Q2 2023 California Resources Corporation Earnings Call
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Good day and welcome to the California Resources Corporation second quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Joanna Park, Vice President of Investor Relations and Treasurer. Please go ahead.
Welcome to the California Resources Corporation second quarter, 2023 coffee.
Participating on today's call are Francisco, Leon <unk>, President and Chief Executive Officer, Nelly Molina, Executive Vice President and Chief Financial Officer, as well as CRC his entire executive team.
I'd like to highlight that we have provided at the Investor Relations section of our website B R E.
These slides provide additional information on our operations and our second quarter results.
We've also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website as well as in our earnings press release.
Today, we are making some forward looking statements based on current expectations actual results could differ due to factors described in our earnings release and in our periodic SEC filings.
As a reminder, we have a lot of additional time for Q&A at the end of our prepared remarks, and we asked that come to limit their questions to a primary and one follow up.
With that I will now turn the call over to Francisco.
Thank you Joanne M. A C. R C. Our strengths are clear cash flow carbon in California.
First our cashless trend comes from our high quality low decline assets.
These assets provide large production base with predictable cash flows from our long live reserves.
Are there would produce some of the lowest carbon intensity oil and natural gas in the U S, which we sell into markets to have access to premium pricing and advantaged realizations as compared to the rest of the U S.
Our second straight, it's our carbon storage platform carbon terrible.
Which benefits from an early mover advantage for Ccs.
Crc's large mineral and surface acreage position was the quality of our geological reservoirs are extensive search surface knowledge and joint venture with Brookfield continues to provide us with a competitive advantage.
Carbon terrible meets the nation and permit applications submitted to the EPA.
Additionally, our Ccs stores potential continues to attract significant interest from current and future emitters.
To date, we have executed five carbon dioxide management agreements or C. D. M. H for a combined injection rate of 815000 metric tons per year, which represents reservations of 16% of our poor space and good progress towards our target of 5 million tons per year of injection by year end 2027.
Our third strength is California.
California's energy industry offers attractive market with high barriers to entry.
The state is the fifth largest economy in the world.
With energy needs, that's far surpass local production.
At CRC, we probably operate under the highest environmental standards in the world and.
And our long track record of safe operation demonstrates our ability to navigate California's regulatory landscape.
California also has ambitious decarbonization goals and the right incentives to drive emission reductions throughout the state.
Trc is well positioned to help advance the speech energy transition.
And be a solutions provider to the state.
From an operational perspective, we continue to make great progress on our business transformation efforts and are now targeting 50 million or more in annualized run rate savings.
The goal of our transformation is to recalibrate their approach to reflect our current and future needs and improve our cost structure.
Therefore, we're evaluating all aspects of the business looking for operational Optimisations organizational improvements and new technologies to drive cost out of the system.
Initial actions have focused on our key business processes around wealth services chemical programs and our warehousing model.
We also see opportunities for improvement in how we utilize our contractors and rental equipment in the field locations.
By aligning our practices in our operations to the current business environment and our long term strategy, we can execute on our strategy to maximize cash flows and further enhance shareholder returns.
Note that savings from these initiatives are not included in the 'twenty three guidance you provided today, but are targeted to be in place before year end and reflected in 24 results.
In the second quarter of 'twenty three we produced 86000 Boe's per day operating one rig in long beach and thirty-five workover rigs.
A combination of strong demand and favorable pricing underpinned 69 million of free cash flow generated in the quarter.
And brings our year to date total free cash flow to $332 million.
During the quarter, we repurchased $64 million of our common shares and paid $20 million to our shareholders in dividends.
This represents 122% of our free cash flow returned to shareholders in the second quarter.
Since may 21, he or she has returned nearly $700 million to our shareholders or nearly 20% of our current market cap.
Our restaurants continue to perform in line with expectations are stable performance is best observed from our gross production results, which excludes variations from our production sharing contracts in long beach and NGL storage levels.
Our flat quarter over quarter gross production demonstrates the productivity of our stacked pay and efficacy of our downhole maintenance program.
As a reminder, we continued to see the Lacey new drill permit approvals.
To receive permits from Cal Jim for Workovers deepening since sidetracked.
Despite a lack of new drilling permits.
We remain on track to deliver 5% to 7% entry to exit production declines.
Our 2023 development plan is focused on permits in hand, and our high return re completion and workover activity highlights he or she its ability to manage the reservoirs and maintain capital efficiency, even at lower activity levels.
On a net production basis oil came in at the midpoint of our guidance range. While total production ended up on the lower end of the storing of Ngls.
We typically store NGL volumes produced during the second quarter to sell in in higher demand periods maximizing our cash flows.
