Q1 2021 California Resources Corp Earnings Call
Good morning, and welcome to the California Resources Corporation first quarter earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Joanna Park. Please go ahead.
Thank you Joanna Clark Vice President of Investor Relations and Treasurer, Welcome to California Resources Corporation first quarter Conference call.
Moving on today's call is nachman filings, President and Chief Executive Officer.
Scott Layoffs Executive Vice President and Chief Financial Officer, John <unk> Executive Vice President of operations Engineering, Vice President Senior Executive Vice President.
And general Counsel, and JV, Chief commercial officer, as well as several other members.
The executive team.
Like to highlight that today, we have provided supplemental slides, which we may refer to during our prepared remarks, which can be found on the investor Relations section of our website Www Dot CRC Dot com. We have also provided a reconciliation of non-GAAP financial measures.
The most directly comparable GAAP financial measure on our website and in our earnings press release.
Today's conference call contains certain projections and other forward looking statements within the meaning of maturity.
These statements are subject to risks and uncertainties and may cause actual results to differ from those expressed or implied in these statements additional information on factors that could cause results to differ are available in the company's 10-K, which will be filed later today. We ask that you refer you and add my cautionary statement in our earnings cash flow.
Play that maybe available on our website following today's call.
We have one additional time for Q&A at the end of our prepared remarks, thanks, and I will now turn the call over to Mike. Thank.
Thank you Joanna and thanks to everyone on the phone for attending today's earnings call.
Jumping to the punch line in the first quarter results delivered a $120 million or free cash flow, which set the backdrop for the $100 million $150 million share repurchase program, we are announcing today.
Our strong start to the year displayed crc's ability to execute on our strategy and deliver meaningful cash flow.
The company is trending towards the high end of our free cash flow guidance that we provided during our March 18th strategy day.
That is $350 million of free cash flow for 2021, and would reflect an 18% free cash flow yield at yesterday's market valuation.
Based on the progress we've made to date and because our stock price does not fully participating in the most recent energy sector rebounds.
We believe that our stock offers a very attractive return the $150 million share repurchase program provides us the flexibility to make good on our commitment to return capital to our shareholders. While also maintaining a healthy balance sheet with low leverage ratios and significant liquidity.
Francisco will detail. This later during his remarks.
From an activity standpoint first quarter results were achieved with just one drilling rig where we drilled 17 wells 15 of which were brought online during the quarter and the other two came online during the second quarter.
During the quarter. We also completed 40 capital Workovers and performed 570 downhole maintenance jobs springing back online nearly 3300 barrels of oil equivalent per day of gross production.
In May we added a second drilling Gregg and increased our maintenance rig count from 30 to 38.
We expect to maintain this level over the next six months.
Focus on quick payback high returns backlog of wells.
I'm extremely proud of our employees from maintaining safe and efficient operations and for adapting to and executing our strategy.
To deliver these strong results.
We have one of the lowest safety incident rates in recent history and outstanding environmental performance.
Shifting gears now.
There has been a fair amount of discussion regarding the California regulatory environment highlighted by our recent announcement to ban fracking fracking, regardless of whether or not such a ban is upheld CRC will see no material impact because less than 1% of our proved reserves require well stimulation and our current long.
Term development plans do not include well stimulation and fat Crc's operations do not require high pressure cyclic steam we continue to operate according to the strictest environmental regulations in the world and the carbon intensity of Crc's barrels are much lower than the average imported barrel as California continues to improve.
70% of its oil needs said differently, there will be no impact to CRC.
If the fracking ban is upheld.
That being said, we look forward to working with the state on its energy transition plans in the second half of this year. We are planning to provide additional clarity on several concrete items directly related to energy transition that will have the potential to benefit California's future success in this area.
Our core operations will continue to deliver solid cash flow, while we work on the east future steps.
Additionally.
CRC is evaluating ways to strengthen our ESG commitment even further we have multiple sustainability opportunities and are looking looking to strengthen our approach through a total review of our ESG efforts. The company is successfully delivering on our current 2030 sustainability goals.
