Earnings Call Transcript - CRC Q2 2025

Operator, Operator

Good day, and welcome to the California Resources Corporation Second Quarter 2025 Conference Call. 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, Vice President of Investor Relations and Treasurer

Good morning, and welcome to California Resources Corporation's Second Quarter 2025 Conference Call. Following prepared remarks, members of our leadership team will be available for questions. By now, I hope you've 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 forward-looking statements based on current expectations. Actual results may differ due to factors described in our earnings release and SEC filings. As a reminder, please limit your questions to one primary and one follow-up as this allows us to get to more of your questions. I will now turn the call over to Francisco.

Francisco J. Leon, CEO

Good morning, everyone. Thanks for joining us. We're excited to share today's update with you. As you can see from our release last night, 2025 is shaping up to be a very solid year. Our teams are executing extremely well, driving strong operational performance, strategically advancing our carbon and power platforms, and returning meaningful capital to our shareholders. Let me walk through a few highlights before handing it over to Clio to discuss quarterly results. First, we delivered record quarterly returns to shareholders. We returned nearly $290 million this quarter, more than 260% of our free cash flow. These record returns were largely related to a discounted share repurchase from ICA facilitating an orderly reduction in their ownership. Our actions reflect our strong conviction in the value and upside we see in our stock. Next, we've implemented ARA-related merger synergies ahead of schedule. About a year ago, we announced this transformative merger and committed to delivering meaningful synergies. We fulfilled that commitment three months ahead of schedule, fully implementing our $235 million target. Importantly, the net present value of these synergies over the next 10 years is estimated at approximately $1.4 billion. That's about two-thirds of the announced deal value or more than 100% of the value of our equity issued at the time of the transaction. We've demonstrated our ability to identify value-accretive combinations, execute seamless integrations, and unlock long-term value through scale and operational synergy. Third, strong operational performance has enhanced our full year outlook. Year-to-date, operational execution and reservoir performance have exceeded expectations. By building on this momentum with the addition of a second rig, we strengthened our outlook, resulting in a roughly 7% increase in adjusted EBITDAX. A few weeks ago, we were encouraged by the California Energy Commission's response to Governor Newsom's directive to ensure fuel reliability during the energy transition. We welcome the state's greater collaboration with refiners and our industry. The state is actively working to improve the oil and gas permitting process, and we expect additional details once the legislature reconvenes in mid-August. If approved, these reforms could give us greater flexibility to access our extensive inventory while being mindful of shareholder returns. We applaud the governor's leadership to advance solutions that address affordability, protect local jobs, and reduce foreign oil dependence. Clio, over to you.

Clio Crespy, CFO

Thanks, Francisco. I'll start with a review of our second quarter results and financial highlights. Our focus on base production management continues to deliver results. We recorded net total production of 137,000 BOE per day with average realizations at 97% of Brent before hedges and 100% after hedging. Nearly all of our costs for the second quarter were within or in some cases, below the lower end of our guidance. Importantly, our first half 2025 costs were down approximately 11% from the second half of 2024, reflecting lower G&A expenses, lower nonenergy operating costs, and lower taxes other than on income. With continued cost discipline and the benefit of ARA-related synergies, we've now reduced nearly all of our 2025 operating expense items by about 7% when compared to our original outlook, even as we anticipate higher energy costs and increased levels of activity in the second half. This performance underscores our ability to effectively manage costs and protect margins. Our teams have done an outstanding job staying focused. Total capital was $56 million with 60% allocated to high-return workovers and sidetracks. Capital came in lower, mainly due to portfolio optimization as well as project deferrals into later this year. Adjusted EBITDAX for the quarter was $324 million, exceeding consensus expectations. This performance was driven by strong commodity price realization, higher-than-expected production, and lower operating costs. We generated $109 million of free cash flow, or $165 million before changes in working capital, demonstrating the resilience and cash-generating power of our assets. Now on our capital returns to shareholders. We returned a record $287 million in the second quarter, bringing year-to-date shareholder returns to nearly $422 million. This quarter's returns were largely driven by a strategic $228 million block repurchase from ICAS executed at $46 per share. Since combining with ARA, we've now repurchased approximately 45% of the equity issued at the time of the merger at an average price, reflecting about a 13% discount to the merger closing price. This has further enhanced the economics of an already accretive deal. Repurchases to date have utilized available cash on hand, reinforcing our long-term capital allocation priorities of delivering shareholder returns, maintaining balance sheet strength, and enhancing shareholder value. Since the inception of our share repurchase program, we returned nearly $1.5 billion to shareholders in dividends and share repurchases, representing approximately 86% of cumulative free cash flow over the last four years. We have slightly over $200 million remaining under our current share repurchase authorization, which was recently extended through June 2026. Looking ahead to the second half of 2025, we are operating from a position of strength. Our leverage remains low at 0.7x. We have an undrawn revolver, and total liquidity remains robust at over $1 billion. We've had solid execution year-to-date, but it gives us the confidence to raise full year production guidance, lower both cost and drilling capital expectations, and increase our adjusted EBITDAX forecast. We are now expecting a 9% improvement in our 2025 free cash flow outlook before working capital, even after adjusting for lower oil prices versus our initial assumptions. All in all, a very solid quarter. Back to you, Francisco.

