California Resources Corporation (CRC) Earnings Call Transcript & Summary

Hello, everyone, and welcome. Thank you for joining us, and I'd like to turn the call over to Doug Leggate.

That's a good effort. Thank you, everybody. Welcome to our first afternoon session of our 2020 virtual energy conference. Again, I express my thanks to everybody making some time to be on the line, but also to our corporates for making the time to participate. And this one is particularly special because we're -- I guess we're kind of seeing California Resources back on our schedule for the first time in quite a while. They've reemerged, of course, as a public company just a few weeks ago. And we're joined today, I'm delighted to say, by Todd Stevens, President and CEO; and Scott Espenshade from Investor Relations. So Todd, congratulations on getting through what I'm sure was a torturous process, and we're delighted to welcome you back to the energy patch. So thank you for being here.

Yes. Thanks, Doug. We're so glad to be back, even if it's virtually talking to you today.

Yes. We'll hopefully get you in person next year. But because of the process you've just been through, I thought it might be useful maybe to ask you just to kick off with a few -- maybe a summary of where you've been, where you are now and what the key differences are? And we've got a bunch of questions on structure and so on. But why don't you kick us off with that? And obviously, a lot has changed since the last time you were able to be with us.

Yes, Doug, that's great. And a lot has changed, a lot has stayed the same. I think it probably makes sense. I will kind of go through -- we have a brief presentation, which your folks have there. It's 15 slides. And I'll talk a little bit and give them the background they need and also understand how much has changed for us primarily from a balance sheet perspective, but also how we've realigned the company. And I'll start on Page 3 and really give everyone a backdrop to California because no one's really familiar with California oil and gas. It's very tightly held by only a few players. Most people in Houston think of, I'd rather do business elsewhere than California because they think it's just -- it's a place where they film Hollywood movies and that's it. But people forget, California is the fifth largest economy in the world. 1/3 of all port traffic in the world goes through California, particularly the ports of L.A. and Long Beach. This is something that people don't realize. But then when you couple that with the fact it's an energy island, and I'll talk a little bit more about what does that mean, that it's -- it has a chronic energy shortage, so it has to import basically over 80% of its natural gas, 70% of its oil and over 1/3 of its electricity. And it's not really tied into the rest of the energy infrastructure in the United States in the Lower 48. So this creates quite a circumstances. And then when you couple that dependence and you say, well, pre-COVID, the in-state native production barely covered the jet fuel use in the state. And to give you a feel for how much when we talk about the fifth largest economy in the world, it's over 10% of the gasoline consumed in the U.S. and almost 20% of the total U.S. jet fuel consumption is in California. So this is really interesting. And then people don't appreciate, California really is a prolific oil and gas province. It's a depositional environment, very similar to the Permian Basin, particularly the San Joaquin Basin. But when you layer on the tectonics of the North American plate and the Pacific Plate crashing into each other, you create all these micro basins, so you end up with an environment where you have every drive mechanism you might see in the world, every type of hydrocarbon produced in all these micro different types of basins. So you have very everything from heavy oil to dry gas. And so it creates a quite prolific environment. We ourselves produce from 400 different horizons, and that gives you that stack in nature where wellbores really gets you a lot of value. And that's why you'll see, in California, historically, it's really been a vertical wellbore environment or a slant wellbore environment, which has been something that's very interesting, but also bodes well for just either some kind of small horizontal drilling or even micro horizontal drilling and things we look at. It's important to understand too that because of this dislocation from the rest of the Lower 48, it's based off a brand. The marginal barrel coming into California is waterborne, and we'll talk more about that. But again, over 70% of it is waterborne, only about 10% of that's Alaska. And now that 60%, over half of that's from Saudi Arabia. And as -- well, you might expect California is a place that's cutting-edge on many policies, particularly when it comes to business and our industry. So being a good steward of ESG and the environment, it's very important for us and very important for the state we do work with. And we look and continue to do complementary projects that compete for capital, but also are in the renewable space that help us with working through the environment. I'll briefly talk about our business and it's really -- if you're following on the presentation, Page 4, we're the largest oil and gas producer in the state. Again, it's very concentrated between 3 of us players, ourselves, Aera and Chevron. Aera is a joint venture between Shell and Exxon; and Chevron, everyone knows who Chevron is. Three of us control about 75% of the production and over 90% of the mineral acreage. These are conventional reservoirs, low base declines, very low compared to the shale universe, low capital intensity. We were spun off with quite a millstone of debt almost 6 years ago. And -- but we've been focused on living within cash flow and free cash flow and value since day 1. It's not a new thing for us. So we continue that focus, where we're focused on generating cash flow through enhancing our margins and lowering our costs and have been since the spin-off. The other unique nature of us is we're kind of like a super major and an independent. We have an integrated business. We have midstream. We have oil and gas processing facilities. We have power plants. We have water infrastructure and storage facilities. So this is something that's very interesting. And one thing I'll quickly walk you through, the state of California, the 4 major basins, if you're looking at that app starting in the north of Sacramento Basin, it's primarily a dry gas basin, a very prolific field, and most of that gas gets supplied into the Bay Area industrial complex. The main basin in California is in Kern County, Bakersfield, where most of the oil and gas industry in the state is headquartered is the San Joaquin Basin, extremely prolific. Some of the largest oil fields ever discovered in North America. Our flagship field Elk Hills is there. Coming back down, Ventura Basin. The Ventura Basin