California Resources Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 2, 2023

Key Takeaways

  • The company delivered record Q1 financial results driven by higher‐than‐expected NGL and natural gas realizations in California, where gas prices spiked amid cold weather and tight in‐state supply.
  • CRC generated $263 million of pre‐tax free cash flow in Q1 and returned $79 million to shareholders through a $20 million dividend and $59 million in share buybacks, having repurchased about 15% of shares since May 2021.
  • 2023 after‐tax free cash flow guidance was raised by 8% to a midpoint of $415 million despite lower commodity price assumptions, reflecting strong operational performance in Q1.
  • A cost reduction and business transformation initiative has identified $20 million of run-rate savings so far, targeting $25–50 million annualized by year-end, and Neli Molina will join as CFO on May 8 to support enhanced efficiency and finance strategy.
  • The Carbon Management arm (Carbon TerraVault) signed two new storage‐only CDMAs, bringing total commitments to 610,000 metric tons per annum, filed a Class VI permit for CTV-4 (174 million metric tons capacity), and aims to secure its first draft EPA permit by year-end.
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Earnings Conference Call
California Resources Q1 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

And welcome to the California Resources Corporation First Quarter Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, Today's event is being recorded. I would now like to turn the conference over to your host today, Joanna Park, Vice President of Investor Relations and Treasurer.

Operator

Please go ahead, ma'am.

Speaker 1

Thanks. Welcome to California Resources Corporation's Q1 2023 Conference Call. Participating on today's call are Francisco Leon, President and Chief Executive Officer as well as the entire Executive Committee. I'd like to highlight that we have provided slides on our Investor Relations section of our website, www.crc.com. These slides provide additional information into our operations and our Q1 results.

Speaker 1

We've also provided information reconciling non GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website as well as in our earnings release. Today, we are making some forward looking statements based on current expectations. Actual results could differ due to Factors described in our earnings release and in our periodic SEC filings. As a reminder, we have allotted additional time for Q and A at the end of our prepared remarks. We ask that participants limit their questions to a primary and one follow-up.

Speaker 1

With that, I'll now turn the call over to Francisco.

Speaker 2

Thank you, Joanna. Good morning, everyone, and thank you for joining us. I am very pleased to be here talking to you today as CEO of CRC as we continue to build A different kind of energy company focused on generating the highest cash flow from our low carbon intensity assets and advancing our carbon management business. My remarks today will focus on 3 key areas. First, our record financial performance in the quarter, which was driven by our strong operational execution and leading natural gas position.

Speaker 2

2nd, The progress we made advancing our plans to reposition the business to unlock shareholder value. And finally, the growing strength of our Carbon Management business as we continue to take steps to enable California's clean energy goals. Turning to our quarterly results, we're off to a great start for the year. Record financial results showcased the quality of our low decline assets and the benefit of a diverse hydrocarbon E and P portfolio. We successfully maintained flat Oil production quarter over quarter on $31,000,000 of drilling and completions and workover capital.

Speaker 2

We drilled 9 wells in 2 side tracks And ended the quarter with 1 drilling rig at Wilmington and 39 maintenance rigs. Our reservoirs Offer stack pace, which means we can re complete and sidetracked existing wells to add pay at attractive returns. This type of activity is highly economic and allows us to bring on production at a fraction of the cost of a new well. For the balance of the year, we intend to increase our workover activity and execute a 1 rig drilling program. We have secured all the necessary drilling permits for our 2023 capital program and are working to build incremental permit inventory for next year.

Speaker 2

Another highlight for the Q1 was the California commodity markets. Because the state operates as an energy island, California realizations reflect the demand for energy and tend to be higher than national benchmarks. Both NGLs and natural gas realizations were above expectations and crude realizations were within guidance. To be more specific, NGL and natural gas realizations benefited from colder than normal weather and the lack of in state production. In the case of natural gas, our realizations for Q1 were approximately 6 30 percent of NYMEX.

Speaker 2

As a reminder, California imports approximately 90% of the natural gas consumed in the state. When demand exceeds Local production plus incoming supply, the market relies upon natural gas and storage to make up the difference. In the case of January and to some degree February, California found itself with limited natural gas inventories and storage And limited local supply of production. As the state's largest natural gas producer, our roughly 12 Bcf of production was available to meet the needs of the state. These factors help drive record results and facilitated another quarter of shareholder returns.

