California Resources Corporation

Good afternoon and welcome to the California Resources Corporation 2022 First Quarter Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Start and 1 on your telephone keypad. To withdraw your question, please press Start and 2. Please note this event is being recorded. I would now like to turn the conference over to Joanna Park, VP of Investor Relations and Treasurer. Please go ahead.

Thanks. Welcome to California Resources Corporation's first quarter 2022 conference call. Participating on today's call is Max McFarland, President and Chief Executive Officer, Francisco Leon, Executive Vice President and Chief Financial Officer, as well as the entire CRC C-suite executive team. I'd like to highlight that we have provided slides on our investor relations section of our website, www.crc.com. These slides provide additional information into our operations and first quarter results. And 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 release. Today's conference call contains certain projections and other forward-looking statements. And these statements are subject to risks and uncertainties that may cause actual results to differ. Additional information on factors that could cause our results to differ are available in the company's 10Q and 10K. A replay will be made available for 30 days following the call on our website. And as a reminder, we have allotted additional time for question and answer at the end of our prepared remarks. We ask that the participants limit their questions to a primary and one follow-up. With that, I will now turn the call over to Matt.

Thank you, Joanna. 2022 began with a reminder about the importance of reliable and affordable energy, as well as a continued focus on energy transition. And CRC made progress on both. First, our core low-carbon intensity E&P business delivered on expectations. Poorly production was in line with guidance, which accounted for our previously announced CGP1 maintenance, along with the Lost Hills divestiture. And the business generated $61 million of free cash flow during the first quarter after the impacts of these two events. If you normalize for the CGP-1 outage, our free cash flow would have been $105 million. Due to a favorable commodity outlook and strong anticipated returns, we are expanding our drilling program in the Los Angeles basin by adding an additional rig in our Wilmington field for a total of five drilling rigs in our overall operation. And we are raising our 2022 oil production by 1,000 barrels of oil per day, raising the 2022 midpoint guidance of our EBITDAX by approximately 88 million and the midpoint free cash flow guidance by nearly 53 million for the full year. Additionally, throughout the quarter, we continue to advance our commitment to the energy transition. On the permitting side, CRC's carbon management team submitted two Class VI permits for an incremental 80 million metric tons of CO2 sequestration for two new projects in the Sacramento Basin, thereby creating a second CO2 storage network in the San Francisco Back Bay area. With these two permit applications, we are more than halfway to our 2022 goal of 200 million metric tons of complete permit applications submitted. On Carbon TerraVault 1, we continue to have a very CONSTRUCTIVE CONVERSATION WITH OUR EMITTERS WHO REPRESENT APPROXIMATELY 20 MILLION TONS OF EMISSIONS PER YEAR. AND OUR INTENT REMAINS THE SAME ON CARBON TERRAVOLT 1. WE ARE TARGETING YEAR END 2022 FOR SELECTION OF THE FIRST 1 MILLION TON PER ANIM EMITTER CONTRACT. ADDITIONALLY ON CPV 1, WE HAVE SUBMITTED PROJECT PERMITS WHICH INCLUDE THE CURRENT COUNTY CONDITIONAL USE PERMIT, A CURRENT COUNTY ENVIRONMENTAL IMPACT an EPA monitoring, reporting, and verification plan. And we are working to submit an LCFS application for CTD1 in the third quarter of this year. These efforts highlight CRC's uniquely positioned asset base that allows us to provide much needed low carbon energy today and net zero fuel for the future. Second, as we envision the net zero future, we believe it will be necessary to leverage existing infrastructure to distribute low carbon and net zero solutions by creating a lower and more specifically an emissions-free fuel. We are therefore excited about our prospects of creating the first net zero carbon barrel in California. These technology advances, projects, technologically advanced projects can create additional energy transition jobs in our state while also offering Californians fuel with a substantially lower carbon intensity than that of an imported barrel and further lowering our overall CO2 emissions and the state's carbon emissions. Therefore, this net zero energy is the solution and emissions are the enemy. So let's focus on eliminating emissions. A recent report by the Intergovernmental Panel on Climate Change, or the IPCC, recently cited carbon dioxide dioxide removal as an essential step to meet the targets of the paris accord validating our view of the importance of building out our carbon management business via carbon terrible to store third-party emissions thereby reducing atmospheric co2 concentrations in addition to this it is imperative that crc finds ways to abate our own emissions and make progress towards our own full scope 2045 net zero goal as well full scope being not only scope one and two, but also offsetting scope three emissions for a true full scope net zero. We have evaluated our portfolio and estimated that we have approximately 200 million barrels of potential CCS plus reserves at our Elk Hill field utilizing CO2 recovery, meaning CRC has the opportunity to