California Resources Corporation

Good day and welcome to the California Resources Corporation first quarter 2025 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 2. 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.

Joanna Park Good morning and welcome to California Resources Corporation's first quarter 2025 conference call. Following our prepared remarks, members of our leadership team will be available for questions. By now, I hope you have had a chance to review our earnings release and supplemental slides. We have also provided information reconciling non-GAAP financial measures to comparable GAAP financial measures on our website and in our earnings release. Today, we will be making some forward-looking statements based on our current expectations. Actual results may differ due to factors described in our earnings release and in our periodic SEC filings. As a reminder, please limit your questions today to one primary and one follow-up, as this allows us to get more of your questions today. And now I will turn the call over to Francisco.

Good morning, everyone. Thanks for joining our call and for your interest in our company. CRC is executing very well. We delivered a solid quarter and are reaffirming our full-year 2025 outlook. Our business strategy is designed to mitigate commodity price volatility and generate cash flow to execute our operations, maintain a strong balance sheet, and sustainably return cash to shareholders. Before Clio covers our first quarter financial and operating highlights, let me open with some thoughts on how CRC is positioned to withstand the uncertainty in today's macroeconomic environment. First, the strategic steps we have taken to strengthen our business were timely. We have achieved critical scale. The era merger made us bigger and better. proving that assets are better in our hands. This combination provided new opportunities to streamline our business and achieve meaningful cost savings that strengthen our returns today and well into the future. We have now realized more than 70% of our total $235 million in announced annual synergies and expect to achieve the full target in early 2026. Second, our cash flow is underpinned by a strong hedge portfolio and diversified revenue stream. For the remainder of the year, we have approximately 70% of our oil production and 70% of our natural gas consumption. Hedge at attractive levels relative to the current strip. In addition, our power and natural gas marketing strategy are delivering meaningful margins, further underscoring the strength of our business. This integrated strategy provides strong visibility into near-term cash generation, supports debt service, and shareholder returns, and allows us to generate free cash flow at Brent prices down to approximately $34 per barrel. Third, we have high-quality conventional assets. They have low decline rates, high net revenue interest, and high ultimate recovery rates. With modest development costs, we can manage our production largely through capital efficient workovers and sidetracks. Low capital intensity provides an advantage over peers. We're also able to control the pace of activity due to our high ownership interest where we own both surface and mineral rights. We have a solid inventory of development projects and recent improvements in the state's oil and gas regulatory environment provide confidence that we will continue to build our permit inventory through several avenues later this year. We are returns focused and allocate capital to our highest return projects while effectively managing production and investing in our growth opportunities. Lastly, the strength of our business allows us to sustainably return meaningful cash to our shareholders. In the first quarter, we returned a record $258 million to stakeholders through dividends, share buybacks, and debt redemption. We continue to show that CRC is a different kind of energy company. I'll turn it over to Cleo to summarize our first quarter results and some of the drivers behind our strong outlook.

Thank you, Francisco. Good morning, everyone, and thank you for joining us. This quarter, our results exceeded the street's expectations. We delivered flat net production quarter over quarter at 141,000 BOE per day and realized prices that were 98% of Brent. Adjusted EBITDAX was 328 million. Net cash flow before changes in working capital was 252 million. And free cash flow totaled 131 million, all of which came in above consensus. This performance was primarily driven by our continued cost discipline. In Q1, our combined operating and G&A costs were $388 million, approximately 5% better than what we had guided. Looking ahead, we expect to reduce our operating costs in the first half of 2025 by nearly 10% compared to the second half of 2024. We remained focused on delivering value to shareholders. This quarter, we repurchased a record $100 million in shares, nearly double our historical average, and paid $35 million in dividends. Altogether, that's $135 million returned, or about 103% of our Q1 free cash flow. With a strong start to the year, and despite nearly a 16% decline in oil prices, we are reaffirming our full-year adjusted EBITDAX guidance of $1.1 to $1.2 billion, driven mostly by our low-decline assets focused on cost reduction and hedge book. We continue to target average annual production of 136,000 BOE per day with DNC capital investment between 165 and 180 million. Now, I want to take a moment to talk about our financial resilience and highlight three core strengths. First, balance sheet strength. We have a strong financial foundation. Our leverage is below one time. We have more than $1 billion in liquidity and nearly $200 million in available cash. Earlier this year, we redeemed $123 million of our outstanding 2026 notes at par, and we expect to address the remainder later this year. This balance sheet strength gives us the flexibility to reduce debt, return capital, and invest in disciplined opportunities. We also have access to third-party capital from Brookfield to support the growth of our carbon management business. Second, our cost reduction progress. As Francisco mentioned, we realized 173 million in annual run rate error-related synergies based on our Q1 results. We expect those to be sustainable and enhance our future margins. Third, executing on our strategy. Our integrated approach is gaining traction. We're capturing value through resource adequacy payments for standby power capacity, natural gas marketing, commodity derivatives, and emerging opportunities in carbon management. We're executing on our broader vision. Our gas-to-power and carbon capture strategies are not only actionable, but they're also scalable and position us to deliver long-term value while reducing risk. We are pleased with how we've started 2025 and confident in our ability to execute for the rest of the year. We're executing today and building for tomorrow. Thank you. Back to you, Francisco.