Speaker 2

The company generated pre tax free cash flow of $263,000,000 of which approximately $79,000,000 was returned to shareholders. This consisted of $20,000,000 in dividends $59,000,000 in share repurchases. Since implementation of our share repurchase In May of 2021, we have bought back approximately 15% of the company's outstanding shares. Combined with our fixed dividend of $1.13 per share, we have returned back to shareholders approximately 22% of our current market cap in less than 2 years. We intend to continue with our active shareholder program and have 5 $67,000,000 remaining under the total Board approved $1,100,000 authorization.

Speaker 2

We also ended the quarter with robust liquidity of $931,000,000 including $477,000,000 of cash on hand. ERC is committed to maintaining a very strong financial foundation and we will continue our focus on achieving greater financial flexibility and commitment to shareholder returns. As we look to the balance of the year, we have increased our 2023 after tax free cash flow guidance by 8% to $415,000,000 at the midpoint of our range to reflect our strong Q1 'twenty three performance. This is partially offset by lower commodity pricing assumptions for the rest of the year, timing of capital, changes to working capital We have provided detailed analysis about our quarterly financial and operational results Our 2023 guidance in the attachments to our earnings release and in our slide deck. Turning to our continued strategic realignment of the company's operations and structure, we announced yesterday the appointment of Neli Molina as CRC's new CFO effective May 8.

Speaker 2

I could not be more excited to welcome Nelly to CRC. She is a seasoned Energy Executive with more than 25 years of corporate finance, capital markets and project financing experience And breaks an extensive background in the development of energy infrastructure projects in the natural gas and power sectors. Nelly joins us from Sempra Energy, where she most recently served as Vice President of Audit Services and Vice President of Investor Relations. I look forward to introducing her to you in the weeks months ahead. And I know we will benefit greatly from her expertise Navigating Today's Evolving Energy Industry.

Speaker 2

In addition to the changes in leadership, we're also focused on pursuing As mentioned last quarter, we launched a cost reduction and business transformation initiative to align with our activity levels and build a more efficient organization. We are targeting annualized run rate cost reduction goal of $25,000,000 to $50,000,000 to be implemented by the end of this year. We have identified $20,000,000 of reductions to date and are working to Expand the scope and scale of cost reductions efforts during Q2. Another key element of our plan is to achieve increased financial flexibility. This quarter, we have successfully reaffirmed our $1,200,000,000 borrowing base And amended our RVL facility to increase the duration and improve the terms.

Speaker 2

These changes will enable us to make additional investments in We will continue to evaluate ways to increase our financial flexibility as the year progresses. As we discussed last quarter, we're evaluating the separation of our carbon management business, Carbon Teravault, as part of our ongoing efforts to optimize the value of our Outgoing CRC CEO, Mac MacFarlane is serving as the Chair of the Board of Carbon Teravolt, And we have been working closely together to determine the best path forward. The Carbon Management business is still in the early stages And there are important milestones that we're working to reach before initiating a potential separation, such as an EPA Class 6 permit approval, Project FID, line of sight to first CO2 injection and first cash flow among others. We're continuing to build out the leading carbon storage business in California. In the Q1, we have made further progress by signing 2 new green Field storage only CDMAs, a green hydrogen project in the Sacramento Basin and our renewable DME project at our Elk Hills Net Zero Industrial Park.

Speaker 2

These projects target 140,000 metric tons of CO2 injection per annum on a combined basis. We now have 4 CDMAs in place for a combined injection rate of 610,000 metric tons per year, representing reservations of about 12% of our port space. Further, we submitted Class 6 permit application for a new development area, which we call CTV 4 for an additional 34,000,000 metric tons, Bringing CTV's total potential permitted storage to 174,000,000 metric tons or over 85% of our stated 2027 target of 200,000,000 metric tons. The CTV team continues to file permits for additional vaults across California to expand our leading position in the state. We are targeting receiving our 1st Class 6 draft permit from the EPA for CTV-one by the end of the year.

Speaker 2

In summary, we're excited about our continued progress in executing our strategic repositioning. In the This quarter of 2023, we had record financial performance, which allowed us to increase our full year guidance. We also advanced our cost cutting initiatives and continue to reposition our business to unlock additional shareholder value. Finally, we further expanded our California leading carbon management strategy to support California's Clean Energy goals. Thank you for joining us on the call today.

Speaker 2

We'll now open the line for questions. Operator?

Operator

Yes. Thank you. At this time, we will pause momentarily to assemble the roster. And the first question comes from Scott Hanover with RBC Capital Markets.

