California Resources Corporation (CRC) is drilling faster than anticipated in its core operations in California and Utah’s Uinta Basin, according to a Monday note from UBS. But despite the operational improvement, the investment bank trimmed its near-term profit forecast and cut its price target on the stock to $70 from $78.
Faster Drilling, Higher Spending
UBS analysts said CRC’s drilling program is running “much faster and better than anticipated,” which could push the company’s capital spending toward the top end of its guidance range. However, the bank left its longer-term spending estimates unchanged, suggesting the faster pace may not signal a permanent shift in strategy.
The oil and gas producer, which focuses on California’s legacy oil fields and the Uinta Basin in Utah, has been working to improve operational efficiency. Faster drilling can reduce costs per well and accelerate production, but it also requires more upfront investment in equipment and crews.
UBS now forecasts second-quarter adjusted EBITDAX—a cash-earnings metric commonly used in the oil and gas industry—of $340 million. That is below the Wall Street consensus of $372 million, indicating that analysts expect earnings estimates to drift lower in the coming weeks.
Data Center Power Deal Adds a New Dimension
UBS also highlighted a 275-megawatt data center power deal at CRC’s Elk Hills facility in California. The agreement, which provides electricity to a data center operator, represents a diversification away from pure oil and gas production. Data centers require massive amounts of reliable power, and CRC’s natural gas-fired generation assets can supply that demand.
This deal is part of a broader trend where energy companies are leveraging their infrastructure to serve the growing needs of the tech industry. For CRC, it offers a steady, long-term revenue stream that is less tied to volatile oil prices. However, the financial impact of the deal is still early-stage, and UBS did not provide specific revenue or profit projections from it.
For context, the Elk Hills field is one of the largest oil and gas fields in California, and CRC has been exploring ways to monetize its power generation capacity. The data center deal could become a meaningful contributor to earnings if demand for computing power continues to surge, as discussed in recent coverage of AI-driven energy demand.
What It Means for Investors
For everyday investors, the key takeaway is that CRC is executing well operationally, but the market may be pricing in higher costs and lower short-term profits than previously expected. The price target cut from $78 to $70 reflects UBS’s view that the stock’s upside is limited in the near term.
Adjusted EBITDAX is a measure of a company’s ability to generate cash from its operations before interest, taxes, depreciation, amortization, and exploration costs. A forecast below consensus suggests that analysts expect CRC’s cash flow to be weaker than the broader market anticipates, which could weigh on the stock price.
Investors should also watch how the data center power deal develops. If CRC can secure more such contracts, it could transform the company’s revenue mix and reduce its exposure to oil price swings. But for now, the deal is a single project, and its impact on overall earnings is likely modest.
CRC’s stock has been volatile, reflecting the broader energy sector’s sensitivity to oil prices and geopolitical events. Recent moves in crude markets, such as the oil price drop that eased Middle East worries, have influenced investor sentiment. Meanwhile, UBS has also raised its profit forecast for Chevron, another major California oil producer, on higher oil prices and stronger refining margins, as noted in a separate UBS note.
Looking Ahead
CRC’s next earnings report will be closely watched. If the company delivers results in line with UBS’s lower forecast, it could confirm that the faster drilling is not yet translating into higher profits. Conversely, if CRC beats expectations, the stock could recover some of the lost ground.
Investors should also consider the broader energy landscape. Oil prices have been under pressure from global demand concerns, but the U.S. economy has shown resilience, as seen in recent jobs data that beat expectations. For CRC, the combination of operational improvements and a new revenue stream from data centers could provide a buffer against oil price volatility, but the near-term outlook remains cautious.
As always, investors should do their own research and consider their risk tolerance before making any decisions. This article is for informational purposes only and does not constitute financial advice.
