business administration school mba...

1

Business Administration School

MBA Thesis

Title Valuation and Sensitivity Analysis

Subtitle California Resources Corporation (CRC)

Student JOAQUIN BALAGUER

Mentor DIEGO FERNANDEZ MOLERO

Mentor’s Signature

Date April, 2016

2

Table of Contents

1. Objective 3 2. Introduction 4

3. Company Profile 5 Origins 5 Business Strategy & Operations 5 Competitive Strengths 8 Assets & Liabilities 9 Risks 15 Stock Charts 16

4. Valuation Methodology 17 Discounted Cash Flows (DCF) Method 17 Valuation Using Multiples 18

5. DCF Valuation 19 Previous Balance Sheets 19 Previous Income Statements 20 CRC Beta Estimation 20 Cost of Equity Estimation 21 Terminal Value 22 Scenarios 23 Assumptions, Projections & Hypothesis (2016-2025) 26 Cash Flow & CRC Estimated Share Value 30 CRC Weighted Average DCF Estimated Share Value 32

6. Sensitivity Analysis 33 Oil Price & Beta 33 Oil Price & Production Level 33 Production Level & Beta 34 Cash Flow Growth Rate 35

7. Valuation Using Multiples 36 EV/EBITDA 36 EV/Production 37 EV/1P 38 P/CF 38 P/Sales 39 Benchmark Companies 39 CRC Weighted Average Multiple Share Value 40

8. Conclusion 41

9. Bibliography 43 10. Appendixes 45

3

1. Objective

To the reader

This thesis, which is the final work for the MBA programme I have pursued, consists of the valuation of the Californian main independent oil and gas exploration and production (E&P) company: California Resources Corporation (CRC hereafter). The aim is to prove, by estimating CRC theoric share price, that my feeling of it being undervalued is correct. This estimation will be followed by a sensitivity analysis to some of the most important value drivers of the company and an investment proposal.

Along the following pages, I will try to answer the following questions:

- Which is the theoric price or estimated value of CRC stock? - How would CRC stock value be modified if key factors such as production, discount

rates or hydrocarbons price change? - Is it possible to increase the company’s market value in current conditions? If not,

what is it needed? - Would an investment in CRC stock be profitable right now?

To the author

My intention is for this thesis to be something more than the final work in my MBA programme, which is required in order to get my degree. I prepared this thesis as a research work in one of the most important oil and gas companies operating in United States. I intended to gain practice and deep understanding about company valuation and, therefore, chose a company which seems to me that is deeply undervalued. In addition to this, I intend to use this work as a guideline for future investments with the intention of making profits either going long or shorting the stock and using option strategies.

Disclosure

I am an Operations Engineer and have been working for important multinational oil & gas companies with operations in Argentina for more than eight years (including Occidental Petroleum Corporation). I am currently long in a variety of oil and gas companies, both big and small, where CRC is included. Nevertheless, I have been very careful not to be industry or own investment-biased in my conclusions towards CRC stock valuation.

Although I have tried not to be too technical in describing CRC operations and revenue flows there is a chance that the reader finds something that may not be fully understood. If this is the case, please be referred to detailed bibliography hereby proposed.12

By preparing this thesis I have intended to present objective results, criteria and possible scenarios. All CRC and industry information used is public and open to everybody’s access.

1 American Petroleum Institute, Introduction to Oil and Gas Production (Washington: API, 2000). 2 Joseph F. Hilyard, the Oil & Gas Industry, a Nontechnical Guide (Oklahoma: PennWell, 2012).

4

2. Introduction

The beginning of this thesis will be focused exclusively on California Resources Corporation (CRC), its background, business, assets and liabilities, operations, risks and future challenges according to 2015 earnings review (data as of December 31st 2015) presented on February 29th 20163. It is important to remark that this 2015 earnings review, which includes 2013 to 2015 information, is the main financial and operational information source for this thesis’

preparation.

Once the company is known and its stream of revenues and expenses is fully understood, it will be time to start estimating the theoretical firm and equity value of the company and, therefore, its stock price in order to identify whether it is underpriced, overpriced or fairly priced in the market (keep in mind that since CRC is a public company, its current market capitalization is known). It should be always taken into consideration that this research work has two important aims to the author: firstly, to gain experience in oil and gas companies’ valuation and secondly, to profit from market potential mispricing knowing that the efficient market hypothesis does not exist in practice.

Through the following pages, different ways or methods for company valuation, both absolute and relative, will be summarized. However, full emphasis will be given to discounted cash flow (DCF) and valuation using multiples.

Given the impossibility to foresee the future, it is important to mention that the DCF CRC stock valuation will be estimated using different scenarios: base, optimistic and pessimistic, which will be thoroughly described.

Prior to the final conclusions, a sensitivity analysis with respect to core variables will be carried out. By doing this, it will be possible to understand exactly which the key drivers of CRC’s theoric market value are and how they behave.

It is worth stating that every hypothesis or criteria used within the valuation process will be explained accordingly and, obviously, it is fully understood by me that there could be lots of different and equally valid alternatives. This impact will be mitigated by the use of the aforementioned scenarios, each one with its own weight in the total estimated CRC share value.

3 CRC 10K 2015 report, www.sec.gov

http://www.sec.gov/

5

3. Company Profile

Origins

California Resources Corporation (NYSE ticker is CRC) is an American independent oil and natural gas exploration and production company operating properties exclusively within the State of California. It was incorporated as a wholly-owned subsidiary of Occidental Petroleum Corporation (NYSE ticker is OXY) on April 23rd, 2014 and remained a wholly-owned subsidiary of OXY until the Spinoff.

OXY is an American oil and gas exploration and production giant (the third largest by market capitalization in US) which is based in Houston Texas and has operations within US (excluding California), Latin America and the Middle East.

On November 30th, 2014, OXY distributed shares of CRC common stock to their stockholders, meaning that CRC had become an independent publicly traded company. This is referred in CRC annual and quarter reports as the Spinoff. OXY retained approximately 18.5% of CRC outstanding shares of common stock which it has stated it intends to divest within 18 months of the Spinoff. Therefore, strong ties still exist between these two companies.

CRC business is focused on conventional and unconventional assets, exclusively in California, which can generate positive cash flow throughout the oil and natural gas price cycle and have the capacity to provide significant production and cash flow growth in a higher price environment. It is the largest oil and gas producer in California on a gross operated basis and it is probable that CRC has established the largest privately held mineral acreage position in the state, consisting of approximately 2.4 million net acres spanning the state’s four major oil and gas basins (San Joaquin, Los Angeles, Ventura and Sacramento as can be seen in the image shown in the next section).

It is important to mention that, in spite of being the only state where CRC currently operates in, the size of California’s economy, in terms of its GDP, is enormous. California is United States’ largest state and estimations show that it is either the 7th or the 8th largest economy in the world, just between Brazil and Italy4. Hence, being the main producer in only one state can still mean being a giant. In addition to this, it is worth considering that California is a net consumer state which satisfies its energy needs by importing oil (over 60% of total consumption) and gas (around 90%).

Business Strategy & Operations

CRC’s net production grew by 1% to a total of approximately 160 MBoe/d for the year ended December 31st 2015. The production is composed of: 104 Mbbl per day of oil, 18 Mbbl per day of NGLs and 229,000 Mcf per day of natural gas.

As of December 31st 2015, it had net proved reserves of 644 MMBoe, with approximately 75% proved developed (i.e. reserves that could be produced with existing wells according to oil and gas prices prevailing on that date). Oil represented 72% of the total proved reserves.

4 http://www.lao.ca.gov/LAOEconTax/Article/Detail/90

http://www.lao.ca.gov/LAOEconTax/Article/Detail/90

6

The company’s current drilling inventory comprises a diversified portfolio of oil and natural gas locations, which allows targeting drilling projects that are economically viable even in a low commodity price environment, as the one it is currently being experienced.

CRC plans to drive long-term shareholder value by applying modern technology to develop its resource base and increase total production. In the current price environment CRC is prioritizing oil projects that provide long-term stable cash flows with low production declines and high returns. The focus is set to generate enough cash flows to internally fund the capital budget. Approximately 90% of CRC drilling inventory is associated with oil rich projects and the company will also be increasing the share of conventional projects against unconventional ones in order to achieve lower capex requirements. It is also aggressively applying proven modern technologies, mainly in drilling and completion works, to enhance production growth.

CRC is currently selling four main products to Californian refineries:

- Oil

This is what everyone is familiar with, the famous “black gold” (which surprisingly

could be clear as water in some oilfields around the world). The benchmark refinery price for oil in California is not West Texas Intermediate (WTI) as one may believe. Since a vast majority of the oil is imported via supertankers, refineries buy oil at waterborne-based prices which are better reflected by Brent crude prices, which averaged 49.19U$/bbl in 2015.

- NGLs (natural gas liquids)

NGLs are liquids derived from natural gas condensation5. The most commercialized ones are butane, propane and ethane. CRC processes all NGLs through its processing plants, which facilitates access to delivery points. NGLs are entirely sold to third parties using index-based pricing pursuant to one-year contracts. NGLs prices averaged 19.62 U$/bbl in 2015.

- Natural Gas

California imports around 90% of the natural gas consumed in the state. Hence, everything is sold intrastate. CRC has transportation capacity contracts in order to sell the production under individually negotiated contracts using market-based pricing on a monthly basis. Natural gas prices averaged 2.66 U$/Mcf in 2015.

- Electricity

CRC generates more electricity than it needs, so a significant portion (around 500 MW) is sold into Californian market mainly through Elk Hills and Long Beach field facilities. It is sold based on market pricing and other requirements. This is not a core product and will not be furtherly referred to.

California is one of the most prolific oil and natural gas producing regions in the world being the third largest oil producing state within the fifty US states. As previously mentioned, CRC currently operates in four of the main basins across the state: San Joaquin, Ventura, Los 5 William L. Leffer, Natural Gas Liquids: A Non-technical Guide (Oklahoma: PenWell, 2014), Chapter 1.

7

Angeles and Sacramento basins (see Image 1). For production purposes, NGLs and natural gas are converted to barrels of oil equivalent (BOE) based on the equivalence of energy content between 6 Mcf of natural gas to one barrel of oil. A barrel in oil equivalence does not necessarily result in price equivalence (see Table 1).

Image 1: Basins Where CRC Operates (Source: CRC 10-K 2015)

8

Table 1: CRC Proved Reserves and Production per Basin (Source: CRC 10-K 2015)

Competitive Strengths

The company is well positioned to successfully execute the previously mentioned business strategies because of, among others, the following competitive strengths:

- Flexible asset base that works in different commodity price environments and preserves future value and growth potential. Near 100% operational control of 137 fields in California, which include star oilfields such as Elk Hills (one of the largest fields in US with a production of 64,000 BOE/d in 2014) in San Joaquin Basin and Wilmington (third largest in US) in Los Angeles Basin.

- Favorable margins driven by California’s deficit energy market, as was

explained in the previous section. Crude oil sold at a premium to WTI prices (close to Brent benchmark).

- Largest acreage position in a world-class oil and natural gas province. CRC is the largest private oil and natural gas mineral acreage holder in California, with interests in approximately 2.4 million net acres. California has five of the twelve largest fields in the lower 48 states based on proved reserves and CRC portfolio includes interests in four of them. Keep in mind that California is the 7 th or 8th economy in the world with significant energy demands that exceed local supply.

- Significant growth potential from opportunity rich portfolio. Drilling inventory (i.e. wells that could be drilled and be productive in the future) at December 2015 consisted of almost 23,450 well locations, both conventional and unconventional. The former, are expected to provide stable lower-risk, near-term production with attractive returns. The drilling inventory increased by 16% from 2014 as a result of CRC’s

technical team efforts.

- Proven operational management and technical teams with extensive experience. CRC’s experienced operational management team and technical staff has a proven track record of applying modern technologies and operating methods to develop the assets.

9

Assets & Liabilities

As per CRC assets, it is worth mentioning the following, in order of importance:

1) Property, Plant and Equipment (PPE), net of depreciation, depletion and amortization

The key asset, even more important that plants, pipelines and facilities, is the quantity of oil and gas that is present (or thought to be with great probability, as shown in Image 26) in the subsurface, which is referred to as reserves.

