Good day, everyone, and welcome to the California Resources Corporation Second Quarter Earnings Conference Call. All participants will be in a listen-only mode After today's presentation, there will an opportunity to ask questions Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Joanna Park, Vice President, Investor Relations and Treasurer. Ma'am, please go ahead.

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

Thank you, Joanna, and thanks to everyone for attending today's earnings call. Second quarter results demonstrate the advantages of our asset position at CRC, the strong execution of our strategy and the diligence of the hardworking employees of CRC. I'd like to thank each of them for their continued dedication in delivering the energy California needs despite COVID, unrelenting heat and fires. As highlighted in our slides, we delivered on several key priorities. We continued our strong financial and operating performance. We announced several A&D transactions that allow us to focus on our core assets. We increased our free cash flow guidance for the full year. And accordingly, we are increasing our share repurchase program by an additional $100 million for a total of $250 million. And lastly, we are expanding our ESG leadership through decarbonization with new low carbon initiatives. Turning to Slide 5, CRC's strategy is based upon three main pillars. One, cost in operational excellence; two, disciplined investing; and three, responsible portfolio management. I'm going to briefly explain how we delivered on all three pillars in the quarter and year-to-date. The first pillar of our strategy focuses on lowering our operating cost model while maintaining top-notch safety performance. The team continued to deliver on both aspects, maintaining corporate G&A cost savings, which are down 16% from 2020 levels and our controllable non-energy costs, which are in line with the first quarter of 2021, both on a per barrel basis. I think it's important to stop and highlight why we are focused on our non-energy cost, because our energy costs rise with rising natural gas prices. The rising natural gas prices are a net positive to CRC because we are a net long natural gas producer. Said differently, our revenues expand faster than our cost, which is a…

Thanks, Mac. Good afternoon, everyone, and thank you for joining us on this call. As Mac highlighted and as shown on Slide 8 of our presentation, CRC continued its strong performance in the second quarter of 2021. CRC reported net quarterly production of 101,000 barrels of oil equivalent per day and 61,000 barrels of oil per day. In essence, CRC has been able to maintain its gross and net oil production year-to-date with only $77 million in CapEx. During the quarter, we added our second drilling rig in our core San Joaquin Basin, and our development program brought online 21 new wells. Furthermore, we ran 35 maintenance rigs and shifted a portion of our capital to bring online an additional 217 maintenance jobs. As previously mentioned, the high impact low reservoir risk and rapid return opportunities allowed us to bring an additional 2,300 BOEs per day of PDP production, while maintaining our non-energy operating costs. Our drilling program has predominantly been focused on the Mount Poso, Elk Hills and Buena Vista fields. Each of these areas are on track to deliver estimated IRRs between 97% to 146%, with a capital workforce forecasted to return over 200%. For the remainder of the year, we expect to maintain our capital cadence with plans to add a third rig in the Los Angeles Basin sometime in the fall. Our commodity realizations remain strong across all of our streams with organizations at 100% of rent, NGLs at 65% of rent and natural gas at 110% of NYMEX. For the remainder of the year, we expect to see continued healthy allocations in oil, NGLs and specialty natural gas, further supporting our revenue potential. As laid out in our slides and given a relatively stable commodity price environment. We expect the headwind from the hedges that…

Great. Thanks, Francisco. So last quarter, we mentioned we're assessing and accelerating our ESG strategy. And today, I'd like to specifically discuss the E or the sustainability aspects of that strategy. As a starting point, CRC is the lowest emitting and lowest carbon intensity oil of the top 100 producers in the U.S. as per a recent study by the Clean Air Task Force. So we start from a low-carbon intensity position. As we continue to evaluate our assets in our footprint, we see multiple ways to further reduce the carbon intensity of our California energy. We intend to use our land, mineral and technical resources for decarbonization and other emission reducing projects, which we believe will help the State in its energy transition plans. As shown on Slide 20, the State of California, emits roughly 425 million metric tons of CO2 each year. California has set a goal to become carbon neutral by 2045 and has provided incentives to support those efforts in decarbonization. We believe and others believe that CCS will provide 15% of the total decarbonization solution, which is roughly 60 million metric tons of CO2 stored each year by CCS. And CRC intends to play a significant role in this CCS decarbonization space. CCS reservoirs must be well understood, requiring geologic data and understanding of the pore space as well as they must be deep enough with sufficient containment to permanently store CO2. CRC's reservoirs are well positioned for CCS because of their unique characteristics of depth, permanent storage capability and proximity to CO2 sources. Within CRC operated assets, we have identified up to 1 billion metric tons of permanent CO2 storage, which would allow us to store approximately 20 million metric tons per year for 50 years. That's the equivalent of removing more than 4…

