Q2 2019 Earnings Call
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I'll now turn the conference over to Mr., Scott Espenshade, Senior Vice President Investor Relations Mr. Osborne shape the floor is yours Sir.
Thank you I'm, Scott Espenshade, Senior Vice President of Investor Relations and land welcome to California Resources Corporation second quarter 2019 conference call participating on today's call is Todd Stevens, President and Chief Executive Officer of CRC, and Mark Smith, Senior Executive Vice President and Chief Financial Officer, as well as several members of the CRC executive team.
I would like to highlight that we have provided slides on our Investor Relations section on our website www Dot CRC dot com. These slides provide additional insight into our operations and second quarter results plus additional information.
Also information information reconciling non-GAAP financial measures discussed to their most directly comparable GAAP financial measures is available in the Investor relations portion of our website in our earnings release.
Today's conference call contains certain projections and other forward looking statements within the meetings of federal security laws. These statements are subject to the risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements.
Additional information on factors that could cause results to differ is available in the Companys 10-Q, which is being filed later today.
We would ask that you review it when available and the cautionary statement in our earnings release.
A replay and a transcript will be made available on our website. Following todays call will be available for at least 30 days. Following the call. As a reminder, we have a lot of similar time for earnings skew in a at the end of our remarks and would ask that participants limit their questions to a primary question and a follow up I will now turn the call over to Todd.
Thank you Scott. Thank you to everyone for attending todays earnings call.
In the first half of 2019, CRC again delivered solid results.
Our second quarter production was in line with our guidance, we continue to make progress on our cost margins and on controlling our Controllables and we're pleased to report additional progress in strengthening our balance sheet and improving our credit position.
We've communicated before that we expected these improvements would be largely transactionally driven.
Allowing CRC to maximize the value of our portfolio for shareholders.
In May we closed the divestiture of a 50% interest in our loss sales operations.
Then last week, we announced our third major development joint venture to date.
We remain keenly focused on strengthening and simplifying our balance sheet.
As we take our next steps to reduce our debt burden will continue to fall in all of the above approach. We know there are multiple ways to achieve our balance sheet objectives, we intend to be strategic as we continue these discussions our diverse portfolio of assets is generating interest on many fronts, including producing properties minerals and infrastructure transactions.
We will continue to pursue other opportunities enhance the balance sheet as we progress through the remainder of 2019.
To put this in context, our three largest development joint ventures provide for potentially over a $1 billion from our partners to drill our broad project inventory.
This highlights the depth of our portfolio and the quality of our assets.
Specifically these joint ventures allow CRC to de risk our resource base bring production and cash flow forward to enhance our credit position.
And to provide flexibility in our capital program to respond to fluctuations in commodity prices.
Our most recent development joint venture showcases the progress CRC has continued to make as it is our largest to date at up to $500 million in development capital with a larger reversionary interest the CRC.
We are proud to partner with colony capital in this joint venture, a well known and respected investor with a solid track record.
Colonies initial investment commitment of $320 million will cover multiple development opportunities throughout the Elk Hills field is intended to be invested over three years consistent with a mutually approved development plan targeting approximately 20 275 wells.
Our JV partner will fund, 100% of the development wells and will earn a 90% working interest in those wells.
Our working interest in those wells will increase from 10% to 82.5% upon colony, achieving an agreed upon return.
Colony also received a warrant to purchase up to 1.25 million shares of our common stock with a $40 exercise price, which connie will be entitled to exercise as funding milestones are met.
We already deployed four rigs to work on our colony joint venture and by the end of August we expect to have five rigs focused on the colony joint venture development.
There continues to be plenty of interest and speculation into the regulatory environment in California.
Last earnings call, we highlighted a tremendous amount of energy, including hydrocarbons at California's economy requires.
We also covered how native oil and natural gas production benefits the state's workforce consumers as well as local and national local and state government as a significant contributor of revenues through production sharing taxes permit fees and royalties.
CRC is operated successfully in the country's most stringent regulatory environment by adapting rapidly and cost effectively to changes in laws regulations and the agency priorities.
We are well situated with our drilling permit inventory.
We have a balanced mix of production from diverse fields and are not dependent on any single drive mechanism or play type.
