California Resources Corporation (CRC) Earnings Call Transcript & Summary

Hello. My name is Joanna Park. I am Vice President of Investor Relations and Treasurer. I'd like to welcome you to CRC's 2021 Strategy Day. Here with me in Santa Clarita are Mac McFarland, Chairman of the Board and Interim CEO; Francisco Leon, EVP and Chief Financial Officer; Shawn Kerns, EVP of Operations and Engineering; and Michael Preston, Senior EVP, CIO and General Counsel. We appreciate all of you joining today. We have approximately 200 people joined for this call, and we're so excited to spend this time with you. We expect our time together today to last approximately an hour. We're going to open up with a presentation on how we are leveraging our great assets, but also utilizing our new balance sheet and the new focus to chart a new course for CRC. [Operator Instructions] Some of the things we talk about today do constitute forward-looking statements based on our current expectations, and actual results could differ due to the factors described on this page as well as our periodic SEC filings. We will also refer to some non-GAAP financial measures today and so reconciliations to the nearest corresponding GAAP measure for historical measures can be found on our website and reconciliations for measures related to 2021 estimates can be found in the appendix of this presentation. Before we begin, I'd like to pass the mic over to Mac for some opening remarks.

So thank you, Joanna, and welcome, everyone. Good morning, good afternoon, depending upon where you are. Welcome to CRC's Strategy Day. We really appreciate you joining us. I know it's been a while. We've been in a bit of a quiet period since we exited bankruptcy in the fourth quarter of last year. But as Joanna said, we think we've got great assets, we've got a new balance sheet, and we are looking to match those attributes in a new direction as we set the new chart and new course for CRC. So with that, for an introduction to CRC, I'm going to turn it over to Francisco. Francisco?

Thank you, Mac. Good morning, everyone. I will start by highlighting some of CRC's strengths and some of the reasons why we see this as a very good quality investment opportunity. CRC has low-risk assets, conventional, very low declines in the low to mid-teens. These are great assets to own through the up and down of any commodity cycle. Our assets are oily. They're bolstered by our Brent-based realizations and if you couple that with our integrated midstream platform, they provide from -- really strong margins, stronger than many of our peers. You also can see value. If you take our 2020 year-end SEC reserves and use a $60 Brent price deck, our PV-10 is $5.7 billion, with about 85% of the value concentrated in the proved developed category. In terms of our balance sheet and our financial situation, we exited bankruptcy with a rightsized balance sheet that really complements our strong asset base. We have about 1.2x leverage and strong liquidity. We see really improvements in this price environment and hoping to increase our liquidity by almost double by the end of the year. As part of this presentation, we're going to cover the tremendous free cash flow potential of our assets, where we're going to talk about our revamped strategy in our continued commitment to ESG, all of them geared towards driving shareholder value. I will turn the presentation over to Mac for the discussion of our go-forward strategy.