On the power side, our 550 megawatt power plant provides us with the ability to manage field level power cost at Elk hills and surrounding fields as well as to optimize between taking incremental volumes of natural gas to market.
Or converting to see natural gas to power for delivery into the queso wholesale power market.
Our natural gas and marketing activities once again had a very strong quarter.
Our city gate gas prices held up much better than field level prices or natural gas and marketing activities. Once again had a very strong quarter.
The team was able to double quarterly margin results versus guidance expectations I'd taken advantage of the transportation and delivery resources, we maintain.
Looking ahead, our natural gas marketing margins should moderate in the second half of 'twenty three as California.
Natural gas inventories returned to more seasonal levels and be abundant hydro generation capacity competes with natural gas fired generation this summer and fall.
Moving to carbon management during the quarter, we execute our fifth CDMA with Burger they clean fuels for a renewable gasoline project. This project further confirms our economic type curve of 50 to 75 EBITDA per metric ton for storage on the project.
We also expanded our capacity to reserve for long Cyprus for their previously announced new hydrogen project.
Anticipated shield two injection has now more than double from 100000 to 205000 metric tons per year for the project.
These facilities. In addition to our agreement signed with them. In fact earlier. This year are planned to be located at our net zero Industrial Park at Elk Hills.
Which provides a unique benefit of offering surface acreage for Buildout midstream and co location with permanent shield to storage.
Post quarter end, we submitted another class six permit application for CTV spot.
Continuing our pole position for storage permits emissions in the queue with E. P. A.
The permit application has a capacity of 17 million metric tons of C. O two storage, bringing ctv's cumulative potential storage capacity on their permit applications to 191 million metric tons.
We continue to target a draft classics permit from the EPA by year end.
The recent EPA draft permit approval for a project in Indiana, it's encouraging for the Ccs industry and provides yet another data point of EPA support for the technology and progress.
We remain optimistic and continue to see positive traction from our conversations with potential emission sources as well as various other stakeholders.
Lastly, we continue to evaluate the separation of our carbon management business.
Carbon terrible continues to make strong progress each quarter. However, we're still in the early stages.
We continue to look for certain important milestones such permit approval project F. I D and line of sight to first year to injection and cash flows before considering a potential separation.
And now I'll pass it over to Natalie to provide an update on <unk> financial position and outlook.
Thank you Francisco and welcome again, everyone.
Our balance sheet remains in solid condition.
During the quarter, we expanded our net or be a commitment by 25 million, bringing our total commitments to 627 million.
We ended the quarter with 927 million of liquidity, which includes $448 million in cash.
Our net leverage position with snacks is a modest 0.2 times leverage while our fixed charge coverage exceed 17 times.
Even though the cyclical nature of the commodity price at keeping our financial strength is a key pillar of our strategy.
Looking forward, we are maintaining our full year production guidance.
That's Francisco mentioned before our reservoirs are performing in line with our expectation, which are informed by decades of operating history.
We anticipate modest declines in the second half of the year in line with our previously disclosed range of 5% to 7% annual decline.
We got in our capital program, we take a dynamic approach in response to commodity price volatility and focus our activity on maintaining oil production and maximizing our free cash flow.
We reaffirm our 2023 capital program to range between 202 hundred $45 million under current conditions with a heavier weighting in the second half of the year due to timing of projects and higher expected work over activity.
Oil and natural gas developments will continue to be focused mainly on executing projects using existing patent.
While commodity prices remain at healthy levels before street softened during the second quarter.
Our updated guidance reflects our strong natural gas marketing activities to date as well as our outlook for commodity price differentials.
The NGL markets reflect seasonal quarterly pricing trends in the global oversupply market environment.
On the natural gas side, our guidance reflects the unprecedented prices by X, but I guess were in the first quarter on a full year average, but also the return to normalized level in the second half of 'twenty three.
As a result, we are lowering the top end of the range about 2023 operating cost guidance by 15 million.
Lower energy related operating expenses expected in the second half of the here.
Additionally, we are narrowing the range of our free cash flow guidance for the year to 380 to 460 <unk>.
Let me remind you that our 2023 guidance is based on an estimated brand price of $77.54 per barrel and $2.87 per Mcf Nymex price.
I would keep our NASA priorities in the second half of a year or the execution of our business transformation initiatives to reduce our expected 'twenty 'twenty four cost run rate in 50 million or more.
And being responsible stewardship of the best uses of our.
Yeah.
With that I will turn it back to Francisco.
Thank you Natalie.
<unk> unique value proposition is founded on our disciplined capital allocation solid balance sheet and free cash flow generation capability.
