Identifying the key driver
In this final part of our series, we’ll study California Resources’ (CRC) stock price movement with respect to energy prices, the dollar index, and the broader market.
NYMEX WTI crude oil started its decline in June 2014, and that’s why California Resources failed to score any gains since its spin-off from Occidental Petroleum (OXY) in November 2014. As you can see in the chart above, California Resources’ stock price was in a downtrend until February 2016 along with NYMEX WTI crude oil.
NYMEX WTI crude oil prices hit a bottom in February 2016. Even California Resources’ stock price, though it failed to recover its losses, rallied strongly along with crude oil.
Clearly, crude oil is a key driver behind movements in California Resources’ stock price. Other upstream companies—like Devon Energy (DVN), ConocoPhillips (COP), and Marathon Oil (MRO)—also have a strong correlation with crude oil prices.
The effect of the stronger dollar
As you can see the chart above, there’s an inverse relationship between California Resources’ stock price and dollar index movements. A stronger dollar weakens energy prices, which affects California Resources’ earnings.
Comparison to the broader market
In 2016, California Resources is underperforming the S&P 500 ETF (SPY) because California Resources is down ~55%, whereas the S&P 500 is up ~6%.
California Resources: The conclusion
California Resources has higher production costs, and CRC also has a leveraged balance sheet. Add to these traits unfavorable energy prices coupled with declining production due to reduced capex. If crude oil prices fall further, California Resources would be at greater risk of steep earnings reductions.