California Resources Corp Q2 FY2024 Earnings Call

Good day, and welcome to the California Resources Corporation Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. At this time, I would now like to turn the conference over to Joanna Park, Vice President of Investor Relations and Treasurer. Please go ahead.

Good morning and welcome to California Resources Corporation's second quarter conference call. This is our first call following the closing of our Aera merger, and we are excited to share our progress. Prepared comments today will come from our CEO, Francisco Leon; and our CFO, Nelly Molina. Following their remarks, we will be available to take your questions. With us on the call, we also have other members of our senior leadership team. By now, I hope you have had a chance to review our earnings release and our supplemental slides. We have also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website, as well as in our earnings release. Today we will be making some forward-looking statements based on current expectations. Actual results may differ due to factors described in our earnings release and in our periodic SEC filings. Thank you for joining us today. I will now turn the call over to Francisco.

Thanks, Joanna and welcome, everyone. We are incredibly excited about the road ahead and the value creation levers we have for existing and future shareholders. CRC is a markedly stronger company today, and we're demonstrating what it means to be a different kind of energy company. Before discussing our second quarter financial and operating highlights, I want to spend a few minutes outlining the strength of our business strategy. We are committed to generating value for shareholders, and we do that by increasing our company's cash flow per share. Despite California permitting headwinds, our focus on improving margins combined with our strong and consistent share repurchase program resulted in mid-teens cash flow per share growth from 2021 to 2023. With the closing of the Aera merger, we again are targeting to grow cash flow per share in 2024. Importantly, we achieved this full-year growth without sacrificing our balance sheet strength. As we integrate with Aera, we will deliver our synergy targets in the next 15 months as we head into an improved permitting backdrop by the second half of next year. Recent economic developments have provided a riskier outlook for the domestic and global economy, placing greater importance on the sustainability of earnings. Our low-decline assets, strong hedge book, and cash flow capability supported by a strong balance sheet provide us with a significant fortress in any volatile environment. The Aera transaction adds improved cash flow capacity and scale, and let me take a few minutes to discuss the merits of the Aera deal. We expanded our conventional energy business, improving the reliability of cash flows and enhanced our growing carbon management business to decarbonize California. We created operational scale and strengthened the durability of our business. Our daily production volumes doubled; California needs oil, and we will be here to provide it. The Aera transaction also increased our average net revenue interests. Today, our fields deliver 90% average net revenue interest. When you compare this to the Permian where average net revenue interests are less than 80%, this is an advantage that boosts our profitability. We're also capturing meaningful cost savings and see more synergies than originally forecasted. We now expect $235 million in total synergies, which reflects $60 million of savings achieved with the refinancing of various debt and $25 million of additional operational synergies. We expect to capture these run rate savings over the next 15 months to improve our bottom line. Our cash flow forecast is expected to more than double from where it would have been on a stand-alone basis and has led us to increase our dividend per share today by 25% as we continue to consistently return more cash to shareholders. Lastly, CRC is a sustainability leader in California, and we operate our business the right way. Today, we have more direct control of in-field emissions and more capacity to accelerate the decarbonization of our portfolio given California's emissions due to the advantageous location of our assets. Over the last five weeks, since the closing of the merger, we have already made great strides. We are executing on our opportunities that will optimize our field operations, combining infrastructure, and leveraging our combined scale to develop more cost-efficient supply chains. As an example, our teams have already connected our two largest fields in the San Joaquin Basin to improve and expand natural gas deliverability. The interconnect allows CRC to take natural gas from our Elk Hills field to Belridge for use in steam flood operations. This connection will provide an additional outlet for Elk Hills' gas during maintenance activities at our midstream infrastructure in Elk Hills and will benefit Belridge by lowering fuel costs for steam generation for enhanced oil recovery. Another early win is the streamlining of well monitoring activity to the nearby Belridge control facility. There are dedicated investments in this area, and we have applied AI technology to improve well performance and uptime with fewer staff. We are adopting best practices and optimizing nearby satellite fields to benefit from more efficient well surveillance efforts across a broader base. Similarly, across the well service value chain, we are seeing early gains from vertical integration of services resulting in lower costs of our well maintenance and plug and abandonment activities. These examples highlight the strong industrial logic behind the merger. The proximity of our neighboring fields positions us to find the most synergies out of this powerful combination. And we're just getting started. On the carbon management front, we submitted another vault for permitting to the EPA for a 102 million metric ton CO2 reservoir in Central California; this will be CTV VI. As a reminder, we now have over 300 million tons under permit review. Like the other reservoirs, CTV VI is centrally located near major emission regions in California. In terms of execution, we're targeting the receipt of California first class VI EPA permit and the FID of our cryogenic gas plant CCS project by year-end. Our goal is to inject CO2 into CTV I before the end of 2025. From a Greenfield emissions perspective, CTV expanded our storage only CDMA with NLC Energy to 430,000 metric tons per annum of CO2 emissions. This project is slated for early 2028. We now have nearly three million metric tons per annum of CO2 projects under consideration throughout the state. You can find all the details in our CTV update release issued today. Now, I would like to move to another important opportunity for us, which is to support the growth of data centers to service California customers while aligning with California's net-zero ambitions in what we refer to as the Carbon Valley where Silicon Valley and the Central Valley meet. CRC's assets are uniquely positioned in the heart of a state that is home to the top 10 data center markets in the U.S., Silicon Valley and Los Angeles. We offer viable solutions for the demands of the tech industry today and a solid runway to meet the needs of tomorrow. First, we can provide data centers with the key ingredients they need to operate: large plots of land, access to fiber networks, water, power infrastructure, natural gas, and related interconnections. Our Elk Hills complex, for example, is in the sweet spot and can meet the data center needs and provide accelerated time-to-market benefits that other potential competitors simply cannot match. Our second advantage is that we can utilize our resources and energy expertise to support the development of carbon-free baseload power before the end of the decade. California has few instant dispatchable sources and we believe retrofitting combined-cycle natural gas with CCS is a solution that delivers both the market needs of low-emission and reliable power. Alternatively, our 320 million metric tons of pore space throughout the state can support the decarbonization of over 2 gigawatts of new alternative power to service co-locators and big tech alike. CRC's offerings align with the state's ambitious carbon neutrality goals without exacerbating power shortages or pressuring power prices in California, which are already among the highest in the nation. With that, I'll hand it over to Nelly.