is the oldest basin. The eastern edge of it is when oil and gas was first discovered west of the Rocky Mountains. Los Angeles Basin where our Wilmington Field, which is the production sharing contract with the state of California and the city of Long Beach. The LA Basin probably has the most oil per acre density, kind of richness that you might see in the world, except that most of the basin has been paved over for service development. But we have 2 very interesting properties here. First, the Wilmington Field, which we'll talk a little bit more about. And then also the Huntington Beach Field, which a lot of people are very familiar with because of its intrinsic value ultimately when oil and gas goes away. And I'll talk about, again, the importance of integrating ESG sustainability projects and renewable projects into our portfolio as we look to continue to be a leading energy producer in the state. Flip real quick on Slide 5. We're a new foundation, a new balance sheet. That's the most important thing for us. This is not how we wanted to get here, but this is how we got here. This is where we are today. We're very pleased to have gotten through our restructuring quickly. The amount of fees paid in restructuring is enormous, so the shorter the better and our shareholders benefit from that. But along the way, we've been able to flatten our organization, not just through the last 6 years -- almost 6 years, but particularly just recently during the restructuring. When we were spun off, we had over 2000 employees. We have materially basically the same asset base. And we're at about 1,100 employees today. We feel like we're stronger, leaner and meaner, and we continue to look at ways to cut costs and become more efficient and drive that margin expansion through, again, cutting costs and growing revenues. And having that integrated business enables us to do those type of things because operational excellence is so important to us. So we still have this value focused, but it really starts with us for safety. So you have to be -- keep your license to operate, be safe. You have to have a great environmental record and be engaged with the communities you live and work in. And that's where ESG really comes into this before. And for us, that is why we're so excited now to be coming back out again as a publicly traded company. I opine that it really is almost like a direct listing when you come back out from restructuring because you just suddenly come out and there's minimal liquidity. You have large shareholders who want to hold on to the shares. So it's something that makes yourself very attractive, but you're trying to get the liquidity built up as you start continue trading. I'll point you to that chart on the page. And you kind of see we have very low leverage, very low decline and we're very attractive valuation. And we're excited to be here and talk about the new foundation we built for the company, both structurally and our cost structure, but also with our new balance sheet. Real quick talking about Page 6. Again, same thing. Lowered our charges greatly. We continue to have a lean structure and look at better ways and really using public data. You can see we have best-in-class decline rates, best-in-class maintenance capital. And I would say, historically, we've been $300 million to $400 million, I would say, at the lower end of that and trying to continue to drive it down. I don't think we're ready to commit to saying definitively because we're doing a lot of work and working with our new Board of Directors, but we feel real good about some of our gains. Through the restructuring and through this year, we've been able to achieve OpEx and G&A savings of well over $300 million. The G&A savings is permanent. I'd say at least 50% of the OpEx savings is sustained, and we continue to look at ways to continue to have sustainable change and making ourselves better structurally from a cost structure standpoint. That's really important. I will, real quick, point you to Page 7 and talk about reserves. So one thing I want to highlight here is -- you've got to remember, we have about 23% of our reserves are PUDs, but only 15% of our -- value of our PV-10 is PUDs. We don't really require a lot of drilling to create the value that's inherent in CRC. Because of the stack pay nature and conventional reservoirs, a workover rig gets you a lot more value and the focus on surveillance and using the focus you have in your cost structure appropriately can get you a lot more value in some cases and then drilling a new well. And that's something I think that's important to understand is, again, we don't -- haven't had a drilling rig working since February by CRC. And we're just focusing on workover rigs and bringing back production that we had shut in during the downturn. This brings me to Page 8. And really, this is one way we think about it, and I want everyone to think -- look at the way we think about things, is you have this lump of investment dollars that you get to spend each year. And it goes into LOE, it goes into G&A and it goes into capital investment. And we're different from many other folks because of that. We don't have to rely on just drilling wells through capital investment. We can focus on LOE. Like in this fourth quarter, I'd say, our LOE is going to creep up a little bit as we add some workover rigs to bring back production online, but we're bringing back production that's profitable. We've been lucky enough during the last 5.5, 6 years to develop tools. We understand the economics of every well of every pattern, so that when we had the downturn earlier, we wanted to maximize profit and maximize liquidity. We're going to start shutting in those wells immediately. And because we have this real-time focus because we have the level of operating control, we can do so, and we can lower that bubble we want to be able to scale up our capital down and up and also our G&A and LOE because for us, you're getting real value and you're looking to get value out of every one of those investments, whether it be in people or OpEx or even CapEx. And that's what's unique about our business because you can look at it from the perspective of -- you could invest in more your power plant, which might lower your costs and generate more cash flow, but it won't show up as new barrels. So you can't really look at us as just a -- from a drilling and production standpoint because we're all about value, we're all about generating cash flow. And this brings me to give you more guidance on Page 9, kind of breaking down year-to-date '19 versus year-to-date '20. You can see the real big decline is on price and a little bit on volume. For us, it was -- the key for us was getting through this as quickly as possible, maximizing liquidity and focusing on getting the cash to our shareholders, not to all the advisers and helpers along the way during restructuring. And you can see here, this is another depiction of what's happened on production