Speaker 3

Thanks. Good morning or good afternoon all. And my first question, it may feel like a little bit of a Multi faceted one, but let me try here. You've made progress on obviously starting the signing up the new CDMAs. And How do you and more of those, I guess, recently were some of the lower capital intensity agreements.

Speaker 3

And how do you think about these excuse me, the mix of these projects Going forward, do you want to see some more of the kind of the front end projects to increase the scale of EBITDA? Or do you Feel confident that I know you said you're only about 12% on total reservations right now, but you feel confident in the larger Quantum of getting that storage permitted, so that scarcity factor isn't really as much of a concern. So I know it's kind of a bit of a multifaceted question, but ultimately I'm just trying to think about the high relative EBITDA opportunity and if a potential offset would be exercising Some of the equity stake options.

Speaker 2

Hey, Scott. Yes, we're focused on both. So Greenfield For CDMAIS on Greenfield, it's really good progress. No question about that. And You have the tailwinds from the IRA increase in the incentives.

Speaker 2

So definitely that's helped put projects together. It also helps that we can co locate these greenfield projects at Elk Hills in the Sacramento area. So It's an easier process to get to a CDMA. Existing point sources, We talked about it before, but you're still going to price discovery, right? How are the credit share across the value chain?

Speaker 2

And you also have to solve for transportation, how do you move the CO2 across the state. We know there's a lot of interest in Sacramento to Ensuring that CCS is successful. Everyone understands that transportation is part of the equation. And we're hoping there's some uncertainty right now. We're hoping that uncertainty is But I'm confident we're going to be delivering both projects.

Speaker 2

Certainly, the Going to PointSource, the ability to deploy more capital, but also increase the EBITDA is something that we're focused on with our partners in Brookfield. So We'll do a little bit of both. I think if you looked at the types of projects that we see in the queue or the types of projects that we're reviewing, You see a pretty good mix between them. It just so happens as we're kind of building kind of this new business live in front of everybody that the first four projects So our Greenfield, but that's not it's this business is not going to be exclusively for Greenfield. We'll bring some point source projects Into the full, hopefully in the near term.

Speaker 3

Yes. And how about the exercising in the equity options on those?

Speaker 2

Yes. So, we preserve the option to invest into the equity of all four projects and Started with Granite and Lone Cypress that have been in the works for longer. We're reviewing not only the Cost profile of those businesses, but the market in a lot of cases like hydrogen, there's not a very well developed market quite yet, but there's a lot of interest. And that also requires understanding the offtake contracts and the depth of the market and where to base Best placed the hydrogen and the ammonia. Ammonia is already tied to a co op in Sacramento.

Speaker 2

So We're evaluating both. We'd like to have a decision this year on Lone Cypress in particular. That's going to be the first project we're reviewing the equity. There's a lot to do, but we're excited. We think these markets will develop nicely in California.

Speaker 2

There's a lot of support again by IRA. Hydrogen has 45V that supports it, but we're seeing a lot of potential demand for the product. So Both Brookfield and CRC have retained that ability to invest in the equity and it's something that gets us very excited about participating in this new energy verticals.

Speaker 3

No, I appreciate that. And it sounds like you're putting a lot of depth in the thought of around this. My follow-up question is on those cost savings you talked about. And could you give us a little bit of color I think you said $20,000,000 There's kind of a line of sight on it right now. But what kind of specific cost savings are you really seeing and what are you targeting?

Speaker 3

And I'm kind of curious with Using, I guess, that A and M service, what specifically was the reason of going like outside to have somebody come in and do that versus Doing stuff like CRC, what can't you do on your own that they can come in and help you with?

Speaker 2

Yes, Scott. So we were looking for ways to change how we work. CRC does a lot of things really well. It's a company that has been operated in under the strictest regulations pretty much in the U. S.

Speaker 2

So there's a lot of there's the team works well. We are have very high operating standards. But we need to change how we work. We need to bring cost in line with activity levels. So that requires a kind of a business transformation, not just a cost So we need to question everything.

Speaker 2

We need to question how we're organized, we need to question what we prioritize and ultimately look for to make decisions Not to take some cost out of the system. The team got to work right away after we came last quarter and described this initiative. In $20,000,000 in a couple of months, it's a pretty good win. And again, we're trying not to this is not a deferral, this is not Removing one time cost, these are run rate savings, these are permanent savings that we want to Take out of the system. So we're evaluating contractors, we're evaluating contracts, chemical contracts, for example, how do we use different How do we ultimately make decisions across the board?

