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California Resources Second Quarter 2022 Results

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   |    Wednesday,August 10,2022

California Resources Corp. reported second quarter 2022 operational and financial results.

The company also announced the formation of a joint venture with Brookfield Renewable, creating a carbon management partnership focused on carbon capture and sequestration development.

Brookfield JV

Brookfield has committed an initial $500 million to invest in CCS projects that are jointly approved through the JV. The investment from Brookfield will be allocated through the Brookfield Global Transition Fund ("BGTF"), the world's largest fund dedicated to facilitating the global transition to a net zero carbon economy. Brookfield, together with its institutional partners, will participate in the joint venture through BGTF. The first CCS project designated for development is CRC's 26R reservoir in the Elk Hills Field which was contributed to the partnership at a value of $10 per metric ton, which will be paid in three installments with the last two installments subject to achievement of specific milestones. The initial Brookfield commitment provides CRC with additional capital to advance the Company's carbon management strategy, de-risks its CCS projects and aims to significantly progress the decarbonization of California. The JV is targeting the injection of 5 million metric tons per annum and 200 million metric tons of total carbon dioxide ("CO₂") storage development, aligned with CRC's 2027 goals. Reaching this target would require an estimated $2.5 billion of total capital, and Brookfield could make additional investments of more than $1 billion in the strategic partnership assuming it fully participates in these CCS projects.

The strategic partnership will benefit substantially from CRC's first mover advantage in gaining access to available storage assets in the state of California and Brookfield's knowledge in global clean energy markets. California is a world-leading location for the development of CCS projects, driven by the state's Low Carbon Fuel Standard and Cap-and-Trade programs, together with the federal 45Q tax credit of $50 per ton of CO₂ captured and permanently stored. CRC is currently progressing CO₂ storage project permit applications and represents four out of the five Class VI well project applications active in California.

Mac McFarland, CRC's President and Chief Executive Officer, said: "We are pleased to partner with Brookfield to develop industry leading CCS projects that support California's energy transition. The Brookfield partnership aligns our carbon management strategy with a strong investment partner, bringing significant operational and development expertise to reinforce our efforts. Brookfield's capital commitment also accelerates our carbon management opportunities. It also enables CRC to maintain capital discipline and financial flexibility to achieve our corporate objectives including achieving our Full-Scope Net Zero 2045 goal."

"Transitioning our economy to net zero is a critical global challenge and that means rapidly scaling our available decarbonization technologies," said Connor Teskey, CEO of Brookfield Renewable. "Brookfield Renewable has been a leader in delivering clean energy for three decades and now we see significant potential in the rollout of carbon capture and sequestration technology. Partnering with CRC presents a great opportunity to continue the growth of our CCS business and expand the scope of decarbonization solutions we provide to our customers."

California Carbon Management Partnership Highlights:

• CRC and Brookfield will jointly develop CCS projects in California through created JVs. The JVs will be owned 51% by CRC and 49% by BGTF

• The California Carbon Management Partnership with Brookfield is an important step in CRC's Full-Scope Net Zero 2045 Goal and Carbon Management Strategy. It highlights the value of CRC's expansive CO₂ pore space portfolio while demonstrating the Company's commitment to capital discipline and retaining flexibility for strategic corporate objectives including shareholder returns and investing in the business

• Strengthens CRC's competitive position in CCS deployment with Brookfield's infrastructure investment experience, operating knowledge, and capital allocation. CRC and Brookfield are targeting the injection of 5 million metric tons of CO₂ per annum over the first five years of the strategic partnership

• CRC is committing $2.5 million over the next three years to the Kern Community College District (Kern CCD) and California State University Bakersfield (CSUB) to promote innovation and implementation of energy transition in California

Second Quarter Operational and Financial Results

McFarland commented: "During the second quarter of 2022, CRC continued to deliver strong operational results and shareholder returns. We expect to maintain our 2022 entry to exit net total production after taking into account asset divestitures. We are raising our full year EBITDAX¹ and free cash flow guidance¹ despite cost inflation and other macro pressures. With respect to our shareholder return strategy, CRC returned approximately 134% of its total generated free cash flow¹ back to its shareholders in the form of dividends and share repurchases. The combination of our strong financial results coupled with ongoing capital investment and shareholder return strategies demonstrate our balanced commitment to our stakeholders.

"Given prevailing market conditions, we are raising our adjusted EBITDAX¹ and free cash flow¹ guidance, and expect to continue our robust shareholder returns despite inflationary cost pressures. Further, the strategic partnership with Brookfield advances our carbon management energy transition efforts and provides increased capital flexibility with which we expect to pursue our overall corporate objectives and deliver on our financial goals and sustainability targets."