costs and our G&A. But we're on track, as you can see, to continue to deliver more cost savings. We had a restructuring during the -- organizational restructuring during the middle of our Chapter 11 proceedings that brought us down to rightsize organization for $40 Brent, but we're not satisfied. We're going to continue to drive costs out and drive down our breakeven and ultimately generate more cash flow. On Page 10, I really quickly talked about earlier, California is an island. This is really the depiction you can see. Oil is waterborne. Back when oil prices were much higher, when we were spun off, people were looking to rail crude into California. That's sort of $12 to $15 a barrel proposition. So that's really stopped. Most people look at us and they say, "Hey, how do I benchmark crude for your portfolio of crude." Buena Vista posting is a good directional proxy for our crude, to understand where we're going. But to give you a feel, our Elk Hills crude typically trades at 105%, 106% of Brent, probably the highest priced crude in North America. It's a very attractive proposition. One thing I'll talk about gas here is natural gas, with 90% of the natural gas imported. Historically, you just had a premium to delivery costs from Canada, the Rocky Mountains, San Juan, Permian. Now because of Aliso Canyon going down and the uncertainty in the natural gas markets. When you get hot days or cold days, so we're talking about winter or summer, not really spring and fall, you get dislocations between border prices and city gate prices. And because we have our infrastructure, we're able to create trading around that and utilize our infrastructure to take advantage of those market dislocations. Typically, you'll see that in our trading income, which could be, in each quarter, tens of millions of dollars for us as we go forward. Looking at Page 11, it kind of gives you a feel of how high our level of operational control is. Typically, if you look at these charts for folks, you'd see kind of a stair-step down or a stair-step up. And really for us, we're able to react in real time, shut-in wells, pattern by pattern, well by well. We don't have a real need to hold leases. We control over our 2 million-plus acres. Most of it's fee. Or if it's not fee, it could be fee simple or some other structure. So there's no having to drill or having to do activity to maintain activity. For us, it's all about value and cash flow. And you can kind of see it as we've come back on this curve in the upper right-hand corner, we continue to get better and sustain those costs and focus on margin expansion. I'd be remiss if I didn't talk about our balance sheet, Page 12. This is our balance sheet at emergence. This -- the $200 million and the $300 million are the result of the restructuring. The $200 million is the second lien, $300 million is Elk Hills Power secured notes. The $35 million was the balance on the revolving credit facility, after we paid all the exorbitant fees to everyone to get through restructuring. But our goal long term is not to be satisfied with where we are today, with like 1.5x. I think we'd like to get in this price environment to 1x leverage or less. At least, that's our goal. We want to obviously focus on ample liquidity. I would say we are a true test of the RBL market. Most RBLs go into restructuring, become a dip and then those dips get rolled into RBLs. Because of the nature of our restructuring and the fighting effectively over our equity, we ended up with a structure that had our dip paid down. And so this was really a greenfield, new RBL, and this shows the kind of depth of the market for us and the kind of great assets we have. We have really great credit statistics when it comes to this, and we're very pleased with our partners and our JOA partners in our credit. On the next page, we have a whole new -- brand-new Board of Directors on Page 13. Some familiar faces for -- I'm sure, familiar for all of you, and some for me that are familiar and some new ones. The one thing I'll point out here, and I'll let you do your own due diligence. I was really pleased when I heard Julio say, him and his wife in his career in the oil and gas space, their favorite place they've ever lived and work was when he worked for Unocal in Bakersfield. So clearly got my attention real quick. And look forward to continuing to work with them and educate them. We've had one really solid Board meeting, and we continue to bring the Board up to speed and work with them. Obviously, being in California, Page 14, you have to be, and I think the industry has to be focused on ESG leadership, we have been from day 1. You have to have a best-in-class safety record. We currently sit at 0.27 IRR going for the year. This is our best year ever in the history of these assets, going back to 20-plus year. Environmental, very important. And also along these lines, we've aligned ourselves as a corporation with California's policies and goals. So we have our 2030 goals, which talk about methane, carbon capture and sequestration, renewables and water. Obviously, a big produce is water. It's coproduced with our hydrocarbons, but we're actually a net supplier of water to agriculture, very important in a state that has cyclical droughts throughout time. We're very engaged in the communities we live and work in, and we're very pleased that CEP in 2019 just gave us a tide for the highest disclosure rating among oil and gas companies with an A-. I would encourage you, if you're more interested in this, look at our sustainability report we just put out a few weeks ago. With that, I'll -- Page 15, I'll sum it up. I mean, you're not going to find a company that has better assets for this type of environment and for -- going forward. They're conventional, low decline, low capital intensity. We're in a position to generate substantial free cash flow and continue to expand our margins as we look at costs and ways to enhance revenues. And we're going to work with our Board of Directors and determine what's the best way forward there. Whether it's going to be some kind of dividend, share buyback, debt paydown, you name it, everything is on the table. But we're looking forward, and these are those kind of assets that you're looking at going forward. We're real pleased to get back to this -- being able to talk to you guys and get back into business, making oil and gas and creating cash flow for our shareholders. This is something that we -- have been off the table here for a little bit. It's done. And looking forward to the questions that we might be having, and I would encourage you. If you want to follow-up with the company directly, Scott Espenshade, our IR folks, will be glad to answer any questions. But with that, Doug, I'll turn it back over to you and Kalei for questions. I know a lot of folks focus on California and not understanding it and all the media stories that get written, but I'll be glad to talk about whatever you guys want to talk about.

