Q3 2019 Earnings Call
Girls.
Welcome to the California Resources Corporation third quarter 2019 conference call.
All participants will be demolition only about.
You mean assistance push more children specialists for Prosigna starts you followed by zero.
After today's presentation will be an opportunity to ask questions.
Last question Your press Star then one order Touchtone phone.
So what's your question. Please press star one too.
Please note today's conference is being recorded.
Now, let's turn the conference over to Scott Espenshade. Please go ahead Sir.
Thank you I'm, Scott Espenshade, Senior Vice President Investor Relations Welcome to California Resources Corporation's third quarter 2019, copper school participating on today's call is taught Stevens, President Chief Executive Officer, or CRC, and Mark Smith, Senior Executive Vice President and Chief Financial Officer, as well several members of the CRC exact.
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I'd like to highlight the we have provided slides in our Investor Relations section on our website Www Dot CRC Dot com. These slides provides additional insight into our operation and our third quarter results plus additional information also information reconciling non-GAAP financial measures discussed are the most directly comparable GAAP financial measure is.
Bill will in the Investor Relations portion of our website and in our earnings release today's conference call contain certain projections and other forward looking statements within the meetings.
So security laws. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements.
Additional information on factors that could cause results to differ is available in the company's 10-Q, which is being filed later today, we'd ask that you reveal when available in the cautionary statement in our earnings Royce Replaying. The transcript will be made available on our website following todays call and will be available for at least 30 days following the call that's <unk>.
Reminder, please have a we have a lot at similar type or queuing at the end of our up our prepared remarks, what asked the participants limit their question to a primary question a follow up I will now turn the call over to talk.
Thank you Scott. Thank you to everyone for attending today's earnings call.
First and foremost I'd like to thank all of California, firefighters and first responders for their continued efforts to battle fires across our state.
Turning to CRC, our large portfolio of low decline conventional assets and significant inventory of projects with low capital intensity continue uniquely position us for superior value creation, even at lower commodity prices.
I'd like to reiterate that we believe the maintenance capital required to hold oil production flat that we'll continue to be between three and $400 million annually of internal drilling completion and Workover capital.
With continued operational efficiencies in our recent organizational redesign we expect maintenance capital of the trend down from current levels.
Our sustained strong safety environmental record combined with our deep geologic insight across four of California is distinct basins continues distinguish CRC as the operator twice for our partners and state and local governments.
We operate in a market that has a large through thirst for our crude oil.
Our seats native production provides a reliable base apply for refineries that import over 70% of their crude by tanker with a large majority traveling from Saudi Arabia, and its neighbors to the volatile straight afford most.
As a result, we have achieved realizations averaging above the premium Brent Brent.
Benchmark for much of the year.
Our asset base supports a future business model predicated on reasonable growth and strong free cash flow.
To get there we remain focused on strengthening the balance sheet to enhance our equity value.
And the third quarter 2019, we saw many external events in four markets opinions of the exploration and production sector plus a wide range of perceptions on the 2020 petroleum market balance.
Well market uncertainty remains CRC has continually receive validation from external external partners of our quality assets strong realizations and operating expertise in this environment.
At CRC remain laser focused on what is within our control and that means continuing to show capital discipline and success and controlling the controllables.
Through these efforts Seragut see it again deliver consistent results third quarter results came in largely as expected with production within our guidance range and costs and margins at or better than anticipated.
This led to free cash flow of $151 million in the quarter and we're pleased to report additional progress and strengthening our balance sheet, improving our credit position.
Turning to our balance sheet, our bank group reaffirmed our borrowing base a $2.3 billion once again confirming the value of our predictable diverse underlying reserves.
This wasn't a phase of the lowest for longest price deck, we've seen since the spin.
We're committed to strengthening and simplifying our balance sheet as we take next steps to reduce our debt. We continue to fall when all the above approach in a disciplined and thoughtful manner.
We are actively discussing multiple pass achieve our balance sheet objectives, recognizing the first set a significant that mature that matures in 2021.
We're finding interest among prospective partners it to participate in developing a variety of our diverse assets, including producing properties expiration minerals and infrastructure.
As we pursue these opportunities we seek to maximize value from our asset sales and monetization and optimize the use of procyte proceeds to meet our key objective a strengthening the balance sheet.
We continue to demonstrate our valuation fundamentals through several completed tracks transactions this year.
In May we divested a 50% interest in our lost hills Steamflood operation at a value of 88000 per flowing barrel of oil.
The transaction open the door to more capital investment in that field by the new operator, and we will share in the added revenues through our retained working interest.
In August we announced our third major development joint venture with Alpine formerly known as called our colony joint venture with our most favorable terms to date, including warrants.
At a $40 strike price.
We are proud of our safety and environmental record in our progress towards our 2030 sustainability goals for water recycling renewables integration methane emission reduction and carbon capture and sequestration that align with stay goals.
To highlight a few milestones in the third quarter, there are central to our long term development plans.
