California Resources Corporation 2026 Q2 Earnings Call

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. As a reminder, please limit your questions to one primary and one follow-up. 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 two 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 focused on near-term execution, our team is also looking to the future. The state's regulatory environment, once 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 for. For the last several years, CRC has been intentionally building a stronger and more integrated California energy platform. Our Aera 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 two steps to strengthen our midstream position, purchasing the Line 100 pipeline from Phillips 66 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 and gathering, transportation, and truck loading infrastructure. That brings us to the Crimson acquisition we announced today. Crimson's midstream platform covers roughly a 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, improve 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 operate as a common carrier, the transaction requires CPUC approval. We recently received tentative approval with no conditions attached, and we expect a 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 off-takers, 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 esteemed list of commercial-scale sequestration operators globally. We have demonstrated our ability to permit, construct, and operate an EPA Class VI project. The startup showcases our 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 the 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 co-developer, to advance the Golden Valley Technology Hub. The proposed 275-megawatt campus would span 100 acres adjacent to Elk Hills 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 reinforced 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 BOE/d, with oil representing 81% of total volumes. 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 Berry-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 six 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 four 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 five rigs in California during the second half of 2026, compared with six 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 their type curve, with average initial production more than 10% above expectations. As you know, production from our conventional wells peak within six to 12 months after coming online, and recent activity will benefit our 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 six 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 five and a half years to eight 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.