And given the significant progress in the areas of water recycling and methane reduction our future efforts will focus on renewables integration and de carbonization projects.
In other words, we are looking to revamp the EV or the environmental approach of our ESG strategy to make a bigger impact on the space de carbonization and energy transition plans through our focus on renewables and Cc Cc U S without compromising our social and governance commitments.
We include opportunities outside of the <unk>, Ccs and EUR project as well as both cell supply and grid supply of renewable energy.
We expect to provide further details on this revamped ESG strategy in the second half of the year.
I'll now turn the call over to Francisco, who will provide additional details on our first quarter financial performance and on our borrowing base Redetermination Francisco.
Thanks, Mac good morning, everyone and thank you for joining us on this call as Mac mentioned earlier CRC continued to successfully execute on our corporate strategy based on strong business financial fundamentals disciplined capital allocation and robust free cash flow generation.
As you can see on slide four of our earnings presentation slides, we have outlined several key quarterly highlights.
Our strong performance during the quarter contributed to an adjusted EBITDAX of $189 million and adjusted net income of $102 million or $1 22 per diluted share.
During the first quarter, we generated $120 million of free cash flow showcasing our industry, leading free cash flow generation capability.
We reported net quarterly production of 99000 barrels of oil equivalent per day, and 60000 barrels of oil per day net oil production was lower by 3000 barrels a day on a quarter over quarter basis, primarily due to the PSC adjustments associated with higher oil prices on a gross basis oil.
Production was essentially flat quarter over quarter, while operating just one drilling rig and this type of keen basin.
A true Testament to the quality of our assets are low decline rate low capital intensity and strong safety culture of our employees.
Our snack highlighted during the first quarter, we took significant actions to further simplify simplify and improve our capital structure. In January 2021, we issued $600 million of 7% senior unsecured notes due in 2026 with the proceeds from this deal we successfully repaid in full.
Our second lien term loan all outstanding senior <unk> power secured notes and used the remainder to repay substantially all of our outstanding borrowings under our revolving credit facility.
Further earlier this month and supported by our strong financial and operational performance, we completed our borrowing base Redetermination, which resulted in an increase of our borrowing base to $1 $2 billion.
Up from $1 167 billion previously.
Additionally, we entered into the first amendment to our revolving credit facility that provides trc with additional strategic flexibility regarding shareholder initiatives and future hedging levels more specifically the amendment solutions that restricted payment condition.
And increases our available capacity to return capital to our shareholders.
With these actions coupled with our with our industry, leading free cash flow generation capability.
<unk> exited the quarter with a single unsecured debt tranche and Undrawn RVO and total liquidity of 545 million, which included $102 million of net cash generated during the quarter for a total of $130 million of cash on our balance sheet.
This quarterly performance. Additionally, underscores the company's strong focus on free cash flow generation, our assets capacity to support our strategy and our employees ability to safely efficiently and reliably produce much needed energy from California.
As stated during our strategy day, we anticipate our 2021 investment plan to generate between 250 and $350 million of free cash flow in a $60 per barrel Brent environment, highlighting the efficiency of our capital deployment and industry, leading low decline rates.
Given our current performance, we are reaffirming guidance and expect to trend towards the high end of our free cash flow range, implying a free cash flow yield in the high teens, while assuming our current market capitalization.
This yield coupled with our estimated 2021 net leverage ratio, although about half a turn position CRC with a strong foundation to deliver sustainable shareholder returns.
As Matt mentioned and as a result of our strong are the strong first quarter and steps taken to improve our cost and capital structures.
We are now in a decision to announce a $150 million share repurchase program effective in the second quarter of 2021.
Margin. This first important step towards returning cash to shareholders and in just seven months after our emergence.
Further as slide six indicates the value of our year end 2020, SEC proved reserves at $60, Brent East over $5 7 billion.
Which is more than double our current enterprise value.
Our high concentration of value in our middle decline proved developed category and large inventory of high return assets in our core fields provide confidence in both the intrinsic value of our stock and the free cash flow deliverability. These.
This supports the recently behind our share repurchase program.