Thank you, Cleo. Before we move to Q&A, let me quickly summarize today's call and offer a few things to watch for as the year unfolds. Through our carbon management business, we continue to build scale and expect new vaults and projects to be announced later this year. Industrial partners are turning to us for solutions to energy challenges and desire for clean, reliable power. We have a leading CO2 storage reservoir business in various stages of permitting, with multiple CCS projects under consideration. We're also excited to launch California's first CCS project at the Elk Hills Cryogenic Gas Plant, with construction breaking ground in the second quarter and with first injection expected later this year. In our power business, we're pursuing multiple new opportunities with AI data center companies and other large off-takers interested in our available power capacity. Our firm supply of gas speed to market, access to land, proximity to CCS, and scalable infrastructure are key attributes in our portfolio. The proximity of our assets to large industrial centers in the world's four largest economies creates multiple advantages as we progress these discussions. Stay tuned for more later this year. CRC is executing, and we sit in an advantage position. With a strong balance sheet, quality assets, a low and declining cost structure, and well-priced hedges, our margins are well insulated from near and medium-term reductions in commodity prices. We certainly recognize the challenges presented in today's markets, but CRC has a plan. In closing, let me reiterate my opening comment. CRC is well-positioned. Our durable assets and integrated business strategy are yielding strong results today. Operator, we're now ready for questions.

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're 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 two. Please limit your questions to one primary and one 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.

Thanks. Thanks, all. Nice quarter. I was wondering if you all could walk through how you're able to achieve the similar EBITDA using a much lower Brent assumption. I mean, obviously, you pointed to some things like lower costs being one thing, but is there things incrementally happening from the prior outlook that has been a tailwind? And can you give us some specifics on what really is driving some of those OPEX costs down?

Hey, Scott. Thanks for the question. Yeah, definitely we're seeing a lot of tailwinds related to our synergy targets. We've, you know, the team is just, what we like to talk about is how the story is good, but the execution is better. The team has just been outperforming every expectation in terms of getting the air assets integrated into CRC. So think about it as three stages. The first stage is, was around refinancing and the people aspect of a merger. The second one was around leaning in on our supply chain advantage and renegotiating good contracts to have a long-term runway. What we're doing right now is we're consolidating infrastructure, and that's where we're seeing tailwinds. We're moving cost savings earlier And that in combination with our very strong hedge book is what positions the company to be able to not only reaffirm guidance, but continue to invest in this business. So excited with the progress and the results from the merger and what we expect to continue getting every dollar from our target in the Synergy Pocket.

The next question comes from Josh Silverstein with RBC Capital Markets. Please go ahead.

Yeah, thanks. Good morning. Yeah, just I had a question on the break-evens that you guys were highlighting. Obviously, they're very low. And, Francisco, you just mentioned the hedge book. Can you give us a sense as to what it may look like on an unhedged basis? Is it closer to those, you know, other kind of work over and sidetrack costs that you guys were alluding to earlier in that slide as well?

Hey, Josh. Yeah, so let me spend a couple minutes talking through how we got here. We have been four years working to position the company to be able to manage the ups and downs in the cycle. Volatility is a given. Commodity prices in a commodity industry. So we have to be able to build a resilient business and deliver sustainable capital return to shareholders. So When we look at our future, it's really underpinned by the quality of the assets. So we have very low decline, predictable assets. But the steps that we take in are steps that we take to get ready for situations with increased volatility like we have right now. So we've done M&A with ERA. We put the hedges in place. We maintain an absolute pristine balance sheet. And we're taking a proactive view on cutting costs. The result of that is, as you pointed out, our corporate break-even is around $34 per end or about $30 per WTI. So that's how we run the business, and we took all these actions to get ready for this moment. So when we look at the go-forward basis, that's what you should expect. It's not a reactive nature or getting caught. by surprise, by any macro. It's about being ready so we can deliver that certainty to the investors and so we can continue to return cash to shareholders predictably.

