Q2 2021 California Resources Corp Earnings Call
[music].
Good day, everyone and welcome to the California Resources Corporation second quarter earnings Conference call.
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At this time I'd like to turn the conference call over to Joanna Park, Vice President Investor Relations and Treasurer Ma'am. Please go ahead.
Welcome to California Resources Corporation second quarter 2021 conference call.
Dissipating on today's call Max Mcfarland, President and Chief Executive Officer.
Francisco, Leon Executive Vice President and Chief Financial Officer.
Several members of the CRC executive team.
Despite COVID-19 unrelenting heat and fires as highlighted in our slides we delivered on several key priorities. We continued our strong financial and operating performance.
We announced several A&D transactions that allow us to focus on her for assets.
We increased our free cash flow guidance for the full year and accordingly, we are increasing our share repurchase program by an additional $100 million for a total of $250 million and lastly, we are expanding our ESG leadership through D carbonization with new low carbon initiatives or.
To slide 5 CRC strategy is based upon 3 main pillars, 1 cost and operational excellence too disciplined investing and 3 responsible portfolio management I'm.
I'm going to briefly explain how we delivered on all 3 pillars in the quarter and year to day.
The first pillar of our strategy focuses on lowering our operating cost model, while maintaining top notch safety performance.
The team continued to deliver on both aspects maintaining corporate G&A cost savings, which are down 16% from 2020 levels and are controllable non energy costs, which are in line with the first quarter of 2021, both on a per barrel basis.
Available opportunity.
Exhibits our ability to stabilize oil production, while also generating meaningful free cash flow.
And it shouldn't be lost to those on the phone, but as we shift dollars from Capex to Opex, we are actually taking the hit to EBITDAX.
And yet we are still forecasting EBITDAX of just over $800 million.
The third pillar of our strategy centers on responsible portfolio management.
CRC demonstrated our commitment to this pillar by purchasing the entire working interest position held by a joint venture partner in our core field.
As well as entering into an agreement to exit the noncore Ventura basin.
Earlier this year, we said we were in too many fields and we believe focusing on our core asset drives the most value.
These transactions enabled us to do just that.
Francisco is going to provide additional details from a high level perspective, these bolt on and bolt off transactions allow us to recycle capital back into our core fields simplify our business model and continue to streamline our cost structure.
Looking forward the strong free cash flow generation in the first half.
Results combined with our updated forecast for free cash flow for the balance of the year give us confidence to increase the full year guidance to the range of $400 million to $500 million and to increase our share repurchase program as I mentioned earlier about 100 million to $250 million in total.
We continue to believe there are significant stock appreciation potential given our low leverage and that we trade at a relative discount to peers.
I'll now turn the call over to Francisco, who will provide additional details on second quarter financial performance before I return to discuss.
Our ESG efforts Francisco.
Thanks, Mike Good afternoon, everyone and thank you for joining us on this call.
Mac highlighted and as shown on slide 8 of our presentation CRC continued its strong performance in the second quarter of 2021.
CRC reported net quarterly production of 101000 barrels of oil equivalent per day, and 61000 barrels of oil per day.
In essence, CRC has been able to maintain its gross and net oil production year to date with only $77 million in capex.
During the quarter, we added our second drilling rig in our core San Joaquin Basin, and our development program brought online 2021, new wells.
Furthermore, we ran 35 maintenance rig and shifted a portion of our capital to bring online an additional 217 maintenance laws.
As previously mentioned the high impact low reservoir risk and rapid return opportunities allowed us to bring an additional 2300 Boe per day of PDP production, while maintaining our non energy operating costs.
Our drilling program has predominantly been didn't focus on day, Mount Pozo, Elk Hills and whenever it feels.
Each of these theories are on track to deliver estimated irr's between 97% to 146% with a capital workforce forecasted to return over 200 per se.
For the remainder of the year, we expect to maintain our capital cadence with plans to add a third rig in the Los Angeles basin sometime in the fall.
Okay R..1 energy costs have decreased by over 10% on a per barrel basis as we defined as we refined are efficient operating model and continued to optimize per project pipeline across our core assets.
Well, we anticipate that our energy costs were modestly increase in the second half of the year, we expect to maintain the improvements for non energy costs.
Ah such and then like with the number of maintenance opportunity to know radar, we're shifting an additional $20 million of Capex do Opex and also increasing crc's opex guidance by an additional $35 million due to a larger then dissipated increase in energy costs.
Let me take a minute here can tell you how energy cost impact our business.
While increasing natural gas prices increase our operating costs, we are net long natural gas.