Speaker 2

And we're questioning everything, right? It's a good opportunity for the refresh. It's a good opportunity to say, okay, can we do better and drive that culture going forward. We brought A and M. 1, they're a very good team.

Speaker 2

2, we want to get that external perspective. California tends to be isolated from what's happening in the rest The U. S, we want to bring best practices, and we want their help assessing and ultimately accelerating Some of these cost saving efforts, we've taken a lot of cost out of the system historically at CRC. So the next Phase is really one that requires kind of a transformation of how we work, and we felt it was best done with some outside help. So I'm very focused on these cost reduction exercises and we're getting a lot of great organic support from the team Presenting new ideas on how do we make this company better.

Speaker 3

Got it. Appreciate it. Thank you.

Speaker 4

Thank you.

Operator

And the next question comes from Doug Leggate with Bank of America.

Speaker 5

Hey, good morning. This is actually Clay on for well, for myself. Francisco, following your announcement last quarter regarding potential It's separation of CCUS from E and P. We received a lot of imbalance on the power plant. What's the valuation?

Speaker 5

What's the G and A burden? What does power market look like? So could you comment on whether it's core to your oil and gas business or whether it's a better fit for a standalone CCUS Business, noting that there are potential synergies with Galcapture. And maybe to add on here, I remember a few years ago, you guys did that deal with Ares. Therefore, if you did something with the power plant here, it wouldn't be the first time.

Speaker 5

But even in that deal, there was an option to buy us back after a period of time. So that suggests to me that there is maybe some constraints in how you think about structuring it?

Speaker 2

Hey, Kalei. So, yes, I mean, I think we have a big advantage in the state by owning a power plant At Elk Hills, it's been truly a great asset for us and it really helps us stay away from the grid, at least from part of our fields, Which helps us bring down cost alongside with it. So the plant delivers about 1 third of the power goes To the oilfield, 2 thirds gets sold to CALISO and Utilities. So it's been a good profitable asset for us Historically, we have the opportunity to make it better to be able with a capture system be able to deliver net zero power in a state that's really hungry for these types of offerings. So we're evaluating where this asset fits best On a go forward basis.

Speaker 2

I mean, I think the prospect of having net 0 is appealing to everybody, but you also have to be able to undertake Calcapture, which as we talked about in the past, it's a capture system on a low concentration FIMO CO2, which is going to be on the higher end of the cost spectrum, right? So how do we make that investment? How do we finance That type of capital call and ultimately where does the asset belong, is it more on CRC Or is it more on Carvan Terrible? Those are the sort of things we're working through. We did release the collateral From the banks to the RVL, and we're looking to have the flexibility so that we can put that asset to work in the best way possible.

Speaker 2

Right now, the way I see the power plant, even though it's a great unique asset in the State of California for E and P companies, we see that asset trading As an E and P multiple, right. So having ability to see the financials, right. So the things so many things you're asking, having the visibility to Showcase how good this plant is and how it can get better by making it a mid fuel power plant. I think it's going to be a great value add and a way to unlock value. So we're working through it, nothing definitive.

Speaker 2

Hopefully, at least I gave you Some of the groundwork here as we're working through these types of assets and where do they best fit in case we do separate the businesses going forward.

Speaker 5

The quick follow-up there and I hope you don't count this as my second question, but there was a FEED study that was performed about 2 years ago And for whatever reason, you guys are performing a second FEED study. Can you give us an update on where that What the status is on that FEED study that you're currently performing?

Speaker 2

We'll see if it's your second question or not depending on what the next one looks like. So, no, it's a great question, Kalei. So we did a feed study with Fluor a few years ago and now we're doing a second feed study with You have to understand the reason we have 2 FEED studies and we're going to continue looking at the cost is that there hasn't been a capture system Put into a natural gas power plant facility of this scale anywhere in the U. S. Before.

Speaker 2

So we want to make sure that we have the cost right. I mean, the technology is really not it's not a new technology. It's not something that concerns maybe the scale does. What is really trying to drive that cost down, we've had a lot of inflationary pressures over the last 2 years. We want to make sure it's the project that not only delivers that ability to reduce that CO2 emission footprint, but it's also a profitable project.

Speaker 2

So what You're going to continue seeing from us is really working to that cost profile. How do we best set up? How do we finance these power plants so that we can make Cal Capture happen. We're targeting FID next year, right? So we're working through it.