Francisco J. Leon, CEO

Thanks, Clio. Before we move to Q&A, let me quickly mention a couple of other items. Near term, we're focused on getting California's first CCS project into operation. CTV JV received construction authorization from the EPA. This was a big milestone as it was the first EPA awarded authorization to construct for our Class 6 project. We expect to complete construction of the Class 6 wells at or around year-end 2025. Pending the receipt of final regulatory approvals, we will be ready to inject early in 2026. As we continue to maximize the value of our assets, we're actively engaged in discussions with multiple potential counterparties to supply power with a pathway to CCS from the Elk Hills power plant and CTV CO2 storage reservoirs for a decarbonized energy solution. To add, there are several exciting developments on the regulatory front driven by the California Public Utilities Commission. The proposed reliable and clean power procurement program could unlock a new market for our carbon management platform. In closing, we have a differentiated business model, benefiting from an integrated strategy and are uniquely positioned to support California's energy transition. Our high-return oil developments complement our expanding carbon management and power platforms. It's well-known that California has some of the highest energy costs in the country. Fortunately, CRC is positioned to provide cleaner and more affordable in-state production which California needs, while advancing decarbonization solutions across the central industries. As the next generation of energy infrastructure continues to develop, CRC has the assets and people to lead a changing energy landscape—one that demands affordability, reliability, and responsibility. CRC truly is a different kind of energy company. Operator, let's open the line for questions.

Operator, Operator

The first question comes from Scott Hanold with RBC Capital Markets.

Scott Michael Hanold, Analyst

Francisco, you mentioned the improving regulatory environment in California, with multiple developments taking place. Could you elaborate on your approach to obtaining oil and gas permits, particularly regarding the litigation in Kern County that seems close to a resolution? What is your perspective on these events, and how do they influence your expectations for receiving new permits? Additionally, considering the various changes happening in California, what are the main priorities, and where do you anticipate seeing the initial benefits of any regulatory adjustments?

Francisco J. Leon, CEO

Scott, thank you for the question. Yes, we have a very dynamic and we're optimistic about all the changes happening in California. The state is actively looking to resolve the permitting situation and to help stabilize local production. A lot of conversations, which we feel are very constructive and what the governor appears to be signaling is that they're going to instruct the legislature to provide a fix for permitting in the state. Right now, the legislature is on a summer break, and we expect more details to come out when they reconvene in mid-August. So it's tough to speculate as to ultimately what the outcome is going to be. But we've been building the company for this moment. We're well positioned. We're at the table, and we're ready to provide solutions. The answer really to California's energy challenges is that we need to be both affordable and clean, and that is local production, and that's the CRC barrel. So we will see in terms of time line. It's hard to predict. Like you said, there's a lot of different fronts being advanced, including the Kern County EIR litigation. But we see the leadership obviously rising up to the challenge and looking to stabilize local production, and we're ready to go when that happens. So once the legislature reconvenes, we'll have a few weeks in session, during which we will know the outcome of those discussions sometime in September, early October.

