California Resources Corporation

Q1 2023 Earnings Conference Call


spk10: Hello, and welcome to the California Resources Corporation first quarter earnings 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 touch-tone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. Now I turn the conference over to your host today, Joanna Park, Vice President of Investor Relations and Treasurer. Please go ahead, ma'am. Thanks.
spk01: Welcome to California Resources Corporation's first quarter 2023 conference call. Participating on today's call are Francisco Leon, President and Chief Executive Officer, as well as the entire Executive Committee. I'd like to highlight that we have provided slides on our Investor Relations section of our website, These slides provide additional information into our operations and our first 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 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 allotted additional time for Q&A at the end of our prepared remarks. We ask that participants limit their questions to a primary and one follow-up. With that, I'll now turn the call over to Francisco.
spk09: Thank you, Joanna. Good morning, everyone, and thank you for joining us. I am very pleased to be here talking to you today as CEO of CRC as we continue to build a different kind of energy company focused on generating the highest cash flow from our low-carbon intensity assets and advancing our carbon management business. My remarks today will focus on three key areas. First, our record financial performance in the quarter, which was driven by our strong operational execution and leading natural gas position. Second, the progress we made advancing our plans to reposition the business to unlock shareholder value. And finally, the growing strength of our carbon management business as we continue to take steps to enable California's clean energy goals. Turning to our quarterly results, we're off to a great start for the year. Record financial results showcased the quality of our low decline assets and the benefit of a diverse hydrocarbon EMP portfolio. We successfully maintained flat oil production quarter over quarter on 31 million of drilling and completions and work over capital. We drilled nine wells in two side tracks and ended the quarter with one drilling rig at Wilmington and 39 maintenance rigs. Our reservoirs offer stacked pays, which means we can re-complete and sidetrack existing wells to add pay at attractive returns. This type of activity is highly economic and allows us to bring on production at a fraction of the cost of a new well. For the balance of the year, we intend to increase our work over activity and execute a one-rig drilling program. We have secured all the necessary drilling permits for our 2023 capital program and are working to build incremental permit inventory for next year. Another highlight for the first quarter was the California commodity markets. Because the state operates as an energy island, California realizations reflect the demand for energy and tend to be higher than national benchmarks. Both NGLs and natural gas realizations were above expectations, and crude realizations were within guidance. To be more specific, NGL and natural gas realizations benefited from colder than normal weather and the lack of in-state production. In the case of natural gas, our realizations for Q1 were approximately 630% of NYMEX. As a reminder, California imports approximately 90% of the natural gas consumed in the state. When demand exceeds local production plus incoming supply, the market relies upon natural gas in storage to make up the difference. In the case of January and to some degree February, California found itself with limited natural gas inventories in storage and limited local supply of production. As the state's largest natural gas producer, our roughly 12 VCF of production was available to meet the needs of the state. These factors helped drive record results and facilitated another quarter of shareholder returns. The company generated pre-tax free cash flow of $263 million, of which approximately $79 million was returned to shareholders. This consisted of $20 million in dividends and $59 million in share repurchases. Since implementation of our share repurchase program in May of 2021, we have bought back approximately 15% of the company's outstanding shares. Combined with our fixed dividends of $1.13 per share, we have returned back to shareholders approximately 22% of our current market cap in less than two years. We intend to continue with our active shareholder program and have $567 million remaining under the total Board-approved $1.1 million authorization. We also ended the quarter with robust liquidity of $931 million, including $477 million of cash on hand. BRC is committed to maintaining a very strong financial foundation, and we will continue our focus on achieving greater financial flexibility and commitment to shareholder returns. As we look to the balance of the year, we have increased our 2023 after-tax free cash flow guidance by 8% to $415 million at the midpoint of our range to reflect our strong first quarter 23 performance. This is partially offset by lower commodity pricing assumptions for the rest of the year, timing of capital, changes to working capital, and higher cash taxes. We have provided detailed analysis about our quarterly financial and operational results on