California Resources Corporation (NYSE:CRC) Q4 2023 Earnings Call Transcript
California Resources Corporation (NYSE:CRC) Q4 2023 Earnings Call Transcript February 28, 2024
California Resources Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the California Resources Corporation Fourth Quarter and Year End 2023 Conference Call. [Operator Instructions] 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: Welcome to California Resources Corporation’s fourth quarter and year end 2023 conference call. Prepared comments today will come from our CEO, Francisco Leon; and our CFO, Nelly Molina. Following our prepared remarks, we will all be available to take your questions. Please limit your questions to one primary and one follow-up. Our remarks today include forward-looking statements based on current expectations. Actual results may differ materially due to factors described in our earnings release and in our SEC filings. We undertake no obligation to update these statements as a result of new information or future events. We will also discuss our pending merger with Aera. We encourage you to read our merger proxy statement when available because they will contain important information.
Copies of this and other relevant documents will be available free of charge on our website and on the SEC’s website. Additional information about the individuals participating in our proxy solicitation such as our directors and officers and their interests, will be provided in our merger proxy statement. We have also provided information reconciling non-GAAP financial measures discussed today to the most directly comparable GAAP financial measures on our website as well as in our earnings release. I will now turn the call over to Francisco.
Francisco Leon: Thank you, Joanna. Welcome, everyone, and thanks for joining us. I realize, we just held a call about 2 weeks ago when we announced our exciting agreement to merge with Aera Energy. So we will keep our comments relatively brief, but we do have some important information to share with you. We will cover three topics today. First, we will summarize our 2023 results and how our strategy created significant value to shareholders. We took decisive steps to strengthen our asset base, lower our costs and grow our carbon management business. These steps position us to continue to build value in 2024 and beyond. Second, we will cover an update on our CCS business, real estate portfolio and merger with Aera. Lastly, we will summarize our 2024 outlook and steps it will take to deliver another year of strong results.
Let’s talk about 2023. We accomplished a lot over the last year. Our E&P operations had a strong year with a low base decline, which we achieved by deploying less capital than we had forecasted. Our team continued to find new and innovative ways to reduce cost and enhance margins. We accomplished these things with a continued focus on safety. In 2023, the team achieved the company’s lowest total recordable incident rate, excluding the period during COVID. Our carbon management business continued to build for the future as we reach first-mover milestones, such as the EPA’s release of the state’s first Class VI permits for CCS that will accelerate the decarbonization of California. In addition, the California direct air capture hub, in partnership with leading DAC technology companies, such as Climeworks and Avnos were selected for DOE funding.
We continue to prove that CRC is a different kind of energy company. We have a quality asset base with oil and gas fields that have low declines, which, coupled with strong realizations, allow us to generate meaningful free cash flow. This is a powerful combination, allowing us to maintain annual production levels using about half of our discretionary cash flow. This means the other half can be used to maintain our strong balance sheet and also return cash to investors. Over the last 3 years, we have generated $1.25 billion of after-tax cash flows, of which we returned over $750 million to shareholders, while also building a strong cash position. Our merger with Aera, once completed, will further strengthen these cash generation capabilities and differentiate the CRC value proposition from peers.
During 2023, we launched an initiative to reduce cost and streamline operations across the business. We achieved about $65 million in sustainable annual run rate cost savings. As we look ahead, we will remain focused on managing our existing cost structure and continuous improvement of our operations. CRC has proven its ability to successfully operate in California to help the state accomplish its goals. There is no better example than our anticipated combination with Aera. Our transaction will create a stronger enterprise to scale, complementary fit, and the potential for $150 million of annual synergies with upside, which we will deliver within 15 months post-close. The merger with Aera will reduce the company’s breakevens and put us on stronger footing to compete against out-of-state and out-of-country suppliers, which is good for California’s local energy supply, and very importantly, the environment.
With Aera, we more than doubled our premium for space and we’ll be better positioned to decarbonize hard-to-abate sectors for the economy as well as to capture our own emissions. Our increased pore space capacity will make us the partner of choice. We are confident we will sign additional projects from both brownfield and greenfield to rapidly expand our carbon management business in the San Joaquin Basin, as well as in other parts of the state. In 2023, we submitted EPA Class VI permit applications for 2 new reservoirs, CTV IV and CTV V, adding an incremental 51 million metric tons of CO2 storage capacity. These storage reservoirs are strategically located in Northern California in proximity to major emission sources. Throughout 2023, we advanced 5 greenfield and 1 brownfield projects that added 860,000 metric tons per year of CCS.
All of these projects were our proposed CTV clean energy park at Elk Hills and 2 were in Northern California. This week, the EPA and Kern County will hold a final hearing for our 26R draft permit. Over the past 2 years, the team has been carefully preparing for this event, and we’re excited about the economic, social and environmental benefits it could bring to California. Once we receive the final permit for the 26R reservoir, we plan to make a final investment decision on our previously announced pre-combustion capture project at our Elk Hills cryogenic gas processing plant, with expected annual injection of 100,000 metric tons of CO2. This will be CRC’s first CCS project, and will enable an almost 7% reduction in carbon emissions intensity from the Elk Hills power plant and pave the way for the first injection of CO2 by the end of 2025.
