California Resources Corporation

Good afternoon and welcome to the California Resources Corporation third quarter earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note This event is being recorded. I would now like to turn the conference over to Scott Espenshade. Please go ahead.

Thank you. I'm Scott Espenshade, Senior Vice President, Investor Relations. Welcome to California Corporation's third quarter conference call. Participating on today's call is Todd Stevens, President and Chief Executive Officer of CRC, and Francisco Leon, Executive Vice President and Chief Financial Officer, as well as several members of the CRC executive team. I'd like to highlight that we have provided slides in our investor relations section on our website at www.crc.com. These slides provide additional insight into our operations and third quarter results plus additional information. Also, information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures is available in the investor relations portion of our website and in our earnings release. Please note that our third quarter information is being issued as a debtor in possession and our emergency share count and basis of accounting will change due to CRC implementing fresh start accounting in the fourth quarter. As a result, the fourth quarter results will not be comparable to the third quarter. As a reminder, we officially withdrawn any and all guidance that relates to 2020 in our operations due to our emergence in the fresh start accounting. Today's conference call contains certain projections and other forward-looking statements. within the meetings of federal security laws. These statements are subject to risk 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 on the company's 10-Q, which will be filed later today. We'd ask that you review it in the cautionary statements in our earnings release. A replay and a transcript will be made available on our website following today's call and will be made available for at least 30 days following the call. I will now turn the call over to Todd.