our 2023 guidance in the attachments to our earnings release and in our slide deck. Turning to our continued strategic realignment of the company's operations and structure, we announced yesterday the appointment of Nelly Molina as CRC's new CFO effective May 8th. I could not be more excited to welcome Nelly to CRC. She is a seasoned energy executive with more than 25 years of corporate finance, capital markets, and project financing experience, and breaks an extensive background in the development of energy infrastructure projects in the natural gas and power sectors. Natalie joins us from Sempra Energy, where she most recently served as Vice President of Audit Services and Vice President of Investor Relations. I look forward to introducing her to you in the weeks and months ahead. And I know we will benefit greatly from her expertise in navigating today's evolving energy industry. In addition to the changes in leadership, we're also focused on pursuing operational excellence. As mentioned last quarter, we launched a cost reduction and business transformation initiative to align with our activity levels and build a more efficient organization. We are targeting annualized run rate cost reduction goal of 25 to 50 million to be implemented by the end of this year. We have identified $20 million of reductions to date and are working to expand the scope and scale of cost reductions efforts during Q2. Another key element of our plan is to achieve increased financial flexibility. This quarter, we have successfully reaffirmed our $1.2 billion borrowing base and amended our RVL facility to increase the duration and improve the terms. These changes will enable us to make additional investments in our carbon management business and further support our shareholder return program, as well as help pave the way for a potential separation of the carbon management business. We will continue to evaluate ways to increase our financial flexibility as the year progresses. As we discussed last quarter, we're evaluating the separation of our carbon management business, Carbon TerraVault, as part of our ongoing efforts to optimize the value of our portfolio. Outgoing CRC CEO, Mac McFarland, is serving as the chair of the board of Carbon TerraVault, and we have been working closely together to determine the best path forward. The carbon management business is still in the early stages And there are important milestones that we're working to reach before initiating a potential separation, such as an EPA Class 6 permit approval, Project FID, line of sight to first CO2 injection, and first cash flow, among others. We're continuing to build out the leading carbon storage business in California. In the first quarter, we have made further progress by signing two new greenfield storage-only CDMAs, a green hydrogen project in the Sacramento Basin, and a renewable DME project at our Elk Hills Net Zero Industrial Park. These projects target 140,000 metric tons of CO2 injection per annum on a combined basis. We now have four CDMAs in place for a combined injection rate of 610,000 metric tons per year, representing reservations of about 12% of our pore space. Further, we submitted Class VI permit application for a new development area, which we call CTV4, for an additional 34 million metric tons, bringing CTV's total potential permitted storage to 174 million metric tons, for over 85% of our stated 2027 target of 200 million metric tons. The CTV team continues to file permits for additional vaults across California to expand our leading position in the state. We are targeting receiving our first class six draft permit from the EPA for CTV1 by the end of the year. In summary, we're excited about our continued progress in executing our strategic repositioning. In the first quarter of 2023, we had record financial performance, which allowed us to increase our four-year guidance. We also advanced our cost-cutting initiatives and continued to reposition our business to unlock additional shareholder value. And finally, we further expanded our California leading carbon management strategy to support California's Clean Energy Goals. Thank you for joining us on the call today. We'll now open the line for questions. Operator?
spk10: Yes, thank you. At this time, we will begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Scott Handler with RBC Capital Markets.
spk05: Thanks. Good morning, or good afternoon, all. And, you know, my first question, it may feel like a little bit of a multifaceted one, but let me try here. You know, you've made progress on obviously, you know, starting the, you know, signing up the new CDMAs. How do you – and more of those, I guess, recently were some of the lower capital intensity agreements. And how do you think about these – excuse me, the mix of these projects going forward? Do you want to see some more of the kind of the front-end projects to increase the scale of EBITDA? Or do you feel, you know, confident – and I know you said you're only about 12%, you know, on total reservations right now. But do you feel confident in the larger quantum of getting that storage permitted – So that scarcity factor isn't really as much of a concern. So I know it's kind of a bit of a multifaceted question, but ultimately I'm just trying to think about the higher relative EBITDA opportunity and if a potential offset would be exercising some of the equity stake options.
