Q2 2022 California Resources Corp Earnings Call
[music].
Good afternoon, and good day, everyone and welcome to the California Resources Corporation second quarter earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance. Please you know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one to withdraw your question you May Press Star two.
Please note today's event is also being recorded.
At this time I would like to turn the conference call over to Joanna Park, Vice President of Investor relation Relations and Treasurer Ma'am. Please go ahead.
And welcome to California Resources Corporation second quarter, 2000, <unk> Conference call.
Participating on today's call are Mark Macfarlane, President and Chief Executive Officer.
Please go Leon Executive Vice President and Chief Financial Officer, while at the Empire Thearchy infection.
I'd like to highlight that we have provided slides on our Investor Relations section of our website Www Dot CRD dotcom.
These slides provide additional information to our operation and our second quarter results.
Also provided information.
Reconciling non-GAAP financial measures discussed.
Most directly comparable GAAP financial measures on our website as well as in our Hearts.
They will make some forward looking statements based on current expectations.
Actual results could differ due to the factors described in our earnings release.
Our periodic SEC filings.
We have a lot of additional time for question and answer at the end of our prepared remarks, let me ask that participants limit their questions to a primary.
And one follow up with that I will now turn the call over.
Great. Thank you Joanna.
We continued to deliver safe reliable operations and strong free cash flow generation.
While also demonstrating our commitment to prioritizing shareholder returns.
Our second quarter in a row, we've returned more than 100% of our free cash flow generated in the quarter through our share repurchase program.
Our 2022.
Year to date share repurchase program has already exceeded the 2021 program.
Operationally our results and our revised outlook reflects.
Solid execution amidst todays volatile environment, we are reaffirming our full year total production outlook and raising our EBITDAX and free cash flow guidance.
And this is after adjusting for inflationary pressures to our costs and changes to our full year drilling programs related to the Kern County, <unk> litigation delay.
Francisco will describe both of these issues in greater detail later on the call.
Where others have been forced to pause their programs.
<unk> continues to leverage our large portfolio of assets, which allows us to continue drilling.
But we are running five.
Drilling and completion rates in California, which is the majority of the active rigs in the state.
Even with the earlier than anticipated impacts of inflation and additional capital to support. These changes I. Just described CRC is raising the midpoint of our full year guidance by 2% on EBITDAX.
By 10% on free cash flow.
Post quarter end, we advanced our carbon management business by entering into a carbon management partnership with Brookfield to develop industry, leading Ccs projects in California.
The partnership will be owned 51% by carbon terrible.
Our wholly owned subsidiary and 49% by Brookfield to pursue capture transport and storage projects.
And then starting out with the initial commitment of 500 million from Brookfield for Ccs projects that are jointly approved through the JV.
Brookfield will contribute $10 per ton.
Where there are 49% share of the storage assets as they are developed.
First project being developed will be our 26, our reservoir at the Elk Hills field.
The JV is targeting the injection of 5 million metric tons per year.
Our 200 million metric tonnes of permanent storage.
In achieving these targets would require an estimated $2 $5 billion of total capital.
Assuming full participation by Brookfield.
And the 5 million metric tons per annum through the JV suggests the potential follow on investment of more than $1 billion from Brookfield, which to be clear would be incremental to the original $500 million.
We are excited about our partnership with Brookfield and how this partnership can advance de carbonization and the energy transition in California.
I'll now turn it over to Francesco to discuss our quarterly results before I provide greater detail on the Brookfield partnership later on the call Francisco.
Thank you Mac for the second quarter, we delivered adjusted net income of $1.13 per fully diluted share.
Which is in line with the prior quarter.
And generated 83 million of free cash flow.
We returned $109 million to our shareholders in the form of dividends.
The repurchases of common stock under our share repurchase program during the second quarter.
Our assets continued to perform well with total production, averaging 91000 Boes per day.
3000 barrels from the 88000 Boe's per day in the first quarter.
As a reminder, in the first quarter, we completed the plan B.
One maintenance and sold our remaining 50% interest in the lost Hills field.
Our second quarter production was positively impacted by 5000 Boe's per day from returning of our CGP one plant to production.
Which increased both our NGL and natural gas volumes.
Additionally, our quarterly production was negatively impacted by approximately 800 Boe per day from asset divestitures, and 1000 barrels per day from PSC effects.
Which was all oil.
Changes in our development plan and well mix in response to the Kern County, Environmental impact report litigation also modestly reduced our oil production volumes and increase our NGL and natural gas volumes.
Our original drilling program anticipated a resolution to the yard mitigation in the first half of 2022.
Another hearing is expected in the third quarter of this year and we're hopeful that a resolution could occur by the end of the year.
The Kern County E. I R litigation represents an operational challenge for many operators in California power.
