Q3 2021 California Resources Corp Earnings Call

November 11, 2021

Good day and welcome to the California Resources Corporation third quarter 2021 earnings Conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

I'll come to the California Resources Corporation third quarter 2021 earnings Conference call.

All participants will be in a listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions. To ask a question you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I'd now like to turn the conference over to Joanna Park, Vice President of Investor Relations. Please go ahead.

To ask a question you May press Star then one on you touched on phone.

To withdraw your question. Please press Star then two.

Please note today's event is being recorded.

I'd now like to turn the conference over to Joanna Park, Vice President of Investor Relations. Please go ahead.

Welcome to California Resources Corporation third quarter 2021 conference call. Participating on today's call is Mac McFarland, President and Chief Executive Officer. [inaudible] Executive Vice President and Chief Financial Officer, as well as several members of the CRC executive team.

Today's call is Matt for filings.

Chief Executive Officer.

[inaudible] Executive Vice President and Chief Financial Officer, as well as several members of the CRC executive team.

I'd like to highlight that we have provided slides on our Investor Relations section of our website www.crc.com. These slides provide additional information into our operation and third quarter results.

How do you see R&D.

These slides provide additional information as to our operation.

third quarter results.

And we've also provided information reconciling non-GAAP financial measures to the most directly comparable GAAP financial measures on our website and filling in our earnings release.

This call contains certain projections and other forward-looking statements and these statements are subject to risks and uncertaintities and may cause actual results to differ.

Forward looking statements and these statements are subject to risks and.

Uncertainty and may cause actual results to differ.

Additional information on factors that could cause our results to differ are available in the company's 10-Q and 10-K. A replay will be made available for the 30 days following the call on our website. And as a reminder, we have a lot of additional question and answer time at the end of our prepared remarks. We ask that you limit yourselves to one primary question and one follow up. With that I will now turn the call over to Mac.

A replay will be made available for 30 days following the call her web site and as a reminder, we have a lot of additional question time.

Question and answer at the end of our prepared remarks.

David <unk>.

We ask that you limit yourselves to one primary question and one follow up.

With that I will now turn the call over to Mac.

Thank you, Joanna and good morning, good afternoon, everyone and thanks for joining the call. In honour of Veterans Day, we would like to thank all of those women and men who served and continue to serve our great nation. Thank you for your service.

In honor of Veterans day, we would like to thank all of those women and men, who served and continue to serve our great nation. Thank you for your service.

In the third quarter, we continued our strong performance maintaining production of low carbon intensity oil, demonstrating our disciplined investment and generating significant free cash flow.

I'd like to thank the employees of CRC for their dedication to make all of this possible during the pandemic. Their strong and consistent performance has enabled us to generate $328 million of free cash flow year to date and announced the following. First, we are updating our annual free cash flow guidance for the year. Which we are increasing to a range of $460 to $510 million.

Which we are increasing to a range of 462 $510 million.

Second, I am pleased to announce that the board has approved a dividend of 17 cents per share payable in the fourth quarter of 2021. And has extended the $250 million share repurchase program until the end of the second quarter of 2022.

And has extended the $250 million share repurchase program until the end of the second quarter of 2022.

Thus highlighting CRC's dedication to shareholder returns. I'd also like to point out that even with the strong cash returns to shareholders. We still expect to have over $325 million of cash on our balance sheet at year-end.

And lastly, we continued to advance our commitment to the energy transition in the sector, building upon our carbon management strategy CRC has adopted a 2045 Full-Scope Net-Zero Goal for scope 1, 2 and 3 emissions.

And the sector building upon our carbon management strategy CRC has adopted a 2045 full scope net zero goal for scope, one two and three emissions.

This puts us among a handful of industry peers do include scope three emissions in our net-zero goals and puts us on a timeframe five years sooner than most, which aligns us with the state of California's 2045 net-zero ambitions.

The state of California's 2045, net zero ambitions.

CRC's low carbon intensity production combined with our unique asset position in carbon management opportunities are the key differentiators, which allow us to have a clear line of sight to achieving the full scope net-zero goal.

Said simply, CRC provides low carbon intensity fuel for today and net zero fuel for the future. When we couple our unique position with the economic incentives available in California, CRC's opportunity stands apart even further because we have the opportunity to reach our net zero goal economically.

When we couple our unique position with the economic incentives available in California, Crc's opportunity stands apart even further because we have the opportunity to reach our net zero goal economically.

As previously disclosed, carbon terrible its near term focus targets up to 200 million metric tonnes of storage potential. Or injection of up to 5 million metric tons per annum by 2027.

Or injection of up to 5 million metric tons per annum by 2027.

This represents nearly double our scope 1 and 2 emissions and provides a clear direction to meaningful progress towards our goals. As I've said before, we do not expect it to be easy to achieve but these are goals they are ambitious and we are committed.

Meaningful progress towards our goals.

As I've said before we do not expect it to be.

Easy to achieve but these are goals they are ambitious and we are committed.

As we committed before we have submitted our second permit to the EPA for [26-hour] reservoirs plan combined with our initial permits for the A1 A2 reservoir at Elk Hills. These make up approximately 40 million metric ton project where Carbon TerraVault I. And supports our goal for first mover advantage in California, and the US when it comes to carbon management.

To the EPA for 26, our reservoirs plan combined with our initial permits for the <unk> reservoir at Elk Hills.

These make up approximately 40 million metric ton project.

Where carbon tariff all one.

And supports our goal for first mover advantage in California, and the U S. When it comes to carbon management.

We continue to have discussions with various emitters, as we've stated before, and we are targeting an announcement on these advancements in 2022. On the solar side, we are progressing our partnership with SunPower on 24 megawatts of behind the meter solar projects.

On the solar side, we are progressing our partnership with Sunpower on 24 megawatts of behind the meter solar projects.

At the current front and North Shafter fields. This is in addition to the previously announced 12 megawatt project at Mount Pozo and advance these projects on a total of 36 megawatts.