Got it. A follow-up question for me, I think I asked this a couple quarters ago, but we've seen another refinery shut down in California. Is there growing concern about who you guys may be able to sell to or the rent premium that you guys receive?

Yeah, so no concern on the refinery shutdowns. We're able to place our crude with the existing refineries. And as a reminder, what we have is the refineries here were built for California crude. It's the Wright-Nelson complexity. Our production has low sulfur. So the answer to why do we have really high realizations on par with Brent It's because of that preferential market to our crude. California is in a tough spot. I mean, we're the fourth largest economy in the world, big consumer of gasoline. I think we're second to Texas. We're the largest consumer of jet fuels in the U.S. And the state is in a difficult situation with reduced refining capacity. But what we talk to the government, what we talk to refineries is there are solutions. There are ways to improve cost structures, and that is to produce more locally. So I think the message has been received, and we're seeing progress across all fronts. So it's the refining situation could be improved, but we're going to help solve that by producing more of our barrels. That is really what the refineries need.

Thanks, Seth.

And we have Scott Handold from RBC Capital Markets. Please go ahead.

Yeah, thanks. You know, for my follow-up from my earlier start, Francisco, I was wondering if you could give us a sense of what you're seeing and hearing on the political landscape, both in California and Washington. I know you stay pretty active and close to that. And what kind of progress, you know, is occurring on things like CO2 pipeline regulation, carbon tax credits, you know, oil and gas permitting specifically in the state. You know, what kind of progress are you seeing at this point? And, you know, is it encouraging? Are you seeing some, you know, movement by some of the politicians to be more open to, I guess, oil companies in the state?

Yes, Scott, I really appreciate that question. Definitely we're seeing it's very encouraging how this is playing out. We And, you know, we're really trying to solve for two things. One is to cut emissions, which aligns very well with California's objectives, but also to produce. California has a natural advantage by having some of the best oil and gas reserves, remaining reserves in the U.S. So we can achieve both cutting emissions and improving affordability of energy and also deliver to energy security. So as we talk through messaging in Sacramento and Washington, D.C., we feel there's a lot of alignment and our projects are really the bridge between the two ideologies. There is a win-win and part of it is what we're delivering. So we do see progress on CO2 pipelines. You mentioned we do see progress on cap and trade. We see progress on oil and gas permitting. I would say across the board, We're seeing indications of much more constructive engagement, progress, tangible progress to be able to put capital to work, whether it's in the new energy space or in the legacy industry. So we have a very positive outlook in terms of engagement on both Sacramento and Washington, D.C.

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

Hey, good morning, guys. For my first question, I'm looking at slide number 16 here, which covers Huntington Beach. It looks like you've got visibility on the necessary permit for land use at the city level. Wondering if that opens up an opportunity to start marketing the real estate to potential buyers, and if you could give us an update on the remediation timeline, that would be great.

Yeah, Kelly. So absolutely. So we, as you mentioned, we submitted the proposal with the city of Huntington Beach. We're going through community reviews. But to be very clear in terms of marketing, the assets for sale, we would sell it for the right price right now. There's nothing holding us back other than making sure we get the best value. And we think we get the best value by abandoning the field, which we control our own pace. But it's really to get the land re-entitled for the best and optimal use, which for this property, we've done a lot of work on preliminary development. And it's going to be a mixed-use community that has 800 homes, 350-plus hotel rooms. So it's going to be a very nice development. This California in L.A. in particular needs a lot of housing. So this will be a great project. And so we're launching those plans. We have had a continuous rig abandonment program since 2023. So we're making progress on that front. And really it's about when can we get the right value to monetize in some form the property. So that's underway. If you look at kind of the local media, there's a lot of press and coverage on this asset. So we expect it to be roughly about a three-year timeline to get all the approvals, and it has to go through CEQA, environmental impact reviews. I'm not sure yet if that can be fast-tracked, but we're doing our part to get this asset ready to go and try to bring some incremental value for shareholders.

This is not my second question, but just a really quick follow-up on this. Can you share any color on how many interested bidders there are?

