Aera Energy LLC (CRC) Earnings Call Transcript & Summary

Good day, and welcome to the California Resources Corporation and Aera Energy Merger Announcement Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Joanna Park, Vice President, Investor Relations and Treasurer. Please go ahead.

Thanks, and welcome to the California Resources and Aera Energy Merger Announcement Conference Call. Today's call will be led by our President and CEO, Francisco Leon. We also have other members of our executive team here today to take your specific questions following our prepared remarks. There are supplemental slides posted under the Investor Relations section of our website, crc.com. These slides highlight our compelling value we see behind today's combination. In addition, we have also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website as well as in today's release. Today, we will be making some forward-looking statements based on current expectations. Actual results may differ due to factors described in today's press release and in our periodic SEC filings. During Q&A, please limit your time to one question and one follow-up. This will allow us to get through more of your questions today. Thanks, and now I'll turn the call over to Francisco.

Good morning, everyone, and thanks for joining us. We're incredibly excited about today's news and the tremendous value it unlocks. This transaction enhances our conventional energy business and provides cash flow to help expand our carbon management business and decarbonize California. The transaction truly benefits all of our stakeholders. This combination demonstrates the merits of consolidation and reinforces our belief that CRC is a different kind of energy company. Over the next few minutes, I will highlight the key value drivers and how they position us to succeed on the road ahead. Many of you are likely familiar with Aera and its successful history in California over the last 2-plus decades. Aera was founded as a private joint venture by Exxon and Shell and is currently owned by IKAV and Canada Pension Plan Investment, CPPIB. Aera operates high-quality assets including 5 of the largest oil fields in the state and has been profitable throughout its 25 years of existence. Here are 4 things to know about the deal. The assets are a great fit, and there is an exceptional fit with CRC. The deal is priced right. The combination creates critical scale in our operations, making us a more durable business. It more than doubles our free cash flow, allowing us to return more cash to shareholders and provides meaningful opportunities to capture synergies. Let me take a minute to expand on these 4 points. First, this deal fits and its price is right. The Aera assets are very complementary to our existing portfolio and are very accretive. 45% accretion to operating cash flow per share and 90% accretion to free cash flow per share. The combination will double our production and make us the largest native producer in the state. This is a great thing for California. Let me explain. California needs oil production. In a recent report issued by the state, their experts acknowledge that California will need oil production through at least 2 more decades to 2045. We are working to rapidly decarbonize all sectors of the California economy, including the energy sector to provide cleaner, more affordable and lower-carbon energy. There is no better company to do that than CRC. Our in-state production reduces reliance on more expensive, higher-carbon foreign barrels and today's deal helps us build a material decarbonization business to benefit all stakeholders. As long as California needs oil, CRC will be here to provide it. This transaction is also great for shareholders. Aera brings a high-return conventional energy business that will significantly boost future cash flow and provide an engine to fund the expansion of our carbon management business. The deal is priced at about 2.6x enterprise value to estimated 2024 adjusted EBITDA and reflects a valuation of less than $30,000 per flowing barrel. The value of this transaction is substantially underwritten by the value of PDP reserves alone. As a reminder, this is an all-stock transaction, with CRC issuing 21.2 million shares. CRC shareholders will own about 77% of the pro forma company. Using our current share price, the enterprise value of the pro forma company will be approximately $5.6 billion. Second, this deal creates scale and durability. There is no denying the benefits of scale in today's energy business. Recently, industry has been rapidly consolidating and assets are migrating to larger, better operators with proven practices and the ability to deliver significant synergies. Today's transaction does the seem for CRC and will allow us to deliver more sustainable results through commodity price cycles. Once closed, we will have more scale in our conventional energy business with equivalent production of nearly 150,000 per day and an incremental 220,000 net mineral acres. This will provide important flexibility for us through capital allocation and direct control of projects. Next, this transaction is expected to more than double our 2024 free cash flow and expand cash returns to shareholders. In 2024 and at current strip prices, we expect to generate approximately $700 million of pro forma free cash flow. That's before any synergies. Because of the low decline nature of our combined portfolio at 10% to 15%, we have a lower reinvestment ratio and can maintain our production using less than 50% of our pro forma cash flow. The fourth highlight relates to the $150 million in meaningful synergies we expect to achieve within 15 months