Of the up two previously announced 45 megawatts behind the meter. Again, I'd like to thank the employees for their dedication and hard work. Our operations team continues to deliver strong results on our maintenance and development programs, which have exceeded expectations from a cost and type curve perspective. Thank you for being here today, and I'll turn the call over to Francisco.

Again.

I'd like to thank the employees for their dedication and hard work. Our operations team continues to deliver strong results on our maintenance and development programs, which have exceeded expectations from a cost and type curve perspective.

Thank you for being here today, and I'll turn the call over to Francisco.

Thanks, Mac good afternoon, everyone and thank you for joining us on this call. As Mac highlighted, CRC continued its strong operational and financial performance in the third quarter of 2021. During the quarter, CRC produced 102000 net barrels of oil equivalent per day, and 62000 net barrels of oil per day.

Mac highlighted CRC continued its strong operational and financial performance in the third quarter of 2021 <unk>.

During the quarter CRC produced 102000 net barrels of oil equivalent per day, and 62000 net barrels of oil per day.

Old thing and modest growth year to date in both gross and net oil production. This is largely due to our inventory of high return quick payback maintenance projects. And it's also supported by only $98 million in drilling completion, and Workover Capex year to date.

This is largely due to our inventory of high return quick payback maintenance projects.

Ultra supported by only $98 million in drilling completion, and Workover capex year to date.

With much of our backlog address the current prices, we are beginning to increase our development program to a more normalized level. In September, we added a third drilling rig in our Los Angeles Basin. And year to date, our development program has brought online 58 new wells.

In September we added a third drilling rig in our Los Angeles Basin and year to date. Our development program has brought online 58, new wells.

In the third quarter, we were running 35 maintenance rigs and we're able to bring online an additional 216 maintenance wells as part of our previously announced shift of capital from drilling to downhole maintenance.

In Q3, this shift allowed us to return to production and an additional 2600 BOE per day, while sustaining our controllable operating costs. Our commodity realizations remained strong across all of our streams with oil realizations at 100% of Brent. Ngls had 73% of Brent and natural gas at 126% of Nymex.

Our commodity realizations remained strong across all of our streams with oil realizations at 100% of Brent.

Ngls had 73% of Brent and natural gas at 126% of Nymex.

Realizations are expected to remain healthy across all three hydrocarbon streams. Particularly for natural gas, which has seen a large increase in the second half of the year.

Particularly for natural gas, which has seen a large increase in the second half of the year.

The rising natural gas prices increase as CRC's operating costs, which I will discuss further shortly. However, it is important to recall that CRC benefits from this increase since we realize higher prices on the sale of natural gas, which we also produce.

Moving on to the cost side of the business, and as shown on slide nine. Our third quarter 2021 G&A cost rose sequentially quarter over quarter and averaged $5 44 per BOE. This is primarily due to increased compensation-related items.

Our third quarter, 2021, G&A cost rose sequentially quarter over quarter and averaged $5 44 per Boe.

This is primarily due to increased compensation related items.

Our third quarter 2021 operating cost excluding PSC effects rose by $1.69 per BOE compared to the second quarter of 2021, primarily due to the rising natural gas prices.

Third to the second quarter of 2021, primarily due to the rising natural gas prices.

We purchased natural gas, which is used as fuel for our steam flood operations and to generate electricity from our Elk Hills power plant.

Excluding the effects of higher natural gas prices for our cost structure in the third quarter of 2021. Our operating costs on a per-barrel basis were in line with the first two quarters of this year. A true Testament to the operation teams ongoing efforts to manage costs that we control.

Our operating costs on a per barrel basis were in line with the first two quarters of this year.

True Testament to the operation teams ongoing efforts to manage costs that we control.

When we look at the effect of natural gas pricing in total, we can see the benefit we derive is the largest natural gas producer in California, and the positive impact on our margins.

Year to date, CRC produced an average of 160 million cubic feet per day and purchase less than half of that amount for our internal consumption.

As we show on slide 10, for every dollar rise in realized natural gas price in the fourth quarter, we expect to see incremental revenue of $15 million more than offsetting the incremental operating costs of approximately $7 million.

During the third quarter, CRC reported an adjusted EBITDAX of $242 million, our highest quarter since we exited bankruptcy a year ago.

Furthermore, this year, some modest Capex requirements helped to generate $131 million of free cash flow in this quarter. Our best quarter so far this year and $328 million of free cash flow year to date.

Our best quarter, so far this year and $328 million of free cash flow year to date.

Results reflect strong operational performance, higher commodity pricing and higher-margin electricity sales from our Elk Hills power plant.

Underpinning CRC strong financial performance has been our successful drilling program. Our 2021 development program has predominantly been focused on the Mount Pozo Elk Hills in Buenavista fields with a combined program IRR of over 90%.

By focusing on high-value high margin horizontals, we have seen large capital efficiency improvements across the fields. Currently, about 90% of our drilling efforts are focused on these promising horizontal opportunities, reflecting stronger economics and lower capital intensity needs.

Currently about 90% of our drilling efforts are focused on these promising horizontal opportunities, reflecting stronger economics and lower capital intensity needs.

Due to the strength of the drilling program to date, along with the rising commodity prices, we accelerated certain projects to the fourth quarter of 2021, which were previously scheduled for 2022. Including adding a fourth rig in the Windows Vista shale and incremental workover opportunities.

Along with the rising commodity prices, we accelerated certain projects to the fourth quarter of 2021, which were previously scheduled for 2022.

Including adding a fourth rig.

In the Windows Vista shale and incremental Workover opportunities.

As a result, we are adjusting our guidance to account for changes in our activity in the current price environment as we look towards our year end.

We are racing CRC's total net production guidance by approximately 2% at the midpoint to 100000 BOE per day. Also increasing capital investment to a range of $180 million to $200 million.

Also increasing capital investment to a range of $180 million to $200 million and.

And increasing free cash flow guidance by approximately 8% to a range of $460 million to $510 million. The combination of our strong operating results and streamlining of our asset portfolio continues to enhance our financial strength.

The combination of our strong operating results and streamlining of our asset portfolio continues to enhance our financial strength.

