California Resources Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 28, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the California Resources Corporation 4th Quarter and Year End 2023 Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Joanna Park, Vice President of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Welcome to California Resources Corporation's 4th quarter and year end 2023 conference call. Prepared comments today will come from our CEO, Francisco Leon and our CFO, Nelli Molina. Following our prepared remarks, we will all be available to take your questions. Please limit your questions to one primary and one follow-up. Our remarks today include forward looking statements based on current expectations.

Speaker 1

Actual results may differ materially due to factors described in our earnings release and in our SEC filings. We undertake no obligation to update these statements as a result of new information or future events. We will also discuss our pending merger with Era. We encourage you to read our merger proxy statement when available because they will contain important information. Copies of this and other relevant documents will be available free of charge on our website and on the SEC's website.

Speaker 1

Additional information about the individuals participating in our proxy solicitation, such as our directors and officers and their interests, will be provided in our merger proxy statement. We have also provided information reconciling non GAAP financial measures discussed today to the most directly comparable GAAP financial measures on our website as well as in our earnings release. I will now turn the call over to Francisco.

Speaker 2

Thank you, Joanna. Welcome everyone and thanks for joining us. I realized we just held a call about 2 weeks ago when we announced our exciting agreement to merge with Era Energy. So we will keep our comments relatively brief, but we do have some important information to share with you. We will cover 3 topics today.

Speaker 2

First, we will summarize our 2023 results and how our strategy created significant value to shareholders. We took decisive steps to strengthen our asset base, lower our cost and grow our carbon management business. These steps position us to continue to build value in 2024 and beyond. 2nd, we will cover an update on our CCS business, real estate portfolio and merger with Era. Lastly, we will summarize our 2024 outlook and steps we will take to deliver another year of strong results.

Speaker 2

Let's talk about 2023. We accomplished a lot over the last year. Our E and P operations had a strong year with a low base decline, which we achieved by deploying less capital than we had forecasted. Our team continued to find new and innovative ways to reduce cost and enhance margins. We accomplished these things with a continued focus on safety.

Speaker 2

In 2023, the team achieved the company's lowest total recordable incident rate, excluding the period during COVID. Our Carbon Management business continued to build for the future as we reached 1st mover milestones, such as the EPA's release of the state's 1st draft Class 6 permits for CCS that will accelerate the decarbonization of California. In addition, the California Direct Air Capture Hub in partnership with leading DAC technology companies such as Climeworks and Avnos was selected for DOE funding. We continue to prove that CRC is a different kind of energy company. We have a quality asset base with oil and gas fields that have low declines, which coupled with strong realizations, allow us to generate meaningful free cash flow.

Speaker 2

This is a powerful combination, allowing us to maintain annual production levels using about half of our discretionary cash flow. This means the other half can be used to maintain our strong balance sheet and also return cash to investors. Over the last 3 years, we have while also building a strong cash position. Our merger with Era, once completed, will further strengthen these cash generation capabilities and differentiate the CRC value proposition from peers. During 2023, we launched an initiative to reduce cost and streamline operations across the business.

Speaker 2

We achieved about $65,000,000 in sustainable annual run rate cost savings. As we look ahead, we will remain focused on managing our existing the Our transaction will create a stronger enterprise to scale, complementary fit and the potential for $150,000,000 of annual synergies with upside, which we will deliver within 15 months post close. The merger with Era will reduce the company's breakevens and put us on stronger footing to compete against out of state and out of country suppliers, which is good for California's local energy supply and very importantly, the environment. With Era, we more than doubled our premium pore space and will be better positioned to decarbonize hard to abate sectors for the economy, as well as to capture our own emissions. Our increased pore space capacity will make us a partner of choice.

Speaker 2

We are confident we will sign additional projects from both brownfield and greenfield to rapidly expand our carbon management business in the San Joaquin basin, as well as in other parts of the state. In 2023, we submitted EPA Class 6 permit applications for 2 new reservoirs, CTV IV and CTV V, adding an incremental 51,000,000 metric tons of CO2 storage capacity. These storage reservoirs are strategically located in Northern California in proximity to major emission sources. Throughout 2023, we advanced 5 greenfield and 1 brownfield projects that added 860,000 metric tons per year of CCS. 4 of these projects were our proposed CTV Clean Energy Park at Elk Hills and 2 were in Northern California.