<unk> continued progress at carbon terrible provides shareholders a way to participate in gcs in Californias a path toward a decarbonize future.
To summarize CRC strengths, our cash flow carbon in California.
Thank you for joining us on the call today, we will now open the line for questions.
Operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speaker phone please pick up your handset before pressing the keys.
At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one primary and a follow up.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Scott Hanold with RBC capital markets. Please go ahead.
Hey, Thanks, you know for my first question I was wondering you know if you all could provide an update on the class six permit process with respect to the Indiana permit that you you'd.
I indicated so if you could compare and contrast, like any kind of differences or the timeframe that they had to go through in Indiana to get theirs and and versus what you. All are doing there. So if you can just kind of compare and contrast, and if there are any differences between those I'm just trying to get a sense of your confidence in that year end target for REIT.
Receiving the draft permit.
Hey, Scott How's it going so yeah, we're we're still targeting the draft permit for CTV before year end 'twenty three.
Big catalyst for CTV be catalysts for California in general.
We're engaging with the E P a regularly.
And I hope we are the first in California, we are dealing with a different part of the EPA or REIT dealing with region nine.
So we talked to both the region nine in headquarters, but we don't have a lot of visibility into the tuned to the permitted in Indiana as best we can tell is that they they filed or before we did.
So a little bit longer timeline for them, but hard to say really from from from where we stand as to how good the permit application was in ultimately the steps that they took to get there.
So I won't comment on that permit just feel like we are.
We made a lot of good progress on the technical discussions with E. P E and still feel very much on target to get the draft permit this year.
Got it and then what do you refer to the technical progress you're you're just talking about like just the suitability of the reservoir and everything you said is that is that fair.
That's fair I mean, there's there's a financial assurances there's community support Theres a number of.
There's a number of things that the EPA is going through as they make decision on permits and I feel that critical.
Critical and the team have done an exceptional job getting us prepared but ultimately.
You know we were waiting for that final a final sign off then we have the draft permit then and the things they not only see our sheet, but the rest of the of the Ccs basis eagerly waiting for the EPA to move on more permits.
Okay and for my next question I'm really I'm sorry.
Sort of keep on the same kind of line of questioning but.
The the the community support you know aspect you know, obviously I think it's gonna be a you know.
Big you know big.
Kind of you know lifting effort to especially being in California, but can you give a sense of like what you would see our C are doing specifically to two you know get the community support and help get that through because I do think there is that a.
That comment period after you receive the draft correct.
Yeah, that's correct. After the draft permit gets granted there's a period of time for public comment and then a final permit goods granted after those are incorporated.
We're working our team is working diligently in parallel to.
To get the public comment a discussion underway and getting the support from the communities.
Our first project, it's critical that the first project is successful for all the stakeholders and we're incurring County, we're also at Elk Hills at a field that we own 100% fee simple remote from from any near bore hood any areas of concern from the public. This is the right place to have our first project.
In California, So in word the right counterparty to be leading it with T. S. We spend time with community leaders and we do community plans, we feel theres a support is there and so again to us it's not a sequential process. We very much got started already and fueled the support is gonna be there. We're also.
Working with Kern County, and the earn County Planning Commission to look at the permits that are required at a local level.
So the world get to or once that once the EPA. It gives us a sign off so.
Lot of things in motion, but we're progressing on in every respect and I look forward to getting started.
I appreciate it thank you.
Yeah.
The next question comes from Kelly, our combined with Bank of America. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
My first question I, just wanted to hit on production so coming into this year I think we were expecting to see high single digit decline by year end because of the constraints that you're seeing on the current county permitting process. So I'm, hoping that you can help us understand what the drivers are to better production performance that youre seeing is it better new well performance.
Is it some kind of tailwind from prior years or is it the underlying base and really the number my question is trying to understand what the unmitigated decline that that portfolio is.
Hey, Kelly good good talking to you. So I think you summarized in your question that the answer really well so.
Order over quarter, if you could look at gross production and that's ultimately the best way to judge the performance of the rest of the war. So you don't have like we had some NGL storage noise in the quarter in and you always have the production sharing contract, but the way you look at the rest of award is to go to gross production and where were flat quarter over quarter.
So in it is see you know tailwind we had three rigs when we started the year. So there's some benefit from performance of those wells are our current development plan, which is focused on the our Wilmington field in long Beach, it's performing extremely well can would well to well type curve, so that helps as well but.
At the end of the day, it's the quality of the underlying S asset write the PDP.