However, we continued to receive permits have a strong inventory of drilling permits for a hybrid program for the remainder of the year.
From a price perspective, CRC benefitted from healthy realized prices across all three hydrocarbons.
Our average realized price of oil in the second quarter after settlement payments on our derivative contracts registered $63.17 per barrel.
NGL pricing remained a bright spot with reallocations of 61% of Brent or $68 in 2009 cents per barrel more than $5 higher than what we received for our oil after hedges.
Natural gas prices have continued to strengthen with five quarters of sequential increases.
You realize the 103% of Nymex or after derivatives settlements $6.72 per Mcf.
The.
<unk> teams continued to focus on our non energy related operating costs. However, we are experiencing cost pressures in certain categories as we renew our contracts specifically on well workovers surface operations and maintenance as we also adjust our activity set.
As it relates to energy related cost natural gas prices continue to increase we'll use natural gas in our business to generate electricity for our operations and also to generate steam promotion cost inputs.
Additionally, higher natural gas prices also increased our purchase electricity cost.
As mentioned in prior quarters, we are a net long in natural gas.
This means that the natural gas, we produce and sell is greater than the natural gas purchase for each of our operations.
While our inflation expectations are relatively more muted versus the rest of the lower 48.
Our full year 2022 operating cost guidance is increasingly like $40 million at the midpoint, mainly due to higher energy cost inflation and the change in well mix.
Production taxes increased by approximately 24%.
Or $8 million.
For the prior quarter due to higher than expected increase during the second quarter and the tax rate assessed on our oil and gas natural gas production by Kalyan.
This was an adjustment to the military and not a volume teams.
G&A was $6.76 per Boe.
And adjusted G&A was $6 since 15 cents per Boe.
Adjusted G&A.
Remove stock settled compensation expense and certain nonrecurring expenses.
On an absolute basis G&A increased approximately $8 million for the first quarter from the first quarter, primarily due to compensation related items, including the expected payout for the performance based portion of our bonus plan.
Annual base pay increases, which took effect in March 2022 and growth in our dedicated carbon management team.
We have increased our total year 'twenty two guidance for adjusted G&A by $50 million to approximately $193 million at the midpoint as we experienced wage inflation.
Our we expect full year adjusted DNA for E&P corporate another to revert to our run rate of less than $5.33 per <unk>.
Also for the full year, we are racing trc's midpoint, EBIT, <unk> and free cash flow guidance by 2% and 10% respectively.
This increase in full year cash flow guidance takes into account the change in well mix impact of inflation and higher commodity price realizations.
Trc's totaled 2022 Bowie average production levels are expected to remain in line with our prior guidance, while oil sets a percent of total production will be lower by approximately 6% to account for the changes.
We also increased our 2022 capital program to a range of $300 million to $410 million.
This includes approximately $18 million for drilling and completion and an additional $13 million to additions to our Workover program.
We also continued to invest in our carbon management business and increasing capital guidance by $5 million.
Trc continues to deliver on the shareholder return strategy.
Since we started our focus on shareholder returns in the early 2021.
He has returned approximately 66% of its free cash would be shareholders through the combination of our share repurchase program and 60 of them.
Year to date, we have returned over 134% of our free cash flow generated as a returns driven strategy rewarded shareholders with strong total returns and will continue to be a healthy commodity price environment.
Even asked there our largest quarter of share repurchases and continued dividends.
Our cash balance remains healthy at $324 million and our liquidity stands at $740 million as of June 32022.
Please keep in mind that quarterly free cash flow results are subject to seasonal impacts.
In fact free cash flow in the second quarter exceeded our internal expectations and we remain confidence confidence in our increased annual guidance as we expect strong free cash flow in the second half of the year from higher revenues from Elk Hills power higher NGL yields and stronger natural gas realizations.
Please note that we have provided detailed analysis to our quarterly financial and operational results and our revised 2022 guidance and the attachments to our earnings streams.
I'll now turn the call back over to Mac discussed our Brookfield JV partnership.
Great. Thank you Francisco.
So a few more details on our partnership with Brookfield CRC has leveraged our asset base and first mover position to secure strategic investment from one of the largest global transition from funds in the world and advance our carbon management strategy.
With $725 billion in assets under management and over 200 billion of that allocated toward towards energy and transit are energy transition in infrastructure projects globally. Brookfield is one of the leading alternative asset managers more recently Brookfield renewable raised $15 billion through the Brookfield Global <unk>.
Transition bonds or <unk> are the largest global transition fund raise to date and it is b G. T. F. There we are partnering with and this is J D.
Combining our carbon management business with Brookfield infrastructure and energy transition experience strengthens our Ccs competitive position.
<unk> initial commitment will be directed towards Ccs projects for two JV entities carbon terrible JV storage go or the storage go and carbon terrible JV infrastructure company or infra co or the two entities storage go we'll build install and operate storage facilities.