Most importantly, CRC received 22 safety awards in the quarter from the National Safety Council displaying our continued diligence make sure our workers return home safely each day.
We surpassed our 2030 methane goal by cutting methane emissions from our operations by 60% wet sand between 2013 in 2018.
The U.S. Department of energy awarded CRC, and the electric Power Research Institute a grant for front end Engineering design study to retrofit, our 550 megawatt Elk Hills power plant with carbon capture technology.
Our team expects to capture Seo to produced by the plan, which will be injected into deep oil and gas formations for enhanced oil recovery and sequestration at Elk Hills.
We believe capturing the plant C O. Two for your has the potential to add Oh, well over 150 million barrels of oil equivalent of resources reduced our need to acquire greenhouse gas allowances and in turn significantly lower cost.
This is just one of the many opportunities available to us across our large asset portfolio.
We provided more details about our sustainability targets and projects in our recent voluntary report to the CDP, formerly known as the carbon disclosure project last year, we received the CDP second highest score among U.S. independence, and we anticipate the 2019, scoring to be released in the coming months.
California is 2019 legislative year ended in September only a handful of bills were path and sign that focus on the oil and gas sector.
These bills, mainly expand the duties or the state oil and gas regulators require regulators to reevaluate abandonment costs, an indemnity bonds and tighten leasing upstate Lance.
We don't expect these bills have a significant effect on CRC is production or project inventory, particularly given our integrated infrastructure under the state's leading standards and our comprehensive agreements covering our operations on state Lance.
Several oil and gas bills garnered much media attention in 2019, but failed to advance we believe they would face similar widespread and vocal opposition from labor in community groups. It pursuit again next year.
Events over the past few months have further highlighting susceptibility of California is energy supply and cost of living to both international turmoil and outages in the states electrical grid.
These events reinforce California is need to grow a balance local supply of NRG, including native oil and natural gas production as well as renewable sources.
In order to preserve affordability reliability and resilience.
As we look toward 2020, we remain well situated with our drilling parent permit inventory.
We continue to benefit from a balance mix up production from diverse fields and are not dependent on anything will drive mechanism or play type.
Additionally, our production comes from minerals held by a variety of ownership types with approximately 55% of our production from CRC own Lance 21% for private owners, 20% from state lands and 4% on federal lands to.
To put this in economic context, our long beach or operational alone has provided nearly $5 billion to the state at Lake County, and the city of long Beach over the past 15 years from operations on state lands in long Beach.
We continue our constructive dialogue with our coalition partners to better, California communities as we prepare for next year's Legislative session.
In terms of our operational performance CRC remains intensely focused on our efforts to control our controls.
Innovation by our operations in engineering teams has yielded what we believe will be a significant sustained cost reductions and improved efficiencies.
As a result, we will continue to review and refine our organizational design and have recently taken steps to reduce our head count we've lived that our actions we reduced our annual cash costs by about $50 million, helping us a sustained margins for debt reduction value creation, but to put this in context, we're now operating our assets with little over half the number of employees.
We had prior to the spin.
We expect to see the impact of our recent cost reductions beginning in the fourth quarter.
Our 2019 capital investment program as focused on enhancing cash margin margins and then maximizing the value of our investment as we continue to strengthen our balance sheet, while living within cash flow.
Can you do apply our disciplined capital allocation process to ensure that we create the most value relying on our internal BPCI metric to adjust quickly to market conditions and align our investments with an expected cash flow to that end. We have currently reduced our CRC rigs to too and we expect to invest less than $60 million of total internally funded.
Capital in the fourth quarter of which about two thirds is expected to be drilling completion and workover capital.
We also expect to operate seven rigs on behalf of our joint ventures.
As noted in our slides joint venture investments to date have delivered gross production volumes inline with our expectations and should exit the or close to 12000 Boe per day.
Our debt is trading at levels that provide a very compelling opportunity for us to reduce principal and associated interest expense.
With our operating cash flow, we will continue to balance debt repurchases with investing in our resource base to drive value for our shareholders.
I'm pleased our debt is near its lowest level since our spin under $5 billion, which we reduced from a peak post spin level of over $6.7 billion, while remaining free cash flow positive for the year.
We see a risk free investment opportunity in our debt with a VTI in excess of two based on the dislocation between current solid fundamental commodity market fundamentals and the pricing of our publicly traded debt.
We will approach 2020, with the same mindset living within cash flow and balancing open market purchases of our deeply discounted that with investment in our assets.
We will continue to utilize our joint venture capital to flex, our spending de risk our portfolio and bring production forward. We will summarize our 2020 capital plan and our next earnings call.
As we've stated in prior calls we plan to utilize 10% to 15% of discretionary cash flow to enhance the balance sheet advance our deleveraging.
Through the first three quarters of 2019, we repurchased $229 million in face value of secondly notes for $149 million in cash.