All of our base hassey naturally very shallow decline and as we're able to move opex dollars through downhole maintenance and it's we're able to the capital Workovers are were able to mitigate that base decline overtime. So it shades of low decline to start with all the activities, having the effect that we would want.
We still think the you know what the end of the day what starts fading out is similar support from the initial activity in the year. So we do see a 5% to 7% entry to exit decline I feel pretty good about that number. If you look from January to December , but we're happy with the results and in the performance of the base and and.
The way its rich the production's responded a year to date.
Awesome I appreciate that color Francesco.
My second question goes to the carbon management business now understand that there's some legislation that's in the works that's going to help define the state regulations on the C. O two pipelines and I think that's now expected in 2024, so I'm trying to understand what the impact they may have on perhaps the third parties that are situated era.
Round, you that are considering capture projects because at the moment. The majority of your off take its with Newbuild plant to be located on your own property, whereas those regulations, maybe aren't as meaningful.
Yeah. So there's a there is a lot of work happening in California to get the.
To get some pipeline regulation and the framework on their way.
We see significant support among legislators for Ccs and there's there's a lot of discussion happening on effectively what's a trailer build to a Senate Senate Bill 905 to.
To get that framework put in place.
The session is still open so I wouldn't say that it's a it's happening next year versus this year, we do see progress we do see conversations happening. So I wouldn't I wouldn't I wouldn't there out of Wouldnt put a timeline to it until we have an ability to see how the session finishes.
So but that is an important piece of legislation that needs to come out and if you think about okay. Why are we at five greenfield instill not at any of the legacy brownfield projects.
It's really two things one is the price discovery negotiations on the split of the economics, which is a normal commercial discussion between parties, but ultimately we have an existing emission source and you have a permitted zinc, which we're gonna have in multiple places throughout the state that connectivity between the two points.
It's critical in without having a good way to to understand how the tier two pipelines is gonna be regulated I think that's a it's an important gap.
Overcoming on both sides of the fence on Ccs now working you know working alongside all the decision makers and stakeholders to providing our input.
As you know hopefully you're going to get us there at the end, but the way we're thinking through this is going on greenfield projects going towards Greenfield projects, It's a tremendous way to accelerate our Ccs, we can't wait always for the regulation to be put in place on the more challenging aspects. We have a project that can be co located.
We have three projects now in fact right blue hydrogen.
Renewable gasoline N V and me and that's the way to bring the energy transition into into the near term, which is something that California really wants to see so it brings alignment.
We provide this one stop shop, it's a good way to showcase our progress as we wait for all their regulations to come into play, but you're right that's going to be an important aspect to see.
That trailer builds to 95 is something that we're very much looking to see in and that's going to help literally connect the points between emission sources and the storage bulbs.
I appreciate it I'll leave it there thanks.
Thanks Kelly.
The next question comes from Nate Pendleton with Stifel. Please go ahead.
Good morning, My first question starting at a high level can you comment on how or if recent M&A in the Ccs space has impacted your view on separating carbon terrible.
But yeah I mean, the thing is in.
Important to see the the M&A space moving on Ccs. It's a good validation are certainly of where the industry is heading and in particular for Florida, Denver, a team it's hard to predict toward where we go from here other than there's a lot of we have no new there was a lot of investor into.
Wrist and investment dollars in this space are those.
Does that lead to two combinations I think it's clear that we're heading there but.
But ultimately we're going to be all in different timelines, we're gonna be in different markets to pursue and I just see it as a good validation point that our Ccs is definitely going to be here to stay and.
Now in terms of the separation I would say you know not focused on on the.
Things that we don't control and indeed, whether we expand or not outside of our current footprint I think the focus really needs to be we need to get permits from the EPA, we need to be able to start construction and get line of sight into that first cash flow I think at the end of the day, we're going to be looking at it.
It's an early stage industry with a lot of.
People that are watching every step of the way so the best way to do it is just to take it step by step and start showing progress and that progress. We've shown in two years, there's been tremendous we'll look to accelerate that but ultimately the permit is the catalyst that I don't see M&A as a catalyst to think the permit situation with the EPA is going to be what gets things moving.
Not only for ourselves, but a lot of other people that are in this space.
Thanks Anna.
Looking at Slide 17, with your carbon tear of all projects to date and the significant addressable market. You mentioned on slide 16, I believe do you have a target cadence for adding new sequestration sites beyond C. T V five or could you provide any color as far as your outlook for additional sites.
Ah shall we would we're targeting 200 million tons of ore space to be permitted.
And we're at 191, so we're we're pretty much there in terms of the permit submission aspect to this.
What we've seen is as we saw with twenty-six Saar, which is part of CTV one.
