Earnings Call Transcript - CRC Q2 2021

Operator, Operator

Good day, everyone, and welcome to the California Resources Corporation Second Quarter 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 also note today's event is being recorded. At this time, I'd like to turn the conference call over to Joanna Park, Vice President, Investor Relations and Treasurer. Ma'am, please go ahead.

Joanna Park, Vice President, Investor Relations and Treasurer

Welcome to California Resources Corporation's second quarter 2021 conference call. Participating on today's call is Mac McFarland, President and Chief Executive Officer; and Francisco Leon, Executive Vice President and Chief Financial Officer, as well as several members of the CRC executive team. I'd like to highlight that we have provided slides on our Investor Relations section of our website www.crc.com. These slides provide additional information into our operations and second quarter results, and we've also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website as well as in our earnings release. Today's conference call contains certain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties, and therefore, may cause actual results to differ from those expressed or implied in these statements. Additional information on factors that could cause results to differ are available in the company's 10-Q, which will be filed later today. We ask that you review it and the cautionary statement in our earnings release. A replay will be made available for at least 30 days following the call on our website. As a reminder, we've allotted additional time for question-and-answer at the end of our prepared remarks and would ask participants to limit their questions to a primary and a follow-up. And with that, I will now turn the call over to Mac.

Mark McFarland, President and Chief Executive Officer

Thank you, Joanna, and thanks to everyone for attending today's earnings call. Second quarter results demonstrate the advantages of our asset position at CRC, the strong execution of our strategy and the diligence of the hardworking employees of CRC. I'd like to thank each of them for their continued dedication in delivering the energy California needs despite COVID, unrelenting heat, and fires. As highlighted in our slides, we delivered on several key priorities. We continued our strong financial and operating performance. We announced several A&D transactions that allow us to focus on our core assets. We increased our free cash flow guidance for the full year. Accordingly, we are increasing our share repurchase program by an additional $100 million for a total of $250 million. Lastly, we are expanding our ESG leadership through decarbonization with new low carbon initiatives. CRC's strategy is based upon three main pillars. One, cost in operational excellence; two, disciplined investing; and three, responsible portfolio management. The first pillar of our strategy focuses on lowering our operating cost model while maintaining top-notch safety performance. The team continued to deliver on both aspects, maintaining corporate G&A cost savings, which are down 16% from 2020 levels and our controllable non-energy costs, which are in line with the first quarter of 2021, both on a per barrel basis. I think it's important to stop and highlight why we are focused on our non-energy cost, because our energy costs rise with rising natural gas prices. The rising natural gas prices are a net positive to CRC because we are a net long natural gas producer. Said differently, our revenues expand faster than our costs, which is a good position to be in. While we worked hard to maintain our cost structure and aim to be a low-cost producer, we're starting to see signs of inflationary pressures creeping into our business. During the quarter, we maintained our high safety standard and extended our low incident rate with a 0.49 IRR year-to-date. The second pillar of our disciplined investing is based on prudent investment and project prioritization. During the quarter, we continued to shift drilling capital to downhole maintenance due to the robust rates of returns of those projects. Our operations team continued to focus on our high-return maintenance backlog and successfully maintain flat production levels while operating only two rigs in the first half of the year. Our thoughtful investment of each dollar toward our best available opportunity exhibits our ability to stabilize oil production while also generating meaningful free cash flow. The third pillar of our strategy centers on responsible portfolio management. CRC demonstrated our commitment to this pillar by purchasing the entire working interest position held by a joint venture partner in our core field as well as entering into an agreement to exit the noncore Ventura Basin. These transactions enabled us to focus on our core asset and drive significant value. Looking forward, the strong free cash flow generated in the first half of the year gives us confidence to increase full-year guidance to the range of $400 million to $500 million. I'll now turn the call over to Francisco, who will provide additional details on second quarter financial performance before I return to discuss our ESG efforts.

