On Friday, Mizuho Securities adjusted its outlook on California Resources Corp (NYSE:CRC), lowering its price target to $63 from $69, while still recommending the stock as a Buy. The revision comes after an update to the net asset value (NAV) model for the company, taking into account year-end 2023 reserves and the guidance for 2024.
The analyst's report indicated that while California Resources had planned to add three drilling rigs in the second half of 2024, a recent court ruling upheld a ban on new drilling permits in Kern County. This legal development has led to a projection of reduced capital activity, with expectations now set for one rig for the fiscal year 2024. Additionally, the company is anticipated to experience a 5-7% decline in production volumes.
Despite the reduction in drilling activity, Mizuho's analysis suggests that California Resources will see an increase in free cash flow, estimating an additional $50-70 million in 2024, assuming Brent crude oil prices at $80 per barrel. This anticipated higher cash generation is seen as mitigating the impact on the company's net asset value.
The firm's NAV-based price target has been adjusted to $63, which is a modest decrease from the previous $69 target. The analyst emphasized that the valuation model maintains a 1-2 rig program through 2033 and does not account for longer-dated inventory, which they believe is not at risk of being written off. Despite these challenges, Mizuho continues to see value in California Resources, as reflected in the maintained Buy rating.
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