In our upstream operations, we consume approximately 28 D. C F. A year of natural gas when we produce and sell approximately 6 BBC every year. So an increase in natural gas prices. Some overall benefit to our financial results, even if our operating costs move higher.
The incremental revenue more than offsets are international costs.
A second quarter of 2021, G&A costs remained flat quarter over quarter, an average $5.25 per day.
Yeah, a dollar per view the low when we entered 2021, where approximately 16% below 2020 per.
Primarily due to our ongoing cost saving efforts and previously announced workforce reductions.
As a result of our edition management of our low the client assets CRC reported and adjusted EBITDA acts of 169 million and adjusted net income of $78 million.94 per diluted share.
The business generated $77 million in free cash flow Ah slight decrease vs. The fourth quarter of 2021, largely due to the timing of property tax payments and higher capital spend.
California, primarily uses an envelope and tax that is based on the value of the minerals in the ground.
Our property tax payments are generally made in April and December of each year as required by California law, and thereby burden are free cash flow in the second and fourth quarters.
Additionally are Catholics increase in the second quarter with a gradually increasing a really big activity as we approach more normalised levels of investments.
During the second quarter, we followed through on our commitment to prioritize shareholders' returns by repurchasing 1 million shares or 1.7% of total shares outstanding for a total of $45 million.
With essentially $200 million free cash flow in the first half of 2021, CRC validated the low capital intensity of our business and demonstrated our industry, leading free cashflow yields.
The combination of a result in the first half of the year and our confidence in the cash flow generation outlook for the rest of the year provides the basis to race or 2021 free cash flow guidance by nearly 50% to a $400 million to $500 million range.
Vincent price of free cash would yield of approximately 20 per cent and current prices.
Hi, and moving guidance.
As we evaluate our share coldly return options and take into account the high levels of free cash flow generation and low leverage with more prepayable debt.
Coupled with our current share price, which treats at a significant discount through our intrinsic value and low multiple relative to our peers.
We feel that repurchasing shares delivers the best value proposition today.
Therefore, as Mac mentions we have decided to increase our share repurchase program by 100 million to $250 million.
Assuming we were able to execute 100 per cent of our extended program expanded ship repurchase program. This year, we would be returning 50% to 60% of 2021 free cash flow of the shareholders.
The balance of our free cashflow expectation still allows us to continue to self fund our capital needs and evaluate our options to deploy capital whether it be dividends.
<unk> acquisitions and divestitures, returning capital into the business through the drove it.
Finally, turning to slide 15, and it's Mack has mentioned we made progress in our portfolio management and NASA Rationalisation plans by advising advancing several strategic transactions.
We increase crc's petition in our core San Joaquin basin by acquiring the working interest in the well tell by mirror, representing 1600 <unk> per day of net production, although which is oil for a total consideration of $53 million.
We also announce I complete exit from the Ventura basin for gross proceeds just exceeding 100 million.
This position represents approximately 3600.
For a day of net production, 65% of which is oil.
Yeah, except from the basin allow CRC to consolidate operations into 3 basins and removes the high costs operating area.
We will provide updated 2021 operational guidance at the close of these transactions, which is expected in the fall of this years of this year.
These transactions together high grade our portfolio and free cash flow per Vod.
This is a result of this strategic AMD transactions, we anticipate incremental improvement in our cost structure, both from an operating in DNA perspective.
Please note that we have provided detailed analysis of our quarterly financial and operational results are of 2021 guidance and the attachments to our earnings release.
Thanks, and I will now turn the call back over to Mac.
Okay C O 2 sources.
Within CRC operated assets, we have identified up to 1 billion.
Metric tons of permanent C O 2 storage, which would allow us to store approximately 20 million metric tons per year for 50 years.
That's the equivalent of removing more than 4 million cars from the road every year.
Well Ccs's, an ultimate solution for California.
Requires about 60 million metric tons per year can we think we have the ability to do about 20 of that each year.
So we have a large opportunity.
And our total 1 billion metric tons of storage, but for now we are currently focused on the most immediate actionable portion, which totals for approximately 200 million metric tons of storage capacity, so 20 per cent of that $1 billion.
And all of that.
300 million metric tons nearly half of it is.
His own fee simple the other half is in close proximity to carve resources and she has a higher degree of probability for near term execution. That's why we're focused on that 200.
We filed a permit for an area called a 182 at Oak Hills, which has a storage capacity of up to 10 million metric tons.
For permanent sequestration.
We're also target Todd.
Targeting a permit filing for an area called 26 are in the third quarter of this year and.
