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LONG BEACH, Calif.–(BUSINESS WIRE)–California Resources Corporation (NYSE: CRC), an independent oil and natural gas company committed to energy transition in the sector, today announced the formation of a joint venture (the “JV”) with Brookfield Renewable (“Brookfield”), creating a carbon management partnership focused on carbon capture and sequestration (“CCS”) development and reported second quarter 2022 operational and financial results.
Brookfield has committed an initial $500 million to invest in CCS projects that are jointly approved through the JV. The investment from Brookfield will be allocated through the Brookfield Global Transition Fund (“BGTF”), the world’s largest fund dedicated to facilitating the global transition to a net zero carbon economy. Brookfield, together with its institutional partners, will participate in the joint venture through BGTF. The first CCS project designated for development is CRC’s 26R reservoir in the Elk Hills Field which was contributed to the partnership at a value of $10 per metric ton, which will be paid in three installments with the last two installments subject to achievement of specific milestones. The initial Brookfield commitment provides CRC with additional capital to advance the Company’s carbon management strategy, de-risks its CCS projects and aims to significantly progress the decarbonization of California. The JV is targeting the injection of 5 million metric tons per annum and 200 million metric tons of total carbon dioxide (“CO2“) storage development, aligned with CRC’s 2027 goals. Reaching this target would require an estimated $2.5 billion of total capital, and Brookfield could make additional investments of more than $1 billion in the strategic partnership assuming it fully participates in these CCS projects.
The strategic partnership will benefit substantially from CRC’s first mover advantage in gaining access to available storage assets in the state of California and Brookfield’s knowledge in global clean energy markets. California is a world-leading location for the development of CCS projects, driven by the state’s Low Carbon Fuel Standard and Cap-and-Trade programs, together with the federal 45Q tax credit of $50 per ton of CO2 captured and permanently stored. CRC is currently progressing CO2 storage project permit applications and represents four out of the five Class VI well project applications active in California.
“We are pleased to partner with Brookfield to develop industry leading CCS projects that support California’s energy transition,” said Mac McFarland, CRC’s President and Chief Executive Officer. “The Brookfield partnership aligns our carbon management strategy with a strong investment partner, bringing significant operational and development expertise to reinforce our efforts. Brookfield’s capital commitment also accelerates our carbon management opportunities. It also enables CRC to maintain capital discipline and financial flexibility to achieve our corporate objectives including achieving our Full-Scope Net Zero 2045 goal.”
“Transitioning our economy to net zero is a critical global challenge and that means rapidly scaling our available decarbonization technologies,” said Connor Teskey, CEO of Brookfield Renewable. “Brookfield Renewable has been a leader in delivering clean energy for three decades and now we see significant potential in the rollout of carbon capture and sequestration technology. Partnering with CRC presents a great opportunity to continue the growth of our CCS business and expand the scope of decarbonization solutions we provide to our customers.”
California Carbon Management Partnership Highlights
Second Quarter Operational and Financial Results
“During the second quarter of 2022, CRC continued to deliver strong operational results and shareholder returns,” said Mac McFarland. “We expect to maintain our 2022 entry to exit net total production after taking into account asset divestitures. We are raising our full year EBITDAX1 and free cash flow guidance1 despite cost inflation and other macro pressures. With respect to our shareholder return strategy, CRC returned approximately 134% of its total generated free cash flow1 back to its shareholders in the form of dividends and share repurchases. The combination of our strong financial results coupled with ongoing capital investment and shareholder return strategies demonstrate our balanced commitment to our stakeholders.”
McFarland continued, “Given prevailing market conditions, we are raising our adjusted EBITDAX1 and free cash flow1 guidance, and expect to continue our robust shareholder returns despite inflationary cost pressures. Further, the strategic partnership with Brookfield advances our carbon management energy transition efforts and provides increased capital flexibility with which we expect to pursue our overall corporate objectives and deliver on our financial goals and sustainability targets.”
Primary Highlights
Financial
Operations
Joint Venture Overview
The carbon management partnership will involve developing both infrastructure and storage assets required for CCS projects in California through newly created joint venture entities, Carbon TerraVault JV HoldCo, LLC (“HoldCo”), Carbon TerraVault JV Storage Company (“StorageCo”) and Carbon TerraVault JV Infrastructure Company, LLC (“InfraCo”).
StorageCo will build, install, operate, and maintain CO2 storage facilities. CRC has contributed the storage rights in the 26R storage reservoir in the Elk Hills field to StorageCo. Brookfield has acquired an indirect 49% interest in StorageCo at an implied value of $10 per metric ton of permitted capacity, payable in three installments for a total consideration of $137 million. The first installment of $45.7 million was funded at close. The second and third installments are due upon completion of certain pre-agreed milestones related to the permitting process with the EPA and final investment decision. Future storage projects for Brookfield’s initial commitment will be contributed on the same terms and milestones.
