California Just Got More Oil-Friendly. One Stock Jumped 21%.

Third-generation oilman Fred Holmes walks past a working pump jack at his oilfield in Taft, Calif. (FREDERIC J. BROWN/AFP via Getty Images)

Key Points

About This Summary

• California passed a bill easing environmental rules for drilling in one area, expected to benefit companies like California Resources and Chevron.
• California Resources agreed to acquire Berry Petroleum for $717 million, a 15% premium, following the passage of the industry-friendly drilling bill.
• The new legislation could lead to increased oil supply and potentially lower crude oil costs for refineries in California.

Oil producers will soon get a license to “Drill, Baby, Drill” in an unlikely place—California.

The Golden State has long been considered hostile to oil companies because of its strict environmental policies. Production there has fallen steadily for decades, from about 750,000 barrels of oil a day in 2000 to about 250,000 a day this year. But the state legislature passed a bill over the weekend that eases environmental rules for drilling in one section of the state. The shift should boost a handful of companies, including California Resources Corporation, Berry Petroleum and Chevron .

California’s sunnier attitude toward oil drilling may have set the stage for dealmaking too. On Monday, just two days after passage, California Resources agreed to buy its smaller rival Berry in an all-stock transaction valued at $717 million, a 15% premium to its closing price on Friday. Berry stock jumped 21% on Monday. California Resources was up 6.2%.

The combined company should be able to pump 161,000 barrels of oil and oil equivalents a day, up from the 137,000 barrels a day that California Resources pumped in the second quarter. California Resources has been seeing “modest declines” in production in recent years, according to Roth Capital Partners analyst Leo Mariani. Both Berry and California Resources have enough reserves to produce consistently at current rates for more than a decade, according to Jefferies.

California has been producing oil for well over 100 years, and was the country’s top oil-producing state in the early 1900s. But oil companies have had trouble operating there in recent years. The state has been slow to issue oil-drilling permits and passed carbon-emission rules that are costly for refineries. Chevron repeatedly criticized the state’s policies as too restrictive before moving its headquarters from California to Houston last year. Texas now produces about 20 times as much oil as California.

But the state’s tone on fossil fuels has changed in the face of sky-high gasoline prices, which are currently 46% above national averages. Prices could soar even more if refiners Valero and Phillips 66 go ahead with previously announced plans to close refineries around Los Angeles and San Francisco, reducing overall gasoline supplies.

Just a few months ago, the state was considering instituting aggressive new rules to force refineries to change their policies to stop gasoline prices from rising. That could have even included a cap on profits. But over the weekend, the legislature took a different tack, passing industry-friendly rules in a bid to increase supply. One bill will allow up to 2,000 drilling permits a year to be issued in Kern County, which is in the center of the state, and mandate fewer environmental reviews than before. Only 84 drilling permits were issued in the entire state in 2024, according to Jefferies analyst Emma Schwartz. Chevron spokeswoman Kelly Russell wrote that the company hadn’t drilled new production wells in California in more than two years because of difficulties getting permits from the state. The company says it “welcomes” the legislation and “has been and will continue to produce in California so long as the state’s policies support our business and it remains economic to do so.”

The bill that passed over the weekend didn’t help every oil company operating in the state. It increased regulations on companies that pipe oil from offshore platforms, a move that could impact a project by Sable Offshore Corp. to drill in the waters off Santa Barbara. A 2015 oil spill near that site devastated local beaches.

On balance, however, the bill is a boon for California drillers. While more oil-drilling from the Kern County wells won’t lead immediately to cheaper gasoline, it could eventually cause supply to rise and the cost of crude oil to fall for refineries—and ease some price pressure in gasoline. The state is still trying to figure out how to keep the Valero and Phillips refineries open. A Bloomberg report last week suggested that the state is talking about subsidizing maintenance at the Valero plant—a stunning about-face given that regulators had recently been considering capping Valero’s profits. The governor’s office didn’t immediately respond to a request for comment on that idea.

For investors looking to play the trend, several analysts recommend California Resources. The Berry acquisition will expand its strong position, and the stock doesn’t appear to attribute much value to its expansion opportunities. “While California is likely to remain a tough regulatory environment for oil and gas producers, on the margin, we believe the regulatory environment may be easing,” wrote JP Morgan analyst Zach Parham. His price target is $64, versus a recent $56.

Write to Avi Salzman at avi.salzman@barrons.com