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Edited Transcript of CRC earnings conference call or presentation 1-Nov-18 9:00pm GMT

Q3 2018 California Resources Corp Earnings Call

Los Angeles Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of California Resources Corp earnings conference call or presentation Thursday, November 1, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marshall D. Smith

California Resources Corporation - Senior EVP & CFO

* Scott A. Espenshade

California Resources Corporation - SVP of IR

* Todd A. Stevens

California Resources Corporation - President, CEO & Director

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Conference Call Participants

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* Gregg William Brody

BofA Merrill Lynch, Research Division - MD

* Jacob Alexander Gomolinski-Ekel

Morgan Stanley, Research Division - Analyst

* John Powell Herrlin

Societe Generale Cross Asset Research - Head of Oil & Gas Equity Research and Equity Analyst

* Kaleinoheaokealaula Scott Akamine

BofA Merrill Lynch, Research Division - Research Analyst

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Sean M. Sneeden

Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist

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Presentation

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Operator [1]

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Good day, and welcome to the California Resources Corporation Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please also note this event is being recorded.

I would now like to turn the conference call over to Mr. Scott Espenshade, Senior Vice President, Investor Relations. Sir, the floor is yours.

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Scott A. Espenshade, California Resources Corporation - SVP of IR [2]

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Thank you. I am Scott Espenshade, Senior Vice President of Investor Relations and Land. Welcome to California Resources Corporation's Third Quarter 2018 Conference Call. Participating on today's call is Todd Stevens, President and Chief Executive Officer of CRC; and Mark Smith, Senior 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 in our Investor Relations section on our website, www.crc.com. These slides provide additional insights into our operations and third quarter results plus additional information. Also, information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures is available in the Investor Relations portion of our website and in our earnings release.

Today's conference call contains certain projections and other forward-looking statements within the meaning of federal security laws. These statements are subject to the risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements. Additional information on factors that could cause results to differ is available in the company's 10-Q, which is being filed later today. We'd ask that you review it when available and the cautionary statement in our earnings release.

A replay and transcript will be made available on our website following today's call and will be available for at least 30 days following the call. As a reminder, we have allotted similar time for earnings Q&A at the end of our prepared remarks and would ask the participants limit their question to a primary question and a follow-up.

I will now turn the call over to Todd.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [3]

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Thank you, Scott, and thank you to everyone for attending today's earnings call. CRC remains laser focused on our strategy to capture the full value of our asset portfolio. Our workforce once again delivered strong performance in the third quarter, growing high Brent-based realizations and generating substantial free cash flow. This continues to underscore the power of our diverse asset portfolio and integrated infrastructure that consistently delivers value and enables us to strengthen – further strengthen the balance sheet.

Our strong track record of doing what we say we're going to do is clear. We drastically cut capital investments in the depths of the downturn, far more than most of our peers to prudently protect and preserve value. Now we are steadily returning to a sustainable level of investment. Through disciplined capital allocation, we effectively arrested our production declines and are moving ahead on a path of value-driven growth. We intend to continue to use our capital wisely.

Our Brent-based realizations before hedges remained strong and have continued to realize over 100% of WTI for the past five quarters. We've delivered on our focus to control the controllables as per unit production costs flattened and assuming the midpoint of guidance are set to decline further in the fourth quarter.

These efforts to maximize revenue and control costs combined with our strong realizations not only enhanced margin performance but delivered core adjusted EBITDAX of $400 million in the third quarter. If we analyze this level of quarterly core adjusted EBITDAX, one would see a leverage ratio approaching our target range of 2.5 to 3 times.

As Mark will discuss further, this drives home CRC's strategic position as we continue our work to simplify the balance sheet and de-lever. We expect continued balance sheet strengthening into 2019, utilizing a targeted 10% to 15% of discretionary cash flow. We will continue to be opportunistic in taking actions that bring forth value and de-risk the enterprise.

Our ability to consistently deliver lies in CRC's value-driven approach, which was the theme of our recent analyst day. This starts with our VCI metric, which is the basis of our capital investment decisions and ensure the effective capital allocation to the highest value projects in our portfolio. We are set to deliver smart growth and real value through disciplined capital allocation that provides for enhanced returns over the full commodity cycle. In this way, we stand out amongst the competition.

As a result, our portfolio of conventional assets competes favorably with shale plays in other states delivering strong and differentiated value. Through a disciplined capital and technology application to our robust inventory, CRC can invest across our portfolio while simultaneously driving efficiencies and enhancing margins. At the same time, we benefit from an unwavering focus on safety and operational excellence and an entrepreneurial mindset that encourages new thinking and improved processes throughout the organization.