We have build coalitions with organized labor business and community focused organizations in the Golden State, who recognize the importance of instate production with a highly qualified local workforce.
As a reminder, every year, California imports over 73% of its crude oil needs sending in excess of $30 billion a year outside of the state to places that don't hire Californians, nor pay, California taxes and don't share California's values.
We believe responsible leaders in Sacramento understand this dynamic and will continue to be thoughtful.
We will continue our constructive dialogue to better, California communities by safely and responsibly, providing our valuable products to the world's fifth largest economy.
Let me turn now to our operational performance, where CRC remains intently focused on our efforts to control our controllables.
I continue to see innovations from our teams, which we believe will reduce costs and enhance value as we move through the year.
Our portfolio management starts as always with our disciplined capital allocation through our internal VI metric to adjust quickly to market conditions and align our investments with expected cash flows.
Darcy benefits from scale and diversity of our world class portfolio, which provides exceptional optionality that enhances our ability to manage through the commodity price volatility.
Our 2019 plan focused focuses on enhancing cash margins and maximizing the value of our investments as we continue to strengthen the balance sheet, while living within cash flow.
We have narrowed the range of internally funded 2019 capital program, which now stands at 350.
$385 million.
Our new joint venture with quality in the recent capital received from VSP will allow CRC to invest the time to increase the total estimated JV capital investment to a range of $175 million to $225 million for 2019.
This activity should provide a slight increase in our quarterly production as we progress through the remainder of the year.
As we have stated we continue to target utilizing 10% to 15% of discretionary cash flow to enhance the balance sheet and advance our deleveraging.
Through the first half of 2019, we repurchased $58 million in face value of our second lien notes for $45 million in cash.
We posted solid cash flow during the first half of 2019 with EBITDAX totaling $556 million, an increase of 12% over the prior year period.
Compared to the first half of 2018 total production was up approximately 2%.
And oil and oil production was up 3% second quarter 2019 crude oil production was down sequentially due to the previously mentioned sale of the 50% interest of lost Hills Steamflood production PSC impacts from higher realized prices and lower capital investment.
Power plant downtime and other factors.
With our laser focused on operational excellence CRC continue to show total cost reductions across most operating expense subcategories.
During the second quarter, we again benefited from higher crude oil realizations, which averaged over 100% of Brent for the quarter.
As you know we receive attractive Brent based pricing as waterborne crude drives drives the California market.
Looking ahead to the impact of IMO 2020, we expect CRC is price realizations remained strong.
Demand for California production is steady and CRC is portfolio of crudes as well position against global alternatives.
CRC has significant competitive advantage in weighted average sulfur content compared to crude imported to California.
As inset state production declines the demand for California crude remains high and refinery runs remains stable.
At the same time, we are thoughtfully, putting additional crude oil hedges in place to further end to underpin our cash flow opportunistically through the cycle.
Conversely, we saw our natural gas and NGL realization slip in the second quarter of 2019, consistent with local and national supply fundamentals.
Natural gas was also affected by the very temperate weather in California during the second quarter of 2019.
For more details on our second quarter performance I will now turn the call over to Mark.
Thanks, Todd CRC is teams drove solid execution in the first half of the year delivering second quarter production within our guidance range, while maintaining our intense focus on controlling costs continuing to strengthen our balance sheet and demonstrating our overall capital efficiency and for preserving margin performance.
In summary, CRC had a strong second quarter underscoring the diversity and optionality of our asset base.
As well as CRC is operational focus on driving value.
Total production was 149000 barrels of oil equivalent per day with quarterly adjusted EBITDAX of $255 million.
And adjusted EBITDAX margin of 39% and an adjusted net loss of $14 million or 29 cents per diluted share, which was largely affected by lower natural gas and NGL prices as well as limited natural gas trading activity, which is seasonal in nature is typically lower in the second quarter when temperatures remodeled.
In the second quarter, we maintained our capital discipline and held our activity level constant through the first half of the year in the second quarter, we internally funded $124 million of capital projects and our JV partners funded an additional $16 million for a total investment of $140 million, while averaging seven rigs.
