Investors flocked to California Resources Corp (CRC)’s notes offering as the recently restructured company touted a cleaner balance sheet and positive free cash flow, according to seven sources following the deal.

Lead Citi circulated talk earlier today for the B2/B+ USD 600m senior unsecured notes due 2026 at 7.25%-7.5%, tight of earlier whispers in the 7.5%-7.75% range. The book is oversubscribed at north of USD 1bn, with commitments accelerated to 3pm today, from the initial target of wrapping tomorrow, two sources said.

Management has expressed the desire to capitalize on the wide open high yield market to take out the company’s exit financing, which includes a second lien TL with onerous pricing and an escalating coupon on its Elk Hill Power (EHP) notes. 

The company began investor outreach last month via a non-deal roadshow, which turned into premarketing for the proposed refinancing.

Proceeds are slated to refinance the USD 200m Libor+ 9% cash/10.5% PIK USD 200m second lien term loan due 2025, USD 300m 6% Elk Hill Power (EHP) secured notes due 2027 as well as repay revolver borrowings. The coupon on the Elk Hill Power notes is set to increase to 7% after the fourth year, and to 8% thereafter. They’re redeemable at any time prior to maturity without a prepayment penalty.

Pro forma liquidity shakes out to USD 424m, consisting of USD 28m of cash and USD 396m of revolver availability. Pro forma leverage totals 1.53x through USD 723m of total debt and USD 471m of 2020 estimated adjusted EBITDAX.

The oil and gas producer stands to benefit from lower leverage as it navigates regulatory hurdles in California, four of the sources said. Last September, Governor Gavin Newsom issued an executive order to phase out gasoline-powered vehicles by 2035, and reaffirmed the goal to end new permits for fracking by 2024.

CRC’s operations have not yet been materially impacted by related regulatory actions, including the Safe Drinking Water Act, Oil Pollution Act, Natural Gas Pipeline Safety Act and other state and federal laws enacted for health and safety and land and environmental protections, according to company documents.  

Rising from the ashes 

The refinancing efforts follow CRC’s emergence from bankruptcy in late October. The court process resulted in the company eliminating approximately USD 5bn of debt and a non-controlling interest in its midstream JV. Under the RSA, the company paid revolver lenders in full, and handed the bulk of its reorg equity to holders of its 1.25 lien term loan. 

At exit, CRC entered into a USD 1.2bn revolver due 2024, with USD 540m in commitments. Liquidity at the time totaled USD 387m, consisting of USD 72m in unrestricted cash and USD 315m in revolver availability.

With prepetition lenders now holding the bulk of the company’s reorg equity, there’s speculation on whether the company will be more shareholder friendly and issue dividends with its expected positive free cash flow, three of the sources said.  

Sources expect the company to generate roughly USD 130m-160m of free cash flow in 2021 with roughly USD 500m in adjusted EBITDAX.  

The company could also use its cash coffer to pay down the remainder of its revolver pro forma the deal and then amend the undrawn facility to lower the hedging requirements, two of the sources said. Under the current facility, the company is required to maintain hedges for no less than 75% of its anticipated oil production from its proved reserves for the first two years after the closing of the revolver.  

CRC said it has hedged 80% of its 2021 production in the USD 40-50 per barrel range. WTI futures breached the USD 50/barrel mark earlier this year, buoyed by Saudi Arabia’s pledge to cut supply, and extended gains to USD 53.7/barrel today.

Sources cited Berry Petroleum, which also operates in the Ventura basin and San Joaquin basin, as CRC’s closest comp. Berry’s one-notch-lower rated B3/B USD 400m 7% senior unsecured notes due 2026 traded today at 91 to yield 9.261%, up from trades at 83.25 to yield 11.358% in early December, according to MarketAxess.

Citi declined to comment. California Resources did not respond to a request for comment. 

2021 Debtwire