Primary Highlights:

• Raising full year 2022 adjusted EBITDAX¹ and free cash flow¹ guidance and reaffirming full year 2022 total production guidance of 91 to 94 thousand barrels of oil equivalent per day
• Investing approximately $13 million in natural gas assets located in the Sacramento Basin and the Buena Vista field to focus on quick and high impact workover opportunities
• In July 2022, CRC's fifth drilling rig began operations at the Wilmington Field
• Repurchased 2,255,445 common shares for $96 million during the second quarter of 2022; repurchased an aggregate 9,136,836 shares for $360 million since the inception of the Share Repurchase Program through July 31, 2022 for an average price of $39.34 per share
• Returned $193 million in total shareholder returns to investors throughout the first half of 2022, 34% more than the total free cash flow¹ generated during the same period
• Declared a quarterly dividend of $0.17 per share of common stock, totaling $13 million payable on September 16, 2022 to shareholders of record on September 1, 2022, with subsequent quarterly dividends subject to final determination and Board approval

Financial:

• Reported net income of $190 million, or $2.41 per fully diluted share. When adjusted for items analysts typically exclude from estimates including mark-to-market adjustments and gains on asset divestitures, the Company's adjusted net income¹ was $89 million, or $1.13 per fully diluted share
• Generated net cash provided by operating activities of $181 million, adjusted EBITDAX¹ of $204 million and free cash flow¹ of $83 million
• Ended the quarter with $324 million of cash on hand, an undrawn credit facility and $740 million of liquidity²

Operations:

• Produced an average of 91,000 net barrels of oil equivalent per day (Boe/d), including 54,000 barrels of oil per day (Bo/d), with capital expenditures of $98 million during the quarter
• Operated three drilling rigs in the San Joaquin Basin and one drilling rig in the Los Angeles Basin; drilled 46 wells (42 online in 2Q22)
• Operated 33 maintenance rigs

Joint Venture Overview

The carbon management partnership will involve developing both infrastructure and storage assets required for CCS projects in California through newly created joint venture entities, Carbon TerraVault JV HoldCo, LLC ("HoldCo"), Carbon TerraVault JV Storage Company ("StorageCo") and Carbon TerraVault JV Infrastructure Company, LLC ("InfraCo").

StorageCo will build, install, operate, and maintain CO₂ storage facilities. CRC has contributed the storage rights in the 26R storage reservoir in the Elk Hills field to StorageCo. Brookfield has acquired an indirect 49% interest in StorageCo at an implied value of $10 per metric ton of permitted capacity, payable in three installments for a total consideration of $137 million. The first installment of $45.7 million was funded at close. The second and third installments are due upon completion of certain pre-agreed milestones related to the permitting process with the EPA and final investment decision. Future storage projects for Brookfield's initial commitment will be contributed on the same terms and milestones.

InfraCo will build, install, operate, maintain CO₂ capture equipment and transportation assets, and provide funding as projects develop. StorageCo and InfraCo are wholly owned by HoldCo.

2022 Production Guidance and Capital Program Update³

CRC's capital program is dynamic in response to oil market volatility and focused on maintaining oil production and strong liquidity and maximizing free cash flow. CRC is increasing its 2022 total capital program to a range of $380 to $410 million from $340 million to $385 million. CRC increased its 2022 capital program for inflation and these cost increases could also impact its capital program in 2023 and beyond. Additionally, in response to the continued strong commodity environment, CRC is adding to its workover program for natural gas assets located in the Sacramento Basin and the Buena Vista field. Finally, CRC has increased its capital program for its carbon management activities.

This level of expected spending is consistent with CRC's strategy of investing up to 50% of its operating cash flow back into CRC's oil and gas operations. Following the joint venture with Brookfield, CRC anticipates that a portion of the operating cash flow previously designated for advancing decarbonization and other emission reducing projects will now be available for other corporate purposes, such as shareholder returns and other strategic opportunities (see a summary of our Business Strategy in Part I, Item 1 & 2 - Business and Properties in CRC's 2021 Annual Report).

The delay in the Kern County EIR litigation (see Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Regulatory Update in the Form 10-Q for the quarter ended June 30, 2022 for additional details on Kern County EIR) led to a change in CRC's drilling program which favors a higher natural gas to oil ratio. Therefore, CRC's 2022 oil production guidance is expected to be negatively impacted by approximately 1,000 Bo/d from this change as well as for 1,200 Boe/d for PSC. CRC's 2022 total production guidance remains consistent with previous expectations in the range of 91 to 94 MBoe/d.

With this capital program, and when adjusted for asset divestitures, production-sharing contracts (PSC) effects and the previously discussed Kern County EIR driven change in well mix, CRC expects to modestly grow oil production from entry to exit and is maintaining its total net production guidance. During the second half of 2022, CRC plans to run five drilling rigs in the Elk Hills, Buena Vista and Wilmington fields. In July 2022, CRC's fifth drilling rig began operations at the Wilmington Field.

In addition, CRC is raising its free cash flow¹ and adjusted EBITDAX¹ guidance by 10% and 2% at the midpoint, respectively, to $365 to $450 million and $895 to $960 million.

CRC is also raising its operating cost guidance to $725 to $755 million from $680 to $720 million due to inflation, change in well mix and higher natural gas and electricity prices.

Adjusted G&A guidance increased by $15 million to $185 to $200 million due primarily to wage and cost inflation as well as increased headcount as we develop our carbon management business.