Speaker 2

This week, the EPA and Kern County will hold a final hearing for our 26R draft permits. Over the past 2 years, the team has been carefully preparing for this event, and we're excited about the economic, social and environmental benefits it could bring to California. Once we receive the final permit for the 26 hour reservoir, we plan to make a final investment decision on our previously announced pre combustion capture project at our Elk Hills cryogenic gas processing plant, with expected annual injection of 100,000 metric tons of CO2. This will be CRC's 1st CCS project and will enable an almost 7% reduction in carbon emissions intensity from the Elk Hills power plant and pave the way for the first injection of CO2 by the end of 2025. Receipt of Class 6 permits for 26R will also advance our Elk Hills Hydrogen Project.

Speaker 2

This project will provide nearly 65 tons per day of clean hydrogen and CRC will sequester over 200,000 metric tons of CO2 per year at CTV 1. CRC and Brookfield will continue to evaluate a potential equity investment in this project. We look to FID this project in the second half of twenty twenty four. We have other CCS accretive deals in the works and look forward to sharing further updates later this year. Before I hand it over to Nelly to cover financial results, let me give you an update on our real estate portfolio.

Speaker 2

I'm happy to announce that we have entered into an agreement to sell a 0.9 acre parcel known as Fort Apache for about $10,000,000 to a local real estate developer. Recently, we finished plug in abandonment operations on 6 wells and removed some surface infrastructure, which cost us about $2,000,000 This transaction provides a good indication on the potential value of the Huntington Beach field. As many of you know, we have about 90 acres located along a 1 mile track on Pacific Coast Highway at Huntington Beach. There, we operate a mature oilfield that produces about 3,000 barrels per day. We plan to permanently plug and abandon about 48 of the 350 or so idle and active wells during 2024.

Speaker 2

As we remediate the property, we will continue to advance rezoning, re entitlement and other due diligence to prepare this unique asset for sale down the road. There are additional details in today's deck. And now, I'll hand it over to Neli to cover financial results. Neli?

Speaker 3

Thanks, Francisco. Our 2023 financial results exceeded expectations with higher than expected free cash flow, a solid balance sheet with ample liquidity and a near zero leverage ratio at year end. We have carefully balanced our cash flow priorities using capital discipline to maintain a strong balance sheet and sustainable cash returns to shareholders. In 2023, our reservoirs performed exceptionally well with entry to exit gross total production declining approximately 6%, in line with our initial expectations. This was made possible with lower than initially expected capital of 185,000,000 dollars demonstrating an improved capital efficiency of our operations.

Speaker 3

The average net production for the year was 86,000 BOEs per day with oil comprising 60% of volumes. For the year, we delivered $653,000,000 in cash flow from operations and $468,000,000 of free cash flow. PIECE's strong financial results allowed us to reduce debt by $55,000,000 in the second half of the year. We implemented $65,000,000 in annual run rate savings in 2023 through our business transformation initiative, which will be reflected in our 2024 results. We will continue to prioritize cash returns to shareholders and a combination with Era enhances this ability.

Speaker 3

In 2023, we returned nearly half of our free cash to shareholders. Over the last 3 years, a total of $813,000,000 or 65 percent of total free cash flow generated was returned through buybacks, dividends and repurchase debt. We recently increased the authorization under our share buyback program by nearly 25% to $1,350,000,000 and extended its term through the end of 2025. Upon closing of the Era merger, we intend to raise our dividend once again. Now let me quickly summarize our 4th quarter results, which were in line or better than the preliminary results we released in early January.

Speaker 3

We generated $65,000,000 in free cash flow and adjusted net income of $67,000,000 or $0.93 per diluted share. Our strong quarterly results were driven by lower operating costs and higher net margin from power sales. 4 quarter production averaged 83,000 BOEs per day and oil averaged 50,000 barrels per day. Non energy costs were below expectations reflecting a partial effect of the savings we actioned last year as part of our business transformation initiative efforts to improve margins. We also completed a $35,000,000 sale of non operated interest around Mountain, which had an associated production of about 900 barrels per day.

Speaker 3

We ended the year with nearly $1,000,000,000 in liquidity and about $500,000,000 in cash. We are very pleased with exceptional 2023 results, the strong foundation of our balance sheet and the trajectory of the business as we look into 2024 expanding our portfolio and accelerating value. Next, Francisco will talk about our outlook for next year.