The capital program was primarily focused on the San Joaquin Basin, where we drilled 33 wells in the Los Angeles Basin, where we drilled six wells.
Sacramento in mature have continued to show modest production decline with no drilling activity.
As Todd highlighted or new development JV will provide added flexibility for capital plans through the remainder of 2019 and future years, providing us with additional ability to align our capital with cash flow and bring forward reserves and production at one of our core assets.
As we have demonstrated we continue to steadily and deliberately reduced our debt the second quarter marks the fifth consecutive quarter that we've repurchased our second lien notes.
We repurchased $58 million in face value of the notes for 45 million.
The face value of our second lien notes now stands below 2 billion and we continue to have meaningful flexibility with our credit agreement to Opportunistically purchase additional notes at a discount.
I want to underscore that we remain intently focused on our commitment to balance sheet strength.
Now turning to the details of our financial performance for the second quarter. We produced an average of 129000 Boe per day during the quarter.
While oil production averaged 79000 barrels per day.
Production was down approximately 4% compared to the second quarter of 2018 with approximately 2000 Boe per day. The decrease due to lost hills, Divesture and PSC effects and nearly 1000 Boe per day due to power plant outages.
Second quarter 2019 sequential results were affected by the 1700 adult excuse me 1700 barrel per day decrease in oil production from the lost hills sale as well as roughly 1500 barrels per day of negative PSC effects.
Power plant power and plant downtime and other factors I should note that our third quarter will be the first full quarter with a lost hills production fully reduced to our 50% retained interest.
We continue to benefit from premium that Brent based pricing and realizations in the second quarter of 2019.
Oil realizations were robust registering 101% of Brent before the effective hedges further we're continuing to see strong realizations for July at a 102% of Brent.
Our hedge program, which underpins our liquidity by supporting cash flow in the event of volatile commodity prices enhanced our realized oil price by $1.89 per barrel for an average realized price of $70 to 66 cents per barrel.
NGL realizations were weaker at the low end of guidance, primarily due to lower butane realizations and came in at 41% of Brent consistent with excess supply in local national markets.
Natural gas realizations registered 88% of Nymex the second quarter is traditionally when we receive our lowest natural gas realizations.
And reflected milder weather in California.
Production costs for the second quarter of 2019 with $230 million or $19 or 62 cents per Boe.
Our focus on our controllable cost cut production cost relatively flat on an absolute basis compared to the prior year period.
We increased our maintenance activity in the quarter, which was offset by the sale of our lost hills and lower downhole maintenance costs.
Excluding PSC effects, our second quarter production costs would have been $17.98 per Boe.
Adjusted General and administrative costs were $6 or 57 cents per BOE, a 36 is below the previous quarter and within our guidance range.
Most of the decrease over the previous quarter resulted from lower cash settled equity based compensation at all levels of the organization due to a lower stock price and 29.
As we previously discussed changes in our stock price introduced volatility in our income statement because a portion of our stock based awards, our cash settled at our Mark to market every quarter.
Taxes other than on income, which are largely comprised of AD valorem taxes based on the values of minerals in the ground that are paid to the counties as well as our GHG cost came in as we expected.
In total for the second quarter 2019, we reported net income of $12 million attributable to our common stock.
Or 24 cents per diluted share adjusting for unusual and infrequent items and other non cash items such as gains on early extinguishment of debt that are generally excluded from core earnings by investment analysts. Our net loss would have been $14 million or 29 cents per diluted share.
Adjusted EBITDAX for the second quarter of 2019 was $255 million up 4% from our prior year quarter, reflecting a stable adjusted EBITDAX margin of 39%.
The decline in adjusted EBITDAX for the first quarter, COVID-19 was largely driven by lower natural gas and NGL prices.
As well as limited natural gas trading activity as I previously mentioned.
CRC reported cash flow from operating activities of $114 million in the second quarter of 2019, which was negatively affected by the timing of interest and AD valorem tax payments, which were made in the second and the fourth quarters.
In the second quarter, we generated approximately $76 million in discretionary cash flow and $266 million in the first half of the year. This compares favorably to our internally funded capital investments of $228 million through the first half of 2019.