Great. Well, thanks, Francisco. As we told you during the high-yield offering that we launched earlier this year, when we began. Sorry, let me start over, I forgot to turn on the mic. As we told you earlier this year during our high-yield offering, we were going through a full-scale strategic review. We've completed that review and focused on the cash flow potential of the business. We work with the operating committee of the CRC Board, which has over 100 years of E&P experience along with our independent advisers, and [Audio Gap] to review our overall situation. We focused on the strategic evaluation of the portfolio, our operations and our cost structure. All the while thinking about how we could create value for our shareholders in the areas of well operations, simplifying our overhead and thinking about how we could find procurement savings in the near term. When you combine that with a $60 barrel Brent strip for the next 5 years, we believe that we can develop or provide sustainable free cash flow in excess of $1.5 billion over the 5-year period '21 through '25, and we'll get to the underpinnings of that later in the presentation. But first, perhaps it's worth going back and revisiting how we got here at CRC and what we're doing now that we've emerged from bankruptcy with this new strategy. So looking back before 2020 and where are we going today, starting with the business model. In the past, we were focused on statewide operations and buy-and-hold strategy and using JV structures to access our assets to provide capital. Today, we're focused on our core fields that provide sustainable free cash flow and a simplified business model. In the past, we really were free cash flow neutral, and we reinvested most of our cash back into the business. Going forward, we're looking to recycle approximately 50% of our discretionary cash flow back into the business and provide and prioritize our returns to shareholders. Our capital structure in the past was over levered, and we had to work around those constraints. Today, we had, as Francisco said, a simplified balance sheet. We're targeting leverage of less than net debt-to-EBITDA of 1.5x, and we have ample liquidity. And our cost structure in the past our cost structure was designed towards growth in M&A. Said differently, we had a large cost structure. Today, we are looking a lean, efficient model, a low-cost culture that provides profitability in any commodity environment. But what hasn't changed? Francisco identified a number of things. And here on the bottom of the chart, let me just go through them a couple -- and add a couple. First, we've got the quality, low-decline asset base that we're going to access, and we'll talk about how we're going to develop that in the next 5 years. Strong free cash flow from our core fields. Obviously, we've got advantageous Brent realizations, and we have a constructive regulatory framework. In Kern County and Long Beach, our core field, the regulatory framework there for permitting and our relationships with the county and the city are great. Additionally, we have no exposure to high-pressure cyclic steam or hydraulic fracking, and we have a large inventory of conventional projects to access over the next 10 years. So building on our solid financial foundation, we really have 3 strategic pillars. The first is cost and operational excellence, meaning that we're going to target sustainable cost savings this year and into the future. That is that simplified operating model, disciplined investing. We're going to prioritize the highest wellhead returns, focused on our core fields. We're going to target less than 36 months worth of payback period on those investments. And again, as I mentioned, we're going to invest roughly 50% of our discretionary cash flow per year back into the business, prioritizing the other 50% for our shareholders. Additionally, portfolio management, the third pillar. We're going to continuously optimize our assets and our value proposition. Said simply, this means we're going to focus on reservoir management in our core assets, our core fields and optimize cash flow from those fields. In our non-core fields, we're either going to transform them or monetize them, divest in them, further simplifying our structure. Additionally, as part of portfolio management, we're going to leverage our asset position for ESG projects. You'll hear more about this, and you've heard some of it from Francisco. But what does that mean? We have good rock for carbon sequestration. We also have a lot of surface acreage that we can leverage for in front of the meter and behind-the-meter renewable projects. Again, all of this is built on a strong financial foundation of low leverage. So just to highlight some of the cost structure savings that we've rationalized this year. On this chart, you can see how we've taken G&A down from $290 million in 2019, down to -- we're going to hit an exit rate of around $180 million of G&A at the end of full year '21. OpEx, again, a fairly sizable reduction in OpEx. We're reducing OpEx in '21 over '20 by $25 million because we're playing catch up on some OpEx spend there. Additionally, we simplified the balance sheet and so we have incremental interest expense savings. But overall, we're targeting $95 million of sustainable cost savings year-over-year going forward. So more on that and more on our guidance for '21, I'm going to turn it back over to Francisco.