spk09: Hey, Scott. Yeah, we're focused on both. So Greenfield, for CDMAs on Greenfield, it's really good progress, no question about that. And you have the tailwinds from the IRA increase in the incentives, so definitely that's helped put projects together. It also helps that we can co-locate these greenfield projects at Elk Hills and in the Sacramento area. So it's an easier process to get to a CDMA. Existing point sources We talked about it before, but you're still going to price discovery, right? How are the credits share across the value chain? And you also have to solve for transportation. How do you move the CO2 across the state? We know there's a lot of interest in Sacramento to ensuring that CCS is successful. Everyone understands that transportation is part of the equation. And we're hoping there's some uncertainty right now. We're hoping that uncertainty is clarified in the near term. But I am confident we're going to be delivering both projects. Certainly the going to point source, the ability to deploy more capital, but also increase the EBITDA is something that we're focused on with our partners and Brookfield. So we'll do a little bit of both. I think if you looked at the types of projects that we see in the queue, the types of projects that we're reviewing, you see a pretty good mix between them. It just so happens as we're kind of building kind of this new business live in front of everybody, that the first four projects are Greenfield, but that's not, this business is not going to be exclusively for Greenfield. We'll bring some point source projects into the fold, hopefully in the future.
spk05: Yeah, and how about the exercising and the equity options on those?
spk09: Yeah, so, you know, we serve the option to invest into the equity of all four projects, and started with Grannis and Lone Cypress that have been in the works for longer. We're reviewing not only the cost profile of those businesses, but the market in a lot of cases like hydrogen. There's not a very well-developed market quite yet, but there's a lot of interest. And that also requires understanding the offtake contracts and the depth of the market and where to best place the hydrogen and the ammonia. Ammonia is already tied to a co-op in Sacramento. So we're evaluating both. We'd like to have a decision this year on Lone Cypress in particular. That's going to be the first project we're reviewing the equity. There's a lot to do, but we're excited. We think these markets will develop nicely in California. There's a lot of support, again, by IRA. Hydrogen has 45B that supports it, but we're seeing a lot of potential demand for the product. Both Brookfield and CRC have retained that ability to invest in the equity, and it's something that gets us very excited about participating in these new energy verticals.
spk05: No, I appreciate that, and it sounds like you're putting a lot of depth in the thought around this. My follow-up question is on those cost savings you talked about, and can you give us a little bit of color on, you know, I think you said $20 million. There's kind of a line of sight on it right now, but what kind of specific cost savings are you really seeing and what are you targeting? And I'm kind of curious with using, I guess, that A&M service, you know, what specifically, you know, was the reason of going, like, outside to have somebody come in and do that versus, you know, doing stuff like CRC? You know, what can't you do on your own that they can come in and help you with?
spk09: Yeah, Scott, so we were looking for ways to change how we work. CRC does a lot of things really well. It's a company that has been operated under the strictest regulations pretty much in the U.S. So there's a lot of – the team works well. We all have very high operating standards. But we need to change how we work. We need to bring cost in line with activity levels. So That requires a kind of a business transformation, not just a cost-cutting exercise. So we need to question everything. We need to question how we're organized. We need to question what we prioritize and ultimately look to make decisions to take some costs out of the system. You know, the team got to work right away after we came last quarter and described this initiative. In $20 million in a couple months, it's a pretty good win. And, again, we're trying not to – this is not a deferral. This is not removing one-time cost. These are run rate savings. These are permanent savings that we want to take out of the system. So we're evaluating contractors. We're evaluating contracts, chemical contracts, for example. How do we use – different, how do we ultimately make decisions across the board? And we're questioning everything, right? It's a good opportunity for a refresh. It's a good opportunity to say, okay, can we do better and drive that culture going forward? We brought A&M, they're one, they're a very good team. Two, we wanna get that external perspective. California tends to be isolated from what's happening in the rest of the US. We wanna bring best practices And we want their help assessing and ultimately accelerating some of these cost-saving efforts. We've taken a lot of cost out of the system historically at CRC. So the next phase is really one that requires kind of a transformation of how we work. And we felt it was best done with some outside help. So I'm, you know, very focused on these cost reduction exercises and initiatives. And we're getting a lot of great organic support from the team presenting new ideas on how do we make this company better.
spk05: Got it. Appreciate it. Thank you.
spk10: Thank you. Thank you. And the next question comes from Doug Legate with Bank of America.
