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Edited Transcript of CRC earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 California Resources Corp Earnings Call

Los Angeles Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of California Resources Corp earnings conference call or presentation Thursday, August 1, 2019 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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* Brian Arthur Singer

Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst

* Gregg William Brody

BofA Merrill Lynch, Research Division - MD

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Kaleinoheaokealaula Scott Akamine

BofA Merrill Lynch, Research Division - Research Analyst

* Paul Benedict Sankey

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Pavel S. Molchanov

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

* Sean M. Sneeden

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

* Tarek Hamid

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the California Resources Corporation Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

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

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Thank you. I'm Scott Espenshade, Senior Vice President of Investor Relations and Land. Welcome to California Resources Corporation Second Quarter 2019 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 insight into our operations and second 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, 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 risk 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 on the company's 10-Q, which is being filed later today. We would ask that you review it, when available, and the cautionary statement in our earnings release. A replay and a 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 remarks. And would ask that participants limit their questions 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. The first half of 2019, CRC, again, delivered solid results. Our second quarter production was in line with our guidance. We continued to make progress on our costs, margins and on controlling our controllables. And we are pleased to report additional progress in strengthening our balance sheet and improving our credit position.

We communicated before that we expect that these improvements would be largely transactionally driven, allowing CRC to maximize the value of our portfolio for shareholders. In May, we closed the divestiture of a 50% interest in our Lost Hills operations, then last week we announced our third major development joint venture to date. We remain keenly focused on strengthening and simplifying our balance sheet. As we take our next steps to reduce our debt burden, we'll continue to follow an all of the above approach. We know there are multiple ways to achieve our balance sheet objective. We intend to be strategic as we continue these discussions. Our diverse portfolio of assets is generating interest on many fronts, including producing properties, minerals and infrastructure transactions. We will continue to pursue other opportunities to enhance the balance sheet as we progress through the remainder of 2019. To put this in context, our 3 largest development joint ventures provide for potentially over a $1 billion from our partners to drill our broad project inventory.

This highlights the depth of our portfolio and the quality of our assets. Specifically, these joint ventures allow CRC to derisk our resource base, bring production and cash flow forward to enhance our credit position. And to provide flexibility on our capital program to respond the fluctuations in commodity prices. Our most recent development joint venture showcases the progress CRC has continued to make as it is our largest to date and up to $500 million in development capital with a larger reversionary interest of CRC. We are proud to partner with Colony Capital on this joint venture, a well-known and respected investor with a solid track record. Colony's initial investment commitment of $320 million will cover multiple development opportunities throughout the Elk Hills Field, is intended to be invested over 3 years, consistent with the mutually approved development plan targeting approximately 275 wells.

Our JV partner will fund 100% of the development wells, and will earn a 90% working interest in those wells. Our working interest in those wells will increase from 10% to 82.5% upon Colony achieving an agreed upon return. Colony also received a warrant to purchase up to 1.25 million shares of our common stock with a $40 exercise price, which Colony will be entitled to exercise as funding milestones are met. We already deployed 4 rigs to work on our Colony joint venture, and by the end of August, we expect to have 5 rigs focused on the Colony joint venture development.

There continues to be plenty of interest and speculation into the regulatory environment in California. Last earnings call, we highlighted the tremendous amount of energy, including hydrocarbons that California's economy requires. We also covered how native oil and natural gas production benefits the states workforce, consumers as well as local and native -- local and state governments as a significant contributor of revenues to production sharing, taxes, permit fees and royalties.

CRC has operated successfully in the country's most stringent regulatory environments by adapting rapidly and cost effectively to changes in laws, regulations and agency priority. We're well situated with our drilling permit inventory. We have a balanced mix of production from diverse fields. They are not dependent on any single drive mechanism or play type. We have built coalitions with organized labor, business and community-focused organizations in the Golden State, who recognize the importance of in-state production with a high qualified local workforce.