Well, Todd, I think in the context of your reemergence, taking some time to walk through the slides makes a lot of sense. So thank you for being proactive in doing that. For everyone on the line, I want to share a little history here real quick, so you all understand what our interest is here. So about 11 or 12 years ago, I -- Todd, you'll remember this, I wrote a report when you were part of Occidental, called Billion Barrel Game Changer, when you were another -- when you were part of Occi. And it was focused on the potential of California. When the separation happened in 2014, for those of you who may not follow this, it was right before -- right after, actually, Thanksgiving massacre, if you like, when Saudi decided to stop supporting the oil price. But your table was set with $6 billion of debt, Todd, into a collapsing oil price. And the key difference, in my opinion, is you were handed that debt, you didn't drill yourself into it. So it was a headwind for you for a very long time and coming out with this balance sheet, I think, hopefully gives people a chance to look at you on your asset base rather than look at you through the lens of the debt you were handed. So again, I want to thank you for being here to walk us through that.

Now having said all of that, we have a $40 oil world right now. We have a market, which is 2% energy. And we have an ESG headwind against after 5 years of abysmal performance for the sector. We have an ESG headwind for investors that they got to get over before you even start thinking about the value proposition. So when you look at all of those things together, how do you -- you talked about the differential quality of the assets. But how do you think about who -- what your investment case is to investors? It's not a dividend case right now. It's probably not a growth case. So what is the investment case for CRC?