InfraCo will build, install, operate, maintain CO2 capture equipment and transportation assets, and provide funding as projects develop. StorageCo and InfraCo are wholly owned by HoldCo.
2022 Production Guidance and Capital Program Update3
CRC’s capital program is dynamic in response to oil market volatility and focused on maintaining oil production and strong liquidity and maximizing free cash flow. CRC is increasing its 2022 total capital program to a range of $380 to $410 million from $340 million to $385 million. CRC increased its 2022 capital program for inflation and these cost increases could also impact its capital program in 2023 and beyond. Additionally, in response to the continued strong commodity environment, CRC is adding to its workover program for natural gas assets located in the Sacramento Basin and the Buena Vista field. Finally, CRC has increased its capital program for its carbon management activities.
This level of expected spending is consistent with CRC’s strategy of investing up to 50% of its operating cash flow back into CRC’s oil and gas operations. Following the joint venture with Brookfield, CRC anticipates that a portion of the operating cash flow previously designated for advancing decarbonization and other emission reducing projects will now be available for other corporate purposes, such as shareholder returns and other strategic opportunities (see a summary of our Business Strategy in Part I, Item 1 & 2 – Business and Properties in CRC’s 2021 Annual Report).
The delay in the Kern County EIR litigation (see Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Regulatory Update in the Form 10-Q for the quarter ended June 30, 2022 for additional details on Kern County EIR) led to a change in CRC’s drilling program which favors a higher natural gas to oil ratio. Therefore, CRC’s 2022 oil production guidance is expected to be negatively impacted by approximately 1,000 Bo/d from this change as well as for 1,200 Boe/d for PSC. CRC’s 2022 total production guidance remains consistent with previous expectations in the range of 91 to 94 MBoe/d.
With this capital program, and when adjusted for asset divestitures, production-sharing contracts (PSC) effects and the previously discussed Kern County EIR driven change in well mix, CRC expects to modestly grow oil production from entry to exit and is maintaining its total net production guidance. During the second half of 2022, CRC plans to run five drilling rigs in the Elk Hills, Buena Vista and Wilmington fields. In July 2022, CRC’s fifth drilling rig began operations at the Wilmington Field.
In addition, CRC is raising its free cash flow1 and adjusted EBITDAX1 guidance by 10% and 2% at the midpoint, respectively, to $365 to $450 million and $895 to $960 million.
CRC is also raising its operating cost guidance to $725 to $755 million from $680 to $720 million due to inflation, change in well mix and higher natural gas and electricity prices.
Adjusted G&A guidance increased by $15 million to $185 to $200 million due primarily to wage and cost inflation as well as increased headcount as we develop our carbon management business.
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TOTAL CRC GUIDANCE3 |
2022E |
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CMB 2022E |
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E&P, Corp. & Other 2022E |
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Net Total Production (MBoe/d) |
94 – 91 |
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94 – 91 |
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Net Oil Production (MBbl/d) |
58 – 53 |
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58 – 53 |
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Operating Costs ($ millions) |
$725 – $755 |
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$725 – $755 |
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CMB Expenses4 ($ millions) |
$20 – $30 |
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$20 – $30 |
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Adjusted General and Administrative Expenses1 ($ millions) |
$185 – $200 |
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$10 – $15 |
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$175 – $185 |
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Total Capital ($ millions) |
$380 – $410 |
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$20 – $30 |
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$360 – $380 |
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Drilling & Completions |
$260 – $265 |
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$260 – $265 |
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Workovers |
$40 – $45 |
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$40 – $45 |
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Facilities |
$55 – $60 |
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$55 – $60 |
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Corporate & Other |
$5 – $10 |
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$5 – $10 |
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CMB |
$20 – $30 |
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$20 – $30 |
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Adjusted EBITDAX1 ($ millions) |
$895 – $960 |
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($30) – ($45) |
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$940 – $990 |
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Free Cash Flow1 ($ millions) |
$365 – $450 |
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($50) – ($75) |
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$440 – $500 |
Supporting Local Communities and Investing in the Energy Transition in California
Aligning with the strategic partnership, CRC will donate $2.5 million over the next three years to Kern Community College District (Kern CCD) and California State University Bakersfield (CSUB) to promote innovation and deployment of energy transition in California. This donation is expected to accelerate R&D efforts in decarbonization technologies in local academic research institutions located where CRC operates. CRC is dedicated to reducing emissions in California and is aligned with the state’s ambitious climate goals. As part of this pledge, CRC is also forming the CRC Carbon Management Institute at Kern CCD and is starting the CRC Energy Transition Lecture Series at CSUB.