Thanks, Francisco. Our second quarter financial results were solid, extending our strong track record of performance. Free cash flow in the quarter reflected strong oil sales, which were higher than we anticipated. Our earnings were in line with expectations and we continued to strengthen our capital structure, adding deeper liquidity with an expanded credit facility. All of this was done in combination with higher cash returns to shareholders. Let me summarize our results for the second quarter. Our business generated $139 million in adjusted EBITDAX and delivered $63 million in free cash flow. Results were driven by consistent base production from our low decline assets with total volumes in line and oil production at the high end of expectations. Second quarter production averaged 76,000 barrels of oil equivalent per day and oil averaged 47,000 barrels per day, above the midpoint of our quarterly oil guide. Our realized oil price in the quarter was $81.29 per barrel after hedges, or 96% of Brent. We ran a one-rig program throughout the quarter. Costs and expenses were on average in line and reflect our recent efforts to enhance margin. One of the largest validations of synergies was demonstrated when we refinanced all of our outstanding long-term debt at better rates. We issued $600 million of new unsecured notes with a coupon 625 basis points below Aera's legacy second-lien loan. This reduced the annual interest expense by about $60 million. During the quarter, we returned $57 million to shareholders, including $35 million in share buybacks and $22 million in dividends, or 90% of our quarterly free cash flow. Year-to-date, we have returned $136 million to shareholders. As part of the merger, we also improved our liquidity position by increasing our borrowing base to $1.5 billion and elective commitments to $1.1 billion. At merger close, we used the available cash on hand to repay $990 million of Aera's outstanding debt, transaction costs, and financing fees, leaving CRC with roughly $1 billion of liquidity. Turning now to our guidance for the second half of 2024 and building on the $60 million of interest expense savings mentioned earlier. We now expect $235 million in total synergies. We anticipate approximately $30 million will be reflected in the second half of 2024 results and the rest in 2025 and beyond. As Francisco mentioned, Aera’s and CRC's assets are interconnected, and we believe there will be additional synergies that can be realized in the near future. Looking to the second half of 2024, we expect our cash flow and free cash flow to more than double due to the increased scale, strength of our business, and our ability to enhance margins through synergies and operational efficiencies. We also expect our 2024 adjusted EBITDAX to be around $1 billion as the business builds momentum into 2025. We will continue to have merger-related costs, which include transaction, integration, and costs to achieve synergies, but these will be reflected in other operating expenses and are non-recurrent in nature. I would like to remind you about our hedge book; no matter how prices may move for the balance of the year and through 2025, we have managed our hedge book to provide the revenues necessary to invest in both the core and carbon management businesses, service our debt, and prioritize shareholder returns, including dividends and share buybacks. In terms of 2026, we have significant hedges in place for that year, which, depending upon the size of our drilling program, will leave us in a solid position. The capital needs for our drilling program will ultimately be heavily influenced by various prevailing market factors. We are committed to preserving a solid balance sheet and believe we have the financial flexibility to deliver on our strategic objectives. With that, I'll turn it back to Francisco.