Thank you, Mac. So a big focus on cost reduction initiatives and continue to improve our capital structure. As Mac said, we're targeting $95 million of savings in 2021 as compared to 2020. What that means is that we are improving the free cash flow breakeven of the company to $35 Brent. For those of you that are -- like to use WTI, that's $32 to $33 per barrel WTI on a comparable basis. Starting with the left side of the page. On OpEx, we saw a tremendous step change in cost reductions from 2019 to 2020. We're going to hang on to those savings, and we're going to push -- our team is going to continue to push down the absolute amount of OpEx in the business. We did see -- because of 2020 was such a difficult year from a price environment perspective, we did see significantly reduced investment levels. So we're going to -- we have a backlog inventory of wells that we're going to bring back online. That's our best dollar, best investment is to put it in OpEx. So you'll see the absolute amount of dollars get reduced, but a little bit higher spend on a dollar per BOE basis as we're trying to target those barrels. In terms of G&A we've had a number of initiatives. We reorganized the teams. We are making a lot of good progress and well -- we are well on our way to be achieving a targeted year-end run rate of $5 per BOE on G&A. In terms of our balance sheet, you saw the high-yield offering that we did in January that was a step in the right direction in terms of continuing to streamline or simplify our balance sheet. We went from 7 tranches of debt to 3 at exit. And now we have just the RBL and unsecured notes on top of it. That also means on an annual interest expense basis, we went from having over $400 million of interest per year to about $50 million to $60 million on a go-forward basis. Turning to Slide 12. What would a good strategy presentation be without a page with lots of numbers, and we also have 10 footnotes. So I know there's out there on the phone today, some Excel wizards and research analysts that will appreciate the level of detail and transparency in line sight to free cash flow that we're providing here. But don't worry for the rest of you, I'll just stick to the highlights and some of the key assumptions. We're available to answer any questions that may come up after the meeting. So our 2021 guidance and business plan is set to deliver a oil production staying flat from entry to exit. And if you look at the part of the slide highlighted in yellow, free cash flow of between $250 million to $350 million. That's taking -- if you take the midpoint of that range, that's at $60 Brent. We are taking into account the full impact of our hedge book as it stands today. We also see upside on this number. There's about $75 million of nonrecurring cost in 2021 related to distributions to JV partners in onetime cost to achieve like severance that will not be here in 2022 going forward. I did say at the beginning, we're very happy with the leverage we have to Brent prices but let me give you an example of that. At Elk Hills, our core and best field, we have prices that on a realized basis are above Brent. They trade on the Bonavista benchmark index. So even if you combine that with our heavier crude, our guidance is that we're going to achieve 97% realizations off of Brent. That also puts us on a realized basis above WTI. Our realized -- our strong realizations also translate to very good prices for our NGLs. That's a combination of butane, propane and natural gasoline, 65% off of Brent for NGLs. Our guess also were guided to about 110% over NYMEX. So what this all means is EBITDAX of $625 million to $725 million and an implied free cash flow yield of about 13% to 18%. A big component of our 2021 program or budget is our capital program. We see a very -- it's a high-graded set of inventory, low risk, very strong economics, which we'll get into. And as I said before, the plan for 2021 is to bring back wells that we shut in due to prices at a $60-plus environment. These wells make a lot of economic sense. So what you'll see is we're going to reinvest about a 40% of our discretionary cash flow at $60 Brent in 2021. We do see as that backlog gets cleared up, and we don't have that opportunity. We do see the reinvestment ratio increasing to about 50% of discretionary cash flow on a go-forward basis. But the inventory of our assets is really strong. We're looking at wellhead economics, wellhead IRRs of over 80% for the wells we're going to drill in 2021. We also see paybacks of less than 25 months. Mac mentioned earlier that our hurdle rate is about 36 months to invest. We see this high-graded inventory delivering about a 2-year payback. So our core fields is where we're going to invest. So if you go to the next slide, Joanna, this is a -- what we feel is our core asset core fields in the company. We have included a short description of our top fields to get everyone acquainted to them. But really, the punchline is we have about 10 years of inventory in our core fields that we can pursue would have a breakeven of $35 Brent or lower. If you were to expand to noncore fields or move up your price assumption, you're doubling that inventory. And as I said in 2021, we are seeing IRRs of 80% plus in 2 years of payback. So what is -- what does it all mean? If you put it all together, very high quality -- turn to the next slide Joanna. A very high-quality asset base, delivers strong cash flow in 2021, $250 million to $350 million. If you couple that with one of the best balance sheets in the sector, we can really put the emphasis now with the bankruptcy behind us, we can put the emphasis of this company on the quality of the asset base and positions the company really well, if you look at the chart to the bottom right, against the rest of the peer set in the industry. And so ultimately compounds to deliver great shareholder returns. On the next slide, I mean, we talked about the quality of the assets, the free cash flow potential, but let's talk about ESG. And we didn't put the ESG slide here because it's the flavor of the week or because our Investor Relations told us this is what you have in every presentation nowadays. Really, we've been focusing on ESG for multiple years. We also think this is one of the keys to success to be able to operate successfully in this state, in California. We have a great track record that we can build on. We have a great platform of projects to pursue on the ESG front. It does all start with safety. We had our best safety year ever for the company in 2020. We also have made great progress, great strides in terms of lowering our methane emissions. We've almost halved our methane emissions since 2016. We also have programs where we recycle water, where we send water to ag, all -- we're checking all the boxes on being a responsible operator. We also have the right platform of projects, as we said. So CCS, as Mac talked about, one of the advantages that we have is we have the right reservoirs. We have the right containers. We also own 100% of the floor space. So ownership of the reservoirs is really important as you think about capturing CO2, and we have a lot of the infrastructure already in place. As Mac said, we're also looking at behind-the-meter and in front of the meter solar projects that, in some cases, will take us off the California grid and into self-supply and provide more power to the state. We can read a lot more about ESG. We have a sustainability report in our website. We also have fantastic third-party validation services like CVP gave us an A-, which is the highest level given to any E&P company last year. So it's great to get that validation from third parties around our disclosures. So we believe in ESG. It's something that we do really well, and we'll continue to build on that. That's the end of the presentation for me, and I'll turn it over to Mac to talk about how our business model compounds over years in terms of free cash flow generation.