And once you're in discussions with E. P. A once you collect more data once you have a better sense of the land position.
Able to expand the projects and that's what we did with 26 are we added capacity to that so there's always going to be room to expand beyond what we're submitting a but I think for our water. She is critical is our we've now secure the pore space that where you want to pursue we started the permitting process, it's about bringing in.
The C O two into those fields. That's the next catalyst in and that's what we're focused on there is over 20 million tons per year of emissions. If you. If you add every every single counterparty that we're talking to at the moment. It adds up to about 20 million tonnes of emissions. We we we think our forest base is stable.
To ultimately on a combined basis get us to about 5 million tonnes of emissions per year. So we're about four times.
In terms of the asset coverage of C. O two of in terms of Counterparties that were talking to or forex or capacity. So.
It's important that you know we started getting reservations, we start or finalizing deals with other parties at some point the pore spaces Gonna. It's gonna run out right. Then and then you have to restart again now theres going to be up a lot more to do we think you know its five times or poor space that we ultimately can do but our near term target is 200 million tons, so really focus on.
That ability to connect the dots with the emitters, because I think everything else, we feel like we got it in pretty good shape.
Got it thanks for taking my questions.
Thanks Nate.
The next question comes from Lytton Kumar with Mizuho. Please go ahead.
Hi, and good afternoon, guys I'm going to start with.
The oil and gas side of things Francisco, you mentioned, the 15 million target on Opex and then look at the numbers.
Really not guiding to that and you said that but could we get a sense of the progress you have made to date I know you aren't expecting an impact this year, but where are you on that project to reduce cost by $50 million.
Hey, Nathan So I'm really excited about this initiative.
I feel like we've had we have a tremendous team a tremendous organization.
But I challenge the team to see if we could do better.
And that was the question can we do better than we have in the past are there opportunities and Omar who is here with me and in though there are some team really have stepped up to the challenge and said, yes, we can do better and we're getting after it. So we gave some examples of the things we're looking at it from the way we can.
Tracked Ah theres still some opportunity to bring some contracting work in house. There. So there are places where you actually may outsource in in kind of challenging the.
You know the model that we've had for a.
Close to a decade now that's an independent company. It was a good time to kind of test are things that we could improve we're looking at warehousing model. We're looking at relationships with key vendors. We're looking argued the organizational design.
But I think that is a commitment that I have from the team is this is noggin or be a one and done process. We're always going to look for ways to improve the cost structure, and so where we might reach a finality here in in the in this quarter in terms of this first stage to get to $50 million. So we can start.
Incorporating and dive into the 'twenty 'twenty four guidance.
We're going to continue working through ways to improve the business and Theres things like energy. For example, CTV is doing a lot of interesting things with new technology on that.
That that could really work in the future and then if we can if we can reduce our exposure to the California grid, that's going to be a big benefit to CRC and a cost structure, that's a big cost driver of the energy cost.
We also have a lot of wells and those wells are great assets for US right, we were able to.
Two sidetrack, we're able to the workovers without having to have a drilling rig onsite that answers part of the question as to why we have such low decline, but we're very spread out over a large footprint. So we're looking at things like our Gen. AI drone technology things that are opened combing the way I think there, we're gonna be particularly well suited.
Did for incorporating some of those technologies when I go forward basis. So so anyway to summarize 50 million is what we have line of sight.
We think we can get to that's where we have a plus because we think we can do a lot more it's a commitment from from the team to continue to look at operations and try to bring down the cost structure and ultimately drive to higher cash flows.
Got it thank you for that answer.
Hum on the CMV side, you know you talk about the type curve or 15 to 125 million.
Million per M. M. P T. A youre close to that first million or so 815000.
CDMA sign.
This might be a long shot, but any sense of which part of the type curve you are tracking to in the first 800.
Yeah, I mean, I think so all five of our projects so far in it and that make the the entirety of that amount.
Is all greenfield storage shortly.
So that points towards the lower end of the type curves. So 50 to 75 is where we bracket the storage only EBITDA in the way to think about that is it's a lower capital.
Our requirement for those storage projects all five of the projects that we are working towards will have a capture component built into the into the facility. So you don't have to attach E. A capture of technology into an existing plant to its already embedded or that.
And plus you also have a much higher concentration of shield two as you bring these projects to life. So so those projects because theyre going to be less capital intensive less capital requirement, but when you look at our returns.
You're able to make really attractive returns.
By even with the lower EBITDA the opposite end of the model is where we have a full ccs that's a service where we called two on emitter and we do all the way from capture equipment installation to transportation to storage in that is the part of the type curves that we point to the higher levels.
