CORRECTION: California Resources continues to produce oil after reaching agreement with lenders

New York — (Clarifies there is no financial restructuring and adds detail on lender forbearance)

California Resources reached an agreement with its lenders and will continue to operate as the coronavirus pandemic cut California refinery runs drastically, reducing the need for its crude oil.

The company, the largest producer of crude in the state, had been severely impacted by Governor Gavin Newsom's statewide order on March 19 ordering 40 million Californians to stay home to prevent the spread of the deadly virus.

As the state ground to a halt, most Californians — with the exception of essential workers — stopped driving, and many business operations ground to a halt.

California Resources became one of the casualties of the pandemic as the state's 1.9 million b/d of refinery capacity slowed dramatically to match falling gasoline and diesel demand.

Refinery runs fell to 55.5% of capacity in the week that ended May 1, when refiners cut back crude inputs to 1.06 million b/d, according to California Energy Commission data.

And the price of Californian crudes fell along with them.

Captive California market

California is not served by any interstate crude pipelines and the oil used at refineries is either brought in by water, train or produced in the state.

And while indigenous production has been falling — to 183.2 million barrels in 2019 — it still supplies about 30% of all crude used by California refineries.

In 2019, California Resources produced 128,000 barrels of oil equivalent a day of crude, of which 80,000 b/d was oil.

However, with the onset of the pandemic, the company shut in 5,000 boe/d of production.

"The coronavirus has caused recent volatility with Brent oil prices reversing course from the recent highs in early January back to lower levels last seen in December 2018," company CEO Todd Stevens said on its February 26 fourth-quarter 2019 results call.

The company did not hold a first-quarter 2020 call as it sought to forge agreements with its lenders and access capital markets.

Are the good times really over?

Refiners like PBF rely on California crudes for their refineries, noting at the time of the 2016 purchase of the 160,000 b/d Torrance, California, facility that its slate would comprise California heavy and medium crudes delivered directly to the refinery via pipeline.

PBF CEO Tom Nimbley called Torrance one of California's most "powerful" refineries for its ability to process the heavy California crudes like THUMS and Kern River, which have low APIs around 16 and high sulfur content of more than 1.5%.

California Resources' main base of operations is in the state's four main onshore basins that produce those crudes, where it has 8,000 miles of gathering lines that feed lines directly connected to refineries.

The Wilmington basin near Los Angeles produces about 20,000 b/d of THUMS crude, most of which goes via pipeline to refineries owned by Phillips 66 and Valero.

Ticking clock

California Resources was created when Occidental Petroleum removed all its assets and liabilities in the state from its balance sheet in 2014, to focus on the Permian Basin.

Its onshore holdings include California's oldest fields in the US, including Elk Hills, which played a part in the Teapot Dome scandal in the early 1920s. Elk Hills produced 51,000 boe/d in 2019, and California Resources has a 100% interest.

The San Joaquin Basin, home of Kern River crude, began production in the 1880s and produced 94,000 boe/d in 2019. It is the largest onshore field in the state.

However, as restrictions ease on coronavirus lockdowns, California refinery runs are rising to meet growing demand, reaching just over 60% in the week that ended June 5.

In the meantime, California Resources is racing to beat the clock on lender repayment.

Before the pandemic took its toll, California Resources had cleaned up its balance sheet. The company reduced its debt from the original $6 billion after the Occidental spin-off to $5 billion.

In a filing with the US Securities and Exchange Commission, the company said its "forbearing parties" had agreed to extend until June 30 the period in which they will forbear from exercising any remedies under credit agreements, giving the company more breathing room.

But it is unlikely that California Resources' operations and crude oil production will be affected by financial problems, according to analysts, and it will benefit from the return of higher demand for refined products.

"Bankruptcy shouldn't interrupt CRC production," said John Auers, Senior Vice President at Turner, Mason.