Supply Chain and Cost Inflation
Operating and capital costs in the oil and natural gas industry are heavily influenced by commodity price environments which are cyclical in nature. Typically, suppliers will negotiate increases for drilling and completion, oilfield services, equipment and materials as prices for energy-related commodities and raw materials (such as steel, metals and chemicals) increase. Recent worldwide and U.S. supply chain issues, together with rising commodity prices and tight labor markets in the U.S., have created cost inflation during 2022 which may continue in future periods. CRC has taken proactive measures to limit the effects of the inflationary market by entering into contracts for materials and services with terms of one to three years. CRC has also taken steps to build its on-hand supply stock for items frequently used in its operations to address possible supply chain disruptions. Despite these efforts, CRC has experienced increased costs thus far in 2022 and CRC anticipates potential additional increases in the cost of goods and services and wages in its operations during the remainder of 2022. These increases have been factored into CRC’s operating and capital costs guidance and could also negatively impact its results of operations and cash flows in 2023 and beyond.
Second Quarter 2022 E&P Operational Results
In November 2020, the SEC amended Regulation S-K to, among other things, provide companies with the option to discuss material changes to results of operations between the current and immediately preceding quarter. CRC has elected to discuss its results of operations on a sequential-quarter basis. CRC believes this approach provides more meaningful and useful information to measure its performance from the immediately preceding quarter. In accordance with this final rule, CRC is not required to include a comparison of the current quarter and the same prior-year quarter.
Total daily net production for the three months ended June 30, 2022, compared to the three months ended March 31, 2022 increased by approximately 3 MBoe/d, or 3%. This increase includes approximately 5 MBoe/d resulting from the return of production at one of CRC’s cryogenic gas processing facilities, which had planned maintenance during the first quarter of 2022. These increases were partially offset by decreases resulting from natural decline, and the divestiture of CRC’s remaining 50% working interest in certain zones in the Lost Hills field in February 2022. CRC’s PSCs negatively impacted its net oil production in the three months ended June 30, 2022 by approximately 1 MBoe/d, compared to the three months ended March 31, 2022. The previously mentioned delays in the Kern County EIR litigation also negatively affected CRC’s net oil production by 200 Bo/d for the three months ended June 30, 2022 due to the change in well mix.
During the second quarter of 2022, CRC operated an average of three drilling rigs in the San Joaquin Basin and one drilling rig in the Los Angeles Basin. During the quarter, CRC drilled 46 net wells and brought online 42 wells. See Attachment 3 for further information on CRC’s production results by basin and Attachment 5 for further information on CRC’s drilling activity.
Second Quarter 2022 Financial Results
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2nd Quarter |
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1st Quarter |
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($ and shares in millions, except per share amounts) |
2022 |
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2022 |
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Statements of Operations: |
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Revenues |
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Total operating revenues |
$ |
747 |
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$ |
153 |
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Operating Expenses |
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Total operating expenses |
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473 |
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396 |
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Gain on asset divestitures |
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4 |
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54 |
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Operating Income (Loss) |
$ |
278 |
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$ |
(189 |
) |
Net Income (Loss) Attributable to Common Stock |
$ |
190 |
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$ |
(175 |
) |
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Net income (loss) per share – basic |
$ |
2.48 |
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$ |
(2.23 |
) |
Net income (loss) per share – diluted |
$ |
2.41 |
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$ |
(2.23 |
) |
Adjusted net income1 |
$ |
89 |
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$ |
91 |
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Adjusted net income1 per share – diluted |
$ |
1.13 |
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$ |
1.13 |
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Weighted-average common shares outstanding – basic |
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76.7 |
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78.5 |
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Weighted-average common shares outstanding – diluted |
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78.8 |
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78.5 |
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Adjusted EBITDAX1 |
$ |
204 |
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$ |
206 |
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2nd Quarter |
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1st Quarter |
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($ in millions) |
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2022 |
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2022 |
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Cash Flow Data: |
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Net cash provided by operating activities |
$ |
181 |
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$ |
160 |
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Net cash used in investing activities |
$ |
(76 |
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$ |
(53 |
) |
Net cash used in financing activities |
$ |
(109 |
) |
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$ |
(84 |
) |
Review of Second Quarter 2022 Financial Results
Realized oil prices, excluding the effects of cash settlements on CRC’s commodity derivative contracts, increased by $16.19 per barrel from $96.13 per barrel in the first quarter of 2022 to $112.32 per barrel in the second quarter of 2022. Realized oil prices were higher in the second quarter of 2022 compared to the first quarter of 2022 as the effects of the COVID-19 pandemic have subsided leaving crude oil production and product inventories at historically low levels. As demand has rebounded, producers have generally maintained capital discipline, OPEC+ members have failed to produce at stepped-up quotas, and the conflict between Russia and Ukraine has created a disconnect between buyers and sellers of Russian produced crude oil.