of closing. Cumulative synergies over the next decade have an estimated PV10 value of $1 billion. The larger synergies will come through operational capital and G&A efficiencies as we apply best practices. This transaction creates resiliency in our returns, and we expect our breakeven price to improve by approximately 10% before synergies. Together with Aera's organization, we have great confidence in our ability to deliver on these projections and more. Lastly, we will continue to be a sustainability leader in California Energy. Our track record in this regard is proven. And with Aera, we will have more direct control of emissions and more capacity to accelerate the decarbonization of our portfolio and California's emissions. Now let me take a moment to outline our priorities of free cash flow pro forma for this deal. Priority #1, for free cash is to enhance shareholder returns. Over the last 3 years, we have returned nearly $800 million to shareholders through stock buybacks and dividends. Yesterday, our Board authorized an increase to our share repurchase program to $1.35 billion and extended the authorization throughout -- through year-end 2025. That means we have approximately $750 million remaining under the plan. Post-closing, we expect to again boost our quarterly dividend, which will be the fourth consecutive increase in as many years. As our enterprise grows, we will continue to prioritize cash returns to shareholders. Priority #2 will be to maintain our strong balance sheet. Aera has $1.1 billion of debt, but provides a substantial stream of cash flow. With an effective date of January 1, we plan to use Aera's free cash to maintain our strong capital structure. We project leverage of less than 0.5x within 12 months of closing. We will opportunistically look to refinance the Aera debt. Our balance sheet and increased scale will provide deeper liquidity, improve credit and access to capital at more competitive rates. Our third priority is to build for the future. Free cash flow from today's high-return oil developments will help fund tomorrow's expansion of our carbon management business. Aera expands our surface footprint with overlapping developments and infrastructure and provides a 27% to our premium for space suitable for classic permit application. This moves us closer to achieving our target of 5 million metric tons of annual CO2 injection. CRC will be in an advantaged position as the market leader for carbon capture and sequestration in California. Before moving to Q&A, let me clarify the value this transaction brings to our carbon management business. The combination doubles our premium pore space and in the near term adds about 54 million metric tons of storage capacity in the San Joaquin Basin. Premium pore space is unique and not all reservoirs are suitable for storage. Aera's assets are fee simple, meaning we control the surface and the minerals. This is a powerful combination and allows us to drive the timing of future carbon projects and develop many of them on their existing regulations. Located in our backyard, Aera expects to receive approval on the 27 million metric ton Class VI permit at Carbon Frontier next year and we plan to submit an additional Class VI permit at Coles Levee once this transaction is closed. Including these potential permits, our premium storage capacity increases to more than 100 million metric tons in the San Joaquin Basin. Next, today's transaction has enormous economic potential for a carbon terrible subsidiary, allowing us a platform to scale this business. The new reservoirs Carbon Frontier and the [indiscernible] Coles Levee will be eligible to be dropped into our existing CTV JV with Brookfield. If accepted, these new reservoirs could result in potentially new Brookfield postpaid contributions. Additionally, and once the reservoir capacity is fully subscribed, we see further potential of $70 million to $180 million in EBITDA generation based on our previous type curve assumptions. Lastly, the deal drives value for all stakeholders throughout -- through the decarbonization of [indiscernible] sectors. With new scale and operatorship of Aera's brownfield emissions, we expect to lower the carbon intensity of production and apply our decarbonization solutions to address the large amount of nearby third-party annual emissions in the San Joaquin Basin. We will have an enhanced ability to store third-party emissions and accelerate the decarbonization of California. We also see incremental potential for other clean technologies such as Direct Air Capture and solar to help California meet its climate goals. We will be California's decarbonization partner of choice. The benefits of today's transactions are compelling. This deal is attractively priced, highly accretive and enhances our conventional energy business, creating scale in our operations and capital allocation flexibility. We have identified $150 million in synergies with upside. This will enhance returns, and we will gain valuable cash flow to grow our business, reduce debt, return cash to shareholders and opportunistically expand our Carbon TerraVault platform. We will be well positioned to provide sustainable energy solutions for the state. CRC will have the leading land and mineral position and proven experience partnering with regulators and other stakeholders to advance common interests. By combining with Aera, we see a stronger and more viable path to higher cash flows, lower carbon emissions and a better California. Thank you for joining us on the call today. We will now open the line for questions. Operator?

[Operator Instructions] Our first question today comes from Scott Hanold, RBC Cap.