As we pointed out CRC has a high level of operational control over our diversified portfolio, which allows us to pivot during volatile periods and rapidly recalibrate our activity with expected cash flows.
We have a proven track record of focusing on value and we will continue to respond and adapt accordingly to succeed through a wide range of price environments.
We front, we front loaded our internally funded capital investments for 2019.
As we look ahead CRC will continue to deploy capital at our highest VCA projects to develop our extensive inventory of actionable projects.
While utilizing our JV capital for added flexibility and to bring forward cash flow.
Our philosophy regarding hedging continues to target up to 50% of our oil production generally over a 12 to 18 month period in order to provide more certainty and cash flows this quarter capital program.
Please refer to our earnings release for the details on our hedge positions.
Also please note that we provide a detailed analysis of the adjusted items as well as key third quarter reported 19 guidance information in the attachments to our earnings release.
And also please note that the third quarter production guidance reflects the full effect of our lost hills divestiture.
Now I'll be happy to take any questions. You may have on that information and on other aspects of our results during the Q and a portion of the call.
Hi, Thanks, and I'll now turn it back over to Tom.
Thanks Mark.
CRC continued to deliver solid results in the first half of 2019 with a disciplined capital program that has focused on value since our inception.
A diverse low decline asset base with exposure to healthy brand base realizations and a continued focus on cost margins and controlling our controllables, which allows CRC to register reliable and consistent results.
The optionality of our resource base, coupled with this discipline has enabled us to continue to generate free cash flow.
It's worth reiterating that we remain keenly focused on strengthening and simplifying our balance sheet.
Lowering our overall level of debt, while utilizing joint ventures to de risk and unlock the full potential of CRC is large asset base.
We now be happy to take any questions you have.
Hey, Thank you Sir.
We will now begin the question and answer session.
To ask a question the May Press Star then one on the Touchtone phone in season. This speakerphone. Please pick a brown said before pressing the keys. If anytime a question has been addressed elect Sungard a question. Please press Star then too.
Again as a courtesy we please ask that you limit yourself to one question and a single follow up if you have further questions time permitting you mostly answered the question queue I get out of the star one to ask a question.
At this time, we will just pause momentarily to assemble our roster.
Hey, first question, we have will come from Kalei Akamine of Bank of America. Please go ahead.
Hey, guys good afternoon.
Hello.
Hey, Glenn can you hear me.
Hey.
So my first question really relates to how you think about adding fixed costs of the business as you execute.
Deleveraging transactions, obviously the team has been very busy so I guess, what I'm trying to figure out is your capacity, perhaps you can talk about it in terms of unit cost or absolute dollars and I'm trying to figure out you know how much you are comfortable with and how much you can.
Perhaps do it to address the balance sheet.
Yes, so if you think about it.
From day, one when we were spun off we've always been contemplating.
Taking balance sheet risks for income statement risk and increasing our fixed charges to bring down our absolute quantum of debt.
We've done it and go out.
Variety of creative ways. So we're not afraid to look at what the best alternatives are.
Clearly, we're looking for the best value proposition and also there is a.
The flip side of this too is as we feel like the absolute quantum of debt comes down there is there a way to reduce and simplify our balance sheet and ultimately reduce our fixed charges that way too. So we think that.
Actually at the end of the day that when we.
Add some income statement.
Risk for balance sheet reducing of risk.
The balance the overall fixed charges will probably come down for the enterprise, even though weve added.
Because of the interest charges and there's other fixed charges will come down.
To give you a feel the company as a whole right now I mean, the most attractive.
Opportunity for US is probably looking at the royalty market is still fairly healthy. We continue to look at that in addition to infrastructure and other straight asset sales and other creative opportunities, but that one is fairly healthy our average royalty and the company is between four and 5%.
We have assets like Elk Hills, where we own fee simple, where you could we add a four or 5% royalty there or elsewhere, yes, we could and that gives you a feel.
For where we're at from that standpoint, as a company, but were looking again. This is an all the above approach.
There's no one magic silver bullet for us and we will continue to be diligent and do the best value proposition because we view the absolute quantum of debt we have as a significant overhang that we feel will help unleash the value of the equity as we continue to chip away and then hopefully to chip away some bigger chunks here with some more transactions as we go through the rest of the year.
