California Resources Corporation (CRC) Earnings Call Transcript & Summary

Good day, and welcome to the California Resources Corporation Second Quarter 2026 Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Daniel Juck, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to California Resources Corporation's Second Quarter 2026 Conference Call. We hope you've had a chance to review our earnings materials, which include our non-GAAP reconciliations. Today's call includes forward-looking statements, and actual results may differ due to factors described in our earnings release and SEC filings. Following prepared remarks, our leadership team will take questions. [Operator Instructions]. I will now turn over the call to Francisco.

Good morning, everyone. We delivered a solid quarter in our oil and gas business, driven by strong operational execution, continued synergy capture and sustainable drilling efficiency gains that strengthened our outlook. We also made good progress on our emerging carbon management and behind-the-meter power platforms and announced 2 important midstream transactions that build on our long-term strategy to generate shareholder value from our California assets. Let me begin with some comments on our strategic plans. Clio will then walk through our quarterly results and outlook. While focus on near-term execution, our team is also looking to the future. The state's regulatory environment, 1 seen as an impediment to our industry is now supporting local onshore production to the benefit of all Californians. Events in the Middle East have caused ripple effects throughout energy markets. Here at home, California's reliance on imported crude and refined products has created temporary transportation and price challenges across the state, highlighting the need for energy security and reliable, stable sources of local supply. That's precisely the need CRC is built on. For the last several years, CRC has been intentionally building a stronger and more integrated California Energy platform. Our Era and Berry mergers created scale and new avenues to profitably grow our business. As the largest producer in the state, the expansion of our midstream infrastructure and marketing capabilities was a logical step to bolster our long-term strategy. Greater control of critical infrastructure will provide options to enhance the commercial capabilities of our business and stability of our operations. This benefits CRC as well as other producers working to move more local product to local markets and ultimately supports California's energy security and affordability. Last quarter, we took the first of 2 steps to strengthen our midstream position purchasing the Line 100 pipeline from P66 for a nominal amount. The deal added about 120 miles of crude pipelines connecting key Central Valley production hubs along with over 1 million barrels of storage capacity in gathering, transportation and truck loading infrastructure. That brings us to the Crimson acquisition we announced today. Crimson's midstream platform covers roughly 2,000 mile network of California crude oil pipelines that run through the heart of our producing fields. The transaction advances our long-term strategy and connects our production directly to California's highest value markets. As the state's largest producer, our integrated platform will provide greater flexibility to move both CRC and third-party volumes, improved price realizations, generate more diversified cash flows and drive new efficiencies. The all-cash deal is financially accretive and is priced significantly below prevailing midstream sector valuation multiples. Because certain Crimson assets to operate as a common carrier, the transaction requires PUC approval. We recently received tentative approval with no conditions attached, and we expect the final decision later this month. Recent market conditions have illustrated the strategic value that Crimson adds to our platform. Takeaway capacity over the last quarter was constrained due to what we expect to be temporary marketing disputes with a pipeline operator and certain offtakers, limiting our ability and that of other local producers to transport barrels to previously contracted markets and pressuring oil price differentials on replacement sales. We have taken proactive strategic steps to broaden our transportation and marketing options and improve the reliability of our market access through new agreements and partnerships. We fully expect these actions, together with the resolution of the ongoing disputes to strengthen differentials and bring realizations in line with historical levels. Now let me focus on the expansion of our growth businesses. On carbon management, we recently commenced CO2 injection and achieved first revenue at California's first CCS project at Elk Hills. This places us on an esteem list of commercial scale sequestration operators globally. We have demonstrated our ability to permit, construct and operate an APA Class 6 project. The start-up showcases are operating, technical and regulatory competencies, all of which can be applied and scaled across the state. We are tracking the CPUC's reliable and clean power procurement program, or RCPPP, as a potential market for natural gas with CCS. Updates from this state are expected this fall. This could be meaningful for CRC as we're well positioned to support California's growing demand for reliable, lower carbon power. California has the potential to decarbonize approximately 17 gigawatts of power. For our CTV platform, this includes a near-term opportunity of approximately 2.4 gigawatts in the Central Valley. Using our Elk Hills power plant and adjacent infrastructure, we recently partnered with Beacon data centers, an energy-focused North American data center codeveloper, to advance the Golden Valley technology hub. The proposed 275-megawatt campus would span 100 acres adjacent to kills and combine our proven permitting and operating experience in California with Beacon's data center expertise. With our co-developer partner funding early stage development, the project will leverage industrial acreage, existing infrastructure and firm power from our Elk Hills plant to help meet rapidly growing demand for power and AI. The proposed behind-the-meter design is expected to minimize power and water usage. We have submitted the conditional use permit and expect the environmental review process to advance later this year. Our ongoing discussions with a handful of global hyperscale data center operators have accelerated and reinforce our confidence in the commercial viability of the Golden Valley technology hub. We look forward to reporting on our progress in the coming quarters. With that, I'll turn it over to Clio.