Operator, Operator

The next question comes from Betty Jiang with Barclays.

Wei Jiang, Analyst

It's really impressive to see the recent quarters showing stronger production with lower CapEx consistently. Could you just elaborate on what's driving that underlying capital efficiency improvements and how that could inform your go-forward maintenance CapEx outlook?

Francisco J. Leon, CEO

Yes, Betty, thank you. So we've been now operating with the air assets for a year. It's clear that those assets are just performing extremely well. The combination of strong assets with the CRC plus ARA operational leadership has been just phenomenal to watch, and the performance, if you measure it in terms of gross production, continues to outperform expectations and certainly what we underwrote when we did the deal. So it's been just a year of quarter-over-quarter success in the team managing the basic client extremely well. We had guided to a range of $500 million to $600 million in terms of maintenance capital. But I think we're comfortable today to say we will be at the lower end of that range. Once we get permits back on track and once we have the full information as to how that's going to work, we'll come back with an updated number. But certainly, we see the capital efficiency and the trend lines being very favorable so far.

Wei Jiang, Analyst

That's helpful. A follow-up to you, Clio. Just on cash tax benefits. Thank you for the guidance for 2025. How do you see that saving evolving in 2026 and beyond?

Clio Crespy, CFO

Great question. Let me frame a little bit the broader impact of the bill, and I'll jump into our outlook for '26. We see a lot of benefits from the One Big Beautiful Bill for us and how it will help us really bring more clean and reliable energy to California. There's many pockets of improvement there. The bill improves the long-term economics for both our E&P and our carbon management businesses. It restores and locks in really key tax incentives, notably 100% bonus depreciation and immediate R&D expensing, but it's also a win for our carbon management business. Our CCS projects are earlier stage and capital-intensive by nature. So the features you see in the bill, such as R&D expensing, bonus depreciation, and also the additional interest deductions, enhance our project economics. So Betty, as it stands today, we expect about $35 million in cash tax savings for this year. So that's a nice add to our free cash flow story. But if you look ahead and what that could mean for future here, we expect our cash taxes as a percentage of EBITDAX to decrease from the low double digits to high single digits. So to give you a sense of scale over a five-year horizon and assuming current activity levels and a $55 to $65 Brent price environment, cumulative tax savings are expected to be in the $80 million to $150 million range. Obviously, additional activity would drive incremental savings there. So all in all, the bill relief supports our free cash flow story and provides additional tailwinds for our carbon management business.

Operator, Operator

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

Scott Michael Hanold, Analyst

I was kind of curious on Page 7, you all highlighted some of the general project returns that you all have going on in the second half of this year. Could you give us some color as you think about, again, the potential of getting new well permits maybe in sometime in 2026? How do those well breakevens compare to a workover side track? And if you had new permits to maintain production, what is sort of the optimal mix of the three?

Francisco J. Leon, CEO

Scott, yes. So just a reminder, we're running two rigs right now. We added our second rig in June primarily; it's going to be drilling side tracks for the rest of the year. We also have a full year 2026 already permitted for those two rig lines with a mix that would be similar to this year, workovers, and sidetracks. As permits come back as we get the ability to drill new wells, you can see that the returns or implied returns with very low breakeven prices will be very additive to the portfolio and the flexibility that we have. It's difficult to pinpoint as we are still in a permit-constrained environment the what-ifs, but we see a very deep inventory of projects. As a reminder, we are conventional assets, which really you look at the quality of the rock. We're not tight shale that needs very high capital-intensive long laterals with 80 state tracks. What we do is about pressure support. It's about injection rates. It's about bypassed oil. So we feel the inventory is several decades of good, attractive inventory as we increase recovery factors.

Operator, Operator

The next question comes from Josh Silverstein with UBS.