You can you address any near term opportunities that you might have on the table.
We're looking at all the above the all the things I outlined.
We've been looking at a different transactions.
From monetizing royalties to monetizing parts of our infrastructure monetizing producing assets of different quantums.
Monetizing acreage monetizing surface land so.
Nothing has been.
Above.
Approach I'd like I've said always everything's for sale, except Elk Hills, you got to buy the company if you want to buy Elk Hills.
So it's rather unique opportunity if we're willing to monetize a piece of royalty at Elk Hills of our flagship asset. The other thing I again, I can't stress enough, we knowingly simplify the balance sheet during the downturn enhanced fixed charges to reduce principal there is an opportunity.
Particularly as we go through August as we continue to look at ways to simplify the balance sheet were going to do the thing Thats best for the company and the best for our shareholders as we look to bring down fixed charges preserve liquidity and and bring down principal over the long term.
And the last one just on this and I'll leave it.
When you guys think about.
When you guys think about sizing and opportunity what's the primary consideration is that what the market will bear or do you think about your own cost structure first.
I think for US it's really about.
Enhancing the cost structure and value obviously.
We're not going to get there and $10 million increments with our quantum of debt. So we have to start looking at larger things to do for the company and we've done a few of those earlier this year.
The colony JV is very important for us with a great partner.
The monetization at 50% of lost Hills, and then getting the carry on the activity there.
It's important for us. So we'll continue to look at creative ways to get there, but I do think that there will be some significant monetization just like I said, we've been looking at different ways ever since the spin whether it was dealing with infrastructure in midstream or or other assets. We have because we have a pretty vast.
Assets, a basically a super major and independent.
Got it and have a separate but related question on the.
The calling JV last year at the Analyst day, you guys highlighted.
Potential Youre project at Elk Hills.
Is this.
JV at all related to that or is that something completely separate.
That's something separate.
Obviously, they could end up being our partner or someone else there on that but I think you are right that that Seo too.
Injection project, there and enhanced recovery oil recovery project is is not part of the current colony JV. We anticipate this will be something that will be in the near term next 12 to 18 months, we'll probably be advancing this too.
Kind of a real project.
And next we have Brian singer with Goldman Sachs.
Great. Thank you good afternoon.
Hey, Brian .
I think you just made a little bit of a reference to it but you highlighted in the press release your ability to continue to buyback buyback that Matt attractive turn terms relative to face value and I just wondered if you can.
Talk a little bit to how you see that kind of playing out and your ability and willingness.
How how significant that could be over the next three to 12 months.
Yes, so for for US clearly when the debts trading, particularly our second liens, which is highly liquid.
Where is that.
Given the fact that it's heavily shorted I think that that gives us even more of an opportunity. So as we see free cash flow and we try to balance that out against liquidity concerns as we look at our business planning through the year, we will continue to increment into that and we have there hasn't been a month gone by I think in the last nine months that we havent purchased some.
Second lien.
Notes in the market. So we continue to look at that every single month and every single day and think about the opportunity set and balance that against our forecast in our portfolio and our cash flow and we'll be mindful of liquidity for the company, but it's definitely an opportunity given where it's traded and and we are mindful as again, all the above approach and we view that as a.
A way to create value for our shareholders and.
Eventually I think we'll get recognition of that.
Of that value creation.
Great. Thanks, and then my follow up is you highlighted some of the headline risk with regards to California regulatory environment and I just wondered if you could just refresh us on your level of engagement with the I guess executive branch and any scope you see for changes impacting and drilling flexibility or fiscal terms.
In California, as the I mean, the oil and gas industry is an important part of what we.
The business here clearly, it's not where it was in the 19 eighties, where there was only 5% of the oil needed in the state was imported but now we're at a point where well in excess of 70% is imported from places like I said Didnt don't share, California is values don't provide pay taxes don't provide good paying jobs.
Utilize highly qualified workforce so for us.
We have.
Fairly constant contact I won't say, it's every day, but it's fairly frequent with the executive branch in California, or governor and or his staff and involved in important decisions.
That affect all businesses in this state and I think it's important to understand how native in state production is vital for.
The economic by vitality of California.