Great. Well, thanks, Francisco. And as Francisco said, we've got great cash flow forecast for '21, and we've got a vision to the future of making sustainable changes to our business model and our cost structure, but a bit on our reserves here on this page. As you can see, and again, we've stated this before, but at $60 for a strip, 21 -- $60 flat Brent strip. We have about $5.7 billion of reserves. 96% of those are in our core fields. And so we feel very comfortable that we've got a great backlog to deliver on our forecast. In addition to that, we think that we compare favorably to our peers as an investment opportunity when you look at EV to the standard measure of oil and gas, a 1.3 ratio -- yes, 1.3 ratio up there, as you can see in the upper right. And I would also point out that on an EV/PV-10, which is in the lower right under the $60 Brent valuation, we are trading at a 0.4x multiple. So we compare favorably on our reserves multiples relative to peers. And again, looking forward, as we access those reserves over the next 5 years, we are going to generate sustainable free cash flow, investing, again, right around 50% of our discretionary cash flow starting in '22 going forward, less than -- right around 40% for '21, as Francisco described. And by the end of '22, excuse me, with that cash flow, we would be on a net debt basis, completely delevered. And so that provides us a very strong financial foundation and financial flexibility to think about how do we refinance the debt, increase our credit ratings, et cetera, and continue to optimize our capital structure. The question that we're often asked is that with the cash flow that's going to be generated, what are you going to do with it? And we see obviously 3 opportunities, return the cash to shareholders, which is a focus of ours, reinvest in the business at a greater level or capture some of the resources around our core assets through A&D, all of which are on the table. But as I say, and I'm probably going to get asked -- we're probably going to get asked the question at the end of this, what are you going to do with the cash if you deliver on your '21 plan? Right now, what I would tell you is we're going to put it on our balance sheet. We're focused on execution, we want to deliver on our commitments, we've come out of bankruptcy, we've got a new balance sheet, we're charting a new course, we want to execute. So in the coming quarters, we'll come back to you with more information on what we're going to do with the cash. But right now, it's going to look like a net debt story. It's going to sit on the balance sheet. So one final slide, and we'll get to Q&A. Obviously, we think that this optimized strategy provides a quality investment opportunity. We've got great assets, a great balance sheet. We've got a great backlog and drilling opportunity and high-value reserves. We're looking to simplify our business model and return cash to shareholders. And again, we think we can easily attain $1.5 billion of cumulative sustainable cash flow over the '21 through '25 period, while maintaining our strong balance sheet and strong financial position. So with that, I'm going to turn it back over to Joanna. I think she had mentioned that you can ask questions, and she'll take those in order, and we have the management team here to answer for about the next 30 minutes. So thank you for joining us.

[Operator Instructions] So our first question is from Mr. Joseph von Meister from Intra Market. And his question is, what is D&C CapEx required to keep production flat? What is baseline maintenance CapEx to keep the plant properly maintained, excluding D&C CapEx?

Yes, I'll take that question, Joanna. So we're guiding for 2021 $200 million to $225 million to keep production flat. We do have a high-graded inventory of assets, and that's an all-in number, including the cost to maintain. We have about $40 million of non-D&C capital in the mix for 2021, we do see, going forward, that number goes up a little bit. It go into the upper 200s on an all-inclusive basis as we work off our backlog inventory of wells that we're having the shorting list. So somewhere in the $275 million to $285 million range, all in, we do expect the cost to maintain the plants to come down as well into the 20 to 25 range for 2022 and beyond.

Okay. Our next question is from [ Mitchell Sacks ] with Grand Slam Asset Management. Can you talk about the regulatory environment in California and the U.S.? And any expected current impact on CRC's fields?

Yes. Let me hit that first, Mike, and then I'll turn it over to you. This is -- as I mentioned earlier, one of the things that we think about being in California is there is a political overlay associated with oil and gas production in California and that people tend to think of California being a tough place to do oil and gas business, it is from a political standpoint. I think from a regulatory standpoint, the way we view it is that we have a constructive regulatory framework, if you will, in Kern County as well as in Long Beach. And those are our 2 core fields. And so let's starts the discussion there. On the back of that, we have the ability to -- as again, we're generating 80% of our cash flow. And those 2 areas and those relationships are good. We don't have necessarily a problem with permitting in those areas. But why don't you build on that, Mike?

Sure. Yes. I would just -- I would add, Mac, that on the federal level, part of your question was on the federal side, there's been some slowing in the first few days of the Biden administration on BLM land permitting, and that really doesn't impact us. We have a very small footprint in that area. So that's not going to hit us at all. In California, we have a very robust permit inventory well into a second year of drilling, if not beyond. So we have a robust inventory now, and we also do not have some of the kinds of production like the high-pressure cyclic steaming and hydraulic fracturing in our drilling plants in our fields that has created some permitting difficulty for other producers in the state.

And our next question is [ Jason Wrangler ] from with Imperial Capital. His question is what kind of opportunities do you see for M&A? And would you look outside of California? Also, are there midstream or downstream opportunities to vertically integrate as you have at Elk Hills?