Speaker 2

Thanks, Nelly. Before opening the call to take your questions, I want to quickly discuss our 2024 outlook. For 2024, we have again prioritized free cash generation and expect total capital investments of $320,000,000 in the midpoint of our guidance range, or about half of our expected cash flow from operations. In 2024, at $80 Brent and $3.25 NYMEX and using our current capital plan, the business is expected to generate approximately $280,000,000 in free cash flow. This will support returns to shareholders through our dividends and our opportunistic share buyback program.

Speaker 2

In addition, we will continue to reduce debt and maintain our strong balance sheet. With the cost savings achieved to date, non energy operating costs are expected to be nearly 6% lower year over year. We expect full year production to average around 80,000 BOEs per day, with about 60% oil. This plan assumes a 4 drilling rig program starting in the second half of twenty twenty four and anticipates a successful resolution of the Kern County EIR litigation and resumption of a normalized level of permit approvals that support a multiyear program. In case Kern County EIR litigation takes longer than expected and CRC is not able to receive drilling permits, we plan to run a 1 rig program with a $200,000,000 to $240,000,000 total capital program and an expectation of a 5% to 7% decline, similar to our 2023 program.

Speaker 2

To be clear, we will only increase activity to 4 rigs if permitting process improvement supports a multiyear drilling program. In the near term, we're laser focused on getting the Era merger closed. We expect that the transaction will close in the second half of the year. We have provided some detailed information in our deck for standalone CRC for the Q1 and full year. CRC is incredibly well positioned today and our anticipated combination with Era will make us financially stronger and more resilient.

Speaker 2

Our conventional energy business has important scale today and our people are finding innovative ways to safely enhance margins and supply California with local and lower carbon energy. We're excited about the growth prospects we see on the horizon through our Carbon Management business and our leadership role in accelerating the decarbonization of California. Thanks for your time today and your investment in CRC. Operator, please open the lines for questions.

Operator

We will now begin the question and answer session. The first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Speaker 4

Hey, thanks. Just sort of curious, are you all receiving permits? I know you're running a dual path, but are you receiving oil and gas permits under the original process? And if you are I mean, are you actually receiving them? And if the litigation does not go in favor of Kern County, what does that make 2025 look like?

Speaker 4

Would you be able to start ramping up rigs as you accumulate permits into the old process?

Speaker 2

Hey, Scott. So we are not receiving permits for new wells. What we're doing though is getting permits for capital workovers. So if you look at the way that CRC has performed now for multiple years, very low decline, corporate decline to the business, adding first OpEx workovers and then capital workovers brings our all in decline somewhere in the high single digits. Then to get to a stay flat scenario, we drill new wells.

Speaker 2

So right now we're sitting with permits on hand for a full year program and no incremental permits have come through, but we feel that we can deliver a very similar program that we did last year in 2023 and that you saw in the results today. What we said is with 1 rig program, we can get to a 5% to 7% base decline. After investments, we did that in 2023 and we also said it's repeatable. So we'll do that in 2024 if Kern County ER is not reinstated. And we expect that to continue into 2025.

Speaker 2

So we have enough permits on hand, we have visibility into workovers to be able to have this a repeatable model on the scenario where Kern County doesn't get resolved.

Speaker 4

Okay. And just to clarify, you said if you don't get a if the EIR isn't resolved, you have currently permits in hand to run that 1 rig program to 25 as well. Is that what I heard?

Speaker 2

Yes, correct. We would have we have multiple years of permits in hand that we can.

Speaker 4

Okay. Got it. Okay. And then on the cover management side, I guess I'm going to stick to the topics of permits. Obviously, you're in the public comment period, so I appreciate the fact there's probably limited things you all could say.

Speaker 4

But anything that you would have heard from some of the comment period that you thought was interesting in a positive way? And if you have any color on, I guess the timeline of getting hopefully the final approval looks more like a late June ish type timeframe right now. Any color on why the EPA kind of moved it to that timeframe?

Speaker 2

Yes. So we continue with the Class VI permit. They're excited about getting to the public comment period right now. We've it's public information. It's in the tracker in terms of how the EPA is thinking about it.

Speaker 2

I wouldn't say there's any delays. We've agreed to do a 90 day public comment period. That's still very much within the timeline. And we've been checking milestones as we go on a way that's again consistent with what we see on the EPA tracker. We've been preparing, we're getting ready for multiple years to get to this point.