Congratulations on the transaction. Looks like a pretty good deal. My first question, Francisco is how does this combination affect the timing and structure of that potential separation of the 2 businesses that you spoke about down the road? Can you give a little bit of color on that?

Scott, thanks for the question. This combination really strengthens our business on both sides, the upstream business and the low carbon. We're continuing to assess the best way to unlock shareholder value that may mean a separation down the road, but the transaction actually expands the options and allows us to be -- to extend the runway in case we need it. We're committed to the value unlock and there's a lot of excitement of our Carbon TerraVault business, but I thought we needed scale in our upstream business, a growth story and more cash flow to be able to deliver on that vision. So we're continuing to work on the view on a separation. We don't necessarily see that the market being receptive to that right now. We're looking to advance and really mature the Carbon TerraVault business as we get permits, as we get first projects off the ground and injection of CO2 next year, but excited to bring a lot of cash flow and really good assets into the portfolio that can help expand the business both ways, upstream and low carbon.

Appreciate that. And good to hear, you kind of slipped in that -- you're still committed to the 2025 first injection, good to hear. My follow-up question is on the oil and gas permitting and it's -- I guess, less directly on obviously, the hearing that was held a couple of weeks ago, but more so on, with Aera, like what permits do they have in hand? And when you step back and think about like you're going through a dual track on getting the permits. Do you feel confident in having regardless of the outcome of that hearing permits to execute this plan? And again, in part of that discussion, can you talk about the permits that Aera would have in hand to allow you to do so?

Yes, I appreciate the question again. So our business and all the assumptions behind this transaction were planned around market certainty and what we can get to them today under the current regulatory environment. So what that means is that there hasn't made an update on the Kern County EIR. We still expect to be increasing activity in the second half of the year. So that hasn't changed. We're awaiting an update after the appeal court listened to the arguments on both sides. So nothing has changed from that perspective. But the value of this transaction doesn't contemplate incremental permits. We really value this and the underwriting was done at a PDP level. So when the projections that we laid out in our materials assume a fully permitted plan for the Aera assets. So all the permits on hand that they need to deliver those cash flow projections is what we have today. So that also means their subside. The upside comes from permits to both groups and the ability to ramp up production down the road. But that's the way we looked at it to make sure that we reflected what we know today, and we priced the deal accordingly.

Our next question comes from Kalei Akamine, Bank of America.

I guess, first off, the industrial logic at this price makes a lot of sense. So congrats on getting that done. My first question goes to the durability of the production base. First off, I can't help, but notice is returns CRC to its legacy scale when I first spun out of Oxy. But that also suggests that California production has declined, so can you talk through that decline rate at the Aera asset? Where do you see the production plateau and what is the capital to hold that production flat? And how many years can you do it for?

Thanks for the question. So yes, full circle in terms of the production rates, as you mentioned. We see the combined capital to maintain production at around $600 million per year. So that would be fully permitted with all the rigs that entail and we see the -- as you know, these are massive oil and gas fields that we own and that Aera owns as well and now forming a combined company, stack pay, multiple producing horizons, just phenomenal [ rock ] that has really strong recovery factors, I mean, in the 40%, 50% recovery factor range. We're able to do a lot of our production activities through sidetracks, workovers, water injection, so we feel good about the inventory. We feel good about the recovery of the oil assets and expect to be able to deliver -- continue to delivering the local oil as we continue to have more and more foreign oil coming into California that's driving prices higher. I think the solution is really to encourage local production and excited to kind of take this on and showcase what we can do with this combined asset, but these are just phenomenal fields Aera owns.

This is not a follow-up, just a clarification. Is the $600 million number fully baked for facilities, maintenance, et cetera?

We're still reviewing the facilities cost. But no, I would say the $600 million, it's more D&C inclusive of workovers and sidetracks.

My follow-up just goes to the timing and perhaps the value of the deal. I guess, big picture, why now, why before the [ EIS ] has been decided and I guess why were both parties comfortable with that uncertainty?

Yes. Why now? It's always very difficult to time and M&A deals, and we stayed opportunistic. I think we really focused on improving our company over the last 2.5 years. And we've done that. We've executed in a significant way, improving the balance sheet, reducing costs, delivering on everything we said we could do. I think that put us in a position to establish conversation with Aera ownership today and glad that we were able to do this and very excited about how we price the deal and look forward to it. There's -- I think that comfort comes from -- in terms of drilling inventory. It comes from the state needs that local production. And again, I think we could have waited. There's -- so we could have done to along the year, but this was the right time. This is the right time and the pricing of the deal is spot on. And it's hard to speculate what had happened if the permits have come in now, but would think we're better together and look forward to reranking the portfolio, looking at this broader set of assets and delivering a high-graded view of the business. So why now, because it was the right time we were ready, and we think this is a great opportunity for us and the shareholders.