Jason, I appreciate the question. I think what I would say is we're not going to comment on M&A activity. I think we're focused coming out of bankruptcy on execution, as I mentioned, and delivering on our cash flows that we just laid out or Francisco laid out. I think it's a good question, but I think we need a couple of quarters of successful execution before we head down that path. And even when we get there, my view on M&A is we don't talk about M&A, we'll let you know when it happens.

Yes. And so then if I can add in terms of the acquisitions and divestitures, we are both buyers and sellers. We'll buy assets near our core, bolt-ons around our core fields. We also will sell assets in noncore fields for the right price. So it's something we're actively looking at.

That's a great point, Francisco because I think one of the things that's a change is -- and we noticed this after the high-yield offering is that we said we're no longer a buy-and-hold CRC. The new strategy is to rationalize assets and to add to our asset base over time. So we're both a buyer and seller, as Francisco said. And since that time frame, we've had numerous inbounds. The old CRC was always the acquirer. And now when there's an active -- people ask, is there an active M&A market or A&D market in California? There is, if you're willing to sell. And I think we're willing to do that over time. We're just not going to talk about it in the public markets.

And our next question is from [ Eric Steve with Goldentree. ] Can you highlight for investors what line items on the P&L, the $25 million of nonrecurring costs will flow through? And also, can you explain to new investors why the noncontrolling interest payments are nonrecurring?

Yes. I'll take that question. So we have 2 components of nonrecurring costs. We have distributions to one of our partners. The reason that's nonrecurring is we see at current prices, that JV reverting later this year. It's a JV that does not have any residual interest in the business. So once the investor reaches a targeted IRR, then that no longer will be an obligation. And well, you will not see that reflected in 2022. In terms of cost to achieve, those are severance costs and other -- or investments we're making to retire, some IT software that we don't -- are not going to use anymore. You'll see that in the other expense line that's where that one comes. So noncontrolling interest, you see on our 10-K and earnings, you'll see a line specific line item highlighting that. The rest of it flows through other expenses.

So just to put a finer point on it, that is obviously -- thanks, Eric, by the way, which -- that's $75 million that we don't see in '22. I would add, and perhaps, it's worth highlighting the reason why we're seeing high severance costs or the cost to achieve a $25 million this year is that as we've gone through and looking at the lean model, we have actually, since the beginning of the year, reduced the total employee base by 10%. We've reshaped the senior leadership team, and we've cascaded that down in our simplification. And in doing so, we're incurring these costs to achieve. That's it. Next question, Joanna.

We have a question from [ Malek Patel. ] Given the recent bankruptcy, how as management -- how can they make sure that this doesn't happen to new shareholders?

Well, I think you have our commitment, as you just heard, that during our one-on-one to the high yield, I used to say that my favorite question that was coming out of that is what are you going to do with the cash? And my answer, Francisco and I did a number of these was, well, first, we're going to generate the cash. And we're focused on execution, we're focused on delivering on our commitments, and we're focused on being prudent about the amount of cash we reinvest. And so that's why you see the targeted numbers of roughly 50% of our discretionary cash flow being reinvested in the business, the other 50% targeted as a return to our shareholders. In addition, we're maintaining a low leverage level, targeting less than 1.5x net debt, ample liquidity. So we're really focused on what does the balance sheet look like? How do we generate cash? And how do we reinvest and provide a return to our shareholders? We think we can do that given that we've got a very strong asset base, conventional asset base, low decline, therefore, requires less reinvestment in the business. We've got a good backlog, as Francisco said, of drilling projects, particularly here in '21 because we built up a little bit of a backlog as we reduced capital and reduced turning operating wells back to service when they came offline in 2020 during the bankruptcy. And so obviously, the capital needs to go up a little bit, but at the same time, we're focused on managing that and maintaining those different targeted ratios. That's how we're going to do it. I would say to you, it will take a couple of quarters, and we're going to prove it out by executing and delivering on our commitments.

Okay. Our next question is from Gregg Brody with Bank of America. His question, historically, you have generated other income from selling electricity, portfolio optimization, et cetera. Are those businesses still part of the reorganized CRC? And if so, how should we think about modeling those line items? Did the Texas freeze cause any outsized gains or losses in the natural gas optimization business?

Yes. Thanks for the question, Greg. We absolutely do continue selling electricity to the grid. So to break it down, our core businesses, oil, NGLs, gas, but we have -- we also sell electricity to third parties. We have a 550-megawatt plant at Elk Hills. We use about 1/3 of that electricity for self supply that's why the Elk Hills economics are so strong. We're able to get off the grid and generate their own power. The rest of it, we sell to third parties for a profit. We also have a trading business. And as you pointed out, there's market dislocation. There's opportunities throughout the year, like we saw in the Texas freeze that bring opportunity to our team. So we'll disclose some of those numbers when we talk about our first quarter numbers, but we did see a good opportunity in the market to capture some modest gas trading revenue. We also have a small farming business. So we have a few other things to talk about. But ultimately, the big one is the electricity sold to third parties for a profit. Happy to have a side bar to discuss some of the details.