spk08: Hey, good morning. This is actually Clay on for, well, for myself. Francisco. Francisco. Following your announcement last quarter regarding a potential separation of CCUS from E&P, we received a lot of imbalance on the power plan. What's the valuation? What's the G&A burden? What does the power market look like? So could you comment on whether it's core to your oil and gas business or whether it's a better fit for a standalone CCUS business, noting that there are potential synergies without capture? And maybe to add on here, I remember a few years ago you guys did that deal with Aries. Therefore, if you did something with the power plant here, it wouldn't be the first time. But even in that deal, there was an option to buy it back after a period of time. So that suggests to me that there are maybe some constraints in how you think about structuring it.
spk09: Hey, Kalei. So, yeah, I mean, I think we have a big advantage in the state by owning a power plant at Elk Hills. It's been truly a great asset for us and It really helps us stay away from the grid, at least for part of our fields, which helps us bring down cost alongside with it. So the plant delivers about one-third of the power goes to the oil field, and two-thirds gets sold to CalISO and utilities. So it's been a good, profitable asset for us historically. we have the opportunity to make it better, to be able with a capture system, be able to deliver net zero power in a state that's really hungry for these types of offerings. So we're evaluating where this asset fits best on a go-forward basis. I mean, I think the prospect of having net zero is appealing to everybody, but you also have to be able to undertake capture, which, as we talked about in the past, it's a capture system on a low concentration stream of CO2, which is going to be on the higher end of the cost spectrum, right? So how do we make that investment? How do we finance that type of capital call? And ultimately, where does the asset belong? Is it more on CRC or is it more on carbon terrible? Those are the sort of things we're working through. We did release the collateral from from the banks through the RVL. And we're looking to have the flexibility so that we can put that asset to work in the best way possible. Right now, the way I see the power plant, even though it's a great unique asset in the state of California for EMP companies, we see that asset trading as an EMP multiple, right? So having an ability to see the financials, right? So some of the things you're asking, having the visibility to really showcase how good this plant is and how it can get better by by making it a net zero power plant, I think it's going to be a great value add and a way to unlock value. So we're working through it, nothing definitive. Hopefully, at least I gave you some of the groundwork here as to as we're working through these types of assets and where do they best fit in case we do separate the businesses going forward.
spk08: The quick follow-up there, and I hope you don't count this as my second question, but there was a feed study that was performed about two years ago And for whatever reason, you guys are performing a second feed study. Can you give us an update on what the status is on that feed study that you're currently performing?
spk09: We'll see if it's your second question or not, depending on what the next one looks like. No, I'd say it's a great question, Kalei. So we did a feed study with Fluor a few years ago, and now we're doing a second feed study with NextDecade. You have to understand the reason we have two feed studies and we're going to continue looking at the cost is that there hasn't been a capture system put into a natural gas power plant facility of this scale anywhere in the U.S. before. So we want to make sure that we have the cost right. I mean, the technology is really not a new technology. It's not something that concerns maybe the scale does, but it's really trying to drive that cost down. You know, we've had a lot of inflationary pressures over the last two years. We want to make sure it's a project that not only delivers that ability to reduce that CO2 emission footprint, but it's also a profitable project. So what you're going to continue seeing from us is really working to that cost profile. How do we best set up? How do we finance it? this power plant so that we can make CalCapture happen. We're targeting FID next year, right? So we're working through it. We're soliciting input. There's a lot of companies that are bringing new ideas, bringing new technology and looking at the supply chain differently. And we're going to look to award the project to whoever can deliver the best price and ultimately get us a project that we feel comfortable that can be executed on. So we're working through it.
spk08: I appreciate that. My real second question is on natural gas. So obviously really big numbers this quarter. Hoping that you can help us understand how to model your exposure. Is it bid week or is it spot? Is it city gate or is it SoCal border? I think any help here would be appreciated because given the tightness in California, it seems like this could be reoccurring.
spk09: Yeah, so I'll start and then I'll turn it over to Jay to give a more in-depth answer. So we do feel this is a California through the regulation and through the penetration of renewables, that gas is going to be absolutely needed, not only in the near term, but as we go forward as baseload. So we were well positioned as the largest natural gas producer in the state. And now we see these spikes happening more and more. So definitely, you know, it's, It's something that the state as an energy island has kind of decided that's what we're going to be. So these natural gas assets that we own through both power and owning the Sacramento Basin and Elk Hills and Buena Vista areas all have gas in the right places. It gives us a lot of flexibility when we see these market shocks to be able to reposition our assets and go out and try to deliver the gas for the state. But maybe, Jay, if you can cover a little bit of the pricing around that.