Earlier this month, we closed on the sale of the majority of our Ventura Basin operations. Which was our highest operating cost area. This helps bolster our already strong liquidity position. Post-closing, our cash balance as of November 3rd was $280 million, bringing our pro forma liquidity to approximately $639 million.

Which was our highest offer.

Operating cost area.

It helps bolster our already strong liquidity position.

Post closing our cash balance as of November <unk>.

<unk> $280 million, bringing our pro forma liquidity to approximately $639 million.

Our updated guidance takes into account the sale of urban drove 18 operations. I would also like to point out that the preferred interest held by benefit Street partners was redeemed in September. Further simplifying our balance sheet and financial flexibility.

I would also like to point out that the preferred interest held by benefit Street partners was redeemed in September.

Further simplifying our balance sheet and financial flexibility.

To conclude CRC continued to demonstrate our commitment to prioritize shareholder returns. As of November 5th, CRC repurchased three 1 million shares for $104 million for an average share price of $33.99 per share. Which represent over 25% discount to our current share price.

As of November 5th.

CRC repurchased three 1 million shares for $104 million for an average share price of $33 99 per share.

Which represent over 25% discount to our current share price.

With $280 million of cash in our balance sheet, our strong financial position has further optionality with our shareholder return strategy.

As Mac mentioned the board has approved a quarterly dividend of 17 cents per share payable in the fourth quarter. When annualized, this will equate to approximately $56 million in shareholder returns.

When annualized this this will equate to approximately $56 million in shareholder returns.

Our healthy free cash flow generation allows us to continue to self-fund our capital needs and will allow us to fund our carbon management activities as we continue to evaluate alternative capital deployment options benefiting our business.

Please note that we have provided a detailed analysis of our quarterly financial and operational results on our 2021 guidance in the attachments to our earnings release. Thanks, and I'll now turn the call back over to Mac for closing remarks.

Thanks, and I'll now turn the call back over to Mac for closing remarks.

Great. Thank you, Francisco. CRC has a uniquely positioned asset base that allows us to provide the needed energy today and to meet the goals of tomorrow with the net zero fuel of the future. CRC continues to exhibit disciplined capital investment in our asset base, which has low decline and low carbon intensity and provides resilient cash flows. We remain committed to our cash flow priorities are building upon our carbon management business and shareholder returns. We made progress on both with two important announcements. Our commitment to 2045 full scope net zero and our quarterly dividend.

CRC has a uniquely positioned asset base that allows us to provide the needed energy today and to meet the goals of tomorrow with the net zero fuel of the future.

<unk> continues to exhibit disciplined capital investment in our asset base, which has low decline and low carbon intensity and provides resilient cash flows we remain committed to our cash flow priorities are building upon our carbon management business and shareholder returns.

<unk> made progress on both with two important announcements our commitment to 2045 full scope net zero in our quarterly dividend.

Thank you again for your interest in CRC and thank you for joining us on today's call. With that, we'll now open the line for questions.

With that well now open the line for questions.

Thank you, we will now begin the question and answer session. To ask a question you may press star then one touchtone phone. If you are using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Scott Hanold with RBC capital markets. Please go ahead.

To ask a question you May press Star then one touchtone phone.

So these are the speaker phone.

please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Scott Hanold with RBC capital markets. Please go ahead.

So it's all your question. Please press Star then two.

Today's first question comes from Scott Hanold with RBC capital markets. Please go ahead.

Thanks, first congratulations on the target to a net zero scope 3. I think you're one of the only oil and gas companies to have a good visibility toward that, so congrats on that. You know my first question. Yeah. My first question is probably for Mac and maybe Chris, just I understand the sensitivity around the discussions with the meters, but can you give us some sense of based on your discussions what are you all hearing from them in terms of the interest level key criteria that they're looking for? And just some sense of you know where the interest is in playing you know the opportunity or are they looking to participate in any of the sort of the start the end of the process? Or are they just looking to find a solution and whatever is easiest?

The target to a net zero scope three I think you're one of the only oil and gas companies to have a good visibility toward that so congrats on that you know my first question. Yeah. My first question is May is.

Is probably for Mac and maybe Chris just I understand the sensitivity around the discussions with the meters, but can you give us some sense of.

based on your discussions what are you all hearing from them in terms of the interest level key criteria that they're looking for? And just some sense of you know

where the interest is in playing you know the opportunity or are they looking to participate in any of the sort of the start the end of the process? Or are they just looking to find a solution and whatever is easiest?

Chris is here with us so I'll let him jump in. But let me just start by saying that I think that when you win it at least as we consider opportunities for sources. We are working with people who are interested in reducing their overall carbon intensity of the products that they make.

Chris is here with us so I'll, let him jump in but let me just start by saying that I think that when you win it at least as we consider opportunities for sources. We are working with people who are interested in reducing their overall carbon intensity of the products that they make and so.

Therefore being able to hopefully either avoid having to produce LCFS credits or creating a product that has a premium associated with it due to lower carbon intensity. So that is the high level, but I'll let Chris jump in and provide some additional comments.

Being able to.

Hopefully either avoid.

Having to produce L CFS credits or creating a product that has a premium associated with it due to lower carbon intensity.

<unk> is the high level, but I'll, let Chris jump in and provide some additional <unk>.

Yeah. So I think that's a great context. Of course, that's going to vary by source right. There are some emission sources when you start to look at how do they price their downstream product.

I think that's a great context.

Of course, that's going to vary by source right. There are some emission sources when you start to look at.

How do they price their downstream product.