We also recently announced our midyear audited reserves of 731 million barrels of oil equivalent and a PV-10 value at $75 Brent of approximately $10 billion. We believe this highlights a meaningful market discount to our net asset value. These reserve adds were delivered at a F&D cost below $10 as we have done each year since our spin. We anticipate even more reserve upside from our activity in the remainder of 2018.

Our prolific reserves in leading mineral ownership feed our deep inventory of actionable projects. CRC has used joint ventures as a force multiplier to accelerate value from this inventory and as a strategic lever to live within cash flow. Both from a development and exploration front, our JVs create value by providing CRC with flexibility, accelerating cash flow and de-risking our portfolio. Our partners continue to show their support through their ongoing investment. In this price environment, our development JVs will revert to CRC in about 12 to 18 months, after the last dollar is invested and will significantly boost cash flow. It's important to note that assuming future prices remain at or around current levels, we expect this reversion to occur in advance of our major debt maturities.

On the growth side, our exploration efforts have been exceptional, delivering a commercial success rate in excess of 50% since we restarted drilling in our high graded exploration portfolio around midyear 2017. We recently signed another two exploration joint ventures. With these latest transactions, we have now attracted investment from multiple companies into a total of nine exploration prospects since midyear 2017. This strong execution on the JV front further validates our robust exploration inventory and has generated over $200 million of net PV-10 value from approximately $17 million of net CRC investment.

On the development side, we also executed a new small joint venture in the Rio Vista field with a California E&P who has performed well in the Sacramento basin.

Production was in line with expectations for the third quarter at 136,000 BOE per day, up 6% from the prior-year period. For the fourth quarter of 2018, we expect to further ramp in production to range between 136,000 and 139,000 BOE per day, firmly establishing a trend of sustainable growth. We are currently running 10 rigs and 11 equivalent capital work over rigs.

As we lean into 2019, we will remain vigilant on safety. It is our top priority to see that our workforce returns home to their families each day in the same condition they arrived at the job site.

As we stated in the analyst day, production growth will result from our relentless pursuit of value as we continue to ensure effective and impactful capital allocation. We expect to enter 2019 at an investment rate that will keep us in line with cash flow prior to working capital while also targeting 10% to 15% of our discretionary cash flow towards balance sheet strengthening.

We continue to focus on driving operational excellence throughout our business. Synergies at Elk Hills have far surpassed initial estimates and continue to materialize. We estimate that we have recognized approximately $16 million in cost savings and revenue enhancements this year to date by streamlining operations and consolidating infrastructure. On an annualized basis, these synergies amount to approximately $34 million, which is well ahead of our initial targeted $20 million over 24 months.

This is in addition to recognizing $15 million of capital savings associated with such items as the transfer of compressors to Buena Vista and restarting a pipeline among other activities. We also look forward to the benefits that will come by connecting other areas of the large Buena Vista field to the Elk Hills power plant next year. This will enable us to leverage our sizable infrastructure to expand delivery of lower-cost Elk Hills' electricity.

As we work to capture the full value of our portfolio and strengthen our balance sheet, we believe that our valuation should be more reflective of our net asset value. Strengthening our balance sheet continues to be a central focus and long-term objective as we work to approach investment-grade territory over time. We expect to focus our efforts primarily on de-leveraging by growing EBITDAX while also evaluating asset monetization's and other diverse opportunities to achieve the capital structure we want. We successfully employed in all of the above approach to manage our capital structure through the downturn and reduced debt by approximately $1.7 billion. Year to date, we have repurchased $177 million of aggregate, principal of our debt. We will continue to be opportunistic and target debt reduction, prioritizing our notes and term loans with the highest coupons for possible refinancing.

Our goal is to return to the classic structure of a revolving credit facility with our banks, in combination with several tranches of unsecured notes. We believe that we are on a path to make this happen. The increasing financial flexibility we foresee reflects the strength of our portfolio and inventory as well as the trajectory of our margin expansion efforts as CRC continues to execute on the significant growth opportunities that lie ahead.

For more on strengthening the balance sheet as well as details on our third quarter 2018 performance, I'd like to now turn the call over to our CFO, Mark Smith.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [4]

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Thanks, Todd. CRC has a world-class portfolio of assets as characterized by high value projects, ready for execution across a broad range of product price scenarios. Our disciplined capital allocation is a core strength that works with our inherent portfolio flexibility to deliver strong and differentiated value through the cycle. This dynamic was clearly evident in our performance for the third quarter of 2018. We delivered 6% production growth year over year and improved margins while core adjusted EBITDAX came in at the highest level since 2014. All of these gains speak to the success of our strategy and value-driven approach.