Yes, Gregg, we can get you further information on how to break down those other revenues. The thing that I would tell you, and we are going to get to it in the first quarter, about the optimization on the gains and losses associated with the Texas freeze. But the one thing I will tell you and that I like seeing was the optimization between operations and our marketing and trading organization. We ended up shutting in fields, shutting down gas requirements where we're buying gas and pushing that gas back to the SoCal border. And yes, we did do some optimization there that benefited the bottom line, and we'll describe that to you at the end of the first quarter.

Okay. Next question is from [ Mr. James Bennett. ] He's asked a couple. Can you discuss the source of trading revenues and costs and what we expect -- can expect in 2021? He also asked about, do you expect your ARO cash flow outflow in 2022 and beyond to continue at the same level as your forecast of $48 million in 2021, will your ARO liability [indiscernible] by a like amount of these outflows.

Do you want to take the trading?

Yes. I mean, I think -- so in trading, we have a team that's actively looking for these opportunities. So we have about $40 million of trading profit baked into our guidance numbers. We do see like the events that we saw in Texas with the winter storm, we see that being a onetime item, but certainly helpful to increase the profitability of our trading business going forward. That wasn't part of our guidance. So we'll talk more, but definitely, there's some upside to that number.

So just to add on that before going to the ARO, we talk about it as trading. I think of it as optimization of assets that we own. We own a number of pipes in other words, transportation contracts. We own storage. We consume gas. We have the ability to optimize that. Some people call it, extrinsic value. I actually think there's some intrinsic value of the assets we own as well as some extrinsic value. So it's not pure trading, I would call it, more optimization of our assets and it's in coordination with our -- the ability to, as I said, I'm looking at Shawn, but our ability to shut in fields, to not take gas to the power plant, but still provide electricity as we need it and push gas back to SoCal border. So it's an optimization, and I'm pretty excited about the coordination that happened in February and look forward to further optimizing that. As far as your ARO question, I think the answer is, is that we do see ARO ticking up a little bit in the out years by $10 million, $20 million versus what we're showing for '21. But we're still in the process of optimizing that. One of the things that we have as a strategic objective for this year that came out of our overall evaluation as we chart the course forward is, how do we think about our ARO and how do we think about optimizing it? And the simple answer is, is that we're going to look to push, when I say push, finish P&A and put wells into the waiver program more often than we've done in the past as opposed to just testing the wells on that 2-year basis. So we're dealing with ARO. We're working to further optimize it, but we do plan on increasing our spend next year with a little bit of the incremental cash flow. Anything you want to add, Francisco?

No. I think you covered it. I mean, it's a work in progress, something that we're focused on. But I think that's right. I think from a guidance standpoint, you'll see a slight uptick in the numbers in 2022 and beyond.

Our next question is, when do you expect to be at your target run rate? And are your current cost savings sustainable? What are you doing to further reduce costs and to get to your target run rate?

Yes, no, absolutely. We made -- with 2, 3 months into the year, we made significant progress on our savings. So we're well on our way. We'll be there before the end of the year. I think one thing to mention, especially as it relates to the OpEx, one thing we haven't had as an industry, and especially this company is stability in terms of being able to capture some savings on the procurement side. That comes a lot of times with a good ability to see out into the future and plan your activity as we were battling through a large amount of debt in the past and having a lot of that money going over to pay interest. Now we have, with the cleanup we've done on the balance sheet, a very strong hedge book that gives us that certainty to plan forward. So we're looking -- working really closely with Shawn and his team to try to bring those costs down further. So -- but feel very confident we're making the strides.

Can I just add there, Francisco. A lot of energy from the organization and the team right now with post bankruptcy, kind of a fresh start here, a lot of energy about -- it's a work never, never done, never complete. And so we're turning over every category, looking at it with fresh set of eyes. And so very excited about what we're looking at there.

What I would say is we're going to get to that $5 a BOE as an exit rate, and it's going to be sustainable from a G&A perspective, and we're going to continuously optimize our OpEx. We're spending a little more in OpEx in order to deal with the backlog of returning wells to service that are this year, but that also provides for some high returns. But we clearly view the objective in our cost programs is to achieve sustainable repetitive savings. In other words, we're going to a new model, and we're going to stay there. We're not going to let costs creep back in.

