October 31, 2020 | Year ended December 31, | ||||||||||||
| 2021 | 2020 | ||||||||||||||
| Revenue | |||||||||||||||
| Oil, natural gas and NGL sales | $ | 2,048 | $ | 237 | $ | 1,092 | $ | 1,329 | |||||||
| Net (loss) gain from commodity derivatives | (676) | (141) | 91 | (50) | |||||||||||
| Sales of purchased natural gas | 312 | 38 | 124 | 162 | |||||||||||
| Electricity sales | 172 | 15 | 86 | 101 | |||||||||||
| Other revenue | 33 | 3 | 14 | 17 | |||||||||||
| Total operating revenues | $ | 1,889 | $ | 152 | $ | 1,407 | $ | 1,559 |
Oil, natural gas and NGL sales – Oil, natural gas and NGL sales, excluding the impact of settled hedges, were $2,048 million for the year ended December 31, 2021, which is an increase of 54% or $719 million, compared to $1,329 million for the combined year ended December 31, 2020. The increase was primarily due to higher realized prices as shown in the following table:
| Oil | NGLs | Natural Gas | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||||
| Year ended December 31, 2020 (Combined) | $ | 1,050 | $ | 135 | $ | 144 | $ | 1,329 | ||||||
| Changes in realized prices | 715 | 127 | 122 | 964 | ||||||||||
| Changes in production | (210) | (12) | (23) | (245) | ||||||||||
| Year ended December 31, 2021 | $ | 1,555 | $ | 250 | $ | 243 | $ | 2,048 |
Note: See Production, Prices and Realizations for volumes by commodity type and realized prices for each period.
The effect of settled hedges is not included in the table above. Payments on commodity derivatives were $319 million for the year ended December 31, 2021 compared to proceeds of $107 million for the combined year ended December 31, 2020. Including the effect cash settlements on commodity derivatives, our oil, natural gas and NGL sales increased by $293 million or 20% in 2021 compared to the same prior year period. A majority of our cash settlements on commodity derivatives during 2021 were related to contracts entered into shortly after our emergence from bankruptcy in order to comply with debt covenants in our Revolving Credit Facility.
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Net (loss) gain from commodity derivatives – Gains and losses from our commodity derivative contracts primarily relate to the non-cash changes in the fair value of our outstanding derivatives resulted from the positions held at the end of each measurement period as well as the relationship between contract prices and the associated forward curves. Gains and losses from our commodity derivative contracts are shown in the table below:
| Successor | Predecessor | Combined | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, | November 1, 2020 - December 31, 2020 | January 1, 2020 - October 31, 2020 | Year ended December 31, | ||||||||||||
| 2021 | 2020 | ||||||||||||||
| (in millions) | |||||||||||||||
| Non-cash commodity derivative loss, excluding noncontrolling interest | $ | (357) | $ | (138) | $ | (19) | $ | (157) | |||||||
| Non-cash commodity derivative (loss) gain, attributable to noncontrolling interest | — | (2) | 2 | — | |||||||||||
| Total non-cash changes | (357) | (140) | (17) | (157) | |||||||||||
| Net (payments) proceeds on settled commodity derivatives | (319) | (1) | 108 | 107 | |||||||||||
| Net (loss) gain from commodity derivatives | $ | (676) | $ | (141) | $ | 91 | $ | (50) |
Sales of purchased natural gas – Sales of purchased natural gas were $312 million for the year ended December 31, 2021, compared to $162 million for the combined year ended December 31, 2020, which is an increase of $150 million, or 93%. The increase was due to higher natural gas prices in 2021 partially offset by decreased volumes. Our natural gas sales net of related purchases were $116 million for the year ended December 31, 2021 compared to $60 million for the combined year ended December 31, 2020.
Electricity sales — Electricity sales increased by $71 million to $172 million during the year ended December 31, 2021 compared to $101 million for the combined year ended December 31, 2020. The increase was predominantly due to higher electricity prices in 2021 resulting from higher natural gas prices as well as reduced hydroelectric generation in California. Additionally, electric power generation was higher in 2021 due to planned maintenance and an outage at the Elk Hills power plant in 2020.