Our next question comes from Nathan Pendleton with Stifel.

Congrats on the great transaction. In your prepared remarks, you spoke about for oil and gas in the state and your low carbon barrel relative to imports. And on Slide 11, you talked about maintaining flat production post-close. I wanted to get your perspective on if you view flat production at the right level longer term with this strengthened asset base.

Yes, I think that's -- right now, that's where we like to be. It's a flat production allows us to deliver cash flow, cash flow growth as we continue to reduce synergies or to achieve the synergies, then that should result in a cash flow growth projection for the oil and gas business and get us to the future of our carbon business. There's always going to be an opportunity with this inventory with this asset base to go beyond the stay flat case. We don't see investors rewarding that strategy and we're coming from a place right now where we're not there yet. So -- but the assets are more than capable of that, and it will be -- we'll continue to be very efficient with our capital. And once we get the permitting resolved, something that we consider. But right now, we still -- we feel it's a stay flat case, it's in the best interest of the shareholders, and that's what they're rewarding. So that's our current strategy. But definitely, the assets can deliver more and look forward to getting the permits and talking about this in the future, but stay flattish is the way to go for now.

Got it. And referencing to Slide 6 on the carbon management business. Can you provide some details on the acquired carbon frontier project and how that fits in with your overall vision for CTV?

Yes, absolutely. Excited to see -- we started our Carbon TerraVault business over 2 years ago. And we're able to get to our draft permit for Elk Hills and CTV I in December. We are being at the leading edge of carbon, doing first of a kind on a number of things and making good progress. It was good to see Aera following and coming up with their own, what looks to be a very strong permit on their own assets. The way I would describe it maybe to simplify it is we see Belridge as a Elk Hills 2.0, very similar asset base, deep reservoirs that are very conducive to storage, we own the land, fee simple. And that's a permit that should be very actionable in the near term. It's undergoing review. It's still -- you can see you can follow that in the EPA tracker, but we see an absolute way to accelerate and bring forward another project that also will have emissions on top of the reservoir. So exciting to be able to look at on Elk Hills, some of the new technologies and some of the new forms of energy, but that the Aera fields, we feel that we can decarbonize the oil field with emissions from the oil and gas production. So a lot of synergies there, a lot of similarities in the type of project and excited to get that project, the Carbon Frontier up to the finish line and enhance the platform that we're building at CTV.

And our next question comes from Nitin Kumar with Mizuho.

I want to start off just -- going back to what Kalei was saying, this does concentrate -- bring you back to a pretty sizable player in the oil and gas business in California. Any early thoughts? We've seen recent deals getting second request from the FTC and stuff like that. Any thoughts on the regulatory reception of the deal?

Nitin, so the primary approval that drives the timing of this transaction is at the federal level with the FTC, as you said. You know the process that the FTC takes and you have the 30-day waiting period that's prescribed by under the HSR Act. We have seen a second request, they seem to be common for transactions in the oil and gas industry. But ultimately, we expect the transaction to be cleared by antitrust regulators. The fact again, the California imports over 70% of its oil and over 90% of its gas from outstate. It's important that we highlight the pricing is really driven by this imports. And as the largest local producer, we don't see in any way affecting competition because we'll continue to compete with those producers from across the sea in the Middle East and outside of the state.

Got it. That's really helpful. And then I noticed you said you are looking to increase your dividend post the close of this deal, the fixed dividend. You already had a 2.7% yield, which is pretty competitive. So if you could help frame for us how are you or the Board thinking about the dividend payout? Is it a percentage of free cash flow? Is it a certain target yield? Like how are you trying to -- what's the kind of mechanism that you might be employing?

Yes. As you know, we've -- we really like the combination of doing the share buybacks and having a fixed dividend. We've been able to do both extremely well for a couple of years, while we also have been build cash in the balance sheet. We were evaluating the dividend policy in light of this transaction. We have to come back and talk about the more specifics later. As we talked about, there's a lot of synergies, $150 million of synergies. There's a lot of cash flow and we're going to look to really optimize how we return that cash to shareholders. So it's premature to talk about a target rate or to be more specific than that, but it's something we're doing and are prepared to discuss once the transaction gets finalized.