So your 1B question, Kelly. Okay. So we're not – we don't have a formal bidding process. We just have announced to interested developers that – to come talk to us. And these are big projects, if you recall – You know, we sold a small property next to Huntington Beach for about $10 million an acre. So these are big dollars. It takes a developer with a great vision for the future. You know, we see rates coming down, interest rates coming down. That helps the project development. So rather than talking about a universe of bidders, think about this as a very unique property that has a lot of interest in the We're marching forward to try to get the best value for it.

Got it. This is my follow-up question. I want to ask on the Elk Hills PPA. The way that we understand it is that the PPA could create demand for clean energy that you could supply from Elk Hills with carbon capture. Carbon capture is a more expensive project than the cryo that you're breaking ground on this quarter. So wondering if you could offer any latest thoughts on funding.

Yeah, the way to think about CalCapture, we see it, the final investment decision, very much connected to a PPA. So you have the clean energy incentives. We have 45Q. We have LCFS. We have avoidance of carbon tax in California. So those are part of the revenue stack that we have. But at the end of the day, we're trying to unlock. a completely new business model, which is baseload 24-7 natural gas fired with carbon capture. And that's kind of the mission to be able to find the right partner, the right PPA for that. So that we're advancing all fronts. CalCapture is doing, we're doing a lot of the engineering, trying to optimize on cost, but we're also looking at the funding behind it. And that comes with a view of, okay, is this power plant going to be a merchant power plant, which is today? Is it going to participate in the resource adequacy, which also is today? Or are we selling that power to a third party? And that third party has the values, the clean baseload electrons. So we're getting a lot of inbounds, a lot of interest on the power. And we think there's going to be hyperscalers are coming back to the table. We're also seeing other off-takers coming back to the picture. Maybe I'll turn it to Cleo. So Cleo joined, as everybody knows, at the beginning of the year. And in her prior job, she was kind of looking at the other side of PPAs, working with technology companies. So maybe she wants to offer a few remarks.

Thanks, Francisco. And hi, Kelly. Yes, so Kelly, as Francisco mentioned, prior to joining CRC, I was working on a number of things, but one that was keeping me very busy was the brokering and structuring deals between the data center developers, so that's your hyperscalers, that's your co-locators, and power asset owners. And that's where really I recognize the significant potential of CRC's power business and how that fit a clear market need and fit that very well. So one of the most exciting opportunities I saw was related to the Elk Hill Power Plant and and was the behind-the-meter partnership model and opportunity that we are being progressing. Now I've got a more in-depth view of our operations, of our assets, and the market, and so I'm even more confident in the strength of our value proposition to data centers and to large off-takers. Our offering really is not only differentiated, but it's resonating strongly in ongoing discussions, and those are advancing constructively.

So just to kind of close out the question, getting the right long-term partner, we want a 10-year plus PPA with the right partner that not only recognizes how valuable this opportunity is. The hyperscalers want speed to market. We can deliver that. We have capacity today. We have land. So we want the right PPA structure in the right way, but we also are looking to solve for the northern CTV reservoirs where we see a lot of demand, potential natural gas power generation, big emitters need a solution. And if we can unlock this at Elk Hills, it should ultimately also scale to our northern reservoirs and create a further business opportunity there. So a lot of things to solve for, but we are making progress. We're getting the land ready We're getting our permits in good shape so that when we finalize the details of a contract with a third party, it'll be something that really can unlock value for us.

The next question comes from Daniel Deckelbaum with TD Cowan. Please go ahead.

Hey, Francisco, Cleo, everyone. Thanks for taking my questions today. Hey, David. Just curious, just going back to the synergies, you've effectively almost achieved your 25 target. And I want to say that you all had left, you know, call it around 60 million of additional synergies and 26 is perhaps upside. Is there any reason why that should remain in 26 versus being pulled forward? Or is it the timing of certain projects that you're looking at? Or it seems like since you're already ahead of the game here, we might be able to see some of those elements perhaps showing up a bit earlier?

Yeah, I love the question. It really speaks to our ability to our team's ability really to deliver the targets ahead of schedule, and we keep doing that. So there's an element of that that, you know, as we lay out the incremental targets and the synergies, the team has been able to identify a number of great projects, and those are going to be – they have been activated. They've been already put in place, and now it's when you realize them is when it counts. But I'll turn it to Omar to give a perspective on the second part of the question, which is, there is a timing component and there's some really interesting projects we're working on that are going to be ready later in the year and really in full force by the beginning of next year. So Omar, do you want to share?

