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spk03: Afternoon, good day everyone, and welcome to the California Resources Corporation Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please 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 and then one. To withdraw your questions, you may press star and two. Please note today's event is also being recorded. At this time, I would like to turn the conference call over to Joanna Park, Vice President of Investor Relations and Treasurer. Ma'am, please go ahead.
spk01: Thanks, and welcome to California Resources Corporation second quarter 2022 conference call. Participating on today's call are Mac McFarland, President and Chief Executive Officer, Francisco Leon, Executive Vice President and Chief Financial Officer, as well as the entire CRC 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 our second 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, we'll make some forward-looking statements based on current expectations. Actual results could differ due to the factors described in our earnings release and in our periodic SEC filing. As a reminder, we have allotted additional time for question and answer at the end of our prepared remarks, and we ask that participants limit their questions to a primary and one follow-up. With that, I will now turn the call over to Nick.
spk05: Great. Thank you, Joanna. We continue to deliver safe, reliable operations and strong free cash flow generations. while also demonstrating our commitment to prioritizing shareholder returns. For the second quarter in a row, we've returned more than 100% of our free cash flow generated in the quarter through our share repurchase program. In fact, our 2022 year-to-date share repurchase program has already exceeded the 2021 program. Operationally, our results in our revised outlook reflect solid execution amidst today's volatile environment. We are reaffirming our full year total production outlook and raising our EBITDAX and free cash flow guidance. And this is after adjusting for inflationary pressures to our costs and changes to our full year drilling programs related to the Kern County EIR litigation delay. Francisco will describe both these issues in greater detail later on the call. Where others have been forced to pause their programs, CRC continues to leverage our large portfolio of assets, which allows us to continue drilling. In fact, we are running five drilling and completion rigs in California, which is the majority of the active rigs in the state. Even with the earlier than anticipated impacts of inflation and additional capital to support these changes I just described, CRC is raising the midpoints of our full-year guidance by 2% on EBITDAX, and by 10% on free cash flow. Post-quarter end, we advanced our carbon management business by entering into a carbon management partnership with Brookfield to develop industry-leading CCS projects in California. The partnership will be owned 51% by Carbon TerraVol, our wholly owned subsidiary, and 49% by Brookfield to pursue capture, transport, and storage projects. and it's starting out with the initial commitment of $500 million from Brookfield for CCS projects that are jointly approved through the JV. Brookfield will contribute $10 per ton for their 49% share of the storage assets as they are developed. The first project being developed will be our 26R reservoir at the Elk Hills Field. The JV is targeting the injection of 5 million metric tons per year, or 200 million metric tons of permanent storage, achieving these targets would require an estimated 2.5 billion dollars of total capital assuming full participation by brookfield in the 5 million metric tons per annum through the jv suggests a potential follow-on investment of more than a billion dollars from brookfield which to be clear would be incremental to the original 500 million we are excited about our partnership with brookfield and how this partnership can advance decarbonization and the energy transition in California. I'll now turn it over to Francisco to discuss our quarterly results before I provide greater detail on the Brookfield partnership later on the call. Francisco? Thank you, Mac.
spk07: For the second quarter, we delivered a just-in-it income of $1.13 per fully diluted share, which is in line with the prior quarter, and generated $83 million of free cash flow. we returned 109 million to our shareholders in the form of dividends and repurchases of common stock under our share repurchase program during the second quarter. Our assets continued to perform well, with total production averaging 91,000 DOE per day, up 3,000 barrels from the 88,000 DOE per day in the first quarter. As a reminder, in the first quarter, we completed the planned CGP-1 maintenance and sold our remaining 50% interest in the Lost Hills field. Our second quarter production was positively impacted by 5,000 BOEs per day from returning of our CGP-1 plant to production, which increased both our NGL and natural gas volumes. Additionally, our quarterly production was negatively impacted by approximately 800 BOE per day from asset divestitures and 1,000 barrels per day from PFCFX, which was all oil. Changes in our development plan and well mix in response to the Kern County Environmental Impact Report litigation