Oil And Gas Revenues Will Suffer Under Renewables Pressure

Key Takeaways

• Shifting to renewables and stricter climate policies in California threaten the company's oil and gas revenues, margins, and project viability.
  
• Heavy reliance on regulated state operations and unproven low-carbon investments increases exposure to earnings volatility and weaker returns.
  
• Advancements in carbon capture, asset monetization, and operational synergies position CRC for sustained earnings growth, financial flexibility, and strengthened margins amid supportive regulatory trends.

Catalysts

Operates as an independent energy and carbon management company in the United States.

• Rapidly accelerating transition to renewable energy sources in California is poised to place long-term, structural pressure on California Resources' core oil and gas revenues, undermining future top-line growth as electrification and clean transportation options cannibalize demand.
  
• Heightening political and social opposition to fossil fuels—combined with evolving climate policies—will likely make permitting and expansion for drilling, CCS, and energy infrastructure significantly more costly and unpredictable, eroding net margins and lengthening project payback periods.
  
• Heavy concentration of operations within a single, highly regulated state exposes the company to outsized operational risk and rising compliance costs, increasing volatility in cash flows and threatening long-term earnings stability despite recent cost reductions.
  
• The company’s carbon management and clean energy ventures entail substantial upfront capital requirements and lack proven returns in California’s newly forming CCS market, threatening lower near
• to medium-term earnings and weakening returns on invested capital relative to current expectations.
  
• The ongoing, secular decline of mature, aging resource fields demands sustained reinvestment merely to maintain flat production, amplifying capital intensity and potentially pushing free cash flow and profitability beneath current assumptions should commodity prices revert or regulatory costs continue to rise.

California Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on California Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming California Resources's revenue will decrease by 5.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 15.1% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach $188.7 million (and earnings per share of $2.3) by about July 2028, down from $501.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

California Resources Future Earnings Per Share Growth

Risks

• Increasing regulatory support and legislative progress in California for carbon capture and storage (CCS) infrastructure, such as CO₂ pipeline permitting, could create substantial new and recurring revenue streams through California Resources' Carbon TerraVault platform, positively impacting long-term revenue and EBITDA growth.
  
• Improved oil and gas permitting environment and constructive government engagement in California present opportunities for CRC to invest in new drilling and workover projects, enabling maintenance or modest growth in production with capital-efficient workovers, which supports cash flows and margin stability.
  
• Growing industrial and AI data center demand for power, especially clean and reliable baseload electricity, positions CRC’s Elk Hills power asset and associated carbon capture initiatives for lucrative long-term power purchase agreements, potentially enhancing both top-line revenue and net margins.
  
• Successful execution of the Aera merger, rapid realization of operating synergies, and continued infrastructure consolidation point to ongoing structural cost reductions, which drive durable improvements in operating margins and create upside for earnings over time.
  
• Early-mover advantage in CCS and strong land and mineral ownership provide CRC with the flexibility to monetize asset sales (such as the Huntington Beach land re-entitlement), unlock value from brownfield development, and attract institutional third-party capital, all of which improve financial resilience, liquidity, and support potential increases in earnings per share.

Valuation

• The assumed bearish price target for California Resources is $48.08, which represents two standard deviations below the consensus price target of $57.83. This valuation is based on what can be assumed as the expectations of California Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $188.7 million, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 6.6%.
• Given the current share price of $49.34, the bearish analyst price target of $48.08 is 2.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.