We generated core-adjusted EBITDAX of $400 million, recall this was before the effective hedges. It is aided by healthy realizations of 97% of Brent and increasing production. Our production remains on a solid growth trajectory. We believe this truly highlights the strength of CRC's cash generation capabilities throughout the cycle as well as our business model which provides significant torque to respond quickly to increasing prices.

We also continued to demonstrate our capital discipline, generating free cash flow of $17 million for the first nine months of 2018 before working capital use. Additionally, our quarterly and year-to-date performance demonstrated our earnings potential, which will be further supported by the transition of our 2019 hedge portfolio and as we increasingly translate higher prices to improve bottom line results.

As Todd mentioned, we continue to work towards simplifying the balance sheet and reducing our fixed charges. As we moved through the cycle over the past few years, we were thoughtful and made value-based decisions. We didn't sell assets at fire sale prices. Rather, we executed on a series of transactions with much more favorable economics and long-term benefits. As a result, we introduced complexity into our capital structure. Now we're back in a more favorable pricing environment and focused on delivering a near investment-grade balance sheet over time to complement our investment-grade asset base.

We're positioning ourselves to capitalize on our momentum and allocating our capital in a disciplined manner to reduce our leverage, to simplify our balance sheet, to increase our financial flexibility, and to be opportunistic. We're also committed to dedicating 10% to 15% of our discretionary cash flow to strengthening our balance sheet.

We made good progress against our financial goals during the third quarter of 2018. As we noted last quarter, we began discussions with our banks to relax certain restricted provisions and have, as a result, secured our eighth amendment. This reinstates an approximate $300 million to leveraging basket previously built from the Ares joint venture and allows for a repurchase of debt at any discount without a time limit. Accordingly, we repurchased $31 million of our second lien notes as well as a small amount of our 2024 notes during the third quarter. Year to date, we've repurchased $177 million in aggregate useful amount for $149 million.

Turning to capital investments, we invested $196 million in the third quarter of 2018, which was below our previous estimate. The majority of that amount or $158 million was internal capital, focused on CRC-only projects. The remaining $38 million of capital was funded by our partners and dedicated towards our joint venture programs. This total capital supported a 10 rig program, 2 rigs dedicated to steamfloods, 4 to waterfloods, 2 to conventional primary production, 1 to unconventional production, and 1 focused on exploration. We drilled 59 wells with internally-funded capital and 36 wells with JV capital during the third quarter.

Turning to production, for the third quarter of 2018 we produced an average of 136,000 BOE per day, up 6% over the prior-year period and coming in at the midpoint of our guidance range. Thanks to our effective capital allocation and increased overall investment, we've arrested the production decline and we're demonstrating our growing and sustainable production profile. We're on track to build upon this momentum with value accreted production growth, which we expect to continue into 2019. As detailed in prior quarter, the impact of production sharing contracts or PSCs resulted in a 1,300 BOE per day negative effect compared to the prior-year period. This was due to increasing prices, slightly offset by the higher capital we invested during the quarter.

We continue to benefit from favorable pricing and healthy realizations. Oil differentials registered a strong 97% of Brent before hedges and 84% after the effect of hedges. Oil realizations reflected ongoing strong demand for California crude, which is used to optimize California refinery yields as well as continued decreases in negative supply. NGL realizations came in at the high end of guidance at 60% of Brent. This was driven by strong local markets and pricing, supported by continued exports. Natural gas realizations also came in at the high end of guidance at 110% of NYMEX, which reflected extremely warm temperatures with pricing swings magnified by limited third-party storage. Additionally during the third quarter, our marketing team leveraged our portfolio, capacity, and infrastructure in order to rapidly supply additional needed natural gas into the California market, which is hampered by restraints and market dislocations. This can be seen in our other revenue and other expense line items, which provided a net margin of $25 million.

Production costs for the third quarter of 2018 were $236 million or $18.92 per BOE, in line with guidance. Per unit costs were down slightly for the third consecutive quarter despite elevated energy costs in the summer months. We like the trend. We see unit cost decreasing further as we move forward. Excluding PSC effects, third quarter production costs would have been $17.55 per BOE.

As typically is the case, we saw our add (inaudible) taxes increases with the new fiscal year for many of the counties in which we operate due to increasing reserve valuation, largely as a result of improved commodity prices. Our property taxes increased to $26 million, reflecting a 13% sequential increase over the second quarter of 2018. We expect this level to hold roughly flat until next year's third quarter.