Image 2: Stylized Representation of Oil and Natural Gas Resource Categorizations (Source: EIA, Sep 2015)

It is worth noting that reserves are composed of oil that is both technically and economically recoverable. Therefore, when oil prices plummet, the amount of reserves inevitably decreases. See Table 2 for detailed reserves per basin.

6 US Energy Information Administration, “Technically Recoverable Shale Oil and Shale Gas Resources: Argentina,” (September 2015): 3.

10

Table 2: CRC PD and PUD Reserves (Source: CRC 10-K 2015)

Table 3: CRC Capitalized Costs (Source: CRC 10-K 2015)

2) Trade receivables, net

There was an important decrease in trade receivables in 2015 (200 MMU$) when compared to 2014 (308 MMU$) as a result of lower product prices and lower oil volumes (see Table 4).

11

3) Inventories

CRC inventory levels, at December 2015, consisted of: materials and supplies and finished goods, which include oil and natural gas products not yet sold. There was a sharp decline in inventories during the last year (see Table 4).

4) Cash

Even though cash is a very important asset, and the most liquid one, it is almost nonexistent in CRC balance sheet. Moreover, since the company’s objective is to fund the capital program with the operating cash flow, it is key to increase cash levels (see Table 4).

Table 4: CRC Current Assets (Source: CRC 10-K 2015)

With reference to the company’s liabilities, the following are the most notorious ones:

1) Debt

Debt is, perhaps, the biggest setback in CRC balance sheet. As of December 31st 2015, long term debt level equals 6,043 BBU$ or more than 80% of its total assets (see table 7). The detailed amount of debt is shown in Tables 5 and 6:

Table 5: CRC Debt Composition (Source: CRC 10-K 2015)

12

Table 6: CRC Debt Maturities (Source: CRC 10-K 2015)

The following Graphs 1, 2 and 3 show the price fluctuation of bonds with maturity in 2020, 2021 and 2024. In average, considering the secured first lien bank debt, bonds were quoted at approximately 35% to 40% of their face value on December 31st 2015:

Graph 1: CRC 2020 Bonds (Source: Interactive Brokers, Feb 2016)

13



14

It is important to mention that in December 2015 a debt swap7 took place involving an exchange of 534 MMU$, 921 MMU$ and 1,358 MMU$ in aggregate principal amount of the 2020 notes, the 2021 notes, and the 2024 notes, respectively, for 2,250 MMU$ in aggregate principal amount of newly issued 8% senior secured second lien notes due December 15th 2022. A deferred gain of approximately 560 MMU$ on the debt exchange was recorded.

2) Deferred Income Taxes

Deferred income taxes dropped sharply from 2,055 MMU$ in 2014 to zero in 2015 as a result of the impairment charges of 4,852 MMU$ that took place in Q4 2015. See more detailed and historic information in Section 5.

3) Accounts payable

This item was significantly reduced from 588 MMU$ in 2014 to 257 MMU$ in 2015. The main reason for this was the plunge in oil related commodities’ price experienced

during the previous year. See more detailed and historic information in Section 5.

4) Accrued liabilities

The important decrease in accrued liabilities (from 334 MMU$ in 2014 to 222 MMU$ in 2015) reflected lower greenhouse gas emission liabilities and accrued interest, in both cases largely due to the timing of payments. See more detailed and historic information in Section 5.

7 http://seekingalpha.com/pr/15628896-california-resources-corporation-announces-expiration-final-results-offers-exchange

http://seekingalpha.com/pr/15628896-california-resources-corporation-announces-expiration-final-results-offers-exchange

15

Table 7 below presents CRC’s balance sheet as of December 31st 2015 where each of the items previously described in this section are shown:

Table 7: CRC 10-K 2015Balance Sheet (Source: CRC 10-K 2015)

Risks

Due to the nature of the business which CRC is involved in, the current risks can be summarized as follows:

- Commodity price fluctuation and volatility - High level of debt (almost 3 times equity and around 6 times EBITDA) - Delisting of NYSE and difficulty to obtain capital funding from the market - Inability to generate enough cash flow to fund capital investments - Highly regulated business (Federal and State) - Uncertainty in new well drilling results (mainly in exploration ones) - Competitive environment for oilfield equipment and qualified human resources - Estimates of proved reserves and future cash flows are not precise and subject to

revisions, impacting CRC share value

16

- Lack of geographic diversification (operations held exclusively in California) - Potential restrictions in the use of water for operations - Concerns about climate change and air quality issues - Catastrophic events could cause substantial liability claims - Terrorism and cyber attacks

Stock Charts

Graph 4: OXY Stock Chart Prior and After the Spinoff in November 2014 (Source: Tradingview, Feb 2016)

Graph 5: CRC Stock Chart since the Spinoff in November 2014 (Source: Tradingview, Feb 2016)

17

4. Valuation Methodology

It is essential to clarify that value and price are rarely, a non-controversial way of saying never, the same. Value is estimated (company valuation, market value estimation in this thesis) and price is known (stock price). This thought is totally opposed to the Efficient Market Hypothesis8, which states that it is impossible to beat the market since stocks always trade at their fair value.

In the following chapters I intend to estimate the intrinsic value of CRC shares, which may be significantly different from the current market stock value in any direction, i.e. CRC shares could be either over or undervalued.

In this thesis CRC stock valuation will be approached by two different but complementary methodologies that will be fully described in the following sections: i) discounted cash flows and ii) multiples. The former has the advantage of considering almost every operative and financial aspect of the company. However, it takes more time because future cash flow predictions need to be defined under some criteria. On the other hand, the latter is easier and faster to obtain but could be misleading since every company has different operative/financial conditions, while belonging to the same sector.

The definitive estimated share value will be the result of a linear combination, or weighted average, of the different values obtained in each method. This estimated share value will be summarized in Chapter 8.

Discounted Cash Flows (DCF) Method

DCF is an absolute valuation method which mainly consists of estimating, from actual financial and operations data (e.g. balance sheets, cash flow and income statements), future cash flows and discounting them at a certain rate. Damodaran proposes three ways to DCF valuation: i) valuation of the equity of the firm only, ii) valuation of the entire firm including bondholders and iii) valuation of the firm in parts, i.e. operations on one side and debt effects on the other side (APV valuation).9

In this thesis, free cash flows available to the equity (FCFE) holders for the next ten years until 2025 plus the perpetuity value will be considered because the aim is to estimate the share price value (see formulae below). These future cash flows will be discounted at a rate representative of CRC cost of equity (Ke), which depends on various factors.

𝐷𝐶𝐹 =𝐶𝐹2016

(1 + 𝑟)1+

𝐶𝐹2017

(1 + 𝑟)2+ ⋯ +

𝐶𝐹2025

(1 + 𝑟)𝑛+ 𝑃𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒

𝐶𝐹𝑖 = 𝐹𝐶𝐹𝐸𝑖

𝑟 = 𝐾𝑒

It is worth mentioning that, for share value estimation purposes, discounting FCFE was chosen over the Gordon Dividend Growth Model because the latter has become increasingly

8 Prasanna Chandra, Investment Analysis and Portfolio Management (New Delhi: MCGraw-Hill, 2008), Chapter 9. 9 Aswath Damodaran, Investment Valuation (New York: Wiley, 2012), Chapter 2.

18

questionable10, mainly for companies which lack steady growth or do not pay any dividends (exactly like CRC).

It must be noted that the FCFE is a measure of what a firm can afford to pay out as dividends so, in other words, dividends paid differ from the FCFE for a number of reasons such as: i) desire for stability, ii) future investment needs (as is the case for CRC), iii) tax factors, iv) signaling prerogatives (sometimes firms use dividends as signals of future prospects) and v) managerial self-interest. Therefore, FCFE Valuation and Dividend Discount Model Valuation are similar only when dividends are equal to the FCFE or when the excess cash is invested in projects with net present value of zero.11

Future FCFEs are not solely dependent on the oil and gas industry but also on the global macro economy and it is worth clarifying that Ke will not necessarily be constant over the next ten years since the actual cost of capital will surely change for CRC in the future years. The company’s DCF valuation will be carried out independently from other comparable companies apart from beta estimation.

It is impossible (unfortunately) to predict the future. The only thing this author can guarantee is that actual future cash flows will surely differ from this thesis’ forecasted predictions.

Hence, three different scenarios will be assessed in order to try to cover every possible outcome: a) base, b) pessimistic and c) optimistic. The final estimation of the intrinsic value of CRC shares carried out by DCF method will be the result of a weighted average, in terms of probability, of every scenario value.

There will be a special section for Ke, beta estimations through years 2016 to 2025 and scenario definition detailing their assumptions, hypothesis and projections in Chapter 5.

Valuation Using Multiples

Analysts tend to focus most on DCF valuation when trying to find the fair value of a company. However, most valuations are relative valuations in reality since the value of most assets (a house, a car, a stock and US dollars in Argentina among others) is based upon how similar assets are priced in the market place.12

Therefore, multiples method, in contrast to DCF, is a relative valuation process with the objective of estimating the company value in comparison with competitors or other similar firms (same industry, same country, same sector, comparable operations) within the independent oil and gas sector (upstream). This sector comprises entities that only explore for and produce oil and gas. They typically do not own refining, processing or marketing facilities (downstream) to prepare that oil and gas and then sell the refined product directly to end users.13 In addition to comparable companies, major integrated oil and gas giants will also be taken into consideration in order to have a broader idea of CRC stock value.

In Chapter 7 there will be a summary of companies selected, each multiple used and its corresponding description.

10 Investopedia, http://www.investopedia.com/terms/f/freecashflowtoequity.asp 11 Aswath Damodaran, Investment Valuation (New York: Wiley, 2012), Chapter 14. 12 Aswath Damodaran, Investment Valuation (New York: Wiley, 2012), Chapter 2. 13 Matthew DiLallo, http://www.fool.com/investing/general/2014/08/05/independent-oil-gas-investing-essentials.aspx

http://www.investopedia.com/terms/f/freecashflowtoequity.asp

http://www.fool.com/investing/general/2014/08/05/independent-oil-gas-investing-essentials.aspx

19

5. DCF Valuation

Valuation as of December 31st 2015 will be estimated by Discounted Cash Flows (DCF) method on the basis of the balance sheets, cash flow and income statements presented in the very next Sections and several hypothesis and scenarios proposed, which will be fully explained. As previously explained, cash flow to be discounted will be the free cash flow available to equity holders (FCFE) and the discount rate will be the cost of equity (Ke) estimated in further ahead in this Chapter.

Previous Balance Sheets

Table 8: 2011 to 2015 CRC Balance Sheets (Source: CRC 10-K 2015)

12/31/11 12/31/12 12/31/13 12/31/14 12/31/15ASSETSCash & Equivalents - 14.0 12.0 Receivables 30.0 308.0 200.0 Inventories 75.0 71.0 58.0 Prepaid Expenses - - - Current Assets - Other 149.0 308.0 227.0 Current Assets - Total 195.0 245.0 254.0 701.0 497.0 Plant, Property & Equip (Net) 11,778.0 13,499.0 14,008.0 11,685.0 6,312.0 Investments - - - Intangibles - - - Deferred Charges - - - Assets - Other 16.0 20.0 35.0 43.0 244.0 TOTAL ASSETS 11,989.0 13,764.0 14,297.0 12,429.0 7,053.0 LIABILITIESAccounts Payable 448.0 588.0 257.0 Notes Payable - - - Accrued Expenses 241.0 334.0 222.0 Taxes Payable - - 26.0 Debt (Long-Term) Due In One Year - - 100.0 Other Current Liabilities - - - Total Current Liabilities 664.0 551.0 689.0 922.0 605.0 Long Term Debt - - - 6,360.0 6,043.0 Deferred Taxes (Balance Sheet) 3,122.0 2,055.0 - Provision for Risks & Charges - - - Investment Tax Credit - - - Deferred Gain and Issuance Costs, Net - (68.0) 491.0 Liabilities - Other 497.0 549.0 830.0 TOTAL LIABILITIES 3,365.0 3,904.0 4,308.0 9,818.0 7,969.0 SHAREHOLDERS' EQUITYPreferred Stock - - - Common Stock - 4.0 4.0 Capital Surplus - 2,631.0 (905.0) Retained Earnings (Net Other) (24.0) (24.0) (15.0) Net Parent Company Investment 10,013.0 - - TOTAL SHAREHOLDERS' EQUITY 8,624.0 9,860.0 9,989.0 2,611.0 (916.0) TOTAL LIABILITIES & EQUITY 11,989.0 13,764.0 14,297.0 12,429.0 7,053.0

20

Previous Income Statements

Table 9: 2011 to 2015 CRC Income Statements (Source: CRC 10-K 2015)

CRC Beta Estimation Since CRC started its operations as a single company after the spinoff from OXY in November 2014, there is not enough historic information available to calculate CRC beta directly.