spk06: Yeah, let me kind of touch on the basic precip here. You know, more times than not, we're going to find ourselves looking to be close to, if not at, the first of the month index. We'd prefer not to carry a lot of gas into the daily market during any particular month. Now in advance of that bid week cycle or during the bid week cycle, we may take some limited fixed price positions that just simply seem frankly attractive given the circumstances that are taking place. I mean, our gas for the most part is produced relative to a SoCal border index, but as you may or may not be aware, we maintain long haul transportation from the field on Kern River. And we've got a really significant position on the SoCal gas system in terms of BTS. So, you know, this is kind of where the semantics get a little bit goofy, I'm afraid. Some people call this trading. We call it marketing and asset management. And the fact is we keep a set of tools around and work very well together. We've got gas production in some of those liquid points in the state. We maintain that transportation that I mentioned. We've got some of the most dependable generating capacity in the state. And we've got really the right folks around to make those decisions. So when the market needs power, we move more gas to the power plant. When the market needs gas, we're able to bring more gas to market. So in general, I think you should probably look at any particular monthly cycle, look for the first-in-month index reflective of kind of a 80-20 SoCal border slash PG&E city gate index.
spk08: I appreciate that thorough response.
spk09: Thanks, Kalei.
spk10: Thank you. And the next question comes from Leo Mariani with Roth MKM.
spk04: I wanted to just delve in a little bit more to a few of the numbers, you know, sort of around the quarter. You know, looking at CapEx, you know, it was just quite a bit, you know, sort of below guidance. And then just follow up on the gas price question. I guess when I looked at sort of, you know, SoCal border, CityGate, didn't really matter. I had a hard time getting to the 21.50 that you guys put up, you know, in the quarter. So maybe there's kind of some other semantics around the pricing or some other local markets that are kind of less visible, you know, outside of these indices that get reported by, you know, data agencies like Bloomberg or sort of whatnot that drove that. But Any more color on how to get to the 2150? And then again, just, you know, CapEx nicely below the guide here. So any thoughts on that?
spk09: Hey, Leo, that sounds good. Let me answer the CapEx question. So, you know, we went through four months, and I know it's hard to believe, of really bad weather in California. A lot of wind, a lot of rain, snow, and that affected our operations. The team did a phenomenal job executing through that, and you don't see a lot of impact in production. In fact, we outperformed on production expectations, but it did delay some of the capital activity that we had planned. We do, you know, as we step down, we're now running one rig in the Wilmington field. We'll continue that throughout the year, but what you should see is a step up in capital work over activity for the rest of the year and as operations get normalized. In terms of the gas pricing question, again, I'll turn it over to Jay for an answer. Sure.
spk06: As I mentioned kind of a couple moments ago, we did execute a few opportunistic fixed price trades during the beta week cycle. But one thing that kind of gets lost, and I'm trying to get a whole bunch into the weeds when it comes to natural gas pricing, is when you see an index posted, natural gas doesn't necessarily trade in the physical market. At that price, there are times of the year when it trades at a discount, and there are times of the year when it will trade at a physical premium. So, for example, to get physical gas at SoCal border, you may end up paying more than the border price. You'll buy physical gas in index plus number. So we had a fair number of index plus numbers transacted in our book for the months of January and, frankly, February. Both are very strong. A lot of different points in the Western gas market, physical gas was trading at significant premiums to the individual posted financial indexes. So combine the opportunistic trades, the limited number we had in that small variation, and I think you get there pretty quickly. Again, I'm not sure Q1 of 23 will be representative of what we see for the balance of the year. I think you're going to find that our gas prices are probably in large measure, excluding the fact that we've got a shortage of gas in inventory right now. I think you're going to find them more reflective of the national gas price.
spk09: And if I can have one thing. So, you know, we have a fantastic marketing and trading team, and then we have a very diversified revenue stream. Last year, we highlighted the NGLs. The NGL barrels were trading higher at some point in the year, than our after heads, oil barrels. This year's natural gas, there'll be times where it's electricity. So really feel good about that diversification that we built for CRC and then given the team an opportunity to manage that to make our most highest return decisions. I think we're set up for success here in the long run.
