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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the California Resources Corporation First Quarter Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Joanna Park. Please go ahead.
Thank you. I'm Joanna Park, Vice President of Investor Relations and Treasurer. Welcome to California Resources Corporation's First Quarter Conference Call.
Participating on today's call is Mac McFarland, President and Chief Executive Officer; Francisco Leon, Executive Vice President and Chief Financial Officer; Shawn Kerns, Executive Vice President of Operations and Engineering; Mike Preston, Senior Executive Vice President, CIO and General Counsel; and Jay Bys, Chief Commercial Officer, as well as several other members of the CRC executive team. I'd like to highlight that today, we have provided supplemental slides, which we may refer to during our prepared remarks, which can be found on the Investor Relations section of our website, www.crc.com.
We have also provided a reconciliation of non-GAAP financial measures discussed to the most directly comparable GAAP financial measure on our website and in our earnings press release.
Today's conference call contains certain projections and other forward-looking statements within the meaning of federal securities law. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements. Additional information on factors that could cause results to differ are available in the company's 10-Q, which will be filed later today.
We ask that you review it and the cautionary statement in our earnings press release. A replay will be made available on our website following today's call and we have allotted an additional time for Q&A at the end of our prepared remarks.
Thanks, and I'll now turn the call over to Mac.
Thank you, Joanna, and thanks to everyone on the phone for attending today's earnings call. Jumping to the punch line. The first quarter results delivered $120 million of free cash flow, which set the backdrop for the $100 million -- $150 million share repurchase program we are announcing today. Our strong start to the year displayed CRC's ability to execute on our strategy and deliver meaningful cash flow. The company is trending towards the high end of our free cash flow guidance that we provided during our March 18 Strategy Day. That is $350 million of free cash flow for 2021 and would reflect an 18% free cash flow yield at yesterday's market valuation.
Based on the progress we have made to date and because our stock price has not fully participated in the most recent energy sector rebound, we believe that our stock offers a very attractive return. The $150 million share repurchase program provides us the flexibility to make good on our commitment to return capital to our shareholders while also maintaining a healthy balance sheet with low leverage ratios and significant liquidity. Francisco will detail this later during his remarks. From an activity standpoint, first quarter results were achieved with just 1 drilling rig where we drilled 17 wells, 15 of which were brought online during the quarter and the other 2 came online during the second quarter.
During the quarter, we also completed 40 capital workovers, and performed 570 downhole maintenance jobs, bringing back online nearly 3,300 barrels of oil equivalent per day of gross production. In May, we added a second drilling rig and increased our maintenance rig count from 30 to 38. We expect to maintain this level over the next 6 months to focus on quick payback, high-return backlog of wells.
I'm extremely proud of our employees for maintaining safe and efficient operations and for adapting to and executing our strategy to deliver these strong results. We have one of the lowest safety incident rates in recent history and outstanding environmental performance. Shifting gears now. There has been a fair amount of discussion regarding the California regulatory environment, highlighted by the recent announcement to ban fracking. Regardless of whether or not such a ban is upheld, CRC will see no material impact because less than 1% of our proved reserves require well stimulation, and our current long-term development plans do not include well stimulation.
In fact, CRC's operations do not require high-pressure cyclic steam. We continue to operate according to the strictest environmental regulations in the world and the carbon density of CRC's barrels are much lower than the average imported barrel as California continues to import 70% of its oil needs. Said differently, there will be no impact to CRC if the fracking ban is upheld. That being said, we look forward to working with the state on its energy transition plans. In the second half of this year, we are planning to provide additional clarity on several concrete items directly related to energy transition that will have the potential to benefit California's future success in this area. Our core operations will continue to deliver solid cash flow while we work on these future steps.