Nonetheless, for this thesis purpose, I will be assuming that CRC unlevered beta value would be the market capitalization weighted average of the ones belonging to five comparable companies: OXY, Conoco Phillips (NYSE ticker is COP), Apache Corporation (APA in NYSE), Hess Corporation (NYSE ticker is HES) and Marathon Oil Corporation (MRO in NYSE). In order to deleverage each beta, the capital structure of each company was considered for the last quarterly balance available (Q3 2015) as one can see in the following calculations.

Fiscal Year Ending 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15Oil and Gas Sales 3,934.0 3,967.0 4,139.0 4,023.0 2,294.0 MMBOE 54.0 56.2 58.0 58.4 $/BOE 73.5 73.6 69.4 39.3 Other Revenue - 106.0 145.0 150.0 109.0 Production Costs 1,219.0 986.0 1,057.0 951.0 Production Cost/BOE 22.57 17.54 18.22 16.28 Gross Profit 2,854.0 3,298.0 3,116.0 1,452.0 Selling, General, & Admin Expenses 273.0 266.0 302.0 354.0 Operating Income Before Depreciation 2,581.0 3,032.0 2,814.0 1,098.0 Depreciation, Depletion, & Amortiz 926.0 1,144.0 1,198.0 1,004.0 Operating Income After Depreciation 1,655.0 1,888.0 1,616.0 94.0 Interest and Debt Expense - - 72.0 326.0 Exploration Expense 148.0 116.0 139.0 36.0 Non-Operating Net Income/(Expense) (130.0) (140.0) (207.0) (176.0) Assets Impairment 29.0 - 3,402.0 4,852.0 Special Items (taxes other than on income) 167.0 185.0 217.0 180.0 Pretax Income 1,641.0 1,181.0 1,447.0 (2,421.0) (5,476.0)Income Taxes (expense) / benefit - Total (670.0) (482.0) (578.0) 987.0 1,922.0 Minority Interest - - - - Extraordinary Items - - - - Discontinued Operations - - - - Net Income (Loss) 971.0 699.0 869.0 (1,434.0) (3,554.0) Preferred Dividends - - - - - Available for Common 971.0 699.0 869.0 (1,434.0) (3,554.0) Earnings Per SharePrimary 2.50 1.80 2.24 (3.75) (9.27) Fully Diluted 2.50 1.80 2.24 (3.75) (9.27) COMMON SHARES:for Primary EPS Calculation - - - 381.900 383.200 for Fully Diluted EPS Calculation - - - 381.900 383.200 Outstanding at Fiscal Year End - - - 385.600 388.200

21

Table 10: CRC Unlevered Beta Calculation (Source: Own Excel Elaboration and Google Finance)

Finally, CRC unlevered beta (U) of 1.14 needs to be leveraged according to CRC capital structure or debt to equity ratio according to the next formula:

β𝐿 = β𝑈 × [1 + (1 − T) ×Debt

𝐸𝑞𝑢𝑖𝑡𝑦]

T is the average income tax of the previous three years and is equal to 38.6% (see Assumptions, Projections and Hypothesis Section in this Chapter).

Debt to equity ratio must be at market value as of December 31st 2015.

The number obtained for levered beta for year 2015 is 3.04, considering that the market value of debt and CRC’s market capitalization are 2.457BU$ and 0.905BU$ respectively (see Table

11 below). Future levered beta value depends mainly on debt to equity (at market value) ratio for years 2016 to 2025. In this thesis, conservatively, beta will be assumed constant in the base scenario, with a yearly 4% increase in the pessimistic scenario and with a 2.5% annual reduction in the optimistic scenario. Future debt and equity market values for each year could also be estimated for levered beta calculation. However, I chose to simplify this aspect maintaining heavy conservative bias.

Table 11: CRC Levered Beta Calculation (Source: Own Excel Elaboration)

Cost of Equity Estimation The cost of equity (Ke) will be calculated using the Capital Asset Pricing Model (CAPM) proposed by the Nobel Prize winners Sharpe, Markowitz and Miller. This CAPM method consists of adding to the risk free rate a market risk premium multiplied by an amplifying factor known as beta and is expressed formulaically below:14

𝐾𝑒 = 𝑟𝑓 + 𝛽 × (𝑟𝑚 − 𝑟𝑓)

Ke is the required rate of return on equity.

14 Aswath Damodaran, Investment Valuation (New York: Wiley, 2012), Chapter 4.

Beta calculation L T D/E U MC [B U$]OXY 1.46 41.5% 27.9% 1.26 51.64 10K2015 Google FinanceCOP 1.28 38.2% 56.3% 0.95 57.59 Q32015 Google FinanceAPA 1.48 43.7% 89.5% 0.98 16.81 Q32015 Google FinanceHES 1.75 30.5% 34.2% 1.41 13.87 10K2015 Google FinanceMRO 2.09 28.8% 43.2% 1.60 8.52 Q32015 Google Finance

1.46 CRC 1.14

12/31/16Ke 14,74%Risk free rate 3,0%CRC unlevered beta 1,14CRC levered beta 3,04Market Premium 1871-2015 3,86%E/(E+D), Dec-2015 26,91%

Bond price [%] 40,0%Debt, MV (millions $) 2.457 Equity, MV (millions $) 905

22

rf is the risk free rate, which will be equivalent to the 10-year US Treasury Bond yield of 3% in 2015 as a proxy in this thesis.

rm is the market rate, i.e. the yearly average return for the entire US market (given that CRC is an American company with operations exclusively in United States). The Standard & Poor’s 500 index (see Graph 3 below), a widely used way of measurement on American overall economy, will be used as a benchmark.

Graph 6: S&P 500 Index from 2012 to Present Day (Source: Google Finance)

The difference between rm and rf is the market risk premium. This would be a measure of the market total return in excess of the risk free rate and represents the returns investors expect in compensation for taking extra risk by investing in the stock market, given that holding shares is riskier than investing in the bond market.

During the period 1871-2015, the annualized return or, more exactly, the compound annual growth rate of the S&P500 adjusting for inflation and including dividends is 6.86%15

The beta coefficient (levered beta) is a measure of the company’s systematic risk, i.e. how much a company's share price reacts against the market as a whole. A beta equal to 1 indicates that the company moves in line with the market. If the beta is greater than 1, the share is exaggerating the market's movements and. When beta is less than 1, it means that the share is more stable. Occasionally, a company can have a negative beta, which means the share price moves in the opposite direction to the broader market. CRC’s leveraged beta will

be calculated in the next Section.

For the ten-year period starting in 2016 and finishing in 2025 analyzed, the cost of equity will surely vary, even if beta is kept constant (Base Scenario), because the risk free rate will not be assumed stable.

Terminal Value

The fact that CRC will continue its operations indefinitely after 2025, for discounted cash flows point of view only since nothing lasts forever, is one of the most important hypotheses 15 http://www.moneychimp.com/features/market_cagr.htm

http://www.moneychimp.com/features/market_cagr.htm

23

made. These operations that will take place after 2025 will generate future cash flows available to equity holders (FCFE) and amount to the terminal value.

Therefore, the Constant Growth Model16 formula will be used in order to estimate the terminal value of those FCFE as follows:

Terminal Value =FCFE2026

𝐾𝑒 − 𝑔 =

FCFE2025 × (1 + 𝑔)

𝐾𝑒 − 𝑔

The cost of equity corresponding to 2025 will be used and “g”, the expected cash flow growth rate in perpetuity, will match the risk free rate for 2025 given that it is a fair, rather conservative, proxy for future cash flow increments. At first glance, a figure between 3% and 4% for the growth rate may seem high but keep in mind that this is a nominal figure which includes US inflation. Nevertheless, a sensitivity analysis regarding “g” for each scenario

chosen is treated in Chapter 6.

In addition, there are different approaches for this future cash flow growth rate suggested by other authors:

- Using an average between the risk free rate and the estimated nominal growth in the world GDP of 3.7%.17

- Matching “g” with the yield of a risk free bond (similar to this thesis’ assumption).18 - Really conservative perpetuity growth of 1% or 0.5%, depending on each scenario

selected.19

Scenarios

Three scenarios will be taken into consideration with the purpose of performing a thorough assessment of CRC stock valuation: base, pessimistic and optimistic scenario. It is extremely important to consider that this current low-oil price environment that the industry is facing could stay for long, get even worse20 or improve steadily and head back to 2014 levels. Each scenario will have its unique weight, or probability of occurrence, for share value estimation purposes.

Therefore, those three scenarios will mainly differ on:

1- Commodity prices (oil, gas and NGLs), mainly affecting revenues and assets (reserves).

2- Production levels, affecting revenues.

3- Production costs (lifting cost), affecting EBITDA

4- CAPEX levels, affecting future cash flows

16 John Graham, Scott Smart, Introduction to Corporate Finance (Mason OH: South-Western, 2012), Chapter 5. 17 Ignacio de Elia, BP plc Valuation Thesis, Master of Finance (Buenos Aires, 2013). 18 Rodolfo Rouco, Tenaris Valuation Thesis, MBA (Buenos Aires, 2014). 19 Adriana Sicala, Pan American Energy Valuation Thesis, MBA (Buenos Aires, 2014). 20 http://www.bloomberg.com/news/articles/2016-02-09/goldman-sees-more-oil-swings-that-could-drag-price-below-20

http://www.bloomberg.com/news/articles/2016-02-09/goldman-sees-more-oil-swings-that-could-drag-price-below-20

24

5- 10-year US Treasury Bonds rate, affecting principally cost of equity (Ke) and perpetuity growth.

6- CRC Levered beta, affecting principally cost of equity (Ke) and perpetuity growth.

Base Scenario:

1- Given that the company produces around 65% of oil (see Table 1), its reserves are composed of almost 70% of oil (refer to Table 2) and that CRC’s oil is marketed at

waterborne-based price levels it is quite correct to assume that the weighted average price per BOE will replicate the Brent price corrected by almost 80%, as shown in the following Tables 12 and 13:

Table 12: Brent CRC Price Correction Calculation

Table 13: Brent and WTI Future Prices

2- As per production levels, a 2.5% constant year decline will be considered given that CAPEX will be partially restricted at the base scenario commodity prices (e.g. no new well drilling in 2016). See production by year in Table 14 below and forecasted production levels in millions of BOE per year in Table 15 in the following Section.

$ 2.012 2.013 2.014 2.015Oil [bbl] 104,02 104,16 92,30 49,19 with hedgeNGL [bbl] 52,76 50,43 47,84 19,62Gas [Mcf] 2,94 3,73 4,39 2,66

Prod. 2.012 2.013 2.014 2.015Oil [Mbbl/d] 99,0 104,0NGL [Mbbl/d] 19,0 18,0Gas [Mcf/d] 246.000 229.000 Total [MBOE/d] 159,0 160,0Total [MMBOE] 58,0 58,4$/BOE 69,4 39,3% to oil 75,15% 79,86%

Brent (BZ) WTI

Spot 34,05 33,42dic-16 40,29 40,66dic-17 44,55 44,04dic-18 47,97 46,19dic-19 49,08 47,80dic-20 51,05 49,04dic-21 52,37 49,95dic-22 52,89 50,23dic-23 52,95 50,87dic-24 53,29 51,20dic-25 53,64 51,53

Source Interactive Brokers

Prices as of January 28, 2016 [U$]

25

Table 14: CRC Production Data for 2013, 2014 and 2015 (Source: CRC 10-K 2015)

3- Lifting cost, or production cost, will be decreasing 0.5% per year from 2016 to 2025 due to strong management efforts. It is a rather conservative appreciation considering that production costs reduction from 2014 to 2015 was slightly more than 1%.