An adjacent area with permanent storage capability for up to an additional 30 million metric tons of C. O..2 we plan to combine these 2 permitted areas into a single project that we're calling carbon terrible 1 which will have a total storage capability of up to 40 million metric tons. We anticipate this project will participate in the caller.
<unk> incentives through the low carbon fuel standard credits or simply L. CSS.
As well as benefiting from 45 Q federal tax credits.
The competition combination of which we believe will provide for an economic project.
And economic Ccs project to be specific.
CRC not only has the reservoir capability for permanent secure theater storage, but it also has the commitment and leadership to reduce emissions and make long lasting environmental and economic progress for the betterment of our communities and shareholders.
In addition to the state leading Ccs efforts, we have identified up to a thousand megawatts in front of the meter solar opportunities, which will help contribute to the energy transition in California further.
Advancing arrangements with Sunpower for initial 12 megawatt 12 megawatts of behind the meter solar.
For hydrocarbon production, which is expected to be lcs's eligible on a well defined it all CFS pathway and are targeting up to an additional 33 megawatts of behind the meter solar projects for our oil and gas production as.
As we further expand our ESG efforts the sustainability committee of the board will provide focus of oversight. Additionally, we have hired.
Chris Gould is our chief sustainability officer, who will lead our newly dedicated sustainability team.
I'd also like to extend a warm welcome to Nicole Neiman Brady as a member of the board of directors and a member of the Sustainability Committee Nicole was appointed to the board. This morning, and it comes with significant experience and ESG investing in energy transition, which further complements Christmas long history and working climate initially.
Their dedication to ESG will bring the needed expertise to deliver on our goals.
Finally will be hosting an analyst day focused on sustainability sometime in the early fall and will provide further details on that analysts day in the coming week.
I am pleased with our results and I'm optimistic for the road ahead. We continue to believe CRC is 1 of the best position companies in the energy sector are strong free cashflow yield low leverage and ese opportunities physician as well now and for years to come.
Again like to thank the employees of CRC for their commitment to reliable and safe production to meet California energy needs. Thank.
Thank you for your interest in CRC and for joining us on the call today.
At this point will open the line for questions.
Ladies and gentlemen at this time will begin the question and answer session.
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Okay. First question today comes from Scott handled from R. B C capital markets. Please go ahead with your question.
Thanks, Congratulations on on this E. S. G perspective, it's certainly a good to see you guys kind of pushing this Ford.
If if you could help me just kind of step back and and you know I think you know for investors and and myself. It's you know the big question is like what what is the value of of this E. S. T F or pre obviously, we've got the credits, but you know how help us put a pen to the paper like you know how how much you know like when you look at this the the carbon Tara.
Vault, 1 like how much capital CRC capital it wouldn't be going to that and you know what what is the old put on credit to their you know just at a high level just to kind of put some numbers to it.
Yeah sure Scott Smack.
First of all let me talk about what we're doing with that project, Okay, which is terrible 1 we're making the permit applications for we've already done it for a 1 or 2 we're gonna do it for 26 are those those numbers are somewhat meaningless unless you know what they are but that gives us the terrible project, 1 with 40 million metric ton.
The reason why we're advancing those permits us because we think that they are really long lead time items, okay, and because we actually have a strategic advantage there and that.
You have to own a poor space by which to create carbon sequestration in California because of the location of these that El Hills, where we own everything fee simple we're already on that so where it may take other projects a year or 2 by which to acquire poor space.
And no the poor space and be able to file a permit we wanted to go ahead and put those permits and now I say that because your question is is to pay where did you take the project from here Alright. There are a number of factors that we are looking at what is the carbon source to capture technology. The transport through the site, but we believe that over time, we will.
Fill in those gaps.
And the.
Develop.
The overall project economics, if you will the reason why we think that this is an economic project is very simple. If you look at where we are in the country and California, California is leading and it's D. Carbonization efforts and is leading and the incentives that have been put forth.
For carbon sequestration capture and sequestration so.
You have a revenue opportunity and I'm gonna I'm gonna.
Mix tax credits with revenue opportunities, but you have a revenue opportunity by generating Elsia first credits, which are trading 187 call at $200.
You have the 45, Q, which per sequestration is $50. A tonne. These are all per ton and then there's discussion about whether or not to insert cap and trade, which is the greenhouse gas emissions trading program in California, which is currently in the 2030 and is expected to go higher per ton, though.
There is available for the <unk> credit.
So it doesn't it doesn't equate you can't take the 1 forward and do that math will lay that out further we continue to advance the Cal capture project.