Our first question today comes from Scott Hanold from RBC Capital Markets. Please go ahead with your question.

Thanks congratulations on this ESG perspective. It's certainly good to see you guys kind of pushing this forward. If you could help me just kind of step back, and I think for investors and myself, it's - the big question is like what is the value of this ESG for - obviously we've got the credits? But help us put a pen to the paper, like how much - when you look at this, the Carbon TerraVault I, like how much capital is CRC capital would go into that? And what is the output on credit is there - just at a high level, just to kind of put some numbers to it?

Yes, sure Scott. It's Mac. First of all, let me talk about what we're doing with that project, okay, which is TerraVault I. We're making the permit applications for - we've already done it for A1A2, and we're going to do it for 26R. Those numbers are somewhat meaningless unless you know what they are. But that gives us the TerraVault project I with 40 million metric tons. The reason why we're advancing those permits is because we think that they are really long lead time item, okay? And because we actually have a strategic advantage there in that you have to own the pore space by which to create carbon sequestration in California. Because of these - the location of these at Elk Hills, where we own everything fee simple, we already own that. So where it may take other projects a year or two by which to acquire pore space. And know the pore space and be able to file a permit, we wanted to go ahead and put those permits in. Now I say that because your question is, is okay, where do you take the project from here, all right? There are a number of factors that we are looking at, what is the carbon source, the capture technology, the transport through the site. But we believe that over time, we will fill in those gaps and develop the overall project economics, if you will. The reason why we think that this is an economic project is very simple. If you look at where we are in the country, in California, California is leading in its decarbonization efforts and is leading in the incentives that have been put forth for carbon sequestration, capture and sequestration. So you have a revenue opportunity, and I'm going to mix tax credits with revenue opportunities, but you have a revenue opportunity by generating LCFS credits, which are trading at $187, call it, $200. You have the 45Q, which for sequestration is $50 a ton. These are all per ton. And then there's discussion about whether or not to incent cap and trade, which is the greenhouse gas emissions trading program in California, which is currently in the $20, $30 and is expected to go higher per ton. Those are the total revenue opportunities. Now obviously, you have capital that has to go into the capture system into our tank and into the transport. But we believe with those incentives is the revenue on the top line, they are drastically advantaged over site other places in the country that only receive a 45Q, $50 a ton tax credit. So when we do that and we look at cash resistance all the way through the value chain, we believe we can develop projects that have good economics because of that revenue stream. And that's why we think we're advantaged. So we don't have a full project outlined in the value outlined, but we're working on that as our next step.

Yes. No, and I appreciate that. And maybe just when I think about this simplistically, and if I were just to sort of take the midpoint of that, call it, $250 per metric ton of potential credits and looking at like the Elk Hills CalCapture. I mean, am I doing the math right where that 1.4 million metric tons per year, I mean, that equates to about $350 million per year, am I doing the math right there, am I like getting in the ballpark?

Yes, so it's a great question. Let me distinguish between this project and the CalCapture project. The CalCapture - the project that we're talking about today in Carbon TerraVault I is a CCS project. CalCapture has actually been designed as an EOR or CCUS project, where we would capture the flue gas off of the Elk Hills power plant, capture the carbon off of it and then use it for enhanced oil recovery. And because of - we're going to lay this further out when we have the Analyst Day, but CalCapture, only a third of that power plant goes back to behind the meter oil production. The other two-third goes out to the grid, okay and so only a third of the carbon captured there is available for the LCFS credit. So it doesn't equate. You can't take the 1.4 million and do that math. We'll lay that out further. We continue to advance the CalCapture projects, but it has a different set of economics than the CCS project we have.