spk04: Okay, that's very helpful, makes a lot of sense. And then just kind of sticking with some of the numbers on the quarter here. Looking at your San Joaquin Basin gas production, it was down around $10 million a day this quarter versus last. Historically, that gas production has been pretty steady. It doesn't really move around much, you know, sort of by quarter. Was there any, like, maintenance or downtime, or is this more of you guys maybe directing more of that gas to the power market and kind of less to the volumes, you know, sort of sold market here in the quarter? Just looking for any color on that.
spk09: Yeah, no, the gas, Leo, really was impacted by weather. That's, you know, you had facilities down because of the high winds, and that affected our gas production in particular. So that's really what happened in the quarter. We do have some maintenance projects throughout the year, but I think Q1, you can attribute most of that change to weather.
spk04: Okay, now that's helpful. And then just on the regulatory front here, You know, kind of any update on just the general permitting situation for oil and gasoline permits in California? I know that Kern County EIS is still a ways away in the decision, but apart from that, can you maybe just talk to whether or not permits are kind of coming outside of those Kern County areas?
spk09: Yeah, so yeah, no update on the appeal around Kern County EIR. So that's still ongoing. As we said before, we expect that to take some time. So we are getting work over permits in Kern County and throughout the state. So those are flowing. We also filed a CEQA for three of our largest fields in Kern County to be able to do field level EIR. That gives us an alternative to be permitting back in the San Joaquin Basin in Kern County. We're building inventory outside of Kern, looking at our gas wells in the Sacramento Basin and continue to get, you know, looking at the South and LA Basin as well. As we said before, we have all the permits in the drilling campaign that we need for 23. So really all we're doing right now is creating as many options as possible for 2024. So working through those But, again, no permits in Kern County yet other than workover permits, which are flowing.
spk04: Okay, but it sounds like, generally speaking, you guys are able to probably get permits outside of the Kern County EIS. That's something you can still obtain here?
spk09: Yeah, I mean, we were, like I said, we have all the permits that we need in Wilmington, so that's in good shape. We do expect to get permits outside of Kern County.
spk04: Okay, thank you.
spk10: Thank you. And the next question comes from Nate Pendleton with Stifel.
spk03: Good morning, and congrats on a strong quarter. Regarding trucking CO2 at your Carbon TerraVault sites that you alluded to earlier, can you provide any details around whether you're exploring the use of low-emissions trucking at other sites, and are there any noteworthy cost or throughput implications that we should be thinking about?
spk09: Yeah, so first of all, on the greenfield developments that we co-locate, adult kills, we'll use our internal gathering lines to be able to move CO2. So that's the first option and that's what we're focused on. To the extent that we're now going into areas that require trucking, yes, so we're looking at low emission vehicles, whether it's hydrogen and fuel cells or other options. So that's very much part of the part of the plan, right? Ultimately, these projects need to provide an across-the-board low-emission solution in order for them to work and to get the full benefit of the credit. So definitely thinking through that as we move CO2 across the state and as we wait for the uncertainty on pipelines to be resolved. But the first order of business and how we're going to get CO2 injection much quicker is to be able to co-locate the plant on top of our reservoir and just deal with behind-the-fence gathering systems.
spk03: Great. Thanks. And stepping back out a bit, over the past few months, we've been tracking an increasing number of Class VI permits, both in California and across the country. At a high level, can you speak to how Carbon TerraVault is differentiated in this growing industry and how you plan to capitalize on your first mover advantage going forward?
