CPP Investments Catapults Into California's Energy Transition Market

Elizabeth Elkin of Bloomberg reports California Resources to buy Aera Energy in $2.1 billion deal:

Oil producer California Resources Corp. will buy Aera Energy LLC in a deal that values the company at about $2.1 billion, including debt, building its drilling portfolio in the Western state.

The combined company will be the largest oil and gas company in California by production, according to a statement announcing the all-stock deal. California Resources rose as much as 8.4% on the news, the biggest intraday spike in nearly a year.

The Golden State has fallen out of favor with many international oil giants as the strictest environmental laws in the country make it harder to drill new wells there. Output in California has been falling for years even as other US basins are still enjoying growth. The transaction will add large, producing assets to the driller’s portfolio, with executives eyeing opportunities to eventually increase oil recovery at the combined company.

It’s been a busy several months for dealmakers in the domestic oil and gas industry, which has seen multiple billion-dollar takeovers as companies flush with cash from the post-pandemic run-up in oil prices look to secure new places to drill.

Oil executives have also been facing pressure from investors to maintain buybacks and dividends. California Resources said it expects to increase its quarterly dividend once the deal closes.

The company will issue 21.2 million shares of common stock to the equity owners of Aera, which is owned by entities managed by German asset management group IKAV and Canada Pension Plan Investment Board. Former Aera joint-venture owners Shell Plc and Exxon Mobil Corp. sold their stakes to IKAV in 2022. California Resources, which was spun off from Occidental Petroleum Corp. in late 2014, filed for bankruptcy in 2020 amid low oil prices, emerging from the process later that year. 

The transaction is expected to close in the second half of 2024.

Sourasis Bose of the Globe and Mail also reports California Resources to buy Aera Energy to boost oil production:

California Resources said on Wednesday it would buy Aera Energy, in a deal valuing the company at $2.1 billion including debt, as the U.S. oil and gas firm looks to more than double its production.

The combined entity will own interests in five of the largest oil fields in California and its 2024 production is estimated to average 150,000 barrels of oil equivalent per day, California Resources said.

The deal also unlocks significant carbon capture and storage (CCS) potential, the company said, as it plans to add around 54 million metric tons of CCS pore space in the San Joaquin basin following the deal’s close.

“It enhances scale across both the upstream and carbon management businesses, with the potential for material synergies,” said Mark Viviano, managing partner and lead portfolio manager at Kimmeridge.

“CRC is uniquely positioned to capitalize on an energy transition that will require net zero oil production,” he added.

Aera is currently owned by German asset manager IKAV and Canada Pension Plan Investment Board. It was started as a joint venture of oil majors Exxon Mobil and Shell and was sold to IKAV for $4 billion in 2022.

California Resources is paying a very reasonable price for the assets, brokerage Roth MKM’s analysts said.

The Long Beach, California-based company said it would issue 21.2 million common shares to the equity owners of Aera.

The company said the deal, expected to close in the second half of 2024, would immediately add to some financial metrics this year and reflect a 45% improvement in its operating cash flow per share. California Resources’ board also authorized a 23% increase in share buyback to $1.35 billion. Shares of the company were up about 12% in afternoon trade.

Oil production in California has been on a steady decline for nearly four decades. New drilling permits have steadily declined since Gavin Newsom became governor in 2019.

The value of the deal does not contemplate incremental permits, a California Resources executive said in an analyst call.

Earlier today, CPP Investments issued a press release stating it will acquire common stock in California Resources Corporation through Aera Energy merger:

Toronto, CANADA (February 7, 2024) – Canada Pension Plan Investment Board (CPP Investments) today announced certain affiliates of CPP Investments have signed a definitive agreement providing for a proposed merger of Aera Energy, LLC (Aera Energy), and California Resources Corporation (NYSE: CRC), an independent energy and carbon management company committed to the energy transition. The transaction values Aera Energy at approximately $2.1 billion, inclusive of Aera Energy’s net debt. CPP Investments will receive newly issued shares of common stock in the combined company upon the close of the transaction that, at current valuations, is expected to represent approximately 11.2% of the combined company.

CRC is an independent energy and carbon management company committed to energy transition. Aera Energy is one of California’s major energy producers and a leading developer of carbon management projects. Together, this combination is expected to create a leader in California’s energy transition, producing low carbon intensity fuels that California needs while accelerating the decarbonization of the state’s industrial and energy industries.

“This transaction provides CPP Investments with an excellent opportunity to scale up our investment in California’s energy transition, with Aera Energy and CRC both aligned in their commitment to enabling new carbon management solutions and each bringing complementary strengths to the table,” said Bill Rogers, Managing Director, Global Head of Sustainable Energies, CPP Investments. “The combined company is set to play a leading role in California’s energy transition, which we view as a promising source of long-term risk-adjusted returns for the CPP Fund.”

IKAV, which owns a 51% equity interest in Aera Energy, will also become a shareholder of the combined company. CPP Investments has held a 49% equity interest in Aera Energy since February 2023.

The transaction is expected to close in the second half of 2024, subject to customary closing conditions, regulatory approvals and CRC shareholder approval.