As previously mentioned Brookfield has acquired a 49% interest in storage co for.
For the first reservoir, which was 26 are.
At our Elk Hills facility.
And in an implied value of $10 per metric ton of permitted.
Permitted capacity as we continue to contribute assets towards the J D.
We'll be done so on the same terms and the same milestones of the $10 per ton.
Brookfield total investment for twenty-six or is $137 million payable in three installments. The first installment of $46 million was made at closing of the JV with the second instalment due one CTV receives the initial permit from the EPA followed by the third installment in a final investment decision of RFID.
Effectively when we have a project committed for storage.
The other JV and forego will build install operate and maintain C O two capture equipment and transportation assets.
We have structured these two entities separately, because we believe it's optimizes the ability to attract incremental capital through project financing by structuring and for co to have more stable cash flows and fixed revenue streams, a JV lends itself. The project financing for the most capital intensive aspect of the Ccs value chain.
We also believe there will be future opportunities for other equity investors and partners to invest in <unk>.
Assuming the JV develops the full 5 million metric tons per annum.
And Brookfield fully participate in their 49% share of the $10 per ton storage contribution from Brookfield would enable CRC to fund all of the capital needs related to its portion of.
Of our near term goal.
Thus limiting the need for corporate capital to fund our carbon management business.
Explain a bit further.
Recall, the economic type curve, we disclosed on our carbon storage update last October .
Assuming a million metric tons of injection requires about $500 million of capital investment across the entire value chain, which is the midpoint of the range. We showed the jv's target of 5 million metric tons of injections per year would require $2 $5 billion of capital by the end of 2027.
That would be the investment made through the JV.
So you're seeing the unlevered portion of that would be about half or roughly $1 $3 billion. However, we anticipate utilizing at least 50% debt, which would bring crc's capital needs to an approximate total of about $638 million over the next five years.
All of this is shown illustrative of Lee on Slide 16.
The 5 million metric tons per annum of targeted injection would require 200 million tons of poor space.
Brookfield, 49% share of the floor space.
Contribution at a $10 per ton on a 200 million tons is approximately $1 billion, which is in well, which is well in excess of the development capital 638 that I previously mentioned required from CRC and factor into this scenario there'll be excess cash flow from the CTV.
Joint venture for distributions to CRC.
Or for reinvestment and additional carbon management activities.
Accusing our target of 5 million tons could potentially provide an incremental $185 million of annual EBITDA, which is the mid point of the economic type curve, we showed net to CRC.
And that would be with limited to no capital contributions from CRC with the JV. This means nearly 100% of the free cash flow generated from our core E&P business would be available for corporate objectives, including shareholder returns.
And strategic investments.
This significantly increases our capital allocation flexibility and needs we have.
Optionality for more than $400 million of free cash flow generation that is expected in 2022.
And annual expected cash flows in the years to come.
Not only are we're in forming strategic partnership for carbon management with Brookfield. We are also strengthening our strategic partnerships within the communities that we live and operate.
CRC is investing in energy transition with our Kern County energy transition pledge.
Pledge aims to build local operating knowledge to support the development and innovation of Ccs within California, and more specifically within our Kern County community the.
The company has pledged two and a half million dollars to Kern County.
Burnt excuse me Kern County College District in California State University Bakersfield to provide resources for research and development workforce training energy transition as well as energy transit transition related to curriculum and scholarships.
In addition to this pledge we are also forming CRC carbon management instituted Kern CCD.
And the Cal State University, Bakersfield carbon terrible lecture series.
So to conclude we continue to liver on our goals and are excited about our future.
Our California carbon management partnership with Brookfield is an important step towards our Paris aligned net zero goal.
<unk> progress on our near term goal.
Demonstrates an economically viable energy transition future.
Once again I'd like to thank the employees of CRC for their dedication and hard work.
And thank you for your interest in CRC and joining us on the on today's call.
We will now open the line for questions operator.
Ladies and gentlemen at this time well begin the question and answer session Basket question, You May Press Star and then one.
You are using a speaker phone would you ask that you. Please pick up your handset prior to pressing the key is to ensure the best sound quality.
So all your questions you May press star two.
Once again that is star and then one join the question queue.
Our first question today comes from.
Scott Hanold from RBC capital markets. Please go ahead with your question.
Thanks, Thanks, all congrats on the JV with Brookfield are certainly good to see a very strong and reputable partner are underpinning the upside optionality all see can.
Can you just give us a sense just make sure I'm thinking about this right.
You know with with their commitment and their carry of $10 per ton.
In my wrong, and kind of thinking that sort of sets a a relative will call floor on you know what this things worth you know the you know the carbon carbon management business.