also modestly reduced our oil production volumes and increased our NDL and natural gas volumes. Our original drilling program anticipated a resolution to the EIR litigation in the first half of 2022. Another hearing is expected in the third quarter of this year, and we're hopeful that a resolution could occur by the end of the year. The Kern County EIR litigation represents an operational challenge for many operators in California. However, we continue to receive permits and have a strong inventory of drilling permits for our FIBREC program for the remainder of the year. From a price perspective, CRC benefited from healthy realized prices across all three hydrocarbons. Our average realized price for oil in the second quarter after settlement payments on our derivative contracts registered $63.17 per barrel. MGL pricing remained a bright spot with realizations of 61% of rent or $68.29 per barrel, more than $5 higher than what we receive for our oil after hedges. Natural gas prices have continued to strengthen with five quarters of sequential increases. CRC realized 103% of NYMEX or after derivative settlements $6.72 per MCF. The operations teams continue to focus on our non-energy related operating costs. However, we are experiencing cost pressures in certain categories as we renew our contracts, specifically on log workovers, surface operations, and maintenance, as we also adjust our activity set. As it relates to energy-related costs, natural gas prices continue to increase. We use natural gas in our business to generate electricity for our operations and also to generate steam for our steam floods. Additionally, higher natural gas prices also increase our purchase electricity costs. As mentioned in prior quarters, we are a net long in natural gas. This means that the natural gas we produce and sell is greater than the natural gas purchased for use in our operations. While our inflation expectations are relatively more muted versus the rest of the lower 48, our full year 2022 operating cost guidance is increasing by 40 million at the midpoint, mainly due to higher energy costs, inflation, and a change in well mix. Production taxes increased by approximately 24% or $8 million for the prior quarter due to higher than expected increase during the second quarter in the tax rate assessed on our oil and gas natural gas production by CalGen. This was an adjustment to the millage rate and not a volume change. DNA was $6.76 per VOE. and adjusted G&A was $6.15 per DOE. Adjusted G&A removes stock settled compensation expense and certain non-recurrent expenses. On an absolute basis, G&A increased approximately $8 million from the first quarter, primarily due to compensation-related items, including the expected payout for the performance-based portion of our bonus plan. Annual base increase, which took effect in March 2022, and growth in our dedicated carbon management team. We have increased our total year 22 guidance for adjusted G&A by 15 million to approximately 193 million at the midpoint as we experience wage inflation. However, we expect full year adjusted G&A for E&P, corporate and other to revert to a run rate of less than $5.33 per DOE. Also for the full year, we are raising TRC's midpoint of EBITDAX and free cash flow guidance by 2% and 10% respectively. This increase in full-year cash flow guidance takes into account the changing well mix, impact of inflation, and higher commodity price realizations. TRC's total 2022 BOE average production levels are expected to remain in line with our prior guidance while oil sets a percent of total production will be lowered by approximately 6% to account for the changes. We also increased our 2022 capital program to a range of 380 to 410 million. This includes approximately $18 million for drilling and completion and an additional 13 million to addition to our work over program. We also continue to invest in our carbon management business and increase the capital guidance by 5 million. CRC continues to deliver on a shareholder return strategy. Since we started our focus on shareholder returns in early 2021, CRC has returned approximately 66% of its free cash flow to shareholders through the combination of our share repurchase program and fixed dividends. Year to date, we have returned over 134% of our free cash flow generated as our return-driven strategy rewarded shareholders with strong total returns in what continues to be a healthy commodity price environment. Even after our largest quarter of shared purchases and continued dividends, our cash balance remained healthy at $324 million, and our liquidity stands at $740 million as of June 30, 2022. Please keep in mind that quarterly free cash flow results are subject to seasonal impacts. In fact, free cash flow in the second quarter exceeded our internal expectations, and we remain confident in our increased annual guidance as we expect strong free cash flows in the second half of the year from higher revenues from LTO's power, higher NGL yields, and stronger natural gas realizations. Please note that we have provided detailed analysis to our quarterly financial and operational results and our revised 2022 guidance and the attachments to our earnings release. I'll now turn the call back over to Mac to discuss our Brookfield JV partnership.