But it has a different set of economics than the Ccs projects we have.
Okay. Okay, and then and then I guess Smith has a revenue stream associated with the oil through the EUR right. So right.
It's got some nuances to it but that's 1 of the things.
When we looked at it.
Where we need to advance our ESG or environmental or carbon strategy, we decided to go forward with this classic permit carbon terrible.
1 because it gives us a direct line to Ccs.
Less complicated with the power plant, if you will but we continue to evaluate the power plant and the power plant economics for EUR.
So U S projects.
Got it got it so I mean, the bottom line as you look at that.
Terrible when you're looking at that it's you know what.
Factors like how much of that carbon.
Per year, you're actually capturing in storage in the credit for that and so there's fundamentally you need to find the source.
And obviously build the infrastructure to get it to there.
To fully develop sort of the the value chain does that is that a fair statement.
Yes, that's a fair statement.
I think when we look at the value chain and we think about that I mean, we have an inherent net natural resource and that we have.
Completed oil and gas fields.
That show.
So.
Pretty tremendous potential for <unk> stores, that's the 1 billion tonnes and we're focused on the obviously that the.
The low hanging fruit isn't for a lack of a better term that $200 million.
And.
When you look at the overall project of getting a Ccs project to be life, where you're actually injecting from a ccs standpoint, having the classics permit through the EPA, we believe as low as 1 of the longer lead time items and that's why we're filing with an advance and building a project award.
Around the tank cars.
If I can just add to the Harvey terrible 1 project you talked about 40 million metric tons, keeping up the size of the tank and so we're going to permit first in our initial estimates are that the injection rates going to be a million tons per year, just to give you a sense of the modeling on that.
Net net kind of goes back to take the $2.50 times a million tons, there's $250 million a year.
Simplistically I guess.
Right yes.
And with a different is it 45 Jewish of tax credits and then we're just talking.
Talking about revenue.
That's how you would start the model yes.
Total amount of revenue that avails itself to carbon capture and sequestration resolved yet.
Yeah, Okay excellent and then has your has obviously we're talking about the carbon capture in the reservoirs are amenable to it and I know theres been some studies, but remind me has there been an actual.
Has there been actual carbon sequestration done on any part of the field that you have the confidence that it will work.
As there are many test pilots to show that.
It's structured looks there, but it actually in reality it does work itself because it's been tested.
I think this is critical we have.
Obviously extensive.
100 years worth of history on these wells from these.
The reservoirs from.
Operating now and so we're leveraging that data and that insight that we have collected.
To make the assessment of the $1 billion and we believe that those are permanent.
Storage.
Capable.
But as far as the permit that you're asking about Scott.
Sales, we have the necessary data.
And studies and analysis that we believe we have done some.
Some pilot studies at the site.
But it is the modeling that we believe is conclusive because as Chris said that we have.
Decades of data around these we feel fairly confident in the analysis and the ability to permit.
Okay 40 megawatts okay.
So to get the permits you don't need to have a demonstrated is I guess the point.
You you need to demonstrate no you do not need to demonstrate through modeling and simulation and the application, but that is all supported by the data that we've collected over all these years. So that's why we feel comfortable.
Okay, Okay, alright enjoy any at all.
I'll pause there just because that was like a long number 1 question I'll call. This is my second question on the on the solar side of things can you talk about the structure of what what the agreement with.
The partner is you know sunpower looks like because it is it a joint venture where there be bring technology in you guys bring the acreage or how does that work what's the like interests between the 2 partners.
Hey, Scott the Jv's no nothing exotic is that in the case of Sunpower for behind the meter projects, we're looking at a PPA structure.
We are the off taker.
And drawing 3 benefits, primarily lower than lower the utility cost on the energy.
L CFS capability and the ability to put extra energy back on the growth.
So Scott.
Yeah.
What we're doing is we're basically giving a land lease using our surface acreage sunpower is building and developing the solar facility, there and where the energy off taker and that gives us what Jay just said so we are actually purchasing the power from them. So from our perspective, it's capital light we pay over.
Time for the energy cost.
But we both benefit they are producing solar power and we're taking that are using it for hydrocarbon production.
And that solar power as it would be.
5%.
<unk> that is.
Is that where you get to the 35% cost reduction.
Okay.
It's cheaper than that.
The overall utility rate delivered at the meter if you will.
It's volume so.
So you are paying for just the the energy production portion of what you would pay from a utility rate, which would include transmission and distribution. Yeah. When you look at what you paid to the utility.
For increments of energy, but you can pay the sunpower.
And I can compare that to what you've been able to resell extra energy yet.