Great. If I can sneak one more in. You had 80% of your oil for next year is hedged post the deal. I'm curious, is that something we should expect to see going forward? Or is that just a short-term thing based on the leverage profile you have right now?

Yes, Nitin. So the 80% refers to the incoming hedge portfolio from Aera. The -- I'll ask Jay to provide a little more details and color on this. But as you know, we have a different hedging strategy now, which we look at more of where Aera has been doing more swaps. So maybe, Jay, if you can give a little color of what we see in the Aera hedge book and how we're likely to think about it on a go-forward basis.

As Francisco pointed out, serendipity to both books are approximately 80% -- 75% to 80% hedged next year, it wasn't by design. But they do use some different instruments. They are swap based. We tend to be a little more option-based. You should expect, based upon the cash flow needs of the business, which will be on an aggregate now evaluated. There'll be different -- likely be different tools employed. It may be more options, it may be more swaps, but that's yet to be figured out. But they had some RBL requirements that asked them to hedge. They've hedged in certain cases. And with the change in the capital structure, you should probably expect a little bit of a change in their hedge book and probably are.

Yes. So we'll continue to evaluate the hedge book. But what I like about the transaction with the effective date right now, and the way we're looking at this deal is the cash and the significant cash generated by the Aera assets until we get to closing will be used to pay down the debt. So the hedge book and the swap instruments actually accomplish that in a way that we can track them and predict that in a more effective way. So we'll reevaluate the hedge book once we have the closing, but the hedges are at a reasonable level and allows us to kind of see a roll-forward balance sheet that's much improved by the time we close.

Our next question comes from Noel Parks with Tuohy Brothers Investment Research.

Good morning. Just had a couple of things. One, just sort of like housekeeping items. There's a mention in the release about lockup conditions and it mentioned something about greater than 6 months, but then a certain percentage of the new shares, 12 months back, another 18 months. So I was just a little confused about the 6-month piece of it. And also, just wondering, is there any sort of contingent consideration in the deal in case I don't know, you have a massive commodity price swing between now and the close?

Yes. It's definitely lockup period. It's a good question. Thanks for asking. We're excited to see IKAV and CPP really be committed to the combined company. And they've agreed to an extensive lockup period. So the way it's going to work is they will be able to sell shares about 1/3 of this 21.2 million shares after 6 months. So they restricted only to 1/3. Then after 12 months, they were going to be able to sell 2/3 of the total shares and then the final third or the total of their own shares, they can sell after 18 months. So to fully clear they need to wait 18 months. And that was a point of negotiation, which we found a lot of alignment from both parties that again look to see, look at the strengths of the combined business, look at the power of being able to put these assets together and generate cash flow together. So the lockup period may look a little bit unusual definitely more extended, but that was the intent is to be together. As you know, they're going to nominate 2 Board members as well. So this is an enhanced team all the way, and we're looking to work together and add a lot of shareholder value.

And contingent consideration or color or anything like that?

No contingent considerations. 100% stock.

Okay. Great. And could you just talk a little bit about Aera's sort of recent history, like what the activity levels have been like kind of what -- how they manage activity sort of before drilling and after COVID. And I'm just wondering that you had a mention about technology and I think being San Joaquin Basin. And could you just talk a little bit about -- do -- are you bringing like a much more extensive technical staff or background with data, seismic, whatever to the combined organization? Or is it really going to be just a matter of more capital to sort of just chase out the potential they have?