For the third quarter of 2018, we reported net income of $66 million, attributable to our common stock or $1.32 per diluted share. Adjusting for unusual and infrequent items that are generally excluded from core earnings by investment analysts, such as noncash derivatives, our net income would have been $41 million or $0.81 per diluted share.

As I mentioned, our core adjusted EBITDAX for the third quarter of 2018, which excludes cash hedge payments on settled derivatives and cash settled stock-based compensation expense, hit a multiyear high at $400 million. As reported, adjusted EBITDAX for the third quarter of 2018 was $308 million, up 65% from the prior-year period and up 26% sequentially. Similarly, the adjusted EBITDAX margin increased to 38% and was flat with the second quarter of 2018. Excluding accounting changes, the third quarter margin would have been 39% compared to the 36% in the prior-year period. This demonstrates the type of performance we're targeting. With a focus on oil and increasing margins, we expect EBITDAX growth in the mid teens or approximately twice the rate of oil production growth.

As we've noted previously, we've changed the underlying instruments in our hedge program to puts and put spreads. Now almost half of our 2019 crude oil production is protected at an average Brent price of approximately $71 per barrel and our positions allow for full upside participation for significantly the majority of our 2019 production.

For additional perspective, annualizing our quarterly core adjusted EBITDAX of $400 million and comparing to our total debt level of roughly $5 billion, one gets a result in a leverage ratio approaching three times. This gives one a picture of what our business looks like and how our balance sheet is positioned on a forward-looking basis, without the overhang of hedges and even assuming no additional improvements from the business as it stands today.

As we announced at our analyst day, our midyear audited reserves were 731 million BOE. This is nearly on par with where we were at our spin, despite prices being 25% lower. It also reinforces the optionality in our portfolio and highlights the strategic decisions we made through the downturn to preserve and enhance our value. We added 110 million BOE in total, of which 60 million of the increase was attributable to the Elk Hills acquisition, about 20 million to reserve adds, and 30 million due to the increased prices less production. This reflected an F&D below $10 per BOE, excluding price revision. With our continued success, we expect our F&D costs to continue to improve.

I want to note that our banks recently reaffirmed our borrowing base at $2.3 billion and we believe this is yet another show of confidence in the strength of our underlying assets and the way in which we've been managing the business. We continue to execute our plan and to balance our de-leveraging goals with high VCI opportunities within our portfolio. To evidence this, a look at our third quarter 2018 year-to-date program shows that we delivered a fully burdened capital program, including corporate overhead, at flat $75 Brent price with a VCI of 2.2 and an IRR of 40%. As Todd said, we're focused on simplifying our balance sheet over time. We believe there's a meaningful value creation opportunity here as we work to lower our fixed charges and improve our valuation through a lower average cost of capital.

We remain value driven and believe our asset base can deliver sustainable oil production growth while also continuing to strengthen our financial position. We're excited about the outlook for the remainder of 2018 and how we're positioned for 2019. Please note that we provided detailed analysis of adjusted items and fourth quarter 2018 guidance information in the attachments to our earnings release as well as in our supplementary earnings presentation.

I'll be happy to take any questions you may have during the Q&A portion of the call. But thanks and I'll now turn the call back over to Todd.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [5]

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Thanks, Mark. As we complete 2018 and lean into 2019, CRC is pursuing the most robust operating and capital plan since the time of our spin. These plans are centered on value-driven production growth, margin expansion, and strong cash flow generation. We are investing to bring forward our large inventory to enhance activity levels into 2019. Production growth will be the result of CRC's ongoing pursuit of value while we deploy our deep operating expertise to capture the full potential of our investment-grade assets and steadily move toward a near investment-grade balance sheet.

We're excited about finishing 2018 on a strong note. We have effectively transitioned this year from a protect-and-preserve mode into sustainable growth and disciplined investment plans that are well positioned to deliver value appreciation for our shareholders.

We now welcome your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have will come from Kaleinoheaokealaula Akamine of Bank of America.

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Kaleinoheaokealaula Scott Akamine, BofA Merrill Lynch, Research Division - Research Analyst [2]

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Todd, I think one of the more understated messages from the analyst day is that the capital intensity of the portfolio is changing. For example, at Elk Hills, you're lining up a CO2 recovery project, which will surely require some pre-productive capital. How do you think about managing your capital efficiency with the levers that you have and I'm wondering if facilities and infrastructure are areas that you could put JV capital to use?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [3]

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Definitely, Kale, we actually are studying that very well at this point in time, cause as you know any kind of CO2 project is facility intensive up front and also changing the metallurgy of well bores and those kind of things. So, for us, we think it's a perfect opportunity to potentially joint venture with someone on that kind of project as we look to manage our cash flow and our -- and ultimately our capital intensity of the business.