Yeah, thanks. Thanks, Francisco. And hi, David. Yeah, if you look at the rest of the 2025, David, and how we are thinking about synergies, we are really focused on delivering operational efficiencies tied to infrastructure consolidation. So we have access capacity in our major fields around gas processing, produced fluid treatment, and in some cases, power. And what we're working on is bringing production from our various fields in the basin to these central facilities to fill in the access capacity. And it does two things for us. It eliminates the need to maintain and operate multiple facilities once you consolidate them. And it also helps us monetize our produced oil, gas, and natural gas liquids. And I'll give you a couple of more concrete examples around the second point. So we acquired Ventura Avenue Field as part of the ERA acquisition, a field that has associated gas but doesn't have the facilities to fractionate natural gas liquids from that gas. So we were actually paying a third party to take that production off our hand. What we're doing now is we're bringing that natural gas liquid production to Elk Hills, where we have capacity in our cryogenic gas plant and monetizing that production stream. Similarly, Bell Ridge, which is a major field we acquired as part of the acquisition, also has associated gas. but do not have gas processing, and we have excess capacity in our cryogenic gas plant. So we are working on a project to connect that gas to CGP, the cryogenic gas plant, drop liquids, and monetize the revenue around that. So some of these projects on that time scale need some initial capital investment, and we are progressing them forward. They will all be completed by the end of third quarter or end of 25, but some of the revenue stream we'll see in first quarter 26 and onwards. So hopefully that will help.

So we're making the investment now. We see the benefit of incremental NGLs in 2026, and so we're going to count the synergies when they come in 26.

I appreciate the call there, Omar and Francisco. And maybe just as a follow-up, I'll stay in the weeds here for a little bit, just You look at the first quarter, you know, obviously hit your numbers and be kept at significantly, you know, it was maybe $10 million of savings relative to your initial plan or guide. You reiterated full year. So I'm curious if you see that as an element of just mix of activity that was, you know, just a coincidence with the first quarter or if there's elements in your capital program that you're also ahead on this year.

It is a mix, and we see there's efficiencies in the numbers, but we also plan the year where we expected a light capital first quarter increase in the second quarter, and then we're also increasing potentially the activity as the second half of the year comes in with a second rig, so there will be a ramp-up in activity that ultimately leads to higher DNC capital as the year progresses. But we are seeing efficiencies and savings through the supply chain discussions around capital as well. So it's a little bit of a mix. The story as a whole is very good.

Thank you, guys.

The next question comes from Nate Pendleton with Texas Capital. Please go ahead.

Good morning. Congrats on another strong quarter. Taking a step back and looking at the value you can add with Aira and the ability to decarbonize production streams, can you talk about your willingness to pursue bolt-ons in California should assets become available in this market?

Yeah, Nate, thanks for the question. So we're very focused on executing our business right now. As you saw, I think it was really important for us to get the transformational deal completed with Aira. As you can see by a lot of our messaging, The key is to have the infrastructure in place, the consolidation to be able to really extract value from any acquisitions. Acquisitions are an important part of our strategy going forward. We do feel that assets in California are going to be better in our hands from every standpoint. So in terms of bolt-ons, when we see something that really makes sense and can be accretive and I would say significantly accretive to cash flow per share, this is something that we would consider. But we have a strong inventory. We have a lot of uses for capital in our portfolio. So it's a really high bar to think about bolt-ons. But it is part of the strategy as we finalize and think about, you know, all the achievements we've done with Aira. And then what do we go next?

Got it. Thanks. And I wanted to shift over to the CCS space. Understanding that your business is primarily focused downstream of the capture for third-party volumes, can you provide any update on recent carbon capture technology advancements and how maybe that's impacting discussions with emitters for CO2 offtake?

Yeah, Nate, so the approach we've taken from day one is to be agnostic on technologies, understanding there's a lot of capital and a lot of progress being made. But where others focus their time and effort in developing that technology, we're really focused. Our advantage comes from our land ownership, our mineral ownership. It's really the pore space is where we see the value in California CCS. So that's where we put our efforts forward. Now, as we unlock the permitting pathway, as we bring emitters both within Elk Hills and Bell Ridge and outside, we do have much more of a sense of where the technologies are coming together. We want to see costs come down. We want to see efficiencies being achieved. But I think that's better done with third-party capital. We have our partners that are developing, like Brookfield is developing their own technology. we'll give them a sandbox to come in and compete for the best offering. And we do have the ability to customize the technology solution for the type of source. And as we get further and further into post-combustion capture, we'll talk about what these technologies can do. In a lot of ways, it's not also a lot of innovation in the space. It's pretty simple aiming units, So it's really about the cost aspect of it and who can deliver a competitive price for capture on a go-forward basis.

