California Resources Corporation

Good day and welcome to the California Resources Corporation second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joanna Park, Vice President of Investor Relations and Treasurer. Please go ahead.

Welcome to the California Resources Corporation second quarter 2023 conference call. Participating on today's call are Francisco Leon, President and Chief Executive Officer, Nelly Molina, Executive Vice President and Chief Financial Officer, as well as CRC's entire executive team. I'd like to highlight that we have provided slides in the investor relations section of our website, CRC.com. These slides provide additional information on our operations and our second quarter results. We've also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website, as well as in our earnings press release. Today, we are making some forward-looking statements based on current expectations. Actual results could differ due to factors described in our earnings release and in our periodic SEC filings. As a reminder, we have allotted additional time for Q&A 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 Francesco.

Thank you, Joanna. At CRC, our strengths are clear, cash flow, carbon, and California. First, our cash flow strength comes from our high-quality, low-decline assets. These assets provide a large production base with predictable cash flows from our long-lived reserves. Further, we produce some of the lowest carbon-intensity oil and natural gas in the U.S., which we sell into markets that have access to premium pricing and advantage realizations as compared to the rest of the U.S., Our second strength is our carbon storage platform, Carbon TerraVolt, which benefits from an early mover advantage for CCS. CRC's large mineral and surface acreage position, plus the quality of our geological reservoirs, our extensive surface knowledge, and joint venture with Brookfield continue to provide us with a competitive advantage. Carbon TerraVolt meets the nation in permit applications submitted to the EPA. Additionally, our CCS storage potential continues to attract significant interest from current and future emitters. To date, we have executed five carbon dioxide management agreements, or CDMAs, for a combined injection rate of 815,000 metric tons per year, which represents reservations of 16% of our pore space and good progress towards our target of 5 million tons per year of injection by year-end 2027. Our third strength is California. California's energy industry offers attractive market with high barriers to entry. The state is the fifth largest economy in the world with energy needs that far surpass local production. At CRC, we proudly operate under the highest environmental standards in the world, and our long track record of safe operation demonstrates our ability to navigate California's regulatory landscape. California also has ambitious decarbonization goals and the right incentives to drive emission reductions throughout the state. CRC is well positioned to help advance the state's energy transition and be a solutions provider to the state. From an operational perspective, we continue to make great progress on our business transformation efforts and are now targeting 50 million or more in annualized run rate savings. The goal of our transformation is to recalibrate our approach to reflect our current and future needs and improve our cost structure. Therefore, we're evaluating all aspects of the business, looking for operational optimizations, organizational improvements, and new technologies to drive costs out of the system. Initial actions have focused on our key business processes around well services, chemical programs, and our warehousing model. We also see opportunities for improvement in how we utilize our contractors and rental equipment in the field locations. By aligning our practices and our operations to the current business environment and our long-term strategy, we can execute on our strategy to maximize cash flows and further enhance shareholder returns. Note that savings from these initiatives are not included in the 23 guidance we provided today, but are targeted to be in place before year-end and reflected in 24 results. In the second quarter of 23, we produced 86,000 DOE per day operating one rig in Long Beach and 35 workover rigs. A combination of strong demand and favorable pricing underpinned 69 million of free cash flow generated in the quarter and brings our year-to-date total free cash flow to 332 million. During the quarter, we repurchased $64 million of our common shares and paid $20 million to our shareholders in dividends. This represents 122% of our pre-cash flow return to shareholders in the second quarter. Since May 21, CRC has returned nearly $700 million to our shareholders, or nearly 20% of our current market cap. Our REST rewards continue to perform in line with expectations. Our stable performance is best observed from our gross production results, which excludes variations from our production sharing contracts in Long Beach and NGL storage levels. Our flat quarter-over-quarter gross production demonstrates the productivity of our stack pay and efficacy of our downhole maintenance program. As a reminder, we continue to see delays in new drill permit approvals, but continue to receive permits from CalGEM for workovers, deepenings, and sidetracks. Despite a lack of new drilling permits, we remain on track to deliver 5% to 7% entry-to-exit production decline. Our 2023 development plan is focused on permits in hand, and our high return, re-completion, and work-over activity highlights CRC's ability to manage reservoirs and maintain capital efficiency even at lower activity levels. On a net production basis, oil came at the midpoint of our guidance range, while total production ended up on the lower end due to storing of NGLs. We typically store NGL volumes produced during the second quarter to sell in higher demand periods, maximizing our cash flows. On the power side, our 550-megawatt power plant provides us with the ability to manage field-level power costs at elk hills and surrounding fields, as well as to optimize between taking incremental volumes of natural gas to market. or converting DC natural gas to power for delivery into the CAISO wholesale power market. Our natural gas and marketing activities once again had a very strong quarter. As CityGate gas prices held up much better than field-level prices, our natural gas and marketing activities once again had a very strong quarter. The team was able to double quarterly margin results versus guidance expectations by taking advantage of the transportation and delivery resources we maintained. Looking ahead, our natural gas marketing margins should moderate in the second half of 2023 as California's natural gas inventories return to more seasonal levels and the abundance of hydrogen generation capacity competes with natural gas fire generation this summer and fall. Moving to carbon management. During the quarter, we executed our fifth CDMA with Verde Clean Fuels for our renewable gasoline projects. This project further confirms our economic type of 50 to 75 of EVTA per metric ton for a storage-only project. We also expanded our capacity reserve for Lone Cypress for the previously announced low-hydrogen project. Anticipated CO2 injection has now more than doubled from 100,000 to 205,000 metric tons per year for the project. These facilities, in addition to our agreement signed with Indentech earlier this year, are planned to be located at our Net Zero Industrial Park at Elk Hills, which provides a unique benefit of offering surface acres for build-out, midstream, and co-location with permanent CO2 storage. Post-quarter end, we submitted another Class VI permit application for CTV-5, continuing our pole position for storage permit submissions in the queue with the EPA. The permit application has a capacity of 17 million metric tons of CO2 storage, bringing CTV's cumulative potential storage capacity under permit applications to 191 million metric tons. We continue to target a draft class 6 permit from the EPA by year end. The recent EPA draft permit approval for a project in Indiana is encouraging for the CCS industry and provides yet another data point of EPA support for the technology and progress. We remain optimistic and continue to see positive traction from our conversations with potential emission sources as well as various other stakeholders. Lastly, we continue to evaluate the separation of our carbon management business. Carbon terrible continues to make strong progress each quarter. However, we're still in the early stages. We continue to look for certain important milestones such as permit approval, project FID, and line of sight to first CO2 injection and cash flows before considering a potential separation. And now I'll pass it over to Nelly to provide an update on CRC's financial position and outlook.