Additionally, CRC is evaluating ways to strengthen our ESG commitment even further. We have multiple sustainability opportunities and are looking to strengthen our approach through a total review of our ESG efforts. The company is successfully delivering on our current 2030 sustainability goals. And given the significant progress in the areas of water recycling and methane reduction, our future efforts will focus on renewables integration and decarbonization projects. In other words, we are looking to revamp the E or the environmental approach of our ESG strategy to make a bigger impact on the state's decarbonization and energy transition plans through our focus on renewables and CCUS without compromising our social and governance commitments.
This may include opportunities outside of the Elk Hills CCUS and EOR project as well as both self-supply and grid supply of renewable energy. We expect to provide further details on this revamped ESG strategy in the second half of the year.
I'll now turn the call over to Francisco, who will provide additional details on the first quarter financial performance and on our borrowing base redetermination. Francisco?
Thanks, Mac. Good morning, everyone, and thank you for joining us on this call. As Mac mentioned earlier, CRC continued to successfully execute on our corporate strategy based on strong business financial fundamentals, disciplined capital allocation and robust free cash flow generation. As you can see on Slide 4 of our earnings presentation slides, we have outlined several key quarterly highlights. Our strong performance during the quarter contributed to an adjusted EBITDAX of $189 million and adjusted net income of $102 million or $1.22 per diluted share.
During the first quarter, we generated $120 million of free cash flow, showcasing our industry-leading free cash flow generation capability. We reported net quarterly production of 99,000 barrels of oil equivalent per day and 60,000 barrels of oil per day. Net oil production was lower by 3,000 barrels a day on a quarter-over-quarter basis, primarily due to PSC adjustments associated with higher oil prices.
On a gross basis, oil production was essentially flat quarter-over-quarter, while operating just 1 drilling rig in the San Joaquin Basin, a true testament to the quality of our assets, our low decline rate, low capital intensity and the strong safety culture of our employees. As Mac highlighted, during the first quarter we took significant actions to further simplify and improve our capital structure. In January 2021, we issued $600 million of 7.125 senior unsecured notes due in 2026.
With the proceeds of this deal, we successfully repaid in full our second lien term loan, all outstanding senior Elk Hills Power secured notes and used the remainder to repay substantially all of our outstanding borrowings on our revolving credit facility. Further, earlier this month and supported by our strong financial and operational performance, we completed our borrowing base redetermination, which resulted in an increase of our borrowing base to $1.2 billion, up from $1.167 billion previously.
Additionally, we entered into the first amendment to our revolving credit facility that provides CRC with additional strategic flexibility regarding shareholder initiatives and future hedging levels. More specifically, the amendment loosens the restricted payment condition and increases our available capacity to return capital to our shareholders. With these actions, coupled with our industry's leading free cash flow generation capability, CRC exited the quarter with a single unsecured debt tranche and undrawn RBL and total liquidity of $545 million, which included $102 million of net cash generated during the quarter for a total of $130 million of cash on our balance sheet. This quarterly performance additionally underscores the company's strong focus on free cash flow generation, our assets' capacity to support our strategy and our employees' ability to safely, efficiently and reliably produce much-needed energy for Californians.
As stated during our Strategy Day, we anticipate our 2021 investment plan to generate between $250 million and $350 million of free cash flow in a $60 per barrel Brent environment, highlighting the efficiency of our capital deployment and industry-leading low decline rate. Given our current performance, we are reaffirming guidance and expect to trend towards the high end of our free cash flow range, implying a free cash flow yield in the high teens, while assuming our current market capitalization. This yield, coupled with our estimated 2021 net leverage ratio of about 0.5 turn positions CRC with a strong foundation to deliver sustainable shareholder returns.
As Mac mentioned, and as a result of our strong -- of the strong first quarter and steps taken to improve our cost and capital structures, we are now in a position to announce a $150 million share repurchase program effective in the second quarter of 2021, marking this first important step towards returning cash to shareholders and in just 7 months after our emergence. Further, as Slide 6 indicates, the value of our year-end 2020 SEC proved reserves at $60 Brent is over $5.7 billion, which is more than double our current enterprise value.
