CRC: Regulatory Trap Limits Berry Merger Upside

Executive Summary

While California Resources Corporation (CRC) remains the largest independent oil and natural gas producer in California, the company faces a challenging near-term outlook characterized by earnings volatility, regulatory friction, and execution risks associated with its pivot to carbon management.

Despite the recent completion of the Berry Corporation merger, which solidifies CRC’s position in the San Joaquin Basin, we believe the market is overestimating the speed at which synergies will materialize and the near-term cash flow contributions from the Carbon TerraVault (CTV) joint venture.

Q3 2025 results highlighted the company’s sensitivity to derivative outcomes and elevated operating costs, which we expect to persist through the first half of 2026. Furthermore, while the legislative landscape has shown signs of improvement with the passage of Senate Bill 237, the regulatory “moat” around California production continues to constrain organic growth and creates a high-cost operating environment.

Business Description & Recent Developments

Core Operations

California Resources Corporation is an independent energy and carbon management company focused exclusively on California. The company operates through two primary segments:

1. Oil and Natural Gas: This segment involves the exploration, development, and production of crude oil, natural gas, and natural gas liquids (NGLs). Assets are concentrated in the San Joaquin, Los Angeles, Ventura, and Sacramento basins. As of year-end 2025, the company’s portfolio is weighted heavily toward oil, which accounts for approximately 78% of production. 
2. Carbon Management (Carbon TerraVault): Through its CTV brand, CRC is developing carbon capture and storage (CCS) projects. This segment focuses on capturing CO2 from industrial sources and injecting it into depleted underground reservoirs.

Recent Developments

• Berry Corporation Merger: On December 18, 2025, CRC completed its all-stock merger with Berry Corporation. The transaction, valued at approximately $717 million (including debt), consolidates CRC’s footprint in the San Joaquin Basin. The deal is expected to generate $80–$90 million in annual synergies, primarily through operational efficiencies and G&A reductions.
• Carbon TerraVault Progress: In early 2026, CRC broke ground on California’s first CCS project at the Elk Hills cryogenic gas plant. The project, part of a joint venture with Brookfield, targets the injection of up to 100,000 metric tons of CO2 annually starting in late 2026.
• Capital Power Partnership: In Q4 2025, CRC signed a Memorandum of Understanding (MOU) with Capital Power to explore decarbonized power solutions, aiming to leverage CRC’s reservoir assets for grid-stability projects..

Industry & Competitive Positioning

The “California Discount”

CRC operates in a unique jurisdiction that serves as both a fortress and a prison. California’s stringent environmental regulations create high barriers to entry, effectively shielding incumbents from new competition. However, this comes at the cost of high regulatory compliance expenses and limited growth opportunities. The state’s energy policies, while aggressive on decarbonization, have recently acknowledged the need for grid reliability, leading to a “pragmatic pivot” that benefits incumbents like CRC who can offer baseload power or carbon management solutions.

Legislative Landscape: Senate Bill 237

The enactment of Senate Bill 237 in late 2025 represents a significant shift in the regulatory environment. The bill prohibits the California Geologic Energy Management Division (CalGEM) from approving more than 2,000 new well permits annually until 2036 but simultaneously deems Kern County’s environmental impact reports sufficient for CEQA compliance. For CRC, this is a double-edged sword: it provides a clearer permitting pathway for maintenance capital but caps aggressive organic growth, forcing the company to rely on acquisitions (like Berry) and efficiency gains.

Competitive Benchmarking

Compared to multi-basin peers like Murphy Oil (MUR) or Matador Resources (MTDR), CRC trades at a discount due to its single-state geographical concentration. While peers enjoy pro-business regulatory environments in the Permian or Gulf of Mexico, CRC must navigate a complex stakeholder map involving state agencies, environmental groups, and local municipalities. However, CRC distinguishes itself with a peer-leading dividend yield of ~2.9% and a low decline rate (8-13%), which supports free cash flow generation.

Historical Financial Performance

Revenue and Earnings Volatility

CRC’s recent financial performance has been characterized by significant volatility driven by commodity price swings and derivative settlements.

• Q3 2025 Performance: The company reported total operating revenues of $855 million, a 37% year-over-year decline from $1.35 billion in Q3 2024. This drop was largely attributed to a reversal in derivative outcomes; the company recorded a net loss on derivatives in Q3 2025 compared to a substantial gain in the prior-year period.
• Margins: Operating costs remain elevated following the integration of Aera Energy (acquired mid-2024). Adjusted EBITDAX for Q3 2025 was $338 million, demonstrating resilience, but margins are being compressed by higher fixed costs associated with regulatory compliance and integration activities.

Cash Flow and Capital Allocation

Despite top-line pressure, CRC has maintained strong capital discipline. Free cash flow (FCF) in Q3 2025 was $188 million. The company continues to prioritize shareholder returns, evidenced by a 5% dividend increase in late 2025 and a share repurchase program with over $200 million in remaining capacity through mid-2026.

Financial Forecasts

Key Assumptions:

1. Production: The forecast for 2026 of net production to average 155 Mboe/d, reflecting the contribution of Berry’s assets (approx. 20 Mboe/d) and a stabilized base decline rate of 11% (midpoint of management’s 8-13% guidance).
2. Commodity Prices: The market assume a Brent crude price of $75/bbl for 2026 and $72/bbl for 2027. We model natural gas at $3.50/Mcf.
3. Synergies: The company models $60 million in realized synergies in 2026, ramping to the full run-rate of $85 million by 2027. This is slightly more conservative than management’s guidance of realizing 50% of synergies within the first six months.
4. Capex: 2026 capital expenditures are projected at $310 million, consistent with the company’s guidance of running a four-rig program.

Comparable Multiples:

• Peer Comparison: The peer group (e.g., Murphy Oil, Matador Resources, SM Energy) trades at an average forward multiple of 4.5x–5.0x..

Reasons to Sell/Underperform

Despite the apparent value in CRC’s cash flow yield, we see three structural impediments to stock performance over the next 12 months:

1. Regulatory Overhang is Structural, Not Temporary: While SB 237 provides clarity, it essentially caps CRC’s growth. The hard limit on new well permits (2,000/year statewide) restricts the company’s ability to ramp up production in a high-price environment. CRC is effectively a “run-off” business model in its legacy segment, managing decline rather than chasing growth.
2. CCS Revenue Timeline is Distant: The market has priced in significant upside from the Carbon TerraVault JV. However, meaningful cash flow from these projects is unlikely to materialize before 2027. The 2026 guidance suggests CTV will remain a net user of capital ($14-$18 million capture capital investment) rather than a generator of free cash flow.
3. Integration Risks: The integration of Berry Corporation, while strategically sound, adds operational complexity. Combining workforce cultures and systems in a highly regulated environment often leads to temporary cost inefficiencies.

Key Risks and Mitigants

Downside Risks

• Commodity Price Spikes: A sustained geopolitical event driving Brent crude above $90/bbl would materially increase CRC’s free cash flow, potentially forcing a re-rating despite the regulatory headwinds.
• Accelerated CCS Monetization: If CRC secures faster-than-expected Class VI permits or signs additional high-value pore space agreements with major industrial emitters, the market could re-rate the stock as a “green energy” transition play.
• Merger Synergies: If management successfully realizes >$100 million in synergies (exceeding the $90 million target) due to overlapping footprint efficiencies in the San Joaquin basin, earnings could surprise to the upside.

Conclusion

California Resources Corporation remains a “show-me” story. While the Berry merger provides scale and the Carbon TerraVault initiative offers a call option on the energy transition, the core business is constrained by a hostile regulatory environment and a lack of organic growth avenues.