Sending billions of dollars every year overseas to places that don't have the same laws from an environmental standpoint, and don't have the same protection I think the the executive branch and a lot of the legislators not all of them also understand that.
What we do hydrocarbons is more than just.
A transportation fuel it provides.
A lot of those refineries in California produce a lot of jet fuel.
And in a lot of products that make our first world lives of Bob.
Actually possible you can't build a tesla without hydrocarbons. So I think some of the things that you realize when you think about it.
And get beyond the very short minded narrative of.
Gasoline for our cars you realize it really underpins our first four lifestyles and are in hospitals and everything else and medicine. So.
I again, I think we have thoughtful leaders that aren't prone to knee jerk reactions or are getting pressured by pitchforks than torches activists, who are have machiavellian objectives that one of the industrialize our country. So I think that it's important to step back and understand what's best truly for California.
Thank you.
Next we have Jason wangler of Imperial capital LLC.
Good afternoon guys.
Was curious in are really tied to talk about.
Production curve on acquired upgrade direct this year.
That's principally because of recruiting activity coming in or is there some other stuff.
About as well.
No I just think again remember our production we don't we don't get we're not a shale company. So we don't get those kind of quick hitting impacts so a lot of our projects we did.
Some of this in the first half four facilities. So what we're doing is setting ourselves up for the back half of the year.
So it was a little bit front end loaded and and we have obviously noted the power plant outage at Elk Hills, even though we've had a 95 plus percent run rate. There you have outages every now and then.
But.
So we see it.
The slight uptick in back half of the year.
And it's really driven by our net investment I think the Connie JV, even though we got off to a great running start will be a rounding error for the year.
But it really pickup obviously in 2024 net to our interest for them it will obviously be meaningful.
Okay. That's helpful. Thank you and then.
On the NGL side.
I know you guys talk a lot about kind of hannon barriers, obviously between oil and natural gas within California is that fair, you're not necessarily the same for NGL or.
How could we think about that obviously, there weve everywhere, but not you guys have put the impact during the quarter as well, yes. If you look at the actual products themselves, you'll see propane is still about twice Mount Bellevue here in California.
Natural gasoline is still a premium to Mount Belvieu, where we really see that hit us in the butane.
That's on par or less than Mount Belvieu. So we're that's something that we feel like because our main markets, Our California, Mexico and Canada, there are little isolated.
We think Canadian butane and some refineries being shut in.
I have ever impacted California more than normal on the NGL side of the house. So this is something that.
Yes, clearly we affected a little bit by the whole nation as a whole, but we are probably not as much in it as an island because of railcars of Ngls as is with crude because crude really is just waterborne is marginal barrel, but yes, we were impacted by that.
Okay I appreciate it I'll turn it back.
Thanks.
Sorry, Sir next we have Paul Sankey of Mizuho. Please go ahead.
Hi, guys.
I was tempted to say thank you all my questions have been answered because there was going to ask you about.
Overwriting royalty, but some.
Maybe we could just go into your realizations were good.
Could you talk about the impacts and it's a bit of a loaded question I apologize, but I noticed that you want to actually to a premium to Brent.
In the quarter, including hedging could you just talk about the sense, which that was hedged relate to.
Something else. Thanks.
So Paul we had some hedges in place that were above where the the price was so we run before the hedge we were at a premium to Brent for the quarter for our portfolio crude.
In our and our hedges, we got to even more premium, but what I will give you. The commentary is as we've gone through the quarter here that the current quarter. After one month, we see those differentials still very strong.
And at the top end of our guidance going one month and obviously there's.
Two more months to go but we feel really good about the strength of the differentials and realizations in California.
Yeah, great. Thanks, Toby being very comprehensive.
Just to be really know what's in say the option to sell that food seeing you guys in New York in about a weeks time, thanks a lot.
Yeah. Thanks policy on August 14. This August 14th Thank you.
And next we'll have Pavel Molchanov of Raymond James.
Okay. Thanks for taking the question.
Let me explain back to the regulatory landscape.
Setting aside the environmental advocates who as you said do not one drilling anywhere at any time.
What specifically is.
Coming out of the new some administration so we saw the.