The next question comes from Betty Jang with Barclays. Please go ahead.

Hi, team. Thank you for taking my question. I want to ask about the base decline and the maintenance capital. What stuck out this quarter is that if I look at your 1Q production versus 3Q last year, your oil volume is only down 2%. And then over that period, your capital was just around $200 million. And I know there's timing of the span, but could we just get an update on where you think maintenance capital is going forward? And then what I'm really trying to get to is in an unconstrained permitting environment, once you take into account all these cost savings and synergies, how much lower could maintenance capex go versus what we thought before?

Yeah, Betty, thanks for the question. It really highlights one of the reasons, one of the ways that we're different than the rest of the sector. Most companies lead by talking about drilling and type curves and how effective their fracks are. That's not CRC. At CRC, we do a lot of our works with base decline mitigation surveillance. So that's OPEX dollars. And then we move on to very efficient capital in workovers and sidetracks. So we're doing that. all of that in the normal course. So then the question comes, okay, with an unconstrained permitting scenario, what would you do? I would say we're not ready to guide into that unconstrained scenario, even though we're seeing a lot of optimistic signs on the permits. Part of it is because now that we're bigger and we have all these new assets to work with, the team has continued to deliver, as you pointed out, the oil production, very low decline, quarter over quarter with very little capital. So what that means is that the blocking and tackling of surveillance, workovers, and sidetracks is working extremely well. So to project that into the future, let's look at the inventory that comes in on a well-permitted basis, the well mix, and we'll be able to guide that on a go-forward basis. What we said before is, you know, it should take about six to eight rigs to keep production flat. But that, you know, we need to continue to evaluate it given the performance of the team. I'd like to come back when we're ready once we have the full inventory of permits ready to go for a little bit longer runway where we can start putting more capital to work.

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

Yeah, hi. Wanted to follow up a little bit here on the production. So, looking at the second quarter guidance, looks like production is going to be down versus 1Q, slightly over 4%, you know, using kind of the midpoint of your guidance. Obviously, that decline would be in excess of the annual decline that you guys have kind of spoken about, and clearly, you know, not nearly as good as the performance that you've been achieving the last couple quarters, which is shallower declines for less capital. So just wanted to see if there's anything specific about the second quarter, or maybe there's some maintenance or shut-ins or whatnot. I did see that in your slides you talked about $10 million a day of production, which sounds like that's going to be going offline to kind of replace some fuel-use gas. So just any more color on that would be helpful.

Yeah, Leo, thank you for the question. I think it's a very important clarification to make. So, yes, the production on a BOE basis steps down, but cash flow goes up at lower prices, right? So how do we do that? Well, the reason is, and there's a slide, slide 13 on the deck, that's a new slide that we put to be able to highlight the dynamic that we have in place Really, the answer to the question, Leo, it goes to our power plant. So we have this combined cycle gas power generation that is a very flexible power plant. It has a flexible configuration. So the way we run it, typically, it's called a two by one. So that means it's two gas turbines for one steam turbine. That's in the normal course where we're sending the full capacity. In periods during the year where in California there's a big solar penetration, it displaces a lot of the base load during parts of the day. So we have the ability, and that's at our discretion, to bring the plant to a one-by-one mode. So what that does is, one, which is what you pointed out, it reduces the natural gas production. But the gas is actually still very, very useful. Instead of counting it as production, what we do is then we historically have been injecting that gas back into the reservoir if it didn't make sense to produce it. Now we have an alternative, another one of the benefits of the era merger, where we can send that gas to Bell Ridge. So remember, these are fields that are next to each other. And by sending that gas to Bell Ridge, we accomplish two things. One, that gas saves those OPEX energy costs at Bell Ridge. So we're buying less gas from third parties at Bell Ridge. Instead, we're moving our non-spec gas north. And then also by going to a one-by-one configuration, we're able to save OPEX on the plant itself. So what you have is a situation where, yes, optically you're seeing net production BOEs, which is about $10 million a day of gas, go down. But what you're seeing also at the same time is increased cash flows by reducing your cost. And because our view is we're here to maximize value and cash flow and not production, it's a very easy choice to make as we have this kind of redundant system where we can send the gas to the optimal use.