We posted solid cash flow during the first three quarters of 2019 with EBITDAX totaling $834 million increase of 4% over the prior year period.
We also delivered $195 million a free cash flow year to date after internally funded capital a record for CRC.
I should also note this is over 40% of our current market cap.
Year to date, we have benefited from higher crude oil realizations, which have averaged over 100% Brent as you know, we we receive attractive Brent based pricing as waterborne crude sets the price for kept the California market.
Looking ahead to the impact of IMO 2020, we expect CRC is price realizations remains strong relative to similar worldwide grades of crude.
Demand for California production is steady and CRC is portfolio crudes is well positioned against global alternatives.
Of interest in California, CRC, the average sulfur content is competitive compared to that of crude imported to California.
As other and stay production sources decline the demand for our California accrued remains high and Rob refinery runs remained stable.
At the same time, where thoughtfully, putting crude oil hedges in place to underpin our cash flow opportunistically through the cycle for more detailed in our third quarter performance I will now turn the call over to Mark.
Thanks Todd.
CRC is high quality low decline asset bases continued to perform in line with our expectations of the first three quarters of 2019.
Thanks to the hard work of our teams and organizational efficiencies, we reduced overall costs, while strengthening our balance sheet through significant debt repurchases, all while keeping production within guidance.
We secured are nice credit amendment granting us more flexibility for potential royalty transactions as Todd noted, we also received or eight straight affirmation of EUR $2.3 billion borrowing base in the semiannual Redetermination Bar Bank group on November 1st.
Balance sheet strengthening continues to be a top priority.
The third quarter marks the sixth consecutive quarter that we've repurchased our second lien notes in March the largest repurchased in a single quarter today.
During the quarter, we repurchased 153 million face value for 90 million in cash for discount of 41%.
This brings our debt below $5 billion nearly the lowest level since our spin.
The face value of our secondly notes now stands well below 2 billion, but we have meaningful flexibility within our credit agreement to opportunistically repurchase additional notes.
We continue to take advantage of the trading levels of our debt and utilize our JV capital to maintain investments in our assets all while living within cash flow and focusing on our commitment to balance sheet strengthening.
CRC is operational focus continues to be on growing values, we work to control the controllables.
We remain disciplined in our capital allocation process and invest capital in our highest VCA projects.
Total production for the third quarter was 128000 barrels of oil equivalent per day, leading the quarterly adjusted EBITDAX of 278 million and an adjusted EBITDAX margin of 41%.
Our strong oil and gas realizations and capital discipline, partially offset by continued weakness in NGL prices.
Led to free cash flow of 151 million and adjusted net income of 17 million or 35 cents per diluted share.
In the third quarter, we maintain or capital discipline and held or internally funded activity level constant.
We utilize the investment over new joint venture partner Alpine, formerly known as our calling me joint venture to allow us to invest within our cash flow, while still increasing development of our flagship Elk Hills field and bringing forward reserves.
We internally funded 117 million a capital projects and our joint venture partners funded an additional 71 million.
For a total investment of 188 million, while averaging 10 rigs was seven rigs operating with joint venture capital.
As Todd mentioned, we reduced our CRC rig count to two rigs to started the fourth quarter and we plan to limit the majority of fourth quarter internal capital the projects with low capital intensity, while continuing to void joint venture investments to provide additional flexibility to our capital plans through the rest of 2019 and into 2020.
This reduction is CRC capital should improve our free cash flow and give us flexibility to further reduce debt. We expect that our operating cash flow plus revolver availability will provide adequate capacity for the $100 million of senior notes maturing in January 2020.
Our drilling program is in the third in the third quarter 2019 continued to focus primarily on the San Joaquin basis, where we drill basin, where we drove 82 wells.
And the Los Angeles Basin, where we drilled eight wells.
We also drilled one exploration well adventure with promising results well Sacramento continued to show a modest natural gas production declined with no CRC drilling activity.
We focused the majority of our drilling capital on low risk primary wells and Waterfloods.
In terms of production, we produced an average of 128000 Boe per day during the quarter, while oil production averaged 79000 barrels per day.
Auction was down 4% compared to the third quarter of 2018.
Excluding approximately 2000 barrels per day of decrease due to lost hills divestiture with the remainder due to our low natural decline and decreased capital investment.
As a reminder of the third quarter 2019 reflects the first quarter full effect for the lost Hills Divesture. So sequential results were affected by over 700 barrel per day reduction in oil production from lost hills as well as other factors offset by positive PSC effects of approximately 1300 barrels per day.
As Tom noted our oil realizations continued to be strong registering a 101% of Brent before the effective hedges.
We continue to believe that realizations will remain strong throughout the remainder of the year and into 2020.
Our hedge program continues to help mitigate the downside in this volatile market environment by supporting our cash flow, which in turn can be used to help strengthen the balance sheet.
Hedges enhanced our realized oil price by $5.56 per barrel during the quarter for an average realized price of $68.41 per barrel.