Other revenue — Other revenue primarily includes fees and sales from processing third party gas. Other revenue increased by $16 million to $33 million for the year ended December 31, 2021, compared to $17 million for the combined year ended December 31, 2020 primarily due to higher natural gas prices.
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The following table presents our operating and non-operating expenses (income) for the year ended December 31, 2021 and the Successor and Predecessor periods of 2020 along with supplemental information for the combined year ended December 31, 2020 (in millions):
| Successor | Predecessor | Combined | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, | November 1, 2020 - December 31, 2020 | January 1, 2020 - October 31, 2020 | Year ended December 31, | ||||||||||||
| 2021 | 2020 | ||||||||||||||
| Operating expenses | |||||||||||||||
| Energy operating costs | $ | 185 | $ | 28 | $ | 132 | $ | 160 | |||||||
| Gas processing costs | 20 | 3 | 19 | 22 | |||||||||||
| Non-energy operating costs | 500 | 83 | 360 | 443 | |||||||||||
| General and administrative expenses | 200 | 40 | 212 | 252 | |||||||||||
| Depreciation, depletion and amortization | 213 | 34 | 328 | 362 | |||||||||||
| Asset impairments | 28 | — | 1,736 | 1,736 | |||||||||||
| Taxes other than on income | 145 | 10 | 134 | 144 | |||||||||||
| Exploration expense | 7 | 1 | 10 | 11 | |||||||||||
| Purchased natural gas expense | 196 | 24 | 78 | 102 | |||||||||||
| Electricity generation expenses | 96 | 10 | 53 | 63 | |||||||||||
| Transportation costs | 51 | 8 | 35 | 43 | |||||||||||
| Accretion expense | 50 | 8 | 33 | 41 | |||||||||||
| Other operating expenses, net | 29 | 9 | 56 | 65 | |||||||||||
| Total operating expenses | $ | 1,720 | $ | 258 | $ | 3,186 | $ | 3,444 | |||||||
| Gain on asset divestitures | 124 | — | — | — | |||||||||||
| Operating income (loss) | 293 | (106) | (1,779) | (1,885) | |||||||||||
| Non-operating (expenses) income | |||||||||||||||
| Reorganization items, net | (6) | (3) | 4,060 | 4,057 | |||||||||||
| Interest and debt expense, net | (54) | (11) | (206) | (217) | |||||||||||
| Net (loss) gain on early extinguishment of debt | (2) | — | 5 | 5 | |||||||||||
| Other non-operating expenses, net | (2) | (5) | (84) | (89) | |||||||||||
| Income (loss) before income taxes | 229 | (125) | 1,996 | 1,871 | |||||||||||
| Income tax benefit | 396 | — | — | — | |||||||||||
| Net income (loss) | $ | 625 | $ | (125) | $ | 1,996 | $ | 1,871 | |||||||
| Net (income) loss attributable to noncontrolling interests | $ | (13) | $ | 2 | $ | (107) | $ | (105) |
Energy operating costs – Energy operating costs were $185 million for the year ended December 31, 2021, which was an increase of 16% or $25 million compared to $160 million for the combined year ended December 31, 2020. The increase was predominantly a result of higher prices for purchased natural gas, which we use to generate electricity for our operations, and for purchased electricity.
Non-energy operating costs – Non-energy operating costs for the year ended December 31, 2021 were $500 million, which was an increase of $57 million or 13% from $443 million for the combined year ended December 31, 2020. This increase was primarily a result of higher downhole maintenance activity in 2021 which was deferred from 2020 as we shut-in wells and suspended surface maintenance activity due to the COVID-19 pandemic. Additionally, non-energy operating costs increased in 2021 due to higher prices for natural gas, which we use to generate steam for our steamfloods. Partially offsetting these increases were lower labor-related costs from headcount reductions in late 2020 and early 2021 and reduced employee benefits beginning in the second quarter of 2021. Although higher natural gas prices in 2021 increased our operating costs, higher prices have a net positive effect on our operating results due to higher revenue from sales of this commodity which we also produce.
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General and administrative expenses – Our general and administrative expenses (G&A) were $200 million for the year ended December 31, 2021, which was a decrease of $52 million from $252 million for the combined year ended December 31, 2020. The decrease in G&A expenses was primarily attributable to lower labor-related costs as a result of workforce reductions that occurred in the second half of 2020 and the first quarter of 2021 as well as employee benefit reductions in the second quarter of 2021. The remaining decrease was also due to lower spending across a number of cost categories. The decrease was partially offset by an increase in compensation expense related to equity-settled awards granted to executives and directors in 2021.