Yes. On the first question, we worked alongside with Aera for many years, as Oxy and then CRC. We see -- a lot of things really well, really fantastic practices in the -- just the high bar of operatorship coming from 2 majors, you would expect that. And so the track record is very strong. I think we've had some declines just like we have in the last year due to the lack of permits, but their production is hanging in there nicely. It's a nice thing about California assets, is the nice thing about the rock that we have here. You don't have the shale problem where 40%, 50% of your company goes away if you don't drill. So here, you have a very well-managed asset, and we spent a lot of time talking to Aera and their team and we're able to confirm kind of the best practices that they follow and excited to confirm that everything that we can see from afar, we can verify once we get closer to the transaction. So we see a well-run business, a very, very strong asset base that has a lot of potential on a go-forward basis. And again, it's a fantastic team. As I said before, we see optimally trying to get to a stay flat on the business. That's about $600 million, I would think about that as about roughly split 50-50, $300 million of capital for CRC, $300 million for Aera. So that's a little bit about the asset base. Yes, in terms of technology, we have -- we see a lot of opportunity around optimizations, around artificial intelligence. We see coverage that trying to get more technology into California. I mean that the unfortunate thing is we don't have hundreds of operators that you have in other basins. So it's going to be more centralized to a few folks that ultimately can drive those technologies. But we're seeing some great things from our team. We're seeing some great things from the Aera team. And now the challenge is going to be and the challenge for the team is going to be put our heads together in high-grade and optimize those technologies. So I don't see anything that I would say is a high capital dollar requirement. What I see is high-impact technology that can be applied to really productive reservoirs to look to bring more oil off the ground and to be able to reduce cost over time. So I would say the enhancement of technology are of that sort and not being around really anything that cost a lot of capital.

Our next question comes from Leo Mariani with ROTH MKM.

I wanted to follow up a little bit just kind of on the background of the transaction here. So it's generally my understanding that this asset was kind of transacted in sort of, I don't know, late '22 and closed sometime in early '23 around $4 billion, and you guys are kind of coming in and buying this for roughly half of that. So would love to just get a little bit of color around that and it's kind of less than 12 months later, you guys are agreeing to buy something that was previously sold. I'm assuming that you guys were kind of the only bitter here, and this was sort of a negotiated process. Can you just provide a little bit more color around the deal background here?

Yes. Leo, so it was a bilateral discussion. So yes, they didn't run a process. I think the reason they approach us is because they see the quality of our operations and the strength and power of the combination. I would say it's very hard to comment on prior deals and what may have been public or not. But I don't think that the full details of the transaction from that IKAV and CPPIB did were really public. And what I would say is that the full purchase price details were likely different from what was disclosed. There were a lot of effective date in different considerations that were not known to the public. What we know is this is a good deal for everybody. I think the highlights to us are clear. We talked about growth in cash flow per share. We talked about the significant synergies and we talked about the expansion of our business. So it's clear in the owners of IKAV and CPPIB now own 23% of that combined company in that upside. And they see this as a deal that's very positive for them. And again, I don't want to comment on what was known or not known as the last deal. What I know is this deal is priced in a way that's attractive to the shareholders, but it's a win-win across the board.

And then look, I think from a high level, some people may interpret this as CRC somewhat doubling down on California oil certainly understand the merits that you guys have outlined, certainly understand the financial numbers seem to make a world of sense, but I guess you guys are well aware, just California oil in general, probably hasn't been the most popular strategy with the average shareholder over the last several years. So just any kind of comments you just have around that would be helpful.

Yes. We we understand California, and we all know how to operate here. We have a proven history and created a lot of value for over a decade. And do we see this as a tremendous opportunity. Assets of this caliber don't come to market very often. And we have the scale, phenomenal fit, significant near-term cash flow, premium pore space and that all gets enhanced by synergies. So we see this as a transformative transaction for CRC, something we needed to look at and excited about where that puts us in terms of the trajectory of the business. So it's an exciting day, Leo. We're very, very happy to be here. And again, we want to be solutions -- provide solutions to the state of California, fifth largest economy. They need energy. Our California, people that live here, they need the energy and affordable energy, and we can deliver that and excited to take that and talk to our multiple communities and showcase the benefits of California local production.

Okay. Understood. And then just on the liability portion, could you address that real quick? You guys are talking about roughly $1.1 billion of liabilities, which sounds like it's exclusive of this $240 million hedge book, which, I guess, seems to be a bit underwater that you guys are taking on. So any kind of more color on that $1.1 billion? Is that primarily debt? Does that include P&A liabilities, is that debt more fixed term debt? Is there kind of more of a flexible sort of bank debt that you guys can pay down? Anything you can offer there would be great.

Yes, that's right. So it's -- most of that is that, part of it is RBL debt that's prepayable. We also -- they also entered into a second lien piece of paper that has some prepayability aspects of it, which we intend to refinance at some point in the near future. So the bulk of it is going to be a second lien note in the RBL. There is a make whole that's attached to the second lien note that comes down with time. It's against prepayable, but with a make whole, so as more time passes here to get the closing that naturally comes down. And there are -- there's a little bit of that that's contingent payments to the prior owners, so those are the kind of the 4 buckets. But the bigger amounts are the RBL draws in the second lien piece of paper.