Because when I do sort of you know back the envelope math at sort of the you know sort of the implied billion ton kind of floor that implies I think you know 15 to $20 of potential valued to CRC and that's obviously just a starting point so am I thinking about that right and in terms of you know what their underpinning as a minimum.
If if not a lot more given that they they're going to require a good rate of return.
So.
Good morning, Scott.
Good to hear from you.
What what I would say about the JV is that it would say negotiated I don't know whether to describe it as a floor or Howard reported but what I would say is.
Brookfield is contributing $10 into the JV for each ton of poor space and that's the initial commitment and then we're going to build projects on top of that rule, which will require incremental cap.
<unk> capital, which will have the incremental returns on top of that so I think that the way that I would say it is about $10 per ton for poor space is effectively the buy in if you will.
To just be pure poor space.
Yeah, Hey, Scott Transcisco. So it's a recognition that the poor space has value I should say, it's an important value metric on.
When an asset class, where very few transactions have been done in this space.
Sure.
Established that as a value right, we've been talking about how our CRC and carbon terrible terrible you're well positioned in the state.
Two to enable the Ccs management business and this is the first step the recognizing that push base has value on top of that you build a project and you can incremental retention that we're pretty excited about putting this marker out there.
Yeah, Yeah, and I think that's kind of the point I was trying to get to if if if they're willing to invest I guess, they're they're basically saying poor space at a minimum is worth $10 right in and obviously they want to build a return off this as well. So when you apply that to year, whether it's 200 million tons or 1 billion tons of potential time sort of like an implied.
51% ownership that that's a pretty substantial value net to the CRC like when when you step back and look at it and that's it and that's kind of what I'm trying to get to that sort of thinking about it right $10.
Per ton is is it sort of how they're thinking about like they're buying for the poor space. So at a minimum that's what it's worth.
I think that's a fair read through a what a what I would say is it's four perfected poor space. So we've spent a lot of time over the last.
Year, and a half working to permit and perfect. Our poorest states. So that its avails itself to get L. CFS credits 45, you and will receive a class six permit that development work is leaning on our current assets as we've described as well as our subsurface knowledge and.
A lot of the people that we have inside of CRC geologists reservoir engineers that understand how to file. These permits. So it is basically the sweat equity along with our assets, which is the scarce resource in California, as we stated previously that.
As lend itself to this JV for Brookfield coming in at that $10 a ton market.
Got it Okay. No. That's that's helpful and my follow up question is as you know again on this JV, but.
You know obviously at 26 or was the initial reservoir that's been put into the JV and can you tell us about the process of like you know how do you think of what is the process of getting you know other reservoirs into the JV because it seems like there's an advantage to you to getting that IND.
The JV and they get compensated for that to stay in front of the funding the capital calls I guess for the projects right. So what is it what is the process by which other other ones will get put into the JV what needs to happen.
Yeah. So Scott one of the things that we wanted to do when we formed the JV is to make it highly actionable and that's why we started with 26 are it's been filed is a permit that's been filed for over a year it's processing through.
And so that's why we contributed 26 into the JV 26 are into the JV and that's why we received the initial funding we're doing it in three installments as.
As we go forward. The objective is so that's basically 30 million tons of storage our objective through this J D.
Is to commit capital both from us as well as from Brookfield to develop 200 million tons of floor space to get to an annual injection rate of 5 million tons. So.
This is laid out on page 16 in our deck, but basically that means two and a half a billion dollars of capital as I as I mentioned in my remarks. So our intent is to deploy the capital perfect 200 million tons of floor space and achieve 5 million tons of injection by 2027.
<unk> aligns with our previously stated goals, we're now doing it with a partner.
That we really value and Brookfield on a 50 149 or basically 50 50 JV.
Right right and then mechanically you know what gets you know the the additional 100 or 170 million tons of of reservoirs into the JV is it the process of <unk>.
Permitting in it in perfecting it to be in a ready to move to the JV at some point.
That's exactly right twenty-six Ares as a year under file and has gone through comments and we have responded to comments with the EPA. We have filed other permits right.
Last quarter, we announced the other 80 million tons, and we filed which is <unk>, two and three and as those get perfected that gets shown to the JV that you dropped into the JV and then we started signing them projects once we do.
Once we get to an investment with <unk> that we've been talking to and come to an RFID. We can eventually drop those and so we will drive them either in at permitting stage a longer permitting process or when we have an <unk>.
When we go to F D within.
In infrastructure investment through <unk>, which is the capture part.
Yes, when it gets dropped into it that's what that's what triggered the payment for the Portuguese.
Yeah, No I got it thank you much.
Our next.
She comes from <unk> Akamine from Bank of America. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking my question.
I've got a couple first one is just on the conventional business.
I'm, hoping that you can help reconcile the oil guidance of 53 to 58 with.