Speaker 2

But maybe I'll turn it over to Chris to give a little bit of a perspective on what we're hearing on the ground, the hearing is today with the EPA. So there's a lot of excitement, a lot of preparation that goes into a day like today. So maybe Chris?

Speaker 5

Yes, thanks. Hi, Scott. Yes, great question. Very timely because as Francisco mentioned, it's the hearing is today as well as the final workshop. It's being conducted jointly by EPA, Region 9 as well as Kern County.

Speaker 5

So looking forward to the conclusion of that today. As you recall, there's been up with the completion today, there will have been 4 of those workshops in the 90 day comment period that Francisco referenced. That's by comparison to the other Class 6 Wabash in Indiana that had none. So in fact, we have had the opportunity to really participate and see what the public and the communities have to say about this. And we're encouraged by it.

Speaker 5

I've been to all of them virtually or in person, including today, later. And the comments have been largely supportive as you can imagine from a community in Kern County that's excited about the energy transition. There is a broad level of support that we have been able to observe in all of those workshops and therefore we're really looking forward to tonight. You'll see in that tracker that EPA has always accounted for roughly 3 to 4 months after the hearing, which is on schedule for today. That 3 to 4 months is the inclusion of those public comments into a final permit, which is why we have set the guidance around the second middle of the year based on EPA's tracker.

Speaker 4

Appreciate the color guys. Thanks.

Operator

The next question comes from Kalei Akamina of Bank of America. Please go ahead.

Speaker 6

Hey, guys. Good morning. It's Kalei Akamine from Bank of America. My first question goes to Huntington Beach where you're pursuing this real estate valuation unlock. So thanks for the additional disclosures as I think it helps provide a range of valuations.

Speaker 6

But what I think surprised us is the pace of the remediation. If you simply measured pace by the rates of plugging the wells, this could easily be a multiyear process. So hoping that you can comment on how you see that timing playing out. That's the first part. And the second part would be, how do you see the value of the PDP wedge at Huntington Beach, because at some point that needs to be phased out?

Speaker 2

Hey, Kalei. So yes, we're very excited about being able to sell this more property for Apache, 0.9 acres for $10,000,000 So it's an $11,000,000 per acre valuation. And so that was we needed to be able to provide that proof point to the market. The larger property, right, so the 90 acres in Huntington Beach, the objective is to optimize the valuation and ultimately to get value recognition in their stock price, meaning we would sell today if the right offer comes along, right? There's nothing holding us back from capitalizing on that valuation.

Speaker 2

Now as we look at not only the continuous development and abandonment of the field, there's a lot of steps that we have to take to get to that optimal valuation. If we sold today, then abandonment, remediation and reentitlement gets priced into the offer. That's our view. If that's not the case, again, we would sell it as soon as we can. But assuming that there's a number of steps that we're going to be a CRC prepared to handle, which is abandonment, the wealth and the re entitlement, then it's going to be a multi year process, again, to find the best value for the land.

Speaker 2

So the abandonment we control fully. The pace of abandonment should not be an indicator of how long this will take. We can accelerate the abandonment. But ultimately what's the what we need to sort through is the ability to reentitle the property so that we can have real estate development, which is going to be the highest and best use of the property. And we're going to work with the City of Huntington Beach.

Speaker 2

We need to work with State Lands Commission, we need to talk to the Coastal Commission. These are processes that take some time ultimately to clear out. The more we advance the ball, the higher the offer is going to be. So yes, we could sell it today, again to maximize the value, which is the objective here. It's better to keep producing the field.

Speaker 2

We have the benefit of about 3,000 barrels gross on the property that we use cash to pay for the abandonment, so it's a self funding, self contained abandonment program. And we'll continue doing that until we can get line of sight to a process where we have a land that we can sell without taking a big deduct. So again, I wouldn't read anything into the abandonment phase because we can completely control that. It's really more about the negotiations and discussions with city officials and the reentertainment of the property. So I would take this takes a few years to unlock.

Speaker 2

So 4 to 5 years is what I would say is to get the full process completed. We don't know for sure, but we started and we're pushing forward to try to maximize the value and bring that value forward as quickly as we can.

Speaker 6

Yes, I appreciate that. It makes sense that there is a pathway to maximizing value there. And the more work that you put into it, the more valuable the net present value of that transaction becomes to you. My second question goes to the Ares deal. So our understanding is that there is a retirement liability.