Whether there are conventional refiner or a renewable refiner or any other source out there. They're all going to have unique attributes and so I'm encouraged in the work and the discussions that we're having with each of them. And it really speaks to the model that we have approached our go-to-market, which is allowing for the flexibility in these very early stages. To engage with these emission sources and be able to tailor with them the type of to the types and the needs that they need where they can monetize the low carbon intensity of their product. So very much advancing the ball across those different sources, Scott, and very encouraged with the response that we are receiving. Let me just add onto that so with the LCFS constructed in California, obviously, people can either view that as a carry for the economics, which have to pay for the captured through the injection system. Or the stick if you will. If it eventually becomes somewhat of a penalty there to have to buy

our go-to-market, which is allowing for the flexibility in these very early stages. To engage with these emission sources and be able to tailor with them the type of to the types and the needs that they need where they can monetize the low carbon intensity of their product. So very much advancing the ball across those different sources, Scott, and very encouraged with the response that we are receiving. Let me just add onto that so with the LCFS constructed in California, obviously, people can either view that as a carry for the economics, which have to pay for the captured through the injection system. Or the stick if you will. If it eventually becomes somewhat of a penalty there to have to buy

To engage with these emission sources and be able to tailor with them.

The type of to the types and the needs that they are.

That they need where they can monetize the low carbon intensity of their product.

So very much.

Advancing the ball across those different.

Sources, Scott and very encouraged with the response that we are receiving let me just add onto that so.

L CFS constructed in California, obviously people can either view that as a carry.

The economics, which have to pay for the captured through the injection system.

Or the stick if you will.

Eventually becomes somewhat of a penalty there to have to buy.

credits for the deficiency, that's one avenue the other one I would tell you is obviously you've seen and we've included a slide on the proposed changes to 45Q. We also see in addition to those that are LCFS eligible we also see increased interest in non LCFS that are 45Q with the uptick in 45 Q that might be interested in exciting greenfield type opportunities. So I think there are the brownfield opportunities that are <unk> compliant in the greenfield opportunities with the increase in 45 Q that is driving a lot of interest.

Eligible we also see.

Increased interest in non L. CFS that are 45, Q with the uptick in 45 Q that might be interested in exciting greenfield type opportunities. So I think there are they the brownfield opportunities that are <unk> compliant in the greenfield opportunities with the increase in 45 Q that is driving a lot of interest.

Got it and could you just mention on the last part of that question was. Whether they're interested in actually the capture process, you know doing part of the capture process. And then having you think the the the CO2 from their transport and synchrony is there any interested I'm taking some of the opportunity here as well.

Whether they're interested in actually the capture process you know doing part of the capture process and then having you think the the the C O two from their transport and synchrony is there any interested I'm, taking some of the opportunity here as well.

I think it, without getting into any one particular discussion it's all over. It's kind of all over the map, it depends on the source it depends on the capital funding, it depends on a lot of variables there, Scott, I think that there are some let's say. What salt, providing an entire solution for me and there are some that say, hey, I'd like to deploy capital and put it to work and possibly look at things that look more like a partnership around the capital, around the capture system et cetera. So it really spans the gamut as we laid out on our October 6th carbon update on that business model. It really does cut across all those different business models.

Without getting into any one particular discussion it's all over.

It's kind of all over the map it depends on the source it depends on the.

Capital funding it it depends on a lot of variables there Scott I think that there are some let's say.

What salt, providing an entire solution for me and there are some that say, hey, I'd like to deploy capital and put it to work and possibly look at things that look more like a partnership around the capital around the capture system et cetera. So it really spans the gamut as we laid out on our okta.

Over sixth carbon update on that business model. It really does cut across all those different business models.

Got it, understood, and as my follow up question just on the shareholder return you know maybe this is you know Mac for yourself, but also Francisco. You step back you initiated the dividend do you have a stock buyback.

As you you step back you initiated the dividend do you have a stock buyback.

No.

You've also made a statement of wanting to utilize 50% of your free cash flow. To get toward that scope three net zero. Can you at a high level discuss a couple of things? One, where do you go from here on that shareholder return proposition? Because even if I take half of the projected $2 $5 billion. It still leaves you a lot of flexibility going forward. So if you had some commentary on that. And then as you you know in the second part of the question is with the 50% sort of allocated to getting toward that scope through net zero like you know you're looking to potentially use your upstream free cash flow, but you know and this is probably for Francisco, but as you look across the other you know may be cheaper sources of capital like you know. What what is the opportunity to utilize that to lean more into giving it back to shareholders?

To get toward that scope three net zero can can you at a high level discuss a couple of things one where do you go from here on that shareholder return proposition because even if I take half of.

The projected $2 $5 billion. It still is leaves you a lot of flexibility going forward. So if you had some commentary on that and then as you you know in the second part of the question is with the 50% sort of allocated to getting toward that scope through net zero like you know you're looking to potentially use your upstream.

free cash flow, but you know and this is probably for Francisco, but as you look across the other you know may be cheaper sources of capital like you know. What what is the opportunity to utilize that to lean more into giving it back to shareholders?

Yeah, Scott, that's Francisco. I'll take the question first. So we have to start with what we said in the script, we're predicting cash of $325 million by the end of the year. So really good accumulation of cash this year and that's post already over $100 million put to work on the SRT and the dividend that we're going to pay out in a few weeks. So the cash flow potential of the cash flow generation of the business continues to deliver.

So.

We have to start with what we said in the script.

Predicting cash of $325 million by the end of the year. So really good accumulation of cash this year and that's post already over $100 million put to work on.

<unk> and the dividend that we're going to pay out in a few weeks.

So the cash flow potential of the cash flow generation of the business continues to deliver.

He needs to do to deliver Ines.

And as we discussed earlier, the framework is to first invest in the core business. And we're going to invest less than 50% of our discretionary cash flow into maintaining our core business. So then you have 50% remaining. We will split it in roughly half between shareholder returns and invest in our carbon management business. Right now, we like the value proposition to the investors to even put a dividend forward, but what else you're going to keep the share repurchase program of life. So we'll have two different avenues of returning cash to shareholders I like the optionality that the share repurchase program gives us.

In our carbon management business right now, we like the value proposition to the investors to even put a dividend forward, but what else youre going to keep the share repurchase program of life. So we'll have two different avenues of returning cash to shareholders I like the optionality that the share repurchase program gives us.

You'll see a lot of value in our stock and we're going to continue putting dollars to work to buy back our shares. It's something that we'll continue to assess and it gives us an opportunity to pull back at some point, but right now we're gonna be entering the year with both of them open in. And we'll see what the market dictates in so we'll allocate accordingly to that 50%.