NGL realizations came in at 38% of Brent the midpoint of guidance, primarily due to excess supply and local and national markets.
And weaker demand due to L.A. and Bay area refinery downtime.
We are beginning to see NGL realizations increased in the fourth quarter as demand strengthens and refineries begin to increase or utilization levels. After scheduled maintenance was completed.
Natural gas realizations registered 120% of Nymex above our guidance, primarily due to increased demand in local markets.
Production cost for the third quarter, 2019 were 221 million or $18, an 82 cents per BOE a day.
Due to our team's efforts at our focus on controlling costs, we were able to lower our production costs from both an overall and per barrel basis compared to the prior year period as well as sequentially.
These were primarily due to reduced costs in both downhole and surface operations, partially offset by heightened energy costs, excluding PSC effects, our third quarter production costs would have been $17.44 per Boe.
Adjusted General and administrative cost for $5, a 54 cents per BOE, a day or dollar three below the previous quarter and well below our guidance range.
Most of the decrease from the previous quarter resulted from lower cash settled equity based compensation, which was about an 8 million dollar reduction due to a lower stock price at the end of the quarter.
As we previously discussed changes in our stock price introduce volatility in our income statement because a significant portion of our stock based awards are cash settled.
And our mark to market every quarter.
As Todd mentioned operational and organizational efficiencies implemented by our teams resulted in a recent reduction in over workforce.
Reported total related charge in the range of $35 million to $40 million in the fourth quarter of 2019.
As a result, we anticipate ongoing cost savings of approximately 50 million annually with slightly more than 50% of the reduction in DNA expenses.
With the remaining in production costs, beginning in the fourth quarter reporting 19.
Taxes other than on income, which are largely comprised of AD valorem taxes based on the value minerals in the ground at our paid to the counties.
As well as our June GHG costs came in as we expected.
In the third quarter reporting 19, we reported net income of 94 million attributable to our common stock or $1.89 per diluted share.
Adjusting for unusual and infrequent items and other non cash items such as gains on early extinguishment of debt that are generally excluded from core earnings by investment analysts are net income would have been $17 million or 35 cents per diluted share.
Adjusted EBITDAX for the third quarter, 2019 was 278 million compared to 308 million for the prior year quarter, primarily due to 6% year over year decrease in production.
Including the lost hills, Divesture and lower natural gas trading income.
While adjusted EBITDAX margins improved sequentially to 41% from 39%.
The increase in adjusted EBITDAX from the second quarter, 2019 was largely driven by higher natural gas trading activity and improve costs.
CRC reported cash flow from operating activities of 268 million in the third quarter reporting 19 significantly higher than the second quarter due primarily to the timing of cash interest payments and add warm cash taxes.
In the third quarter, we generated approximately 153 million in discretionary cash flow and 419 million through the first nine months of the year comparing favorably to our internally funded capital investments of 345 million through the first nine months of the year.
As we pointed out CRC has a high level of operational control of our diverse portfolio, which allows us to pivot during volatile periods and rapidly recalibrate our activity with expected cash flows.
We have a proven track record of focusing on value and we will continue to respond and adapt accordingly to succeed through a wide range of price environments.
We believe our success is evident with the amount of free cash flow that CRC generated in 2019 in the third quarter. We provided 151 million of free cash flow at 195 million for the first nine months after internally funded capital.
We believe will generate additional free cash flow in the fourth quarter with a prudent capital investment plan.
In the fourth quarter, CRC will deploy capital only to the highest VCI projects in our inventory.
We front end loaded our capital for the year to offset part of a natural decline rate and plan to primarily use will utilize our joint venture capital for added flexibility and to continue bringing forward cash flow.
Also please note that we've provided detailed analysis of adjusted items as well as key fourth quarter 2019 guidance information and Curt hedge positions in the attachments to our earnings release I'll be happy to take any questions. You may have on that information and other aspects of our results during the Q a portion of the call.
Thanks, I'll now turn the call back over to Todd.
Thanks Mark.
CRC remains laser focused on our strategy to capture the full value of our asset portfolio.
Our team continues to deliver solid results in the first three quarters, a 2019 with the disciplined capital program that is focus on value since our inception.
Our diverse slow decline asset base with exposure to healthy Brent based realizations and a continued focus on cost margins and controlling our controllables allow CRC to achieve reliable and consistent results.
These attributes combined with the Optionality of our resource base in our capital discipline and have enabled us to continue to generate free cash flow.
We remain keenly focused on strengthening and simplifying our balance sheet lowering our absolute level of debt.
While utilizing joint ventures to provide capital flexibility into de risking unlock the full value.
Potential of CRC is large asset base, we'd now be happy to take your questions.
Thank you.
I'll begin the question answer session.
To ask a question you Press Star then one the other touchtone phone.
Hi, how are you going to speakerphone, please pick up or handset for pressing the keys.
I'm sorry. Your question. Please press Star then too.
Today's first question comes from power.