Thank you, Francisco, and welcome again, everyone. Our balance sheet remains in solid condition. During the quarter, we expanded our net RBL commitments by 25 million, bringing our total commitments to 627 million. We ended the quarter with 927 million of liquidity, which includes 448 million in cash. Our net leverage position reflects a very modest 0.2 times of leverage, while our fixed charge coverage exceeds 17 times. Given the cyclical nature of the commodity prices, keeping our financial strength is a key pillar of our strategy. Looking forward, we are maintaining our full year production guidance. As Francisco mentioned before, our reservoirs are performing in line with our expectations, which are informed by decades of operating history. We anticipate modest declines in the second half of the year, in line with our previously disclosed range of 5% to 7% annual decline. Regarding our capital program, we take a dynamic approach in response to commodity price volatility and focus our activity on maintaining oil production and maximizing our free cash flow. We reaffirm our 2023 capital program to range between $200 and $245 million under current conditions with a heavier weighting in the second half of the year due to timing of projects and higher expected work cover activity. Oil and natural gas developments will continue to be focused mainly on executing projects using existing permits. While commodity prices remained at healthy levels, the forward strip softened during the second quarter. Our updated guidance reflects our strong natural gas marketing activities to date, as well as our outlook for commodity price differentials. The NGL market reflects seasonal quarterly pricing trends and the global oversupply market environment. On the natural gas side, our guidance reflects the unprecedented price spikes registered in the first quarter on the full year average, but also the return to normalized levels in the second half of 23. As a result, we are lowering the top end of the range of our 2023 operating cost guidance by 15 million due to lower energy-related operating expenses expected in the second half of the year. Additionally, we are narrowing the range of our free cash flow guidance for the year to 380 to 460 million. Let me remind you that our 2023 guidance is based on an estimated brand price of $77.54 per barrel and $2.87 per MCF NYMEX price. Our key financial priorities in the second half of the year are the execution of our business transformation initiative to reduce our expected 2024 cost-run rate in $50 million or more, and being responsible stewardship of the best uses of our balance. With that, I will turn it back to Francisco.