Receipt of Class VI permits for 26R will also advance our Elk Hills hydrogen project. This project will provide nearly 65 tons per day of clean hydrogen, and CRC will sequester over 200,000 metric tons of CO2 per year at CTV I. CRC and Brookfield will continue to evaluate a potential equity investment in this project. We look to FID this project in the second half of 2024. We have other CCS accretive deals in the works and look forward to sharing further updates later this year. Before I hand it over to Nelly to cover financial results, let me give you an update on our real estate portfolio. I’m happy to announce that we have entered into an agreement to sell a 0.9 acre parcel, known as Fort Apache for about $10 million to a local real estate developer.
Recently, we finished plug and abandonment operations on 6 wells and remove some surface infrastructure, which cost us about $2 million. This transaction provides a good indication of the potential value of the Huntington Beach Field. As many of you know, we have about 90 acres located along a 1-mile track on Pacific Coast Highway at Huntington Beach. There, we operate a mature oil field that produces about 3,000 barrels per day. We plan to permanently plug and abandon about 48 of the 350 or so idle and active wells during 2024. As we remediate the property, we will continue to advance rezoning, reentitlement and other due diligence to prepare this unique acid for sale down the road. There are additional details in today’s deck. And now I’ll hand it over to Nelly to cover financial results.
Nelly?
Nelly Molina: Thanks, Francisco. Our 2023 financial results exceeded expectations with higher-than-expected free cash flow, a solid balance sheet with ample liquidity and a near zero leverage ratio at year-end. We have carefully balanced our cash flow priorities, using capital discipline to maintain a strong balance sheet and sustainable cash returns to shareholders. In 2023, our reservoirs performed exceptionally well with entry to exit gross total production declining approximately 6%, in line with our initial expectations. This was made possible with lower than initially expected capital of $185 million, demonstrating an improved capital efficiency of our operations. The average net production for the year was 86,000 BOEs per day, with oil comprising 60% of volumes.
For the year, we delivered $653 million in cash flow from operations, and $468 million of free cash flow. These strong financial results allowed us to reduce debt by $55 million in the second half of the year. We implemented $65 million in annual run rate savings in 2023 through our business transformation initiative, which will be reflected in our 2024 results. We will continue to prioritize cash returns to shareholders and a combination with Aera enhances this ability. In 2023, we returned nearly half of our free cash to shareholders. Over the last 3 years, a total of $813 million or 65% of total free cash flow generated was returned to buybacks, dividends and repurchase debt. We recently increased the authorization under our share buyback program by nearly 25% to $1.35 billion and its extended term through the end of 2025.
Upon closing of the Aera merger, we intend to raise our dividend once again. Now, let me quickly summarize our fourth quarter results, which were in line or better than the preliminary results we released in early January. We generated $65 million in free cash flow and adjusted net income of $67 million or $0.93 per diluted share. Our strong quarterly results were driven by lower operating costs and higher net margin from power sales. Fourth quarter production averaged 83,000 BOEs per day, and oil averaged 50,000 barrels per day. Non-energy costs were below expectations, reflecting a partial effect of the savings we actioned last year as part of our business transformation initiative efforts to improve margins. We also completed a $35 million sale of non-operated interest around Mountain, which had an associated reduction of about 900 barrels per day.
We ended the year with nearly $1 billion in liquidity, and about $500 million in cash. We are very pleased with the exceptional 2023 results, the strong foundation of our balance sheet, and the trajectory of the business as we look into 2024, expanding our portfolio and accelerating value. Next, Francisco will talk about outlook for next year.
Francisco Leon: Thanks, Nelly. Before opening the call to take your questions, I want to quickly discuss our 2024 outlook. For 2024, we have again prioritized free cash generation and expect total capital investments of $320 million in the midpoint of our guidance range or about half of our expected cash flow from operations. In 2024, at $80 Brent and $3.25 NYMEX, and using our current capital plan, the business is expected to generate approximately $280 million in free cash flow. This will support returns to shareholders through our dividends and our opportunistic share buyback program. In addition, we will continue to reduce debt and maintain our strong balance sheet. With the cost savings achieved to-date, non-energy operating costs are expected to be nearly 6% lower year-over-year.
We expect full year production to average around 80,000 BOEs per day, with about 60% oil. This plan assumes a 4 drilling rig program starting in the second half of 2024, and anticipates a successful resolution of the current Kern County EIR litigation and resumption of a normalized level of permit approvals that support a multiyear program. In case, Kern County EIR litigation takes longer than expected and CRC is not able to receive drilling permits, we plan to run a 1-rig program with a $200 million to $240 million total capital program, and an expectation of a 5% to 7% decline, similar to our ‘23 program. To be clear, we will only increase activity to 4 rigs if permitting process improvement supports a multiyear drilling program. In the near term, we are laser-focused on getting the Aera merger closed.
We expect that the transaction will close in the second half of the year. We have provided some detailed information in our deck for stand-alone CRC for the first quarter and full year. CRC is incredibly well positioned today and our anticipated combination with Aera will make us financially stronger and more resilient. Our conventional energy business has important skill today, and our people are finding innovative ways to safely enhance margins and supply California with local and lower carbon energy. We are excited about the growth prospects we see on the horizon through our carbon management business, and our leadership role in accelerating the decarbonization of California. Thanks for your time today and your investment in CRC. Operator, please open the lines for questions.
Operator: [Operator Instructions] The first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.
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