Realized oil prices, including the effects of cash settlements on CRC’s commodity derivative contracts, increased by $2.87 from $60.30 in the first quarter of 2022 to $63.17 in the second quarter of 2022. The increase is due to a higher commodity price environment in the second quarter of 2022 compared to the first quarter of 2022. See Attachment 4 for further information on prices.
Adjusted EBITDAX1 for the second quarter of 2022 was $204 million. See table below for the Company’s net cash provided by operating activities, capital investments and free cash flow1 during the same periods.
FREE CASH FLOW1 |
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Management uses free cash flow, which is defined by us as net cash provided by operating activities less capital investments, as a measure of liquidity. The following table presents a reconciliation of our net cash provided by operating activities to free cash flow. We supplemented our non-GAAP measure of free cash flow with free cash flow of our exploration and production and corporate items (Free Cash Flow for E&P, Corporate & Other) which we believe is a useful measure for investors to understand the results of our core oil and gas business. We define Free Cash Flow for E&P, Corporate & Other as consolidated free cash flow less results attributable to our carbon management business. |
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2nd Quarter |
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1st Quarter |
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($ millions) |
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2022 |
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2022 |
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Net cash provided by operating activities |
$ |
181 |
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$ |
160 |
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Capital investments |
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(98 |
) |
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(99 |
) |
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Free cash flow1 |
$ |
83 |
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$ |
61 |
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E&P, corporate & other free cash flow1 |
$ |
98 |
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$ |
64 |
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CMB free cash flow1 |
$ |
(15 |
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$ |
(3 |
) |
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The following table presents key operating data for CRC’s oil and gas operations, on a per BOE basis, for the periods presented below. Energy operating costs consist of purchases of natural gas used to generate electricity, purchased electricity and internal costs to generate electricity used in CRC’s operations. Non-energy operating costs equal total operating costs less energy and gas processing costs. However, non-energy operating costs include the costs of purchasing natural gas from third parties that is used to generate steam for CRC’s steamflood operations.
OPERATING COSTS PER BOE |
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The reporting of our PSCs creates a difference between reported operating costs, which are for the full field, and reported volumes, which are only our net share, inflating the per barrel operating costs. The following table presents operating costs after adjusting for the excess costs attributable to PSCs. |
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2nd Quarter |
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1st Quarter |
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($ per Boe) |
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2022 |
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2022 |
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Energy operating costs |
$ |
6.88 |
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6.68 |
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Gas processing costs |
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0.54 |
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0.56 |
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Non-energy operating costs |
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15.50 |
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15.63 |
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Operating costs |
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$ |
22.92 |
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$ |
22.87 |
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Excess costs attributable to PSCs |
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(2.58 |
) |
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(2.30 |
) |
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Operating costs, excluding effects of PSCs (a) |
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$ |
20.34 |
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$ |
20.57 |
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(a) Operating costs, excluding effects of PSCs is a non-GAAP measure. |
Energy operating costs for the second quarter of 2022 were $57 million, or $6.88 per Boe, which was an increase of $4 million or 8% from $53 million, or $6.68 per Boe, for the first quarter of 2022. These increases were primarily a result of higher prices for purchased natural gas, which CRC used to generate electricity for its operations, and for purchased electricity. Energy operating costs were also higher on a per Boe basis as a result of lower production volumes between periods.
Non-energy operating costs for the second quarter of 2022 were $129 million, or 15.50 per Boe, which was an increase of $5 million or 4% from $124 million, or $15.63 per Boe, for the first quarter of 2022. This increase was primarily a result of higher compensation-related expenses and increased downhole maintenance activity.
Balance Sheet and Liquidity Update
CRC’s aggregate commitment under the Revolving Credit Facility was $552 million as of June 30, 2022. The borrowing base for the Revolving Credit Facility is redetermined semi-annually and was reaffirmed at $1.2 billion on April 29, 2022.
As of June 30, 2022, CRC had liquidity of $740 million, which consisted of $324 million in cash and $416 million of available borrowing capacity under its Revolving Credit Facility.
Acquisitions and Divestitures
During the three months ended June 30, 2022, CRC recorded a gain of $4 million related to the sale of certain Ventura basin assets. The amount recognized in the three months ended June 30, 2022 of $4 million related to additional earn-out consideration on closings that occurred in the second half of 2021 and the first half of 2022.
Contacts
Joanna Park (Investor Relations)
818-661-3731
Joanna.Park@crc.com
Richard Venn (Media)
818-661-6014
Richard.Venn@crc.com
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