With the comment in the press release at.
Oil production will be above the first quarter by year end it.
Just given the performance that we've seen from your oil production year to date it looks like the midpoint should be an easy bar to hurdle. So wondering why the low end is where it's at.
Yeah ultimately do we there is some I mean as we've talked about it.
Combination of the production sharing contract that we have a long beach.
And the changes in the well mix so with the I R.
Litigation with having to change the plan to amend the Weldon with drilling.
And two where we can keep the rigs for the five rigs is that the inventories there is a change in mix in nature sides variability into the program. So I think the guidance that we have out there is just a result to that.
And a recognition that some variability says.
Wait for results in the IR and.
At the end of the day, we have high confidence in delivering the projects, they're very good return projects, but they they tend to be gas have more gas and ngls in the mix. So that's where I think the spread in the range you can see some liquidation of that variability of what's going to happen in the second half of the year.
It also.
Go ahead Sir.
Yeah sure. So we also tried to build the variability associated with the production sharing contract, which is a bit of an arcane.
But at the production sharing contracted prices went back to where they were during the second quarter, which theyre not doing right now screen, but if prices, where we settled that almost a $112. During the second quarter that drove a lot of PSC barrels so in other words a.
Reduction from gross to net barrels as we gave barrels back.
Sure.
The production sharing contracts. So we tried to build some of that variability if prices were to come in high we would probably end up towards the low end of our oil range if prices come in lower than what we're forecasting for the balance of the year. Our net reduction would come in higher. So there is that variability that builds itself into the range as well.
I guess the follow up is it appears the oil price has stabilized lease on the strip during the back end of the year. So we're not too worried about the PSC effects. So I'm, hoping that you can help me understand the other moving piece, which is the <unk>.
Is that pathway to resolution there.
So well, let me just first address the well mix of what we've had to do.
Loses Kern County here and ill turn it over to Mike <unk> General Counsel and just a second to talk about the process there.
But we were anticipating earlier in the year, because it's being litigated that it would be settled earlier right now its still in litigation and it doesn't look like it's going to.
We don't anticipate resolution of that until the end of the year. So what we had to do in the second quarter and going into you know.
Current day was adjust adjust our drilling program.
To use the permits that we have which is which is a good thing because we have a lot of permits we can go drill and that's why we're keeping five rigs active but we had to adjust and by doing so what what would it.
The outcome of that was that we ended up with.
A more more gas.
In our mix and therefore lower lower oil.
So that's the impact of it but Mike do you want to talk about the resolution sure I think.
I would expect in May the court basically identified.
A small number of what we are.
Deemed deficiencies in the IR process.
And so those those deficiencies are being addressed essentially by Kern County, and they're working on.
They essentially fixes to those those fixes will need to be taken back to the court there being brief by the parties over the next few weeks and then the court will have to.
Make a judgment on those.
Those fixes so to speak so we expect that process to take several weeks and probably into June .
Early in the fourth quarter before we get some clarity.
That's great I appreciate that.
My second question is on the Ccs JV, so understand that Brookfield is spending up by 10 million Bucks and that by the <unk> four for reservoir 26 are but all the capital with staying with the JV. So I'm trying to understand what the $500 million will buy in terms of storage transportation and couch.
And then what the cadence of that spend will be.
Well.
So great question, the $500 million will either by floor space or will actually invest and capture equipment or any other capital needs within the JV. So again I go back to that our intent is to develop 5 million tons of injection by 2027, if we do that it's been a required two and a half.
Which is going to be in excess of the initial commitment of $500 million, but it will be on a project by project specific basis that we will make the big capital commitments and the investments.
US as well as <unk>.
Brookfield the difference and I was trying to establish earlier was that because of the $10 per ton.
We are getting for their contribution and for the 49% that will alleviate our capital calls for future projects, because we can recycle that capital for those capital calls.
And one thing to add color. So we talked about in the past.
As we are developing this new business, we have the option to just be the off taker. Since we have the scarce resource in the storage tanks, where we've also talked about how.
This business could very much be a full service business.
And I think the Brookfield partnership brings that second piece to reality, because by having Brookfield lessor partners, having this funding mechanism and then <unk>.
Finding the JV.
A.
Storage or an in Franco.
Single word.
The takeaway should be that the capital the intent is to deploy capital all the way through the value chain. So that's capture midstream and storage and that's where the JV is going to be focusing and providing a service at the Californian meters. All the way from from the meter to the storage tanks. So the deployment of our capital.
It is ambition tubular smack sent by the poor space and then deploy that capital. So that we can put the infrastructure in place to be able to have a 100% of that value stream.
Thanks for that guys on the last question that yet on the economics. So first off congrats on getting some clarity on the funding, but I'm trying to understand how.