Joshua Silverstein, Analyst

Clio, you had mentioned you plan to retire the remainder of the 2026 note in the second half of this year. After that, how are you thinking about free cash flow allocation going forward? You don't have another maturity until 2029. So how are you thinking about the buyback? I know you were just opportunistic, but is there more of a game plan to have kind of a percentage allocation? Or how would you think about that?

Clio Crespy, CFO

Sure, Josh, and I appreciate the question. Let me start by reemphasizing that we're committed to driving long-term shareholder value and providing shareholder returns. It's really a core part of our value proposition, and our track record in this regard really speaks for itself. We've returned about $1.5 billion in dividends and share repurchases since the program inception, which is roughly 30% of our current market cap. You asked what we're going to do on the buyback side. Looking forward, we plan to remain opportunistic with share repurchases. We still have over $200 million available under our share repurchase program, and we extended that through June 2026. We feel good about the performance of our assets and our free cash flow trajectory. That being said, we're being thoughtful. If you look at just this year, we've already returned capital at scale. We've returned 178% of free cash flow back to our shareholders. In the second half of this year, we need to balance any incremental buyback activity with our other strategic priorities. So for us, longer term, I'd say it's about taking a balanced approach here. We're going to stay disciplined, but also focused on long-term value.

Joshua Ian Silverstein, Analyst

Got it. And then on the CVT I project, I think you guys have moved from year-end '25 to early '26 as the new first injection days. I think this was from some of the EPA delays there. Can you just talk about broadly how your construction is going? Would you have been on track for the year in '25, first injection? Just any update there would be great.

Francisco J. Leon, CEO

Josh, yes, so we are on track to be done with construction by the end of the year. We talk about being ready to inject by the end of the year. What that means is that we take care of things that we control, which is getting the project ready to go. What's more difficult to handicap is the speed for the EPA to give the final approval. And that's what we're signaling for early 2026. Part of it is holidays; part of it is first mover. We are the furthest along of any company in the U.S. in terms of moving forward a Class 6 permit from permit to execution. So there's an expectation that the EPA is going to react quickly, but ultimately, we don't have a precedent to compare to. But we'll be ready with construction and ready to inject by the end of the year and start with our first project early in '26.

Operator, Operator

The next question comes from Kale Akamine with Bank of America.

Kaleinoheaokealaula Scott Akamine, Analyst

Maybe I'll follow up on the permitting front. I appreciate that we're going to have to wait on the Newsom bill. But wondering if you can comment on the details of that proposal. My understanding is that there's kind of the P&A piece where every two wells P&A will allow one new drilling permit. Do you see that P&A piece as a bottleneck? Or do you think there's already sufficient industry activity to build a healthy permitting queue?

Francisco J. Leon, CEO

Kale, yes, I would say details, I wouldn't run with any details at this stage. There's a proposed language. There's still a few weeks before we know what certainty. We're certainly aware of the plug-in requirement. But we already have a very aggressive P&A program. So it's something that, as we've adapted and built a California-made E&P company, we do it extremely well in a very efficient way. So as we move forward, we don't see P&A requirements as something that ultimately gets in the way from a CRC perspective. So we continue to adapt, and it's difficult to speculate on exactly what the solution will be. But we're really excited about the ability to showcase the asset base and this just phenomenal inventory that we've built over the years and almost two million acres of minerals behind it with very high NRI. So I think the focus is going to be on the California return, the California comeback on oil and gas, and we're having very constructive conversations to get that unlocked so it benefits the affordability concerns that Californians have.

Kaleinoheaokealaula Scott Akamine, Analyst

I appreciate those details, Francisco. Maybe just a reference item. How many wells are you P&Aing this year? Or how many do you plan to do on a given annual year basis?

Francisco J. Leon, CEO

Yes. I think what we disclosed publicly is we're averaging about 1,500 wells per year.

Kaleinoheaokealaula Scott Akamine, Analyst

Got it. I appreciate that. My second question is on the potential Elk Hills PPA. What do you think your current breakeven is to leave the grid? And I appreciate that there's many individual pieces, and they're very nuanced, but maybe if you could address one specifically, what do you think you're going to get for resource adequacy in 2026?