Depreciation, depletion and amortization – Depreciation, depletion and amortization in each of the Successor periods was lower than the Predecessor period of 2020 primarily due to a decrease in the carrying value of our property as a result of fair value adjustments recorded as part of fresh start accounting on our emergence date. For further detail about our fair value adjustments see Part II, Item 8 – Financial Statements and Supplementary Data, Note 15 Fresh Start Accounting.
Asset impairments – Asset impairments were $28 million for the year ended December 31, 2021 compared to $1.7 billion for the combined year ended December 31, 2020. The asset impairment charges in 2021 included $25 million related to a commercial office building located in Bakersfield, California due to the decline in commercial demand for office space of this size and type in that market. The impairment charge of $1.7 billion in 2020 was due to the sharp drop in commodity prices at the end of the first quarter of 2020. Approximately $1.5 billion of this charge related to certain of our proved properties and $228 million related to unproved acreage that was no longer included in our development plans at that time. For further detail about our first quarter 2020 asset impairment, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 2 Property, Plant and Equipment.
Taxes other than on income – Taxes other than on income were $145 million for the year ended December 31, 2021, which was an increase of $1 million from $144 million for the combined year ended December 31, 2020. In 2021, we paid higher greenhouse gas taxes due to emission levels as we increased activity and increased market prices, which was partially offset by a decrease in ad valorem and production taxes.
Purchased natural gas expense – Purchased natural gas expense was $196 million for the year ended December 31, 2021, which was an increase of $94 million or 92% from $102 million for the combined year ended December 31, 2020 primarily due to higher prices in 2021 for purchased natural gas related to our trading activities.
Electricity generation expense – Electricity generation expenses increased to $96 million for the year ended December 31, 2021 from $63 million for the combined year ended December 31, 2020. The increase of $33 million was predominantly a result of higher pricing in 2021 on purchased natural gas used in electricity generation.
Other operating expenses, net – Other operating expenses, net was $29 million for the year ended December 31, 2021, which was a decrease of $36 million or 55% from $65 million for the combined year ended December 31, 2020. In 2020, other operating expenses, net included a one-time payment of $20 million made in connection with an expiring pipeline delivery contract and $7 million related to an outage at the Elk Hills power plant. Both of the years ended December 31, 2021 and the combined year ended December 31, 2020 include $15 million of severance costs related to the reduction in our workforce and the departure of certain executive and other senior officers.
Gain on asset divestitures – Gain on asset divestitures for the year ended December 31, 2021 was $124 million related to the sale of the majority of our Ventura basin operations, unimproved land and other non-core assets. No gain or loss was recognized in 2020 on the sale of royalty interests and a non-core asset since we accounted for these transactions as normal retirements. For more information on our asset divestitures, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 3 Divestitures and Acquisitions.
Reorganization items, net – Reorganization items, net was $6 million for the year ended December 31, 2021, all of which related to legal, professional and other fees related to our bankruptcy, compared to a $4.1 billion net gain for the combined year ended December 31, 2020. Reorganization items, net for the combined periods of 2020 includes legal, professional and other fees related to our bankruptcy, a net gain from the cancellation of our pre-emergence debt and the associated write-off of the unamortized balance of deferred gain, original issue discounts and deferred issuance costs and debtor-in-possession financing costs which were incurred during our bankruptcy proceedings. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 14 Chapter 11 Proceedings for additional information about reorganization items, net.
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Interest and debt expense, net – Interest and debt expense, net was $54 million for the year ended December 31, 2021 compared to $11 million for the Successor period of 2020 and $206 million for the Predecessor period of 2020. Interest and debt expense, net during 2021 primarily consists of interest on our Senior Notes. Interest and debt expense, net for the Successor period of 2020 primarily includes interest on our Revolving Credit Facility, Second Lien Notes and EHP Notes as well as amortization of debt issuance costs and deferred gain as shown in the table below. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 4 Debt for additional information on our credit agreements and January 2021 Senior Notes offering.