Our next question is from [ Jeff Robertson. ] Can you elaborate on the CCUS commercial opportunities on CRC's asset base? Are there other commercial projects that [indiscernible] over the next few years?

Yes, I'll take that one. Thanks for the question, Jeff. CRC is uniquely positioned here in California to take advantage of CCUS. And when you look at CRC and think about it, it really comes down to 3 kind of main pillars here to focus on. We've looked at this a number of years. We have the best reservoirs in the state. They're ideal for carbon capture and sequestration. They've been reviewed by third parties and they're adjacent to our core facilities. So we know that we've implemented some pilots, and we know that it works. And so from a subsurface standpoint, we're there. The second part is identifying a source of CO2, and we're just completing our FEED study on a capture plant at Elk Hills called Cal Capture. And we're going through the optimization of that design right now to kind of identify the source of CO2 from our plant or from adjacent properties or other operators. And then I think the third thing is bundling all that together with the subsurface technical knowledge, facilitating the delivery of CO2 to Elk Hills and then evaluating it commercially to determine when is the best time to execute on that project.

Yes. And if you widen that out, I think what other opportunities are there? Again, I think Francisco and I have highlighted them. It's something that I'm excited about is not only do we have the Cal Capture project that Shawn was just describing, but we also have, Francisco says, the rock that is there for storage. We believe we've got a lot of rock that can -- for carbon sequestration. We may do it on some smaller scale, and we're looking at doing that. But we also, as I mentioned earlier, we have the surface acreage that -- I've come from power, I've a lot of experience in power. I'm looking forward to the opportunity and thinking about with this team, what we might be able to do with the surface acreage on solar, renewables and batteries and how we integrate those, either behind-the-meter into our production as a low-carbon fuel source or even in front of the meter to help meet the growing electricity needs of California. So there's a number of opportunities there. We're just -- we're in the very beginning of thinking about how do we continue to advance the Cal Capture project but think about other opportunities to leverage our asset base.

Our next question is from Bruce Stein from [ BAS Capital. ] Mac, how is the CEO search coming along? And Francisco, can you talk about hedging? And just want some of the feelings could -- that are working against CRC right now?

So the CEO search, thanks for -- the CEO search. Yes, that -- as we described before, the Board is actively in a CEO search, as we -- and we described this back in January during the high-yield offering, and we're on the same course, which we said would be -- we're targeting towards the end of the first quarter, beginning of the second quarter to finalize that search, and we continue down that path and on that time line. That's all I have for you now, more to come in the next few weeks.

Yes. In terms of hedges, so as we exited bankruptcy, we had to raise money to an exit financing. This was in the fall, where prices were much lower where they were right now. And the conditions the banks put on our RBL was to have a hedge book that ultimately put 75% of our oil needed to be hedged for 2 years. Now within that requirement, there's a lot of flexibility within it. And only a small portion of that is in the form of swaps that lock in the price. So we have colors. We have, as you can see -- on our financials, you have the ability to capture some of the upside. But there is a requirement from the RBL, and we're complying with it effectively. We'll continue to work with the banks as conditions have changed, and the market has improved a lot to make sure we are all aligned in terms of hedging decisions to capture best value for the business.

So Bruce, if I may just add to that -- to Francisco's comments. What I would say is that hedges are done on purpose in order to protect the capital that we're investing in our development program or putting down hole. And so I view it as an opportunity cost as opposed to worked against or a loss. It's definitely reduced the amount of cash flow we're going to have this year. But it wasn't so long ago. Those collars were put on as purchase $40 puts sold, $60 calls to be costless collars. It wasn't that long ago that the $40 puts look like they may pay out. We're in a much better position. I'd rather be losing on the $60 calls than implementing a $40 put. Let's just put it that way. And so my view is, is that going forward, while we had to do it for the RBL, our hedging strategy is that as we put capital to work, and we're doing it so that we have returns within the next 24 to 25 months, as Francisco said, particularly in the '21 drilling program, that we can hedge that out for those 2 years, have a return of that capital -- and a return on that capital and own the entire back end of those wells as well as all the reserves that we have to further develop if the Brent market continues to run up. Now obviously, the Brent market right now is backward dated fairly significantly over the next 2 years, but that's my view on hedging. It's an opportunity loss. Yes, the $60 calls look like they are a drag at this point in time and some of the swaps that we put on are out of the money. But overall, our portfolio has risen, and that's a good thing.

We have a question from [ Chad Quinn. ] The question is, can you clarify if distributions to noncontrolling interest and changes in working capital are included in the $250 million to $350 million free cash flow guidance?