If I also expand further on peers comparable valuation as compared to our guided 2021 numbers were certainly trading below our sector average of enterprise value over 'twenty 2021 EBITDA multiple of around five times.
Continuing on as we make progress on the goals of our new strategic direction discussed earlier in the year.
<unk> made several organizational changes by realigning the company's corporate and operational functions.
As a result, our first quarter 2021, G&A costs averaged $5 36 per Boe.
Which is 87 cents below the previous quarter, primarily due to our ongoing cost saving efforts and workforce reductions.
For the remainder of the year, we expect Crc's G&A performance to further improve and reach an approximately $5 per Boe run rates, while trending towards the low end of the previously issued guidance of $180 million to $190 million per year.
Further operating cost for the first quarter of 2021 were $164 million or $18 33 per Boe.
Which 91% higher than the prior to the previous quarter.
The company invested in downhole maintenance and Workovers from existing wells incrementally raising opex.
I would like to provide a bit more clarity on this point.
On slide 16 of our earnings deck, you can find additional color of Trc's opportunity set with respect to our high impact maintenance well backlog.
She is able to opportunistically reenter these existing well bores and bring back incremental barrels through well maintenance.
Through rapid technical interpretation and commercial analysis, well remediation work is prioritized to bring the highest value wells back online first.
Increasing uptime and production through high impact well work and Opex maintenance at the fraction of the cost of a new well.
This capital shift will allow for a return of PDP production barrels with almost no reservoir risk and short paybacks, demonstrating another strength of our assets for the remainder of the year, we anticipate opex to modestly increase however, since we view opex dollars in capital investment dollars almost unit changes.
Capital investment will be reduced similarly in our ability to achieve our free cash flow targets will be strengthening.
Simply this is a huge differentiator for CRC, where our conventional play a player with a low decline asset base that compete that compares favorably versus our shield counterparts.
For the remainder of the year, we expect to continue demonstrating the resilience and quality of Crc's low decline and low risk crashes.
Continuous improvement of our cost structure and disciplined capital allocation.
The combination of all of this is what gives us confidence that we will trend towards the high end of our 2021 free cash flow guidance and our ability to return cash by initiating the $150 million share repurchase program.
Finally, please note that we have provided detailed analysis of our quarterly financial and operational results and our 2021 guidance in the attachments to our earnings release.
Thanks, and I'll now turn the call back over to Matt to discuss the outlook from the rest of 2021.
Okay.
Thank you Francisco.
And during the quarter.
We have a robust $545 million liquidity position and one of the lowest leverage metrics in this sector.
We began to deliver tangible results on our strategy almost $200 million and adjusted EBITDAX and a $120 million of free cash flow during the quarter. We initiated the share re purchase program that we discussed today commencing a $150 million program, a very strong quarter in my view and something that we have.
We're proud of and CRC.
As we look at look ahead CRC has largely completed our strategic repositioning, but we continue to look for additional ways to improve we.
We intend to provide insights on our business as we transition forward and demonstrate healthy progress on our targets with our corporate strategy in place. We are on track to deliver strong cash flows Francisco discussed and towards the high end of our guidance range, our strategy of strong cost control and efficient operations.
And responsible portfolio management are set to drive free cash flow.
As I mentioned previously we're looking to expand and strengthen our ESG strategy to focus our approach on de carbonization and energy transition in California, but more on that in the second half of the year.
Again, thank you for your interest in CRC and for joining us on this call today.
At this point, we will now open the line for any questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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To withdraw your question. Please press Star then two U.
Please ask that you limit yourself to one question and one follow up.
You have additional questions you may re enter the questions.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Leo Mariani.
With Keybanc.
Please go ahead.
Hey, guys.
Wanted to touch base real quickly here on the return of capital plan. Obviously, you guys chose to go with the buyback will take the stock is reacting favorably to that year to date, but you also talked about other potential return of capital strategies that may come later in the year.
How do you guys kind of think internally about those different options and kind of weigh them against each other clearly it looks like the buyback one and in the near term, but it sounds like you might be looking at supplementing this with maybe some kind of dividend later on.