Interest and debt expense, net decreased in the Successor period of 2020 as compared to the Predecessor period of 2020 primarily due to the discharge of our debt upon emergence from bankruptcy.
The table below shows interest and debt expense, net for the Successor and Predecessor periods (in millions):
| Successor | Predecessor | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, | November 1, 2020 - December 31, 2020 | January 1, 2020 - October 31, 2020 | |||||||||
| 2021 | |||||||||||
| Interest expense on debt | $ | 49 | $ | 10 | $ | 223 | |||||
| Amortization of deferred gain | — | — | (39) | ||||||||
| Amortization of debt issuance | 7 | 1 | 29 | ||||||||
| Other interest | 1 | — | 1 | ||||||||
| Capitalized interest | (3) | — | (8) | ||||||||
| Interest and debt expense, net | $ | 54 | $ | 11 | $ | 206 |
Other non-operating expense, net – Other non-operating expenses, net for the year ended December 31, 2021 was $2 million compared to $89 million in the combined period of 2020. Other non-operating expense includes pension cost, other than the service cost component, related to our pension and postretirement benefit plans. The higher expense in 2020 was primarily a result of legal, professional and other fees in preparation for our bankruptcy filing and an abandoned financing transaction.
Income tax benefit – We released our valuation allowance in the fourth quarter of 2021. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 8 Income Tax for more information on the realizability of our deferred tax assets.
Net income attributable to noncontrolling interests – Upon emergence from bankruptcy, we acquired all third-party membership interests in the Ares JV. As a result, the allocation of net loss (income) to noncontrolling interest holders in the Successor period not comparable to the Predecessor periods.
The net loss allocated to the noncontrolling interest holder, BSP, in the Successor period of 2020 primarily related to non-cash losses on derivatives. BSP's preferred interest in the BSP JV was automatically redeemed in full in September 2021 and income was allocated to BSP up to the redemption date.
See Part II, Item 8 – Financial Statements and Supplementary Data, Note 14 Chapter 11 Proceedings for additional information on the Ares JV and Part II, Item 8 – Financial Statements and Supplementary Data, Note 10 Equity for more information on the redemption of the preferred member interest from BSP.
The Successor and Predecessor Periods of 2020 vs. 2019
See Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations, Statement of Operations Analysis in our 2020 Form 10-K for our analysis of the changes in our consolidated statements of operations for the Successor period from November 1, 2020 through December 31, 2020 and the Predecessor periods from January 1, 2020 through October 31, 2020 and the year ended December 31, 2019.
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Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity and capital resources are cash flows from operations, cash on hand and available borrowing capacity under our Revolving Credit Facility. As of December 31, 2021, we had liquidity of $672 million, which consisted of $305 million in cash and $367 million of available borrowing capacity under our Revolving Credit Facility. In February 2022, we obtained $60 million of additional commitments from new lenders increasing our liquidity due to our available borrowing capacity under our Revolving Credit Facility increasing to $427 million from $367 million. As of December 31, 2021, we were in compliance with all of the covenants of our Revolving Credit Facility. For a description of the terms and conditions of our long-term debt, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 4 Debt.
We consider our low leverage and ability to control costs to be a core strength and strategic advantage, which we are focused on maintaining. At current commodity prices, we expect to generate operating cash flow to support and invest in our core assets and preserve financial flexibility. We regularly review our financial position and evaluate whether we may (i) increase investments in our drilling program to accelerate value, (ii) return available cash to shareholders through dividends or stock buybacks to the extent permitted under our Revolving Credit Facility and Senior Notes indenture, (iii) advance carbon management activities, or (iv) maintain cash on our balance sheet. We expect to begin paying cash income taxes in 2022. Our tax paying status depends on a number of factors, including the amount and type of our capital spend, cost structure and activity levels. We expect to focus on asset retirement activities over the next several years to reduce our idle well inventory. We believe we have sufficient sources of liquidity to meet our obligations for the next twelve months.
Derivatives
Significant changes in oil and natural gas prices may have a material impact on our liquidity. Declining commodity prices negatively affect our operating cash flow, and the inverse applies during periods of rising commodity prices. Our hedging strategy seeks to mitigate our exposure to commodity price volatility and ensure our financial strength and liquidity by protecting our cash flows. Our Revolving Credit Facility includes covenants that require us to maintain a certain level of hedges. We have also entered into incremental hedges above and beyond these requirements for some time periods and will continue to evaluate our hedging strategy based on prevailing market prices and conditions. In some circumstances, these hedges (including hedges entered into by us in 2020 to comply with covenants in our Revolving Credit Facility) may prevent us from realizing the full benefits of price increases.