4- See CAPEX allocation assumption for the next ten years in Table 17 in the following Section.

5- The 10-year US Treasury Bonds’ yield, which will be treated as the risk free rate, will be assumed, for the following ten years, as follows:

6- Book value debt to equity ratio will be taken into consideration when leveraging CRC unlevered beta (equal to 1.14 for 2016). In this scenario beta will be considered stable until 2025.

Pessimistic Scenario:

1- Exactly the same as in Base Scenario.

2- As per production levels, a 4% constant year decline will be considered given that CAPEX will be totally restricted from 2017 at the pessimistic scenario commodity prices. See forecasted production levels in millions of BOE per year in Table 17 in the following Section.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25Risk free rate 3.0% 3.0% 3.0% 3.0% 3.0% 3.5% 3.5% 3.5% 3.5% 3.5%

26

3- Lifting cost will be decreasing 1.5% per year from 2016 to 2025 due to strong management efforts and massive layoffs.

4- See CAPEX allocation assumption for the next ten years in Table 16 in the following Section.

5- The 10-year US Treasury Bonds’ yield, which will be treated as the risk free rate, will be assumed, for the following ten years, as follows:

6- Book value debt to equity ratio will be taken into consideration when leveraging CRC unlevered beta (equal to 1.14 for 2016). In this scenario beta will be increasing by 4% yearly until 2025.

Optimistic Scenario:

1- Exactly the same as in the previous scenarios.

2- As per production levels, a 1.5% constant year increase will be considered given that CAPEX increment from 2016 onwards. See forecasted production levels in millions of BOE per year in table 19 in the following Section.

3- Production costs will be considered stable from 2016 to 2025, which is a really conservative assumption since it is easier to reduce costs per BOE when production is higher.

4- See CAPEX allocation assumption for the next ten years in table 18 in the following Section.

5- The 10-year US Treasury Bonds’ yield, which will be treated as the risk free rate,

will be assumed, for the following ten years, as follows:

6- Book value debt to equity ratio will be taken into consideration when leveraging CRC unlevered beta (equal to 1.14 for 2016). In this scenario beta will be decreasing by 2.5% yearly until 2025 because of a stronger balance sheet, a higher level of earnings and a consequent reduction in Debt to Equity ratio.

Assumptions, Projections & Hypothesis (2016-2025)

In the following tables, there is a summary of each assumption taken into consideration for each one of the previously described scenarios:

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25Risk free rate 3.0% 3.0% 3.0% 3.0% 3.0% 3.5% 3.5% 3.5% 3.5% 3.5%

27

Base Scenario:

Table 15: Base Scenario Main Assumptions (Source: Own Excel Elaboration)

Table 16: Base Scenario Financial Projections (Source: Own Excel Elaboration)

Main hypothesis:

- CRC stopped paying dividends on 2015 in line with the top management strategy of funding the capital program with the cash flow from the operations. Therefore, it is assumed that no dividends will be paid for the next ten years until 2025.

Assumptions - Base Scenario ($ in thousands)

Actual Projected for the Fiscal Year Ended12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25

Sales Growth Rate -42.98% -26.3% 11.3% 6.3% 2.3% 0.6% 0.7% -0.8% -2.0% -2.1% -1.6%Production (MMBOE) 58.4 56.9 55.5 54.1 52.8 51.5 50.2 48.9 47.7 46.5 45.3CRC BOE price (in $) 39.3 29.7 33.9 36.9 38.7 40.0 41.3 42.0 42.3 42.4 42.8Production Cost/BOE (in $/BOE) 16.3 16.2 16.1 16.0 16.0 15.9 15.8 15.7 15.6 15.6 15.5Gross Margin 60.4% 47.9% 54.6% 58.5% 60.7% 62.1% 63.5% 64.3% 64.7% 65.0% 65.5%S&A excl depr./Sales 15.4% 15.0% 14.5% 14.1% 13.7% 13.3% 12.9% 12.5% 12.1% 11.7% 11.4%Depreciation/Begin. PPE 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%Tax rate 38.60% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6%Receivables /Sales 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%Inventory /CGS 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1%Other current assets/Sales 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%Other LT assets/Net PPE 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%Exploration Expense/CAPEX 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%Non-Operating Net Income(Expenses)/Total Expenses -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5%Special Items (Taxes Other Than on Income)/Production 308.2% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0%Payables &Acc. Exp./Total Expenses 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9%Interest/Total Debt 5.1% 5.9% 6.1% 6.4% 6.6% 6.9% 7.2% 7.5% 7.8% 8.1% 8.4%CAPEX as % of sales 17.5% 2.8% 3.8% 4.8% 7.0% 9.3% 11.5% 11.6% 11.8% 12.1% 12.3%CAPEX based on the above (in $) 401 50.0 75.0 100.0 150.0 200.0 250.0 250.0 250.0 250.0 250.0Dividend Payment (% of NI) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Financial Projections - Base Scenario ($ in thousands)


Income Statement ($millions) Revenues 2,403.0 1,770.4 1,970.0 2,094.6 2,142.2 2,154.9 2,170.1 2,153.5 2,111.2 2,066.3 2,034.3 Production Costs 951.0 922.6 895.0 868.3 842.3 817.2 792.8 769.1 746.1 723.8 702.2 S&A excl. depr. 354.0 265.0 286.0 295.0 292.7 285.6 278.9 268.5 255.3 242.4 231.5 EBITDA 1,098.0 582.8 788.9 931.3 1,007.2 1,052.2 1,098.4 1,115.9 1,109.8 1,100.1 1,100.6

Depreciation 1,004.0 542.3 500.0 463.5 432.3 408.0 390.2 378.1 367.1 357.0 347.8 EBIT 94.0 40.5 288.9 467.8 574.9 644.2 708.2 737.8 742.7 743.0 752.7

Interest Expense 326.0 362.2 371.2 385.4 400.8 416.9 433.5 450.9 468.9 487.7 507.2 Debt Expense - - - - - - - - - - Exploration Expense 36.0 4.5 6.7 9.0 13.5 18.0 22.4 22.4 22.4 22.4 22.4 Non-Operating Net Income/(Expense) (176.0) (160.2) (159.3) (156.9) (153.1) (148.7) (144.5) (139.9) (135.1) (130.3) (125.9) Assets Impairment 4,852.0 - - - - - - - - - - Special Items (taxes other than on income) 180.0 113.9 111.0 108.3 105.6 102.9 100.3 97.8 95.4 93.0 90.7 Pre-tax Income (5,476.0) (600.3) (359.4) (191.8) (98.0) (42.3) 7.4 26.7 20.9 9.6 6.5

Tax Expense (2,113.9) (231.7) (138.7) (74.0) (37.8) (16.3) 2.8 10.3 8.1 3.7 2.5 Tax Shield - - - - - - 1.7 6.3 4.9 2.3 1.5

Net Income (3,362.1) (368.6) (220.7) (117.7) (60.2) (26.0) 6.3 22.7 17.7 8.2 5.5 Dividends - - - - - - - - - - EPS (8.66) (0.95) (0.57) (0.30) (0.16) (0.07) 0.02 0.06 0.05 0.02 0.01

Balance Sheet ($ millions)AssetsCash 12.0 - 165.9 379.3 565.5 709.6 816.7 929.3 1,027.3 1,107.1 1,176.0 Receivables 200.0 154.4 171.7 182.6 186.8 187.9 189.2 187.7 184.1 180.1 177.4 Inventory 58.0 56.3 54.6 53.0 51.4 49.8 48.3 46.9 45.5 44.1 42.8 Other Current Assets 227.0 175.2 194.9 207.3 212.0 213.2 214.7 213.1 208.9 204.5 201.3 Total Current Assets 497.0 385.8 587.2 822.2 1,015.6 1,160.6 1,269.0 1,377.0 1,465.8 1,535.9 1,597.5

Net PPE 6,312.0 5,819.7 5,394.6 5,031.1 4,748.8 4,540.8 4,400.6 4,272.5 4,155.4 4,048.4 3,950.5 Other LT Assets 244.0 225.0 208.5 194.5 183.6 175.5 170.1 165.2 160.6 156.5 152.7

Total Assets 7,053.0 6,430.4 6,190.3 6,047.7 5,948.0 5,876.9 5,839.7 5,814.7 5,781.9 5,740.7 5,700.7

Liabilities & Owners' EquityPayables & Accrued Expense 1,826.0 1,661.7 1,652.6 1,627.7 1,588.1 1,543.0 1,499.6 1,451.8 1,401.3 1,352.0 1,306.4 Revolver - 10.3 - - - - - - - - - Short Term Debt (current portion of LT) 100.0 - - - - - - - - - - Notes Payable - - - - - - - - - - - Long Term Debt 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 Total Debt 6,143.0 6,053.3 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0

Shareholders Equity (916.0) (1,284.6) (1,505.2) (1,623.0) (1,683.1) (1,709.1) (1,702.8) (1,680.1) (1,662.4) (1,654.2) (1,648.7) Total Liabilities and Owners' Equity 7,053.0 6,430.4 6,190.3 6,047.7 5,948.0 5,876.9 5,839.7 5,814.7 5,781.9 5,740.7 5,700.7

Beginning Cash 12.0 (10.3) 165.9 379.3 565.5 709.6 816.7 929.3 1,027.3 1,107.1 Change in Cash (22.3) 176.2 213.4 186.2 144.1 107.1 112.6 98.1 79.8 68.9 Net Cash Available at EOY 12.0 (10.3) 165.9 379.3 565.5 709.6 816.7 929.3 1,027.3 1,107.1 1,176.0

28

- No debt principal will be paid within 2016-2025 period and every maturity will be duly rolled over. Hence, I assume that interest over total debt will increase 4% yearly from 2015 to 2025. - This scenario is the one with the most probability of being closer to the actual events in the future. This is why the weight will be considered at 50%.


Table 17: Pessimistic Scenario Main Assumptions (Source: Own Excel Elaboration)

Table 18: Pessimistic Scenario Financial Projections (Source: Own Excel Elaboration)



Sales Growth Rate -42.98% -49.2% 9.6% 4.7% 0.7% -1.0% -0.8% -2.3% -3.5% -3.6% -3.1%Production (MMBOE) 58.4 56.1 53.8 51.7 49.6 47.6 45.7 43.9 42.1 40.4 38.8CRC BOE price (in $) 39.3 20.8 23.7 25.9 27.1 28.0 28.9 29.4 29.6 29.7 30.0Production Cost/BOE (in $/BOE) 16.3 16.1 16.0 15.8 15.6 15.5 15.3 15.2 15.0 14.9 14.7Gross Margin 60.4% 25.9% 35.7% 41.7% 44.9% 47.2% 49.4% 50.7% 51.5% 52.2% 53.1%S&A excl depr./Sales 15.4% 14.7% 13.9% 13.2% 12.6% 11.9% 11.3% 10.8% 10.2% 9.7% 9.2%Depreciation/Begin. PPE 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%Tax rate 38.60% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6%Receivables /Sales 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%Inventory /CGS 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1%Other current assets/Sales 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%Other LT assets/Net PPE 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%Exploration Expense/CAPEX 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%Non-Operating Net Income(Expenses)/Total Expenses -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5%Special Items (Taxes Other Than on Income)/Production 308.2% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0%Payables &Acc. Exp./Total Expenses 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9%Interest/Total Debt 5.1% 6.1% 6.5% 6.9% 7.3% 7.7% 8.2% 8.7% 9.2% 9.8% 10.3%CAPEX as % of sales 17.5% 4.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAPEX based on the above (in $) 401 50.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Dividend Payment (% of NI) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%