As to whether it would that would point to the higher levels of the paper that also has higher capital commitments and therefore, you need a higher contribution from the incentives in order to make a return so right now we work we're focusing on the lower end.
But lower in this case means really good returns in low capital. So we're happy with those projects we.
We do.
One to pursue a brownfield projects and that's many brownfield projects as we can at the end of the day. This business is going to be successful is if we can decarbonize existing industry as much as we can that's ultimately what gets the support from California, That's what we need in the state and we would think we're really.
Well positioned to achieve both ends of the spectrum.
Got it okay. If I can sneak one last one just any update on the Kern County, permitting a I know you had said that you expect permitting to restart.
Second half of next year, but any updates there.
That's still the timeline or add.
We anticipate a hearing in the appeal.
Process to be scheduled sometime in Q4 of this year.
And that pushes a decision.
A final decision to at the beginning of next year.
So we were looking to be back to normal activity in the second half of 'twenty four so no real changes other than we think the hearing is going to get scheduled here very soon.
As a reminder, we're working on alternative plans to field level, what's being challenged in the court does the current county, our environmental impact report, we're doing field level sequels in an E. R. Schwarz three of our core fuels in the San Joaquin Basin that collectively have about 90% of our proved undeveloped.
We're also looking for inventory and ability to drill wells outside of Kern County, So it's in all of the above strategy to get us back on track by the second half of next year.
Great. Thanks, so much.
The next question comes from Leo Mariani with Ralph M. K M. Please go ahead.
Yeah, Hi can you guys talk about just the the production guide in the third quarter. The second quarter, you get 86000 barrels a day net he has talked about seeing some declines in the second half, but your third quarter Guide is 86 to 88 that implies sort of a you know a modest increase can you just kind of help us connect the dots there.
Hey, Leo yes. The so you basically are recovering some will the Ngls that we were not able to sell a show on a sales basis that stirred shift happens so absent.
Any any big movements in price that affects your P. S. E barrels are we see it at the best the right range 86 to 88 for the third quarter. So that does imply a further decline in the fourth quarter.
Okay. That's helpful. And then just in the second quarter I mean, it looks like you guys paid out more than 100% of your free cash flow to shareholders in the form of dividends as well as buybacks is that sort of an anomaly or are you guys sort of comfortable potentially doing that just depending on.
Let's see where the stock is and then the macro situation based on the strength the balance sheet here.
Yeah last year, we paid over 100% of free cash flow. If you look at 2020 two.
Year to date, we're closer to 50, we had a very high cash flow order in Q1 and.
And and so if you average Q1 into Q2, even though Q2 is higher than 100% worried about 50%, we're very comfortable with our with our capital allocation strategy, but we do evaluate the best method to provide returns and value to shareholders every quarter I mean, we do have a fixed dividend.
But it's about $1 13 per share.
So that's that's in there that they gives the market a more of that fixed component and then the rest of it is discretionary based on how the business is looking in and where we see the most value. We do look at what does the buy the best return.
For the company and that's where we act on so you know.
We haven't been prescriptive on the shareholder buybacks.
But because we like to assess every quarter to where we are but if you look backwards, we have been over 100% in 2020, two and but right now we're closer to 50% for the year.
Okay. That's that's helpful.
And then also could you just comment on you know sort of existing competition for Ccs deals out there in California as far as I know you guys are the only ones that are kind of puts them. Some deals on the board here with with five deals, but certainly correct me if I'm wrong any information you can kind of provide about the competitive landscape would be helpful.
Also is there any update on the sale of the parcel that you're working on in Huntington Beach area.
Yeah.
Yeah, I'll go with the with the the Fort Apache, which is R. One acre parcel in Huntington Beach first and then I'll come back to the Ccs question.
So we have we are making progress there's many components to converting in oilfield too.
To a real estate project that we're going through abandonment are we're looking at the regulatory requirements, but you also look at market conditions.
So we're working through all three as we said before we think this gives us a really good look as to what ultimately be the decision that we make for the bigger property, which is 90 acres down the street.
So it's a good way to test the waters and make sure we understand all the requirements are from.
From the law and and ultimately gets this.
<unk> sold into are the highest and best bidder. So we're working through that are we said.
From the beginning said that this was going to be something that we would do by year end.
Not just because we want to just provide a lot of cushion there's a lot of things to do and we're working through it I think I reported last time. We are we started working on abandonment Ah Theres a few wells on site Theres facilities, we have to remove so all of that process has begun and they show ongoing so I look back to will.
Reports the results of Oh that sale later this year.
Assuming market conditions hold so so that's kind of the update there we're working through that in terms of Ccs.