Unless otherwise indicated, we use the term “hedge” to describe derivative instruments that are designed to achieve our hedging requirements and program goals, even though they are not accounted for as cash-flow or fair-value hedges. We did not have any commodity derivatives designated as accounting hedges as of and during the year ended December 31, 2021.
Refer to Part II, Item 8 – Financial Statements and Supplementary Data, Note 7 Derivatives for more information on our open derivative contracts as of December 31, 2021.
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Uses of Cash
2022 Capital Program
We have increased our 2022 capital program from our 2021 level and target a range of $330 to $375 million. The program includes $300 to $335 million for oil and gas development and $30 to $40 million for carbon management projects. This level of expected spending is consistent with our strategy of investing up to 50% of our operating cash flow back into our oil and gas operations.
We prioritize high oil mix projects that provide high margins and low decline rates to maximize our cash flow from operations. Our technical teams are consistently working to enhance value by improving the economics of our inventory through detailed geologic studies as well as application of more effective and efficient drilling and completion techniques. We regularly monitor internal performance and external factors and adjust our capital investment program with the objective of creating the most value from our asset portfolio.
The actual amount of spending under our 2022 capital program will depend on a variety of factors, including commodity prices, the success of our drilling program, operating costs and other general market conditions. Because we own and operate substantially all of our assets, the amount and timing of our capital spending is largely within our control. Any curtailment of the development of our properties will lead to a decline in our production and may lower our reserves. A continued decline in our production and reserves would negatively impact our cash flow from operations and the value of our assets.
Other Uses of Cash
Other than our 2022 capital program and hedging activity, our expected material uses of cash during 2022 include, among other possible uses: (1) cash settlements on commodity derivative contracts and premiums for entering into new contracts (2) payments to service our debt; (3) domestic income taxes; (4) asset retirement obligations; and (5) advancing carbon management activities. After these material uses, we intend to return cash to shareholders through either future dividends or share repurchases.
The table below summarizes our current and long-term material cash requirements as of December 31, 2021 that we expect to fund with operating cash flow (in millions):
| Payments Due by Year | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 Year | Years 2 and 3 | Years 4 and 5 | More than 5 Years | ||||||||||||||
| On-Balance Sheet | (in millions) | |||||||||||||||||
| Long-term debt(a) | $ | 600 | $ | — | $ | — | $ | 600 | $ | — | ||||||||
| Interest on long-term debt | 177 | 43 | 87 | 47 | — | |||||||||||||
| Pension and postretirement(b) | 108 | 17 | 19 | 15 | 57 | |||||||||||||
| Operating and finance leases(c) | 62 | 12 | 16 | 11 | 23 | |||||||||||||
| Off-Balance Sheet | ||||||||||||||||||
| Purchase obligations(d) | 136 | 54 | 42 | 10 | 30 | |||||||||||||
| Total | $ | 1,083 | $ | 126 | $ | 164 | $ | 683 | $ | 110 |
(a)Represents the outstanding long-term debt balance as of December 31, 2021. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 1 Debt for more information on our long-term debt agreements.
(b)Represents undiscounted future obligations for defined benefit and supplemental plans.
(c)Our operating leases include drilling rigs, commercial office space, fleet vehicles and certain facilities. Our finance leases include information technology equipment and are not material to our consolidated financial statements taken as a whole.
(d)Amounts include payments that will become due under long-term agreements to purchase goods and services used in the normal course of business primarily including pipeline capacity and land leases. Purchase obligations for pipeline capacity are based on contractual volumes and current market rates for that firm transportation capacity during the contract period. Land leases reflect obligations for fixed payments under our term contracts. Also included is a commitment to invest approximately $12 million in evaluation and development activities at one of our oil and natural gas properties prior to January 1, 2023. During 2021, we entered into an amendment allowing us to accept certain land use requirements which, at the time of acceptance on or before May 2022, will relieve us from our remaining obligation.