As a reminder, every year California imports over 73% of its crude oil needs, sending in excess of $30 billion a year outside of the state to places that don't hire Californians, nor pay California taxes and don't share California's values. We believe responsible leaders in Sacramento understand this dynamic and will continue to be thoughtful. We'll continue our constructive dialogue to better California communities by safely and responsibly providing our valuable products to the world's 5th largest economy.

Let me turn now to our operational performance where CRC remains intently focused on our efforts to control our controllables. I continue to see innovations from our teams, which we believe will reduce cost and enhance value as we move through the year. Our portfolio -- management starts as always, with our disciplined capital allocation through our internal VCI metric to adjust quickly to market conditions and align our investments with expected cash flows. CRC benefits from scale and diversity of our world-class portfolio, which provides exceptional optionality that enhances our ability to manage through the commodity price volatility. Our 2019 plan focuses on enhancing cash margins and maximizing the value of our investments as we continue to strengthen the balance sheet, while living within cash flow.

We have narrowed the range of internally funded 2019 capital program, which now stands at $350 million to $385 million. Our new joint venture with Colony and the recent capital received from BSP will allow CRC to invest -- to increase the total estimated JV capital investment to a range of $175 million to $225 million for 2019. This activity should provide a slight increase in our quarterly production as we progress through the remainder of the year.

As we have stated, we continue to target utilizing 10% to 15% of discretionary cash flow to enhance the balance sheet and advance our deleveraging. Through the first half of 2019, we repurchased $58 million in face value of our Second Lien Notes for $45 million in cash. We posted solid cash flow during the first half of 2019 with EBITDAX totaling $556 million, an increase of 12% over the prior year period. Compared to the first half of 2018, total production was up approximately 2% and oil production was up 3%. Second quarter 2019 crude oil production was down sequentially due to the previously mentioned sale of the 50% interest of Lost Hills steamflood reduction, PSC impacts from higher realized prices and lower capital investment, power and plant downtime and other factors.

With our laser-focused on operational excellence, CRC continue to show total cost reductions across most operating expense subcategories. During the second quarter, we again benefited from higher crude oil realizations, which averaged over a 100% of Brent for the quarter. As you know, we received attractive Brent-based pricing as waterborne crude drives the California market. Looking ahead to the impact of IMO 2020, we expect CRC's price realizations to remain strong. Demand for California production is steady and CRC's portfolio of crude is well positioned against global alternatives.

CRC has significant competitive advantage in weighted average sulfur content compared to crude imported to California. As inside state production declines, the demand for California crude remains high and refinery runs remains stable. At the same time, we are thoughtfully putting additional crude oil hedges in place to further underpin our cash flow opportunistically through the cycle. Conversely, we saw our natural gas and NGL realizations slip in the second quarter of 2019 consistent with local and national supply fundamentals. Natural gas was also affected by the very temperate weather in California during the second quarter of 2019.

For more details on our second quarter performance, I'll now turn the call over to Mark.

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

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Thanks, Todd. CRC's team has drove solid execution in the first half of the year, delivering second quarter production within our guidance range while maintaining our intense focus on controlling costs, continuing to strengthen our balance sheet and demonstrating our overall capital efficiency and preserving margin performance.

In summary, CRC had a strong second quarter, underscoring the diversity and optionality of our asset base as well as CRC's operational focus on driving value. Total production was 129,000 barrels of oil equivalent per day, with quarterly adjusted EBITDAX of $255 million, and adjusted EBITDAX margin of 39% and an adjusted net loss of $14 million or $0.29 per diluted share, which was largely affected by lower natural gas and NGL prices as well as limited natural gas trading activity, which is seasonal in nature and is typically lower in the second quarter when temperatures are milder. In the second quarter, we maintained our capital discipline and held our activity level constant through the first half of the year. In the second quarter, we internally funded $124 million of capital projects, and our JV partners funded an additional $16 million for a total investment of $140 million while averaging 7 rigs.

The capital program was primarily focused on the San Joaquin basin where we drilled 33 wells and the Los Angeles Basin where we drilled 6 wells. Sacramento and Ventura continue to show modest production decline with no drilling activity. As Todd highlighted, our new development JV will provide added flexibility for our capital plans through the remainder of 2019 and future years, providing us with additional ability to align our capital with cash flow and bring forward reserves in production at one of our core assets.