Income Statement ($millions) Revenues 2,403.0 1,220.2 1,336.9 1,399.6 1,409.4 1,395.9 1,384.1 1,352.4 1,305.5 1,258.0 1,219.5 Production Costs 951.0 903.8 859.0 816.4 775.9 737.4 700.8 666.1 633.0 601.6 571.8 S&A excl. depr. 354.0 178.9 186.2 185.2 177.1 166.7 157.0 145.7 133.6 122.4 112.7 EBITDA 1,098.0 137.5 291.7 398.0 456.3 491.8 526.3 540.6 538.8 534.0 535.0

Depreciation 1,004.0 542.3 500.0 457.1 417.8 381.9 349.1 319.1 291.7 266.6 243.7 EBIT 94.0 (404.8) (208.4) (59.1) 38.5 109.9 177.2 221.5 247.1 267.4 291.3

Interest Expense 326.0 376.2 413.4 444.1 474.5 506.1 540.0 576.6 617.1 663.1 715.7 Debt Expense - - - - - - - - - - Exploration Expense 36.0 4.5 - - - - - - - - - Non-Operating Net Income/(Expense) (176.0) (146.0) (141.0) (135.1) (128.5) (121.9) (115.7) (109.5) (103.4) (97.6) (92.3) Assets Impairment 4,852.0 - - - - - - - - - - Special Items (taxes other than on income) 180.0 112.1 107.6 103.3 99.2 95.2 91.4 87.8 84.3 80.9 77.7 Pre-tax Income (5,476.0) (1,043.6) (870.4) (741.6) (663.7) (613.3) (570.0) (552.4) (557.6) (574.2) (594.4)

Tax Expense (2,113.9) (402.9) (336.0) (286.3) (256.2) (236.8) (220.0) (213.2) (215.3) (221.7) (229.5) Tax Shield - - - - - - - - - - -

Net Income (3,362.1) (640.8) (534.4) (455.3) (407.5) (376.6) (349.9) (339.1) (342.4) (352.5) (365.0) Dividends - - - - - - - - - - EPS (8.66) (1.65) (1.38) (1.17) (1.05) (0.97) (0.90) (0.87) (0.88) (0.91) (0.94)

Balance Sheet ($ millions)AssetsCash 12.0 - - - - - - - - - - Receivables 200.0 106.4 116.6 122.0 122.9 121.7 120.7 117.9 113.8 109.7 106.3 Inventory 58.0 55.1 52.4 49.8 47.3 45.0 42.7 40.6 38.6 36.7 34.9 Other Current Assets 227.0 120.7 132.3 138.5 139.5 138.1 137.0 133.8 129.2 124.5 120.7 Total Current Assets 497.0 282.3 301.2 310.3 309.7 304.8 300.4 292.4 281.6 270.9 261.9


Total Assets 7,053.0 6,326.9 5,826.5 5,360.8 4,926.2 4,524.7 4,157.7 3,818.2 3,504.5 3,216.9 2,954.8

Liabilities & Owners' EquityPayables & Accrued Expense 1,826.0 1,515.0 1,462.5 1,401.4 1,333.5 1,265.0 1,200.3 1,135.9 1,072.8 1,013.0 957.7 Revolver - 325.7 412.2 462.8 503.6 547.2 594.8 658.9 750.7 875.3 1,033.5 Short Term Debt (current portion of LT) 100.0 - - - - - - - - - - Notes Payable - - - - - - - - - - - Long Term Debt 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 Total Debt 6,143.0 6,368.7 6,455.2 6,505.8 6,546.6 6,590.2 6,637.8 6,701.9 6,793.7 6,918.3 7,076.5

Shareholders Equity (916.0) (1,556.8) (2,091.1) (2,546.5) (2,953.9) (3,330.5) (3,680.5) (4,019.6) (4,362.0) (4,714.5) (5,079.4) Total Liabilities and Owners' Equity 7,053.0 6,326.9 5,826.5 5,360.8 4,926.2 4,524.7 4,157.7 3,818.2 3,504.5 3,216.9 2,954.8

Beginning Cash 12.0 (325.7) (412.2) (462.8) (503.6) (547.2) (594.8) (658.9) (750.7) (875.3) Change in Cash (337.7) (86.5) (50.7) (40.8) (43.5) (47.6) (64.1) (91.8) (124.6) (158.1) Net Cash Available at EOY 12.0 (325.7) (412.2) (462.8) (503.6) (547.2) (594.8) (658.9) (750.7) (875.3) (1,033.5)

29

Main hypothesis: - CRC stopped paying dividends on 2015 in line with the top management strategy of funding the capital program with the cash flow from the operations. Therefore, it is assumed that no dividends will be paid for the next ten years until 2025.

- No debt principal will be paid within 2016-2025 period and every maturity will be duly rolled over. Hence, I assume that interest over total debt will increase 6% yearly from 2015 to 2025. - This scenario will be considered equally probable to the optimistic one. Hence its weight will be considered at 25%.


Table 19: Optimistic Scenario Main Assumptions (Source: Own Excel Elaboration)



Sales Growth Rate -42.98% -0.3% 15.8% 10.7% 6.5% 4.7% 4.8% 3.3% 2.1% 1.9% 2.5%Production (MMBOE) 58.4 59.3 60.2 61.1 62.0 62.9 63.9 64.8 65.8 66.8 67.8CRC BOE price (in $) 39.3 38.6 44.0 48.0 50.4 52.0 53.7 54.6 54.9 55.1 55.7Production Cost/BOE (in $/BOE) 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3Gross Margin 60.4% 59.7% 64.7% 67.6% 69.1% 70.1% 71.0% 71.5% 71.7% 71.8% 72.1%S&A excl depr./Sales 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4%Depreciation/Begin. PPE 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%Tax rate 38.60% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6% 38.6%Receivables /Sales 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%Inventory /CGS 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1%Other current assets/Sales 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%Other LT assets/Net PPE 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%Exploration Expense/CAPEX 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%Non-Operating Net Income(Expenses)/Total Expenses -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5% -13.5%Special Items (Taxes Other Than on Income)/Production 308.2% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0%Payables &Acc. Exp./Total Expenses 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9% 139.9%Interest/Total Debt 5.1% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%CAPEX as % of sales 17.5% 2.1% 5.4% 8.1% 10.7% 13.1% 15.3% 17.5% 19.8% 22.0% 24.0%CAPEX based on the above (in $) 401 50.0 150.0 250.0 350.0 450.0 550.0 650.0 750.0 850.0 950.0Dividend Payment (% of NI) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

30

Table 20: Optimistic Scenario Financial Projections (Source: Own Excel Elaboration)

Main hypothesis: - CRC stopped paying dividends on 2015 in line with the top management strategy of funding the capital program with the cash flow from the operations. Therefore, it is assumed that no dividends will be paid for the next ten years until 2025. - No debt principal will be paid within 2016-2025 period and every maturity will be duly rolled over. In this case, interest over total debt is assumed stable at 5.67% (see Table 6) from 2015 to 2025.

- This scenario will be considered equally probable to the pessimistic one. Hence its weight will be considered at 25%.

Cash Flow & CRC Estimated Share Value

Base Scenario:

In Table 21 below, the free cash flow of the equity holders (FCFE) from 2016 to 2025 is shown. For this Base Scenario, only from 2021 onwards CRC is going to generate positive earnings. It is worth mentioning that cash flow is assumed constant over each year. Hence, the discounting period used is 0.5 years, 1.5 years and so on until 9.5 years (for 2025).



Income Statement ($millions) Revenues 2,403.0 2,396.0 2,775.4 3,072.0 3,270.8 3,425.2 3,590.8 3,709.5 3,785.9 3,857.3 3,953.3 Production Costs 951.0 965.3 979.7 994.4 1,009.4 1,024.5 1,039.9 1,055.5 1,071.3 1,087.4 1,103.7 S&A excl. depr. 354.0 369.7 428.3 474.1 504.7 528.6 554.1 572.4 584.2 595.2 610.1 EBITDA 1,098.0 1,061.0 1,367.4 1,603.5 1,756.7 1,872.1 1,996.8 2,081.6 2,130.4 2,174.7 2,239.6

Depreciation 1,004.0 542.3 500.0 470.0 451.1 442.4 443.0 452.2 469.2 493.3 524.0 EBIT 94.0 518.6 867.3 1,133.6 1,305.6 1,429.8 1,553.8 1,629.4 1,661.2 1,681.4 1,715.6

Interest Expense 326.0 348.3 342.6 342.6 342.6 342.6 342.6 342.6 342.6 342.6 342.6 Debt Expense - - - - - - - - - - Exploration Expense 36.0 4.5 13.5 22.4 31.4 40.4 49.4 58.4 67.3 76.3 85.3 Non-Operating Net Income/(Expense) (176.0) (180.0) (189.9) (198.1) (204.2) (209.5) (215.0) (219.5) (223.3) (226.9) (231.1) Assets Impairment 4,852.0 - - - - - - - - - - Special Items (taxes other than on income) 180.0 118.6 120.3 122.1 124.0 125.8 127.7 129.6 131.6 133.5 135.6 Pre-tax Income (5,476.0) (132.8) 201.0 448.3 603.4 711.4 819.1 879.2 896.3 902.0 921.0

Tax Expense (2,113.9) (51.3) 77.6 173.1 232.9 274.6 316.2 339.4 346.0 348.2 355.5 Tax Shield - - 47.6 106.3 143.0 168.6 194.1 208.4 212.4 213.8 218.3

Net Income (3,362.1) (81.5) 171.0 381.5 513.5 605.4 697.0 748.2 762.8 767.5 783.8 Dividends - - - - - - - - - - EPS (8.66) (0.21) 0.44 0.98 1.32 1.56 1.80 1.93 1.96 1.98 2.02

Balance Sheet ($ millions)AssetsCash 12.0 364.0 929.3 1,567.7 2,212.0 2,834.4 3,445.8 4,013.0 4,507.6 4,928.3 5,294.3 Receivables 200.0 208.9 242.0 267.8 285.2 298.6 313.1 323.4 330.1 336.3 344.7 Inventory 58.0 58.9 59.8 60.6 61.6 62.5 63.4 64.4 65.3 66.3 67.3 Other Current Assets 227.0 237.1 274.6 304.0 323.7 338.9 355.3 367.1 374.6 381.7 391.2 Total Current Assets 497.0 868.8 1,505.6 2,200.2 2,882.4 3,534.4 4,177.6 4,767.8 5,277.6 5,712.6 6,097.4


Total Assets 7,053.0 6,913.5 7,186.7 7,652.8 8,230.0 8,890.0 9,644.3 10,439.9 11,241.3 12,046.8 12,874.1

Liabilities & Owners' EquityPayables & Accrued Expense 1,826.0 1,868.0 1,970.2 2,054.8 2,118.6 2,173.1 2,230.4 2,277.8 2,316.5 2,354.4 2,397.9 Revolver - - - - - - - - - - - Short Term Debt (current portion of LT) 100.0 - - - - - - - - - - Notes Payable - - - - - - - - - - - Long Term Debt 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 Total Debt 6,143.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0 6,043.0

Shareholders Equity (916.0) (997.5) (826.5) (445.0) 68.5 673.9 1,370.9 2,119.1 2,881.9 3,649.4 4,433.2 Total Liabilities and Owners' Equity 7,053.0 6,913.5 7,186.7 7,652.8 8,230.0 8,890.0 9,644.3 10,439.9 11,241.3 12,046.8 12,874.1

Beginning Cash 12.0 364.0 929.3 1,567.7 2,212.0 2,834.4 3,445.8 4,013.0 4,507.6 4,928.3 Change in Cash 352.0 565.3 638.5 644.3 622.4 611.4 567.2 494.6 420.7 366.0 Net Cash Available at EOY 12.0 364.0 929.3 1,567.7 2,212.0 2,834.4 3,445.8 4,013.0 4,507.6 4,928.3 5,294.3

31

Table 21: Base Scenario FCFE and Value per Share (Source: Own Excel Elaboration)


In Table 22 below, the free cash flow of the equity holders (FCFE) from 2016 to 2025 is shown. For this Pessimistic Scenario, CRC is expected to have a negative cash flow every year which will surely lead to filing for bankruptcy. It is worth mentioning that cash flow is assumed constant over each year. Hence, the discounting period used is 0.5 years, 1.5 years and so on until 9.5 years (for 2025).

In this scenario, a share price of 0.00 will be assumed given that it is not possible for a share price to be negative.