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Cash Flow Analysis
Cash flows from operating activities – Our net cash provided by operating activities is sensitive to many variables, particularly changes in commodity prices. Commodity price movements may also lead to changes in other variables in our business, including adjustments to our capital program.
Our operating cash flow for the year ended December 31, 2021 was $660 million, which was an increase of $554 million, or 523%, from $106 million for the combined year ended December 31, 2020. The increase was primarily related to higher average realized prices (including the effects of settlements on our commodity derivatives) partially offset by declining production and increased costs from higher activity levels in 2021 as compared to 2020. Further, in 2021, we realized cost savings from actions taken to reduce the size of our workforce and employee benefits along with other cost savings measures. Our improved operating cash flow in 2021 reflects lower interest payments and professional fees compared to 2020 when we restructured our balance sheet through bankruptcy proceedings. With improved operating cash flow in 2021, we took additional steps to protect our downside commodity price risk by entering into derivative contracts, perform asset retirement activities and build our inventory of greenhouse gas allowances.
Cash flows from investing activities – Our net cash used in investing activities was $161 million for the year ended December 31, 2021, which was an increase of $124 million from $37 million in the combined year ended December 31, 2020. This use of cash primarily related to a higher capital program in 2021 as compared to 2020 when we reduced our capital investment to a level necessary to maintain the mechanical integrity of our facilities. We sold the majority of our Ventura basin operations in 2021 and the cash from this divestiture was partially offset by the cash paid for the acquisition of working interests in certain joint venture wells held by MIRA. During the combined period ended December 31, 2020, we realized cash proceeds of $41 million from the sale of royalty interests and non-core assets.
The table below summarizes net cash used in investing activities (in millions):
| Successor | Predecessor | Combined | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, | November 1, 2020 - December 31, 2020 | January 1, 2020 - October 31, 2020 | Year ended December 31, | ||||||||||||
| 2021 | 2020 | ||||||||||||||
| Capital investments | $ | (194) | $ | (7) | $ | (40) | $ | (47) | |||||||
| Changes in capital investment accruals | 20 | (1) | (24) | (25) | |||||||||||
| Acquisitions, divestitures and other | 13 | 1 | 34 | 35 | |||||||||||
| Net cash used in investing activities | $ | (161) | $ | (7) | $ | (30) | $ | (37) |
Cash flows from financing activities – Our net cash used in financing activities was $222 million for the year ended December 31, 2021 and primarily related to distributions to BSP as well as repurchases of our common stock under our Share Repurchase Program. During the year ended December 31, 2021, we issued Senior Notes, the proceeds of which were used to repay our EHP Notes and our Second Lien Term Loan with the remainder used to paydown our Revolving Credit Facility. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 4 Debt for additional information on our credit agreements.
Our net cash used in financing activities was $58 million for the combined year ended December 31, 2020. Uses of cash in 2020 primarily related to our debt transactions as a result of our bankruptcy proceedings and a payoff of $100 million of existing debt in January 2020. We also made $134 million of distributions to noncontrolling interest holders in the combined period of 2020, which included payments of $70 million to our former noncontrolling interest holder, ECR and $64 million to BSP. We raised proceeds of $446 million from an equity issuance at the time of our emergence from bankruptcy.
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The table below summarizes net cash (used) provided by financing activities for the years ended December 31, 2021 and 2020 (in millions):
| Successor | Predecessor | Combined | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, | November 1, 2020 - December 31, 2020 | January 1, 2020 - October 31, 2020 | Year ended December 31, | ||||||||||||
| 2021 | 2020 | ||||||||||||||
| Debt transactions | $ | (12) | $ | (126) | $ | (241) | $ | (367) | |||||||
| Distributions to noncontrolling interest holders | (50) | (30) | (104) | (134) | |||||||||||
| Repurchases of common stock | (148) | — | — | — | |||||||||||
| Issuance of common stock | 2 | — | 446 | 446 | |||||||||||
| Common stock dividends | (14) | — | — | — | |||||||||||
| Other | — | — | (3) | (3) | |||||||||||
| Net cash (used) provided by financing activities | $ | (222) | $ | (156) | $ | 98 | $ | (58) |
Lawsuits, Claims, Commitments and Contingencies
We are involved, in the normal course of business, in lawsuits, environmental and other claims and other contingencies that seek, among other things, compensation for alleged personal injury, breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief.