Thanks, Scott, and thank you to everyone for attending CRC's third quarter earnings call. We're glad to be back reporting our results and look forward to discussing the significant value opportunity within CRC. CRC has always had a low decline, stable, high margin, world-class asset base to deliver affordable, reliable, and sustainable energy to Californians. With Chapter 11 behind us, CRC now has a strong balance sheet and one of the best leverage ratios in its peer universe. Even in the face of market volatility, we are exceptionally well situated to thrive and create substantial value for our shareholders. First, I want to acknowledge and welcome our new board of directors, whose members share our values of character, responsibility, and commitment. The board has already shown keen insight into our business, market dynamics, and governance. We're excited to work with the board in setting CRC's strategy to create and deliver value for investors in 2021 and beyond. For those of you who are new to CRC, let me give a short introduction as we are quite advantaged over most companies in our sector. CRC is a differentiated energy business known for our low-decline conventional oil production, low capital intensity, and exposure to the Brent crude oil markets, which benefits our realized pricing. In addition, CRC has an integrated midstream infrastructure, highly efficient power plants, successful marketing and trading function, and an enviable suite of sustainability projects that strengthen our ability to generate free cash flow while enhancing our capability to operate safely and productively in California. We are now unburdened from the capital structure imposed upon us by our former parent at our spin almost six years ago. Not the way we wanted to get here, but hey, we're here. With a new and much stronger balance sheet, you can expect CRC to build on the strengths of our underlying business. Our low-decline capital-efficient assets provide a high degree of operating flexibility, which enables us to consistently operate within cash flow and maintain a disciplined focus on return on investment capital through our value creation metrics. With a solid financial foundation, we are confident that we have the right portfolio and team in place to deliver value to our shareholders. Our simplified balance sheet, combined with our disciplined capital allocation, phenomenal assets, and strong relationships in California positions us well to succeed through the commodity price cycles and meet consumer needs and investor priorities. We invite you to track our efforts to drive down costs, maintain a strong balance sheet, and deliver solid returns and cash flow. Let me first talk about our new balance sheet. Our restructuring process has simplified our balance sheet and eliminated the midstream JV at Elk Hills. Additionally, we've also taken the opportunity to further improve and optimize CRC's cost structure to be competitive and profitable in the current Brent price environment. Our balance sheet and credit metrics now reflect a crossover credit right on the crest of the investment grade that matches our high-quality portfolio of assets. We will continue to utilize our capital discipline to maintain this strong financial foundation, which we believe is a major differentiator for CRC. Through 2020, we flattened CRC's cost structure and made it leaner. All told, cost-cutting efforts have achieved a reduction of well over $300 million in lower production costs and G&A. annualizing the difference between the third quarter of 2019 and 2020. These actions promote our ability to operate profitably in a $40 Brent environment, maintain crude oil production, and deliver free cash flow. However, we are never satisfied. We'll continue to focus on ways to decrease our cost structure, enhance our revenues, and drive further efficiency. Our unique asset base provides CRC and our new board with multiple levers to drive free cash flow for the company as we develop our 2021 investment plan. We have also continued to demonstrate strong capital discipline. Year-to-date, we have invested a total of $131 million with $37 million of CRC capital and $94 million of capital from our joint venture partners. The vast majority of that amount was invested during the pre-pandemic period with only $7 million of internally funded capital invested in the second and third quarters. We will have limited capital investment in the fourth quarter. Let me now give you a deeper dive into what we see as the major investment attributes of CRC's business and the elements of our strong and sustainable foundation. First, we have reinforced our longstanding value focus. We have maintained the same CRC DNA that investors have come to respect over the past six years. We'll continue to live within our cash flow, focus on reducing costs, enhance margins, and utilize our VCI metric, which supports disciplined capital allocation to generate attractive returns on investment through the cycle. Recall that our value creation index is a cash-on-cash return metric or present value index that we utilize to test every new investment we consider, ensuring we are maximizing returns. In this commodity price environment, we rely heavily on payback metrics as well. As the largest producer in California with over a 2 million acre land position, we are well situated to focus on growing value from the Golden State's prolific yet underdeveloped resource base. Our diverse portfolio of low-decline assets with low capital intensity uniquely positions us to generate strong cash flow. Second, these are assets we know exceptionally well. CRC's business encompasses all four major productive bases in California with integrated operations that provides a unique opportunity set and synergy for sustainable operational excellence. We operate in world-class oil fields where our highly skilled team deploys technological innovations to deliver value through primary, secondary, and enhanced oil recovery. The state's recent energy supply challenges and its over-dependence on imports reinforces the value of our resource portfolio and infrastructure for the world's fifth largest economy. Finally, CRC's culture is built upon a commitment to ESG leadership, which is detailed in our third annual sustainability report that we released last month. This report illustrates the longstanding commitment and dedication of our workforce to apply ingenuity and technology to meet Californians' needs for sustainable, affordable, and reliable energy, and to contribute to our communities. This report also summarizes our progress on our 2030 sustainability goals for carbon, methane, water, and renewables, which aligns us with the state's climate goals. As I noted, CRC has an industry-leading portfolio of sustainability projects, and our 2019 climate disclosure was recognized by CDP earlier this year with an A- ranking at their leadership level. I encourage you to read our sustainability report. Our 2030 sustainability goals aren't mere aspirations. Achieving annual sustainability project milestones and HES metrics is directly tied to the annual incentive compensation of our management and workforce. We believe CRC's sustainability strategy exemplifies ESG leadership that is directly aligned with the state of California. Further, I want to provide a specific example from the third quarter that demonstrates the diligence of our workforce. in helping our fellow Californians overcome the current challenges. In August, California was hit with a heat wave and significant wildfires that jeopardized the state's electricity supply. Our operations team responded rapidly by restarting a dormant cogeneration plant and reducing our electricity demand during peak demand hours to conserve electricity for our communities. Our state's challenges with energy liability have shined a spotlight on California's needless dependence on imports for more than 70% of our oil, 90% of our natural gas, and nearly a third of our electricity. To meet California's climate goals, we believe it is essential for California leaders to apply the same safety, labor, and environmental standards on the production of imported energy that we adhere to in every day in our operations. Doing so would ensure that California's leading policies and ambitious goals improve the global environment and would encourage more producers worldwide to implement leading sustainability goals and ESG practices like CRCs. I would like to thank all our employees for their dedication, focus, and efforts throughout 2020. They have simultaneously preserved and protected the business and delivered significant cost savings while maintaining record safety performance during the pandemic. I'm particularly proud of our plant and field workers who have delivered every day the energy that is needed day in and day out during this challenging year. I'd also like to thank all of California's essential workers who continue to meet our state's daily needs for food, water, medical care, and energy. As economies are struggling to restart around the world, we have seen a partial return of petroleum demand, but it is a long road to full recovery. We anticipate that progress on COVID-19 vaccines or treatment will eventually restore economic activity and further support petroleum demand, particularly for jet fuel. While we don't expect improvement in crude oil prices heading into 2021, The curtailment of capital investment in the sector across the globe should eventually balance supply and demand. We'll continue to apply our VCI and payback metrics in evaluating our investment alternatives in this price environment. At this point, I'd like to introduce Francisco Leon to many of you at CRC's new CFO. Francisco has been with CRC and its predecessor for over 15 years and has served in many roles, most recently as EVP of Corporate Development and Planning. I've worked with Francisco for many years, and I feel that his skillset in capital allocation and value creation will be a major plus in his new role as CFO. He has been an instrumental part of our restructuring and our cost reduction efforts. Francisco will summarize the core elements of our emergence and third quarter results.