It's something that we'll continue to assess and it gives us an opportunity to to.

To pull back at some point, but right now we're gonna be entering the year with both of them open in and we'll see what the market market dictates in so we'll allocate accordingly to.

that 50%.

There's two frameworks to do it now with two particular pads to do it. And then the carbon management business, we''l see, you know a kind of a ramp up of investments over the next few years. Right now where we're talking to have mirrors or making the initial steps to creating this new business segment, that's going to ramp up naturally as you get closer to F.ID and as you get closer to making a decision on a go and no go for the capture system or the pipeline so the storage tanks.

And then the carbon management business, which he.

You know a kind of a ramp up of investments over the next few years right now where we're talking to have mirrors or making the initial steps to creating this new business segment, that's going to ramp up naturally as you get closer to F. I D and as you get closer to it.

making a decision on a go and no go for the capture system or the pipeline so the storage tanks.

So naturally, you're going to see a progression from potentially have heavier weighting in the first few years to shareholder returns.

Naturally you're going to see a progression from potentially have heavier weighting in the first few years to shareholder returns.

In terms of the proportions and then the ramp up in carbon management. So there's a little bit of timing associated with the split of capital. What we're seeing is the financing side of the equation is maturing rapidly there's a lot of good sources from private equity to government loans.

From private equity to government loans.

To the bond market being attractive to participate in the carbon management business. Now we said we're not afraid to put our balance sheet forward.

<unk> to participate in the carbon management business now we said, we're not afraid to put our balance sheet forward.

We may use some of the cash that we're generating divorced these initiatives, but to me the best point to negotiate the highest potential negotiating leverage is to have cash on the balance sheet that then unlocks the financing sources. I don't want to commit to one only one way of doing this and say we're definitely gonna put this much money to work by this stage.

Because you find a cheaper source of financing I will definitely do that and I think that the stage is set for us to be able to have a lot of different options and then just optimize some of the best financial structure as we try to pursue this carbon management business.

Got it, so so in theory, if you're all were able to find that you know cheaper source overtime. The shareholder return would take up a larger portion of that free cash flow? Is that what I'm hearing?

Yeah, I would say. Carbon, so yes, shareholder returns ultimately we have discretion on what that incremental source of capital where that cash goes to. We will see what the best Avenue is. But I don't want to commit to all kind of shifting back and that interest, is really just kind of more of it you're saying well what if this happens.

Carbon so yes shareholder returns ultimately do we have discretion on what that incremental source of capital where that cash goes to we will see what the best Avenue is but so I don't want to commit to all kind of shifting back and that interest is really just kind of more of it you're saying well what if this happens.

And I'm trying to provide some feedback, but ultimately we'll see right. The shareholder return aspects of our business is going to be there given our very low capital intensity assets and the type of assets that we own. But they're so they're gonna be all opportunities and you know whether it's acquiring a bolt-on a near Elk Hills for example, we might put the cash forward towards that end.

And we might see really good value there. So don't want to box us in to just saying, yes, if you'd get sources of financing and carbon management it all flips back to shareholder returns, we're going to look at it we're going to explore it if that's the best avenue will do it. But we also have dry powder to do other things with it. Scott just to add a bit from my perspective, what Francisco said is absolutely true. What we have is a framework and we're committed to both sides of the after we spend and reinvest in maintaining the OE production.

Scott just to add a.

from my perspective, what Francisco said is absolutely true. What we have is a framework and we're committed to both sides of the after we spend and reinvest in maintaining the OE production.

Both sides, shareholder return and carbon management work, we're committed to both. But what we have is because of the strong cash flows of the core business E&P business, we have ultimate flexibility and we've demonstrated that now for three quarters. I think Francisco saying projecting out into the future we remain committed but we remain flexible. And as we see opportunities, we have the ability to either return to cash to shareholders or invest in projects that we think our shareholders accretive.

<unk> and as we see opportunities we have the ability to either return to cash to shareholders or invest in projects that we think our shareholder accretive.

Understood, appreciate the color. And our next question today comes from Leo Mariani with Keybanc. Please go ahead.

And our next question today comes from Leo Mariani with Keybanc. Please go ahead.

Hey, guys. Just wanted to ask a question on the fourth rig that you're adding here, just wanted to get a sense I guess as you guys look into 2022. Do you think four rigs is kind of the right number to roughly achieve your goals of holding roughly flattish in 2022? Or do you think they may have to be an additional rig they may have to come in here?

Just wanted to ask a question on the fourth rig that you're adding here just wanted to get a sense I guess as you guys look into into 2022.

Do you think four rigs is kind of the right number to roughly achieve your goals of holding roughly flattish in 2022? Or do you think they may have to be an additional rig they may have to come in here?

Flattish in 2022, what do you think they may have to be.

Additional rig they may have to come in here.

Yeah, Leo, this is Francisco. We ramped up from one rig to four here as we exited the year. And we like that entry point into 2022. As we've guided before, we talked about it you know we see once this backlog inventory is no longer there, we're gonna switch more dollars to capital and we see that maintenance capital over a business about $275 million. So that implies you know somewhere between four to five rigs, we feel really good about the four rigs that we have right now going into the year.

Ramped up from one rig to two four.

As we exited the year.

And we like that entry point into 2022.

As we've guided before we talked about it you know we see ones this backlog inventory.

no longer there, we're gonna switch more dollars to capital and we see that maintenance capital over a business about $275 million. So that implies you know somewhere between four to five rigs, we feel really good about the four rigs that we have right now going into the year.

Sean currency share with us our head of operations I don't know if you have anything. =But I just wanted to be clear the $2.75 included is that just D&C. It's a capital number so. Yeah.

A capital number so.

Yeah.

Yeah, I'll just add Francisco, you know the four rig program is very consistent with what we've been drilling this year in 2021, and so we have our plans laid out and we'll just kind of roll into 2022 with that four rig program.

Okay. Thanks, and then just additionally, I wanted to see if you could provide a little bit more color just around the commercial progress on some of the negotiations with some of these industrial emitters.