permanently sequester CO2 emissions while replacing some of our production with an incremental supply of net zero barrels. For the past 12 months, we have analyzed and reviewed the DOE supported feed study results for our cow capture project at CRC's 550 megawatt Elk Hills power plant. As a reminder, this project captures the flue gas off the power plant for permanent storage in oil producing reservoirs. We concluded that further evaluation of operational strategies and cost proposals may yield better results and increase the viability of this project. As a result, we have agreed to explore the development of next carbon solutions for NCS technology based on a FEL2 or pre-feed study, which suggests significant capital reduction and operational improvements could be made to the original feed study. Additionally, NCS has performed over 11 FEL feed studies and has identified opportunities that work with low concentration CO2 emissions similar to those at the Elk Hills Power Plant. NCS is expected to conduct this feed study over the next six plus months and positions us for an investment decision by the end of 2023. The project is slated for the Stevens Reservoir at Elk Hills, which has similar characteristics to CTU1 and is compliant with LCFS requirements and eligible for 45Q credits. Said simply, this means permanent CO2 storage. The project is expected to yield approximately 1.4 million tons of injected CO2 emissions per annum, or 28 million tons for the life of the project, and produce an incremental 7,000 barrels of net zero oil per day. To put things in perspective, California leads in domestic electric vehicle sales. with approximately 200,000 sales in 2021. Through CRC's CalCapture project, the equivalent emissions from 300,000 gas-fueled vehicles will effectively be removed each year from the road, further supporting California's climate goals and the Paris Climate Accord. Said differently, the captured emissions equate to powering 300,000 gas-fueled passenger vehicles every year with net zero fuel to create net zero tailpipe emissions. We see this as one of the most efficient and economical ways to implement the energy transition broadly while leveraging the state's existing infrastructure. This full-scope net zero barrel will be made in California by Californians in a state that has ambitious climate goals but also relies on crude imported from high carbon intensity sources with less stringent environmental standards to meet its demand. We believe carbon management is a natural extension of our core competencies, and CRC is able to bring scalable and commercial carbon management solutions to help advance the energy transition for a lower carbon future. Switching gears, with ample liquidity of $744 million, we maintained our disciplined investing approach and solid financial foundation. We continue to see our equity deeply underappreciated And therefore, we are increasing our share repurchase program by 300 million to a total of 650 million and extending it through the second quarter of 2023. We believe this is the best path to providing returns to shareholders. Again, I'd like to thank the employees for their dedication and hard work. Our low carbon intensity EMP and carbon management teams continue to deliver strong results Thank you for being here today. And with that, I'll turn the call over to Francisco. Thanks, Mac. Good afternoon, everyone, and thank you for joining us on this call. As Mac mentioned, 2022 began on a good note for CRC. During the first quarter, we produced 88,000 net barrels of oil equivalent per day, in line with our expectation, given the planned CGP-1 maintenance and lost sales sales. Speaking of CGP1, I would like to highlight that work was performed safely and ahead of schedule. I would like to thank the team for their efforts. CRC has generated positive free cash flow for the last five quarters in a row, with $61 million during the quarter and $206 million of adjusted unit tax. This demonstrates CRC's significant cash generation capability and potential for sustainable shareholder returns. In fact, After investing in our four rig drilling program and advancing our carbon management business, we returned over 100% of the first quarter's free cash flow through a combination of our share repurchase program and our 17 cents per share dividend. Given the confidence in our assets and commodity backdrop, we're expanding our SRP by 300 million through the second quarter of 2023 for a total program of 650 million. We're also declaring a 17 cent per share dividend for the second quarter. Commodity realizations remain strong across all of our streams. And for the remaining of 2022, we expect realizations to be within historical norms. Despite these strong realizations, our legacy RBL credit agreement hedges continue to be a headwind, resulting in a quarterly 181 million cash loss. Moving forward and taking into consideration the additional flexibility within the revised RVL amendment, our forward hedging strategy will focus on maintaining financial discipline, protecting our downside while supporting our capital allocation objectives, including the investment in our EMP assets, growing carbon management business, and shareholder return initiatives. With respect to the new RVL amendment, Post quarter end, CRC successfully amended the RVL credit agreement for two key items subject to a one and a half times or lower leverage test. First, CRC will no longer have minimum or rolling hedging requirements. The second item allows us for a limited restricted payments basket, providing additional flexibility for share repurchases