Francisco J. Leon, CEO

Yes, we're still not ready to guide until 2026 on any front. We still see the print for '25 as the highest ever resource adequacy for 2025 in a state that's very short on reliable power. We see long-term success on that program. But we don't want to put any numbers in '26. We still haven't placed any contracts in motion. What we're also thinking about is really how we get the market to price the value of that power generation into our multiple. We keep talking about customers that could come behind the meter and take that power and be a premium to what we make today and give us the duration on the contract. That's been the focus, and to stay on that front, we're making really good progress on what I would say are framing discussions and have interest from several groups. We remain very encouraged, and our focus is on making the right deal. So in our conversations with customers, it's clear that they need power now; that's obvious. But clean power is still very much a priority. Reliable clean power in a state like California will come from natural gas with CCS. We're convinced that's the winning strategy, and we keep pushing forward to align the best contract to add value to our power business.

Operator, Operator

The next question comes from Zach Parham with JPMorgan.

Benjamin Zachary Parham, Analyst

Just wanted to follow up on the Elk Hills power plant and a potential power deal there. Can you give us a sense of potential timing for signing something? I know you're in negotiations that have talked about having conversations. But is that likely to be something that happens later this year? Is 2026 a possibility? How are you thinking about that from a timing perspective?

Francisco J. Leon, CEO

Yes, Zack, we are very much focused on it, and our plan is to provide an update before the end of the year. There's a lot of interest; there's a lot of conversations happening. We highlighted on the script another evolution of a story, which is the CPUC in California is considering adding carbon capture alongside nuclear and hydro into the reliable and clean power procurement program. So there's clearly not only market signals or regulatory support for the type of projects that we're pursuing, but we're also seeing M&A in the state, with buyers of existing power plants that are not in California coming into California and talking about carbon capture as a solution. We're also seeing hyperscalers doing deals in natural gas in other parts of the country. We see our portfolio as an advantage, and we're going to capitalize on that advantage. The feedback we're getting is that Kern County will be a great site for development of data centers. We have a firm stream of natural gas, we have land, we have permitted port space, and we have existing power generation. This is not a turbine in backlog. This is an actual and running power plant with extremely high reliability. So we see the AI and hyperscaler market looking for what we have, and we're very much pursuing something to announce later this year. So the timeline hasn't changed, and we continue to be excited about the prospects and the conversations we're having.

Benjamin Zachary Parham, Analyst

And then my follow-up on cash return. I mean, you opened very aggressively on buybacks recently. The other portion of that has been your dividend. How do you think about dividend growth over the medium and long term?

Francisco J. Leon, CEO

Yes. We've been very successful in having a combination of buybacks and a fixed dividend. As it relates to the fixed dividend, we like the growth model. We've grown our dividend every year for the last four years. It is a key part of our shareholder return policy and something that we evaluate with our Board of Directors every year. It’s something that we think our shareholders value and appreciate, and it's something that will continue to be a part of the package of shareholder cash returns every year. So that's a mainstay, and we'll continue to evaluate for a potential further increase.

Operator, Operator

The next question comes from David Deckelbaum with TD Cowen.

David Adam Deckelbaum, Analyst

I wonder if we can go back to just the maintenance capital conversation, just appreciating that you all will update that number once permitting becomes a little bit more clear, but I'm curious, just as you kind of sit today, maybe Clio, you could chime in on just the management of the free cash profile. How – if you had an unconstrained permitting environment, how quickly would you look towards moving to maintenance in the current commodity environment?