Speaker 2

We're soliciting input. There's a lot of companies that I'll bring in new ideas, bring in new technology and looking at the supply chain differently. And we're going to look to award the project to whoever can deliver the best price and get us a project that we feel comfortable that can be executed on. So we're working through it.

Speaker 5

I appreciate that. My real second question is on natural gas. So obviously, really big numbers this quarter. Hoping that you can help us understand how to model your exposure. Is it BidWeek or is it Spot?

Speaker 5

Is it CityGate or is it SoCal Border? I think any help here would be appreciated because given the tightness In California, it seems like this could be reoccurring.

Speaker 2

Yes. So I'll start and then I'll turn it over to Jay To give a more in-depth answer. So we do feel this is a California through the regulation and through the penetration of renewables That gas is going to be absolutely needed, not in the near term, but as we go forward as baseload. So we're well positioned as the largest natural gas producer in the state. And now we see these spikes happening more and more.

Speaker 2

So definitely, it's something that state that's an energy island is kind of Decided that's where we're going to be. So these natural gas assets that we own through both power and owning the Sacramento Basin, now Kilsen, Buenavista areas all have gas in the right places. It gives us a lot of flexibility when we see this market shocks To be able to reposition our assets and go out and try to deliver the gas for the state. But maybe Jay, if you can cover a little bit of the pricing

Speaker 6

Yes, let me kind of touch on the basic precip here. More times than not, we're going to find ourselves looking to be close to if not at The 1st of the month index, we prefer not to carry a lot of gas into the daily market during any particular month. Now in advance of that bid week cycle or during the bid week cycle, We may take some limited fixed price positions that just simply seem frankly attractive given the circumstances that are taking place. I Our gas for the most part is produced relative to the SoCal Border Index. But as you may or may not be aware, we maintain long haul transportation from the field on Kern River.

Speaker 6

We've got a fairly significant position on the SoCalGas system in terms of BTS. So this is Where the semantics get a little bit goofy, I'm afraid. Some people call this trading, we call it marketing and asset management. And the fact is we keep a set of tools around and work very well together. We've got gas production in some of those liquid points in the state.

Speaker 6

We maintain that transportation as I mentioned. We've got some of the most dependable generating capacity in the state. We've got really the right folks around So when the market needs power, we move more gas to the power plant. When the market needs gas, we're able to bring more gas to market. So In general, I think you should probably look at any particular monthly cycle look for the 1st of month index reflective of kind of a 80 20 SoCal BorderPG and E City Gate Index.

Speaker 5

I appreciate that there are a response.

Speaker 2

Thanks, Clay.

Operator

Thank you. And the next question comes from Leo Mariani with ROTH MKM.

Speaker 7

I wanted to just delve in

Speaker 2

a little bit more to a few

Speaker 7

of the numbers sort of around the quarter. Looking at CapEx, it was quite a bit sort of below guidance. And then just follow-up on the gas price question. I guess when I looked at sort of SoCal Border, CityGate, didn't really matter. I had a hard time getting to the 2,150 that you guys put up So maybe there's kind of some other semantics around the pricing or some other local markets that are kind of less visible outside of these indices that get reported by data agencies like a Bloomberg or sort of whatnot that drove that.

Speaker 7

But Any more color on how you get to the 2,150? And then again, just CapEx nicely below the guide here. So any thoughts on that?

Speaker 2

Hey, Leo, that sounds good. Let me answer the CapEx question. So we went through 4 months and I know it's hard to believe of really Bad weather in California, a lot of wind, a lot of rain, snow, and that affected our operations. The team did a phenomenal job Executing through that and you don't see a lot of impact in production. In fact, we outperformed on production expectations, but it did delay some of the capital We do as we step down, we're now running 1 rig in the Wilmington field.

Speaker 2

We'll continue that throughout the year. But what you should See is a step up in capital workover activity for the rest of the year and as operations get normalized. In terms of the gas pricing question, again, I'll turn it over to Jay for an answer.

Speaker 6

Sure. As I mentioned kind of a couple of moments ago, We did execute a few opportunistic fixed price trades during the during the beta week cycle. But one thing that kind of gets lost and I'm trying to get a whole bunch into the weeds When you see an index posted, natural gas doesn't necessarily trade in the physical market At that price, there are times of the year when it trades at a discount and there are times of the year when it will trade at a physical premium. So for example, to get physical gas at SoCal Border, you may end up paying more than the border price. You'll buy physical gas in index plus number.