Thank you, Francisco. Let me cover our second quarter results and our outlook. Net production averaged 149,000 barrels of oil equivalent per day with oil representing 81% of total volume. Oil realizations were approximately 95% of Brent before hedges within our second quarter guidance range. Operating costs were in line with guidance at $347 million. As expected, G&A declined nearly 9%, reflecting very related efficiencies. Second quarter adjusted EBITDAX was $338 million, while operating cash flow and free cash flow before working capital were $300 million and $151 million, respectively. We have implemented more than 100% of our 2026 Berry synergy target 6 months ahead of schedule, representing approximately $103 million of annualized savings. Across our integration and broader cost reduction initiatives, we now expect up to $470 million of cumulative synergies and structural cost reductions through 2028. This reflects the quality of the combined portfolio and our ability to translate integration into durable margin improvement. Execution continued to improve during the quarter. In California, time-to-market improved approximately 25%, allowing us to complete more wells sidetracks and workovers than planned. In the Uinta, we drilled 4 wells ahead of schedule. We reduced cycle times and our D&C costs were below plan. The team continues to target first production in the fourth quarter as planned. These efficiency gains allowed us to pull activity forward into the second quarter resulting in total capital of $149 million for the period. As a result, we have streamlined our development program reducing planned 2026 D&C and workover capital by $10 million. We are redeploying those savings into targeted facilities investments, which is why our total capital guidance range remained unchanged. More importantly, we believe the underlying drilling and capital efficiency gains are sustainable. We now expect to operate an average of approximately 5 rigs in California during the second half of 2026, compared with 6 in our prior plan while maintaining nearly flat gross entry to exit production. Faster time to market is only half of the story. We have also materially improved well productivity. Approximately 80% of the wells drilled year-to-date have outperformed the type curve with average initial production more than 10% above expectations. As you know, production from our conventional wells speak within 6 to 12 months after coming online and recent activity will benefit for 2027 volumes. Together, accelerated cycle times and stronger well productivity are a powerful combination and have meaningfully improved our long-term maintenance capital outlook. We now estimate that California production can be maintained with 6 rigs on a normalized annual basis. One fewer than previously projected and approximately 5% lower D&C and workover maintenance capital. Both represent meaningful structural improvements in the capital efficiency of the business. During the quarter, we refinanced our remaining 2029 senior notes with new senior notes due 2035. This extended our weighted average debt maturity from 5.5 years to 8 years, reduced annual expenses by $5.5 million and achieved the lowest credit spread in CRC's history. Our capital allocation priorities remain unchanged: invest in high-return organic growth and strategic opportunities, maintain a strong balance sheet and return meaningful capital to shareholders through a sustainable dividend growth model and opportunistic buybacks. Temporary takeaway constraints during the second quarter related to marketing disputes and subsequent operational needs required us to temporarily build inventory of approximately 1,500 barrels of oil per day during the quarter. increasing operating costs and negatively impacting our differentials. Absent these temporary impacts, production would have exceeded guidance while adjusted EBITDAX and operating cash flow before working capital would have each been approximately $25 million higher. We are actively addressing this matter while executing on alternative logistics and marketing solutions. By the end of July, we had sold the substantial majority of this inventory. As a result, we expect third quarter oil price realization of approximately 93% of Brent. We think it is a prudent assumption based on current market conditions. To be clear, we do not view that as a new long-term run rate. We expect realizations to improve as the commercial and logistics actions already underway take effect. Those actions will give us a broader slate of alternatives to move CRC and third-party barrels to California's highest value markets while strengthening our cash flow outlook. Turning to guidance. We target full year net production to average approximately 153,000 barrels of oil equivalent per day, while maintaining our full year capital guidance of $520 million to $560 million. Including Uinta, our outlook continues to reflect approximately 1% gross entry to exit production growth. Importantly, we continue to see our full year realizations at about 94% within our original 94% to 98% range. We expect to enter 2027 at the normalized California 6-rig pace contemplated in our long-term maintenance framework. Updated 2026 guidance will be provided following the close of the Crimson transaction. disciplined execution, lower costs, including synergy capture, and strategic actions are supporting margins. Ultimately, stronger well performance and sustained operating efficiencies are enhancing free cash flow while lowering the long-term maintenance capital required to sustain our unique low decline California production base. I'll turn it back to Francisco.