Thank you, Nelly. CRC's unique value proposition is founded on our disciplined capital allocation, solid balance sheet, and free cash flow generation capabilities. CRC's continued progress at Carbon TerraVault provides shareholders a way to participate in CCS in California as a path toward a decarbonized future. To summarize, CRC's strengths are cash flow, carbon, and California. Thank you for joining us on the call today. We'll now open the line for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1, on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourself to one primary and a follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Hey, thanks. You know, for my first question, I was wondering, you know, if you all could provide an update on the Class 6 permit process with respect to the Indiana permit that you had, you know, indicated. So if you could compare and contrast, like, any kind of differences or differences the timeframe that, um, you know, they had to go through in Indiana to get theirs and, and, uh, versus what you all are doing there. So if you can just kind of compare and contrast, and if there are any differences between those, um, just trying to get a sense of your confidence in, in that year end target for re receiving the draft permit.

Hey, Scott, uh, how's it going? So, yeah, we're, we're still targeting the draft permit, uh, for CTV before year end 23. Big catalyst for CTV, big catalyst for California in general. We're engaging with the EPA regularly, and I hope we are the first in California. We are dealing with a different part of the EPA. We're dealing with Region 9. So we talked to both Region 9 and headquarters, but we don't have a lot of visibility into the permit in Indiana. Best we can tell is that they filed before we did so a little bit longer timeline for them. But hard to say really from where we stand as to how good the permit application was and ultimately the steps that they took to get there. So I won't comment on that permit, just feel like we made a lot of good progress on the technical discussions with the EPA and still feel very much in target to get the draft permit this year.

Got it. And when we refer to the technical progress, you're just talking about, like, just the suitability of the reservoir and everything like that. Is that fair?

That's fair. I mean, there's financial assurances. There's community support. There's a number of things that the EPA is going through as they make decisions on permits, and I feel that Chris Gould and the team have done an exceptional job getting us prepared. But ultimately, you know, we were waiting for that final – final sign-off that we have the draft permit. And I think not only CRC, but the rest of the CCS space is eagerly waiting for the EPA to move on more permits.

Okay. And for my next question, I'm going to sort of keep on the same, you know, kind of line of questioning. But, you know, the community support, you know, aspect, you know, obviously I think is going to be, you know, a big, you know, big issue. know kind of um you know a lifting effort too especially being in california but can you give a sense of like what uscrc are doing specifically to to um you know get the community support and and help get that through because i do think there's that uh that comment period after you receive the draft correct yeah that's correct after the draft permit gets uh granted there's a period of time for public comments and then a final permit gets granted after those are incorporated

Our team is working diligently in parallel to get the public comment discussion underway and getting the support from the communities. You know, our first project is critical that the first project is successful for all the stakeholders. And we're in Kern County. We're also at Elk Hills, at a field that we own 100% fee simple, remote from any neighborhood, any areas of concern from the public. This is the right place to have our first project in California. And we're the right counterparty to be leading it. We see as we spend time with community leaders and we do community plans, We feel there's a support that is there. And so, again, to us, it's not a sequential process. We very much got started already and feel the support is going to be there. We're also working with Kern County and the Kern County Planning Commission to look at the permits that are required at a local level so that we're good to go once the EPA gives us a sign-off. So a lot of things in motion, but we are progressing in every respect. And I look forward to getting started.

Appreciate it. Thank you.

The next question comes from Kalei Akamain with Bank of America. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. In my first question, I just want to hit on production. So coming into this year, I think we were expecting to see high single-digit declines. by year end because of the constraints that you're seeing on the current county permitting process. So I'm hoping that you can help us understand what the drivers are to the better production performance that you're seeing. Is it better new well performance? Is it some kind of tailwind from prior years? Or is it the underlying base? And really, the nub of my question is trying to understand what the unmitigated decline of the portfolio is.

Hey, Kalei, good talking to you. So I think you summarized in your question the answer really well. So quarter over quarter, if you look at gross production, and that's ultimately the best way to judge the performance of the reservoir. So you don't have, like we had some NGL storage noise in the quarter, and you always have the production sharing contract. But the way you look at the reservoir is to go to gross production, and we're flat quarter over quarter. So, and it is a, you know, tailwind, we had three rigs when we started the year. So there's some benefit from performance of those wells. Our current development plan, which is focused on the Wilmington field in Long Beach, it's performing extremely well, kind of with wells above type curve. So that helps as well. But at the end of the day, it's the quality of the underlying asset, right? The PDP of our base has a naturally very shallow decline And as we're able to move OPEX dollars through down-home maintenance, and as we're able to do capital workovers, we're able to mitigate that base decline over time. So, it's a low decline to start with, all the activities having the effect that we would want. We still think, you know, at the end of the day, what starts fading out is some of the support from the initial activity in the year. So, we do see a 5 to 7 percent entry to exit decline I feel pretty good about that number if you look from January to December. But we're happy with the results in the performance of the base and the way the production has responded year to date.