The Sustainable Energies group pursues investments in renewable and conventional energy, carbon capture, distributed and energy services, emerging and disruptive technologies, as well as agriculture. As at September 30, 2023, the Sustainable Energies group portfolio totalled C$31 billion in net assets.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 21 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At September 30, 2023, the Fund totalled C$576 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or on X @CPPInvestments.

Now, for a little backgrounder, I suggest you read my comment on CPP Investments, IKAV, Aera Energy and how the world really works.

Importantly, CPP Investments worked with its partner IKAV to acquire Aera and I noted this:

Aera Energy is California’s second-largest oil and gas producer and accounts for nearly 25% of the state’s production and the new owners (IKAV and CPP Fund) plan to use renewable power across the company’s acreage. 

As stated in the first article, it will also repurpose certain legacy oil and gas infrastructure to facilitate carbon capture and storage capabilities.

Now, California Resources Corporation which specializes in carbon management and energy transition will acquire Aera from IKAV and CPP Investments which will receive newly issued shares of common stock in the combined company upon the close of the transaction that, at current valuations, is expected to represent approximately 11.2% of the combined company.

Bill Rogers, Managing Director, Global Head of Sustainable Energies, CPP Investments, states this in the press release:

“This transaction provides CPP Investments with an excellent opportunity to scale up our investment in California’s energy transition, with Aera Energy and CRC both aligned in their commitment to enabling new carbon management solutions and each bringing complementary strengths to the table. The combined company is set to play a leading role in California’s energy transition, which we view as a promising source of long-term risk-adjusted returns for the CPP Fund.”

Remember, energy transition is an important theme at CPP Investments and all of Canada's large pension funds. They want to be early leaders here and scale up opportunities to benefit from the decarbonization of the US and global economy. 

That's where the puck is headed and the more you read about California Resources Corporation, the more you'll understand why CPP Investments and IKAV struck gold on this deal.

 

I also think it is worth reading this message from its CEO Francisco J. Leon (featured above):

Looking ahead in 2023 and beyond, I am excited to be a part of the next chapter of California Resources Corporation (CRC) in my new role as President and Chief Executive Officer. I have been in the energy industry for more than 20 years and with CRC since its inception in 2014, having most recently served as the company’s Chief Financial Officer. I am honored to now have the opportunity to lead CRC as we continue to advance the energy transition and meet California’s ambitious climate goals.

As CEO, my business goals are to enhance CRC’s long-term value, deliver strong shareholder returns and maximize cash flow per share of the business. I am also committed to maintaining our company’s high operational and safety standards that we have achieved and been recognized for over the years. In our efforts to mitigate climate change, we are also laser focused on investing in and growing our carbon management business to help California achieve carbon neutrality by 2045 while benefiting the environment, working families and all parts of our society.

To help California achieve these goals, we are leading the way in pursuing several decarbonization initiatives across the state, such as Carbon TerraVault (CTV) and the California Direct Air Capture (DAC) Hub. CTV is engaged in developing carbon capture and storage (CCS) projects that safely capture, transport and inject carbon dioxide (CO₂) from industrial sources into depleted underground reservoirs for permanent storage. CTV has also assembled a consortium of more than 40 diverse organizations to create the California DAC Hub – the state’s first full-scale Direct Air Capture + Storage (DAC+S) network of regional hubs that will capture and permanently store atmospheric CO₂ using low carbon emission energy. We plan to continue expanding our decarbonization initiatives throughout the state in close collaboration with our diverse community stakeholders and business partners to provide transformational economic benefits to our surrounding communities.

Today the company is in great financial health, attributable in large part to the women and men of CRC working hard every day to build a different kind of energy company that is providing some of the lowest carbon intensity oil and natural gas in the US and helping California achieve its ambitious climate goals. The energy transition is ushering in an exciting new era for the industry. Innovations in industrial technologies are gearing us toward a more sustainable, reliable and affordable energy supply. Additionally, the energy industry provides excellent career opportunities for people from different backgrounds. I am proud of CRC's sizable multicultural workforce, with nearly 40% diverse employees working throughout all of CRC’s areas of operation.

I am very excited about the future of CRC and look forward to working with my exceptional CRC colleagues, regulatory and government agencies, and our esteemed business and community partners to continue to make a positive impact in the communities where we all live and work. Speaking on behalf of CRC, we are grateful for the continued support of our stakeholders as we serve Californians by responsibly producing ample, safe and reliable energy, actively promoting the conservation of water, habitat and energy as a responsible steward of our natural resources, and investing in low carbon initiatives that position CRC to lead the energy transition in California and beyond.

Sincerely, 

Francisco J. Leon
President and Chief Executive Officer
California Resources Corporation

I remind my readers that California Resources Corporation is a publicly listed company whose shares are trading nicely since going public four years ago:

Anyways, Bill Rogers and the Sustainable Energies group at CPP Investments now manage C$31 billion in net assets and this new combined company will figure prominently in their portfolio.

Below, a fascinating discussion with carbon capture experts Tom McDonald, founder of Mosaic Materials, Emily Wimberger, managing partner at Hua Nani Partners, Chris D. Gould, managing director of Carbon TerraVault, and UC Davis Economics Professor David Rapson (moderator). The discussion focuses on the prospects for large-scale carbon removal via Direct Air Capture (DAC) technologies and what role they should play in shaping climate policy.