California Resources Corp 10-Q

Item 3 Quantitative and Qualitative Disclosures About Market Risk For the three and nine months ended September 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 The Senior DIP Credit Agreement required 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 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 oil hedge positions at October 31, 2020, as shown in the table below, provide for the following expected outcomes: Q4 2020 Q1 2021 Q2 2021 July 2021 Barrels per day 13,800 13,500 4,500 4,200 Receive Brent if Brent > $46.52 Receive Brent if Brent > $46.67 Receive Brent if Brent > $40 Receive Brent if Brent > $40 Receive $46.52 if Brent between $46.52 and $36.52 Receive $46.67 if Brent between $46.67 and $36.67 Receive $40 if Brent between $30 and $40 Receive $40 if Brent between $30 and $40 Receive Brent +$10 if Brent <$36.52 Receive Brent +$8.33 if Brent <$36.67 Receive Brent +$10 if Brent <$30 Receive Brent +$10 if Brent <$30 Barrels per day 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 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 Barrels per day 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 Our post-emergence Revolving Credit Facility and our Second Lien Term Loan require us to maintain hedges on part of our crude oil production as described in Part I, Item 1 – Financial Statements, Note 6 Debt . We are currently in the process of entering into additional oil hedges to meet the hedging requirement in our credit agreements. 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. 65 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 September 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 September 30, 2020 was not material and losses associated with counterparty credit risk have been insignificant for all periods presented. Interest-Rate Risk 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. Our debtor-in-possession credit agreements were repaid subsequent to September 30, 2020 (on our Effective Date) and replaced with our new Revolving Credit Facility, Second Lien Term Loan and EHP Notes. Our Revolving Credit Facility and Second Lien Term Loan carry variable interest rates. A one-eighth percent change in the interest rates on the outstanding borrowings under these facilities at October 27, 2020, excluding $118 million of cash temporarily used to collateralize letters of credit, would result in an approximately $400,000 change in annual interest expense assuming no payments are received under our interest-rate cap agreements described below. See Part I, Item 1 – Financial Statements, Note 6 Debt for additional information on our debtor-in-possession financing and post-emergence indebtedness. 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. No settlement payments were received in either 2020 or 2019.