Awesome. I appreciate that, Keller Francisco. My second question goes to the carbon management business. Now, understand that there's some legislation that's in the works that's going to help define the state regulations on the CO2 pipelines, and I think that's now expected in 2024. So I'm trying to understand what the impact they may have on perhaps the third parties that are situated around you that are considering capture projects. Because at the moment, the majority of your offtake is with new build plans to be located on your own property where those regulations maybe aren't as meaningful.

Yeah, so there is a lot of work happening in California to get the to get some pipeline regulation and the framework underway. We see significant support among legislators for CCS, and there's a lot of discussion happening on effectively what's a trailer bill to Senate Bill 905 to get that framework put in place. The session's still open, so I wouldn't say that it's happening next year versus this year. We do see progress. We do see conversations happening. So I wouldn't put a timeline to it until we have an ability to see how the session finishes. But that is an important piece of legislation that needs to come out. And if you think about, okay, why are we at five greenfields and still not at any of the legacy brownfield projects, It's really two things. One is the price discovery negotiations on the split of the economics, which is a normal commercial discussion between parties. But ultimately, we have an existing emission source and you have a permitted sink, which we're going to have in multiple places throughout the state. That connectivity between the two points is critical. And without having a good way to understand how the CO2 pipeline is going to be regulated, I think that's an important gap that we're overcoming on both sides of the fence on CCS. Now, working alongside all the decision makers and stakeholders to providing our input is hopefully going to get us there at the end. But the way we're thinking through this is, going on greenfield projects, going towards greenfield projects, it's a tremendous way to accelerate CCS. We can't wait always for the regulation to be put in place on the more challenging aspects. We have a project that can be co-located. We have three projects now, in fact, right? Blue hydrogen, renewable, gasoline, and DME. And that's a way to bring the energy transition into the near term, which is something that California really wants to see. So it brings alignment. We provide this one-stop shop. It's a good way to showcase progress as we wait for other regulations to come into play. But you're right, that's going to be an important aspect to see that trailer bill to 905 is something that we're very much looking to see, and that's going to help literally connect the points between emission sources and the storage vaults.

I appreciate it. I'll leave it there. Thanks.

Thanks, Kelly. The next question comes from Nate Pendleton with Stifel. Please go ahead.

Good morning. My first question, starting at a high level, can you comment on how or if recent M&A in the CCS space has impacted your view on separating carbon-terra-volt?

Yeah, I mean, I think it's interesting. You know, important to see the M&A space moving on CCS. It's a good validation, certainly, of where the industry is heading, and in particular for the Denbury team. It's hard to predict where we go from here, other than there's a lot of, we knew there was a lot of investor interest in investment dollars in this space. Does that lead to combinations? I think it's clear that we're heading there. But ultimately, we're going to be all in different timelines. We're going to be in different markets to pursue. And I just see it as a good validation point that CCS is definitely going to be here to stay. Now, in terms of the separation, I would say, you know, not focused on the things that we don't control and whether we expand or not outside of our current footprint. I think the focus really needs to be we need to get permits from the EPA. We need to be able to start construction and get line of sight into that first cash flow. I think at the end of the day, we're going to be looking at a – it's an early stage industry. with a lot of people that are watching every step of the way. So the best way to do it is just take it step by step and start showing progress. And, you know, the progress we've shown in two years has been tremendous. We look to accelerate that. But ultimately, the permit is the catalyst. I don't see the M&A as the catalyst. I think the permit situation with the EPA is going to be what gets things moving, not only for ourselves, but for a lot of other people that are in this space.

Thanks. And looking at slide 17, with your Carbon Terravault projects to date, and the significant addressable margin you mentioned on slide 16, I believe, do you have a target cadence for adding new sequestration sites beyond CTV5, or could you provide any color as far as your outlook for additional sites?

