California Resources Concludes Merger With Aera Energy

California Resources Corporation CRC has concluded its $1.13 billion all-stock merger, announced in February 2024, with Aera Energy, LLC. The total valuation of the deal is $2.1 billion, including debt.In a special meeting held on Jun 26, 2024, CRC shareholders authorized the issuance of stocks needed to close the merger deal. As part of the agreement, the entities owning Aera Energy have received 21.3 million shares of common stock of CRC. The total value of $1.13 billion was based on the closing price of the CRC stock on Jun 28.

Aera Energy is a joint venture (JV) between Shell SHEL and ExxonMobil XOM that was later sold to IKAV, a German asset manager in February 2023 for $4 billion. Following this acquisition, the Canada Pension Plan Investment Board ("CPP") purchased a 49% stake in the JV. Additionally, Oaktree Capital Management, LP holds equity in Aera Energy.

During April and May 2024, the pro forma net daily production of CRC and Aera averaged 146 thousand barrels of oil equivalent per day (Mboe/d), with 79% of this production being oil. For the second half of the year, the combined company projects capital expenditure between $170 million and $210 million, and net daily production in the range of 140-146 Mboe/d.

CRC's management is confident in the combined company's ability to achieve $150 million in annual synergies within 15 months of the deal's closure. The deal is also expected to boost free cash flows and create long-term value for the shareholders.            

Along with the closure of the transaction, CRC has increased its borrowing base from $1.2 to $1.5 billion. The company has also increased the aggregate commitment amount under its Revolving Credit Facility from $630 million to $1.1 billion.

The combined company will be run by the current executive board of California Resources, with Bobby Saadati, CEO of IKAV Energy Inc., and James Jackson, managing director, Sustainable Energies at Canada Pension Plan Investment Board, as part of the board of directors.

Zacks Rank and Key Picks

Currently, CRC carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the energy sector are Sunoco LP, SM Energy and Hess Midstream Partners LP HESM. Sunoco presently sports a Zacks Rank #1 (Strong Buy), while SM Energy and Hess Midstream carry a Zacks Rank #2 (Buy) each.

Sunoco LP is one of the largest distributors of motor fuel in the United States. The partnership distributes fuel to independent dealers, commercial customers, convenience stores as well as distributors. Its current distribution yield is greater than the composite stocks in the industry, providing unitholders with consistent returns.

SM Energy is an upstream energy firm operating in the prolific Midland Basin and the South Texas regions. For 2024, the company expects its production to increase from the prior-year reported figure, signaling a bright production outlook.

Hess Midstream owns, operates, develops and acquires a wide range of midstream assets, providing services to Hess Corporation and other third-party customers. The partnership has a stable fee-based revenue model secured via long-term commercial contracts. Since Hess Midstream operates through 100% fee-based contracts, it is exposed to minimal commodity price risks.

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