Neil CFS, the effective reduction as a <unk> 35 per cent reduction is meaningful.
Got it okay. Thank you.
Once again, if you'd like to ask a question. Please press star and 1.
Our next question comes from Eric <unk> from Goldentree. Please go ahead with your question.
Hey, guys. Thanks for the call congratulations on a terrific quarter.
A couple of quick questions.
<unk>.
In terms of.
The electricity business and the infrastructure or trading business.
It looks like another very strong quarter for both of them what should investors expect for gross margin for those quarters for the remainder of the year for those segments for the remainder of the year.
Yeah, So Eric if you take into account.
So looking at the second quarter look at both of the elements that you talked about electricity business in infrastructure optimization.
We saw about $35 million.
35 to 40.
So when we sell them and especially natural gas tends to be seasonal so it's difficult to predict it out by multiple quarters electricity side, it's a little bit predictable.
As we show now.
Good day analysis on the earnings release, we're seeing pretty consistent.
Associated with this project. So that's what we did in the second quarter.
Volume for assumption to assume that the next 2 quarters are going to be very similar.
Terrific. So next 2 quarters could be similar on an aggregate basis to what.
Each of Q3, and Q4 could look similar to what Q2 looks like because that is up to San Francisco.
Yeah, No that's fair Gregg.
Great terrific. Thank you very helpful. And then second question with respect to the.
Ah the A&D.
Selling ventura and buying on into Mount Pozo incur in front from Iraq.
Does the does the full year guidance it looks like it doesn't contemplate at this point the Ventura sale and that you will reassess guidance once that closes pro forma for it for the sale is the same true for the bolt on acquisition or does the current guidance contemplate.
The acquisition.
It's twofold growth of America.
We closed after the end of the quarter and we're still working to close interestingly both transaction day net impact with that transaction will be reflected next time, we issued guidance is not in the current guidance.
Okay terrific.
For for for clarifying that.
And can you you know it looks like.
Considering the oil composition.
By a pretty accretive trade.
That.
And I know there are a lot of other benefits in terms of streamlining the operations and what are you focused more capital but from from your vantage point did you did you see the trade as accretive and can you maybe talked about low but.
Yeah, absolutely definitely accretive.
Yes.
We're looking to.
Looking at our portfolio.
As we talked about before we will see both.
Acquisitions and divestitures on everything on the portfolio strength, we see an opportunity to buy in fourth quarter, we will do that.
And then the noncore assets that are not getting the level of capital to grow them or we're going to.
Okay.
Eagle transaction to divest them so.
Yes, I mean ultimately as we.
We disclose some of the high level numbers in terms of production.
So you can do you can do the math on it just in there but.
We see this transaction as an accretive in this.
Yes.
On the net basis high grading our Boe.
So definitely.
Definitely the transaction for us in terms of migrating the portfolio.
Terrific. Thanks for that color and guys. Congratulations again on a great quarter.
Thanks.
And we do have a follow up question from Scott Arnold from RBC Capital markets. Please go ahead with your follow up.
Yeah on the pivot to more of the maintenance and downhole activity can you remind us where you're at in terms of the backlog with that then you know how much more you you all can lean on that going forward because I think there you you had a big a bit of a backlog coming in from last year, but.
Just kind of curious what the plan is to work it down to say more normal levels.
So.
Scott Smack in I'll ask Shawn Kearns to jump in here after this but.
We have been reallocating capital into Opex as you say, because we did build up a maintenance backlog through the end of last year, whether it be the prices whether it be we.
Restriction on cash if you will or building liquidity as Frank went through bankruptcy and exiting at the end of last year that backlog, we expect to work down to normal levels by the end of this year and so we don't see the same type of opportunity that we would normally it's not going to continue past about the end of this year, but Sean do you want to.
Specificity or share macro yeah, I'll add to that Scott.
Basically you know we did pick up some rigs to work down that backlog in the first half. We've we've knocked out about 1200 wells and brought those back online, we're making real good progress on getting that backlog work down.
That wrapped up third quarter fourth quarter, and then we'll be back to a more normal normal levels of maintenance expenditures.
Yeah.
I appreciate that thank you.
Yeah.
And ladies and gentlemen, im showing no additional questions I'd like to turn the floor back over to management for any closing remarks.
Well, thanks, everyone for your interest and participation on today's call and we look forward to.
Discussing our sustainability and in <unk>.
<unk> projects further in the fall thank you.
Okay.
Ladies and gentlemen that does conclude today's conference call. We do thank you for attending you may now disconnect your lines.