Thanks, Clio. Let me close with a quick summary before opening the line for questions. First, today's midstream transaction strengthens our California platform, reinforcing market access, improving margins, and increasing our ability to move local barrels to the state's highest value markets. Second, we're executing very well. better wells, lower cost and sustained efficiency gains are reducing long-term maintenance capital and rig requirements while reinforcing free cash flow resilience. Third, we're advancing our carbon and power platforms. The start of CO2 injection and revenue generation California's first CCS project were great milestones and our new planned project with Beacon data centers at the Golden Valley technology hub is leveraging growing demand for firm power and data center capacity. Together, these actions make CRC more integrated, more efficient and better positioned to create durable value in California. Operator, we're ready for questions.

[Operator Instructions].. The first question today comes from Betty Jang with Barclays.

I want to start off with Crimson. Francisco, you mentioned earlier that the company has been intentionally building an integrated California energy platform over the last few years. includes the expansion of midstream infrastructure. So can you just frame this print acquisition within that broader strategy. What role does the asset play in that vision? And how long you guys have been thinking about this opportunity?

Yes, we've been thinking about midstream integration for some time. We started thinking about Crimson in particular about 3 years ago. But the first story of our business was to acquire Era and Berry, gave us a lot of scale, a lot of remaining oil and expanded our footprint considerably. And as that footprint was growing, we felt critical infrastructure around those barrels was going to be key to step into -- and it was truly a natural step. We already managed a lot of pipe in California. So we understand the systems really well. So now we're getting into common carrier, which has contracted revenue, which we really like. And these are assets that are very difficult to replicate. If you think about our playbook, it really hasn't changed. From an acquisitions perspective, we're looking for high-quality assets at attractive values. In assets where we have an advantage and what that integration that comes into our hands, becomes even more valuable. So we think we have a good track record of doing that and Crimson fits that pattern? In terms of the asset, so 2,000 miles system, it connects to most of our key fields and across multiple basins support certainly our production, but also improves market access and it strengthens the connectivity to some of the highest value markets in the state. Restoring capacity for this pipe was important too from a state perspective. It addresses a real constraint from other producers and ultimately, that close to consumers in the state -- this pipeline system is needed. And I think you're seeing that reflected in a supportive regulatory process. As I mentioned on the script, we have a tentative CPUC approval with no conditions and expect to receive final approval later this month. So if you step back, Crimson is doing exactly what an acquisition should be the one for us. It's adding more stable contracted cash flow and makes the broader California platform even stronger.

Got it. That makes sense. And maybe tying that to the differentials and the transport constraints that we are seeing right now. Can you just help us understand it better on just what's driving the current bottleneck? Maybe more color on this pipeline legal case that you mentioned earlier -- what gives you the confidence that this pressure is going to be alleviated soon and just maybe some outlook into 2027, how this differential improves from here?

Sounds good, Betty. I'll give you some high-level perspective and Clio can talk about some of the impact in the quarter, but we see this impact as being temporary. And to start, maybe I'm going to give a little context on what we're seeing in California because a lot has changed over the last year, and in our view, a lot of things are improving significantly. We're running about 7 -- and there are 7 rigs that are being run in the state today. 5 of those rigs are CRCs. That's the highest level of activity that we've seen in the state since 2023. If you heard the second quarter earnings from some refineries, they're starting to make significant capital investments back in the state. On top of that, production has been increasing and the pipes in the southern system are running full. If you take it as a whole, you'll see that the signs of a market significantly improving. Now you couple that with the Middle East conflict and it is leading to some near-term conditions that are favoring refiners. And on top of that, we're dealing with a pipeline operator that's behaving in a manner that we feel is inconsistent with established tariffs. But we do view those as temporary conditions and not structural changes to the California market. Again, we see the market as improving drastically. Our team has done a great job. And it's between our marketing organization, the relationships we have with refineries. We have multiple transportation connections. We did a timely acquisition of Line 100 that provided 1 million barrels of storage and gave us a lot of options. So where you're seeing that reported differential impacts for some producers in the basin are approaching about $20 a barrel we limited that impact to CRC to about $2 a barrel. And we see -- we think we've seen the worst of the impact and are working really hard to improve -- to get back on track to historical levels. The other way to think about it is we're also thinking beyond the noise and the disruption. Going forward, we see a potentially fragile global energy supply chain where reliable barrels produced under stable governments are concom increasingly more valuable, which makes owning this California infrastructure even more important. So that's where Crimson came in. So as we move into 2027, we like the greater control of Midstream. We like the multiple market connections and storage -- we have strong marketing capability that actually allow us to move our barrels to the best markets and ultimately capture value. So with that, maybe I'll turn it to Clio for her context.