spk05: Great. Thank you, Francisco. So a few more details on our partnership with Brookfield. CRC has leveraged our asset base and first mover position to secure a strategic investment from one of the largest global transitions funds in the world and advance our carbon management strategy. With $725 billion in assets under management and over $200 billion of that allocated towards energy transition and infrastructure projects globally, Brookfield is one of the leading alternative asset managers. More recently, Brookfield Renewable raised $15 billion through the Brookfield Global Transition Fund, or BGTF, the largest global transition fund raised to date. And it is BGTF that we are partnering with with in this JV. Combining our carbon management business with Brookfield's infrastructure and energy transition experience strengthens our CCS competitive position. Brookfield's initial commitment will be directed towards CCS projects through two JV entities, Carbon TerraVault JV Storage Co., or the Storage Co., and Carbon TerraVault JV Infrastructure Company, or InfraCo., are the two entities. StorageCo will build, install, and operate storage facilities. As previously mentioned, Brookfield has acquired a 49% interest in StorageCo for the first reservoir, which is 26R, at our Elk Hills facility at an implied value of $10 per metric ton of permitted capacity. As we continue to contribute assets towards the JV, it will be done so on the same terms and the same milestones of the $10 per ton. Brookfield's total investment for 26R is $137 million payable in three installments. The first installment, $46 million, was made at closing of the JV, with the second installment due once CTV receives the initial permit from the EPA, followed by the third installment at a final investment decision, or FID, effectively when we have a project committed for storage. The other JV, Infraco, will build, install, operate, and maintain CO2 capture equipment and transportation assets. We have structured these two entities separately because we believe this optimizes the ability to attract incremental capital through project financing. By structuring Infraco to have more stable cash flows and fixed revenue streams, the JV lends itself to project financing for the most capital-intensive aspect of the CCS value chain. We also believe there will be future opportunities for other equity investors and partners to invest in Infraco. Assuming the JV develops the full 5 million metric tons per annum and Brookfield fully participates in their 49% share, the $10 per ton storage contribution from Brookfield would enable CRC to fund all of the capital needs related to its portion of our near-term goal. Thus, limiting the need for corporate capital to fund our carbon management business. Let me explain a bit further. Recall the economic type curve we disclosed on our carbon storage update last October. Assuming a million metric tons of injection requires about $500 million of capital investment across the entire value chain, which is the midpoint of the range we showed, the JV's target of 5 million metric tons of injection per year would require $2.5 billion of capital by the end of 2027. That would be the investment made through the JV. CRC's unlevered portion of that would be about half or roughly $1.3 billion. However, we anticipate utilizing at least 50% debt, which would bring CRC's capital needs to an approximate total of about $638 million over the next five years. All of this is shown illustratively on slide 16. The 5 million metric tons per annum of targeted injection would require 200 million tons of pore space. Brookfield's 49% share of the pore space contribution at a $10 per ton for the 200 million tons is approximately $1 billion, which is well in excess of the development capital, 638 that I previously mentioned, required from CRC. In fact, under this scenario, there would be excess cash flow from the CTV joint venture for distributions to CRC or for reinvestment in additional carbon management activities. Achieving our target of 5 million tons could potentially provide an incremental $185 million of annual EBITDA, which is the midpoint of the economic type curve we showed, net to CRC and that would be with limited to no capital contributions from CRC to the JV. This means nearly 100% of the free cash flow generated from our core E&P business would be available for corporate objectives, including shareholder returns and strategic investments. This significantly increases our capital allocation flexibility and means we have optionality for more than $400 million of free cash flow generation that is expected in 2022 and annual expected cash flows in the years to come. Not only are we forming a strategic partnership for carbon management with Brookfield, we are also strengthening our strategic partnerships within the communities that we live and operate. CRC is investing in energy transition with our Kern County Energy Transition Pledge. The pledge aims to build local operating knowledge to support the development and innovation of CCS within California and more specifically within our Kern County community. The company has pledged $2.5 million to Kern County College District and California State University Bakersfield to provide resources for research and development, workforce training, energy transition, as well as energy transition related curriculum and scholarships. addition to this pledge we are also forming the crc carbon management institute at kern ccd and the cal state university bakersfield carbon terravault lecture series so to conclude we continue to deliver on our goals and are excited about our future our california carbon management partnership with brookfield is an important step towards our paris aligned net zero goal crc's progress and our near-term goal demonstrates an economically viable energy transition future. Once again, I'd like to thank the employees of CRC for their dedication and hard work. And thank you for your interest in CRC and joining us on today's call. We'll now open the line for questions. Operator?
spk03: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1. If you are using a speaker phone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. Our first question today comes from Scott Handel from RBC Capital Markets. Please go ahead with your question.
spk04: Thanks. Thanks all. Congrats on the JV with Brookfield. You know, certainly good to see a very strong and reputable partner underpinning the upside optionality you all see. Can you just give us a sense, just make sure I'm thinking about this right. You know, with, you know, their commitment and, you know, their carry of $10 per ton, Am I wrong in kind of thinking that sort of sets a relative, we'll call it, floor on, you know, what this thing's worth, you know, the carbon management business? You know, because when I do sort of, you know, back the envelope math, you know, that's sort of the, you know, sort of the implied billion ton kind of floor. That implies, I think, you know, $15 to $20 investment. of potential value to CRC. And that's obviously just a starting point. So am I thinking about that right in terms of what they're underpinning as a minimum, if not a lot more given that they're going to require a good rate of return?
spk05: So morning, Scott. Good to hear from you. Look, what I would say about the JV is that it was a negotiated, I don't know whether to describe it as a floor or however you put it, but what I would say is Brookfield is contributing $10 into the JV for each ton of pore space. And that's the initial commitment. And then we're going to build projects on top of that, which will require incremental capital, which will have incremental returns on top of that. So I think that the way that I would say it is that $10 per ton for pore space is effectively the buy-in, if you will, to just the pure pore space.