As we've demonstrated, we continue to steadily and deliberately reduce our debt. The second quarter marks the fifth consecutive quarter that we repurchased our Second Lien Notes. We repurchased $58 million in face value of the notes for $45 million. The face value of our Second Lien Notes now stands below $2 billion, and we continue to have meaningful flexibility within our credit agreement to opportunistically purchase additional notes at a discount. I want to underscore that we remain intently focused on our commitment to balance sheet strengthening.

Now turning to the details of our financial performance for the second quarter, we produced an average of 129,000 BOE per day during the quarter, while oil production averaged 79,000 barrels per day. Production was down approximately 4% compared to the second quarter of 2018, with approximately 2,000 BOE per day and the decrease due to the Lost Hills divestiture and PSC effects, and nearly 1,000 BOE per day due to power and plant outages. Second quarter 2019 sequential results were affected by the $1,700 -- excuse me, 1,700 barrel per day decrease in oil production from the Lost Hills sale as well as roughly 1,500 barrels per day of negative PSC effects, power and plant downtime and other factors.

I should note that our third quarter will be the first full quarter with our Lost Hills production fully reduced to our 50% retained interest. We continue to benefit from premium Brent-based pricing and realizations in the second quarter of 2019, oil realizations were robust registering a 101% of Brent before the effect of hedges. Further, we're continuing to seeing strong realizations for July at 102% of Brent. Our hedge program, which underpins our liquidity by supporting cash flow and even evolves the commodity prices, enhanced our realized oil price by $1.89 per barrel for an average realized price of $70.66 per barrel. NGL realizations were weaker at the low end of guidance, primarily due to lower butane realizations and came in at 41% of Brent, consistent with excess supply in local and national markets. Natural gas realizations registered 88% of NYMEX, the second quarter is traditionally when we receive our lowest natural gas realizations, and reflected mild weather in California.

Production costs for the second quarter of 2019 were $230 million or $19.62 per BOE. Our focus on our controllable costs kept production cost relatively flat on an absolute basis compared to the prior year period. We increased our maintenance activity in the quarter, which was offset by sale of our Lost Hills and lower downhole maintenance costs. Excluding PSC effects, our second quarter production cost would have been $17.98 per BOE. Adjusted general and administrative costs were $6.57 per BOE, $0.36 below the previous quarter, and within our guidance range. Most of the decrease over the previous quarter resulted from lower cash settled equity-based compensation at all levels of the organization due to a lower stock price in 2019.

As we previously discussed, changes in our stock price introduced volatility in our income statement because a portion of our stock-based rewards are cash settled and are mark-to-market every quarter. Taxes, other than on the income, which are largely comprised of ad valorem tax is based on the values of minerals on the ground and are paid to the counties as well as our GHG cost came in as we expected. In total, for the second quarter of 2019, we reported net income of $12 million attributable to our common stock or $0.24 per diluted share. Adjusting for unusual and infrequent items and other noncash items such as gains on early extinguishment of debt that are generally excluded from core earnings by investment analysts, our net loss would have been $14 million or $0.29 per diluted share. Adjusted EBITDAX for the second quarter of 2019 was $255 million, up 4% from our prior year quarter, reflecting a stable adjusted EBITDAX margin of 39%. The decline in adjusted EBITDAX from the first quarter 2019 was largely driven by lower natural gas and NGL prices as well as limited natural gas trading activity, as I previously mentioned. CRC reported cash flow from operating activities of $114 million in the second quarter of 2019, which was negatively affected by the timing of interest in ad valorem tax payments, which are made in the second and the fourth quarters.

In the second quarter, we generated approximately $76 million in discretionary cash flow and $266 million in the first half of the year. This compares favorably to our internally funded capital investments of $228 million through the first half of 2019.