Thanks, Francisco. So from a financial perspective, I think the key point here is that we view this as a temporary commercial issue rather than a change in the underlying earnings power of our business. And there are really 3 things to highlight here. First, operationally, this was a strong quarter. And despite the temporary disruptions during the quarter, we still realized approximately 95% of rent which was within our second quarter guidance range of 94% to 96%, and we had established that at the beginning of the quarter before these transportation and marketing issues emerge. And that really speaks to both the strength of the underlying business as well as to the execution of the team, of course, and Francisco mentioned this, but they really adapted quickly found alternative solutions, and ultimately, that allowed us to deliver within guide. Second, the total financial impact during the quarter, that was approximately $25 million or less than $2 per BOE and roughly half of that was timing related from the temporary inventory build while the balance was primarily weaker differentials while also transportation costs represent a smaller component. The substantial majority of those inventory barrels, those were sold during July. So that timing impact, it's largely behind us. And those sales that are already reflected in our guidance. Third, we are guiding for the third quarter of oil realization to approximately 93% of Brent. Now to be clear, we don't view that as a new long-term run rate. As we said in our remarks, we think that's a prudent assumption while the commercial and logistics actions that we've already put in place that those take effect. We expect the third quarter to represent the low point of realizations this year with our implied fourth quarter guidance that reflects the beginning of the recovery. So stepping back, we currently expect full year oil realizations of approximately 94%. That remains within the original 94% to 98% framework that we had established back in March and that was before these temporary disruptions emerged.

The next question comes from Nitin Kumar with Mizuho.

I wan to start on the Uinta, you mentioned a lot of the improvements in efficiencies in California. But if I remember correctly, you have 3 wells coming online by the end of this year. Can you maybe give us an update on the drilling in the asset? And what are your plans for the asset longer term?

Nitin, yes, it sounds good. We're actually drilling 4 wells. And we've been very pleased with the drilling performance to date. We're actually currently drilling the fourth well which should be done in the next few days. So we're running ahead of schedule. Then we move into completion rig in early September, and we expect to have online and producing all 4 wells before the end of the year. On the cost side, these wells are roughly about $11.5 million. And based on what we're seeing today, we expect to complete the wells ahead and below the ASC. So good progress on the drilling. Now in terms of what's next, we're evaluating our strategy in the Uinta. It's a very large position, 100,000 acres with good resource potential but it's largely undeveloped. And it requires a pretty significant amount of capital to develop the scale that we need for a second asset. So as we do a side-by-side and we compare the Uinta assets with California, Uinta has higher capital intensity, higher breakevens, lower crude quality, waxy crude that is famous for but also has higher transportation and operating costs and steeper declines. Ultimately, it's a drag of about 1% on realization. So putting it side by side with the California assets that have very low decline and generate better returns. It's hard to see us allocating a lot of dollars back into the Uinta -- so I would say it's a noncore asset to core asset -- noncore asset where we're taking CRC, and we will continue to evaluate the best way to maximize the value of that asset going forward. As of today, I don't see it competing for long-term capital in our portfolio.

Got it. Okay. And so maybe just to clarify, does that mean that with the 4 wells you've tested enough to say that maybe this is something that doesn't belong in the portfolio? And is there a time line for the asset to be sold? Or are you going to wait for the results?

Yes, I wouldn't say there's anything around the drilling. Ultimately, we need the completion crews to come in based on what we've seen, we like the well performance it's more around the type of assets, right? It's unconventional high decline asset and 1 that's going to require a significant amount of capital. So -- like I said, we'll see how the rest of the program goes. But if you think -- if you want a long-term answer, I don't think it's core to our business.

Got it. And I'm sorry, I want to sneak one more in, just quickly. You talked a lot about the integrated platform with this purchase of Crimson. Clio, maybe looking at Slide 10, from a capital allocation standpoint, -- how does the Crimson asset fit in? And what was attractive about this specific asset?