The revenue on a metric ton basis, all of that how that translates to free cash flow net CRC on.
Any guidance you can give us there will be extremely helpful and I'll leave it there.
Yeah. So the way to think about it is it's a 51% JV carbon terrible 49% Brookfield. So the revenue line gets great go on a long working interest levels.
If you're building a model then you add the $10 per ton from Brookfield site to our side of the share and then we run the rest of the model to warranty interest levels. So.
The expectation is the funding comes from our working interest basis, and then the revenue on the cash gets split equally again.
Putting the $10 per ton as a contribution from Brookfield to CBD.
Would that practically the Australia, if you have that as a funding mechanism.
On the CPE side, and you're able to use and recycle that.
Capital contribution that's what's going to ultimately be a big share of our capital calls now we fully expect each projects too.
Perhaps it would be related to the project financing.
Still very much early and we need to define what the loan to values are going to be and how this is going to play out but at the end of the day. If you assume 50% of the capital is each project finance and then have the other 50%.
Equally split roughly equally between the partners from an equity call.
This year of our all of our capital ultimately we're recycling the funds from Brookfield. So that's what you get and that's what we're saying capital funding mechanism for the JV that gives us full exposure to our share of the cash flow without having to put capital calls from the CRC periods.
I appreciate that the project financing teeth isn't yet figure it out, but maybe on a plain vanilla basis, Jeff on your equity exposure can you help us understand how perhaps a $100 per metric ton of revenue credits will translate to free cash flow.
Yes, so its 51% to us it's a 29% to Brookfield. In then you take expenses associated with the project capital and when you get to cash flow. So it's a pretty motto a 50 50 JV or are there then the initial contribution for the voice space.
So.
One thing that I would point you back to is if you go to carbon day last October where we laid out our economic type curve, we've said somewhere between and Theres the assumptions laid out on the page, where we said the range of the EBITDA would be $50 million to $100 million per ton of inject of injected zero.
Okay.
And.
That still holds true regardless of our joint venture that's at the project level that would still hold true then there is the splits as is for instance go was describing on how they gauge the.
The cash flows up.
But to describe it a bit further if you had just more of a storage only type project, which means youre not trying to recover a whole bunch of capital investment because that's typically associated with the actual system you'd be towards the $50 a ton of EBITA, if you needed capital recovery.
Would be closer to the 100.
Dollars a ton of EBITDA, but that's because you're basically recouping the initial capital investment the cash flows.
Obviously, you would have less cash out at the $50 and EBITDA early on and so it would fall.
More closely straight to the bottom line.
Non cat without taking into consideration taxes.
Wondered would do the same but you have a significant cash outflow upfront that's how it would look at the project level.
And is that does that help Ann.
Yes, that's very helpful and the last question and Im sorry to keep trying at this but can you just tell me if it's tax normally.
Just like any other cash distributions or if there's any anomalies associated with gain.
The tax credit.
Yes, I mean, ultimately, yes, right now the 45 kilos of tax credits.
So yes, the modeling would be L CFS into revenue line.
Item and then 45 will be a tax credit that is able to offset.
Some of the income generated by the partnership so they are there would there has to be it's a I would say specific.
Tax modeling that we'll have to do and but very similar to what's happened to them.
Sooner than the other.
Other renewable type projects, where youre, having youre collecting credits that offset the revenue and the profitability of that.
For the enterprise.
Great guys I'll leave it there.
I would just add add onto France for instance go as we've stated before.
We are a taxpayer this year and the years going forward and so we actually have an appetite for the tax credit. So there is a synergy there for us to flow through and to use those tax credits and a typical as <unk> was saying renewable energy development.
You'd have to bring in tax equity for the projects, we can actually flow through at a consolidated basis and use our tax credits.
Great. Thanks, guys.
Our next question comes from Eric <unk> from Goldman <unk>. Please go ahead with your question.
Hey, guys. Thanks for the call and congratulations on the.
Yes.
Deal looks very exciting.
Was just hoping you could give a little more color on outside of this deal what is going on with the <unk>.
The <unk> business and specifically.
Are you still progressing on deals with E mirrors or do you have to sort of pause given that now you have a partner in and.
And also if you could give an update on how far along you are in terms of.
Submitting with 200 million tons for permitting and also give me a sense of.
You know very exciting about these first 200 million times.
Is there potential for more projects beyond that as well and how are you thinking about the scope of this enterprise.
Yes, good morning, Eric.
Everybody questions and they're all good ones.
So we.
We set a goal to file 200 million tons of permits by the end of the year, we filed <unk>.
At the beginning of this year, we announces first quarter earnings call. We had already filed before that 42 were at 120. Our goal is to be at 200 by the end of the year. We're still on track to do that so that's an end of year goal. So we'll do that with respect to the.
The JV our goal is to get the first 5 million tonnes.