We're excited to execute our strategy across a platform that is now bigger and better. Our hedge book, durable cash flows, and balance sheet flexibility provide business stability through market volatility. Moving forward, we will have three primary areas of focus. First, we will drive our business decisions to deliver cash flow per share growth and strong returns to shareholders while preserving a strong balance sheet. Second, we will continue to drive operational efficiencies and execute on $235 million of operational and financial synergies that will improve the business' cost structure. Finally, we will continue to expand our California-leading carbon management platform through new carbon dioxide management agreements and permit applications to offer sustainable energy solutions to existing and developing industries to support California's net-zero goals. We truly are a different kind of energy company and look forward to unlocking the value of our expanded enterprise for the benefit of our shareholders and our fellow Californians. And with that, we can now open the line for questions. Operator?

Thank you. Our first question today will come from Scott Hanold, RBC. Please go ahead.

Yeah. Thanks. Good morning. It looks like the carbon capture assets are squarely positioned for this carbon-free data center AI demand opportunity. I know it's early, but when you look at the economics of this, how does that compare with some of the other prior on carbon capture projects you're evaluating? Also, as you think about the different power solutions to utilize for these data centers, I know you talked about the combined-cycle kind of facilities, but are there other options, and does that impact the economics?

Hey, Scott. Yes. Thanks for the question. Yes, indeed. If you go to our slide deck today, we highlight the location of our reservoirs that we've been permitting now for over two years in the northern part of California. This has been a long-time build and execution from our team to get us to the right areas around the state where we can service all these potential emitters. So we're excited about that. The location of these northern reservoirs, you can see it on the map, there have been a lot of questions as we have built our carbon capture strategy around where the emissions are going to come from. Anything that should clear that would be part of getting into the Bay Area, San Francisco, Sacramento, where a lot of the existing hard-to-abate sectors of emissions are located. So we like the positioning there. We also are looking at data center growth with a lot of interest. As these older power plants that have been in service for a long time are going to be critical to attracting and retaining data centers in California. Data centers need 24/7 baseload power. It's a race to get to market; first time to market is critical. So having existing infrastructure is absolutely going to be key. The nice thing is with carbon management, we offer not only the time to market opportunity but we also have an ability to bring decarbonized power generation into the fold that also meets the other criteria. As we move up north, and really the strength of our business there is in the pore space availability to sequester emissions, we will look for partnerships around these existing power plants. There will be an opportunity to develop other technologies like fuel cells and geothermal will also come into play. Those would be important depending on what data centers ultimately want to power their AI. I don't foresee any changes to the tide curve; I would say I'm very confident that we have the right pricing for storage-only projects. What you are seeing here is more the market development on both the emission side and also on who's going to consume that power for future growth. So no changes that I would say coming in our type curve; I feel very good about our positioning and how we are aligned to accommodate this incremental power that will come from data centers.

I appreciate that color. And then my next question is going to be on the oil and gas business. How do you see activity on the combined basis looking forward into 2025? Where is it going to be focused on? And where are we at with getting oil and gas permits? I know you're all running a dual path, but can you remind us and refresh us on where we are which gives you confidence in getting to more of a maintenance mode in the second half of 2025?

Yes, for sure. We are confident in our one-rig inventory that we talked about before in terms of new wells. These assets really focus on workovers and sidetracks. That's the bread and butter of our assets and Aera assets as well. With a one-rig program running between the two assets, workovers on sidetracks, we should be able to deliver that mid-single-digit decline even without any incremental permits. So we feel good about the quality of the assets, the low decline, and the ability to work over all their wellbores and go to different zones for incremental production. So that's the way ultimately this business runs. To get to a steady state where we keep production flat and maintain stability in cash flows, we still see the second half of 2025 as the point in time where we have a line of sight, a path to getting permits back again in California. That hasn't changed. We still are working towards that timeline, looking at multiple alternatives, as we've talked about before. But again, this company runs very well, as you saw with our results year-to-date, with only a 2% decline during the period. These assets run really well with just the blocking and tackling and focusing on base production. That’s the great thing about the assets that we own.