Yes. It's not a growth and production case, but I think it's probably a growth to cash flow. Clearly, we -- that's our focus and always has been our focus is generating the free cash flow because that's what gets people's attention. And that's really what you have to do now. And our investment case is around best-in-class assets. Clearly, we'll define what we're going to do with the free cash flow, whether it's investing in the business or -- but it will be in some shareholder-friendly way, whether it's dividend, share buybacks or whatever. And alongside -- and we're in the strictest regulatory environment focused on ESG, very predictable assets. Really, what I like to tell people, and it's true. Is not a lot of belowground risk. This is more aboveground risk that you're dealing with in California. And I think it's something that -- when you get into -- delve into the details and get beyond the headline risk, you start understanding the true value proposition here. And I think that's it. Oil and gas is going to be here for a long time. Even if you get beyond the transportation aspects of it, it's too important for our way of life and everything we do. I mean, heck, I think Tesla is 50% plastic by volume, so they could have battery, can work and have that distance. So I mean -- cell phones and everything else, people think about that 0.25 barrel of oil that goes into everything we need every day. We're in the middle of COVID. There's not a single piece of PP&E that's not from hydrocarbons, including isopropyl alcohol, hand sanitizers. So I think people -- as they get -- are educated and our industry needs to do a better job to appreciate what we do, what we don't do, but also and how important the focus is of our industry on the things that matter, which now you're starting to see everyone come around and we've always been focused on, which is generating free cash flow, living within our means and trying to get to be shareholder friendly. We came out initially paying a modest dividend and quickly had to slash that as the price environment changed dramatically over the last 5.5, 6 years. But we think we have the perfect assets for this environment, and we understand what the investors want. They want best-in-class ESG. They want free cash flow, and we'll work with our Board to determine how that gets distributed in a shareholder-friendly way. And that's what I think wins the day, and you got to compete for, like you said, that 2% of the S&P.

Well, let me see if I can go through some bullet point questions here because the downside of your presentation is we only have about 17 minutes left, so we're going to take on a lot of things we want to ask you about. So let me start off with this. When I talked about this report we wrote 12 years ago, Billion Barrel Game Changer, it's all ancient use now. But the underlying point is that your acreage is incredibly asset-rich. That's maybe not the environment today, but let's assume there is an oil price recovery at some point. When I used to ask you the question about disposals, your answer was, well, we're not going to sell -- we don't really want to sell stuff into a fire sale environment. How has your view changed on -- you've got an inventory which is enviable that you could drill over a very, very long period, but you're clearly not going to get to that. So is there an asset monetization strategy in your future?

I think it's been the same as it always has been. I think everything is potentially for sale except Elk Hills. You got to buy the company if you want to own Elk Hills. We've been able to execute on a few divestments along the way. I'd say the California market isn't incredibly deep. I'd say there's probably a lot of buyers in the tens of millions of dollars range, but the hundreds of millions of dollars range is not a ton of buyers. But we're willing to listen and -- about anything that makes sense. And we had actually planned before -- late last year to do some cleanup work and continue to do cleanup work. And -- but that is put off during the restructuring, clearly, because you don't want to get that mired in that mess. But you'll see us focus on doing some cleanup work and focus on our asset base and looking at -- again, looking through it and saying, does this make sense? Does this not make sense? And I think what you come to is what I just said. Elk Hills and the immediate fields around it that tie its infrastructure, that's the core and heart of the company. But everything else, I think at the right price is out there. And we'll revisit that. I mean, particularly in this environment as more people become interested in these type of assets.

