California Resources Corporation (NYSE: CRC) has been suffering with the woes in oil prices. But what if the shares have fallen too much, and what if that selloff was for the wrong reason?

A research report from Bank of America Merrill Lynch was issued on Monday which effectively challenges the short selling thesis here. Investors will want to consider that Merrill Lynch is not just incredibly bullish here. This is the most optimistic of all analyst reports on this stock — and by far.

The Merrill Lynch team believes that California Resources is the latest victim of short selling which is believed to be predicated on flawed analysis which overlooks several critical industry and internal issues.

A report published by ‘Blue Mountain’ was cited, and Merrill Lynch’s team thinks the report is wrong and they even question why recent management statements and disclosures have been ignored. The team indicated that no material discussions have taken place with ‘Blue Mountain’ on behalf of California Resources.

Merrill Lynch even said that its base case of a recovery to $80 places California Resources as one of the best values in the sector. As far as the flaws brought up by the short report:

The primary argument being leveled at CRC is that, with a relatively mature asset base, its fixed costs are unsustainably high, rendering no value on future production in a ‘blow’ down scenario. However, the embedded assumption that, regardless of scale, fixed costs are unchanged is wrong, in our view, suggesting that California Resources’ fixed costs will remain at 85% of 2014 levels regardless of recent cost reductions and company commentary that means the ’worst case’ for fixed costs is no more than 57% of total operating expense. As a minimum, anyone following the ‘Short’ needs to understand why this is being ignored. By our estimate, the blow down value for California Resource’s reserves is about $7 billion.

Another draw here is that the annuity value shows at the simplest level a $15 value. That $15.00 remains the current price objective and the firm has maintained its Buy rating. What stands out here is that this is a $5.42 current price. Merrill Lynch said in its investment thesis:

A look at the asset mix reveals a strategy less focused on unconventional drilling than initially expected. Instead California Resource’s focus is on a robust portfolio of high return ‘flood’ assets that can bolster free cashflow, even in a depressed oil tape. We believe a balanced approach to growth that focuses on debt reduction can drive equity value with a 5% drop in debt driving a 10% increase in value. Given a strong asset base and a capacity to drive free cash flow, our rating is Buy.

What investors need to consider here is that California Resources Corporation has only 5 actual analysts covering the company in the Thomson Reuters universe. The Merrill Lynch price objective is far higher than most of the others, with one target being as low as $4.00, the median target being $8.00, and the mean (average) target being $8.85.

As far as the short selling interest here, the mid-June short interest was over 25.7 million shares. This sounds massive, but there were over 33 million shares listed in the short interest in two different reports earlier this year.

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