As we pointed out, CRC has a high level of operational control over our diversified portfolio, which allows us to pivot during volatile periods, and rapidly recalibrate our activity with expected cash flows. We have a proven track record of focusing on value, and will continue to respond and adapt accordingly to succeed through a wide range of price environments. We front-loaded our internally funded capital investments for 2019. As we look ahead, CRC will continue to deploy capital at our highest VCI projects, develop our extensive inventory of actionable projects, while utilizing our JV capital for added flexibility and to bring forward cash flow. Our philosophy regarding hedging continues to target up to 50% of our oil production, generally over a 12- to 18-month period, in order to provide more certainty in cash flows in support of our capital program.

Please refer to our earnings release for the details on our hedge positions. Also, please note that we provided detailed analysis of adjusted items as well as key third quarter 2019 guidance information in the attachments to our earnings release. And also, please note that the third quarter production guidance reflects the full effect of our Lost Hills divestiture. And I'll be happy to take any questions you may have on that information and on other aspects of our results during the Q&A portion of the call.

And thanks, and I'll now turn it back over to Todd.

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

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Thanks, Mark. CRC continued to deliver solid results in the first half of 2019 with a disciplined capital program that is focused on value since our inception. A diverse, low decline asset base with exposure to healthy Brent-based realizations and a continued focus on costs, margins and controlling our controllables, which allow CRC to register reliable and consistent results. The optionality of our resource base, coupled with this discipline, has enabled us to continue to generate free cash flow.

It is worth reiterating that we remain keenly focused on strengthening and simplifying our balance sheet. Lowering our overall level of debt, while utilizing joint ventures to derisk and unlock the full potential of CRC's large asset base. We now be -- happy to take any questions you have.

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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 Kalei Akamine of Bank of America.

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

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Hello?

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

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Kalei, can you hear me?

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

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So my first question really relates to how you think about adding fixed cost to the business as you execute deleveraging transactions? Obviously, the team has been very busy. So I guess, what I'm trying to figure out is your capacity, perhaps you can talk about it in terms of unit cost or absolute dollars, and I'm trying to figure out how much you're comfortable with and how much you can perhaps do to address the balance sheet?

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

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Yes. So if you think about it, from day 1 when we were spun off, we've always been contemplating, taking balance sheet risk for income statement risk and increasing our fixed charges to bring down our absolute quantum of debt. And we've done it in a variety of creative ways. So we're not afraid to look at what the best alternatives are. Clearly, we're looking for the best value proposition. And also there is the flip side of this too is, as we feel like the absolute quantum of debt comes down, there has been a way to reduce and simplify our balance sheet, and ultimately reduce our fixed charges that way too. So we think that -- at the end of the day, that when we add some income statement risk for balance sheet reducing of risk, the overall fixed charges will probably come down for the enterprise even though we'll have all added because of the interest charges and those other fixed charges will come down. To give you a feel of the company as a whole right now, I mean the most attractive opportunity for us is probably looking at the royalty market, it's so fairly healthy. We continue to look at that in addition to infrastructure and other straight asset sales and other creative opportunities, but that one's fairly healthy. Our average royalty in the company is between 4% and 5%. We have assets like Elk Hills where we own fee simple, where could we add a 4%, 5% royalty there or elsewhere, yes, we could. And that gives you a feel for where we're at from that standpoint as a company. But we're looking, again, this is an all-of-the-above approach. There is no one magic silver bullet for us and we'll continue to be diligent and do the best value proposition who we view the absolute quantum of debt we have is a significant overhang that we feel will help unleash the value of the equity as we continue to chip away and then hopefully chip away some bigger chunks here with some more transactions as we go through the rest of the year.