Sure. Well, let me move on to talk about some of the structures that you had in place because through the multiple steps that you tried to take because, let's face it, you fought pretty hard to try and stave off the restructuring, but it came with a lot of complications in the structure of the business. What do those look like today? Have you managed to simplify a lot of those things like joint ventures and so on?

Yes. So the most important joint venture was -- it got collapsed back into the company with the Elk Hills joint venture. And as you can see that, that was with the -- our power plant and processing plant at Elk Hills, very important infrastructure that gives us a competitive advantage in the area and low-cost power. That has been collapsed, and it turned into equity and that $300 million of debt you see on our balance sheet. There are still outstanding -- some joint ventures, but they're not currently active. There's some of the drilling JVs. There is only one currently being paid out, which is the BSP joint venture, which is other controlling interest when you look at our financial statements. That will probably be done at the end of '21 or maybe before or after, depending on prices. And that is -- has no tail to it, so that just expires. And it currently has a pace of about $17 million a quarter that we pay that out. And then it will -- that will just go away because that was a net profit interest, not a typical working interest transfer to the ownership. But yes, it's substantially cleaned up. Obviously, we have inventory. I think at this point in time, if we were to entertain JVs, it would have to be very attractive cost of capital or a risk-adjusted cost of capital if it was someone who wanted to invest exploration dollars on our acreage.

Okay. So Kalei Akamine has joined me on for some questions. I'm going to pass to him to readout a couple that have come in on the Vericast system. I just want to remind everybody, we have got this new system we're using for the virtual conference. So there's a couple of questions up there already, Todd. So we'll get to those in a minute, but I want to run through a couple of others before we do that. The first one is just to go back to the generic strategy. So what is the -- strategically, what are you trying to achieve at this point? Is it whole production flat? Is it grow a little bit? Is it expand margins, pay down debt? How do you think -- how would you describe the strategy?

We're still working on that with our Board of Directors to finalize things. But I think, to be honest, you'll want to be in somewhere between maintaining current production to maybe maintaining oil production or some lesser version of that and how you generate maximum free cash flow. You're trying to dial all these levers, and we're fortunate to have so many levers. But I would say that it's probably somewhere in there. We've declined quite a bit just because of the restructuring and trying to maximize liquidity and staying off restructuring as long as we could because we understood this is not where we wanted to go for a long period of time, but we finally had to surrender. But for us, it's going to be -- I think once we work it out with our Board of Directors, we're going to come into a situation where, if I had to guess, we'll be in that scenario where we'll invest in the business to a certain amount to maintain production at a certain level, maybe it's a slight decline, maybe it's maintaining it flat. And then generating cash flow and focusing on margins and -- both growth in margins from enhancing revenues and also reducing costs.

So one of the things that's quite different about you guys is your assets are predominantly conventional. And so when you think about decline rates and growth rates and sustaining capital, it's maybe a little easier for folks to understand the unconventional model when they talk about drilling locations. How do you characterize your underlying decline and the visibility you have on drilling locations, if you like, to be able to either sustain or grow that?

Yes. So basically, our underlying decline is somewhere between 10% and 15%, depending on downtime. So if you were to split maybe on that and say 12.5%, you're probably plus or minus, correct. As of right now, we have some production shut in that -- at current prices, we're slowly bringing it back as we put more workover rigs to work. And then the other part is our down list is also out there, and we're getting to that, too, as we add a few more workover rigs. We don't want to add back production just to add back production. It has to actually make cash flow for us.

Okay. So would it -- when you think about that, follow-on question would be the sustaining capital. Obviously, there's a lot of things go into that. What is that sustaining capital? And what would you say is -- today is the oil price breakeven to achieve that after dealing with interest charges and all the other expenses you have?

Yes. We have -- we've historically said it's between $300 million and $400 million to sustain oil production flat for 3 to 5 years because you can do anything for one year, especially when you have kind of a different asset mix like us and very many different levers you can pull. I think it's at the very lower end of that range and probably below that range now. I don't think we're ready to commit yet because we're working out strategy with our Board of Directors and how we want to invest going forward. But I would say, on a historical basis, the $300 million to $400 million range and near the very low end of that range. I'd say that's where we're at today. And looking forward, clearly, we feel real good about where we're at. Our breakeven is probably somewhere in the mid-30s. After now, we have different interest costs as a company.