spk07: Yeah. Hey, Scott, Francisco. So it's a recognition that the pore space has value, right? on an asset class where very few transactions have been done in the space. So it's established that as a value, right? We've been talking about how CRC and carbon teravolts are really well positioned in the state to enable the CCS management business. And this is the first step to recognizing that poor space has value. On top of that, you build a project and you can increment the return. So we're pretty excited about putting this marker out there.
spk04: Yeah, yeah. And I think that's kind of the point I was trying to get to. If they're willing to invest, I guess they're basically saying poor space at a minimum is worth $10, right? And obviously they want to build a return off this as well. So when you apply that to your, whether it's 200 million tons or a billion tons of potential times sort of like an implied return, 51% ownership, that's a pretty substantial value net to CRC, like when you step back and look at it. And that's kind of what I'm trying to get to, is that sort of thinking about it right, $10 per ton is sort of how they're thinking about like they're buying for the pore space. So at a minimum, that's what it's worth.
spk05: I think that's a fair read through. What I would say is it's for perfected pore space. So we've spent a lot of time over the last year and a half working to permit and perfect our pore space so that it avails itself to get lcfs credits 45q and will receive a class 6 permit that development work is leaning on our current assets as we've described as well as our subsurface knowledge and a lot of the people that we have inside of crc geologists reservoir engineers that understand how to file these permits so it is Basically, the sweat equity along with our assets, which is the scarce resource in California, as we stated previously, that has lent itself to this JV for Brookfield coming in at that $10 a ton market.
spk04: Got it. Okay. No, that's helpful. And, you know, my follow-up question is, you know, again, on this JV, but, you know, obviously the 26R was the initial – you know, reservoir that's been put into the JV. And can you tell us about the process of like, you know, how do you think or what is the process of getting, you know, other reservoirs into the JV? Because it seems like, you know, there's an advantage to you to getting that into the JV and they get compensated for that to stay in front of the funding, the capital calls, I guess, for the projects, right? So what is the process by which other ones will get put into the JV? What needs to happen?
spk05: Yeah, so Scott, one of the things that we wanted to do when we formed this JV is to make it highly actionable. And that's why we started with 26R. It's been filed. It's a permit that's been filed for over a year. It's processing through. And so that's why we contributed 26 into the JV, 26R into the JV. And that's why we received the initial funding. We're doing it in three installments. As we go forward, the objective is, so that's basically 30 million tons of storage. Our objective through this JV is to commit capital both from us as well as from Brookfield to develop 200 million tons of pore space to get to an annual injection rate of 5 million tons. So this is laid out on page 16 in our deck. But basically that means $2.5 billion of capital, as I mentioned in my remarks. So our intent is to deploy the capital, perfect 200 million tons of pore space, and achieve 5 million tons of injection by 2027, which aligns with our previously stated goals. We're now doing it with a partner that we really value in Brookfield on a 5149 or basically 5050 JV.
spk04: Right, right. And then mechanically, what gets the additional 170 million tons of reservoirs into the JV? Is it the process of permitting it and perfecting it to be ready to move to the JV at some point?
spk05: That's exactly right. 26R is a year under file, and it's gone through comments, and we've responded to comments with the EPA. We have filed other permits, right? Last quarter we announced the other 80 million tons that we filed, which is CPD 2 and 3. And as those get perfected, they get shown to the JV, they get dropped into the JV, and then we start assigning them projects once we do, once we get to an investment with emitters that we've been talking to. and come to an FID, we can eventually drop those in. So we will drop them either in at permitting stage, along the permitting process, or when we go to FID with an infrastructure investment through InfraCo, which is the capture part.
spk07: Yeah, when it gets dropped in, that's what triggers the payment for the force base.
spk04: Yep, now I got it. Thank you much.
spk03: Our next question comes from Kaylee Ackermine from Bank of America. Please go ahead with your question.
spk08: Hey, good morning, guys. Thanks for taking my question. I've got a couple. First one is just on the conventional business. I'm hoping that you can help reconcile the oil guidance at 53 to 58 with the comment in the press release that said, you know, oil production will be above the first quarter by year end. You know, just given the performance that we've seen from your oil production year to date, it looks like the midpoint should be an easy barge or hurdle. So wondering why the low end is where it's at.
