California Resources Corp 10-Q

Item 3 Quantitative and Qualitative Disclosures About Market Risk For the three and six months ended June 30, 2020, there were no material changes to commodity price risk, interest rate risk or counterparty credit risk from the information provided under Item 305 of Regulation S-K included under the caption Management's Discussion and Analysis of Financial Condition and Results of Operations (Incorporating Item 7A) – Quantitative and Qualitative Disclosures About Market Risk in the 2019 Form 10-K, except as discussed below. Commodity Price Risk In March 2020, we monetized crude oil hedge positions in place for April 2020 forward with our counterparties, except for certain hedges held by our BSP JV, for approximately $63 million. We recognized the proceeds received in net derivative gain (loss) from commodity contracts on our condensed consolidated statements of operations in the first quarter of 2020. As of June 30, 2020, we did not have any commodity hedges covering our share of production. The Senior DIP Credit Agreement requires us to enter into hedging arrangements covering at least 25% of our share of expected crude oil production for the next twelve months. On July 24, 2020, we entered into various derivative instruments through July 2021 to satisfy this requirement. Unless otherwise indicated, we use the term "hedge" to describe derivative instruments that are designed to achieve our hedging program goals, even though they are not accounted for as cash-flow or fair-value hedges. Our current oil hedge positions provide for the following expected outcomes: August-September 2020 Q4 2020 Q1 2021 Q2 2021 July 2021 Barrels per day 4,950 4,800 4,500 4,500 4,200 Receive Brent if Brent > $40 Receive Brent if Brent > $40 Receive Brent if Brent > $40 Receive Brent if Brent > $40 Receive Brent if Brent > $40 Receive $40 if Brent between $30 and $40 Receive $40 if Brent between $30 and $40 Receive $40 if Brent between $30 and $40 Receive $40 if Brent between $30 and $40 Receive $40 if Brent between $30 and $40 Receive Brent +$10 if Brent <$30 Receive Brent +$10 if Brent <$30 Receive Brent +$10 if Brent <$30 Receive Brent +$10 if Brent <$30 Receive Brent +$10 if Brent <$30 Barrels per day 4,950 4,800 4,500 4,500 4,200 Ceiling price of $48.05 Brent Ceiling price of $48.05 Brent Ceiling price of $48.05 Brent Ceiling price of $48.05 Brent Ceiling price of $48.05 Brent Receive Brent between $40 and $48.05 Receive Brent between $40 and $48.05 Receive Brent between $40 and $48.05 Receive Brent between $40 and $48.05 Receive Brent between $40 and $48.05 Floor price of $40 Brent Floor price of $40 Brent Floor price of $40 Brent Floor price of $40 Brent Floor price of $40 Brent Barrels per day 6,600 6,400 6,000 6,000 5,600 Receive $44.75 Brent at all prices Receive $44.75 Brent at all prices Receive $44.75 Brent at all prices Receive $44.75 Brent at all prices Receive $44.75 Brent at all prices We also currently have Brent-based crude oil contracts for insignificant volumes through May 2021 which were entered into by our BSP JV and are included in our consolidated results but not in the above table. The BSP JV also entered into natural gas swaps for insignificant volumes for periods through May 2021. The hedges entered into by the BSP JV could affect the timing of the redemption of the BSP preferred interest. 51 Counterparty Credit Risk Our credit risk relates primarily to trade receivables and derivative financial instruments. Credit exposure for each customer is monitored for outstanding balances and current activity. For derivative instruments entered into as part of our hedging program, we are subject to counterparty credit risk to the extent the counterparty is unable to meet its settlement commitments. We actively manage this credit risk by selecting counterparties that we believe to be financially strong and continuing to monitor their financial health. Concentration of credit risk is regularly reviewed to ensure that counterparty credit risk is adequately diversified. As of June 30, 2020, the substantial majority of the credit exposures related to our business was with investment-grade counterparties. We believe exposure to counterparty credit-related losses related to our business at June 30, 2020 was not material and losses associated with counterparty credit risk have been insignificant for all periods presented. Interest-Rate Risk As of June 30, 2020, we had borrowings of $1.3 billion outstanding under our 2017 Credit Agreement, $1 billion outstanding under our 2016 Credit Agreement and $731 million outstanding under our 2014 Revolving Credit Facility, all of which carry variable interest rates. On July 15, 2020, we filed for relief under Chapter 11 of the Bankruptcy Code and as a result interest on our pre-petition debt is limited to what is determined by the Bankruptcy Court to be an allowed claim. On July 23, 2020, we entered into debtor-in-possession credit agreements, which carry variable interest rates, as further described in Part I, Item 1 – Financial Statements, Note 5 Debt . In March 2018, we entered into derivative contracts that limit our interest-rate exposure with respect to $1.3 billion of our variable-rate indebtedness. The interest-rate contracts reset monthly and require the counterparties to pay any excess interest owed on such amount in the event the one-month LIBOR exceeds 2.75% for any monthly period prior to May 4, 2021. We did not report any gains or losses on these contracts for the three months ended June 30, 2020 or the three months ended June 30, 2019 in other non-operating expense on our condensed consolidated statements of operations. No settlement payments were received in either 2020 or 2019.