Speaker 6

Can you talk to us about what that is and what it means in terms of an annual spend rates? And on top of that, can you talk about your ability to push that liability out, whether that's through increased activity or other means?

Speaker 2

Yes. So, you know, ARAP and CRC have both been very aggressively pursuing abandonment and togging and abandonment of wells. I think the spend that they have historically is very consistent with ours. I can't really comment, we haven't put out the rest of the information on Era. We need to get a little bit further along in terms of closing the deal.

Speaker 2

But the Era properties tend to be shallower. So they may have more wellbores, but they also have much more limited debt to in terms of the differences between the asset bases. But I will provide more color as we go forward. We haven't released any of that information and more detail on the assets, but we'll do so as we get the proxy filed, as we get closer to the completion of the HSR process. So it's but again, the point should be as we've been abandoning wells on both sides.

Speaker 2

We have good programs, ARO programs in place. We're also looking to deploy technology to reuse wellbores for clean energy, for water rights, for CCS. So we look at wellbore in California as having multiple lives and multiple uses. So excited to have to look at the Era assets through that lens.

Speaker 6

So is it fair to say based on the last comment that if you were to see opportunities to reuse the wellbores, you would be able to moderate the pace of ARO spend?

Speaker 2

Yes, we're actively looking at that for our portfolio, Kelly and ARR would be applied the same way. There's opportunities, really good exciting opportunities of bringing produced water to surface that can be treated and used for agriculture. And you don't want to be drilling separate well warts for that. If we can reuse an existing well wort, that's going to be a much better option. We're also looking at things like enhanced geothermal technology that uses the heat in the rocks on from steam flooding for multiple decades to try to bring clean energy to surface.

Speaker 2

So we're looking at and a lot of places to deploy some money to bring that technology to California. And I think there's like I said multiple uses, multiple lives to these world wars and we're excited to bring that to fruition.

Operator

The next question comes from Nate Pendleton with Stifel. Please go ahead.

Speaker 7

Good morning. Thanks for taking my question. Building on some earlier comments, when reading through some of the supporting documents for the 26 draft permit, It seems to us that there is broad support from the local community. At a high level, can you speak for a moment about the role you see for energy transition projects such as CCF in California, specifically related to California communities that have historically been dependent on oil and gas revenues?

Speaker 2

Yeah, Nate, I'll tag team this with Chris. But absolutely, I think the we have a very unique market in California where you have a state government that's pushing in really in favor of an energy transition. But we also have a state that has relied on oil and gas revenues to support the communities and to pave the roads, to pay for libraries and fire stations. A lot of that cash flow and the tax revenue that's collected by the counties is really supports a quality of life for the community. So a transition away from oil and gas and into some new technology needs to satisfy not only the environmental requirements of the state, but also supplement the income that the counties and everybody receives.

Speaker 2

So we're excited to be able to do both extremely well. We see our CRC platform as not being mutually exclusive, but one that can continue to deliver oil and gas, low carbon oil and gas better than anything that comes from imports, but also advancing the technology and the investments on the clean side. So we see us at being the leader, cementing our leadership on both and really trying to drive those solutions that end up in the right place for the state. But maybe I'll ask to see if he has any more comments.

Speaker 5

Yes. I'd just add to that that, Kern County has already demonstrated the willingness ability to execute on the energy transition. The example I would give is the build out of solar in the county, right? It's been prolific. It's the largest solar installations that provides energy to the state in addition to the oil and gas that's provided now.

Speaker 5

So it's really the heart of the energy transition and it has a track record of moving forward in that regard. Carbon Capture is just the next opportunity set that they can build on the success that they've already demonstrated with solar and other wind and other forms of energy. And that's why we're confident that it's a great place to do business.

Speaker 7

Thanks for the detail. And staying on CCUS, is there any update you can provide on potential CO2 pipeline regulations for the state that would enable transportation of CO2 outside of field boundaries?

Speaker 2

Yes. So this is we're looking at a 905 Senate Bill 905 Cleanup Bill. We expect it to be in the agenda for the legislature around May or June when the budget is announced. So anticipating some progress there. We've been engaging with the legislative group that's pushing this bill forward to make sure we have our views and represented there.