spk07: Yeah, ultimately there's, I mean, as we talked about, it's a combination of the production sharing contract that we have in Long Beach and the changes in the well mix. So with the EIR litigation, with having to change the plants on the wells that we're drilling. And so where we can keep the rigs full for the five rigs that the inventory is there, there's a change in mix. And it just adds variability into the program. So I think the guidance, Kalei, that we have on there is just a result of that expected and recognition there's some variability as we wait for results in the EIR. At the end of the day, we have high confidence in delivering the projects. They're very good return projects, but they tend to have more gas and MGLs in the mix. So that's where the thing to spread in the range is a recognition of that variability of what's going to happen in the second half of the year.
spk05: Go ahead, Matt. Yeah, sure. So we also try to build the variability associated with the production sharing contract, which is a bit of an arcane thing. thing but it the production sharing contract if prices went back to where they were during the second quarter which they're not doing right now if you look at the screen but if prices were we settled at almost 112 during the second quarter that drove a lot of psc barrels so in other words a reduction from gross to net barrels as we gave barrels back for under the production sharing contract so We tried to build some of that variability. If prices were to come in high, we would probably end up towards the low end of our oil range. If prices come in lower than what we're forecasting for the balance of the year, our net production would come in higher. So there's that variability that builds itself into the range as well.
spk08: I guess the follow-up is, it appears that oil price has stabilized, at least on the script through the back end of the year. So we're not too worried about the PSC effects So I'm hoping that you can help me understand the other moving piece, which is the EIR. What is the pathway to resolution there?
spk05: So, well, let me just first address the well mix. So what we've had to do was this Kern County EIR and then turn it over to Mike Preston, General Counsel, in just a second to talk about the process there. But we were anticipating earlier in the year because it's being litigated that it would be settled earlier. Right now it's still in litigation and doesn't look like it's going to – we don't anticipate resolution of that until the end of the year. So what we had to do in the second quarter and going into current day was adjust our drilling program to use the permits that we have, which is a good thing because we have a lot of permits that we can go drill, and that's why we're keeping five rigs active. But we had to adjust, and by doing so, the outcome of that was that we ended up with more gas in our mix and therefore lower oil. So that's the impact of it. But Mike, you want to talk about the resolution? Sure. I think I would expect in May, the court basically identified a small number of what were deemed deficiencies in the EIR process. And so those deficiencies are being addressed essentially by Kern County and they're working on essentially fixes to those. Those fixes will need to be taken back to the court. They're being briefed by the parties over the next few weeks. And then the court will have to make a judgment on those fixes, so to speak. So we expect that process to take several weeks and probably into early in the fourth quarter before we get some clarity.
spk08: That's great. I appreciate that. My second question is on the CCSDB. So understand that Brookfield is putting up 500 million bucks. And that buys the port space for a Reservoir 26R. But all the capital was staying with the JV. So I'm trying to understand what the $500 million will buy in terms of storage, transportation, and capture, and then what the cadence of that spend will be.
spk05: Well, so... Great question. The $500 million will either buy pore space or will actually invest in capture equipment or any other capital needs within the JV. So again, I go back to that our intent is to develop 5 million tons of injection by 2027. If we do that, it's going to require $2.5 billion, which is going to be in excess of the initial commitment of $500 million. But it will be on a project-by-project specific basis that we will make the capital commitments and the investments, us as well as Brookfield. The difference that I was trying to establish earlier was that because of the $10 per ton that we are getting for their contribution and for the 49%, that will alleviate our capital costs for future projects because we can recycle that capital for those capital costs.
spk07: And one thing to add, Calais, so we talked about in the past as we're developing this new business, we have the option to just be the offtaker since we have the scarce resource in the storage tanks. But we've also talked about how this business could very much be a full service business. And I think the Brookfield partnership brings that second piece to reality because by having Brookfield as our partner, by having this funding mechanism and then defining the JV as a storage or an infra-co, I think what the takeaway should be is that the capital, the intent is to deploy capital all the way to the value chain. So that's capture, midstream, and storage. And that's where the JV is going to be focusing in providing a service at the California emitters all the way from the emitter to the storage tanks. So the deployment of that capital is envisioned to do, as Mac said, by the pore space and then deploy that capital so that we can put the infrastructure in place to be able to have 100% of that value stream.
spk08: Thanks for that, guys. The last question is just, On the economics. So first off, congrats on getting some clarity on the funding. But I'm trying to understand how the revenue on a metric ton basis, how that translates to free cash flow net to CRC. Any guidance you can give us there would be extremely helpful. And I'll leave it there.