Thank you.

And our next question will come from Kalei Akamine with Bank of America. Please go ahead.

Hey, good morning, guys. Francisco, CRC team. I've got a follow-up on the bigger thematic on data centers. There’s no question that there's a bigger data center thematic out there, and guys on my side are obviously trying to figure out what that means for businesses like yours. Maybe at a base level, we can agree that it's positive for the gas price. I guess where I'm a little bit less clear is what it means for volumes. So as you think about the potential outcomes of what data centers mean for your business, is there a scenario that clearly drives volume growth in your business in response to price?

Yes, as a reminder, CRC has about 80% of the natural gas production in the state, and the rest of it we import from other states. So are there scenarios of growth? Absolutely. If you look at the growth profile of data centers and then you go to the fact that these data centers are not going to rely on renewables and intermittent power; you need to come back to baseload. California doesn't really have a lot of options. We’re down to one nuclear plant, and hydro tends to be variable depending on the rain. So looking at this existing infrastructure and all these independent power producers who are natural gas power generation, which, in some cases, are not fully utilized today, should be part of the plan in California to maximize that utilization. If you can put the decarbonization plan in place, you can really solve for multiple variables, and that’s what has us really excited. The decarbonization, which we're very committed to doing, also brings reliability with this infrastructure and affordability through local production. As we've highlighted before, we don't feel like all barrels or all Mcf are created equal. Local production—that can be certified through third parties, showing that you have low methane emissions like we did with MIQ, or that it's responsibly sourced across the board—should matter to the consumer about where their energy comes from. If you start thinking about data center consumption needs and a path towards having preference for local production, it really gets you excited about our natural gas position and the ability to service many of these power plants. So yes, I mean, there are definitely scenarios out there that are favorable. We're a little bit ahead of the market, but I like our assets and where we're positioned from just a production standpoint and an infrastructure point as well.

I guess when you think about it, you see a lot of behind-the-meter sort of opportunities for your natural gas in your power?

Yes, absolutely. I mean, I think that's something that we're really focused on. We have this power plant at Elk Hills, 550 megawatts, and we added more power with the Aera transaction, so we're above 800 megawatts combined. Right now, if you look at the trading multiples of CRC, we trade at a discount to PDP, and we have a critical asset that has a lot of value. We participate in a very attractive capacity program right now, but there's no value recognition for this asset. So we're going to work towards whether it's data centers or other potential partners. We're going to look to unlock the value of the power plant, and you can do that through contract price and duration. We're focused on that. That's where the data center opportunity brings a growing and exciting industry into the forefront of our thinking. There could be ways to unlock that value in the power plants. As you know, we use about one-third of the power for self-consumption, while the rest gets sold into the grid. So those behind-the-meter opportunities will be important to unlock over time.

Got it. There's a lot changing in the long-term for sure; a very interesting setup. I guess my follow-up is on the near-term outlook for California gas. I think some of us were surprised to see Southern California under the hub in the second quarter, whereas Permian seems to have returned. As we sort of head into 2025, that Permian looks a little bit more durable with L&G and perhaps siphoning some California imports away. But there are a lot of things happening in California; renewables are growing. As you run your scenarios for 2025, how do you see the balances playing out?

Sounds great, Kalei. So it's a great question on gas. I'll turn it over to Jay here in a minute to cover the near-term impact. But yes, as a reminder, California is short gas; we import a lot of the gas that we consume in the state. As LNG projects get sanctioned and advanced, the gas will flow to locations where it can find better pricing. So that's why it's important to develop that local industry so that we can truly provide that gas when the market needs it. Regarding the short term, I'll let Jay speak to that.

Your notations are correct; in Q2, both the border and the Citygate traded below or near the screen, which is pretty unusual for the last couple of years. Gas is going to go where it's most valuable, and gas was making its way to California, particularly from the Permian, where its alternative market price would have been something close to zero or negative. So like water, it's going to flow to the most attractive points. Going forward, I think you're already seeing what's going to happen. A lot of this Permian gas is getting stuck in the Rockies, for example, and is unable to reach California today. So you're seeing differentials in price between California and, for example, the Rockies. I think you're going to see more and more of that in the next year. We produce roughly 15% of the natural gas we consume in the state over time, which isn't a great position to be in right now; it's good to have low-cost gas coming from elsewhere, but over time, we need to dictate our own fate.