Speaker 2

And we believe there's support from legislators and the administration and the California Resources Board. So confidence that it's going to get addressed in 2024. As a reminder, there is also work happening at the federal level through the FEMSA regulations that could also work if California is not able to get there first. So it's really a question of who can get there first. Is it California?

Speaker 2

Is it the Feds? But we're looking to advance CCS through pipeline regulation. We also are working on a strategy where we're doing a lot of our activity within field boundaries and that's what the greenfield projects that we announced and now brownfield projects with Eira. If you're able to contain the emissions within fuel boundaries, you can start advancing projects, have demonstration that CCS is the technology that we all think is going to be in terms of decarbonizing the state and start test stepping into being a cash flow generator type projects as we look for the pipeline regulations to come through. But ultimately, if the state is going to be successful in reaching its objectives, we're going to need pipelines to be able to move CO2 throughout the state.

Speaker 2

So looking forward to getting resolution either to the state process on 905 or to the federal regulations.

Speaker 7

Appreciate the color. Thanks for taking my questions.

Speaker 2

The

Operator

next question comes from Leo Mariani with Roth MKM. Please go ahead.

Speaker 8

I wanted to focus a little bit on the standalone CapEx Ex and production guidance for 2024 for CRC. Just wanted to make sure I kind of understood the numbers here. At the midpoint of your production guide, it looks like around a 7% annual decline. I guess that's kind of a little above maybe what I had thought given that you guys are running 4 rigs in the second half of the year. I know that you've kind of said that probably that number is about right with a 1 rig program, but you're doing a little bit more per that guide in the second half of the year.

Speaker 8

And then just with respect to the capital, I know you guys talked about kind of a low $300,000,000 maintenance capital level, but your guide this year is kind of $300,000,000 to 3.40 of capital and clearly that's maybe a little bit less than maintenance activity in 24, just given that you're only running the 1 rig in the first half. So maybe you could just kind of close the loop on the guide and maybe there's some timing differences here that explain some of this?

Speaker 2

Yes, Leo. So the remember we sold we announced that we sold the property around mountain about 900 barrels at the end of last year. So when you're looking at the decline, you need to factor that in there. There's an asset sale. We've also had some weather impact here as we started the year.

Speaker 2

But so from a reservoir perspective, we're looking at a stay flat scenario, where we can maintain 80,000 BOEs throughout the year, with ultimately less capital that to get to that BOE level that we have talked about before. The 300 $1,000,000 to $340,000,000 also includes capital on maintenance of our Elk Hills power plant and some one time items. So do we see that as a scenario that hadn't we haven't developed now for some time where we have the permits for the incremental rigs, if we were to be able to achieve that, then what would happen and that's what we're solving for in that higher scenario. So you put $300,000,000 to $340,000,000 of capital in the free cash flow at the prices that we assume it's about $280,000,000 dollars If we're not able to get the current county resolution and we step down to or maintain just the 1 rig program for the year, then the capital program steps down to $200,000,000 to $240,000,000 so around roughly $100,000,000 less And then that accrues to about a free cash flow of about $350,000,000 right? So those are the rough math numbers.

Speaker 2

We wanted to provide the bookends as we've already demonstrated on the low end what our assets and our team are able to deliver with a 1 rig program, which is that 5% to 7% decline. We also wanted to provide the restoring and going back to normal levels activity and that's the flat case, right. So now you have both bookings to be able to triangulate on your model.

Speaker 8

Okay, that's helpful. And then just wanted to follow-up on a couple of the other numbers in here. It looks like cash taxes for the Q4 came in a little bit above the previously provided guidance range. Wanted to get a sense on that of expectations for Q1 and full year 2024 on cash taxes? And then with respect to share buybacks, looks like those have kind of stepped down the last few quarters.

Speaker 8

It was kind of limited in Q3 and then you didn't have anything in the Q4. So just wanted to get a sense of how we should think about that heading into 2024 and perhaps there's some restrictions on that due to the Aerodil. So any clarity you could kind of provide on whether or not buybacks are pretty important part of the process here this year would be great?

Speaker 2

Yes. So on the tax side, we had a gain on the Round Mountain asset. That's what you're seeing in terms of the incremental cash tax in 4Q. There's always going to be timing. We're a full taxpayer and the timing of cash taxes, it's difficult to predict on a quarterly basis.

Speaker 2

So it could be lumpy, but at the end of the day, we for a full taxpayer, we've disclosed that before. And I think we also gave you the 1st quarter cash tax numbers to pull plug into your model. So but ultimately the increase that you saw in the last quarter is due to the Round Mountain gain.