spk07: Yeah, Kalei, so the way to think about it is it's a 51% JV, carbon terrible, 49% Brookfield. So the revenue line gets split along working interest levels. Then if you're building a model, then you add the $10 per ton from Brookfield side to our side of the share, and then you run the rest of the model to working interest levels. So the expectation is the funding comes on a working interest basis, and then the revenue and the cash gets split equally Again, putting the $10 per ton as a contribution from Brookfield to CTV. So what that practically does, right, if you have the funding mechanism on the CTV side and you're able to use and recycle that capital contribution, that's what's going to ultimately be a big share of our capital costs. Now, we fully expect these projects to have the ability to do project financing. very much early, and we need to define what the loan-to-values are going to be and how this is going to play out. But at the end of the day, if you assume 50% of the capital is project finance and then you have the other 50% equally split, roughly equally split between the partners on an equity call, then we're obviously getting the share of our capital. Ultimately, we're recycling the funds from Brookfield. So that's where you get, and that's what we're saying, it's a capital funding mechanism to the JV. that gives us full exposure to our share of the cash flows without having to put capital calls from the CRC parents.
spk08: I appreciate that the project financing piece isn't yet figured out, but maybe on a plain vanilla basis, just on your equity exposure, can you help us understand how perhaps $100 per metric ton of revenue credits will translate to free cash flow?
spk07: Yeah, so it's 51% to us, 49% to Brookfield, and then you take expenses associated with the project capital and you get to your cash flow. So it's pretty much a 50-50 JV other than the initial contribution for the post days.
spk05: So one thing that I'd point you back to is if you go to carbon day last October, where we laid out our economic type curve. We've said somewhere between, and there's assumptions laid out on that page, but we said the range of the EBITDA would be $50 to $100 million per ton of injected CO2. And that still holds true regardless of our joint venture. That's at the project level. That would still hold true. Then there's the splits, as Francisco was just describing, on how they get split. you know, the cash flows up. But to describe it a bit further, if you had just more of a storage-only type project, which means you're not trying to recover a whole bunch of capital investment because that's typically associated with the capture system, you'd be towards the $50 a ton of EBITDA. If you needed capital recovery, you'd be closer to the $100 a ton of EBITDA but that's because you're basically recouping the initial capital investment. The cash flows, obviously, you'd have less cash out at the $50 in EBITDA early on, and so it would fall more closely straight to the bottom line without taking into consideration taxes. The $100 would do the same, but you'd have a significant cash outflow up front. That's how it would look at the project level. Does that help answer the question?
spk08: That's very helpful. The last question, and I'm sorry to keep prying at this, but can you just tell me if it's taxed normally, just like any other cash distribution would, or if there's any anomalies associated with being a tax credit?
spk07: Yeah, I mean, ultimately, as of right now, the 45Q is a tax credit. So yes, the modeling would be LCFS. It's a revenue line item. And then 45Q would be a tax credit that is able to offset some of the income generated by the partnership. So there has to be... I would say specific tax modeling that we have to do, but very similar to what happens with solar and other renewable-type projects where you're collecting credits that offset the revenue and the profitability of the enterprise.
spk08: Great, guys. I'll leave it there.
spk05: I would just add on to Francisco. As we've stated before, and we are a taxpayer company, this year and the years going forward. And so we actually have an appetite for the tax credits. So there's a synergy there for us to flow through and to use those tax credits. In a typical, as Francisco was saying, renewable energy development, you'd have to bring in tax equity to the projects. We can actually flow through at a consolidated basis and use our tax credits.
spk08: Great. Thanks, guys.
spk03: Our next question comes from Eric Steve from Goldman tree. Please go ahead with your question.
spk06: Hey guys, thanks for the call and congratulations on the, uh, the, the, um, deal looks very exciting. Um, was just hoping you could give a little more color on outside of this deal. What is going on with the, um, the, the CMB business and specifically, um, are you still progressing on deals with emitters or do you have to sort of pause given that now you have a partner and reassess? And also, if you could give an update on how far along you are in terms of submitting the 200 million tons for permitting and also give us a sense of, you know, very exciting about these first 200 million tons, but, you know, is there potential for more projects beyond that as well and And how are you thinking about the scope of this enterprise?
spk05: Yeah. Morning, Eric. There were about eight questions in there. All good ones. So we set a goal to file 200 million tons of permits by the end of the year. We filed 80 at the beginning of this year. We announced those at the first quarter earnings call. We had already filed before that 40. So we're at 120. Our goal is to be at 200 by the end of the year. We're still on track to do that. So that's an end of year goal. So we'll do that. With respect to the JV, our goal is to get the first 5 million tons, which is injected by 2027, which is 200 million tons of storage. But we hope that this JV is successful to where we can continue on and build on the backs of it even further. So we're not stopping there. We're not going to stop at 200 million tons of permits by the end of the year. We're going to keep going next year and file more permits because that's the objective. We think that there's a good business case for doing so. We think it's economic and we think that it helps the energy transition to the net zero barrel that we think we can produce by 2045. With respect to the commercial arrangements, they are not stopping because of this JV. I would say that they're actually accelerating because of the JV. We now have additional forms of capital. We have an additional partner who brings not only the investment in the capital, but also origination, structuring, deal development, all of the things that you would want. I think that this is a really good partnership. It's scalable. I think that we're going to continue to do that. Now, we have been in the background, as we have always been, working to develop emitter contracts, and we continue to do so. And we've said by the end of this year, we hope and we plan on, our target is, to be aligned with an emitter that allows us to inject a million tons by the year end 2025.