Speaker 6

We had a fair number of Index Plus numbers transacted in our book for the months of January And frankly, February, both are very strong. A lot of different points in the Western Gas market, physical gas was trading Add significant premiums to the individual posted financial indexes. So combine the opportunistic trades, the limited number we had In that small variation, I think you get there pretty quickly. Again, I'm not sure Q1 of 'twenty three will be representative of what we see for the balance of the year. I think you're going to find Gas prices are probably in large measure, excluding the fact that we've got a shortage of gas in inventory right now.

Speaker 6

I think you're going to find them more reflective of the national gas price.

Speaker 2

And if I can add one thing. So we have Marketing and Trading team and then we have very diversified revenue stream. Last year, We've highlighted the NGLs. The NGL barrels were trading higher at some point in the year Then our after hedge oil barrels, this year's natural gas, there'll be tons where it's electricity. So really feel good about that diversification that we built For CRC and then given the team an opportunity to manage that to make our most highest return decisions, I think we're set up for success here in the long run.

Speaker 7

Okay. That's very helpful. Makes And then just kind of sticking with some of the numbers on the quarter here. So looking at your San Joaquin basin gas production, it was down around $10,000,000 a day this quarter versus Historically, that gas production has been pretty steady. It doesn't really move around much sort of by quarter.

Speaker 7

Was there anything like maintenance or downtime? Or is this more of you guys Maybe directing more of that gas to the power market and kind of less to the volumes sort of sold market here in

Speaker 8

the quarter, just looking for any color on that.

Speaker 2

We know that the gas, Leo, really was impacted by weather. That's you had Facility is down because of the high winds and that affected our gas production in particular. So that's really what happened in the quarter. We do have some maintenance projects throughout the year, but I think Q1, you can attribute most of that change to weather.

Speaker 7

Okay. Now that's helpful. And then just on the regulatory front here, kind of any update on just the general permitting Situation for oil and gas drilling permits in California, I know the Kern County EIS is still a ways away in the decision, but But apart from that, can you maybe just talk to whether or not permits are kind of coming outside of those Kern County areas?

Speaker 2

Yes. So yes, no update on the appeal around Kern County EIR. So that's still ongoing. As we said before, we expect that Take some time. So we are getting workover permits in Kern County and throughout the state.

Speaker 2

So those are flowing. We also filed a CEQA for 3 of our largest fields in Kern County to be able to do field level The IR that gives us an alternative to be permitting back in the San Joaquin Basin in Kern County. We're building inventory outside of Kern, Looking at our gas wells in the Sacramento Basin and continue to get looking at The South and LA Basin as well. As we said before, we have all the permits in the drilling campaign that we need for 2023. So really all we're doing right now is Creating as many options as possible for 2024.

Speaker 2

So working through those, but again, no permits in Kern County yet other than workover

Speaker 7

Okay. But it sounds like generally speaking, you guys are able to probably get permits outside of the Kern County Yes, that's something you can still obtain here?

Speaker 2

Yes. I mean, we were like I said, we have all the permits that we need in Wilmington. So that's been in good shape. We do expect to get permits outside of Kern County.

Speaker 7

Okay. Thank you.

Operator

Thank you. And the next question comes from Nate Pendleton with Stifel.

Speaker 4

Good morning and congrats on a strong quarter. Regarding trucking CO2 at your carbon terra vault that you alluded to earlier, can you provide any details around whether you're exploring the use of low emissions trucking at other sites? And are there any noteworthy cost There are throughput implications that we should be thinking about?

Speaker 2

Yes. So first of all, on the greenfield developments that we co locate At Elk Hills, we'll use our internal gathering lines to be able to move CO2. So that's the first option That's what we're focused on. To the extent that we're now going into areas that require trucking, yes, so we're looking at low emission vehicles, whether it's Hydrogen and fuel cells or other options. So that's very much part of the plan, right?

Speaker 2

Ultimately, these projects need to provide Across the board, low emission solution in order for them to work and to get the full benefit of the credit. So Definitely thinking through that as we move CO2 across the state and as we wait for The uncertainty on pipelines to be resolved. So but the first order of business and how we're going to get CO2 injection much quicker is to be able to co locate The plan to on top of our reservoir and just have deal with behind the fence gathering systems.