Helpful. Thanks, guys.

And our next question will come from Betty Jiang with Barclays. Please go ahead.

Good morning. Thanks for taking my question. This is probably a data center question, but also related to carbon capture. I want to ask about the CalCapture project. It is a very meaningful project and it's in-house. These post-combustion projects are more capital intensive, so I would love to understand the decision drivers around whether or not you plan to move forward with that project. And how much of that is tied to signing a power purchase agreement with buyers that are willing to pay a premium for low carbon power?

Hey, Betty. Yes, so CalCapture involves putting a capture system on our Elk Hills power plant. We really like the ability to control our own destiny and emissions behind the meter. We're looking to provide a solution for the state that's going to require pipelines and ultimately bring the scalability to our carbon capture business. But in the meantime, until we get a better framework to retrofit pipelines, having those emissions behind the meter—whether at our power plant or steam generation—is the best way to push the industry forward. We feel confident about the control points we have. As you mentioned, this is a natural gas combined cycle plant with a low concentration of CO2. Looking at the cost curve, it will likely be on the higher end for sources that can capture. The value drivers we need are ultimately good definitions around the cost of capture, and we've conducted multiple front-end engineering design studies now. We have a good handle on how much that will cost. So, you need to bring in revenue drivers around incentives, which are a combination of federal and state incentives and also PPAs from data centers. Ultimately, what we're looking for is the right price point where the consumer of that power recognizes the advantage of already having that power in place, but also being able to unlock carbon-free power before the end of the decade. We're actively exploring this and are excited about the possibilities at the Elk Hills power plant.

Got it. Very interesting, look forward to that. And my follow-up is more on the free uses of free cash flow. We are seeing quite a bit of free cash flow generation in 2024 and 2025. I was wondering what are the calls on your cash for the next several years? The only thing we see is that potential 2026 maturity; is that something that you want to preserve cash to pay off? Or as you start generating that meaningful free cash flow, are you more likely to direct the cash toward returns, perhaps through buybacks?

Yes, Betty. Looking back, our track record as a company since 2021 demonstrates that we've returned $894 million in cash to shareholders through a combination of dividends and buybacks. We also accumulated a significant amount of cash. That's the business model that CRC offers: the ability to generate a lot of cash and then aggressively return it back to shareholders. We are very comfortable with a fixed dividend model and want to continue offering that to our shareholders, while also growing it. This is the fourth consecutive year where we've grown our dividend, and that's a key part of our strategy. Share buybacks are also important, especially at levels where we are trading today. As we await all the catalysts to unfold, it makes a lot of sense for us to buy back our shares at what we see as a meaningful discount—this is where the discretionary piece ultimately comes in. Regarding the 2026 debt maturities, we want to be at a 0.5 turn net leverage, and we're currently slightly above that. We want to get there quickly, and so we look to preserve some cash to achieve that. We're also willing to be in the market if there's an opportunity to buy those bonds. The 2026 notes are callable for a little more than a year from now, and step down to par next year, giving us some prepayment options. Ultimately, we talk with our Board every quarter to decide what's the best use of that cash; in the last few quarters, that has been largely buybacks. We will continue to preserve that optionality, and it’s a good place to be when you have cash. We aim to lock in a fixed dividend and then look for ways to buy back more shares. As we mentioned, we will continue to balance our strengths, and we're watching the maturities carefully, looking at them closely.

And our next question will come from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning. Francisco, turning back to the CalCapture project, what is the latest cost estimate for that project? And how do you think about funding it? How long would it take to add capture to the plant in terms of permitting and construction?

The full picture definitely comes together on costs and permitting, but also on the revenue line. Once you have all those components, we can address your question. We are looking at different financing opportunities; there is a lot of appetite from private equity and growing support from traditional lending to deploy capital in projects like carbon capture that decarbonize existing infrastructure. We feel good about the direction of that business model. However, we know we need to understand the incentive packages and long-term PPAs around carbon-free power in order to make that decision. We're still assessing this, so look for an update that provides a more comprehensive view on the timeline, cost estimates, and ultimately how we can generate an attractive return on the project.