I had oil and gas regulator being replaced after.
Scandal at the Department.
But has the governor actually spelled out.
What kind of what the administration stance on.
Oil and gas activity is going to be.
Yes, I think what he said and I think in a campaign. If you go back to that you talked about he wanted to tighten up the fracking rules in the state and hydraulic fracturing rules.
And he's been quiet, but again I go back I am known the governor as Lieutenant Governor for a long time, he's a very thoughtful guy he's not going to.
Take knee jerk reactions to anything.
And I do think there probably will be something like that at some point in time.
He takes everything into account that the Dougherty thing I think thats been out in the press I think that had more to do with the conflict of interest in what's in the papers is probably we both know the same amount.
They filled out a form 700 and some of the employees held the shares of companies in an industry that they are directly or indirectly regulating.
So, yes, I feel like there.
The Governor is a man of his word and he said that he was going to tighten some regulations up and I think he's going to do that.
I don't know what that will entail I know, we we were in contact with them and we talk about many things, including current legislation that's being proposed.
So.
I do think he understands and obviously if you really want to look at some details. He did give a little speech. When he was added mckitrick at a a schoolhouse visiting as a.
Chevron's oil spill out there and I think it was very thoughtfully dining and give a feel for what what kind of governor he is going to be and how he approaches issues and challenges and and again. He is not a person thats going to take a knee jerk reaction to anything or bout of pressure from activists or business or anything you can do what he thinks is in the best interest of the California.
Okay, and just to clarify do you have any rigs today that are engaged in.
In fracking.
Yes.
I think I want one.
One out of seven.
Well, we have we have total of 10.
Five years here shortly we'll be working only on the colony JV at Elk Hills and the rest are.
Up and down the state of California, few and Alley basin in the one the one rig we were talking about as in Kern County.
Okay.
Okay. Thanks follow up on.
Gas prices.
Six months ago, there was a period of time.
Kind of a wide disconnect between California gas, which was trading at a very hefty premium.
To Henry hub, and you mentioned.
More moderate weather recently.
Do you envision any return to that period when you had.
For for 50 gas in the state.
Yeah, it's really as you saw.
As we had the quarters the first quarter in the fourth quarter.
We had significant trading income from natural gas and it really.
Around degree days, so, it's either hotter or colder than what people expect.
We really didnt have much of a summer in California, and here in Southern California until July .
So that the hotter weather has showed up we expect trading income and the back half of the year I would say.
It probably be slightly less than the current level based on what we've seen so far with the weather, but obviously more hot weather or in the fall more cold weather could have a stronger impact on our on our trading operations. When it comes to natural gas, but we definitely see the hot weather showed up here in the third quarter and it will have it will have an impact.
Okay I appreciate it.
Thanks for the.
Next we have Terra Tommy.
Of JP Morgan.
Hi, good afternoon.
Hey, Hi, Derek.
On the.
On the second lien note repurchases and before taking questions I apologize, but the second lien note repurchases reduced the upcoming a haddow payment in 2021.
I'll, let Mark go ahead and answer that.
Yes, the way to think about that as just a proportional reduction in that obligation as those bonds were repurchased.
So not quite a one for one WCS obligations.
Im sorry.
Couldn't hear your little bit light you want to repeat your question.
All right not quite a run for one reduction, but it does reduce the obligation.
Yes on a proportional basis.
Got it.
And then secondly on the colony capital JV is that going to be accounted for.
Similar to the benefit street, JV or the or the mirror JV it'll be like the mirra Macquarie JV, it's more more traditionally used to seeing.
Okay, so more traditional synergies.
Got it.
Okay that was it for me most my questions been asked thank you very much. Thanks Derek.
Next we have Sean Sneeden of Guggenheim.
Hi, and thank you for taking the questions.
Hi, Sean.
Yes, Todd you guys talked a lot about.
Royalties and that market remaining reasonably attractive to you.
I think if I.
Recall correctly most of those.
Reside outside of your current borrowing base, but can you just remind us are there any limitations on on if you were to go down that route of monetization.
Are there any limitations of how you could apply those proceeds for instance, you know could you captured this count on the second liens today or to the term loan.
The term loans or RBL restrict how you apply that.