Speaker 4

Great. Thanks. And stepping back out a bit. Over the past few months, we've been tracking an increasing number of Class 6 permits, Both in California and across the country. At a high level, can you speak to how CarbonTerraVault is differentiated in this growing industry and how you plan to capitalize on your

Speaker 2

No, absolutely. So we filed our first permit in August of 2021, 2nd permit in November of 2021. So when we talk to the EPA at the time of filing, they said it's going to take 18 to 24 months. But really, this new era of Class VI permits was just starting a lot of uncertainty in the process. We learned a lot throughout the things that EPA has as well.

Speaker 2

What we know is there's a high rigor On all fronts, technically, commercially, that's expected from anybody that submits an application. We've seen some permissions some permits being withdrawn. And I think we have everything that it takes to have Our permit come in this year. We've done a lot of work. Technically, we have seismic, we have a good understanding of the reservoir at El Khils.

Speaker 2

Our team has worked diligently to position the permit in the best way possible for the EPA. We're working with having support By the EPA, I think we're right there, begin given the dialogue, given the progress that we made, I feel very good that we're going to have the permit this year. The key is that first permit is a big catalyst, catalyst to more projects, more emission sources coming together To really giving the market transparency as to what happens next. And I think What we heard through multiple channels is that Carbon Terrible is putting some of the Best positioned permits out there and again we're working well with the EPA to try to get that to the finish line.

Operator

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

Speaker 9

Hi, good morning.

Speaker 2

Hi.

Speaker 9

Just a couple of things. There's sort of high But I'm just thinking about, I guess, overall, looking at Some of your or hoping to get some thoughts on where you might see in the Carbon business A greater degree of vertical integration over time. And of course, you announced today a couple of new storage only You also clearly, you like the margins from that business line and you've given us some guidance And what those economics might look like. So where would you I mean, do you see any low hanging fruit As far as over time, bringing more project development or even construction activities in house over time Or the way the early projects are unfolding, is that pretty much the sort of ideal, I guess burden of risk reward that you'd be looking to achieve?

Speaker 2

Yes. So Amar, in that question, let me try to address it. So on these greenfield projects, as a reminder, We see BorseSpace as being the scarce resource in the state. And contrary to the other parts What we said is our type curve is going to deliver between $50 $75 per ton for storage only deals. All 4 CDMAs that we signed today fit within that type curve.

Speaker 2

So not only are we Validating the pore space care city point, but you have third parties that ultimately work their economics through And value that storage and pore space. It's difficult to say where we're going to have the most vertical integration, but as we take You have the option to invest equity into these projects. We're learning a lot, right. We're not a hydrogen company. We're not Green or blue, we're not ammonia companies, but so we're trying to understand the business model.

Speaker 2

And if there's a way to add value and there's a way to make returns, it's something that we'd like to do. We do see integration happening not only with ourselves As you bring power, you can sell power, sell natural gas into these projects and provide land, but we're seeing integration even amongst the that we're bringing together as we develop these big industrial centers, net year industrial centers like we have at Elk Hills. It's hard to say if we need to bring these projects in house. Right now, we're looking to partner We're really smart people that have done this before and they're just looking to develop a market in California, which seems to be the most attractive So I don't know yet about in house projects. We'll see more thoroughly that it's a difficult question to answer.

Speaker 2

But we do I do know that we're seeing the California Energy Sector in a very different light as we get exposed to all these projects

Speaker 9

Great. Thanks. And maybe sort of continuing along similar lines of discussion. The Net 0 Industrial Park, could you maybe talk about the business development process For that, we get some sense of some of the building blocks from the announced projects. But I'm just curious about Criteria of what sort of projects maybe you are eager to Get more of or would rule in and as opposed to maybe types of projects you would be more inclined to rule out For the industrial park setting?

Speaker 2

Yes. No, I mean, I think We have a lot of conversations ongoing and I You're only able to see the 4 that we brought forward in terms of CDMA. We're really evaluating multiples of What we brought in, as we talked about before, we feel we're oversubscribed. So that means we're talking to many more Parties that we have capacity for. So there is a selection process, right?

Speaker 2

So obviously, when we're dealing with people that have the Credibility and that can bring these projects forward, where we can get permits locally as well and that are serving A market need in that these projects are ultimately going to have strong long term offtakes to be able to Lock in returns and ultimately do incremental financing. So there is a selection process, right? That's why We moved we're not doing MOUs just for the sake of announcing that we're making progress. We're really Focus on non conditions precedent. We're finalizing contracts that have much more need to them, because

Speaker 6

we want

Speaker 2

to make sure we can we are building this all these projects that need to be able all to come together so that we can get to our Injection targets by 2025 and then 2027, 2028 for the 5,000,000 tons. So we are selecting, right? You have this funnel and we are kind of high grading the projects that we think can get to the finish line and provide good returns For us in Brookfield, our partner. So it's hard to say what we are not considering without being specific. But I would say what you see is a high graded list of projects that we feel very strongly that we can execute on.