That's fair; we'll wait for the details. I was curious, could you provide more color on CTV6? It's going to be your largest site once approved. Is that tied to a specific project that has been announced or one that hasn't? Also, I noticed the anticipated timeline for CPA approval is in 2027; is that a bit longer due to the size, perhaps building in some conservatism there?

Yes, absolutely. I'm very pleased with the pipeline inventory, and the CTV team has been building. When we started the strategy in 2021, we aimed for one billion metric tons of potential; now we have 300 million tons already in the queue for permitting in different areas and different types of reservoirs—some from assets we own and some from acquisitions we've made over time. It’s a testament to how skilled this team is in achieving our strategy, and very few companies can show as much progress as we have. We continue to refine the permitting process to get better, as we also seek to acquire premium pore space in California. Regarding CTV6, it is located in Central California, and we prefer to describe it as filling in the gaps across the Central Valley where we can find the best intersection of high-quality injection rates combined with attractive acquisition costs and ease of execution. This is the next step in our process. We like the area and anticipate that it will follow the same timeline as we've seen in the EPA tracker for CTV1 through CTV5. I don’t think there’s anything about it that would necessitate a longer timeline, but we hope that timeframes will continue to compress at the EPA as we push ahead.

And our next question will come from Kevin MacCurdy with Pickering Energy Partners. Please go ahead.

Hey, good morning. We appreciate all the details and the shareholder return. You mentioned that over the last several quarters, the Board found the buyback to be the most attractive use of free cash flow. What indicators are you looking at to make that decision? Is it an internal NAV or recent share price dislocation? Do you have any flexibility to temporarily go above free cash flow if you saw a large dislocation?

Yes. We look at it mainly through the lens of intrinsic value of the business. You can evaluate it based on multiple EBITDA metrics, but we prefer to look at the sum of the parts: our integrated business model, the stable and valuable PDP oil and gas wedge, and the cash flow we are generating from power generation. We add that to the value of our reservoirs and the potential for carbon management and the opportunities associated with data centers. The collective value of our business is significantly higher than where we are trading today, and that’s what gives us confidence in our capital allocation decisions. Should we pursue opportunities to go beyond cash flow in times of market distress? Yes, we have effectively done it before. If asset sales or timing opportunities arise, we can be more aggressive. It's a strong position to be in when you have cash, and our goal is to continue maximizing shareholder return while maintaining balance sheet strength.

Great. Thanks for all that detail. As a follow-up, we noticed you increased your oil mix for the second half of the year to around 79%, effectively increasing your oil guidance. What’s driving that? Is that something you’re seeing in the new Aera assets, or is that reflective of your legacy assets?

Yes, absolutely. That’s a consequence of the asset bases. The Aera assets primarily focus on oil, with gas and NGLs coming from the CRC portfolio. With the combination of assets, you should expect a higher oil weighting and increased net revenue interests, as I mentioned earlier. Our portfolio of assets throughout the state also allows us to blend crude to optimize our output. So yes, you should expect a higher oil weighting due to the Aera portfolio, which is almost exclusively oil.

And the next question will come from David Deckelbaum with TD Cowen. Please go ahead.

Thanks for taking my questions, guys. I’m curious just to follow up on some of the other questions around the return on capital. How did you arrive at the specific fixed dividend? Should we think of it as it grows over time relative to free cash or long-term oil prices?

We look at the fixed dividend in terms of how it compares to other E&P companies to indices. We want to ensure we have a competitive yield for investors. Given how low capital intensity these assets are, they are excellent for providing consistent dividend growth over time. We want to offer an attractive cadence with significant growth, and we're moving forward aggressively while looking at synergies. We feel the step-up should require a higher incremental change than we had in prior assessments where we were closer to a 10% growth. Providing a consistent fixed dividend is a priority, and we have the capacity to deliver that over time, considering the quality of our assets and our focus on finding more synergies to return cash to shareholders.

Appreciate the color; it certainly looks like there’s plenty of runway left there. I wanted to ask more on the AI data center thematic. I’m curious about the current state of the permitting environment, especially now with Aera having closed. Where are most of your efforts focused around those initiatives? Could you update us on the balance of pursuing state-level permits versus what you're seeing happening at the local Kern County level?