So, we're targeting 200 million tons of pore space to be permitted, and we're at 191. So we're pretty much there in terms of the permit submission aspect of this. What we've seen is, as we saw with 26R, which is part of CTV1, once you're in discussions with the EPA, once you collect more data, once you have a better sense of the land position, you're able to expand the projects. And that's what we did with 26R. We added capacity to that. So there's always going to be room to expand beyond what we're submitting. But I think what else is critical is we've now secured the pore space that we want to pursue. We started the permitting process. It's about bringing in the CO2 into those fields. That's the next catalyst, and that's what we're focused on. There's over 20 million tons per year of emissions. If you add every single counterparty that we're talking to at the moment, it adds up to about 20 million tons of emissions. We think our pore space is able to ultimately, on a combined basis, get us to about 5 million tons of emissions per year. So we're about four times, in terms of the coverage of CO2, in terms of counterparties that we're talking to, we're 4x our capacity. So it's important that we start getting reservations, we start finalizing deals with other parties, At some point, that pore space is going to run out, right, and then you have to restart again. Now, there's going to be a lot more to do. We think, you know, it's five times our pore space that we ultimately can do, but our near-term target is 200 million tons. So really focus on that ability to connect the dots with the emitters, because I think everything else, we feel like we got it in pretty good shape.

Got it. Thanks for taking my questions.

Thanks, Nate.

The next question comes from Nitin Kumar with Mizuho. Please go ahead.

Hi, and good afternoon, guys. I'm going to start with the oil and gas side of things. Francisco, you mentioned the 50 million target on OPEX. As I look at the numbers, you're really not guiding to that, and you said that. But could we get a sense of the progress you have made to date? I know you aren't expecting an impact this year. But where are you on that project to reduce costs by $50 million?

Hey, Nitin. I'm really excited about this initiative. I feel like we have a tremendous team, a tremendous organization. But I challenge the team to see if we could do better. And that was the question. Can we do better than we have in the past? Are there opportunities in the Omar, who's here with me and others from the team, really have stepped up to the challenge and said, yes, we can do better, and we're getting after it. So we gave some examples of the things we're looking at it from the way we contract. There's some opportunity to bring some contracting work in-house. There's other places where you actually may outsource in kind of challenging the model that we've had for, close to a decade now as an independent company, it was a good time to kind of test things that we could improve. We're looking at warehousing model. We're looking at relationships with key vendors. We're looking at the organizational design. But I think the commitment that I have from the team is this is not going to be a one and done process. We're always going to look for ways to improve the cost structure. And so where we might reach a finality here, in this quarter in terms of this first stage to get to $50 million so we can start incorporating that into the 2024 guidance, we're going to continue working through ways to improve the business. There's things like energy, for example. CTV is doing a lot of interesting things with new technology that could really work in the future. And then if we can reduce our exposure to the California grid, that's going to be a big benefit to CRC and our cost structure. That's a big cost driver, the energy cost. We also have a lot of wells, and those wells are great assets for us, right? We were able to do sidetracks. We're able to do workovers without having to have a drilling rig on site. That answers part of the question as to why we have such low decline. But we're very spread out over a large footprint. So we're looking at things like gen AI, drone technology, things that are up and coming. But I think we're going to be particularly well suited for incorporating some of those technologies on a go-forward basis. So anyways, to summarize, $50 million is what we have line of sight. We think we can get to – that's where we have a plus because we think we can do a lot more. It's a commitment from the team to continue to look at operations and try to bring down the cost structure and ultimately drive to higher cash flows.

Got it. Thank you for that answer. On the CMB side, you know, you talk about the type curve of 50 to 135 million per MMPTA. You're close to that first million or so, 815,000 CDMAs signed. This might be a long shot, but any sense of which part of the type curve you are tracking to in the first 800?

Yeah, I mean, I think all five of our projects so far, Nitin, that make the entirety of that amount is all greenfield storage only. So that points towards the lower end of the type curve. So 50 to 75 is where we bracket the storage only EBITDA. And the way to think about that is it's a lower capital requirement for those storage projects. All five of the projects that we are working towards will have a capture component built into the facility. So you don't have to attach a capture technology to an existing plant so it's already embedded or that. Plus, you also have a much higher concentration of CO2 as you bring these projects to life. So those projects, because they're going to be less capital-intensive, less capital requirement, when you look at returns, you're able to make really attractive returns even with the lower EBITDA. The opposite end of the model is where we have a full CCS as a service, where we go to an emitter and we do all the way from capture equipment, installation, to transportation to storage. And that is the part of the type curve that would point to the higher levels of the type curve. That also has higher capital commitments, and therefore you need a higher contribution from the incentives in order to make a return. So right now we're focusing on the lower end, but lower in this case means really good returns and low capital. So we're happy with those projects. want to pursue a brownfield project, as many brownfield projects as we can. At the end of the day, this business is going to be successful if we can decarbonize existing industry as much as we can. That's ultimately what gets the support from California. That's what we need in this state. And we think we're really well positioned to achieve both ends of the spectrum.