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

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Can you address any near term opportunities that you might have on the table?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [7]

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We're looking at all of the above. All of the things I outlined. We've been looking at different transactions, from monetizing royalties to monetizing parts of our infrastructure, monetizing producing assets of different quantums, monetizing acreage, monetizing surface land. So nothing has been above approach. Like I've said, always -- everything is for sale except Elk Hills, you got to buy the company if you want to buy Elk Hills. So it's rather unique opportunity if we're willing to monetize a piece of royalty at Elk Hills, of our flagship asset. The other thing, again, I can't stress enough. We knowingly simplify the balance sheet during the downturn, enhance fixed charges through a reduced principal. There is an opportunity particularly, as we go through August, as we continue to look at ways to simplify the balance sheet, we're going to do the thing that's best for the company and the best for our shareholders as we look to bring down fixed charges, preserve liquidity and bring down principal over the long term.

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Kaleinoheaokealaula Scott Akamine, BofA Merrill Lynch, Research Division - Research Analyst [8]

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And the last one on just on this and I'll leave it. When you guys think about sizing an opportunity, what's the primary consideration? Is it -- what the market will bear or do you think about your own cost structure first?

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

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I think for us, it's really about enhancing the cost structure and value. Obviously, we're not going to get there in $10 million increments with our quantum of debt. So we have to start looking at larger things to do for the company. And we've done a few of those earlier this year. The Colony JV is very important for us with a great partner. The monetization at 50% of Lost Hills and we're getting the carry on the activity there. It's important for us. So we'll continue to look at creative ways to get there, but I do think that there will be some significant monetizations. Just like I said, we've been looking at different ways ever since the spin, whether it was dealing with infrastructure and midstream or other assets we have because we have a pretty vast -- assets are basically super major and independent.

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Kaleinoheaokealaula Scott Akamine, BofA Merrill Lynch, Research Division - Research Analyst [10]

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Got it. And I have a separate, but related question on the Colony JV. Last year at the Analyst Day, you guys highlighted potential EUR project at Elk Hills. Is this JV at all related to that or is that something completely separate?

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

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That's something separate. Obviously, they could end up being our partner or someone's else there on that. But I think, you're right, that CO2 injection project there, enhanced oil recovery project is not part of the current Colony JV. We anticipate this will be something that'll be in the near term, next 12 to 18 months we'll probably advancing this to kind of a real project.

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Operator [12]

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And next we have Brian Singer with Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [13]

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I think you just made a little bit of a reference to it, but you highlighted in the press release, your ability to continue to buy back debt at attractive terms relative to face value. And I just wondered if you can talk a little bit to how you see that climate playing out, and your ability and willingness? How significant that could be over the next 3 to 12 months?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [14]

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Yes. So for us, clearly, when the debt is trading, particularly our Second Liens, which is highly liquid, where that -- given the fact that it's heavily shorted, I think that gives us even more of an opportunity. So as we see free cash flow and we try to balance that out against liquidity concerns as we look at our business playing through the year, we'll continue to increment into that. And we have -- there hasn't been a month gone by, I think in the last 9 months that we haven't purchased some Second Lien Notes in the market. So we continue to look at that every single month and every single day, and think about the opportunity set and balance that against our forecast and our portfolio and our cash flow and would be mindful of liquidity for the company. But it's definitely an opportunity given where it's traded. And we are mindful of -- again, all of the above approach and we view that as a way to create value for our shareholders, and eventually, I think we'll get recognition of that value creation.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [15]

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Great. And then my follow-up is, you highlighted some of the headline risk with regards to California regulatory environment. And I just wondered if you could just refresh us on your level of engagement with the, I guess, Executive branch and any scope you see for changes impacting and drilling flexibility or fiscal terms?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [16]

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In California, I mean, the oil and gas industry is an important part of what we -- the business here. Clearly, it's not where it was in the 1980s, where there was only 5% of the oil needed in the state was imported. But now we're at a point where well in excess of 70% is imported from places, like I said don't share California's values, don't provide -- pay taxes, don't provide good paying jobs and utilize a highly qualified workforce.

So for us, we have a fairly constant contact, I won't say it's every day, but it's fairly frequent with the Executive branch in California or the Governor and/or his staff and involved in important decisions that affect all businesses in this state. I think it's important to understand how native in-state production is vital for the economic vitality of California, sending billions of dollars every year overseas to places that don't have the same laws from an environmental standpoint and don't have the same protection.