Yes, good morning, Leo it's Mac how are you.
Good to hear from good.
Yeah look the share repurchase program. We felt was in the best interest of the deployment of capital and returned to shareholders. At this point in time, given where the stock is not necessarily participated as we mentioned.
With the rebound in the sector and so we thought that that's the day.
The best first step and that's the first step we're taking as we go through the remainder of the year, we'll continue to evaluate all different forms of <unk>.
Our ability to return cash to shareholders as well as potentially looking at.
Little I'll say potential add ons of recycling of capital in the business, but we'll make those decisions as we progress through the second quarter.
Anything you want to add.
No I mean, I think we had a.
Good quarter building cash ready to announce the first step in oil.
Circle back when when we have anything else to announce.
Okay, Great and I guess.
Just wanted to touch base with you guys on the regulatory environment. Obviously, you guys in your prepared comments discuss.
<unk> discussed the potential Frac ban in California, but maybe just aside from that which sounds like it would be a very limited impact on most people's businesses in California, So far.
You guys aware of any other regulatory developments that may be populating. The state I know there was a Senate bill that was.
Could have been somewhat deleterious shutdown didn't make it out of committee recently, but I guess, you're expecting any other energy bills that may come up in the legislative sessions this year.
And just any thoughts you might have on the potential for 2500 foot setbacks that could that eventually emerge and in California, but did emerge.
Do you guys have a rough idea of the impact on your business.
Yes Leo.
So.
We've discussed this previously obviously there were there are two bills.
Net SB 467, SB $419, 67, which had a in its early stages had a fairly significant impact on the E&P space did not make it out of subcommittee on vote.
Was being reconstituted in I think is still hasnt, even made it to sub committee and then $4 19, obviously is the labor Bill and how it impacts upstream E&P.
As it get to refinery not that particular, bill, but as refiners were impacted with using union labor.
2019, we don't think will have an impact on our projections given that we already have a agreement to use trade.
On surface operations or for a lot of our surface facilities types of operations, but.
Let me ask my impression that general counsel to add onto that.
Thanks, Mac I would agree.
Were the two primary rebuilds that we've been watching this year.
Setbacks setback bills have been introduced over the last two years and Havent advanced.
There may be some rulemaking relating to setback.
Proceeds in the future.
We're obviously keeping track of that.
As you may be aware.
The lion's share of our operations are in Kern County in.
Relatively remote locations, but in any event, we're fully engaged with the rest of industry.
Analyzing that legislation and keeping an eye on it we don't anticipate anything in the near term that will significantly impact us.
Okay. Thanks, guys.
Thank you.
The next question will be from Noel Parks with Tuohy Brothers. Please go ahead.
Good morning.
Hey, good morning, good morning.
Just a couple of things.
You were talking a bit about the <unk>.
Credit line and just some of the.
Stricter payment conditions, there are not a topic.
It usually comes up a lot but.
I guess since it's it's a new revolver and everything like that could you just talk a little bit more about.
The implications for.
Various means of returning cash or shoulder to shareholders with the with those conditions.
Sure No it's Mac just.
Real quick yes, it's not often you get to discuss the arcane.
Covenants inside of our capital structure, but when we exited from bankruptcy we had some.
Cleanup work to do that's why we had the high yield notes that came out and then this RVO amendment that just trying to put everything regular way as we came out of bankruptcy. It was optimized to get out of bankruptcy, but not necessarily optimized and what I'd consider regular weighted capital structure and so that's what Francisco and the team have been working on but I'll, let <unk>.
<unk> is going to give you the finer points of the ERP.
Yes, absolutely so.
We want to make the <unk> more much more of a tender form so.
The biggest change is hard to distributable free cash flow.
Going to a last 12 month calculation, which is very typical.
<unk>.
That allows us to to really reflect the cash that we're building currently into the business.
Build out over time to think about distribution of capital to the shareholders. That's one the second one once around the ability to have more flexibility on our hedging.
So we we looked at both the maximum and minimum of the hedging capacity racing the the ceiling on the maximum hedging that we choose to do.
We went up to 85%.