Operator

The next question comes from Noel Parks with Tuohy Brothers Investment Research. Please go ahead.

Speaker 9

Hi, good morning or good afternoon for us. Just a couple of questions. So in your remarks, you mentioned that with the Aehr acquisition, you're confident that you're going to have more brownfield and greenfield CCS potential projects ahead. And I'm just wondering if you could talk a little bit about what that would look like with the combined companies. I was just wondering, is it a matter of this helping deals get closed more quickly just because you have more heft?

Speaker 9

Or is it a matter of allowing a larger enterprise or series of companies to do a broader set of deals across more geographies? So does it speed things up? Does it simplify anything?

Speaker 2

Yes. So the Eira deal is very helpful in multiple ways. We're able to add more pore space in Kern County, which we really like. So to the tune of 54,000,000 tons of incremental pore space in fields that are in our backyard. So as we're thinking through connecting brownfield emitters to our different sites having different entry points and different storage capacity is very helpful.

Speaker 2

We're excited about the market. There's discussions ongoing. If we aggregate all the people we're talking to, it's about 20,000,000 metric tons of emissions per year. So the market potential is large and it's exciting to think through. It's about really where we're at is how do you connect it, so that's where we need the pipes and where do you store it.

Speaker 2

And as we can develop more pore space quickly, I think we're going to be well positioned to be able to receive the CO2 and ultimately bring caskets forward. We're developing more pore space and a lot of the new pore spaces in the northern part of California. But anything that we can bolt on to Kern County and bring other projects that will have future potential, whether it's through our own production and reducing increasing the pore space as we deplete our reservoirs or by acquiring some of their ARRIS fields that have that potential. It's an exciting proposition that just again brings more certainty into the brownfield market. Now the greenfield as I discussed, there's generations of emissions that ARR brings to the table that are going to be easy to capture or within fully within our control, right?

Speaker 2

So if you think about confidence in bringing those emissions forward, the best case scenario is to have those emissions on top of the reservoir, so co location, and you want to have full control of those emissions. As we showed with our gas processing pre combustion project, that gives us much more certainty to get to the finish line and the highest percent of the incentives. So Aira allows us to do that through some of the emissions through steam floating and cogens that they have in the portfolio. So we like the Aira deal for multiple reasons and a lot on the traditional oil and gas business in the synergies. But one thing to look for is how our team is going to tackle and is going to think through the area properties and try to bring those accelerate those and bring those to life sooner than probably the current owner was

Speaker 9

expecting. Great. And thinking about the Class 6 permits and of course that upon final approval that will be such a milestone and then the same for subsequent permit approvals. Once that happens, sort of post EPA approval, what is the handover like to either further regulatory involvement or I wonder does it change in terms of like a district office steps in another federal entity, DOE or somebody takes the lead. So what comes next after the permit?

Speaker 2

So the EPA is the primary agency that approves Class 6 permit. It's a federal permit and but they're working closely with Kern County where we're going to have the first project out of the gate. And Kern County is running a parallel path to also get all of the local permits in place. So maybe I'll turn it to Chris to describe that in more detail.

Speaker 5

Yes. Well, so first on EPA, right, the final permit comes out, but then the process ultimately continues with us, with the county, the conditional use permit to construct that Francisco was referencing, if you will, receipt of that and then we go FID and then we begin the process to first injection in 2025 as planned. But obviously, as we go with those permits in hand, we'll continue to do things like pre injection testing and complying with the conditions in the permit that EPA set forth, as we lead up the first injection. And then ultimately, that's like immediately what's next, right after the permits are in hand. And then ultimately, there's an ongoing process in the Class 6 for monitoring, reporting, verification, being able to claim the 45Q credits.

Speaker 5

Obviously, we'll be doing that in accordance with the permits and at both the EPA level and then county as well in terms of what we're committing to do to continue to advance carbon management more broadly there, but specifically any requirements at the field level we'll continue to do throughout the life of the project. So it's near term steps to complete and move on to construction for first injection then ongoing monitoring and verification and things of that nature.

Operator

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

Speaker 2

Thanks for joining us today. We'll be presenting at several investor conferences in March and we look forward to seeing you. Thanks a lot.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
California Resources Q4 2023
00:00 / 00:00