All of Raymond James Please go ahead.
Hey, guys.
Thanks for taking the questions is Mohamad go online behalf Hamilton of.
So first.
Wildfires have been in the headlines a lot I don't think any of your assets are.
Affected by decide directly but I'm curious given the growing severity and frequency of these kind of events.
Can you talk a bit about Europe fire protection about the fire protection measures you've taken across your asset base.
Yes, Thanks, Bob the.
California wildfires season, our mud.
Slide season and earthquake preparedness is something that we take very seriously and this is not the first time, we've dealt with these kind of issues were well prepared for this and we work regularly with the local first responders and and different agencies of the government to give you an idea we do have minor impacts in some of.
The impact could be directly related to something like the Maria fire, which is around our operations, but also.
Some of the fires, where they do safety shut off of the power and anticipation of high wind events by so Cal Edison PG knee. So we do have some of that but we take that into our guidance and it's.
It's not a material thing from a CRC perspective, but yes, it is something and as I noted at the outset, we take very seriously we.
We really appreciate the work being done by all the firefighters and they are the first responders as they react to these events that occur here, Unfortunately, California every year pretty much.
Okay and now let me also asking but about the policy landscape the governor seems to be coming under more pressure more and more pressure to restrict our oil and gas drilling in the state or do you guys anticipate something like a beat three four or five Guinea revive died during next year's legislative session.
I think every year, there's legislation that's brought up that in it and you can look at even the severance tax that spend brought up for decades in some form.
And.
California, they deal with things that did that have real.
Impacts like a severance tax which would take money out of the county coffers and put it in the stake offers.
But there's always the irresponsible legislation push for political purposes.
Maybe 345 was something a lot of cities and local governments already have their own setbacks and deal with these issues.
Again, I think if it got to be more than veg language.
It might be something that even industry could get behind and support but it is it was a two year bill. So it probably will come back and there will be other things that we can't think of today that will happen, but that is the nature of the world. We live in what a hyper politicized landscape that.
We deal with here in California, and other parts of the country.
Where does this just happens every year, but I think things that are responsible and serve the people, California and make sure. They ensure that we have a diverse reliable and local energy supply that is resilient into the challenges of wildfires in the like.
Or something that is important to everyone here.
Okay understood. That's all for me thanks.
Thanks, and our next question today.
Blunden of Goldman Sachs. Please go ahead.
Hi, guys. Good evening, thanks for taking the time.
Taking a look at at some of your uses of cash if obviously bought back bonds at a discount.
On the liquidity front that does pressure the metrics just a little bit interested in your take on on two things just minimum liquidity you'd need to.
To manage intra quarter swings in working capital for example, and then.
Second notice that the borrowing base has reaffirmed its just a positive but.
What would it take for you guys said, taking a look at increasing your commitments under that facility. We've seen a couple of other.
Issuers do that just to give themselves a bit more flexibility given where commodities are right now.
I think for us.
Few different questions. You asked there we're always trying to balance out as we look to simplify the balance sheet member we started with a simple balance sheet, we knowingly complicated the balance sheet to protect preserve and create value for our shareholders and now we're looking to re simplify the balance sheet with a few things in mind, we're trying to bring down the absolute quantum of debt, we're trying to break down.
On our our fixed charges were trying to balance that with liquidity and ultimately the maturities. So for us what we view ourselves in a unique opportunity from a value perspective to be able to.
Bring down the absolute quantum of debt like I noted in my comments, we were sitting here at $60 Brent environment, It's not a $30 Brent environment, but thats, what the market's acting like with regards to our way our debts trading.
So I think it's a unique opportunity for us to bring down our quantum of debt our fixed charges and balance that out against liquidity. That's something we're always looking at when you talk about.
Working capital swings I think weve swing, a few hundred million dollars each month.
As we as we look depending on the investment and.
And the bills that come do each month.
That's helpful and then.
In your restricted payment capacity can you provide an update on where that stands right now I'll, let mark walk you through that.
You want to clarify for us what you mean, whatever you say you are restricted payment capacity, there's several different aspects I want to make sure I understand what you're referring to.
And this and this one ability to to buyback thoughts.
We have.
We have roughly $200 million.
Of availability under what we refer to as the non borrowing base asset sale basket.
Great. Thanks for your help push it.
Sure.
And our next question today comes from Gregg Brody of Bank of America. Please go ahead.
Good afternoon.
Hi, Greg.
Great.
Through those those.
The cost cutting numbers.
I missed some of it and maybe you could just clarify.
Thank you run through and then just clarify the 30 540 million of charges, that's going to this quarter, how much of that as cash.
And then I think usage you allocate it.
Where we see the savings.
Production costs, but I missed the rest yes. So it's about a 50 million dollar a year or reduction in overall costs and about 60% of that's related to.
DNA and about 40% of that's related to Opex.
And then.
Going forward, we should start seeing in the fourth quarter and as far as the charges I'll, let you let mark tell you exactly what that was.