If I can sneak one last one just any update on the current County permitting. I know you had said that you expect permitting to restart in second half of next year, but any updates there.

That's still the timeline or at we anticipate a hearing in the appeal process to be scheduled sometime in Q4 of this year in that pushes a decision final decision to the beginning of next year. So we're looking to be back to normal activity in the second half of 24. So no real changes other than we think the hearing is going to get scheduled here very soon. As a reminder, we're working on alternative plans to field level. What's being challenged in the court is the current county environmental impact report. We're doing field level sequest and EIRs for three of our core fields in the San Joaquin Basin that collectively have about 90% of approved undeveloped. But we're also looking for inventory and ability to drill wells outside of Kern County. So it's an all of the above strategy to get us back on track by the second half of next year. Great. Thanks so much.

The next question comes from Leo Mariani with Roth MKM. Please go ahead.

Yeah, hi. Did you guys talk about just the production guide in the third quarter? So second quarter, you did 86,000 barrels a day net. You guys talked about seeing some declines in the second half, but your third quarter guide is 86 to 88. That implies sort of a modest increase. Can you just kind of help us connect the dots there?

Hey, Leo. Yeah, so you basically are recovering some of the NGLs that we were not able to sell. So on a sales basis, that shift happens. So absent any big movements in price that affects your PSE barrels, we see that that's the right range, 86 to 88 for the third quarter. So that does imply further some decline in the fourth quarter.

Okay, that's helpful. And then just in the second quarter, I mean, it looks like you guys paid out more than 100% of your free cash flow to shareholders in the form of, you know, dividends as well as buybacks. Is that sort of an anomaly or are you guys sort of comfortable potentially doing that just depending on, you know, say where the stock is and then the macro situation based on the strength of the balance sheet here?

Yeah, last year we paid over 100% of free cash flow if you look at 2022. Year to date, we're closer to 50. We had a very high cash flow order in Q1. And so if you average Q1 and Q2, even though Q2 is higher than 100%, we're at about 50%. We're very comfortable with our capital allocation strategy, but we do evaluate the best method to provide returns and value to shareholders every quarter. I mean, we do have a fixed dividend. But, you know, it's about $1.13 per share. So that's in there that gives the market more of a fixed component. And then the rest of it is discretionary based on how the business is looking and where we see the most value. We do look at where is the best return for the company, and that's what we act on. So, you know, we haven't been prescriptive on the shareholder buybacks, but because we like to assess every quarter where we are. But if you look backwards, we have been over 100% in 2022, but right now we're closer to 50% for the year.

Okay, that's helpful. And then also, could you just comment on, you know, sort of existing competition for CCS deals, you know, out there in California? As far as I know, you guys are the only ones that have kind of put some deals on the board here with five deals, but certainly correct me if I'm wrong, any information you can kind of provide about the competitive landscape would be helpful. And then also, is there any update on the sale of the parcel that you're working on in Huntington Beach area?

Yeah, I'll go with the Fort Apache, which is our one-acre parcel in Huntington Beach first, and then I'll come back to the CCS question. So we are making progress. There's many components to converting an oil field to a real estate project. We're going through abandonment. We're looking at regulatory requirements, but you also look at market conditions. So we're working through all three. As we said before, we think this gives us a really good look as to what ultimately be the decision that we make for the bigger property, which is 90 acres down the street. So it's a good way to test the waters and make sure we understand all the requirements from the law and ultimately gets this acre sold into the highest and best bidder. So we're working through that. We said, I think we've from the beginning said that this was going to be something that we would do by year end, not because we want to just provide a lot of cushion. There's a lot of things to do and we're working through it. I think I reported last time we We started working on abandonment. There's a few wells on site. There's facilities we have to remove. So all of that process has begun and it's ongoing. So look back to reports of the results of that sale later this year, assuming market conditions hold. So that's kind of the update there. We're working through that. In terms of CCS, in competition. I mean, you can see, if you look up to the EPA website, you'll see that on the permit submission front, we are not the only ones. There's a number of other projects out there. They do tend to be more for self-solutions, meaning there's parties that want to reduce their own emissions, and they have a site that they identify nearby, and that's how they're trying to do. So we haven't seen a carbon-terrable competitor come out that has a view to look at all of the state's emissions quite yet, at least not based on what you could see publicly. We do see competition. We do see this as being not like the Gulf Coast where it seems like a free-for-all, but here you're going to have competition. We think there's going to be a very successful business undertaking and that we see others that are either trying to acquire land others that you're going to start seeing some permits, we think, in the EPA of parties that maybe they're not there or don't register as potential counterparties in the state. So feel good about what we've established to date, which is the core position that we wanted to have and what ultimately ties to our commitment. But, yeah, don't be surprised if within the next six months you start hearing about others coming into California. Thank you so much.