Francisco J. Leon, CEO

David, thanks for the question. The way we think about streamlining our permits is that we'll have a lot more flexibility in the portfolio, and it's another tool to add to our very successful shareholder return program. We have grown cash flow per share every year, and that's with permit constraints and lower pricing. We feel that we're extremely well set up. If you think about what we have, we have a solid balance sheet. The team is executing superbly, and there’s a very strong foundation of assets with production that have very low declines and low capital intensity. So new permits will enhance our ability to deliver value by drilling our extensive inventory. We won't be looking purely at maintenance production as the objective; we look at growth in cash flow per share as the objective. So what that means in terms of shareholder returns is we will be looking for the best mix to deliver that continuing growth on cash flow per share.

David Adam Deckelbaum, Analyst

I appreciate the color, Francisco. And maybe just as a follow-up to that, you talked about the permit backlog, and I know that the company had pivoted a bit this year to applying for conditional use permits under CalGEM. At this point, what has the experience been like? And with a two-rig program, what's the backlog in terms of drilling years at this point?

Francisco J. Leon, CEO

Yes. We continue to move all things in parallel. We see there was a revised EIR approved at the county and is heading back to the trial court for consideration. We are also working to satisfy the requirements for the conditional use permits. None of that has been slowed down, but the focus and attention is on a legislative fix that ultimately will be the best path forward to get permits back on track. The inventory in terms of the duration of that inventory depends on the ultimate outcome of the discussions. There are different ways that we can ultimately get back to drilling more wells. We haven't had issues with sidetracks and workovers, and we continue to permit those and build that inventory beyond 2026. Progress continues across multiple fronts. I think we'll have a few updates by the end of the legislative session so that we can true up to where we are and where we think the future will be.

Operator, Operator

The next question comes from Nate Pendleton with Texas Capital.

Nathaniel Pendleton, Analyst

Congrats on the strong quarter. With my first question, I wanted to dig a little deeper into the Class VI permitting process. Can you share any thoughts on how permitting is progressing for the A1/A2 reservoir and your other CTV projects? Also, maybe if you could touch on any meaningful changes you have seen now that the new administration has had a little bit of time to make their mark.

Francisco J. Leon, CEO

Thanks for the question. I'll turn it to Chris to provide more details on EPA Class VI.

Chris D. Gould, EPA Class VI Specialist

Nate, yes. The EPA tracker continues to be the best estimate out there for timing. We continue to see progress on all the permits that you see there through CTV VI, and we maintain a constructive dialogue with EPA, particularly on the back of the first-of-a-kind and applying the learnings from 26R. Nowhere is that more evident than with A1/A2, as you know, in the same complex as 26R, so very conducive to applying those learnings. I remind you that A1/A2 is also part of the Kern County conditional use permit, which was final. We do see the estimate is likely for a draft permit for A1/A2 this year, and we see the rest of the permits as the tracker is a good estimate. There are estimates, so things can always change, but it looks reasonable to us.

Francisco J. Leon, CEO

The EPA is committed to expediting permits, putting more resources behind the different EPA regions. We're encouraged by the signal to streamline permits on that front and look forward to receiving incremental Class VI permits in the very near term.

Nathaniel Pendleton, Analyst

Got it. And maybe staying on CTV. On Slide 16, you added a comment about expecting support for CO2 pipeline transportation from California legislators. Can you provide some details on what you're seeing on the pipeline front?

Francisco J. Leon, CEO

Yes. It's another area where we're very encouraged about the progress. There's legislation that's advancing through the California legislature that would support the construction of CO2 pipelines. Assembly Bill 881 would basically lift the moratorium on interstate CO2 pipelines. The bill has a lot of momentum. It's currently sitting in the Senate. If it passes the legislature and is signed by the governor by mid-October, the bill will be in effect by January 1, 2026. We haven't seen this much support and momentum in 2 to 3 years where we've been working on this. We remain very optimistic that this is an important step towards unlocking the scale of carbon management, and we're seeing a lot of good support and dialogue with California leadership around this topic.

Operator, Operator

I understand that there is time for two last questions. We have a question from Michael Furrow from Pickering Energy Partners.

Michael Webb Furrow, Analyst

It was positive to see the company step in and repurchase shares from ICA when they came to market in June. Now ultimately, the future intentions of each shareholder are unknown. But would you say that CRC is still well-positioned to kind of step in again and help support these sellers if they come to market? And if so, would that require an expansion of the authorization program?