We accrue reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. Reserve balances at December 31, 2021 and 2020 were not material to our consolidated balance sheets as of such dates.
In October 2020, Signal Hill Services, Inc. defaulted on its decommissioning obligations associated with two offshore platforms. The Bureau of Safety and Environmental Enforcement (BSEE) determined that former lessees, including our former parent, Occidental Petroleum Corporation (Oxy) with a 37.5% share, are responsible for accrued decommissioning obligations associated with these offshore platforms. Oxy sold its interest in the platforms approximately 30 years ago and it is our understanding that Oxy has not had any connection to the operations since that time and is challenging BSEE's order. Oxy notified us of the claim under the indemnification provisions of the Separation and Distribution Agreement between us and Oxy. In September 2021, we accepted the indemnification claim from Oxy and we are now appealing the order from BSEE.
We also evaluate the amount of reasonably possible losses that we could incur as a result of these matters. We believe that reasonably possible losses that we could incur in excess of reserves cannot be accurately determined.
See Part II, Item 8 – Financial Statements and Supplementary Data, Note 6 Lawsuits, Claims, Commitments and Contingencies.
Critical Accounting Estimates
Our critical accounting policies and estimates that involve management's judgment and that could result in a material impact to the consolidated financial statements due to the levels of subjectivity and judgment include the following:
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| Title | Description | Judgments and Uncertainties | Sensitivities | |||
|---|---|---|---|---|---|---|
| Reserves | The carrying value of our property, plant and equipment represents the costs incurred to acquire or develop the asset, including any asset retirement obligations, net of accumulated depreciation, depletion and amortization and impairment charges, if any. We use the successful efforts method of accounting for our oil and gas producing activities. Under this method, we capitalize the costs of acquiring properties, development costs and the costs of drilling successful exploration wells. The estimated amount of proved reserve volumes are used as the basis for recording depletion expense. We determine depletion on our oil and natural gas producing properties using the unit-of-production method. Under this method, acquisition costs are amortized based on total proved oil and gas reserves and capitalized development and successful exploration costs are depleted based on proved developed oil and natural gas reserves. Future cash flows from expected reserve volumes for producing properties may be used in an impairment analysis or a determination of whether sufficient future taxable income will be generated to permit realization of existing deferred tax assets. We also use reserves to predict when a producing well will become inactive, and then idle, to schedule the timing of abandonment in estimating our asset retirement obligations. | The determination of quantities of proved reserves is a highly technical process performed by our petroleum engineers and geoscientists. The analysis is based on drilling results, reservoir performance, subsurface interpretation and future development plans. Production rate forecasts are derived using a number of methods, including estimates from decline-curve analysis, type-curve analysis, material balance calculations, which consider the volumes of substances replacing the volumes produced and associated reservoir pressure changes, seismic analysis and computer simulations of reservoir performance. These field-tested technologies have demonstrated reasonably certain results with consistency and repeatability in the formations being evaluated or in analogous formations. The data for a given reservoir may also change over time as a result of numerous factors including, but not limited to, additional development activity and future development costs, production history and continuous reassessment of the viability of future production volumes under varying economic conditions. | Our total proved reserves were 480 MMBoe and our total proved developed reserves were 405 MMBoe at December 31, 2021. We estimate our 2022 DD&A rate for our oil and natural gas producing properties using the unit-of-production method will be approximately $4.50/Boe. A 5% change in our reserves would increase or decrease this DD&A rate by approximately $0.25/Boe. If realized prices used in our year-end reserve estimates increased or decreased by 10%, our proved reserve quantities at December 31, 2021 would have increased by 4 MMBoe or decreased by 8 MMBoe, respectively. |
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| Title | Description | Judgments and Uncertainties | Sensitivities | |||
|---|---|---|---|---|---|---|
| Realizability of Deferred Tax Assets | We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude that it is more-likely-than-not that some portion or all of our deferred tax assets will not be realized, the deferred tax asset is reduced to the amount realizable by a valuation allowance. | In making such assessments regarding the realizability of our deferred tax assets, numerous judgments and assumptions are inherent in the determination of whether sufficient future taxable income will be generated to permit realization of existing deferred tax assets. Significant assumptions include commodity price curves and estimates of future expected operating, development and abandonment costs. We also evaluate whether we are in a three-year cumulative income position and our historic earnings trends which may support our ability to protect future taxable income. | At December 31, 2020, we had a tax valuation allowance of $549 million against our entire U.S. federal and state deferred tax assets. During 2021, we realized substantial improvements in commodity prices and have an improved financial position. At December 31, 2021, we assessed the realizability of our deferred tax assets and determined that all our deferred tax assets are more-likely-than-not realizable. Changes in assumptions or changes in tax laws and regulations could materially affect the recognized amount of valuation allowance. |
Significant Accounting and Disclosure Changes
See Part II, Item 8 – Financial Statements and Supplementary Data, Note 1 Nature of Business, Summary of Significant Accounting Policies and Other for a discussion of new accounting standards.