Wanted to see if you could provide a little bit more color just around the commercial progress on some of the negotiations with some of these industrial emitters.

And this might be a bit of a tough way to frame it. Just wanted to get a high-level sense, if there's any way to like ballpark quantify like the number of like very serious conversations you are having.

Just wanted to get a high level sense, if theres any way to like ballpark quantify like the number of like very serious conversations you are having is it.

Is it just a handful or is it like 50 conversations with emitters? And then just wanted to get a sense like have some of these discussions progressed to a fairly late stage. How could you maybe characterize how far you are down the road on some of these key discussions?

And then just wanted to get a sense like have some of these discussions progressed to a fairly late stage how could you maybe characterize.

How far you are down the road on some of these key discussions.

Yes, good morning, Leo it's Mac.

What I would say.

I'd probably go back to some statements as we've said before that if we signed everything up we would be way over-subscribed for Carbon TerraVault I. I think that the discussions are advancing. I think that we based off of the continuation of discussions we would stick with our type curve is still being the type curve that we see, that we put out on October 6. It's been an affirmation of continued affirmation and continued interest in Carbon TerraVault I.

That.

The discussions are advancing.

I think that we based off of the continuation of discussions we would we would stick with our type curve is still being the type curve that we see that we put out on October six.

It's been affirmation of continued affirmation and continued interest in carbon terrible one.

Yeah.

Okay, and I guess.

Apart from carbon terrible one I know, obviously you guys have plans to do.

You know more of these classic sequestration projects I guess did the discussions also.

Potentially look at other sites down the road I'm, just trying to get a sense of.

What the kind of size of the opportunity can be here or is there just a lot of folks looking at some of the other fields in the future then I get to be permanent as well.

In short the answer is yes, but again I'll go back and say that the way. We described it before was we're putting carbon terrible one together we filed the permits on it but we're focused on the next 160 that get us to 200 million tons Christmas.

Here, Chris has been working with the team to prioritize our opportunities as we said we thought we have a fair amount of unique assets that we can we can convert into carbon terrible two or three or four or five and to get us somehow to some.

In some form or fashion to get us to the 200.

Metric tons that we're focused on first for Chris do you want to provide some insights on that.

I think.

Those conversations in addition to see T V. One or are occurring right. We are active where we have our focus on.

As we've talked about we submitted the E P. A.

Permit application for 26 are we want to deliver on what we promised and committed to on C. T V. One but in parallel with that with the goals that we've put out.

Our 200 million tons, we are advancing in discussions with.

Scoping out different sources across across those geographies and prioritizing where we think the next the.

The next set of opportunities or so.

That is to say we're working on it. We are we are not stopping with C. T V. One we're focused on that but we're progressing at the next 160.

Just to add a quick overlay to what Chris said, we have teams that are advancing the permitting and the defining of the next tons to get us to 200, but concurrent to that we also have commercial engineering and operations teams that are working on the source of CTV, one and concurrent to that as well.

Structure through and where we hope to get with a project.

We're working.

Francisco and the finance organization are looking at opportunities for <unk>.

To finance that either through debt or equity markets.

All of it it's all going on concurrently.

And we're excited about the prospects.

Okay. Thanks, guys.

Thanks Leo.

And our next question today comes from color. Thanks.

Please go ahead.

Hey, Good morning, guys can you hear me yes.

Yes, particularly.

Thanks for getting me on Mac I wanted to hit a couple of topics here.

In these first will be on the base business, which I feel is getting perhaps overlooked by the market that is really focused on low carbon at the moment.

So I think the market is trying to understand how CRC fits into this new E&P landscape, which requires you to have a track record so I'll get menu for coming out of the gates very strong this year and showing them the gas returns into capital discipline, but we want to know how long you can do it for so I'm, hoping that you can help with.

Some parameters around the free cash capacity.

So what I'm looking for is what's the maintenance capital.

The oil breakeven.

And what production plateau that support and.

And how deep is the inventory to support it.

So in other words, how long.

Yeah sure so.

Great question and I appreciate the interest in the core business because it's a lot of what we do I mean, there's a lot of conversation around.

Our carbon management activities, but you're absolutely right. We did highlight this in the carbon strategy day, but not to the level of details that you asked but we provided a five year type projection there.

Let francisco pick it up from here and talk about.

Maintenance capital maintaining production there were some assumptions there maybe you want to go through some of them yeah, no I'd be happy too so delay the.

The inventory, we've always felt trc was inventory rich and the issue. We've had since we came out of the gate. This year. She has been the balance sheet, which we we addressed this past year, so inventory looks.

Very attractive now it's not shale, so you're not going to hear US talk about you know, there's 24 hour ip's, an IND and move into into that where you're guiding to the market. So we have.

For us it's a really good tanks really good oil and gas.

Rocks that we can get the oil out of the ground through waterflood and scheme fluid or primary drilling so its not always the drilling and completion side of the equation that solves for how attractive your inventory is right. If you can.

If you can get the oil by injecting water, that's a very attractive, very high return business for us. Now and the inventory of what we talked about in the past is at about four rigs, which is our current pace. We have about 10 years of inventory.

Get the oil by by injecting water.

It's a very very attractive very high return business for us now and the inventory of what we talked about in the past is Oh no.

About four rigs, which is our current pace.

Hello about 10 years of inventory.

We're focusing on right. This year on some of the shallower zones in the San Joaquin Basin, but we also have a rig in the L. A basin I mean, that's a pretty good sustained level I mean, we can expand L. A basin, but we were seeing a lot of really good returns in the shallow zones.

It sounds like Keane basin. So we see about 10 years. So a lot of inventory now that said dynamic view when we came out and we talked about these prices were lower than they are today price point at 86 expands on inventory and a pretty significant way.

And if you look at our historical filings you see eat reserves in a much higher.

One 2 billion barrels of three P reserves, so we see a lot of good.

Projects there in terms of a breakeven.

Right now, we see we have a pretty attractive hedging program.

Protecting giving us a nice floor to work with.

So on 2022, we see a breakeven into that into the $30.

Per barrel range before we have to build we have to be before we have to pull back on the capital. So we're hedging to support the capital to support the dividend and we see a very attractive runway here as we go forward.