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Kaleinoheaokealaula Scott Akamine, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Okay, my next question, just on the analyst day you mentioned that 10% to 15% of the cash flow would go back to the balance sheet. Noticed this quarter you repurchased about $30 million of debt. Can you clarify if these funds are a part of that capital allocation strategy and can we expect this allocation to be ratable or opportunistic going forward?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [5]

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I think for us it's really opportunistic and to give you an idea, I think we might have purchased more in the quarter, except that we had a blackout period. So, again, we're going to be opportunistic as we see what we feel like are dislocations in the market, but this is definitely part of our strategy to further strengthen our balance sheet.

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Kaleinoheaokealaula Scott Akamine, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Great. I'll leave it there, guys, thanks.

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Operator [7]

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Next we have Tarek Hamid of JP Morgan.

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Unidentified Analyst, [8]

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Hi, it's actually John in for Tarek. Just wanted to, Mark actually touched upon this earlier but with California gas prices kind of been creeping up lately, I know you mentioned you know seeing constraints, could you guys just talk about where you see prices going heading into winter?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [9]

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Yes, you have these situations where you get a dislocation between city gate and border prices where it's usually on really hot or really cold days. So in July and August, we saw a few weeks that where it was hotter and the demand was higher, so you had orders of magnitude almost difference in price between border and city gate. And because of our -- us being business and having infrastructure and assets associated with that, we were able to capitalize on it and that's why you see the large trading volume. We do think if you have a colder than normal winter, that will be the same type of opportunities that come our way. And this wasn't, like I said, it wasn't balanced through the whole quarter. This is just a few weeks in July and August where we earned that extra income.

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Unidentified Analyst, [10]

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Okay, thanks. Yes, that's very helpful. And then moving over to the capital budget, the increase going into fourth quarter, can you guys just give a little more color in terms of what exactly, what type of work overs or facilities you're going to be investing that capital in?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [11]

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Yes, remember as we talked about this year we were pretty front loaded with facility, so we're more backend loaded with drilling and work over activity. So you'll see it'll be more drilling and work over activity, and we're really trying to, as I said in my comments there, lean into 2019. So we're not -- you know it's not a step change we're trying to gradually ramp into 2019 with the capital program we're expecting there. And so going forward and aligning ourselves with the cash flows and then keeping in mind the 10% to 15% to strengthen the balance sheet and that's all the exercise is. And obviously, if prices move materially down or up, we'll adjust that. But I think if they move materially up, I think we're more inclined to use those funds to strengthen the balance sheet further than we are to invest in the business.

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Unidentified Analyst, [12]

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Okay, so all else equal kind of a similar pace capital spend in '19 as we've seen the last couple quarters?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [13]

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Yes, I think when you look at '19, you have to really be a function of price. So, you know we're planning around a few different price scenarios at this point in time. So, yes, if you look at it and you think prices are going to hold pat here, you can get a feel for where we're at, but you also got to remember we have inclining production as we continue to invest in the business. And also the nature of our production is you don't get the immediate impact of a shale well, you have more of a 6 to 9-month lag until you get peak production. So there's all those factors that come into play when you think about the cash flow coming into the business.

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Unidentified Analyst, [14]

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Okay, okay, no that's really helpful. I appreciate the color. That's all I have. Thank you.

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Operator [15]

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Next we have Sean Sneeden of Guggenheim.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [16]

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Thanks for taking the question. You had, Todd or Mark -- I guess like could you talk a little bit about you know the 10% to 15% of discretionary cash flow for debt reduction. You know when you think about ways to financially accelerate de-leveraging, do you think you have additional mechanisms beyond kind of bond buybacks or further asset sales that are kind of part of the arsenal, if you will?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [17]

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Yes, Sean, I'll give you a quick commentary and then let Mark talk about kind of some of the aspects of what baskets are available and those kind of things. But I think for us it's really again like it was during the downturn, all of the above approach. We'll look at acquisitions, monetization, straight divestitures, look at buying back our debt, even though you know some of the debt is obviously traded up from the depths of the downturn. But with regards to what we can do with specific baskets and how we -- and I think this is the part that's lost on some people just we went from this very simple capital structure. We knowingly complicated it during the downturn. Now we have the opportunity to go back and being simple. I'll let Mark alleviate some of those concerns or talk about it.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [18]

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So, Sean, it's a good question. We've been working with the banks all through this cycle. We purposely went back to them. We built some baskets as a result of some of the transactions that we did before. Those baskets were predicated upon certain usage at certain bond prices and only for a certain period of time. As Todd indicated, you know we had some blackout periods that affected our ability to execute on that. So we went back to the banks and we asked them, look, let's restore $300 million of the basket and let's make where we can execute at any discount, not simply a prescribed discount. And so as we move forward and we look at our discretionary cash flow, we'll be looking at those opportunities as they present themselves as well as other opportunities we might have. And we'll weigh that against our financial position, our liquidity, and we'll be thoughtful about the way in which we execute as we have all along. Does that help?