I think the Executive branch and a lot of the legislators, not all of them, also understand that what we do with hydrocarbons is more than just transportation fuel. It provides a lot of -- refineries in California produce a lot of jet fuel. And in lot of products that make out our first-world lives actually possible, you can't build a Tesla without hydrocarbons. So I think some of these things that you realize when you think about it and get beyond those very short-minded narrative of, it's gasoline for our cars. You realize it really underpins our first-world lifestyles. And in our hospitals and everything else, in medicine.

So again, I think we have thoughtful leaders that aren't prone to knee jerk reactions or getting pressured by pitchforks and torches activists who are -- have Machiavellian objectives that want to deindustrialize our country. So I think that it's important to step back and understand what's best truly for California.

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Operator [17]

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Next we have Jason Wangler of Imperial Capital, LLC.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [18]

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I was curious in the release Todd, you talk about seeing production kind of on a slight uptick the rest of this year. Is that specifically because of the JV activity coming in? Or is there some other stuff that could you speak about as well?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [19]

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No. I just think -- got to remember, our production, we don't give -- we're not a shale company. So we don't get those kind of quick-hitting impacts. So a lot of our projects we did, some of this in the first half for facilities. So what we're doing is setting ourselves up for the back half of the year. So it was a little bit of front-ended loaded. And we obviously noted the power plant outage at Elk Hills, even though we had a 95-plus percent run rate there. You do have outages every now and then. But -- so we see it -- a slight uptick in back half of the year, and it's really driven by our net investment. I think the Colony JV, even though we got off to a great running start, will be a rounding error for the year, but it will really pick up obviously, in 2020 for net our interest. For them, it will obviously be meaningful.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [20]

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Okay. That's helpful. And then on the NGL side, I know you guys talk a lot about kind of having some barriers obviously between oil and natural gas within California. Is that barrier not necessarily the same for NGLs? Or just how should we think about that? It's obviously been weak everywhere, but obviously you guys had some impact during the quarter as well?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [21]

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Yes. If you look at the actual products themselves, you'll see propane is still about twice as Mont Belvieu here in California. Natural gasoline is still a premium to Mont Belvieu. Where we really see the hit is in the butane, that's on par or less than Mont Belvieu. So that's something that we feel like -- because our main markets are California, Mexico and Canada, they're a little isolated. We think Canadian butane in some refineries being shut in have impacted California more than normal on the NGL side of the house. So this is something that -- clearly, we're affected a little bit by the whole nation as a whole, but we are probably not as much as Island because of railcar of NGLs as it is with crude because crude really is just waterborne, it's in a marginal barrel. But yes, we are impacted by that.

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Operator [22]

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Next we have Paul Sankey of Mizuho.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [23]

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All my questions have been answered but I was just going to ask you about [overriding] royalty. But maybe we could just go on to your realizations were good. Could you talk about the impacts, and it's bit of a low-grade question, I apologize, but I noticed that you went out actually to premium to Brent in the quarter, including hedging. Could you just talk about what the extent to which that was hedge related or something else?

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

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So Paul, we had some hedges in place that were above -- where the price was so we -- but before the hedge, we were at a premium to Brent for the quarter for our portfolio of crude. And our hedges, we got an even more premium. But what I will give you the commentary is, as we've gone through the quarter here, the current quarter, after 1 month, we see those differentials still very strong and at the top end of our guidance going 1 month in, and obviously, there is 2 more months to go, but we feel really good about the strength of the differentials and realizations in California.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [25]

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Yes. Great. Todd, you've been very comprehensive. I'll just be really, naughty and take the opportunity to say I look forward to seeing you guys in New York in about a week of time.

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [26]

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Paul, see you on August 14.