Thanks, Nitin. And yes, that's a great question. I actually think the important distinction here is how we evaluate investments. So every dollar competes for capital, whether we're drilling well, acquiring an asset, refinancing debt or returning capital to shareholders -- we apply exactly the same investment framework to every capital allocation decision. And from that perspective, Crimson met every one of our investment criteria. We've been building toward an opportunity like this for a while. We were patient and when strategy really met opportunity at the right valuation we acted. So strategically, it strengthens an integrated California platform. that we believe has significant long-term competitive advantage. And Francisco mentioned, that's a key part of our long-term strategy. Financially, we're acquiring the asset at approximately 4.4x estimated 2027 EBITDA. And so that represents a very attractive entry point valuation relative to comparable public midstream assets. We also believe it's a highly accretive use of capital particularly when you consider the CRC specific synergies and the commercial opportunities here. And finally, we've already demonstrated our ability to create value by integrating acquired assets within CRC's existing infrastructure. A good example of this is the integration of our 2 largest fields, so connecting Bell Ridge to our Elk Hills processing system. That project immediately increased gas and NGL production while improving the economics of the combined asset base. So Crimson gives us another opportunity to apply that same playbook. We don't evaluate Crimson solely on the cash flows generated by the pipeline itself. We also evaluated based on what it does for our broader California platform. It's improving market access, increasing commercial flexibility, enhancing realized pricing and ultimately creating more value across the integrated business. If I put it simply, we believe Crimson, it's worth more inside of CRC than it would as a stand-alone midstream company. And we've been very deliberate about where we want to build the business. but also equally disciplined about the price we're willing to pay. So we're very comfortable passing on opportunities until they meet both our strategic and also our financial objectives. And that's really ultimately how we think about capital allocation. It has to be the right asset at the right valuation and at the right time.

The next question comes from William Barber with UBS.

My first question is just around the Golden Valley Tech Hub. If you could just walk us through how the partnership with Beacon data centers came about? And then with the conditional use permits submitted an environmental review expected to advance later this year, -- can you outline like the critical path forward from here? How should we be thinking about the sequencing of hyperscaling commitments, power agreements, permitting and obviously, FID?

Billie, thanks for the question. So -- we talked to a lot of developers and ultimately, Beacon was the best fit for us. They're doing a lot of very large projects in North America with data centers. So they bring great engagement and current engagement with the potential hyperscalers and the tenants. They're doing construction, they're capitalizing the project. So if you look at what they bring to the table over and then it's a nice complement to our land position or power infrastructure and ultimately, our ability to permit and execute in California. So we think it's a strong combination in -- at the end of the day, we look at data center development, maybe a little bit different from what you're seeing from other E&Ps. We're very comfortable starting with project development and not with the headline, because that's ultimately what gets projects done in California, and that's our advantage. E&P companies are talking about acquiring land and ordering turbines or building power plants from scratch. We already have all of that. And so then our focus is on derisking the project in around what the hyperscalers actually need. So in our direct conversations with hyperscalers, the perspective is that the procurement -- the power procurement cycle is evolving. The EC electrons that were readily available are gone. So as you're thinking about what comes next, their focus impact on cleaner and reliable electrons and they really care about the certainty and ultimately, when you have the business operating. And they are focused on project community relations. So we think Project Golden Valley is really well positioned for that. As you said, we filed the conditional use permit, is a public permit. And what you can see in that permit is on the power side that we designed a triple redundancy into the power solution. It will be a behind-the-meter solution. So we're not dependent on waiting years for new grid interconnection and we also designed around 2 of the major friction points, which is water and community support. The project has a very low water use. It's using closed loop cooling system. And on the community side, we have documented support from over 100 local residents and business owners. So we're doing a lot of the groundwork, a lot of what's needed to deliver the project, so from here, the work stream really is to advance many things in parallel. It's the hyperscale engagement and the commercial agreements. They certainly are the next value we can unlock but we'll continue progressing permitting, engineering and financing. That's how projects get done in California. You start with the project development and you advance multiple pieces together, and that's something our team knows how to do.

Got it. Maybe switching over to the E&P business. You guys have improved execution enough to run California on 5 rigs through year-end and then 6 going forward. with the 5% lower maintenance capital required in 2027 and beyond while your 2026 wells drilled are also coming in ahead of expectations. I guess just what were some of the key drivers and initiatives here, how durable are they? And ultimately, what does this mean for capital efficiency and your production cadence heading into 2027?