spk09: No, absolutely. So we filed our first permit in August of 2021, second permit in November of 21. So when we talked to the EPA at the time of filing, they said it's going to take them 18 to 24 months. But really, you know, this new era of Class 6 permits was just starting a lot of uncertainty in the process. We learned a lot throughout. I think the EPA has as well. What we know is there's a high rigor on all fronts, technically, commercially. That's expected from anybody that submits an application. We've seen some permissions, some permits being withdrawn. And, you know, I think we have everything that it takes to have our permit come in this year. We've done a lot of work. Technically, we have seismic. We have a good understanding of the reservoir, adult kills. Our team has worked diligently to position the permit in the best way possible for the EPA. We're working with having support from local communities in Kern County to bring these projects forward and have really good dialogue with the EPA. So, you know, I think we're in the running to be one of the first permits by the EPA. I think we're right there given the dialogue, given the progress that we made. I feel very good that we're going to have the permit this year. And, you know, the key is that first permit is a big catalyst, catalyst to more projects, more emission sources coming together, to really giving the market transparency as to what happens next. And I think what we heard through multiple channels is that Carbon Terrible is putting some of the – best, you know, best positioned permits out there. And again, we're working well with the EPA to try to get that to the finish line.
spk03: Got it. Thanks for taking my questions.
spk10: Thanks, Nate. Thank you. And once again, please press star, then one, if you would like to ask a question. And the next question comes from Noel Parks with TUI Brothers Investment Research.
spk07: Hi, good morning.
spk09: Hi.
spk07: Just a couple of things. There's sort of high-level questions, but I'm just thinking about, I guess overall, looking at some of your or hoping to get some thoughts on where you might see in the carbon business a greater degree of vertical integration over time and, of course, You announced today a couple new storage-only deals, so clearly you like the margins from that business line, and you've given us some guidance on what those economics might look like. So where would you – I mean, do you see any low-hanging fruit as far as over time bringing more project development or even construction activities in-house over time? Or the way the early prejudice are unfolding, is that pretty much the sort of ideal, you know, I guess burden of risk reward that you'd be looking to achieve?
spk09: Yeah, so a lot in that question. Let me try to address it. So on these green fuel projects, as a reminder, we see a poor space as being the scarce resource in the state. And, you know, contrary to the other parts of the question, where, you know, what we said is our pipe curve is going to deliver between $50 and $75 per ton for storage-only deals. All four CDMAs that we've assigned today fit within that type curve. So not only are we, you know, validating the pore space scarcity point, but you have third parties that ultimately work their economics through and value that storage and pore space. It's difficult to say where we're going to have the most vertical integration, but as we take, you have the option to invest equity into these projects We're learning a lot, right? We're not a hydrogen company. We're not green or blue. We're not ammonia companies. So we're trying to understand the business model, and if there's a way to add value and it's a way to make good returns, it's something that we'd like to do. We do see integration happening not only with ourselves. As you bring power, you can sell power, sell natural gas into these projects and provide land. but we're seeing integration even amongst the partners that we're bringing together as we develop these big industrial centers, next year industrial centers like we have at Elk Hills. It's hard to say if we need to bring these projects in-house. Right now, we're looking to partner with really smart people that have done this before, and they're just looking to to develop a market in California which seems to be the most attractive to get these green projects underway. So I don't know yet about in-house projects. We'll see. We're still early that it's a difficult question to answer. But I do know that we're seeing the California energy sector in a very different light as we get exposed to all these projects coming through the door.
spk07: Great. Thanks. And maybe sort of continuing along similar lines of discussion. The net zero industrial park, could you maybe talk about the business development process for that? We get some sense of some of the building blocks from the announced projects, but I'm just curious about criteria of what sort of projects maybe you are eager to get more of or would rule in, and as opposed to maybe types of projects you would be more inclined to rule out for, you know, for the industrial park setting?
spk09: Yeah, no, I mean, I think we have a lot of conversations ongoing, and I think you're only able to see the four that we brought forward in terms of CPMA. We're evaluating multiples of what we brought in. As we talked about before, we feel we're oversubscribed. So that means we're talking to many more parties than we have capacity for. So there is a selection process, right? So obviously, we're dealing with people that have the credibility and that can bring these projects forward where we can get permits locally as well and that are serving a market need and that these projects are ultimately going to have a strong long-term off-takes to be able to lock in returns and ultimately do incremental financing. So, there is a selection process, right? That's why, you know, we moved, we're not doing MOUs just for the sake of announcing that we're making progress. We're really focused on conditions precedent, we're finalizing contracts that have much more meat to them because we want to make sure we are building all these projects that need to be able all to come together so that we can get to our injection targets by 2025 and then 2027, 2028 for the 5 million tons. So we are selecting, right? You have this funnel and we are kind of high-grading the projects that we think can go to the finish line and provide good returns for us and Brookfield, our partner. So it's hard to say what we are not considering without being specific, but I would say what you see is a high-graded list of projects that we feel very strongly that we can execute on.