In competition I mean, you can see if you look out to the EPA website, you'll see that on the permit submission front, we're not the only ones. There said theres a number of other projects out there.
They do tend to be more for self solutions, meaning theres parties that want to reduce their own emissions in they have a site that they identify nearby and in there that's how they're trying to do so we haven't seen E carbon terrible.
Competitor come out that that has a view to look at all of the states emissions quite yet at.
At least not based on what you can see publicly we do see a competition.
Competition, we do see this as being a S.
Not like the Gulf Coast, where it seems like a free for all but here youre going to have a you're going to have competition. We think there's going to be a very successful business on they're taking and that we see others that are either trying to acquire land others that are you going to start seeing some permits we think in the P. A.
Oh parties that maybe they're not there or Don Register as as potential counter parties in the state so.
So feel good about what we've established to date, which is the core position that we wanted to have and we'll we'll to medley ties to our commitments but.
Yeah don't be surprised if within the next six months you start hearing about others coming into California.
Thank you so much.
The next question comes from Noel Parks with Tuohy Brothers investment Research. Please go ahead.
Hi, good afternoon.
Yeah.
I know how are you.
Good thanks just.
Just a couple of things.
You know I was thinking that of.
Of course that a company has the long roots in oil and gas production and you observed that C.
Ccs is a very young industry. So for the five deals you've done so far you know it was kind of a sense that the train is just starting to chug, along and maybe who can ready to leave the station for CCF. I was wondering can you sort of walk through the deals to date and describe what types of things.
You were negotiating on each of these transactions to get you are to get the customer to pull the trigger sort of like what are what are the issues that are in the mix when you're with with these past deals.
Yeah. So you know we are the.
We're kickstarting the energy transition in California, and there's a there's a lot of interest to develop markets like hydrogen or renewable gasoline the project, we announced converted today.
But in a lot of cases.
You don't have first of all you don't have the product, but you also know how the market and the offtake. So the energy transition I think we were you know we're very committed to it but we need to drive towards that and that's a lot of investment that needs to come in and that's where you know we are working with agencies to get the permits.
On their way otherwise the transition is going to take much longer.
But what we're trying to do with the conditions precedent that are established in the C. V. Amazed basically relate to things like offtake agreements in some cases, we have already an existing offtake agreement with the Counterparties in some others, we're working through that right. So who's going to buy the blue hydrogen from loan Cyprus critical.
That we understand that are in and that's in terms of are you know we have preserved the option to invest into the projects on all five at this point Ah Boy, that's a good way to really look into the market and how that evolves now we there's a lot of groups are in a lot of very.
So a lot of groups with very deep pockets that that one of the belt that hydrogen network for heavy trucks in California, but that doesn't mean that things we have something like seven stations in the entire state. So that that's going to require it's a little bit of a circular kind of chicken and the egg problem behalf off takers that want the product that they are building plans.
We're ready to go and then but you don't have the hydrogen in a form that's readily available and cost efficient that that ultimately they can sell so we're trying to bring all of that together on these projects. So but again, it's very well aligned with where the state is asking us to be and so we want to be there.
Tip of spear, we wanted to be the leader in this space, where we want to create these markets, but it's going to take some time now if you'd think about brownfield greenfield right. Because this may be sounds like it's early stage in its not going to get there it will get there and again, because we're focusing on areas, where we already owned the land and we're gonna be co located.
With the rest of the wars that that brings us much closer to a final investment decision than others. If you had a brownfield project you still have to install a capture facility on an existing plant and then make sure you have the right build out on the pipeline. So this is why these projects are not happening next year right. That's what we said.
You know to get to our critical mass of injection. We're looking at end of the year 2027, because a lot of these projects have to come together.
But theres. So just again to recap it's a lot about the offtake agreements was going to be buying these products is the support going to be there. What's the price are we went through a significant change positive one where the I R. A last year and 45 Q, providing a much better support for some of these projects and that's where we're actively.
Trying to capitalize shown on the screen field projects, but there's still a lot a lot of work to do but ultimately that classics permit for US is the catalyst that all that gets a lot of things going we have the capital with Brookfield, we get the permits and it's a matter of starting the construction in getting these products to market.
Great. Thanks, a lot and that's what I was looking for.
And.
You know are you also talked a bit about our technology.
Technology development you're talking.
Largely about in house applications for our cost savings, but.
Just zooming out a little bit too and he's got a little bit of a Devil's advocate question.
Hum post injection of of C O two.
I was wondering if you have.
Got any worker.
Talk about what sort of monitoring technology post injection youre going to need and I'm just wondering.
Is that so is that something that's costly or the message or the vendors for doing that standardized Jessica.