Speaker 9

Great. Thanks a lot.

Speaker 2

Thanks, Noel.

Operator

Thank you. And the next question comes from Eric Si with GoldenTree.

Speaker 8

Hey, guys. Thank you for the call. Another follow on question regarding the CO2 business. In terms of the projects in the queue and those that you're still talking to, you gave us some color earlier that it's a mix of greenfield and brownfield that was I'm curious in terms of the potential size of those projects, is it in line with the size of the projects you've already announced? And when I talk about size, Talking about 1,000,000 tons of CO2 sequestered each year.

Speaker 8

Are the Remaining projects you anticipate on here, are they similar size or are there some bigger chunkier ones out there? Any color on that would be appreciated.

Speaker 2

Hey, Eric. So I mean, so remember, we're dealing with a total addressable market of 400,000,000 tons of emissions in So there's definitely, as you said, chunky emission sources out there. In your naturally, if you're having to investment on capture, if you're having to connect point source to sync and put pipelines in place, you're going to have to have Scale naturally to those point source projects. Now having said that, we look at all of these projects, we look at proximity to our tanks, We look at that counterparty and we look at the commercial aspects of the injection payment, right? And so in order if we do If we'll CCS as a service, what that means?

Speaker 2

So it's hard to answer that question, but we are looking At multiple sized projects throughout the state, but there are some big emitters that need solutions, right? There are emitters out there That right now they're paying $30 per ton or carbon tax and that's increasing every year. They're also probably going through Trying to replicate what we're doing and finding out that subsurface in permitting is probably not a core competency. So We're having those dialogues. We're educating.

Speaker 2

We're trying to land the right deal and the right partner and expect Some point source legacy emissions hopefully in the near term, but we're working through it. But again, the size of the price It's big. It's just a matter of figuring out, okay, what's the best place to store the Shield 2 and agreeing to terms.

Speaker 8

Great. Thank you. And one follow-up, I mean it seems like Elk Hills is really, really well suited to get a lot of attractive projects here. But it sounds like you're going to be well oversubscribed. Are there is there more Potential storage space in that field that you guys are evaluating?

Speaker 2

Yes, for sure. I mean Elk Hill's 47,000 acres fee simple property with a power plant with natural gas with A lot of elements to bring new technology into the field. We're looking for ways To our incremental pore space, I mean, we've already extended expanded one of our permits in 26 hours. So, Yes. Ultimately, yes, as we draw more oil and gas, we're creating pore space, right?

Speaker 2

And at some point that pore space and the injection of 202 may be more valuable than what we're That's not the case today, but it could be. So the key is having those tanks that we know and understand really well. And as the market comes together and as we see the value of the in storing CO2, we will be looking for ways to create more pore space At Elk Hills or in the near proximity down there, we do see a lot of running room in the Sacramento area. There's a lot of near Emissions near there and we're building a very, very nice portfolio of assets. So creating these Two options, I think, gives us the most access to the market that we can see.

Speaker 8

Terrific. Thank you. And second question is, With as we model out the production, oil and gas production throughout the remainder of the year, Just trying to understand, are there is there any other than potential impacts from adverse weather, are there any scheduled Maintenance downs that would impact the quarterly production cadence or should we just can we sort of Annualize the sort of rate we see progressing from Q1 to Q2?

Speaker 2

Yes. So we provided Q2 guidance. There is One of our plants in Elk Hills was down for maintenance a couple of weeks ago, but that's reflected in the guidance for Q2. What we said is because we're only going to do drilling activity with permits on hand. We and so effectively that's one rig for the rest The year we see production declining between 5% to 7% for the year entry to exit.

Speaker 2

So that number Still looks good to us as we go here. So more we held production held up very nicely in Q1. We will start seeing a little bit of a decline in Q2 and that will be the case for the rest of the year. So it's not going to be copy paste Q1. You should look at The guidance and the trend, we do see 5% to 7% decline for the year.

Operator

Thank you. And this concludes both the question and answer session as well as the conference itself. Thank you for attending today's presentation.

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