spk07: Great. Thanks a lot.
spk10: Thanks, Noel. Thank you. And the next question comes from Eric See with Golden Tree.
spk02: Hey, guys. Thank you for the call. Another follow-on question regarding the CO2 business. In terms of the projects in the queue and those that you're still talking to, you gave us some color earlier. It's a mix of greenfield and brownfield. That was interesting. I'm curious, in terms of the potential size of those projects, is it in line with the size of the projects you've already announced? And when I talk about size, I'm talking about... million tons of CO2 sequestered each year. Are the remaining projects you anticipate, Tony, are they similar size or are there some bigger, chunkier ones out there? Any color on that would be appreciated.
spk09: Eric, so, I mean, so remember, we're dealing with a total addressable market of 400 million tons of emissions in California, right? So there's definitely, as you said, chunky emission sources out there. And you're naturally, if you're having to put investment on capture, if you're having to connect point source to sink and put pipelines in place, you're going to have to have a scale naturally to those point source projects. Now, having said that, we look at all of these projects. We look at proximity to our tanks. We look at counterparty, and we look at the commercial aspects of the injection payment, right? So if we do a full CCS as a service, what that means. So it's hard to answer that question, but we are looking at multiple-size projects throughout the state, but there are some... some big emitters that need solutions, right? There are emitters out there that right now they're paying, you know, $30 per ton or carbon tax, and that's increasing every year. They're also probably going through, you know, trying to replicate what we're doing and finding out that subsurface and permitting is probably not a core competency. So we're having those dialogues, we're educating, we're trying to, uh, to land the right deal and the right partner and, you know, expect some point source legacy emissions, you know, hopefully in the near term. But we're working through it. But, again, the size of the price is big. It's just a matter of figuring out, okay, what's the best place to store their CO2 and agreeing to terms.
spk02: Great. Thank you. And one follow-up. I mean, it seems like Elk Hills is really, really well-suited to, you know, get a lot of attractive projects here. But it sounds like you're going to be well oversubscribed. Is there more potential storage space in that field that you guys are evaluating?
spk09: Yeah, for sure. I mean, Elk Hill is 47,000 acres, fee-simple. Property with a power plant, with natural gas, with a lot of elements to bring new technology into the field. We're looking for ways to add incremental pore space. I mean, we've already expanded one of our permits. in 26 hours. So yes, ultimately, yes, as we draw more oil and gas, we're creating pore space, right? And at some point that pore space and the injection of CO2 may be more valuable than what we're extracting. That's not the case today, but it could be. So the key is having those tanks that we know and understand really well. And as the market comes together and as we see the value of the in-store CO2, we will be looking for ways to create more pore space at LKLs or in the near proximity down there. We do see a lot of running room in the Sacramento area. There's a lot of near emissions near there, and we're building a very, very nice portfolio of assets. Creating these two options, I think, gives us the most access to the market that we can see.
spk02: Terrific. Thank you. And second question is, as we model out the production, oil and gas production throughout the remainder of the year, just trying to understand, is there any, you know, other than potential impacts from adverse weather, are there any scheduled changes
spk09: maintenance downs that would impact the quarterly production cadence or should should we just can we sort of um uh you know annualize the sort of rate we see progressing from q1 to q2 yeah so we provided q2 guidance there is um one of our plans uh in l kills uh was down for maintenance uh a couple weeks ago but that's reflected in the guidance for q2 um what we said is because we're we're only going to do drilling activity with permits on hand uh we and so effectively that's one rig for the rest of the year uh we see production declining uh between five to seven percent for the year entry to exit um so that that number still looks good to us as we go here uh you know so more you know we held uh production held up very nicely in q1 uh we do start seeing a little bit of a decline in q2 and and And that will be the case for the rest of the year. So it's not going to be copy-paste Q1. You should look at the guidance and the trend. We do see 5% to 7% decline for the year.
spk10: Thank you. And this concludes both the question and answer session as well as the conference itself. Thank you for attending today's presentation. May now let's connect your phone lines.

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