Francisco J. Leon, CEO

Yes. We absolutely stand ready. We see a tremendous amount of value in our stock. We started the year when the first lock-up period came in, and we said we would step in if there was any interest from shareholders exiting. Then we followed through and ended the block that we announced earlier. So we continue to stand ready in terms of making sure the exit of any sponsor is efficient. Subsequent to us stepping in, ICA sold another 1 million shares to a third party, showing that there’s a very efficient market and a lot of liquidity for our shares and a lot of appetite for our shares. We strongly believe in the buyback program and we see a lot of catalysts coming that are not recognized in the value of the company. As we rebuild cash and look at paying down debt, buybacks continue to be very much an element of our cash return strategy.

Michael Webb Furrow, Analyst

That's great. Just a quick follow-up on production taxes. It looked like they came in pretty low this quarter and helped drive some of the quarterly beat versus our model. In the back half of the year, production tax guidance kind of looks similar to the 1Q rate again. So can you inform us on what some of the drivers are for why the production taxes stepped down so much as they did in the second quarter?

Clio Crespy, CFO

Yes, Mike, we can. We had accrued at a higher rate, assuming a higher increase than is the one we saw. So that's the adjustment you observed on the production taxes. It's a catch-up.

Operator, Operator

The next questioner comes from Scott Gruber with Citigroup.

Scott Andrew Gruber, Analyst

Francisco, I want to come back to the upstream investment strategy. If there's an unconstrained permitting environment, your tax position has improved. Is there any appetite not just to maintain production, but to recapture some lost volumes? Or is that really a question about other calls on capital? You obviously have the carry on the carbon management side. But just curious how you weigh recapturing lost volumes? Or is that off the table?

Francisco J. Leon, CEO

Yes. As I indicated, Scott, the way we look at managing the business is around cash flow per share. That's what we think is the metric that drives stock performance and shareholder value. We have been in a permit-constrained environment for a few years, but have been able to grow cash flow per share even with lower pricing. The focus has been on buybacks and cost-cutting exercises and synergies around the ARA merger. In an unconstrained case, we now have the ability to move the top line, and we look forward to the flexibility and added element to continue driving cash flow per share. At the end of the day, it's not growing production just for the sake of growing; it's about growing cash flow. If we find the right combination of opportunities, we're going to invest in an unconstrained environment to a level that maximizes that cash flow per share. I don't want to be prescriptive about rigs or about activity at this stage until we can cross into the unconstrained permitting scenario, but our commitment is to continue to drive shareholder value in the combination of everything we have at our disposal.

Scott Andrew Gruber, Analyst

That makes sense. And then a follow-up on the asset level detail on Slide 15. Obviously, your recovery factors...

Operator, Operator

Excuse me, Mr. Gruber. I'm sorry you were breaking up. Would you please state your question?

Scott Andrew Gruber, Analyst

Sorry. I'm curious about the recovery factors you show on Slide 15. How much more running room do you think you have to squeeze those recovery factors higher?

Francisco J. Leon, CEO

Yes. We have truly world-class reservoirs and fantastic rock here. You might be surprised to see recovery factors that are as high, but the reality is we have a lot of room to grow. We've seen fields in California that get up to 70% to 75% recovery. We have a massive running room, and incremental 1% recovery factor adds millions of barrels of reserves. The benefit of not having to deal with very tight rock that doesn't flow and doesn't have the permeability is that your running room is in the multiple decades of quality inventory. It's about pressure maintenance, and it's about making sure you have the right water floods and steam floods. Yes, running room is absolutely an advantage that we'll be able to showcase. Looking at the slide, we have a 97% working interest and 91% NRIs. I don't think you'll find a lot of in the public independents that have the quality of runway and inventory that we have here in California.

Operator, Operator

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

Francisco J. Leon, CEO

Thanks again for joining us today. We hope to see you at several conferences this fall, and hope everybody has a good day. Thank you.

Operator, Operator

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