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FORWARD-LOOKING STATEMENTS
This document contains statements that we believe to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical facts are forward-looking statements, and include statements regarding our future financial position, business strategy, projected revenues, earnings, costs, capital expenditures and plans and objectives of management for the future. Words such as "expect," “could,” “may,” "anticipate," "intend," "plan," “ability,” "believe," "seek," "see," "will," "would," “estimate,” “forecast,” "target," “guidance,” “outlook,” “opportunity” or “strategy” or similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements.
Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, they are inherently subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. No assurance can be given that such forward-looking statements will be correct or achieved or that the assumptions are accurate or will not change over time. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
•fluctuations in commodity prices and the potential for sustained low oil, natural gas and natural gas liquids prices;
•legislative or regulatory changes, including those related to (i) drilling, completion, well stimulation, operation, maintenance or abandonment of wells or facilities, (ii) managing energy, water, land, greenhouse gases (GHGs) or other emissions, (iii) protection of health, safety and the environment, (iv) tax credits or other incentives, or (v) transportation, marketing and sale of our products;
•availability or timing of, or conditions imposed on, permits and approvals necessary for drilling or development projects;
•changes in business strategy and our capital plan;
•lower-than-expected production, reserves or resources from development projects or acquisitions, or higher-than-expected decline rates;
•incorrect estimates of reserves and related future cash flows and the inability to replace reserves;
•the recoverability of resources and unexpected geologic conditions;
•our ability to realize the benefits of business strategies and initiatives related to energy transition, including carbon capture and storage projects and other renewable energy efforts;
•our ability to finance and implement our carbon capture and storage projects;
•global geopolitical, socio-demographic and economic trends and technological innovations;
•changes in our dividend policy and our ability to declare future dividends;
•production-sharing contracts' effects on production and operating costs;
•limitations on our financial flexibility due to existing and future debt;
•insufficient cash flow to fund planned investments, interest payments on our debt, stock repurchases or changes to our capital plan;
•insufficient capital or liquidity unavailability of capital markets or inability to attract potential investors;
•limitations on transportation or storage capacity and the need to shut-in wells;
•inability to enter into desirable transactions, including acquisitions, asset sales and joint ventures;
•joint ventures and acquisitions and our ability to achieve expected synergies;
•our ability to utilize our net operating loss carryforwards to reduce our income tax obligations;
•our ability to successfully gather and verify data regarding emissions, our environmental impacts and other initiatives;
•the compliance of various third parties with our policies and procedures and legal requirements as well as contracts we enter into in connection with our climate-related initiatives;
•the effect of our stock price on costs associated with incentive compensation;
•changes in the intensity of competition in the oil and gas industry;
•effects of hedging transactions;
•equipment, service or labor price inflation or unavailability;
•climate-related conditions and weather events;
•disruptions due to accidents, mechanical failures, power outages, transportation or storage constraints, natural disasters, labor difficulties, cyber-attacks or other catastrophic events;
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•pandemics, epidemics, outbreaks, or other public health events, such as the COVID-19; and
•other factors discussed in Part I, Item 1A – Risk Factors.
We caution you not to place undue reliance on forward-looking statements contained in this document, which speak only as of the filing date, and we undertake no obligation to update this information. This document may also contain information from third party sources. This data may involve a number of assumptions and limitations, and we have not independently verified them and do not warrant the accuracy or completeness of such third-party information.
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