On Wednesday, UBS initiated coverage on California Resources Corporation (NYSE:CRC), a company engaged in hydrocarbon exploration in the state of California, with a Buy rating and a set price target of $68.00. The firm sees the company as a unique player in the exploration and production (E&P) sector due to its diversified assets that include power generation, real estate, and an emerging Carbon Capture, Utilization, and Storage (CCUS) business.
UBS's optimistic stance is largely anchored on the potential of California Resources' CCUS unit. The unit is currently valued at $14 per share, significantly higher than the $4 per share that is implied in the stock's current valuation. This valuation comes even when the company's Upstream business is valued at 2.5 times its forecasted fiscal year 2026 enterprise value to EBITDA (EV/EBITDA), which is the lowest target multiple among UBS's E&P coverage.
According to UBS, the E&P business of California Resources is currently trading at a 15% to 7% discount to their fiscal year 2026 West Texas Intermediate (WTI) and Henry Hub (HH) price deck, assuming a range from flat to a 5% decrease in production. UBS anticipates that the E&P sector will adjust to reflect a more accurate valuation in the near future.
A significant milestone for California Resources is expected in the fourth quarter of 2024, as the company is projected to begin receiving its Class VI permits. UBS identifies this event as a key catalyst that will enhance the visibility of the growth trajectory for the CCUS unit, thus potentially driving the company's stock value upward.
UBS's coverage launch reflects a positive outlook for California Resources, highlighting the company's distinct market position and the anticipated growth of its CCUS business. The firm's analysis suggests that the current stock price does not fully reflect the intrinsic value of these assets, particularly the emerging CCUS segment.
In other recent news, California Resources Corporation (CRC) has been making significant strides in the energy sector. The company has been focusing on enhancing its cash flow and accelerating decarbonization efforts, as evidenced by its robust second-quarter financials following its merger with Aera. CRC reported $139 million in adjusted EBITDAX and $63 million in free cash flow, returning $57 million to shareholders. The company expects a substantial increase in cash flow in the second half of 2024, with a projected adjusted EBITDAX of around $1 billion.
Mizuho Securities has maintained an Outperform rating on CRC, highlighting its potential as a significant player in carbon management within California. This confidence in CRC's strategic direction is rooted in its advancements in Carbon Capture and Storage (CCS), and its recent acquisition of Aera Energy, which has strengthened its market position.
In addition to these developments, CRC has also determined the consideration for its cash tender offer to purchase a portion of its outstanding 7.125% senior notes due 2026. This move is part of CRC's strategy to manage its hedge book to support investments, debt servicing, and shareholder returns. The company is also considering refinancing or prepaying debt as part of its commitment to reducing net leverage and enhancing shareholder value.
InvestingPro Insights
To complement UBS's optimistic outlook on California Resources Corporation (NYSE:CRC), recent data from InvestingPro offers additional context for investors. As of the last twelve months ending Q2 2024, CRC reported a revenue of $2,259 million, with a gross profit margin of 52.41%. This robust margin aligns with UBS's view of CRC as a unique player in the E&P sector.
InvestingPro Tips highlight that CRC has raised its dividend for 3 consecutive years, with a current dividend yield of 3.04%. This consistent dividend growth, coupled with a 37.17% dividend growth rate in the last twelve months, may appeal to income-focused investors. Additionally, CRC operates with a moderate level of debt and has liquid assets exceeding short-term obligations, which could provide financial flexibility as it develops its CCUS business.
The company's P/E ratio of 21.46 and Price to Book ratio of 2.22 suggest that while the stock isn't cheap, it may still have room for growth, especially if UBS's projections for the CCUS unit materialize. Investors seeking more comprehensive analysis can access 7 additional InvestingPro Tips for CRC, offering deeper insights into the company's financial health and market position.
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