The next question comes from Noel Parks with Toohey Brothers Investment Research. Please go ahead.

Hi, good afternoon.

Hi, Noel, how are you?

Good, thanks. Just a couple of things. You know, I was thinking that, of course, that a company has the long roots in oil and gas production, and you observed that CCS is a very young industry. So for the five deals you've done so far, you know, it's kind of a sense that the train is just starting to chug along and maybe you're getting ready to leave the station for CCF. I was wondering, can you sort of walk through the deals to date and describe what types of things you were negotiating on each of these transactions to get you or to get the customer to pull the trigger? So, like, what are the issues that are in the mix when you're with these past deals?

Yeah, so, you know, we are kick-starting the energy transition in California. And there's a lot of interest to develop markets like hydrogen or renewable gasoline, the project we announced with Verde today. But in a lot of cases, I mean, you don't have, first of all, you don't have the product. but you also don't have the market and the offtake. So the energy transition, I think we're very committed to it, but we need to drive towards that. And that's a lot of investment that needs to come in. And that's where we are working with agencies to get the permits on their way. Otherwise, the transition is going to take much longer. What we're trying to do with the conditions precedent that are established in the CDMAs basically relate to things like offtake agreements. In some cases, we have already an existing offtake agreement with the counterparties. In some others, we're working through that, right? So who's going to buy the blue hydrogen from Lone Cypress? Critical that we understand that. And that's in terms of our, you know, we have preserved the option to invest into the projects on all five at this point. But that's a good way to really look into the market and how that evolves. Now, there's a lot of groups with very deep pockets that want to develop that hydrogen network. for heavy trucks in California, but that doesn't mean I think we have something like seven stations in the entire state. So that's going to require, it's a little bit of a circular kind of chicken and the egg problem. You have off takers that want the product that they're building plans are ready to go. And then, but you don't have the hydrogen in a form that's readily available and cost efficient that ultimately they can sell. So we're trying to bring all of that together on these projects. So, but again, it's very well aligned with where the state is asking us to be. And so we want to be the tip of the spear. We want to be the leader in this space. We want to create these markets, but it's going to take some time. Now, if you think about brownfield, greenfield, right, because this maybe sounds like it's early stage and it's not going to get there, it will get there. And again, because we're focusing on areas where we already own the land and we're going to be co-located with, the reservoirs, that brings us much closer to a final investment decision than others. If you had a brownfield project, you still have to install a capture facility on an existing plant and then make sure you have the right build-out on the pipeline. So this is why these projects are not happening next year, right? That's why we said, you know, to get to our critical mass of injection, we're looking at end of the year 2027 because a lot of these projects have to come together. But there's, so just again, to recap, it's a lot about the offtake agreements. Who's going to be buying these products? Is the support going to be there? What's the price? We went through a significant change, positive one with the IRA last year and 45Q providing a much better support for some of these projects. And that's what we're actively trying to capitalize on, on these greenfield projects. But there's still a lot, a lot of work to do, but ultimately that, Class 6 permit for us is the catalyst that gets a lot of things going. We have the capital with Brookfield. We get the permits, and it's a matter of starting the construction and getting these products to market.

Great. Thanks a lot. That's just what I was looking for. And, you know, you also talked a bit about technology development. You're talking largely technology. about in-house applications for cost savings. But just zooming out a little bit to a little bit of a devil's advocate question, post-injection of CO2, I was wondering if you have done any work or can talk about what sort of monitoring technology post-injection you're going to need. And I was wondering, is that something that's costly are the methods or the vendors for doing that standardized? Just thinking that as you have, you know, worries about, you know, maybe opposition to, you know, injection of CO2, you know, just sort of forestalling any concerns that might be there around, you know, if staying sequestered, et cetera.