Okay. And then I guess...

It also has a revenue stream associated with the oil through the EOR, right so.

Yes.

It's got some nuances to it. But that's one of the things. When we look at where we need to advance our ESG or environmental or carbon strategy, we decided to go forward with this class VI permit at Carbon TerraVault I, because it gives us a direct line to CCS and it's less complicated with the power plant, if you will, but we continue to evaluate the power plant and the power plant economics for EOR at - CCUS project.

So I mean the bottom line is, is look at the TerraVault I you're looking at that, it's - what factors like how much of that carbon per year are you actually capturing in storage in the credit for that? And so there's - fundamentally, you need to find the source and obviously build the infrastructure to get it to there to fully develop sort of the value chain, is that a fair statement?

Yes, that's a fair statement. But I think that when we look at the value chain and we think about that I mean, we have an inherent natural resource in that we have depleted oil and gas fields that show pretty tremendous potential for CO2 stores. That's the billion tons. And we're focused on the - obviously, the low-hanging fruit is, for a lack of a better term, that $200 million. And the - when you look at the overall project of getting a CCS project to be live, where you're actually injecting from a CCS standpoint, having the Class VI permit through the EPA, we believe is one of the longer lead time items, and that's why we're filing this in advance and building a project around the tank. Francisco?

Yes, if I can just add, so the Carbon TerraVault I project, you talked about 40 million metric tons. Think about that as the size of the tank. That's what we're going to permit first there and our initial estimates are that the injection rate is going to be 1 million tons per year so, just to give you a sense of the modeling around that.

Right and that kind of goes back to take the 250 times 1 million tons there's $250 million a year. I mean, simplistic way I guess, right?

Yes again, with a difference that 45Q is a tax credit, and then we're just talking about as a revenue and that's how you would start the model, yes.

That's the total amount of revenue that avails itself to carbon capture and sequestration that's right.

Yes, yes okay excellent. And then has your - obviously, we're talking about the carbon capture in the reservoirs are amenable to it. And I know there is been some studies. But remind me, has there been an actual - has there been actual carbon sequestration done on any part of the field that you have the confidence that it will work? Is there many test pilots to show that it structured looks there, but it actually in reality it does work itself because it's been tested?

I think - this is Chris Gould. We have obviously extensive 100 years' worth of history on these wells from these reservoirs from operating them. And so we're leveraging that data and that insight that we have collected to make the assessment of 1 billion. And we believe that those are permanent CO2 storage-capable.

But as far as the permit that you're asking about, Scott at Elk Hills, we have the necessary data and studies and analysis that we believe we have done some pilot studies at the site. But it is the modeling that we believe is conclusive. And because, as Chris said, that we have decades of data around these, we feel fairly confident in the analysis and the ability to permit just to - 40 megawatts.

To get the - so to get the permits, you don't need to have it demonstrated is, I guess the point?

You need to demonstrate - no, you do not need to demonstrate your modeling and simulation in the application, but that is all supported by the data that we've collected over all of these years. So that's why we feel comfortable with this.

Okay, okay. And joining, I'll apologize for this because that was like a long number one question. I'll call this my second question on the solar side of things. Can you talk about the structure of what the agreement with the partner is SunPower looks like? Is it a joint venture? Would they bring technology and you guys bring the acreage or how does that work? What's the like interest between the two partners?

Hi Scott, this is Jay Bys. No, nothing as exotic as that in the case of SunPower for behind-the-meter projects, we're looking at a PPA structure where we are the off-taker enjoying three benefits, primarily lower than utility costs on the energy, LCFS capability and the ability to put extra energy back on the grid.

So Scott, I mean, what we're doing is we're basically giving a land lease using our surface acreage. SunPower is building and developing the solar facility there. And we're the energy off-taker, and that gives us what Jay just said. So we're actually purchasing the power from them. So from our perspective its capital-light, we pay over time through the energy cost, but we both benefit. They are producing solar power, and we're taking that solar power and using it for hydrocarbon production.

And that solar power is going to be 55% cheaper, is that where you get the 35% cost reduction?

It's cheaper than the overall utility rate delivered at the meter, if you will.

Okay.