And clay this is Sean if I could add you know speaking to our inventory that Francisco was talking about I think a notable change.

That we do you've seen lately, that's doing really well is drilling more horizontal wells.

It's a little bit different than we've done from the past and we're seeing really good performance there and when we talk about Horizontals. In this regard. These are on stimulated because the quality of the rock in California. So good so we're able to drill these wells.

Target some some horizontal areas in the reservoir and we're able to be more efficient with our capital dollars are going forward.

Thank you I appreciate that.

Maybe maybe if you could just hit the maintenance capital spending level and I'll throw a twist on this.

What do you say to those that argue that it's going to take longer to stabilize due to the inconsistent spending the past several years and the long lead time between spending and the production response.

And add to the fact that we haven't seen production held flat for a sustained period of time.

Yeah, I mean, the things that you'd be evidenced delays this year three consecutive quarters I understand your point of you know you.

You need to have.

You know multiple quarters, but this year has been a.

A really exceptional year from a from an operating perspective, where we're holding production flat with lower capital were below $200 million to hold it flat.

I mean, we will guide to a higher number next year right just to be clear, we were seeing about 275 million and that is only to clarify the point to hold oil production. So we do see this year as being a year, where we had a good backlog of wells. We can return back to production next year will be.

More into a kind of a drilling.

You know building that wedge overtime to get back to that to keep to maintain their production, but the way to think about conventional assets and CRC assets I understand your point that it's you don't have the.

The shale production that immediately comes in and but you get on the treadmill right. If you're chasing those barrels then you cannot stop production for us it's like a slow rising tide, if we continue putting dollars toward in both opex and Capex and Opex.

Important tool that we use to invest in getting production out of the ground. If we have a sustained level of investment what you see is a one of the best.

Decline sort of one of the lowest declines in the industry right. So you know what youre in the low teens say, 10% to 15% decline and that allows you to project the business, that's very sustainable and has high confidence in those cash flows over time. So yes, it's a different model, we kind of have to reeducate the market as to how conventional assets.

Work, it's less of a drilling and completion, it's more about maintaining reservoir pressure and putting dollars to work there, but that also allows us to plan the business without worrying about okay. If prices drop and we have to back away the drilling rigs and the production goes away right. So it gives us a lot of a lot of confidence to the plan forward.

As Mac, let me, let me say it this way.

We believe in what we're doing.

And the way that we build credit credibility I said this in the high yield offering that we did earlier this year.

During strategy and say at each quarter, we're going to build that credibility one quarter at a time, we believe that we have the inventory we have the low decline we have the capital discipline and that's what we're going to execute on.

I wanted to pick up on your comment about hedging.

As you stated Trc's balance sheet is in the best position that has ever been in.

Is that 100 on the philosophy to hedge why do it.

Is it to fund the growth in low carbon or to fund the drilling program, what's the strategy behind it.

Yes sure.

Good question and it's.

First let me, let me try to parse some things if I if I may.

If you look at the hedging and the Mark to market that is flowing through the income statement and the hedging.

The the losses that we've seen to date.

We're gonna realized cash this year as well as the forward Mark to market losses, those are almost entirely.

As of 930, those are almost entirely associated what I'll call legacy hedges that were enacted before the trade dates where all before 12 31 2020 and they were requirement at that point in time as we exited bankruptcy to meet their requirement by the RV L. If you look at the hedging.

That we've done since then which I think is more applicable to your question is effectively as of 930 aftermarket I know theres been some write ups, but there are some differences on the shaping of our hedges and when they heard et cetera, they're effectively at market or minimally out of the money, but why do we enter into those hedges. So we've got a couple of things we've rolled up the.

<unk> priced on the puts for next year. So that we have a higher floor. That's the protect downside without getting into a view on commodity we think that's prudent management to stabilize cash flows that allows us to have longer rig contracts more stable production more stable investment in production. It also provides stable cash flows.

This is not 100% I mean, if you ever look at it and it's not 100% and we hedge a up to 85% we can hedge up to 85% of our crude production, but that's only 75% of our revenues right. We still have Ngls and that's <unk>.

Natural gas revenues so the.

The hedging philosophy is to provide coverage for things like doing the carbon management reinvesting in the business, adding a dividend we have low decline assets, but it basically helps us smooth our investment horizon over a longer period of time.

That's perfect.

Sneak one more in and this one is on count gaps here.

My understanding was that the feed study was completed in the summer. So I'm wondering what's standing between you and <unk> on that project.

Yeah.

The feed study we're still you know there are some things that had to go into it that we're working through on an owner's costs et cetera, and we've asked to take a second look at the cost. And we've gone through with a, I'll call it a, what would you .O5 pencil or something. You know we went through it. We gave it back to the engineers said go back and refine the cost estimates sharpen our pencil, I guess the phrase I was looking for.

I'll call it a.

What would you point O five pencil or something I you know we went through it we gave it back to the engineers said go back and refine the cost estimates sharpen our pencil I guess the phrase I was looking for so.

We're working through that our views are there are a couple of things associated with that because because just everyone I think pretty much understands but just for sake of clarity a third of the power plant is used for hydrocarbon production. The other two thirds goes out to market on the California ISO okay. So.

Right now as we understand that the way the rules are written in our interpretation is that only one-third of the carbon capture from the plant is LCFS pathway eligible. Now it still is at some levels of enhanced oil recovery that would be associated with it. You start to get the economics that could make sense. However, there are some regulatory changes. Right now there is no avoidance of greenhouse gas emissions for capturing C02 off of combined cycles in California. We think that that will change over time. And if you did that right now and change over time, we think regulations will eventually get there because it's necessary to have combined cycles on the grid. And those combined cycles need to have an incentive to have carbon sequestered. That's the only way basically to have a combined cycle you can't do it unless you're using hydrogen as a [inaudible] which is a whole another ball game you still got to get rid of the C02, so we think that there's a movement in that direction. And if we were to offset greenhouse gas emissions for the full lot of the emissions by sequestering CO2, right now those allowances are trading around 30 to $32 a ton. And so because it produces roughly 2 million tons.