Yes, so we.
Have the same baskets in place that we've had.
We have carved out a royalty out of our borrowing base. So it is a non borrowing base asset if we were to monetize a royalty.
We would add to the current basket, which is currently sits at well over $300 million, we could purchase repurchase.
And it would continue to do that so if if you had one dollar you get an another 50 cents into the basket is how it would work.
And but then we could be opportunistic and remember the way our debt currently sits is.
We have to purchase in any we can purchase in any debt at any kind of discount.
Okay. So if trading over par like our our term loan from 2016, which is at LIBOR plus tenants creates its our most egregious from a fixed cost standpoint.
That one currently we could not purchase in because it doesn't trade at a discount.
Mark and his team are working.
Get an amendment, so that because that becomes callable I believe August 12.
And.
And we'd like to be in a position to if that economics made the most sense to take that end versus the second liens versus any of the other capital part of the capital structure. We can do so so I know mark and his team have been working on that and we anticipate having that flexibility by the time of our next transaction that we pull out.
Pull across the finish line.
Got it but that's super helpful.
And I guess, maybe just follow up to that.
Mark I mean, you guys have been pretty good about managing the borrowing base throughout the cycle and how you've selective assets to contribute to that.
I know it's early but.
Are you guys thinking about this fall and I guess has.
Some of your strategic initiatives that you're working on that.
How does that factor into how you think about that.
With your with your comment on on the fall assume years, you're referring to is potential borrowing base Redetermination wonderful.
That's correct yes.
We continue to work with the banks as you know we have a track record of working very closely with the banks and keeping them right in the front seat was.
We have ongoing dialogue with them.
It's hard to anticipate today, what the price take the banks may be using it that that for borrowing base redetermination.
I think one of the things that clearly sips, our asset base apart from our peers.
Is the fact that it has relatively shallow decline rate and we've shown the banks over time, where we've gone.
Relatively stable.
Overall underlying asset value regardless of.
As we roll ourselves forward in time, even under a blowdown scenarios. So.
I think they understand that they demonstrate a willingness to work with us I hate to get out ahead of our ahead of ourselves by commenting on what.
Some forward looking might.
But take in the fall, but we looked we have taken assets out of the borrowing basis as Todd says that gives us flexibility to put some back in as we deem appropriate.
And we will keep an eye on it will work with the banks closely as we move forward to the to the full.
Got it that makes sense.
And then I guess just one.
Quick housekeeping question, but.
Tied with.
Maybe five any five passing.
How do you guys think about it.
Or is there any impact from an accounting standpoint.
For PJ liabilities or the arrow on the balance sheet does that effect.
Timing or anything along those lines.
No there is no no meaningful impact it's already accounted for.
Got it.
That's helpful. Thank you.
Thanks, Sean.
Next we have Gregg Brody of Bank of America.
Good afternoon guys.
Hi, Greg.
Just on the.
The JV just so in terms of the cost of capital and when you say the words, such as well for sure.
Remind us what those are or the ballpark.
No I think we've said what we can say I think in aggregate. We've what we've said is we feel like these terms are far superior to the Macquarie terms, which was a similar JV.
So.
But.
Again, we were lent we've said what we can really say on this in our press release announcing it and also here today on on what the terms actually are.
Understood and just to clarify the big accounting for this will be similar to the merger JV, yes.
Got it Thats it from me guys. Thanks for the time.
Thanks, Greg.
Well at this time, we will conclude our question and answer session I would now like to turn the conference call back over to Mr., Todd Stevens for any closing remarks, Sir.
Thanks, Mike. Thank you for participating in today's call CRC is already completed two meaningful transactions in the first half of the year to further de levering and advance our high VCA inventory.
Who continue to be guided by disciplined capital allocation aligned with expected cash flows to capture the full value of our high quality low decline and low risk resource base.
Aided by unrelenting focus on operational excellence, our business model is built to perform through the cycle and deliver consistent value to our shareholders. We look forward to seeing you on the road. Thank you have a good day.
And we thank you Sir also into the rest of management team for your time again. The conference call is now concluded at this time you may disconnect. Your lines. Thank you take care and have a wonderful day everyone.
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