Just thinking about as you have.
Worries about not you don't need the opposition to.
Injection of C O two.
You know just further forestalling any concerns that might be there around it staying sequestered et cetera.
No the great question and I'll pass it all do Chris Gould, the Detroit answer Yeah, Hey, there I think the first the most important thing to understand when it comes to monitoring is.
That's part of the E P. A class six permit.
So all their requirements are spell it out as to what needs to be done and how for how long by what sensitivities those need to be done.
<unk> into if you will.
So theres really not a lot of guesswork there we know what we have to do and we will get the permit on the basis of complying with that when it comes to fulfilling those requirements. There's a lot of different applications or opportunities to do it through collaborations with existing [noise] monitoring all the way through.
<unk>.
You know new technologies that we've been heavily engaged with the D. O E. Other universities that conduct this sort of monitoring and have done so for many years, particularly in a state like California. So we feel very well prepared for complying with the that the permit.
Requirements with an abundance of different you know emerging or existing technologies. Thank you.
Great. Thanks, a lot.
And we have a follow up from Scott Hanold from RBC capital markets. Please go ahead.
Hey, Thanks Francisco Real quick you mentioned you know obviously on the shareholder return.
All are going to look at what.
Creates most values for the shareholders.
Just some context, you know obviously, you've got the base dividend in there, but you know as you kind of step in and look at the the buybacks, obviously when you're doing it before for the last year or so I mean doing it under $40 that was sort of a lay up decision right now your 10 to $15 per share higher like can you walk us through that thought process.
So you know from from your on the allocation of those shareholder returns like where does the stock price play into that and how do you think about like where it is today versus you know, obviously, where it had been over the last year.
Hey, Scott welcome back so what's your price targets like 60.
So.
No.
Got it Oh, yes, so we have the option to increase the dividend we have the option to continue with buybacks. We also can look at the debt Oh all options are on the table, we we like to be opportunistic because just like we did last last quarter.
We were able to buy inducer shares at 39, and if you look at the history over the last four five months.
We were able to pick.
Pick a really good time to deploy the cash to Dubai, the the lowest average price where the share.
That discretion that ability to make a decision really comes from a returns oriented analysis right. So we look at the opportunities in front of US and then we make a decision now well, we even though there is discretion in the how we are how we return cash to cash to shareholders. We're very committed to the program into we turned the highest.
Mount of cash to the shareholders over the long run right. So even though there may be some variability in the amounts in the quarter and the like are we do look at it actively and ultimately we're very committed.
Now we E. S. A reminder, right we didn't talk about it today, but we have the high yield indenture that ultimately governs.
Our ability to distribute cash via either dividends or buybacks in the last 12 months, 50% of net income calculations, so dairy see oil price or commodity price component to it if you're bringing in you might have a period of very high prices at the moment.
But you're bringing in lower commodity prices from the last 12 months and that access of capping mechanism right. So because we dealing with those caps the and youre dealing with discretion is very difficult to be more prescriptive, but very committed to returning as much cash to the shareholders as we can.
That's helpful and one real quick one for me just to close it off for me just on some of these greenfield projects that you all have CV amaze for when you think about you know obviously you have your classics permit which is something you're working towards but are there any other like permits are approvals that we should be thinking about to get.
Blue hydrogen or bloom on your renewable gasoline facility approved either at the state or even at the current County Planning Commission is there any specific approvals or or legislation that govern some of that.
Yeah no sure.
Do you need a conditional use permit that's a critical local California permit.
And that's and.
Doing in conjunction and working very closely with the Kern County Planning Commission.
So those conversations are ongoing for the projects that are going to be at Elk Hills like I said before we were working on all of those in parallel.
It's nice to have the the current accounting planning commission there because they see all aspects of the well or the energy spectrum right. They they are the ones that do the conditional use permits for oil and gas, but also for solar and wind projects. So it's a natural extension of what they do to look at the greenfield projects and be the the.
The group that oversees this permits.
So that's one to look for and but like I say, we're working through it there they're aware of our plans a lockstep working with a lot of the you know the same information that you send to the EPA you have to provide locally so that would be one to look for after we get the draft permit this year.
We'll share more of the progress in the inner workings of the California approval. So that that's the one I would highlight certainly we're looking for the.
The pipeline regulation to also be put into place in the near term that's going to be critical as we move away from co location.
Thank you.
Okay, well, that's a wrap thank you so much for spending time with us and look forward to seeing you on the road, we're gonna be going to a number of investor conferences in the coming weeks and look forward to seeing everybody in person. Thank so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Goodbye.
Yeah.
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Okay.
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