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Operator [27]

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And next we have Pavel Molchanov of Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [28]

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Let me spring back to the regulatory landscape. Setting aside the environmental advocates who, as you said, do not want drilling anywhere at any time, what specifically is coming out of the new sub-administration. So we saw the head oil and gas regulator being replaced after a scandal at the department. But has the Governor actually spelled out what -- kind of what the administration stance on oil and gas activity's going to be?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [29]

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Yes. I think what he said in the campaign if you go back to that, he talked about, he wanted to tighten up the fracking rules in the state, the hydraulic fracturing rules. And he's been quiet -- but again, I go back -- I've known the Governor as lieutenant governor for a long time. He's a very thoughtful guy. He's not going to take knee jerk reactions to anything. And I do think there probably will be something like that at some point in time. He takes everything into account. The DOGGR thing, I think that's been out in the press. So I think that has more to do with the conflict of interest, and what's in the papers is probably, we both know the same amount. They filled out a Form 700, and some of the employees held shares of the companies in an industry that they're directly or indirectly regulating.

So yes, I feel like the Governor is a man of his word, and he said that he was going to tighten some regulations up. And I think he's going to do that. I don't know what that'll entail. I know we were in contact with him, and we talk about many things, including current legislation that's being proposed. So I do think he understands and he obviously, if you really want to look at some detail, he did give a little speech when he was out in McKitrick at a schoolhouse visiting -- our Chevron's Oil Spill out there. And I think it was very thoughtfully done, and he can give a feel for what kind of Governor he is going to be and how he approaches issues and challenges. And again, he's not a person that's going to take a knee jerk reaction to anything or bow to pressure from activists or business or anything. He's going to do what he thinks is in the best interest of the Californians.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [30]

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Okay. And just to clarify, do you have any rigs today that are engaged in fracking?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [31]

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Yes. I think, 1.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [32]

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One out of 7?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [33]

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Well, we have a total of 10. Five here shortly we'll be working only on the Colony JV at Elk Hills, and the rest are up and down the State of California, a few in L.A. basin. The 1, regularly we're talking about is in Kern County.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [34]

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Okay. Just follow up on gas prices. 6 months ago, there was a period of kind of a wide disconnect between California gas, which was trading at a very hefty premium to Henry Hub. And you mentioned more moderate weather recently. Do you envision any return to that period when you had 4 450 gas in the state?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [35]

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Yes. It's really as you saw -- as we had the quarter as the first quarter and fourth quarter, we had significant trading income from natural gas. And it really, around degree days. So it's either hotter or colder than what people expect. We really didn't have much of a summer in California -- here in Southern California until July. So the hotter weather has showed up. We expect trading income in the back half of the year. I would say, it'd probably be slightly less than the current level based on what we've seen so far with the weather. But obviously more hot weather or in the fall more cold weather could have a stronger impact on our trading operations when it comes to natural gas. But we definitely see the hot weather showed up here in the third quarter and it will have an impact.

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Operator [36]

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Next we have Tarek Hamid of JPMorgan.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [37]

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On the Second Lien Note repurchases, a bit of a technical question, so I apologize, but the Second Lien repurchases reduced the upcoming [AHAD L] payment in 2021?

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

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I'll let Mark go ahead and answer that.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [39]

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Yes. The way to think about that is just a proportional reduction and that obligation as bonds are repurchased.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [40]

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They're not quite a 1 for 1, but it does reduce the obligation?

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [41]

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I'm sorry, I couldn't hear you, you're a little bit light, you want to repeat your question.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [42]

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Is that a 1 for 1 reduction, but it does reduce the obligation?

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [43]

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Yes. On a proportional basis.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [44]

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Got it. And then secondly, on the Colony Capital JV, is that going to be accounted for similar to the Benefit Street JV or the MIRA JV?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [45]

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It'll be like the MIRA, Macquarie JV. It's more traditional what you're used to seeing.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [46]

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Okay. So more traditional standard JV. Got it. That was it for me. Most of my questions have been asked.