Now it still is.

At some levels of enhanced oil recovery that would be associated with it you start to get the economics that could make sense. However, there are some regulatory changes right. Now there is no avoidance of greenhouse gas emissions for capturing C. O two off of combined cycles.

in California. We think that that will change over time. And if you did that right now and change over time, we think regulations will eventually get there because it's necessary to have combined cycles on the grid. And those combined cycles need to have an incentive to have carbon sequestered. That's the only way basically to have a combined cycle you can't do it unless you're using hydrogen as a

[inaudible] which is a whole another ball game you still got to get rid of the C02, so we think that there's a movement in that direction. And if we were to offset

greenhouse gas emissions for the full lot of the emissions by sequestering CO2, right now those allowances are trading around 30 to $32 a ton. And so because it produces roughly 2 million tons, or

A ton and so because it produces roughly 2 million tons, you start or two.

2 million tons from the Powerpoint, you start to add to the economic returns on cash taxes. So when you ask a question about feed study, where we're finding it when you were asking about getting to FID, I'd say we're a ways away and we need to see some regulatory changes, but we continue to think that it is coming towards us and that is a project that we continue to invest. I'll call it early-stage development dollars.

I'll call it early-stage development dollars.

I appreciate that. Thank you for answering all the questions and I look forward to getting up to do more on the low carbon part of the business next week at the Bofa conference sorry for it and we look forward to it thanks for hosting us.

Thank you for answering all the questions and I look forward to getting up to do more on the low carbon part of the business next week at the Bofa conference sorry for it and we look forward to it thanks for hosting us.

Our next question today comes from Ray Deacon of Petro Lotus. Please go ahead.

Yes, Hi, Hi, Mike.

My question was on.

The Elk Hills power plant and how much of the gas is supplied from the Elk Hills field and would you like to.

Put your hands on a more gas resource and is that is that possible.

It's effectively 100% sourced I mean, you you could talk about it.

100% sourced Reg and the other thing that I would tell you just as when we look at it so.

C R.

We're being very effective on a cost.

Discipline standpoint from on a non energy operating expenses, but the energy costs go up and that's because when we look at that as a floating price of energy whether it be in the steam generators, whether it be on the gas and supply the power plants, but we are a net gas producer we've generated roughly 60 bcf of gas a year.

We consumed 30 Bcf of gas a year so again.

Give or take I mean, and so when.

That's why we had a slide in there that shows the fourth quarter sensitivity to gas. So we're in that gas producer, but 100% give or take for the most part is behind the.

And our field.

Your own fields got it and just one more I had read that California was going to shut in a fairly big nuclear plant. This year and I was just wondering do you think the.

The gas market could get even tighter from here, where we're now.

Okay.

It's hard to say I think that if you look at you know.

If the expectation that the plant is going to be shut down at somewhat makes its way into the market.

Yeah Yeah.

Tvs.

More incremental generation you mentioned the more support you need in the form of a reliable resources.

Yeah. There were some concerns are more gas generation will be needed to support that incremental Jim.

Yes.

If that's the case.

Yeah.

Got it got it thanks very much.

Thanks, Greg.

Hey, guys.

Right.

Oh, yes, absolutely. Our final question today comes from Eric <unk> with Goldentree.

Good luck.

Hey, guys. Thanks for the call great quarter, and great to hear all the sell side the interest that's building.

Great story.

It was a terrific quarter I guess, I'm wondering where you guys really.

We need to cover off the ball was on the natural gas.

Trading and and on electricity, where.

Gross profit was well above what you guys guided to historically for those businesses can you maybe level.

Level set and just give us sort of updated view on what we should expect for profitability from those areas going forward.

So look with natural gas prices higher obviously.

If if if.

I was going to get into an electricity term, if we beat the market heat rate with the heat rate of our unit, arguing that can expand and expand our margins by dispatching into the market with higher gas prices and so our electricity revenues have been higher if theres been some higher demand, obviously theres a hydro has been a bit to punished here and it comes from the north So there has been.

Increased demand of the unit and so increased profits and increased spreads our margins. If you will and that's what's contributed to that.

And then as far as gas. We've just had opportunities to move gas around as we have several transport agreements and we've been able to optimize that better.

We've just had opportunities to move gas around as we have several transport agreements and we've been able to optimize that better.

We.

We generally think that Jay and the team are going to do a good job, but sometimes not everything's repeatable. But right now as we look forward, energy margins that being the electricity that's being sold into the future remains strong. Anything you want to add? No. I think you said, one or two things changed in the California gas market in the last 30 days.

Lisa Canyon capacity get moved up from 34 Bcf to nearly 42. That should be Winfield, should be a stabilizing element, maybe compressing aluminum prices, let's see.

Three four bcf to nearly 40 gig.

That should be Winfield should.

It should be a stabilizing element, maybe compressing aluminum prices, let's see.

The second thing is you kind of the major lines socal gas be restored to greater use.

About 800000 Btu per day of capacity, we didn't have before.

We've seen the market receive that very well unfortunately the producer.

Responses to the lower gas prices.

Californians got unique circumstance, we get.

We've got a limited number of limited amount of gas supply, we've got a limited amount of gas storage.

Our needs from a power perspective tend to be hinged on gas or either incremental needs.

Likely this will be a volatile market for both gas and power for some time to come.

Eric I mean, I think what Jake.

And obviously watching the market there were some things that made the market tighter there than a couple of things announcement that should relieve the market of it.

I think time will tell I think that as we go through this there was an interesting report that came out recently and I think the title was something to the effect of the turbulence.

The energy transition and we I think in California, or perhaps at the pinnacle of that are the forefront or whatever the right thing with the tip of the spear.

And that of course, but where we are.

We're seeing it as the state moves through this energy transition that is creating this volatility.

It's really tough to predict.

What will happen in the years to come other than continued volatility.

With that let me just say.

Thanks for everyone's interest in CRC and.

Have a good veterans day.

Thank you. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Q3 2021 California Resources Corp Earnings Call

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