So you're paying for just the energy production portion of what you would pay from a utility rate, which would include transmission and distribution.

Yes. And you look at what you paid to the utility for increments of energy, what you pay to SunPower and then compare that to once you've been able to resell extra energy at and you add it in the LCFS, the effective reduction is a 35% reduction, it's meaningful.

Our next question comes from Eric Seeve from Golden Tree. Please go ahead with your question.

Congratulations on a terrific quarter. A couple of quick questions, in terms of the electricity business and the infrastructure or trading business, looks like another very strong quarter for both of them. What should investors expect for gross margin for those quarters for the remainder of the year - for those segments for the remainder of the year?

Yes I think so, Eric. If you take into account - so looking at the second quarter, if you look at both of the elements that you talked about, electricity business and infrastructure optimization, we saw about $35 million of benefit, $35 million to $40 million. Some of the settlements, especially natural gas tends to be seasonal. So it's difficult to project that out and by multiple quarters. The electricity side is a little bit more predictable. But I think as we've shown now, you can see the analysis on the earnings release. We're seeing pretty consistent benefit associated with those projects. So that's what we did in the second quarter. It's part of our assumption to assume that the next two quarters are going to be very similar to that.

Terrific so the next two quarters could be similar on an aggregate basis to what - each of Q3 and Q4 could look similar to what Q2 looked like. Is that what you're saying, Francisco?

Yes, that's fair.

Right terrific thank you very helpful. And then second question with respect to the A&D selling Ventura and buying on into Mount Poso and confront from MIRA. Does the full year guidance - it looks like it doesn't contemplate at this point the Ventura sale and that you'll reassess guidance once that closes pro forma for the sale? Is the same true for the bolt-on acquisition or does the current guidance contemplate the acquisition?

It's true for both America. We closed MIRA after the end of the quarter, and we're still working to close Ventura. So both transactions, the net impact of that transaction will be reflected next time we issue guidance and it's not in the current guidance.

Okay terrific, thanks for clarifying that. And can you - it looks like considering the oil composition a pretty accretive trade, is that - and I know there are a lot of other benefits in terms of streamlining the operations and letting you focus more capital. But from your vantage point, did you see the trade as accretive and can you maybe talk to that a little bit?

Yes, absolutely they are definitely accretive. As we're looking to look at our portfolio, as we talked about before, we'll see both acquisitions and divestitures on everything on the portfolio. So if we see an opportunity to buy into our core, we'll do that. And then the non-core assets that are not getting the levels of capital to grow them, we're going to try to look for a good transaction to divest them. So yes I mean ultimately, as we disclosed some of the high-level numbers in terms of production, so you can do the math and adjust them there. But we see these transactions as accretive and as - on the net basis, high-grading our BOE. So, definitely a good transaction for us in terms of high-grading the portfolio.

And we do have a follow-up question from Scott Hanold from RBC Capital Markets. Please go ahead with your follow-up.

Yes. On the pivot to more of the maintenance and downhole activity, can you remind us where you're at in terms of the backlog with that? And how much more you all can lean on that going forward? Because I think you had a bit of a backlog coming in from last year, but just kind of curious what the plan is to work it down to say, in a more normal levels?

Scott, it's Mac, and I'll ask Shawn Kerns to jump in here after this. But we have been reallocating capital into OpEx as we say, because we did build up a maintenance backlog through the end of last year, whether it be the prices, whether it be the restriction on cash, if you will, or building liquidity as going through bankruptcy and exiting at the end of last year. That backlog we expect to work down to normal levels by the end of this year. And so, we don't see the same type of opportunity that we would normally - it's not going to continue past about the end of this year. But Shawn, do you want to - some more specificity there?

Sure, Mac. Yes, I'll add to that, Scott. Yes basically, we did pick up some rigs to work down that backlog. In the first half, we've knocked out about 1,200 wells and brought those back online. We're making real good progress on getting that backlog worked out, have that wrapped up third quarter, fourth quarter, and then we'll be back to more normal levels of maintenance expenditure.

And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

No. Well thanks, everyone, for your interest and participation on today's call, and we look forward to discussing our sustainability and in CCS projects further in the fall. Thank you.

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