Yeah, Greg will we expect to take up 35 to 40 million dollar onetime charge.
And then on a cash basis that would be paid out over the remainder of the roughly next year.
Our next year.
Got it so.
But all that is cash.
So so we'll be taken so so I just want to make sure. We're really clear here, Greg that 35 to 40 million will be the accrual we take and then that'll flow out in terms of cash over the next year.
So nothing in the fourth quarter.
The charges all be in the fourth quarter.
I'm thinking about cash so you're saying most of it charge in the fourth quarter, but you'll see the cash impact of 30 to 40 million.
Yes.
50 million savings over the.
Battle over roughly the next 12 months right.
Yes.
To be full run rate in 12 months.
Wow.
I want to make sure I've got it I've got you clear on that Greg will take the accrual in the fourth quarter and so that will bring our run rate on an ongoing basis down to normalized.
So you there.
Order.
Right.
Got it thank you sorry.
Okay.
And then maybe I don't.
Just a question there is just so I'll leave it there just on the answer to the asset sale process can you kind of give us update sort of where things are today.
Hey, just give some color.
I know I mentioned in my.
Opening comments, it's all the above strategy, but truly as.
Some people would like to have a bunch of specifics some of it is confidential, but when you think about it again, we don't just have some leases and.
Pumping units, we actually have a vibrant business that you typically would see inside of a super major so when we say we're really looking at all the above we're looking at things from the standpoint.
Any part of our infrastructure assets in our midstream assets Monetizations, there monetization of existing producing assets, we went through the downturn.
Preserved our asset value to get to a point, where we had stable prices like now around 60, Brent. So we wouldn't conduct fire sales we have surface land I think everybody knows we have a large positioned in Huntington beach, and elsewhere, which were looking at creative ways to monetize.
And there's all kinds of financial engineering ways, you can dream up.
But you could talk about M&A, whether it be.
Acquiring something else here in California could be a deleveraging event, depending how you capitalize things a bit business development opportunity elsewhere. So I get expound all day long about all the things were looking at but it's not just one shot we have lots of ammunition and where were pursuing a lot of pass here.
I appreciate.
Thank you for the additional color.
Thanks, Greg.
Your next question comes from Paul Sankey at Mizuho. Please go ahead.
Hi, guys.
Well I think I was thinking of the sort of high level about.
What it was like back in February 2016, so it was a bit lower but nevertheless, the argument, but then was that if you believed in oil 60 Brent.
This would be an enormous home run and.
I was just wondering I'm going to think operationally you would say in and tell me if I'm wrong over the period between 16 and though.
You haven't been essentially negative operational surprises as regards to how will.
The company performs at the different oil prices.
I think it's fair to say so it would seem to be more as you see a market perception.
Great that's occurring insofar as I.
I guess, the sell down an equity oil exceeds across the board.
Maybe less appetite for risk in oil debt you know I, just wondered what youre Europe's deception isn't all that stuff.
Paul I think it's still the same thing.
We have we screen poorly on debt, but I don't think people try to Peel back the onion too often to look at what are the underlying assets were not a capital intensive asset business, we've been able to be free cash flow census, positive census spend even in February 2016.
We've been able to do what we say we're going to do from February 16, which is much more bleak times than now.
And I think right now my perception is that their energy is definitely out of favor for for whatever reason I think it's too. Many of you have in burn too many times in the last five years, but but I also think that there's a perception with CRC.
The debt investors want to have a self fulfilling prophecy of a reorganization when in reality you know, there's a maturity wall out there in 2021, and it's not like we don't we're not aware of it again, we're trying to work through methodically things that we've been contemplating census span, but the condition.
That haven't been right to do these kind of monetization well wouldn't be fire sale type values and you see to start to that earlier. This year, we've been married very methodical very strategic.
You know my background, what we're going to keep our cards close the vast and do things that are going to maximize value for our shareholders and we have plenty of time left to execute on that prior to.
All these assumptions about what's going to happen and I view, the distressed debt pricing as an opportunity for us to de lever again were Brent brands, but 62, something today, it's not $30 a barrel, yes, I mean, it was kind of kind of an obvious point, but just wanted to do too.
To go give you a fulsome on that given that you mentioned in your comments I'm sorry did you update on.
Central for royalty or other deals sort I'm sure you must have referenced.
Where we.
Is it because its fossil proceed we're looking to do it will what is happening.
Work in progress.
I'd say if.
I was doing it I would expect it had been done by now, but it's not me there's two parties involved.
And in some cases actually more parties involved so we're in the business are trying to create the most value so where we've been working with some parties and one party has stood out we've been giving them. Some time and we have planned BC DNF waiting to be executed on if that one doesn't go the.
Way, we anticipated to go so.
Again, we have a lot of levers to pull we have a fulsome business for different types of assets again, a like a super major.
So we're really.