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Operator [47]

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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 [48]

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Todd, you guys talked a little bit about royalties and that market remaining reasonably attractive to you. And I think, if I recall correctly, most of those reside outside of your current borrowing base. But can you just remind us, are there any limitations on, if you were to go down that route of monetization, are there any limitations of how you could apply those proceeds. For instance, could you capture discount on the Second Liens today or do the term loan -- term loans are -- be out of restrict? How you apply that?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [49]

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Yes. So we have the same baskets in place that we've had. We have carved out our royalty out of our borrowing base, so it is a non-borrowing base asset. If we were to monetize a royalty, we would add to the current basket, which is -- currently sits at well over $300 million. We could repurchase and it would continue to do that. So if you had $1, you get another $0.50 into the basket. It's how it would work. And -- but then we could be opportunistic. And remember, the way our debt currently sits is, we have to purchase in any -- we can purchase in any debt at any kind of discount. So it's trading over par like our term loan from 2016, which is at LIBOR plus 10 3/8. It's our most egregious from a fixed cost standpoint. That one currently we could not purchase in, because it doesn't trade at discount. Mark and his team are working to get an amendment so that -- because if that becomes called, I believe August 12, and we would like to be in a position to, if that -- the economics made the most sense to take that in versus the Second Liens versus any of the capital -- part of the capital structure, we can do so.

So Mark and his team have been working on that, and we anticipate having that flexibility by the time of our next transaction that we pull across the finish line.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [50]

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Got it. That's super helpful. And I guess, maybe just a follow-up to that. Mark, I mean, you guys have been pretty good about managing the borrowing base throughout the cycle, and how you've selected assets to contribute to that. I know it's early, but how are you guys thinking about this fall? And I guess, has some of your strategic initiatives that you're working on, has that -- how does that factor into how you think about that?

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [51]

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With your comment on the fall, I assume you're referring to potential borrowing base redetermination in the fall?

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [52]

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That's correct. Yes.

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Marshall D. Smith, California Resources Corporation - Senior EVP & CFO [53]

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Yes, we continue to work with the banks. As you know, we have a track record of working very, very closely with the banks and keeping them right in the front seat with us. We have ongoing dialogue with them. It's hard to anticipate today what the price tag the banks maybe using, if that full borrowing base redetermination. I think one of the things that clearly sets our asset base apart from our peers is the fact that it has relatively shallow decline rate and we've shown the banks over time where we thought relatively stable underlying asset value regardless of as we roll ourselves forward in time even under a blowdown scenario. So I think they understand that and they demonstrate a willingness to work with us. I hate to get out ahead of ourselves by commenting on what some forward-look might take in the fall, but we, look, we have taken assets out of the borrowing basis, as Todd says. That gives us flexibility to put some back in as we deem appropriate and will keep an eye on it. We'll work with the banks closely as we move forward to the fall.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [54]

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Got it. That makes sense. And then, I guess, just one quick housekeeping question, but Todd, with AB 585 passing, how do you guys think about or is there any impact from the accounting standpoint from a P&A liabilities or the arrow on the balance sheet? Does that affect timing or anything along those lines?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [55]

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No. There is no meaningful impact. It's already accounted for.

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Operator [56]

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Next we have Gregg Brody of Bank of America.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [57]

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Just on the JV, I'm just -- in terms of the cost of capital and when you think the working just will revert. Can you remind us what those are at the ballpark?

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

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No. I think we said what we can say. I think in aggregate, what we've said is we feel like these terms are far superior to the Macquarie terms, which is a similar JV. So -- but, again, we've said what we can really say on this in our press release announcing it and also here today on what the terms actually are.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [59]

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Understood. And just to clarify, the accounting for this will be similar to the MIRA JV?

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Todd A. Stevens, California Resources Corporation - President, CEO & Director [60]

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Yes.

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Operator [61]

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At this time, we will 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 [62]

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Thanks, Mike. Thank you for participating in today's call. CRC has already completed 2 meaningful transactions in the first half of the year to further our delevering and advance our high VCI inventory. We'll continue to be guided by disciplined capital allocation aligned with expected cash flows to capture the full value of our high quality, low decline and low-risk resource base.

Aided by unrelenting focus on operational excellence, our business model is built to perform through the cycle and deliver consistent value to our shareholders. We look forward to seeing you on the road. Thank you. Have a good day.

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Operator [63]

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