And but also lowering the minimum hedging capacity.
To 33% of PDP volume subject to a leverage ratio. So ultimately, we're bringing a lot of flexibility into our ABL that we didn't have our emergence and just going to more of a regular way as Mac said.
Distributing cash to shareholders.
Great. Thanks for the clarification.
And.
In terms of the different.
Hey, Scott renovation alternative energy projects that.
You're you're looking at.
Just curious if you had an investment hurdle in mind for what you are.
I think would be would be worthy of of capital.
And.
I'm just wondering what other considerations are in play as you if you looked at the.
The various projects.
You you might take on.
Okay.
Yes, no it's Mac.
As I outlined at a fairly high level, because we're still doing the detailed work and Thats why we said more on this in the second half.
We're looking at a number of things including.
In addition to the Elk Hills project continuing to advance the <unk> project there.
And obviously, we're completing the feed study there.
That will be out in September.
This year the completed studies.
We're also looking at using.
Number of our depleted vehicles for Ccs as well as as I mentioned self supply through renewables primarily solar.
In this case as well as providing grid supply using some of our surface acreage.
Using solar on on those acres and when I look at those things we have not necessarily fully developed the entire.
I'll call It project plan, including how we're going to look at the financing, but we would also look for alternative financing structures to bring in or potential partners because.
Yeah.
The renewable space for example has a different cost of capital than we do as an oil and gas companies that we'd be looking for bringing in the right type of capital structure, but leveraging our assets.
In order to be a part of that energy transition so.
A lot there probably not specifically answering your question, but we would we would not enter into.
On an economic transaction from our perspective, and that's why we would look at alternative sources of capital both equity and debt to fund some of these activities.
So that's actually that's actually helpful. Scott I was looking for thanks, a lot Okay, hey, thanks Paul.
And the next question is from Ray Deacon with Petro Lotus. Please go ahead.
Yeah, Hey, good morning.
I had a question about your.
Yeah I had a question about your JV the dollars that we're going to be spent to.
Some of the drilling JV is what.
What quarter do you think those will hit in.
But yeah. This is francisco right as we outlined in the earnings release.
We anticipate one of the Jv's with benefit Street partners to be reverting sometime this year.
Late third quarter early fourth quarter.
That's that's part of the pre agreed conditions on the contract and you see in natural exit.
To them and there is no residual oil.
The shape of any of our wells once the Wednesday revert.
Okay got it and I guess, just lastly, given that free cash flow it looks like its at the high end of.
Your prior guidance.
Do you still feel the one 5 billion over five years of free cash flow is the right number or could it could it be a number higher than that.
Yes.
And their strategy day to $1 5 billion, assuming the midpoint of our guidance at $60 Brent.
We do see things rolling off like DSP in our hedges improve into next year, but we're not changing guidance at this point, we're staying with the $1 5 billion, but certainly the price environment has continued to strengthen.
We'll see we'll see how and where we ended up later.
Later in the year, but for now we're staying with the billion.
And have a guidance that we've given for five years.
No I think that's right.
We see a backlog of opportunities.
Yes.
Correct.
Right.
Yeah, and I guess, just lastly, if I could a quick one.
I agree the 18% free cash flow yield seems.
Much too high.
If the dividend doesn't resolve that I guess, what would be your preferred way to get the market to look harder I guess at the story.
Yeah. So today, we announced the share repurchase program $150 million.
We certainly think this is the first move.
Two because we see.
The stock being undervalued on a relative basis to the entire sector. So.
The good thing is our if you see our free cash flow projections, there very strong for the year.
We don't have to make any any debt repayments, we have we're seeing well with our high yield transaction that we did early in the year very little leverage so we have a lot of opportunities.
Available to us.
We will continue to assess how the stock performs.
And then we'll think about what comes next.
Now we felt this was the right first move on the share repurchase program.
Several other options that could go from eventually paying a dividend to doing.
Investing in the business and putting more money into into our wells.
And a number of other other options as well so we feel that we have we built up the cash we cleaned the.
The contract the contractual aspect of our restrictions.