Okay, I appreciate that thorough answer. Now, just jumping over to the kind of oil and gas, you know, permitting side, you certainly talked about how things are improving of late, but can you get a little bit more specific in terms of where the EIR in kind of Kern County, you know, sort of stands today? My understanding was I think maybe the public comment period is maybe recently kind of wrapped up, and just can you give any kind of color on where we stand and what you think the timeline is for a judge to be taking a harder look at that in the near term?

Thanks for the question on permitting. It's really been a tremendous highlight. We're very encouraged by the progress being made on the permitting front. The focus has been on the EIR, but as we talked about before, we have multiple alternatives in motion, which we think all of them will work into the future. We're, you know, we're very optimistic, first of all, because we have what we need in terms of sidetracks and workovers. We've reached what I would say is a regular way process and have all the permits that we need for 2025. We're building inventory into 2026 for our drilling program, specifically as it relates to the Kern County EIR program. Litigation process continues, but the county is expected to adopt a revised EIR later in the year to address the deficiencies identified by the court. So we expect some resolution and progress towards the second half of the year. But at the same time, we're doing what's called a conditional use permit, which is an alternative route with a different agency where we have about 90% of approval and developed reserves in four fields. and we're developing a field-specific permitting process around those. So I would say if you look at it as a whole, if you step back from the specifics on EIR and kind of what's in the public domain, if you step back, we have a very constructive dialogue with multiple agencies. There's a need for more local production. I think there's a much better understanding than in the past that the solution to affordability and cutting emissions is local production. And we want that to be a CRC barrel. So this year we decided, even if we get a lot more progress on permits, to continue with a two rig program. But what we're doing is we're really building that inventory of high quality projects and gaining more and more confidence. We'll be ready to go.

The next question comes from Phillips Johnson with Capital One. Please go ahead.

Thanks for the question. Just wanted to clarify the wording in the press release regarding the potential PPA. It read that you guys are engaged in discussions with multiple large-scale industrial customers for the PPA. Francisco, it sounds like from your comments on the call here, that doesn't imply that you're no longer negotiating with other types of potential counterparties. Am I hearing that right?

Hey, Philips. Thanks for clarifying. So we're very much focused on data centers as the off-taker for LKL's power, 200 megawatts plus. The implication around incremental industrial players really is more about new inbounds that are also looking for clean baseload power. We were California's short power and short baseload power. And I think we've seen a lot of examples globally what happens if you have an over-dependence on renewables. So we have similar dynamics here. And the interest level on what's one of the most efficient plants in the state of California that can be turned into with a carbon capture into a low carbon to no emission plant. It's a very interesting proposition that goes beyond data centers. So the signal is not about a shift. The signal is more about an expansion of interest beyond data centers. But we still are very much engaged with data centers, both hyperscalers and co-locators.

Okay. That sounds great. Cleo, you noted the share buyback was really strong in the first quarter. It was basically 2x the pace as what you bought back in the prior two quarters. Can you maybe talk about what you're thinking about in terms of the pace of buybacks going forward?

Hi, Philips. I'm happy to give you a bit more context around our decision around in Q1, and obviously that's going to give you color effectively on how we prioritize our buybacks and how we consider them versus our other capital opportunities. we see great value in our equity, and we're committed to retaining and returning shareholder, increasing those shareholder returns. So we saw a clear value dislocation in our stock in Q1, and we were in a strong position to act decisively. As a reminder, by the year end 2024, we had rebuilt a cash balance that was over $350 million. We had done that, you know, in six months after the era merger closed. And we took steps to deliver in February. So we redeemed $123 million of our 26 notes, and that demonstrated our commitment to balance sheet strength and also our disciplined capital management. But with the excess cash, share repurchases were the most compelling use of capital at the time to really drive long-term shareholder value. And if you put this into perspective, Since the ERA merger closed in July last year, we've repurchased 20% of the shares issued at the merger close, and we did so at an average discount of about 9% versus issuance price. So this really further enhances what was already a highly accretive deal, and I'd say it underscores our disciplined, value-focused approach to capital allocation. Now, if I look forward, Philip, to your comment, well, yes, we remain opportunistic in our approach. We'll continue to evaluate our buybacks alongside the other capital priorities, but you can expect us to remain focused on maximizing returns and really delivering value to our shareholders.

