California Resources Corp (NYSE:CRC) Is A High Reward Opportunity

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Like most small E&Ps, California Resources Corp (NYSE:CRC) has been the victim of low oil prices and a high debt load. Those two just do not go together and shareholders of CRC have paid a heavy price. However, we don't think all hope is lost. Matter of fact, for opportunistic investors, we think CRC has big potential with high rewards at current prices.

First off, CRC is the largest oil and natural gas exploration and production company in California on a gross-operated basis. The company operates its world class resource base exclusively within the State of California, applying integrated infrastructure to gather, process and market its production. The firm has a mineral acreage consisting of approximately 2.4 million net acres spanning the state’s four gas and oil basins. The company’s four gas and oil basins include San Joaquin Basin, Los Angeles Basin, Ventura Basin and Sacramento Basin.

The key here is that CRC is not operating in some third world country with geopolitical risks like Libya, Iraq or Egypt. We don't have to worry about a war or violence breaking out, except maybe for the occasional environmentalist in their Tesla (NASDAQ:TSLA) spouting global warming nonsense.

Second, doing a back of the napkin analysis yields an undervalued company. CRC is producing roughly 160k boepd. The current market value for this is $45k boepd. This gives the company an enterprise value of $7.2 billion. With a debt load of roughly $6.4 billion, that leaves an equity value of $800 million. At $.38 per share, CRC is trading with a market cap of just $147 million. By all accounts, CRC is undervalued.

Third, CRC's management has already taken steps to get its financial house in order. Cash costs, excluding interest charges, are expected to fall by 11% from 2014 levels and 2015 capital investments are expected to total approximately $400 million, enabling CRC to drill and complete 311 wells and invest about $160 million in its infrastructure and facilities. In December, the company said:

"CRC continues to focus on its longer term debt reduction target. This month, CRC closed a bond exchange which reduces the principal on its outstanding debt by $563 million while increasing interest by just $21 million per year. CRC has been pursuing multiple transactions to achieve further deleveraging. Detailed discussions on specific transactions progressed throughout the fourth quarter. However, in light of the recent further drop in commodity prices, we do not expect to announce any further deleveraging transactions in 2015."

Fourth, CRC has a crushing debt load because of its parent company Occidental Petroleum Corp (NYSE:OXY). OXY chose to burden the spin off with too much debt. The liabilities were transferred from OXY to CRC. We think OXY bears a lot of this responsibility and it wouldn't take much for a good litigation attorney to make a case for CRC.

Fifth, most of the company's debt is not due until 2020 or later. This bides the company time and allows for a recovery in oil prices to happen, which we think will occur within the next year or two. Drilling rig counts have dropped dramatically as investment in oil projects has grinded to a halt. When the supply/demand imbalance corrects itself, these projects will not ramp up fast enough to meet demand. As a result, oil prices can recover a lot quicker than people realize.

Sixth, institutions like Vanguard have been dumping the stock since prices went under $1. Couple this with short selling and you have a perfect storm for lower prices. However, at current levels, the risk to the downside looks minimal while the upside is enormous, especially when we look at the chart and see how far CRC has fallen.

Currently trading at 52 week lows, we see CRC as one of the best risk/reward opportunities in the oil patch. CRC certainly has the potential to be a multi-bagger and one which we are definitely watching and keeping an eye on. For continuing coverage on CRC and our other hot stock picks, sign up to Insider Financial today and get our free penny stock newsletter!

Disclosure: We have no position in CRC and have not been compensated for this article.