Just taking your time trying to do what's in the best interest of our shareholders and not Russian do something that we're going to regret after we do it.
Understood. Thanks.
Thanks, Paul.
Our next question today comes from Sean Sneeden.
Please go ahead.
Hi, good afternoon, and thanks for taking my questions.
Thanks.
I guess, you guys called out maintenance capital.
Oh prepared remarks and.
Yes, now that May ultimately trend down I guess, what you're going to alert alluded to.
Hi, I guess from from our perspective, how do you think about.
The addition of the calumny JV.
That transform tell you guys think about maintenance capital at all or I guess, what are the levers that kind of get to that.
Lower level.
I think it's an added tool and the tool box for US again might remember the jvs are really powerful tool because it helps us manage our cash flow and commodity business, where there is volatile swings helps us de risk opportunities working with our partners and helps us bring value forward to things that werent competing for internal capital.
So it's an important tool in our tool box for us.
As we as we look to manage the business going forward and ultimately people forget about this the they do have reversions and the Jvs too, which is real cash flow and they all revert differently. They all have different slightly different criteria. We're very pleased with the colony JV, but talking about what.
You referenced.
We're always striving to get better at what we do and so we're always looking to get better so part of our.
Restructuring it wasn't something that we thought about Oh boy, let's let's change is this actually started about six months ago, why I sat down with our team and we challenge ourselves. We thought hey, we can do this better faster be more efficient and come out leaner and meaner and the end. So we spent a really long time, looking thats and working and getting it to.
Structuring organization that we feel is going to yield the kind of benefit than we're starting to see that on the margin. It's not big numbers, we're starting to see it right away. How we feel like what we've always said you know kind of our maintenance capital $3 million to $400 million of drilling completion of Workover capital keep but help us keep oil production flat for three to five years.
That's something that were validating even further and pushing that down with our new structure and looking to take costs out of the system from an operating standpoint and also from a.
Gionee standpoint, and then from a capital standpoint, becoming more efficient were already kind of very low capital intensity. So we think over time that'll that'll make us even bigger.
In faster and stronger.
Got it and I guess some of the cost savings that's kind of 50 million dollar number you've referenced was kind of part of that strategy.
I'm trying to lower but kind of maintenance capital business.
Fairway think about it.
No I think it was it was twofold a little bit was we've we we went into the downturn, we spun off with well over 2000 employees and I think about 8000 contractors, if I remember right and we had we were cast member on December Onest 2014 was the Monday after the Friday would hope.
So they weren't going to support product prices.
So we quickly reduced our activity to remain within free cash flow and we continue to do so and then during the downturn. We added we had to do things the different way to manage the business to enable us to be free cash flow positive and take the steps necessary to do so we try to preserve as much organizational capacity as we could so that when we.
Came out of the downturn, we were able to do some those things will be realized as we probably preserve too much organizational capacity as we went in and started really studying how we did the work it wasn't an exercise when you're at a larger company, where you say I need. So many heads are so much money. It was really how can we make the organizational better start from the bottom up and then.
I really look at how we work how we do things and how we deploy we have to how we deploy our financial capital, but our human capital to the highest value projects in the company and that's why I think it's not it wasn't an exercise it ended up with 50 million of absolute savings a year and cash savings from Opex in Gionee, but I think there were.
Reality is it started at something like we can be better at what we're doing right now and what's what's redesign whole organization that way.
That makes sense.
And then I guess, mark just to be clear it gets the the 200 million dollar basket for bond repurchases that I think you referenced earlier.
Applies specifically to the second lien or the unsecured right.
And I am I guess, just curious to get your thoughts around how you're thinking about the significant discount on.
The one and half lien term loan if that has changed any of the calculus around buybacks at all for you.
Well I think this will go I think this would go to answer.
Both components to that question.
That $200 million associated with the non borrowing base basket can be used to repurchase.
Any debt at a discount Sean.
So we tend to evaluate the various components with the capital structure and.
And look at where we might get the biggest benefit and we'll call it.
Accordingly, yes, Sean I think I'd focus you on remember when we got the ninth amendment that was in early August .
We were contemplating using proceeds from a transaction. They go after though the best value opportunity for the shareholders, which was the one and a half lanes because of the high coupon associated with them.
But as our other debt has traded down we now balance that opportunity set and saying, what's the best value proposition from both a principal reduction and a fixed charge.
Reducing our fixed charges. So I think it's rob from our standpoint.
We're just we're evaluate that landscape as we as we look at at that where the debt trade each day and try to be opportunistic in the marketplace. Some of its extremely liquid some of its not you you can see where you think it's trading based on your Bloomberg screen, but in reality. There is some of that stuff that doesn't trade and thats just some hypothetical price.
Are there some particular buyers I won't name one here, but they know who they are they're listening who buy up every single last dollar of well some of that stuff when it becomes available.
Got it but that's helpful and if I could just squeeze one last one then.
On the few we grant that you guys.
Talked about.
How actionable is that in the near term here.