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

Thanks for taking my question. You talked about the cost savings, but the electricity margin guidance for the year increased quite substantially. I just want to dig into that a little bit and see, is that better pricing or lower cost or a combination?

Hey, Nitin. As I was explaining how we manage the power plant, the way to think about the margins is where merchant power prices fluctuate and we're solving for that by going from a two-by-one to a one-by-one operation. The resource adequacy, which is what we call in California the capacity program, that is fixed, that's contracted. And so that, as we've been talking about, it's $150 million for 2025. So when you see an expansion in the margins, that means that the steps that we also are taking on the going to buy one by one increases that margin, right? So it's the combination of how we might manage the merchant aspect of it, plus the incremental value that we're seeing in the contracted aspect of RA.

Great. Thanks. I'll leave it there.

Thanks, Nathan. The next question comes from Noel Parks with TUI Brothers Investment. Please go ahead.

Hi. Good afternoon. Just a couple things. So you mentioned earlier that we should be able to look for some new programs announced for carbon terravault later this year. I'm just wondering, can you just maybe sort of characterize the agreements or the process to getting there? I'm just If you can just give us an idea of what does the home stretch look like in getting to some of these deals?

Right now the focus for Carbon TerraVolt is executing on our first project. We're breaking ground in a few weeks. Really important that we get that first project underway. We're looking to have CO2 injected by the end of the year, this year. which means first cash flow for CCS in all of California. The team has been also progressing the conversations with the EPA around incremental permits. I think we have six or seven permits that have been in the queue for a couple years that should be getting very close to final issuance, at least in draft form. So that will increase the pore space that's permitted and really expand that capacity that we have in the state. What we've seen is as we get the first-of-a-kind permits in the state as we make progress, more and more interest comes from emitters. So what I would say is the focus right now is Elk Hills, its first project, but the way this should expand, it will be around a lot of our northern reservoirs, close to the Bay Area, where we have a lot of potential customers customers where from existing power sources or new power sources in particular, there's other industrial customers that are going to look for solutions to bring their emissions to some of our fields. Remember, in California, we have a forcing mechanism beyond the incentives, which is a growing carbon tax. So from a financial perspective, it makes sense for these companies to be looking to store away that CO2, and we want to be ready for that market opportunity. So I would say the announcements or the progress that you'll see on both permits and emitters should start moving. We have had a lot of focus on the Central Valley in California. This should start moving up north. That's what we're looking to expand, and that's where the team is focused next. Great.

So is it fair to say that, you know, since carbon capture, carbon sequestration is going to be new in the state and is, you know, new generally at scale, is it just that there's a little bit of a standoff on the one hand, there's a recognition of the importance and the benefits, And, you know, there is interest out there, but there, I guess, isn't enough of a sense of urgency to make customers afraid that they're all going to have to, you know, crowd through the door at the same time. And so I guess I'm saying, so the awareness that the available porous space, the largest finite, isn't enough to make people maybe be more aggressive about committing to, you know, taking up the capacity you have?

Yeah, maybe to reframe the question a little bit, I don't necessarily agree with the view of how you framed the question around any sort of delays. It is a new business. It's a new opportunity. We're making progress. tremendous progress. If you look at the progress that Carbon Terrible has made compared to others nationally, we're right up there in terms of speed. Now, there's a lot of aspects to cover, and we have both figuratively, we have a big pipeline of emitters. We also are working on physical pipelines, right? That's the part that our focus has been to really unlock and the scale of the business is there's never been a need to transport CO2 in California. So now that there is a need and there's a market need and there's a government ambition, then we need to get those pipelines permitted. That takes time. That takes time here. That takes time basically in any state. But we're seeing a lot of progress. We're actually very optimistic about the momentum on CO2 pipelines. We're getting... Both the Senate and the Assembly have bills in the California legislature where they're proposing the framework by which we're going to be able to use retrofit CO2 pipelines in the state. So I look for that. That's a big catalyst for the CTV business. We feel the momentum is there and the moratorium should be lifted soon. Later this year, there's a lot of support and a lot of interest both from the market and from regulators to be able to flow CO2 soon. So once that unlocks, then the ability to talk about emitters, to be able to talk about the business model is going to start crystallizing a lot more, but we need that physical connectivity that comes with CO2 pipelines being approved.

This concludes our question and answer session. I would like to turn the conference Back over to Francisco Leon for any closing remarks.

Great. Thank you so much. We're looking forward to seeing you. We're going to do several conferences throughout the summer. But thanks again for listening, and have a good day. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.