I guess on the noncontrolling interest, that's fully baked in there. We do not include working capital in those numbers as those change throughout the year. But yes, on the noncontrolling interest.

And we have one from [ Marco Steel. ] There's an engineering question maybe for Shawn. Can you elaborate on the engineering strategy to optimize your top fields?

Yes, absolutely, Marco. As Mac mentioned, we have tremendous assets all across California and some of our core fields, these are super giant fields with lots of wellbores and lots of inventory. So in the short term, what we're doing is really focusing on reservoir surveillance and that's identifying where the opportunities are to add additional production. The assets here in California have a lot of stack pay and a lot of uphole opportunity that we can access with workovers versus drilling rig. And a lot of this activity is in our existing asset base with spare room in our facility. So you're not out in some of your noncore properties, building new infrastructure, you're utilizing what you already own. So through that process, the team is a lot more focused on these core areas and how to address that kind of easy-to-get potential.

We have a question that, as you mentioned, share repurchases and a dividend. What are your thoughts on doing a fixed plus variable model?

So as we outlined, there's a number of different opportunities when we generate free cash flow and what we could do with the free cash flow. It is -- the fixed plus variable dividend model has caught some legs, obviously, in the E&P space, and it's something that we're looking at. Everything is on the table, but we haven't made any decisions at this point in time. Again, like I said, we'll get back to you in the next couple of quarters with how we think about allocating that cash and what we're doing with that cash. Right now, we're focused on making sure we make the right investments, we execute and we deliver cash that can be returned to shareholders in one form or another.

We have a follow-up from Joseph von Meister from [ Inter Market. ] Is there a legacy impact on Elk Hills from the JV partnerships entered into prior to bankruptcy?

Sure. So yes, the -- if you recall, we had a JV with Ares. It's part of our midstream assets. That JV is no longer part of our company, that got resolved as part of the bankruptcy. And so that one, there's no impact to the company at all on any of our midstream assets to a JV. We continue to have our drilling JVs. Those were not impacted at all by the bankruptcy.

But again, one of the noncontrolling interest will roll off this year, we'll pay that out. The other thing that I would add is that as part of the bankruptcy, obviously, and one of the reasons why we did the high-yield offering is that when we came out of bankruptcy, we still had a note that was over top of the Elk Hills property. That has now been taken out as part of the high-yield offering. And as Francisco said earlier in the presentation, we went from 3 tranches down to 2 being the RBL and the high-yield notes that we have now. That third tranche that was taken out was the Ares note that was over top of the Elk Hills facility. And so we've really simplified the balance sheet. We're in the process of further simplifying. There's some clean up work that we're doing on the RBL to make it a perfectly regular way, if you will, to provide ultimate financial flexibility, and you'll hear more about that in the coming months. But we feel pretty good about what we've done to clean up the capital structure, and now we're in execution mode, as I said.

Okay. We're going to take our last question. This is on workovers. Can you talk a little bit about the cost of what sort of productivity or returns you think you might get out of them? How do you come up with the priority of which areas or which wells to tackle first?

Tackle that question, [indiscernible].

Sure. Yes, afterwards. So our best investments will always come from -- if we use an existing wellbore. So our capital workover is a wellbore that already exists, where we go through our stack pay, and we complete in a different zone. So it adds reserves. You already did a bulk of the investment to the drilling that's already in place. So for 2021, we see IRRs of 140% for those particular type of activities. It's not unlimited. The team works really hard to identify these opportunities, but it's a really great return to any of our investments. Shawn, anything else you want to add?

No, I'd just add, Francisco that our technical team has an immense amount of knowledge about these reservoirs. We've operated them decades. And so we understand the potential of these projects and have a very rigorous process where the teams are continually optimizing and high grading all of these investment activities. And so we just -- we kind of keep putting that forward and executing on the best dollar we can spend.

Great. I think that concludes our Q&A portion. The Investor Relations team will be available to answer any modeling-type questions and any other follow-ups that you may have. And with that, I'll turn the call back over to Francisco and Mac for any closing remarks.

Yes. I'd just like to say, again, thank you all for joining. I know we've been in a bit of a quiet period here. And as I've mentioned, we think that CRC has got a bright future. We think we've got great assets, great low-decline assets, conventional in nature. We've got a backlog of inventory for drilling and workovers that we're accessing for '21, and we can for the next 10 years, as Francisco said, at fairly low breakeven prices. We simplified our cost structure, simplified our balance sheet, and we're focused on execution and cash returns to shareholders. And we continue to look forward to executing on our commitments to ESG and revamping, in fact, looking at other ways that we can expand our ESG footprint, if you will, in the future. So thank you very much, and I think that concludes the call for today. Thank you.