And which is injected by 2027, which is 200 million tons of storage.
But we hope that this JV is successful to where we can continue on and build on the backs of it even further so we're not stopping there.
We're not going to stop at 200 million tons with permits by the end of the year, we're going to keep going next year and file more permits because that's the objective.
That there is a good business case for doing so we think it is.
Economic and we think that it helps the energy transition to <unk>.
Zero barrel that we think we can produce by 2045 with respect to the commercial arrangements. They are not stopping because of this JV I would say that they are actually accelerating the business.
We now have additional forms of capital we have an additional partner.
Who brings not only the investment and the capital, but also origination structuring deal development all of the things that you would want I think that this is a really good partnership it scalable I think that we're going to continue to do that now.
<unk> been in the background.
We have always been working to develop a mirror contracts and we continue to do so when we said by the end of this year we hope.
And we plan on.
Our target is to be aligned with the emitter that.
Allows us to inject 1 million tonnes by the year end 2025.
That's great color, Mike. Thank you and just just sort of a follow on and what I'm getting at is here and it's kind of a follow on to Scott's question I'm, just trying to frame what the potential value could be net CRC I mean, I guess, the quick and Dirty math is you can say, okay 200 million times to the JV.
Now a marker on that $10 per tonne, so thats $2 billion, but then there is.
Incremental projects that you can bring after the $200 million times that youre looking at the 200.
<unk> tons that Youre looking at now I'm, just trying to get some rough sense.
Could you remind us how do you think about what the potential beyond $200 million.
Is there.
And the portfolio and I appreciate that it's early days and you're still forget out, but just trying to get a rough sense of that.
The range of what could be possible.
So the $10 a ton is a contribution by Brookfield to acquire 49% of the poor space.
The objective of developing 200 million tons of storage, which allows 5 million tonnes per annum of injection. What I would say is Brookfield and also very aligned on investing the capital for the capture equipment and the storage, which we've estimated if we got to a 5 million ton target would be $2 5 billion.
Excluding financing et cetera split across the investors and were very aligned with Brookfield. They their fund has returned targets IRR targets and those targets align very well with what we see we think we can develop from a per at a project level, so that incremental gaslog I think Francisco.
Describe the bearing carbon day that when we were the 100% owner of this target we would generate close to $400 million.
Roughly of EBITDA by 2027 at the midpoint of our economic type curve shown then now we are doing to roughly half of that because of the.
The sell down in the position to 200 million tons, but were also picking up with to $10 a ton for the port space.
Yes, that's right.
The the initial assumption was two and a half two to $2 5 billion notional capital.
We don't do military show up in about $400 million sort of annualized EBITDA.
So now the math is for net to CTV is.
<unk>.
Lower the capital call by half so one 2 billion.
Results in $200 million, so EBIT shared to us the difference two ways that the one 2 billion now in these ash.
Brookfield requires more space that gets funded through that mechanism. So it's a it's.
So Barry we're trying the mice capital and ultimately improved returns and we've done that with this deal.
Sorry, what I'm trying to get that guidance beyond the 5 million times that this JV contemplate how much more do you think your asset base like support how much more projects might be out there beyond this 5 million tons.
So so that goes back to the original target, where we said we've identified up to 1 billion tons of potential storage across our portfolio.
We're trying to set interim goals that our long term goal is a net zero by 2045, which means that by that time, we would have to be injecting about 20 million tons per year and if you just do the conversion math that gets you to roughly a 1 billion tons of storage. So we're still on path to do any of them were just stating the.
Interim goals right now that are within the next five years.
So Eric I would say that there's.
This is focused on the first 200 million tons of storage. We're also focused on our long term goal of 1 billion tons of storage.
Awesome very exciting thanks for the call guys.
Thanks, Eric.
Our next question Okay.
Yes.
A follow up from Scott Hanold from RBC capital markets. Please go ahead with your follow up.
So one again on the JV and then more of a financial side kind of question, but the first one is when would you obviously partnered up with Brookfield can you can you talk to do they bring any kind of skill set to the joint.
A joint venture in terms of whether it's a capture transportation or they can also bring some skills to the project or should we think about this is pretty much you all have a lot of that already kind of handled.
Hey, Scott.
Yes.
We really like.
With brakes Brookfield brings to the table.
So beyond the financing, which has been the focus of the discussion.
They are very advanced in their views around carbon capture and sequestration.
The fever invested into capture systems that can be made a large investment to intra company called <unk> a Canadian company, that's up of course combustion capture system.
And two they have a really good sense or not.
Not only the.
The technology Thats going to work.
But also on the cost side of the question as to what these systems can be can be build towards an important and how you can scale that business.
That also means they've looked at and meters and they've been ways to capture emissions.
Not only in Canada, but in the U S and so when we started talking to them.