No, that's a great question. I'll pass it over to Chris Gould to provide the answer.

Yeah. Hey there. I think the first, the most important thing to understand when it comes to monitoring is that that's part of the EPA class six permit. So all the requirements are spelled out as to what needs to be done and then how, for how long, by what sensitivities those need to be dialed into, if you will. Um, So there's really not a lot of guesswork there. We know what we have to do, and we will get the permit on the basis of complying with that. When it comes to fulfilling those requirements, there's a lot of different applications or opportunities to do it through collaborations with existing monitoring all the way through new technologies that we've been heavily engaged with the DOE, other universities that conduct this sort of monitoring and have done so for many years, particularly in a state like California. So we feel very well prepared for complying with the permit requirements with an abundance of different, you know, emerging or existing technologies. Thank you.

Great. Thanks a lot.

And we have a follow-up from Scott Hanold from RBC Capital Markets. Please go ahead.

Yeah, hey, thanks. Francisco, real quick, you mentioned, obviously, on the shareholder return that you all are going to look at what creates most values for the shareholders. And just some context, obviously, you've got the base dividend in there, but You know, as you kind of step and look at the buybacks, obviously, when you're, you know, doing it before for the last year or so, I mean, doing it under $40, that was, you know, sort of a layup decision, right? Now you're $10 to $15 per share higher. Like, can you walk us through that thought process of, you know, from your, on the allocation of those shareholder returns, like, where does the stock price play into that? And how do you think about, like, where it is today versus, you know, obviously where it had been over the last year?

Hey, Scott. Welcome back. So what's your price target? Like 60? Yes. So we have the option to increase the dividend. We have the option to continue with buybacks. We also can look at the debt. All options are on the table. We like to be opportunistic because just like we did last quarter, We were able to buy shares at 39. And if you look at the history over the last four or five months, I think we were able to pick a really good time to deploy the cash to buy the lowest average price for the share. that discretion, that ability to make a decision really comes from a returns-oriented analysis, right? So we look at the opportunities in front of us and then we make a decision. Now, even though there's discretion in how we return cash to shareholders, we're very committed to the program and to return the highest amount of cash to the shareholders over the long run, right? So even though there may be some variability in the amounts in the quarter and the like, we do look at it actively and ultimately we're very committed. Now, as a reminder, we didn't talk about it today, but we have the high yield indenture that ultimately governs our ability to distribute cash via either dividends or buybacks. And it's a last 12 months, 50% of net income calculation. So there is a oil price or a commodity price component to it. If you're bringing in You might have a period of very high prices at the moment, but you're bringing in lower commodity prices from the last 12 months, and that acts as a capping mechanism, right? So because we're dealing with those caps and you're dealing with discretion, it's very difficult to be more prescriptive, but very committed to returning as much cash to the shareholders as we can.

No, that's helpful. And one real quick one for me, just to close it out for me. Just on some of these greenfield projects that you all have CVMAs for, when you think about, you know, obviously you have your Class 6 permit, which is, you know, something you're working towards, but are there any other, like, permits or approvals that we should be thinking about to get, like, a blue hydrogen or a blue ammonia or renewable gasoline facility approved either at the state or even at the current county planning commission? Is there any specific approvals or legislation that governs some of that?

Yeah, no. So, you know, you need a conditional use permit. That's a critical local California permit. And that's doing in conjunction and working very closely with the current county planning commission. So those conversations are ongoing for the projects that are going to be at Elk Hills. Like I said before, we're working on all those in parallel. It's nice to have the Kern County Planning Commission there because they see all aspects of the energy spectrum, right? They're the ones that do the conditional use permits for oil and gas, but also for solar and wind projects. So it's a natural extension of what they do to look at the greenfield projects and be the group that oversees these permits. So that's one to look for. But like I said, we're working through it. They're aware of our plans now. lockstep, working with a lot of the same information that you send to the EPA, you have to provide locally. So that would be one to look for after we get the draft permit this year. We'll share more of the progress and the inner workings of the California approval. So that's the one I would highlight. Certainly, we're looking for the pipeline regulation to also be put into place in the near term. That's going to be critical as we move away from co-locations. Thank you. Okay. Well, I think that's a wrap. Thank you so much for spending time with us and look forward to seeing you on the road. We're going to be going to a number of investor conferences in the coming weeks and look forward to seeing everybody in person. Thanks so much.

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