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [19]

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That's helpful. And just remind me on the basket of the eighth amendment, how much incremental capacity do you guys have left in that? Is it like the 270 or like the kind of 30 million less that you did the quarter?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [20]

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Yes, yes-- I think it's all 300, it's all 300 million of that basket that's -- and then to the extent that again consistent with the amendment to the extent that we had other sales or monetizations of other non-barring based properties, we would continue to build baskets.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [21]

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Got you and I guess just maybe Todd strategically maybe alluded to it in the response there, but when you think about you know the ability for acquisitions to enter into the foray, does that make sense of the method to drive de-leveraging and kind of build size and scale in this environment, obviously it's been a pretty big topic this week in E&P?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [22]

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Yes, I think you know you looked at our acquisition of Elk Hills. It couldn't have been a better one from the standpoint of integrating it and the opportunity to create value. I think for us doing an acquisition just to de-lever doesn't make a lot of sense and we have to do something that we look to create value for our shareholders. We don't want to be down 30% over 2 days like some of our peers. So I think from our perspective, we're really focused on value and if we can't add any value through an acquisition, you know it's not something we're going to really entertain. Doesn't mean we didn't look at everything, but you know it's not something we're going to follow up on if we don't feel like we can really add value there.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [23]

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Got it. That's helpful. And then just lastly, I think return to capital has been a pretty big focus across the sector. When you think about using that as a potential way to return capital to shareholders, is that something that necessitates you guys to be kind of in the 2 to 3 times range, that you guys have kind of outlined before? Or how do you think about kind of in your longer term plan?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [24]

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Yes, I mean since the original spin, when we were in a much different price environment, you know 25%, 30% higher than today, we've said we want to be kind of 2.5, 3 times mid-cycle pricing. And I think you've got to remember we are a commodity business that's cyclical. So, we are -- you could argue about what part of the cycle we're in, but we're not at the bottom anymore. We know that. So for us we want to push and get to that point and do the kind of things we have to do to get there. We have a lot of levers to pull. We'll pursue and look at all those different opportunities to get there. And just like we talked about, Mark and I both, we have a sense of urgency to want to do that and do it right and create the most value for our shareholders. So, yes, it's something we want to do and if we overachieve we'd be fine with that too, but from our perspective we're kind of laser focused on execution and then also de-leveraging the balance sheet over time and strengthening it.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [25]

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Great. That's helpful. Thank you very much.

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Operator [26]

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Next we have Gregg Brody of Bank of America Merrill Lynch.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [27]

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Just some questions on the income statement. I'm just -- I think you alluded to this in your opening comments, but I'm looking at the other revenue and the other expense and it's a larger number and both the revenue and a cost number, but looks like a higher margin. Is that related to what's going on in the power market? What's driving that and how permanent is that?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [28]

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That's from the natural gas, from our marketing and trading group. Again, because we have a business with all the assets and infrastructure associated with it, when there's dislocations in value for natural gas as we saw with the border prices being so materially different than the city gate prices, we were able to take advantage of that a few weeks in July and August and that was, that was really the product of it. And you see that in other revenues and other expenses.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [29]

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Yes, Gregg, just to follow up on that, there was an accounting change that was enacted on a perspective basis. So what you're seeing there is not necessarily a directly comparable period over period. In the prior periods, it was netted and this period it was broken out.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [30]

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I'm just -- I'm just looking versus the previous two quarters of this year.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [31]

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Yes.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [32]

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And looked like quite a -- that is comparable correct?