The the match was was pretty obvious given all the time and effort invested into Ccs and.
And as you look across the U S. Even though they see that the California.
It's a differentiated opportunity given our CFS as a place to place money and commend at CRC had.
The components to really make this partnership works so.
<unk> talked about Theres, a structuring there the largest one of the largest renewable investors in the world right. So the structure initial origination.
There's a number of them.
There's insurance product Theres, a number of things that he can bring to the combination of the partnership with the Cte level.
Then we're very excited about but to us the work.
Head and shoulders above all others in terms of your understanding of the Ccs markets and employing the technology aspect of it.
Just to add on.
Everything Francisco said is exactly why we formed this JV or this partnership.
But to be very clear it is our skill sets and as our assets and the subsurface knowledge of the floor space that is the focus area of this joint venture because we're building from there.
And that's why they're contributing $10 a ton to the buy in for the reporting 49%.
Yeah got it absolutely that that makes sense and then my follow up is is you know obviously with this partnership as you said youre going to have.
A lot of the near the funding needs taken care of initially and I think going back to last year. When you kind of latest solo you talked about I think about 50% of your free cash flow being allocated to Iraq.
Shareholder returns of 50% potentially do carbon management you know.
When you think about like now that other half of the pool is kind of freed up like what what are your thoughts on like how how you allocate that the residual free cash flow.
Being generated by the upstream business now that you don't need to fund.
The carbon capture business, what can we expect with that.
Yeah. Thanks, Scott So so exactly we previously said after we reinvest in the business to keep production effectively flat.
Then we would split.
The free cash flow thereafter.
After tax free cash flow thereafter.
50, 50 between shareholder initiatives and carbon management now obviously with this joint venture and with the $10 a tonne. We don't have the same capital needs. Our capital calls on those cash flows and so it gives us greater flexibility I think is the point you were actually making your question gives us.
Your flexibility with that cash we show that on page 29 in the deck, where over the next five years, we're forecasting over two $5 billion of cumulative after tax free cash flow.
And we can we can use that now assuming that there's not a strong call on it for carbon management because of the sort of self funding mechanism given the $10 a ton.
Or other.
Aspects most St. Francis do you want to talk about the user.
Yes, absolutely.
Hello.
And yes. This is the conference operator, the speaker line is still connected.
Yes, we would yes, we arent hey, Scott So just to further to what Matt was saying.
We did case presented on slide 29 has us investing in our core business.
To maintain our production at first instance.
Then after you invest in the core business, we generate in the scenario.
Over $2 $5 billion to $7 billion to be exact effect after tax free cash flow.
So that's that's what we see in the cumulative cash flow generated over the next five years on the core business.
And then that allows us to think about ways to deploy that in many different avenues. Certainly we've had a very successful share repurchase program. When we bought back over 10% per share per cent of the shares of the company since we started the program.
We can also think about growing the fixed dividend.
We look at acquisitions, you can look at more investment into our core operations, perhaps around enhance oil recovery. So.
By doing this transaction and with the significant cash flow generation potential of our assets.
We move into either shareholder initiatives or more investment into oil and gas assembly sold of being able to maintain that cash and having the funding mechanism separately on the Brookfield.
Thanks for that.
Yes.
And our next question comes from Karl Blunden from Goldman Sachs. Please go ahead with your question.
Hi, Thanks, very much for the time.
Just one with regard to the options around cash flow deployment.
You will be able to comment on your current restricted payment capacity under the bond indenture.
Sure so we.
So as you know we look first to the RVO.
We got a.
We negotiated to have warm limited RP capacity subject to leverage test will describe.
And the last in the last earnings call in terms of the high yield indenture. We wanted to do we wanted to take a similar approach, we launched a process to and each with bondholders to making a similar request for improved terms that from our perspective.
Bring our idea of high yield indenture or to current market terms.
Given that we placed on our bonds in January of 2021.
At the end of the day, there's been a lot of volatility in the market.
With the fed.
Going a lot of twists and turns along the way and.
We decided to pull back on that asking but it's something that we'll continue thinking about at the end of the day, though we have specific baskets within the agreement we have an ability to deploy cash.
As we roll off some of the lower pricing quarters and through last year and start with these it's accumulative net income test over the last 12 months. So we were adding capacity as we bill and it's more than sufficient to continue doing share buybacks.
And soon to be investments in carbon management, certainly now with the Brookfield deal.
One of those investments.
It really reduces the capital call lines of CRC. So, we'll reassess where we wanted to do with the high <unk> and then true going forward.
Accidents Brookfield announcement.
And differently about how to how to invest in the carbon management business, so more to come on that.
And ladies and gentlemen, with that we will end today's question and answer session as well as today's conference call. We.
We do thank you for attending.
May now disconnect your lines.