spk06: That's great color, Mac. Thank you. And just sort of a follow-on. And what I'm getting at is here, it's kind of a follow-on to Scott's question of just trying to frame what the potential value could be net to CRC. I mean, I guess the quick and dirty math is you could say, okay, 200 million tons to the JV. There's now a marker on that at $10 per ton. That's $2 billion. But then there's incremental projects that you can bring, you know, after the $200 million tons that you're looking at, the $200 million. million tons that you're looking at now. I'm just trying to get some rough sense of, you know, could you remind us, you know, how do you think about what the potential beyond 200 million is, you know, is there, you know, in the portfolio and appreciate that it's early days and you're still figuring that out, but trying to get a rough sense of, you know, the range of what's, what could be possible.
spk05: Yeah. So, so the $10 a ton is, a contribution by Brookfield to acquire 49% of the pore space with the objective of developing 200 million tons of storage, which allows 5 million tons per annum of injection. What I would say is Brookfield and us are very aligned on investing the capital for the capture equipment and the storage, which we've estimated if we got to our 5 million ton target would be $2.5 billion, excluding financing, et cetera, split across the investors. And we're very aligned with Brookfield. Their fund has returned targets, IRR targets, and those targets align very well with what we see we think we can develop at a project level. So that's incremental cash flow. I think Francisco has described it during Carbon Day that when we were the 100% owner of this target, we would generate close to $400 million roughly of EBITDA by 2027 at the midpoint of our economic type curve shown then. Now we're going to roughly half of that because of the sell-down in the position, so 200 million tons, but we're also picking up the $10 a ton for the pore space.
spk07: Yeah, that's right. So the initial assumption was $2.5 billion of capital would ultimately result in about $400 million of annualized seed at that. So now the math is for net-to-CTV is you lower the capital call by half, so $1.2 billion results in $200 million of EBITDA shared to us. The difference, too, is that the $1.2 billion now is, as Brookfield acquires more pore space, that gets funded through that mechanism. So we're trying to optimize capital and ultimately improve returns, and I think we've done that with Steelhawk.
spk06: Sorry, what I'm trying to get at guys is, you know, beyond the 5 million tons that this JV contemplates, how much more do you think your asset base might support? How much more projects might be out there beyond this 5 million tons?
spk05: So that goes back to the original target where we said we've identified up to a billion tons of potential storage across our portfolio. we're trying to set interim goals, but our long-term goal is a net zero by 2045, which means that by that time, we'd have to be injecting about 20 million tons per year. And if you just do the conversion math, that gets you to roughly a billion tons of storage. So we're still on path to doing it. We're just stating the interim goals right now that are within the next five years. So Eric, I'd say that there's, This is focused on the first 200 million tons of storage. We're also focused on the long-term goal of a billion tons of storage.
spk06: Awesome. Very exciting. Thanks for the call, guys. Thanks, Eric.
spk03: Our next question is a follow-up from Scott Handel from RBC Capital Markets. Please go ahead with your follow-up.
spk04: So one, again, on the JV and then, you know, more of a financial, you know, side kind of question. But the first one is when you, you know, obviously partnered up with Brookfield, you know, can you talk to, do they bring any kind of skill set, you know, to the joint venture in terms of whether it's a camps or transportation? Are they going to also, you know, bring some skills to the project? Or should we think about this pretty much you all have a lot of that already kind of handled?
spk07: Hey, Scott. We really like what Brookfield brings to the table. So beyond the financing, which has been the focus of the discussion, They are very advanced in their views around carbon capture and sequestration. They've invested into capture systems. They made a large investment into a company called Entropy, a Canadian company that's a post-combustion capture system. And so they have a really good sense of not only the technology that's going to work but also on the cost side of the question as to what the systems can be built towards and ultimately how you can scale that business. That also means if they've looked at emitters and they've looked at ways to capture those emissions, not only in Canada, but in the US. And so when we started talking to them, You know, the match was pretty obvious given all of the time and effort they invested into CCS. And as they looked across the U.S., you know, they see that California, it's a differentiated opportunity given LCFS as a place to place money. And then that CRC had the other components to really make this partnership work. And Mac talked about it, there's a structuring, there's the largest, one of the largest renewable investors in the world, right? So there's structuring, there's religionation, there's a number of, there's insurance product, there's a number of things that they can bring to the combination here of the partnership at the CTV level. that we're very excited about. But to us, they were head and shoulders above others in terms of their understanding of the CCS markets and including the technology aspect of it.