Table 22: Pessimistic Scenario FCFE and Value per Share (Source: Own Excel Elaboration)

Free Cash Flow Calculation ($ in thousands)

Fiscal Year Ended12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25

Net Income (368.6) (220.7) (117.7) (60.2) (26.0) 6.3 22.7 17.7 8.2 5.5 Plus Depreciation 542.3 500.0 463.5 432.3 408.0 390.2 378.1 367.1 357.0 347.8 Decrease (increase) in receivables 45.6 (17.4) (10.9) (4.2) (1.1) (1.3) 1.4 3.7 3.9 2.8 Decrease (increase) in inventory 1.7 1.7 1.6 1.6 1.5 1.5 1.4 1.4 1.4 1.3 Decrease (increase) in other current assets 51.8 (19.7) (12.3) (4.7) (1.3) (1.5) 1.6 4.2 4.4 3.2 Increase (decrease) in a/p & accrued expenses (164.3) (9.1) (24.9) (39.6) (45.1) (43.4) (47.7) (50.6) (49.3) (45.5) Less Capital Expenditures (50.0) (75.0) (100.0) (150.0) (200.0) (250.0) (250.0) (250.0) (250.0) (250.0) Decrease (increase) in LT assets 19.0 16.4 14.1 10.9 8.0 5.4 5.0 4.5 4.1 3.8 Free Cash Flow available to equity holders (FCFE) 77.7 176.2 213.4 186.2 144.1 107.1 112.6 98.1 79.8 68.9 FCFE Growth 126.7% 21.1% -12.8% -22.6% -25.7% 5.1% -12.9% -18.7% -13.6%

Free Cash Flow available to equity holders (FCFE) 77.7 176.2 213.4 186.2 144.1 107.1 112.6 98.1 79.8 68.9 Period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 Discounted FCFE 72.6 143.3 151.3 115.0 77.6 49.1 44.8 33.8 23.9 17.9

Valuation

Perpetuity Growth Method

PV FCFE 729.3

Growth Rate of FCF after 2025 3.5%Terminal Value 607.3 PV of Terminal Value 157.8 Equity Value 887.1 Diluted Shares 388.2 Value per share 2.29 2.33 31st December 2015



Net Income (640.8) (534.4) (455.3) (407.5) (376.6) (349.9) (339.1) (342.4) (352.5) (365.0) Plus Depreciation 542.3 500.0 457.1 417.8 381.9 349.1 319.1 291.7 266.6 243.7 Decrease (increase) in receivables 93.6 (10.2) (5.5) (0.9) 1.2 1.0 2.8 4.1 4.1 3.4 Decrease (increase) in inventory 2.9 2.7 2.6 2.5 2.3 2.2 2.1 2.0 1.9 1.8 Decrease (increase) in other current assets 106.3 (11.5) (6.2) (1.0) 1.3 1.2 3.1 4.6 4.7 3.8 Increase (decrease) in a/p & accrued expenses (311.0) (52.5) (61.0) (67.9) (68.5) (64.7) (64.4) (63.1) (59.7) (55.3) Less Capital Expenditures (50.0) - - - - - - - - - Decrease (increase) in LT assets 19.0 19.3 17.7 16.2 14.8 13.5 12.3 11.3 10.3 9.4 Free Cash Flow available to equity holders (FCFE) (237.7) (86.5) (50.7) (40.8) (43.5) (47.6) (64.1) (91.8) (124.6) (158.1) FCFE Growth 63.6% 41.4% 19.6% -6.8% -9.4% -34.5% -43.3% -35.7% -26.9%

Free Cash Flow available to equity holders (FCFE) (237.7) (86.5) (50.7) (40.8) (43.5) (47.6) (64.1) (91.8) (124.6) (158.1) Period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 Discounted FCFE (221.9) (69.9) (35.2) (24.1) (21.7) (19.4) (21.4) (25.0) (27.3) (27.5)

Valuation


PV FCFE (493.4)

Growth Rate of FCF after 2025 3.5%Terminal Value (979.1) PV of Terminal Value (170.3) Equity Value (663.7) Diluted Shares 388.2 Value per share (1.71) 2.33 31st December 2015

32


In Table 23 below, the free cash flow of the equity holders (FCFE) from 2016 to 2025 is shown. For this Optimistic Scenario, only in 2016, the first year in the analysis, CRC is expected to have negative earnings. Positive earnings will arise in 2017 and continue until 2025. It is worth mentioning that cash flow is assumed constant over each year. Hence, the discounting period used is 0.5 years, 1.5 years and so on until 9.5 years (for 2025).

Table 23: Optimistic Scenario FCFE and Value per Share (Source: Own Excel Elaboration)

CRC Weighted Average DCF Estimated Share Value

Taking into consideration the aforementioned weights for each of scenario, the DCF method valuation for CRC stock, produces an estimated value of 3.97U$/share, as it can be seen in the table below:

Table 24: DCF method weighted valuation (Source: Own Excel Elaboration)

This estimated stock value is around 70% higher than December 31st 2015 price of 2.33U$/share and more than 120% greater than March 4th 2016 closing price of 1.76U$/share. This could strongly indicate that CRC stock might be currently undervalued by the market, in line with the author’s original sentiment.

Due to the heavy burden of debt, and the possible multiple mispricing it implies, DCF method of valuation will have an 80% (instead of an expected 50%) weight when calculating the overall estimated share value.



Net Income (81.5) 171.0 381.5 513.5 605.4 697.0 748.2 762.8 767.5 783.8 Plus Depreciation 542.3 500.0 470.0 451.1 442.4 443.0 452.2 469.2 493.3 524.0 Decrease (increase) in receivables (8.9) (33.1) (25.9) (17.3) (13.5) (14.4) (10.3) (6.7) (6.2) (8.4) Decrease (increase) in inventory (0.9) (0.9) (0.9) (0.9) (0.9) (0.9) (1.0) (1.0) (1.0) (1.0) Decrease (increase) in other current assets (10.1) (37.5) (29.4) (19.7) (15.3) (16.4) (11.7) (7.6) (7.1) (9.5) Increase (decrease) in a/p & accrued expenses 42.0 102.2 84.6 63.8 54.5 57.3 47.5 38.6 37.9 43.6 Less Capital Expenditures (50.0) (150.0) (250.0) (350.0) (450.0) (550.0) (650.0) (750.0) (850.0) (950.0) Decrease (increase) in LT assets 19.0 13.5 8.5 3.9 (0.3) (4.1) (7.6) (10.9) (13.8) (16.5) Free Cash Flow available to equity holders (FCFE) 452.0 565.3 638.5 644.3 622.4 611.4 567.2 494.6 420.7 366.0 FCFE Growth 25.1% 12.9% 0.9% -3.4% -1.8% -7.2% -12.8% -14.9% -13.0%

Free Cash Flow available to equity holders (FCFE) 452.0 565.3 638.5 644.3 622.4 611.4 567.2 494.6 420.7 366.0 Period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 Discounted FCFE 421.9 461.7 458.5 408.8 350.4 299.6 247.8 193.4 147.9 116.0

Valuation


PV FCFE 3,106.0

Growth Rate of FCF after 2025 3.5%Terminal Value 4,050.7 PV of Terminal Value 1,284.5 Equity Value 4,390.5 Diluted Shares 388.2 Value per share 11.31 2.33 31st December 2015

DCF_Base 2.29 50.0%DCF_Pessimistic - 25.0%DCF_Optimistic 11.31 25.0%

3.97

33

6. Sensitivity Analysis

Although we have arrived to an estimated share value in the previous Chapter by the use of DCF method and we will arrive to another different estimation in the next Chapter from the perspective of relative multiple-based valuation, it is utterly interesting to assess how the share value of CRC would change if key variables such as: i) oil price, ii) production level, iii) beta and iv) cash flow growth rate “g” for perpetuity value change.

Oil Price & Beta

In the following table, the reader could appreciate how the estimated CRC share value changes when oil prices and beta vary and the production level decreases at 2.5% yearly (Base Scenario condition). It is worth mentioning that oil price variation comes in the form of a percentage in the Brent future curve shown in the previous Chapter.

This company seems to be extremely sensitive to the oil price environment since a 10% decrease in the Brent future curve, all other things being equal, could make the stock worthless (i.e. bankruptcy).

Table 25: CRC share estimated value depending on oil price and beta (Source: Own Excel Elaboration)

Oil Price & Production Level

In the table below, the variation of estimated CRC share value when oil prices and production level change is shown. In this case, beta is considered fixed at 3.04.

This table shows how a decrease in oil prices could be made up for an increase in production levels in order not to file for bankruptcy. In addition, an investor should take note about the potential of CRC’s stock value if both prices and production recover.

2.04 2.24 2.44 2.64 2.84 3.04 3.24 3.44 3.64 3.84 4.04

65% -9.98 -9.03 -8.23 -7.56 -6.99 -6.49 -6.06 -5.68 -5.34 -5.04 -4.77

70% -7.97 -7.19 -6.55 -6.01 -5.54 -5.14 -4.79 -4.49 -4.21 -3.97 -3.76

75% -5.95 -5.36 -4.87 -4.45 -4.10 -3.79 -3.53 -3.29 -3.09 -2.90 -2.74

80% -3.94 -3.53 -3.19 -2.90 -2.65 -2.44 -2.26 -2.10 -1.96 -1.84 -1.72

85% -1.93 -1.69 -1.50 -1.34 -1.21 -1.09 -1.00 -0.91 -0.83 -0.77 -0.71

90% -0.08 -0.01 0.04 0.08 0.12 0.15 0.17 0.19 0.21 0.22 0.24

95% 1.42 1.37 1.32 1.28 1.24 1.21 1.17 1.14 1.11 1.09 1.06

100% 2.96 2.79 2.64 2.50 2.39 2.29 2.19 2.11 2.03 1.97 1.90

105% 4.86 4.52 4.23 3.98 3.77 3.58 3.41 3.26 3.12 2.99 2.88

110% 6.81 6.31 5.88 5.51 5.19 4.91 4.66 4.44 4.24 4.06 3.90

115% 8.80 8.13 7.56 7.07 6.65 6.28 5.95 5.66 5.40 5.17 4.95

120% 10.80 9.95 9.24 8.64 8.11 7.65 7.25 6.89 6.57 6.27 6.01

125% 12.82 11.81 10.96 10.23 9.60 9.06 8.57 8.14 7.75 7.41 7.09

130% 14.86 13.68 12.69 11.84 11.11 10.47 9.91 9.41 8.96 8.55 8.19

135% 16.89 15.55 14.42 13.45 12.62 11.89 11.25 10.67 10.16 9.70 9.28

140% 18.93 17.42 16.15 15.06 14.12 13.30 12.58 11.94 11.37 10.85 10.38

145% 21.01 19.32 17.91 16.71 15.67 14.76 13.95 13.24 12.60 12.03 11.51

150% 23.09 21.24 19.68 18.36 17.21 16.21 15.33 14.55 13.85 13.22 12.64

% Brent Future Curve

Value per share @ -2.5%

Production Yearly Variation [$/sh]CRC Levered Beta

34

Table 26: CRC share estimated value depending on oil price and production levels (Source: Own Excel Elaboration)

Production Level & Beta

Now it is the turn to assess how CRC estimated share value varies when production levels and leverage (i.e. beta) change. I will be considering oil prices at 100% parity to Brent future curve this time.

If oil prices result to be exactly as in the Brent future curve, CRC estimated share value will not be worthless event in production level declines and beta increases by 50% (which would be really weird). CRC stock value is much more sensitive to a change in production levels than to a change in beta.

