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.