And as we continue to perform well, we'll look at we'll look at other ways to return capital to shareholders and moving stock price.
Got it thank you very much.
And the next question will come from Jeff Robertson with water Tower Research. Please go ahead.
Thank you my question is on the Workover activity as you add as you work through the backlog that you have.
Ultimately spending money on Workovers will that have a positive impact then on the follow on production costs.
That'll be noticeable in the company.
And then secondly, how long would it take to work through the backlog that you reference.
That was built up when the company was dealing with its balance sheet and maybe deferring capital that otherwise would've spent been spent on this type of projects.
Yes, Jeff it's Mike so.
The backlog that we had coming out of 'twenty, one because we didn't.
It didn't necessarily.
Do the same amount of maintenance last year as we typically would provided us this opportunity and so the opportunity is really to shift capital dollars into opex dollars and you'll see that in our guidance in the slides and so we move $15 million into shifted places in the guidance that allow us so that does.
Have a it brings barrels back but it also increases our operating expenses.
Numerator side of things and so I'm not sure exactly how to answer your question, specifically, but we do get good high return barrel as far as working through the backlog.
We see maintaining that 38.
Maintenance rigs for the balance of the year and working our way through and so as we go into 2022, we will see less opportunity and therefore, we'll shift those dollars back into Capex.
I'm looking at Shawn currency your head of operations, Sean anything to add no Mac you got that right.
And really we will take care of that this year, we are picking up our maintenance rig activity working that backlog off.
And as you mentioned the incremental.
Operating cost is really just temporary to bring those growth back on and then you'll see the benefit going into 2022.
Okay.
Thanks, I guess I was curious I guess, Mike maybe I didn't word it right but.
The upfront cost of spending money on Workovers, which is obviously reflected in operating costs, but then you get the production benefit. So I guess my question is does that wash out over time and operating costs. So you you kind of go into a steady state where you've got the benefit of production lowering.
In fact, a lowering production because you've already spent the upfront money to re complete a well or some project.
Yes, Jeff that's right. It is accretive so once once you get those barrels back online.
Take more than takes care of that cost.
Okay. Thank you.
And once again, if you have a question. Please press Star then one.
The next question will come from Eric <unk> with Golden Tree. Please go ahead.
Hi, guys. Thanks for the call great quarter, a couple of quick questions. Your realizations in the quarter were terrific I put it on the on the NGL side.
Can you provide any any color in terms of what investors should expect going forward for crude Todd in your NGL side in terms of realizations.
Eric This is J P.
Touching on the Ngls over the last year, obviously, it's been a very tumultuous marketplace for Ngls.
So where we sit today compares quite favorably to the same period last year.
Do we expect to see continued strength in that area, you've got some inflationary pressures.
<unk> got some disequilibrium however in the economic rebound, it's hard to say.
Appreciation that we've seen over the last 12 months over the next 12 months.
Okay terrific. Thank you and then my other question was.
Could you maybe give a little bit of color to investors on.
Where you are you talked already about workovers, but in terms of the new.
New drilling can you give people a sense of where where are you drilling wells today and what kind of returns are you seeing.
Yes.
Well sure the 17 wells that we drilled in the first quarter, which is now up to 22 has been in the Mount Pozo area and.
We've been.
We've been up what I would say is on target both in terms of cost as well as initial IP across the 22 wells I mean, obviously, some above some below but beating the type curve on average.
And now we are.
We started a second rig in this quarter earlier this quarter.
And wait to Vista.
So we're starting to drill there.
We are currently evaluating our original plan had taking that up to three or four rigs in the second half of the year, which is still the current plan, but we're evaluating whether or not we push some of that out and go with some additional dollars on workover, Sean anything to add on that nothing that man.
Just drilling in and around our core areas.
Terrific I would answer your question, yes, Sir.
Sure.
Great.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mac Macfarlane for any closing remarks.
Keep it simple. Thank you for your interest and participation on today's call and look forward to speaking with everyone.
The second quarter earnings call in the upcoming Investor meetings take care.
Thank you Sir.
France has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
Okay.
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Good day.
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