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [33]

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Yes. That is comparable prior two quarters to it, as Todd said, that opportunity presented or that situation presented itself in the third quarter.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [34]

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And it really is a function of natural gas demand and so it's hot days or cold days is when you have this dislocation.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [35]

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That seems like is that continuing this quarter or is -- I think you mentioned it still is, but I'm curious, not quote the same way.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [36]

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We haven't seen the same huge prices but it is continuing generally.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [37]

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Got it. And then, you know, I know gas is a cost as well for you. It seems like if you take this part out of it, if you take the marketing business out, it's fair to say that any increase in gas cost is being offset by your gassy assets?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [38]

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Yes, we're net long and you got to remember once October ended yesterday, we actually go back to winter electricity rates, which are less too. So if you actually were able to get in and look at quarter to quarter, our controllable operating costs actually declined. And our stuff that's not controllable, which is energy, went up modestly. So you'll see some of that because you know you'll have one month of summer rates and then two months of winter rates. So I think if you were able to get in the details, you'd be able to see that, from a controllable standpoint, we did an exceptional job quarter to quarter even as we grew.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [39]

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That's great. And then I know you had the higher compensation this quarter, which you says -- you highlight as $9 million. I believe it was a higher number last quarter. How should we think about that going forward, considering the change in your stock price?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [40]

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Yes, that's just a mark to market. So it's between two time periods, so it had a stock price at September 30 was around $45. So and then you know the last quarter we had a larger run up in price, so you're going to see more of effect as you mark to market it. And so if our price held today where it was, you'd see it actually go down. If it was that way December 31, but it really is just those two discrete dates, not any average or anything like that.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [41]

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And am I recalling correctly that there were cash payments last quarter associated with that? I mean is that --

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [42]

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No.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [43]

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There were not, it was just--?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [44]

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It's once a year. It was once a year.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [45]

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When did that take place?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [46]

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I think it happens next August, is what I believe.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [47]

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Okay, that's why it showed up last quarter. Got it. Just remember that part. All right that's the -- that's it for me guys. Thank you very much.

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Operator [48]

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Next we have Pavel Molchanov of Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [49]

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Thanks for taking the question. One more on gas, topic that has not historically been as impactful as it is now I suppose. How high would pricing have to be for you to enhance the role of gas activity in your CapEx budget? In other words, you know back at the analyst day you were saying you would be essentially a none event going forward, but you know obviously it's second quarter in a row you're looking at pricing at a premium to Henry Hub, so--?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [50]

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Yes, I think for us it's really 3.50 is one if you looked at the dry gas in the Sac Basin. But, because, you know obviously the associated gas that Elk Hills and elsewhere is, you know, byproduct of oil. But if you want to think about just pure gas economics in the Sac Basin, for us to compete in our portfolio on a standalone basis, I think 3.50 is the one where we'd want to have it there. But it does get more and more intriguing as we keep getting these dislocations with city gate prices as we market it and look at it because any hot or cold days can bring on this kind of issue and we take advantage of it every chance we get.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [51]

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Okay, that's helpful. And then kind of a housekeeping/accounting question. $25 million expense this quarter, non-controlling interest which went up $5 million from Q2 and doubled from Q1. What exactly is that? And how should be model that going forward?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [52]

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I think it's the joint venture payments to Ares and potentially others.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [53]

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Right.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [54]

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It really started in April.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [55]

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And it's going to continue until you get (inaudible).

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [56]

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Will that continue to increase at the rate it's been going or does it level off?

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [57]

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No.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [58]

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No, it's flat now at the April rate.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [59]

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It'll generally level off. It won't increase the same rate, no.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [60]

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Okay. Appreciate it, guys.

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Operator [61]

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And next, Jacob Gomolinski-Ekel.

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Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [62]

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Good evening and thanks for taking the questions. I know historically we had talked about the ability to deploy up to about 1.5 billion of CapEx per year with the current organization and it looks like you're on pace for $800 million for this year. When I look at the G&A this year, looks like it's trending to like $315 million versus last couple years in the $250 million dollar range. So just trying to understand if that ramp in G&A is CapEx driven or what might be driving that G&A increase and how we should be thinking about it on a run rate basis?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [63]

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It's really the stock comp, cause remember we were just talking about the mark to market. So during the downturn, we had two issuance of stock tracking comp that was paid out in cash, so therefore, you have to mark to market each quarter. And those two things vest during -- this is the most material part, during August of 19 and August of 20. But also remember, we added Elk Hills, which added both operating costs and some G&A plus a loss of Copis from Chevron of not staying the operator.

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Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [64]

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Okay, I guess it's just those stock comp is -- a combination of Elk Hills and stock comp is driving that 60 million, more like 70 I guess. What do you think about next year on a more normalized basis, back out the stock, cash--?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [65]

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I can't -- yes, if you back it out you're going to get kind of a flat plus or minus number. And you can talk with Scott or Joanne about that because we have the details behind that for you, but yes, what's drive -- there really is no material rise. It's really driven by our -- this comp that we did during the downturn and the addition of Elk Hills. You got to remember the addition of and the lack of to capture the Copis from Chevron.