Should we think about that it's kinda like immediately kind of at adding 150 million of reserves or.
Or how should we kind of think about what the capital needs of that program will be.
So this is a large capital project.
This is something that you book reserves when when they become commercially viable. So there in that contingent category because I think at this point in time their technical reserves that actually work, but you have to have a commitment to invest the money in the facilities to grow. This so it is something that we're doing the feed study right now.
We have people working on this this isn't a.
Going to be overnight, but once you start committed to building. The facility you can start booking those reserves. So I think we have a slide on that in the deck.
Slide seven so you can take a look at that but it's a it gives you kind of a timeframe, where we think it based on today it could be accelerated but I would think of that at this point in time. If you look on slide seven you can see it looks like it comes on stream around 2023, but.
It is something that we're in the process of.
Working on right now.
Got it that's very helpful. Thanks for all the time guys.
Our next question comes from Andrew Ginsburg RW Pressprich. Please go ahead.
Hi, guys. Thanks for taking my call show.
I just wanted to actually question in terms of the recent college coach sanction job that the Trump from registration place on the Chinese shipping from so I know a lot of the crude is imported from Saudi Arabia, and the middle East and since tanker rates have been kind of exploding lately.
Are you guys did that provide any tailwind cues eyes from realization to Brian .
I think it just firms our realizations up and causes upward pressure on our barrels because that added costs, because remember 70, 374% of accrued as imported into California, it's almost entirely super tankers, whether it's the 10% from Alaska or the kind of the two thirds from mostly the middle East.
Yes that is just giving upward pressure to the pricing in California, and our ability to bid up our barrels.
All right.
Makes sense.
And then just circling back to the carbon capture study.
You mentioned that you think it could be accretive to it overall cost structure.
Did you have an idea of.
I can ask you made a percentage in terms of caution on how much should be able to decrease costs from that.
It's probably too early to know exactly because what happens in that ghd market is actually a.
Bitten marketplace, so that gets bid up overtime and we've seen some financial players come in there so wait and see but we think overtime that will be bid up but we we have some estimates, but I think it's too premature to say how much that might be.
Right. So then really from from the cost perspective, any positive momentum from that would really be from.
The credits that need to pay for in terms of.
Any kind of admissions you're saying.
Yes, we would no longer needed by credit for our power plant.
Okay awesome.
Helpful. Thank you.
Thanks.
And our next question comes from tax for me of JP Morgan. Please go ahead.
Good afternoon.
Hey, Jack on the just talk a little bit more about sort of what you're seeing in terms of the impact of wildfires on natural gas pricing, obviously sort of you've got the impact both on the fly, but you've also had a bit of demand impact as well.
I'll turn it back down over and over again.
I think we haven't seen any real impact on city gate pricing in this state I think go without a lot of people rushing out to by natural gas generators that are pike rates and demand overtime as they see the grid being pretty unreliable, but.
That's just my commentary.
Got it.
And then.
Josh on this a little bit.
Mr earlier comments, but just think about sort of a lot of the ball chefs in the area between sort of asset sales and liability management.
Any sort of thoughts around kind of when you would expect to sort of have something meaningful to announce.
Hey, John spot, but it sort of.
Offset in part question to ask.
No I look like I said to Paul earlier, I think we would hope we'd be across the finish line a lot of these things were contemplating there isn't a lot of loitering involved but we are trying to work the best solution for our shareholders. So we're trying to be patient and.
And use the military term wait for the whites their eyes. So.
We're not going to pull the trigger too soon we're going to do at best and not and try to get the maximum value.
If that means we have to wait a little while we're going to wait a little while.
We continue to run the business to continue to generate free cash flow.
Again, we're not in a rush to do anything.
We'd love to be done here and a few weeks, but hey, it's there's when you have other parties involved you know you're at your at their whim, sometimes when you're trying to work with them. So it doesn't always happen in your timeframe.
Fair enough.
Then just last one from me.
With the borrowing base.
Affirmation.
I'm, assuming no changes to the covenants from the ninth amendments.
Just want make sure that's correct.
Tortoise correct.
Got it.
Barring base was reaffirmed with the with no other nor the provisions.
Great.
Well that's it for me thanks for taking my questions.
Thanks Derek.
Ladies and gentlemen, this cleanser question answer session. I was just one of the conference back over to Tom Stevens for any closing remarks.
Thank you everyone for participating in today's call CRC has a track record of completing meaningful transactions and we're keenly focused on additional transaction to transactions a further our de levering and advance our high VTI inventory will continue to be guided by disciplined capital allocation aligned with expected cash flows to capture the full value of our high quality loaded.
Line and low risk resource base.
Aided by our unrelenting focus on operational excellence our business model is built to performed throughout the cycle can deliver consistent value to our shareholders will see out there on the road. Thank you.
Yes, Sir the conference has now concluded when thanks for attending today's presentation. You may now disconnect your lines and have a wonderful day.