Table 27: CRC share estimated value depending on production levels and beta (Source: Own Excel Elaboration)

-2.50% -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50%

65% -6.49 -6.27 -6.05 -5.82 -5.58 -5.32 -5.06 -4.79 -4.50 -4.20 -3.89

70% -5.14 -4.88 -4.62 -4.35 -4.06 -3.76 -3.45 -3.12 -2.79 -2.43 -2.07

75% -3.79 -3.50 -3.19 -2.87 -2.54 -2.20 -1.84 -1.46 -1.07 -0.67 -0.25

80% -2.44 -2.11 -1.76 -1.40 -1.02 -0.63 -0.23 0.20 0.58 0.97 1.37

85% -1.09 -0.72 -0.33 0.05 0.40 0.77 1.15 1.54 2.03 2.54 3.07

90% 0.15 0.49 0.85 1.22 1.60 2.06 2.56 3.10 3.66 4.24 4.86

95% 1.21 1.58 1.98 2.47 3.00 3.55 4.12 4.72 5.34 6.00 6.68

100% 2.29 2.80 3.33 3.89 4.47 5.08 5.71 6.38 7.07 7.79 8.54

105% 3.57 4.14 4.73 5.35 5.99 6.66 7.35 8.07 8.82 9.61 10.42

110% 4.91 5.52 6.17 6.84 7.53 8.26 9.01 9.80 10.61 11.46 12.35

115% 6.27 6.94 7.63 8.35 9.10 9.88 10.69 11.53 12.41 13.32 14.27

120% 7.65 8.36 9.10 9.87 10.68 11.51 12.38 13.29 14.23 15.20 16.22

125% 9.05 9.81 10.61 11.43 12.29 13.18 14.10 15.07 16.07 17.11 18.19

130% 10.46 11.27 12.12 12.99 13.90 14.85 15.83 16.85 17.91 19.01 20.15

135% 11.88 12.74 13.63 14.55 15.51 16.51 17.55 18.63 19.75 20.91 22.12

140% 13.30 14.20 15.14 16.11 17.13 18.18 19.28 20.42 21.60 22.83 24.10

145% 14.75 15.70 16.69 17.72 18.78 19.89 21.04 22.24 23.48 24.77 26.12

150% 16.20 17.20 18.24 19.32 20.44 21.60 22.81 24.06 25.37 26.72 28.13

Value per share @ Levered Beta =

3.04 [$/sh]% Production Yearly Variation

% Brent Future Curve

2.04 2.24 2.44 2.64 2.84 3.04 3.24 3.44 3.64 3.84 4.04

-3.50% 1.71 1.66 1.61 1.57 1.53 1.49 1.46 1.42 1.39 1.36 1.33

-3.00% 2.30 2.19 2.10 2.01 1.94 1.87 1.81 1.75 1.70 1.65 1.60

-2.50% 2.96 2.79 2.64 2.50 2.39 2.29 2.19 2.11 2.03 1.97 1.90

-2.00% 3.80 3.53 3.31 3.11 2.95 2.80 2.67 2.55 2.44 2.35 2.26

-1.50% 4.67 4.31 4.01 3.75 3.53 3.33 3.16 3.00 2.87 2.74 2.63

-1.00% 5.58 5.13 4.74 4.42 4.14 3.89 3.68 3.48 3.31 3.16 3.02

-0.50% 6.54 5.98 5.51 5.12 4.77 4.48 4.21 3.98 3.78 3.59 3.42

0.00% 7.54 6.87 6.31 5.84 5.44 5.08 4.78 4.50 4.26 4.04 3.84

0.50% 8.58 7.80 7.15 6.60 6.13 5.72 5.36 5.04 4.76 4.51 4.28

1.00% 9.67 8.78 8.03 7.40 6.85 6.38 5.97 5.61 5.29 5.00 4.74

1.50% 10.82 9.80 8.95 8.23 7.61 7.08 6.61 6.20 5.83 5.51 5.22

2.00% 12.01 10.86 9.90 9.09 8.40 7.80 7.27 6.81 6.40 6.04 5.71

2.50% 13.26 11.97 10.90 9.99 9.22 8.55 7.96 7.45 6.99 6.59 6.22

3.00% 14.55 13.12 11.93 10.93 10.07 9.33 8.68 8.11 7.61 7.16 6.75

3.50% 15.91 14.33 13.01 11.91 10.96 10.14 9.43 8.80 8.24 7.75 7.31

4.00% 17.32 15.59 14.14 12.92 11.88 10.98 10.20 9.51 8.91 8.36 7.88

4.50% 18.80 16.90 15.31 13.98 12.84 11.86 11.01 10.26 9.59 9.00 8.48

5.00% 20.34 18.26 16.54 15.08 13.85 12.78 11.85 11.03 10.31 9.67 9.09

Value per share @ 100% Brent

Future Curve [$/sh]CRC Levered Beta

% Production Yearly

Variation

35

Cash Flow Growth Rate

In the Table shown below, an idea of how CRC estimated share value changes for different cash flow growth rate “g” levels is exposed. This exercise was carried out for each scenario

for an average of the three previous years’ change in cash flows and 0.5% increments from

0% to 5% (remember, 3.5% was used in this thesis as was explained in the previous chapter). It can be concluded that CRC estimated share value is not so sensitive to changes in “g”,

mainly in Base and Pessimistic scenarios.

Table 28: CRC share estimated value depending on cash flow change rate in perpetuity (Source: Own Excel Elaboration)

-15.1% 2.01 0.0% 2.18 0.5% 2.19 1.0% 2.21 1.5% 2.22 2.0% 2.23 2.5% 2.25 3.0% 2.27 3.5% 2.29 4.0% 2.31 4.5% 2.33 5.0% 2.35

g U$/shareBase Scenario

-35.3% (1.35) 0.0% (1.62) 0.5% (1.63) 1.0% (1.64) 1.5% (1.66) 2.0% (1.67) 2.5% (1.68) 3.0% (1.69) 3.5% (1.71) 4.0% (1.73) 4.5% (1.74) 5.0% (1.76)

g U$/sharePessimistic Scenario

-13.6% 8.98 0.0% 10.33 0.5% 10.43 1.0% 10.55 1.5% 10.67 2.0% 10.81 2.5% 10.96 3.0% 11.13 3.5% 11.31 4.0% 11.51 4.5% 11.74 5.0% 12.00

g U$/shareOptimistic Scenario

36

7. Valuation Using Multiples

During this chapter, in contrast to the previous one, a relative valuation of CRC stock will be obtained. The following multiples, which are widely used within the industry21, were selected:

- EV/EBITDA

- EV/Production

- EV/1P

- P/CF

- P/Sales

For the share value estimation objective, each multiple will have an equal weight of 20%. Each multiple will be duly explained along the following Sections.22

EV/EBITDA

This ratio is widely used for oil and gas companies across the globe since it gives a measure of the enterprise value, which is the market capitalization plus debt minus cash, over the EBITDA of a company. This is an important metric as oil and gas firms typically have a lot of debt and the EV includes the cost of paying it off. EBITDA measures profits before interest and the non-cash expenses of depreciation and amortization. In times of low commodity prices, as we are currently experiencing, multiples expand, and in times of strong commodity prices multiples contract.

Enterprise multiples may vary depending on the industry. Hence, it is key to compare the multiple to other companies or to the industry in general. Higher enterprise multiples in high-growth industries like biotech and lower multiples in industries with slow growth like railways are to be expected. In addition to this, a low EV/EBITDA ratio could also indicate that a company might be undervalued.

In the following table, the reader is able to appreciate how CRC EV/EBITDA multiple of 3.05 compares to: i) a group of comparable companies, ii) major integrated giants, iii) the industry and iv) the sector.

21 http://www.investopedia.com/articles/basics/11/common-multiples-used-in-oil-and-gas-valuation.asp 22 www.investopedia.com

http://www.investopedia.com/terms/d/debt.asp#axzz1gKhHisSM

http://www.investopedia.com/terms/d/depreciation.asp#axzz1gKhHisSM

http://www.investopedia.com/terms/a/amortization.asp#axzz1gKhHisSM

http://www.investopedia.com/terms/c/commodity.asp#axzz1gKhHisSM

http://www.investopedia.com/terms/g/growthindustry.asp

http://www.investopedia.com/terms/u/undervalued.asp

http://www.investopedia.com/articles/basics/11/common-multiples-used-in-oil-and-gas-valuation.asp

http://www.investopedia.com/

37

Table 29: EV/EBITDA multiple comparisons (Source: Own Excel Elaboration)

If we assume that the simple average of six comparable companies worth 6.13 should be CRC EV/EBITDA, then the enterprise value of CRC should be 6.73BU$ (more than 50% undervalued) and its stock should trade at around 11U$ per share.

EV/Production

This important multiple, also referred to as price per flowing barrel, is a key metric used by many oil and gas analysts. This takes the enterprise value and divides it by barrels of oil equivalent produced per day. If the multiple of a company is high compared to the firm's peers, then it is trading at a premium, and if the multiple is low amongst its peers it is trading at a discount.

However, this ratio does not take into account the potential production from undeveloped fields and investors should also determine the cost of developing new fields to get a better idea of an oil company's financial health.

See next table for EV/Production comparison against: i) a group of comparable companies and ii) major integrated giants.

Table 30: EV/Production multiple comparisons (Source: Own Excel Elaboration)

For this multiple, the average of the comparable companies is 148.15U$/BOE compared to CRC’s 57.36U$/BOE (more than 60% undervalued). Therefore, the stock should trade at around 16U$ per share, which is enormously higher than the current value.

EV/EBITDA MV [B$] EV [B$] EBITDA [B$] EV/EBITDA

OXY 51,64 55,65 5,03 11,07 Yahoo Finance

COP 57,59 60,35 18,37 3,29 https://www.stock-analysis-on.net/NYSE/Company/ConocoPhillips/Valuation/EV-to-EBITDA#Ratio-Current

APA 16,81 21,43 5,78 3,71 Yahoo Finance

HES 13,87 14,96 1,60 9,33 Yahoo Finance

MRO 8,52 14,50 4,50 3,22 https://ycharts.com/companies/MRO/enterprise_value

CPE 0,55 0,81 0,13 6,14 Yahoo Finance

XOM 324,51 367,32 39,67 9,26 Yahoo Finance

CVX 169,31 184,47 17,14 10,76 Yahoo Finance

Oil & Gas Industry 5,04

Oil & Gas Producers Sector 4,69

CRC 0,90 3,35 1,10 3,05 EV = 6,73B U$ UNDERVALUED

Share Value = 11,03 U$ 49,8%

6,13

EV/Production MV [B$] EV [B$] Production [MMBOE] EV/Production [$/BOE]

OXY 51,64 55,65 251,49 221,29 http://www.oxy.com/investors/Documents/Earnings/Oxy3Q15EarningsPressRelease.pdf

COP 57,59 60,35 556,63 108,42 http://seekingalpha.com/symbol/COP/earnings_news

APA 16,81 21,43 175,20 122,32 http://boereport.com/2015/11/24/fitch-affirms-apaches-long-term-ratings-at-bbb-outlook-remains-stable/

HES 13,87 14,96 134,32 111,38 http://seekingalpha.com/symbol/HES/earnings_news

MRO 8,52 14,50 158,41 91,53 http://ir.marathonoil.com/releasedetail.cfm?ReleaseID=940677

CPE 0,55 0,81 3,47 233,98 http://www.streetinsider.com/Earnings/Callon+Petroleum+(CPE)+Tops+Q2+EPS+by+4c%3B+Raises+Annual+Production+Guidance/10785601.html

XOM 324,51 367,32 1460,00 251,59 http://news.exxonmobil.com/press-release/exxonmobil-earns-42-billion-second-quarter-2015

CVX 169,31 184,47 938,05 196,65 http://www.naturalgasintel.com/articles/101620-chevron-quite-sober-about-oil-prices-watson-says

CRC 0,90 3,35 58,40 57,36 EV = 8.65B U$ UNDERVALUED

Share Value = 15,99 U$ 38,7%

148,15

http://www.investopedia.com/terms/p/price-per-flowing-barrel.asp

http://www.investopedia.com/terms/b/barrelofoilequivalent.asp

http://www.investopedia.com/terms/b/barrelofoilequivalent.asp

38

EV/1P

This easily calculated metric, enterprise value of a company over its proven reserves, requires no estimates or assumptions and helps us understand how well resources will support the company's operations. This ratio should not be used in isolation, as not all reserves are the same. However, this multiple can still be an important metric to use to evaluate the valuation of acquiring properties when little is known about the cash flow.