or other shareholder returns and investments in our carbon management system. As we turn to the cost side of the business, on slide nine, we saw total quarterly operating costs rise by nearly $2 per VOE, quarter over quarter, mainly as a result of lost production from CGP-1. In addition, increases to natural gas prices drove energy-related operating costs 22% higher on a per VOE basis from the previous quarter. Per unit non-energy operating costs were mostly in line with expectations. accounting for the CGP-1 plan turnaround. As a result, we expect our per barrel non-energy operating costs to return to our normal levels for the remainder of the year. During the quarter, we invested $99 million of capital, which includes $65 million of P&C and capital workovers and approximately $50 million for CGP-1 maintenance. Given the improved commodity environment and the expected results of our drilling program IRRs, of over 100%, we are adding a fifth rig at our Wilmington field in Long Beach. This rig is expected to bring an additional 1500 net barrels of oil per day to our exit production, assuming flat current prices. I'd like to take a moment to discuss our Wilmington field assets. These are high quality water floods with high cumulative recoveries, low decline rates and low maintenance capital needs. We expect IRRs of new wells to be above 160% at current commodity levels with paybacks of around one year, which is similar to the rest of our 2022 drilling program. We continue to see the strength of our assets and the depth of our inventory perform above our expectations. I'd like to remind you that the PV10 of approved reserves at 2021 SEC prices was $6.2 billion, which grows to $8 billion at $80 brands, and it's more than double our current enterprise value. We expect our 2022 drilling program to deliver NPV of $445 million, or $5.73 per share, and brings forward value to our PDP which already represents approximately 80% of the company, 84% of the company's value. We continue to see significant portfolio optionality in our low-decline assets with a large number of drilling locations and vast mineral acreage. With close to 14 years of reserve life, we can continue to self-fund our low-carbon E&P business, sustainably deploy additional shareholder returns, and fund our carbon management activity. The first quarter of 2022 was CRC's largest quarter of share repurchases to date, further demonstrating CRC's commitment to shareholder returns. We have repurchased approximately 239 million since the inception of the program, resulting in the repurchase of approximately 7% of our shares that we had at the emergence. Even after a quarter of higher capital investment and shareholder returns, we continue to build our cash balance to 328 million at the end of the quarter, all from 305 of cash at the end of 2021, and improve our already strong net leverage ratio of less than half a turn. Moving to our 2022 corporate guidance on slide 15, and given the rise in longer-term outlook for commodity prices, we're adjusting our 2022 guidance to reflect $98 oil price and $5.30 natural gas price, as well as the impact of an additional rig in the Los Angeles Basin, higher energy prices, and some reclassifications. In summary, we are raising our oil production guidance by 1,000 net barrels per day, primarily due to the addition of the Wilmington Field Rig. We're raising our 2022 four-year operating cost guidance by 40 million, primarily due to higher natural gas prices, which are driving our energy costs are driving up our energy costs and the cost of gas where our steam flows. As a reminder, this increases a net benefit to CRC as we see we are net long natural gas. We are racing our 2022 EMP capital program by 25 million due to the addition of the warming fuel rate. Additionally, on the carbon management front, we're adjusting our full year estimate of carbon management capital to remove approximately 15 million of expected lease acquisition costs that will be treated as carbon management expenses instead. Reflecting all these changes, we're increasing our 2022 capital program by $10 million. Finally, we expect to pay between $30 to $40 million in cash for the year. As a result, we are raising our corporate pre-cash flow and adjusted EBITDA guidance by 17% and 11% at the midpoint respectively. Of note, prior to our carbon management business spending, CRC is expected to generate between $425 and $480 million of free cash flow from the EMP business. To conclude, CRC has a great start to the year, operating safely and prioritizing high return projects. From an exit to exit rate, We plan to maintain production this year while only spending approximately $275 million of BNC and work over capital. We're excited to continue to develop our low carbon intensity assets and with the addition of a fifth grade. Additionally, we continue to build CRC's carbon management business as we explore additional options to further drive value and increase shareholder returns. Please note that we have provided detailed analysis of our quarter financial and operational results on our 2022 guidance and the attachment to our earnings release. Thank you. And I'm not trying to call back over to Mac for closing remarks. Thank you, Francisco. In conclusion, we continue to believe that CRC is well positioned for the future and to lead the energy transition as an E&P company. The company has a sound financial position, well-managed operations, and a growing carbon management business. Thank you for your interest in CRC and for joining us on today's call. We'll now open the line for questions. Operator?