[Operator Instructions] Our next question comes from Scott Hanold with RBC Cap. Sorry. Our next question actually comes from Fernando Zavala with Pickering Energy Partners.

Just a quick one for me. On the Pro Forma capital, can you give a breakout of how much is [ CCS ] spend versus E&P or if that's only E&P spend?

Yes. So in terms of the capital, the bulk of the capital for both companies is still very much on the oil and gas business. I think we talked about -- our average spend on carbon is around $40 million, $50 million. We haven't guided for 2024 in specifics, but that's what we had assumed when we last had our earnings call. It's a smaller amount for the Aera business. They're a little bit earlier in the process, so not significant capital. So the bulk of the capital that we see is going to be more traditional oil and gas.

Okay. Got it. And then just a quick follow-up. When you talk about the $600 million of maintenance capital, is that to maintain the Pro forma '24 production that you provided? Or is that like a fourth quarter number?

No, correct. It would be fully -- if we had all the permits to drill and maintain production in that $145 to $150 range that we guided, that would be the capital needed to maintain that production.

And our next question comes from Scott Hanold with RBC Cap.

Let me back in here. Beyond the Classics permits, can you -- and I think it's in the Belridge field. Can you talk about the CMB efforts that Aera had? I mean, did they have any plans with off-takers or any kind of greenfield plans on their business? Can you give a little color there?

Scott. Yes, the way we see -- the approach that they were taking was more of self-help. They were in talks with third-party emitters, but it's really more about the emissions that they were generating or that they are generating. So more of a brownfield self solution strategy. And like I said earlier, a lot of these emissions are on top of the reservoir. So they can be -- they don't require long-range transportation to be able to store them. So yes, we're looking forward to spending more time on the carbon side of the business and looking at potential opportunities to bring synergies and think through those projects in different ways, but that's kind of the short answer, more brownfield self solution.

Got it. Understood. And really quickly, you had mentioned that -- and just to clarify, when you look at the purchase price, that is basically underpinned by PDP-only value when you look at it. So when you look at the $2.1 billion, that's basically the value of the PDP blowdown reserves. Is that correct?

It's the value of the PDP, yes, the PDP assumption is what ultimately underpins the enterprise value of the business. So that means no value attributed to the carbon business, no value attributed to the real estate portfolio or the land assets. So we were able to transact and underwrite the deal on a PDP basis.

Okay. And you mentioned real estate and other assets. I mean, obviously, you guys got a significant sort of marketing midstream power business as well as real estate. Do they -- do they have anything else under the hood outside of the upstream and CMB business?

They do, I think cogens, you're able to generate their own power in some of the fields. There's a lot of infrastructure and gathering lines and pipelines. Right of ways that are going to be very valuable as we think about this business on a go-forward basis. They have a pretty advanced project on water treatment. So yes, very high-quality facilities and look forward to a further and more specific rollout of all the Aera assets. But -- it's like CRC integrated business with a lot of investments that have been made by Oxy and Shell and Exxon that deliver higher realizations and more control of your assets. So again, another one of the aspect is very complementary.

Okay. I appreciate that. It sounds like you got another Hemi under the hood here.

Thank you. And we have a follow-up from Kalei Akamine with Bank of America.

Sorry for the very quick follow-up. Just wondering what the inventory depth of the asset is, how many years can you hold the 76,000 barrels per day flat at the $600 million combined capital number that you talked about?

Yes. The way to think about these assets are -- they're just great recovery factors. And the inventory in our portfolio, and it's the same with Aera it's never really an issue in terms of quality, profitable, high-return inventory. As you know, the challenge we've had is getting the permits in a timely fashion to develop it. So that's the way I would think about this, rich inventory, decade plus of activity that we could pursue as we rectify and get the permanent back on track.

This concludes our question-and-answer session. I would like to turn the conference back over to Francisco Leon, for any closing remarks.

Thanks again, everybody. Again, what I repeat, the excitement that we have of the combination today, we're focused on enhancing shareholder value, and we see this transaction as delivering that day 1 and as we execute on the business plans and the synergies of the combined companies after closing. Thanks so much. And please follow up with any questions.

Thank you. The conference has concluded. Thank you for attending today's presentation.