Francisco Leon, Executive Vice President and Chief Financial Officer

Thanks, Mac. Good afternoon, everyone, and thank you for joining us on this call. As Mac highlighted and as shown on Slide 8 of our presentation, CRC continued its strong performance in the second quarter of 2021. CRC reported net quarterly production of 101,000 barrels of oil equivalent per day and 61,000 barrels of oil per day. In essence, CRC has been able to maintain its gross and net oil production year-to-date with only $77 million in CapEx. During the quarter, we added our second drilling rig in our core San Joaquin Basin, and our development program brought online 21 new wells. Furthermore, we ran 35 maintenance rigs and shifted a portion of our capital to bring online an additional 217 maintenance jobs. As previously mentioned, we expect to maintain our capital cadence with plans to add a third rig in the Los Angeles Basin sometime in the fall. For the remainder of the year, we expect to see continued healthy allocations in oil, NGLs, and specialty natural gas, further supporting our revenue potential. During the quarter, our operations team successfully maintained our operating cost of $16.75 per BOE, excluding PSC effects. Our second quarter 2021 G&A costs remained flat quarter-over-quarter and averaged $5.25 per BOE, nearly $1 per BOE below where we entered 2021, primarily due to our ongoing cost-saving efforts. As a result of our efficient management of our low-decline assets, CRC reported an adjusted EBITDAX of $169 million and adjusted net income of $78 million. The business generated $77 million of free cash flow, validating the low capital intensity of our operations. With essentially $200 million of free cash flow in the first half of 2021, CRC validated its low capital intensity and demonstrated its industry-leading free cash flow yields. This provides the basis to raise our 2021 free cash flow guidance by nearly 50% to a $400 million to $500 million range.

Mark McFarland, President and Chief Executive Officer

Great. Thanks, Francisco. So last quarter, we mentioned we're assessing and accelerating our ESG strategy. CRC is the lowest emitting and lowest carbon intensity oil of the top 100 producers in the U.S. as per a recent study by the Clean Air Task Force. We intend to use our land, mineral and technical resources for decarbonization and emission reducing projects, which we believe will help the state in its energy transition plans. CRC intends to play a significant role in the CCS decarbonization space. Within CRC operated assets, we have identified up to 1 billion metric tons of permanent CO2 storage, which would allow us to store approximately 20 million metric tons per year for 50 years. We filed a permit for an area called A1A2 at Elk Hills, which has a storage capacity of up to 10 million metric tons for permanent sequestration. We are also targeting a permit filing for an area called 26R in the third quarter of this year, with permanent storage capability for up to an additional 30 million metric tons of CO2. We anticipate this project will participate in the California incentives through the LCFS credits as well as benefiting from the 45Q federal tax credits. The combination of these incentives will provide for an economic CCS project.

Scott Hanold, Analyst

Thanks for the congratulations on this ESG perspective. It's certainly good to see you guys pushing this forward. If you could help me just step back, and I think for investors and myself, the big question is like what is the value of this ESG? If you could provide some numbers around the Carbon TerraVault I, like how much capital would go into that, and what is the output on credit?

Mark McFarland, President and Chief Executive Officer

Yes, sure Scott. First of all, let me talk about what we're doing with the project, okay, which is TerraVault I. We're making the permit applications for both A1A2 and we will also do so for 26R. The revenue opportunity by generating LCFS credits and 45Q tax credits all provide a revenue stream. We believe that while there are upfront costs associated with capture technology, the revenue from these incentives in California makes it economic. We don't have full project outlined in terms of value yet, but we're working on that as our next step. We continue to advance the CalCapture projects, but it has a different set of economics than the CCS project.

Francisco Leon, Executive Vice President and Chief Financial Officer

If I can just add, so the Carbon TerraVault I project is sized for 40 million metric tons. Our initial estimates are targeting an injection rate of 1 million tons per year.

Chris Gould, Chief Sustainability Officer

We have extensive history on these wells from these reservoirs from operating them. We believe that we can leverage that data to make assessments regarding CO2 storage capabilities.

Jay Bys, Senior Vice President

In the case of SunPower for behind-the-meter projects, we're looking at a PPA structure where we are the off-taker enjoying benefits such as lower utility costs.

Eric Seeve, Analyst

Congratulations on a terrific quarter. A couple of quick questions, in terms of the electricity business and the infrastructure or trading business, what should investors expect for gross margin for those segments for the remainder of the year?

Francisco Leon, Executive Vice President and Chief Financial Officer

Based on what we saw in the second quarter, we anticipate a similar performance in both the electricity business and infrastructure optimization for the remainder of the year.

Mark McFarland, President and Chief Executive Officer

Thanks for your interest and participation on today's call. We look forward to discussing our sustainability and CCS projects further in the fall. Thank you.

Operator, Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.