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Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [66]

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Yes, no, I'm -- appreciate it. I'm happy to talk to Joanne and Scott. It is like a 30% increase year on year, so I figured it's a little bit more than comp but it sounds like add plus Elk Hills. On the JV front, I mean it would be great, you mentioned a few new ones. It would be great if you could expand a little bit in terms of where those will focus and also sort of what your outlook is for the -- on the JVs going forward. And maybe also wanted to confirm that that $10 billion PV-10 number takes into account all of the JVs or if there's any potential sort of acceleration that you're not getting credit for, just from timing.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [67]

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I believe that takes it all into account at midyear and probably not some of the most current ones. And remember as we talked about, some of those are expiration JVs, which when you think about value add that's a bang for your buck almost immediately after the well is drilled and then the offsets. We're currently drilling development wells around two or three of our exploration discoveries over the last few years. So we're very excited about that opportunity set. But then in addition to our development joint ventures, we're in active discussions with our current partners about extending/amending, doing different things and new partners about new potential joint ventures. So for us it's an important part of what we do because we have such a large amount of inventory, but it does so many things for us as we've said many times. Helps us manage our cash flow, manage our activity and ultimately de-risk our inventory and bring the cash flow forward for our shareholders.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [68]

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Hey, Jacob, this is Mark. I just want to tie back into your question or your last comment that 30% increase year over year. I just want to qualify that if you take a look at our second quarter numbers, you'll see that our absolute levels of G&A and our unit G&A was up year over year and we explained it the same way we've explained it here, stock comp and Elk Hills. But if you look at our G&A on a sequential basis, you'll see that it's come down from -- it's come down sequentially both on an absolute as well as a unit cost basis. So, you know, consistent with the commentary that would be consistent with stock price performance, etc. So, I'd encourage you to take a look at it sequentially and think back on the Elk Hills acquisition and some of the other underlying drivers as opposed to just looking at raw year-over-year number in absolute isolation.

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Operator [69]

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Thank you, sir. The next question we have will come from John Herrlin of Societe Generale.

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John Powell Herrlin, Societe Generale Cross Asset Research - Head of Oil & Gas Equity Research and Equity Analyst [70]

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Got a question for you on the reserves. You were up 113 million barrels from year end to mid year. We talked about 63 million barrels of additions from the purchase of Elk Hills, 23 of you know the E&D. You produced about 11, right, so how much of it is price in terms of the provisions?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [71]

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John, let me look at this a second. We'll check it out. And also remember this year the activity was frontloaded with more facilities than drilling. And we're back end loading more drilling so I think you'll see more upward bias in our reserves from the midyear report to yearend as you look at the activity set. But, it --

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John Powell Herrlin, Societe Generale Cross Asset Research - Head of Oil & Gas Equity Research and Equity Analyst [72]

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It's just an add that's all. Then the next question--

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [73]

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About 50 with price?

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John Powell Herrlin, Societe Generale Cross Asset Research - Head of Oil & Gas Equity Research and Equity Analyst [74]

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On hedges, it looked like you had some roll off for the rest of the year, is that because of your partnership stuff. Did they roll out stuff going forward or--?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [75]

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The hedges we have this year, most of them are calls we sold to buy puts in '16. And then the rest, some of the small hedges were for our partners.

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John Powell Herrlin, Societe Generale Cross Asset Research - Head of Oil & Gas Equity Research and Equity Analyst [76]

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Okay, so that's why they disappeared. They were your partners.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [77]

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Yes and our total price provisions were 50. Just so you know.

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John Powell Herrlin, Societe Generale Cross Asset Research - Head of Oil & Gas Equity Research and Equity Analyst [78]

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That's -- thank you.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [79]

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All right.

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Operator [80]

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I'm showing no further questions at this time. We'll conclude our question and answer session. I would now like to turn the conference call back over to Mr. Todd Stevens for any closing remarks. Sir?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [81]

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Thank you, everyone, for joining us on today's call. We hope today's discussion helps drive home that CRC is strongly positioned to create value in its environment. Our conventional asset portfolio is highly competitive and delivers strong and differentiated value. With the robust opportunity set and significant inventory potential, we are expanding our investment across our portfolio. We are enhancing efficiencies, expanding margins, an expected benefit from a dedication to operational excellence in everything we do. And our financial position will continue to improve as we allocate a portion of our discretionary cash flow towards balance sheet strengthening while simplifying our capital structure. We believe CRC is a compelling investment opportunity and look forward to seeing many of you on the road through the remainder of the year. Talk to you later, bye.

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Operator [82]

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And we thank you, sir, and also to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you, take care, and have a great day, everyone.