Yes. I mentioned before that we see multiple alternatives to get the permits back on track. We are working with various agencies in Kern County; the county issues initial permits, while CalGEM (formerly DOGGR) issues the remaining ones. CalGEM has been undergoing a significant reorganization, which accounts for some delays. However, we are having productive discussions regarding our permitting process. Ultimately, we see a path to more field-specific permitting, making it easier to define on lands where we have ownership, giving us inventory to drill within the new rules. Our core fields are Elk Hills and Belridge, which we own largely, and we see opportunities to do workovers and sidetrack wells. We are working through changes at the agencies, and we have the data and practices in place to get back on track.

And our next question will come from Leo Mariani with ROTH. Please go ahead.

Hi, guys. I was hoping to dive a bit deeper into some of the regulatory progress and initiatives in the state. Can you talk about the current status of some of the new potential 3,200-foot setbacks that have been proposed? Is there any real movement or update on the state's push to come up with rules and regulations for new CO2 pipeline infrastructure?

Regarding the setbacks, these are now a law mandating 30 to 400-foot setbacks in the state. We have been working on documenting the impact for two years and we feel comfortable with the law going into effect—there's no significant impact to the CRC portfolio or the Aera assets. Everything is located in Kern County's rural areas away from communities. So we see no impact or only a very insignificant one on the setbacks going forward. Regarding pipeline regulation, Senate Bill 905 had a temporary moratorium on CO2 pipeline regulation. We see a lot of support for the state of California to reach decarbonization targets without a pipeline solution; it's just not achievable. As we build our carbon management business and put permits in place for pore space, pipelines will drive significant business growth. We feel good about the opportunities for launching projects, and decision-makers at the state level are increasingly aware of the industry's needs. The California legislative session just started after the summer break; we're optimistic for some resolution in the coming weeks.

Okay, appreciate that. I wanted to jump over to the electric generation business. My understanding is that you guys are getting roughly $150 million from the state to serve as a backup electric generation provider if needed. When I look at your guidance for full year 2024, you're estimating around $100 million in EBIT. Can you help me reconcile those numbers? Are you expecting a loss from the business in kind of a regular way, and then this $150 million is expected to be on top, which gets you to $100 million EBIT guidance?

The short answer is don't forget we had a major turnaround at the plant early in the year. The plant was offline for a period of time, so the costs were elevated due to purchasing power from the grid. There’s an offset, but I'll turn it over to Jay for additional color.

There are two pieces of the revenue stream: the energy sale stream and the Resource Adequacy (RA) capacity stream. For 2024, the RA revenue stream will be approximately $104 million across the year; it will be closer to that $150 million figure in 2025. Don't forget the energy contribution this year hasn't been as robust as last year due to prevailing pressures from intermittent resources. If we get a warm summer or a cold winter, we expect that to change. But for now, the capacity piece represents the larger portion of the revenue stream in our power business.

And the next question will come from Noel Parks with Tuohy Brothers Investment Research. Please go ahead.

Hi. I just had a couple of questions. I want to clarify. I apologize if you've touched on this already. On the Aera properties, are there any lingering land or lease issues where sequestration target areas around Aera? I’m wondering, is there anything you need to clean up that isn't tied to production anymore but may be valuable for sequestration?

Yes, one of the exciting things about the Aera transaction is that it allows us to expand our premium pore space near Bakersfield, with two significant additions to the portfolio: one called CarbonFrontier, which is in the EPA tracker, and another property called Post Levy, which is adjacent to Elk Hills that we look to permit in the future. The advantage we have in California is strong land ownership, which is paramount for operators like CRC. We own a lot of the surface and subsurface rights in these reservoirs. Aera has the same feature in their asset. While there will always be small cleanup items, we don't see any significant issues that can affect our progress. We feel good about the projects being strong candidates for permitting to advance the emission capture in the Central Valley.

Great, thanks. Did Aera have any partnerships in place similar to your CTV and Brookfield? Will these persist now that the combination is closed? Are there any contractual issues, rights of first refusal, or other commitments from third parties that may affect you?

No; there were no partnerships, no CDMAs on their acreage or capital commitments of any kind. These assets will anticipate contributing to the partnership and will work alongside Brookfield to advance those projects. We called it at a fortuitous time; Aera was following CRC's lead in terms of permitting, while we were ahead on the commercial and financing side. This is a fantastic opportunity to push projects forward, with CRC leading the way with the CTV team towards filling those reservoirs.

This concludes our question-and-answer session. I'd like to turn the conference back over to Francisco Leon for any closing remarks.

Thank you for joining us today. We will be presenting at investor conferences in September. Lots to talk about; we're looking forward to seeing you. Thanks.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.