spk05: Well, Scott, just to add on, everything Francisco said is exactly why we formed this JV or this partnership. But to be very clear, it is our skill sets, it is our assets, and the subsurface knowledge of the floor space that is the focus area of this joint venture because we're building from there out. And that's why they're contributing $10 a ton to the buy-in for their 49%.
spk04: Yeah, got it. Absolutely. That makes sense. And then, you know, my follow-up is, you know, obviously with this partnership, as you said, you're going to you know, have a lot of the, um, you know, the funding needs taken care of initially. And, you know, I think in, you know, going back to, you know, last year when you kind of laid this out, you talked about, uh, I think about 50% of your free cashflow being allocated to, you know, shareholder returns at 50% potentially to carbon management. Um, you know, when you think about like now that other half of the pool is kind of freed up, like what, what are your thoughts on like how, you know, how you allocate that, the residual free cashflow? you know, being generated by the upstream business now that you don't need to fund, you know, the carbon capture business. What can we expect with that?
spk05: Yeah, thanks, Scott. So, exactly. We previously said after we reinvest in the business to keep production effectively flat, then we would split the free cash flow thereafter, after-tax free cash flow thereafter, 50-50 between shareholder initiatives, and carbon management. Now, obviously, with this joint venture and with the $10 a ton, we don't have the same capital needs or capital calls on those cash flows. And so it gives us greater flexibility. I think it's the point you were actually making in your question. It gives us greater flexibility with that cash. We show that on page 29 in the deck, where over the next five years, we're forecasting over $2.5 billion of cumulative after-tax free cash flow. And we can use that now, assuming that there's not a strong call on it for carbon management because of the sort of self-funding mechanism, given the $10 a ton, for other aspects. So, Francisco, you want to talk about the uses there?
spk07: Yeah, absolutely, Phil.
spk03: Hello? Yes, this is the conference operator. Is the speaker line still connected?
spk07: Yes, we are. Hey, Scott, so just to further to what Mac was saying, The case presented on slide 29 has us investing in our core business to maintain our BOE production at first instance. And then after you invest in the core business, we generate in this scenario over $2.5 billion, $2.7 billion to be exact, of after-tax free cash flow. So that's what we see as the cumulative cash flow generated over the next five years on the core business. And then that allows us to think about ways to deploy that in many different avenues. Certainly we've had a very successful share repurchase program where we bought back over 10% of the shares of the company since we started the program. We can also think about growing the fixed dividend We look at acquisitions. We can look at more investment into our core operations, perhaps around enhanced oil recovery. So, you know, by doing this transaction and with the significant cash flow generation potential of our assets, we move into either shareholder initiatives or more investment into oil and gas as a result of being able to retain the cash and having the funding mechanism separately on the Brookfield.
spk04: Thanks for that.
spk03: And our next question comes from Carl Blunden from Goldman Sachs. Please go ahead with your question.
spk02: Hi, thanks very much for the time. Just one with regard to the options around cash flow deployment. Would you be able to comment on your current restricted payment capacity under the bond indenture?
spk07: Sure. So as you know, we looked first at the RBL and we negotiated to have unlimited RP capacity subject to leverage test we described in the last earnings call. In terms of the high yield indenture, we wanted to take a similar approach. We launched a process to engage with bondholders to making a similar request for improved terms that, from our perspective, would bring our high yield indenture up to current market terms, given that we placed our bonds in January of 2021. At the end of the day, there's been a lot of volatility in the market, you know, with the Fed throwing a lot of twists and turns along the way. And We decided to pull back on that ask and buy something that we'll continue thinking about. At the end of the day, though, we have specific baskets within the agreement. We have an ability to deploy cash as we roll off some of the lower pricing quarters into last year and start with these. It's a cumulative net income test over the last 12 months. We're adding capacity as we go and it's more than sufficient to continue doing shared buybacks, to do dividends and to do investments into carbon management. Certainly now with the Brookfield deal, it takes one of those investments, it really reduces the capital column to CRC. We'll reassess where we want to be with the high yield indenture going forward, but certainly after this Brookfield announcement, we're thinking differently about how to invest in the carbon management business. So some more to come on that.
spk03: And ladies and gentlemen, with that, we will end today's question and answer session as well as today's conference call. We do thank you for attending. You may now disconnect your lines.
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