When this multiple is high, the company of interest would be trading at a premium for a given amount of oil in the ground. A low value would suggest a potentially undervalued firm, and again with this CRC multiple it seems to be the case.

It is worth remembering that proven reserves are those claimed to have at least 90% probability of being recovered. They can be subdivided in proven developed (PD), which can be produced by existing wells, and proven undeveloped (PUD), requiring additional CAPEX to be brought to the surface.

See next table for EV/1P comparisons against: i) a group of comparable companies and ii) major integrated giants.

Table 31: EV/Proven reserves multiple comparisons (Source: Own Excel Elaboration)

For this multiple, the average of the comparable companies is 12.88U$/BOE compared to CRC’s 4.36U$/BOE (more than 65% undervalued). Therefore, the stock should trade at

slightly more than 19U$ per share, which is around ten times its current value.

P/CF

This price to cash flow multiple is often considered by oil and gas analysts because it is a lot much harder to manipulate cash flow than earnings and book value by the means of aggressive accounting. One disadvantage might be that, while easily calculated, can be misleading if there is a case of above average or below average financial leverage.

As with EV/EBITDA multiple, it is also important to note that in times of low commodity prices multiples expand, and during high commodity prices multiples decrease.

See next table for P/CF comparisons against: i) a group of comparable companies and ii) major integrated giants.

EV/1P MV [B$] EV [B$] 1P [MMBOE] EV/1P [$/BOE]

OXY 51,64 55,65 2819,00 19,74 OXY 2014 10-K

COP 57,59 60,35 8900,00 6,78 http://www.conocophillips.com/newsroom/Pages/2015/ConocoPhillips-Reports-Fourth-Quarter-and-Full-Year-2014-Results.aspx

APA 16,81 21,43 2396,00 8,94 APA 2014 10-K

HES 13,87 14,96 1431,00 10,45 HES report

MRO 8,52 14,50 2198,00 6,60 http://ir.marathonoil.com/releasedetail.cfm?ReleaseID=897082

CPE 0,55 0,81 32,82 24,76 CPE 2014 10-K

XOM 324,51 367,32 25300,00 14,52 http://news.exxonmobil.com/press-release/exxonmobil-2014-reserves-replacement-totals-104-percent

CVX 169,31 184,47 8402,00 21,96 http://www.chevron.com/annualreport/2014/documents/pdf/Chevron2014AnnualReport.pdf

CRC 0,90 3,35 768,00 4,36 EV = 9.89B U$ UNDERVALUED

Share Value = 19,18 U$ 33,9%

12,88

http://www.investopedia.com/terms/c/cashflow.asp#axzz1gKhHisSM

39

Table 32: P/Cash Flow multiple comparisons (Source: Own Excel Elaboration)

In this case, the company is undervalued yet again. The average of the comparable companies is 7.90 compared to CRC’s 1.65 (almost 80% undervalued). In consequence, the stock should trade at around 11U$ per share.

P/Sales

This is the only ratio that compares a company’s stock price to its revenues. The price to sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues. A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation.

See next table for P/S comparisons against: i) a group of comparable companies and ii) major integrated giants.

Table 33: P/Sales multiple comparisons (Source: Own Excel Elaboration)

Guess what. Not surprisingly, CRC appears undervalued one more time for this final multiple. The average of the comparable companies is 2.68 compared to CRC’s 0.39 (more

than 85% undervalued). Hence, the stock should be trading at almost 16U$ per share.

Benchmark Companies

CRC share relative valuation will be calculated from the same five companies used in Chapter 5 for beta estimation (including OXY) and Callon Petroleum Company (CPE in NYSE), a very small independent oil and gas company from United States whose market capitalization is similar to CRC’s.

P/CF MV [B$] P [$/sh] Operating annual CF [$/sh] P/CF

OXY 51,64 67,71 4,39 15,43 Google Finance

COP 57,59 46,69 6,14 7,61 Google Finance

APA 16,81 44,47 9,60 4,63 Google Finance

HES 13,87 48,48 6,92 7,00 Google Finance

MRO 8,52 12,59 2,39 5,27 Google Finance

CPE 0,55 8,34 1,12 7,47 Google Finance

XOM 324,51 77,95 8,32 9,37 Google Finance

CVX 169,31 89,96 10,56 8,52 Google Finance

CRC 0,90 2,33 1,42 1,65 P = 11.18 U$/sh UNDERVALUED

20,8%

7,90

P/Sales MV [B$] P [$/sh] Sales [$/sh] P/Sales

OXY 51,64 67,71 16,50 4,10 Google Finance

COP 57,59 46,69 24,07 1,94 Google Finance

APA 16,81 44,47 18,00 2,47 Google Finance

HES 13,87 48,48 22,75 2,13 Google Finance

MRO 8,52 12,59 8,85 1,42 Google Finance

CPE 0,55 8,34 2,09 3,99 Google Finance

XOM 324,51 77,95 64,59 1,21 Google Finance

CVX 169,31 89,96 69,03 1,30 Google Finance

CRC 0,90 2,33 5,91 0,39 P = 15.81 U$/sh UNDERVALUED

14,7%

2,68

40

For informative purposes only, the multiples of some of the largest American major integrated oil and gas companies such as Exxon Mobil (XOM in NYSE) and Chevron Corporation (CVX is the ticker in NYSE) will be shown. It is worth mentioning, however, that these last companies’ multiples will not be considered for CRC share value estimation.

The comparable companies’ list is as follows:

- OXY (former parent company)

- COP (independent, similar)

- APA (independent, similar)

- HES (independent, similar)

- MRO (independent, similar)

- CPE (independent, much smaller. Comparable only in market capitalization amount)

- XOM (major integrated, not similar)

- CVX (major integrated, not similar)

CRC Weighted Average Multiple Share Value

Taking into consideration the aforementioned weights for each of the five multiples analyzed, the multiple method valuation for CRC stock gives an estimated value of 15.03U$/share, as it can be seen in the table below:

Table 34: Multiples method weighted valuation (Source: Own Excel Elaboration)

This estimated stock value is almost 530% higher than December 31st 2015 price of 2.33U$/share and more than 700% greater than March 4th 2016 closing price of 1.76U$/share. This could be also taken as a strong indicator that CRC stock might be currently undervalued by the market.

Due to the heavy burden of debt, and the possible multiple mispricing it implies, this method of valuation will have a 20% (instead of an expected 50%) weight when calculating the overall estimated share value.

EV/EBITDA 11.03 20.0%EV/Production 15.99 20.0%EV/1P 19.18 20.0%P/CF 11.18 20.0%P/S 15.81 20.0%

14.64

41

8. Conclusion

Throughout this thesis, CRC assets, operations and revenue stream were assessed in order to gather enough resources to be capable of estimating its absolute and relative intrinsic value, which is totally different to its market capitalization. Therefore, its estimated share value was obtained and the initial undervaluation sentiment was confirmed.

The company is currently immersed in a dire situation mainly because of its enormously high level of debt and the current oil price crisis, which is caused by an oil glut derived from oversupply and stagnant global demand. In this case, both valuation methods, DCF (absolute valuation) and multiples (relative valuation), showed that CRC stock is undervalued and could be an extremely interesting investment opportunity as it is exposed in the tables shown below:

Valuation Method Scenario/Multiple Estimated Share Value

Method Weight

DCF

[80%]

Base 2.29 50%

Pessimistic 0.00 25%

Optimistic 11.31 25%

Multiple Valuation [20%]

EV/EBITDA 11.03 20%

EV/Production 15.99 20%

EV/1P 19.18 20%

P/CF 11.18 20%

P/Sales 15.81 20%

Table 35: Different Estimations and Weights of CRC Share Value (Source: Own Elaboration)

Table 36: CRC Final Estimated Share Value (Source: Own Excel Elaboration)

Final Valuation 6.10DCF_Base 2.29 50.0% 80.0% 40.0%DCF_Pessimistic - 25.0% 80.0% 20.0%DCF_Optimistic 11.31 25.0% 80.0% 20.0%EV/EBITDA 11.03 20.0% 20.0% 4.0%EV/Production 15.99 20.0% 20.0% 4.0%EV/1P 19.18 20.0% 20.0% 4.0%P/CF 11.18 20.0% 20.0% 4.0%P/S 15.81 20.0% 20.0% 4.0%

3.97

14.64

42

Although 80% DCF and 20% multiples seem to be rather arbitrary, it is a really conservative assumption given that the multiple method is valuing the share at around 15U$. Nevertheless, a brief sensitivity analysis regarding DCF-multiple weight allocation has been carried out and the results are shown below:

As a final recommendation, keeping in mind that Brent future curve and CRC production level are the most important value maximizers, an investor should go long CRC at the current oil and gas price levels. A buying strategy could be buying 50% now and 50% if Brent goes above 50U$. Price target is set at 6.10U$/share.

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% %DCF14.64$ 13.57$ 12.50$ 11.44$ 10.37$ 9.30$ 8.24$ 7.17$ 6.10$ 5.04$ 3.97$ CRC share value

43

9. Bibliography

Academic Bibliography

1. Damodaran. “Investment Valuation”

2. Chandra. “Investment Analysis and Portfolio Management”

3. Graham, Smart. “Introduction to Corporate Finance”

4. Fabozzi. “Fixed Income Analysis”

5. Hull “Options, Futures and Other Derivatives”

6. Markus. “Oil & Gas, The Business and Politics of Energy”

Reports

7. CRC 2014 10-K Annual Report

8. CRC 3Q2015 10-Q Quarterly Report

9. CRC 2015 10-K Annual Report

10. US Energy Information Administration. “Annual Energy Outlook 2015,” Abril 2015

Other Thesis

11. De Elia, Ignacio. BP thesis (Master of Finance San Andres, 2013)

12. Rouco, Rodolfo. Tenaris thesis (MBA San Andres, June 2014)

13. Sicala, Adriana. PAE thesis (MBA San Andres, June 2014)

Excel Calculation Sheets (Own Elaboration)

14. “CRC Year – Base Scenario.xlsx”

15. “CRC Year – Pessimistic Scenario.xlsx”

16. “CRC Year – Optimistic Scenario.xlsx”

44

Internet Sources

17. www.sec.gov (10K and 10Q filings)

18. www.crc.com (company website)

19. www.streetinsider.com

20. www.reuters.com

21. www.bloomberg.com

22. www.tradingview.com

23. www.investopedia.com

24. www.google.com/finance

25. www.finance.yahoo.com

26. www.interactivebrokers.com

27. www.ft.com

28. www.seekingalpha.com

29. www.api.org (American Petroleum Institute)

30. www.wikipedia.org

31. www.opec.org

32. www.eia.gov (US Energy Information Administration)

http://www.sec.gov/

http://www.crc.com/

http://www.streetinsider.com/

http://www.reuters.com/

http://www.bloomberg.com/

http://www.investopedia.com/

http://www.google.com/finance

http://www.finance.yahoo.com/

http://www.ft.com/

http://www.api.org/

http://www.wikipedia.org/

http://www.opec.org/

http://www.eia.gov/

45

10.Appendixes

Table 37: CRC Identified Drilling Locations per Basin (Source: CRC 10-K 2015)

Table 38: CRC Acreage, Producing Wells and Identified Drilling Locations (Source: CRC 10-K 2015)

Table 39: Production Data in CRC’s main Basins (Source: CRC 10-K 2015)

46

Table 40: Reserves by Basin and Recovery Mechanism (Source: CRC 10-K 2015)

Table 41: CRC Total PD and PUD Oil Reserves (Source: CRC 10-K 2015)

47

Table 42: CRC Total PD and PUD NGL Reserves (Source: CRC 10-K 2015)

Table 43: CRC Total PD and PUD Natural Gas Reserves (Source: CRC 10-K 2015)

48

Table 44: CRC Costs Incurred in 2013, 2014 ad 2015 (Source: CRC 10-K 2015)

Table 45: CRC Results of Operations in 2013, 2014 ad 2015 (Source: CRC 10-K 2015)

49

Table 46: CRC Results per Unit of Production in 2013, 2014 ad 2015 (Source: CRC 10-K 2015)

Table 47: CRC Oil, NGL and Natural Gas Production per Day in 2013, 2014 ad 201 (Source: CRC 10-K 2015)