Depressed oil prices have left California Resources Corp (NYSE:CRC) with a debt-laden balance sheet and huge interest expenses. For a company whose earnings-to-cash interest ratio is as low as 1.4, the decision by the Federal Reserve to leave interest rates unchanged seems to offer some reprieve. California Resources would have faced a higher interest burden if the Fed hiked lending rates.
Though California Resources only generated adjusted EBITDA of $184 million in 2Q2016, the company ended up paying $132 million in interest in that quarter. That brought the company’s adjusted EBITDA-to-cash interest ratio to about 1.4, quite a low level.
As crude prices began to slide, California Resources borrowed to sustain its operations. But the prolonged slump in oil prices has meant that the company is struggling to generate enough cash flow to fund operations and pay down debt. However, California Resources has demonstrated a commitment to cut its debt level despite the difficult industry conditions.
Debt reduction efforts
As of mid-2015, California Resources had a debt of $6.8 billion. But over a period of only five quarters, the company has managed to cut its debt burden by about 21%, thus reducing the debt amount to $5.3 billion as of Sept. 2016.
California Resources can be seen using a variety of strategies to lower its debt burden. Debt-to-equity swap, open market repurchases and cash tender offers are some of the strategies that California Resources has employed to lower its debt profile.
California Resources is also divesting noncore assets to raise funds that it then uses to pay down its debt. Many energy companies are selling assets to boost the cash positions and lower their debt profile. However, the challenge is that with the depressed oil prices, sellers of energy assets are finding it difficult to attract premium buyout prices.
In the case of California Resources, the company’s multipronged debt reduction efforts suggest that it is on the right track in cleaning its balance sheet.