Our high concentration of value in our low decline pro-developed category and large inventory of high-return assets in our core fields provide confidence in both the intrinsic value of our stock and the free cash flow deliverability. This supports the reasoning behind our share repurchase program. If I also expand further on peers' comparable valuation as compared to our guided 2021 numbers, we're certainly trading below our sector average of enterprise value over 2021 EBITDA multiple of around 5x.
Continuing on, as we make progress on the goals of our new strategic direction discussed earlier in the year, CRC made several organizational changes by realizing the company's corporate and operational functions. As a result, our first quarter 2021 G&A cost averaged $5.36 per BOE, which is $0.87 below the previous quarter, primarily due to our ongoing cost-saving efforts and workforce reductions.
For the remainder of the year, we expect CRC's G&A performance to further improve and reach an approximately $5 per BOE run rate, while trending towards the low end of the previously issued guidance of $180 million to $190 million per year. Further, operating costs for the first quarter of 2021 were $164 million or $18.33 per BOE, which is $0.91 higher than the previous quarter that the company invested in downhole maintenance and workovers of existing wells, incrementally raising OpEx.
I would like to provide a bit more clarity on this point. On Slide 16 of our earnings deck, you can find additional color of CRC's opportunity set with respect to our high-impact maintenance well backlog. CRC is able to opportunistically reenter these existing wellbores and bring back incremental barrels through well maintenance. Through rapid technical identification and commercial analysis, well remediation work is prioritized to bring the highest-value wells back online first, increasing uptime and production through high-impact well work and OpEx maintenance at a fraction of the cost of a new well.
This capital shift will allow for a return of PDP production barrels with almost no reservoir risk in short paybacks, demonstrating another strength of our assets. For the remainder of the year, we anticipate OpEx to modestly increase. However, since we view OpEx dollars and capital investment dollars almost interchangeably, capital investment will be reduced similarly, and our ability to achieve our free cash flow targets will be strengthened.
Said simply, this is a huge differentiator for CRC. We're a conventional player with a low-decline asset base that compares favorably versus our shale counterparts. For the remainder of the year, we expect to continue demonstrating the resilience and quality of CRC's low decline and low-risk core assets, continuous improvement of our cost structure and disciplined capital allocation. The combination of all of this is what gives us confidence that we will trend towards the high end of our 2021 free cash flow guidance and our ability to return cash by initiating the $150 million share repurchase program.
Finally, please note that we have provided detailed analysis of our quarterly financial and operational results and our 2021 guidance in the attachments to our earnings release.
Thanks. And I'll now turn the call back over to Mac to discuss the outlook for the rest of 2021.
Thank you, Francisco. To conclude and during the quarter, we have a robust $545 million liquidity position and 1 of the lowest leverage metrics in the sector. We began to deliver tangible results on our strategy, almost $200 million in adjusted EBITDAX and $120 million of free cash flow during the quarter. We initiated the share repurchase program that we discussed today, commencing a $150 million program. A very strong quarter, in my view, and something that we are proud of at CRC.
As we look ahead, CRC has largely completed our strategic repositioning but we continue to look for additional ways to improve. We intend to provide insights on our business as we transition forward and demonstrate healthy progress on our targets. With our corporate strategy in place, we are on track to deliver the strong cash flows Francisco discussed and towards the high end of our guidance range.
Our strategy of strong cost control, efficient operations and responsible portfolio management are set to drive free cash flow. As I mentioned previously, we're looking to expand and strengthen our ESG strategy to focus our approach on decarbonization and energy transition in California, but more on that in the second half of the year.
Again, thank you for your interest in CRC and for joining us on this call today.
At this point, we will now open the line for any questions.
[Operator Instructions]. And the first question will be from Leo Mariani with KeyBanc.
I wanted to touch base real quickly here on the return of capital plan. Obviously, you guys chose to go with the buyback. Looks like the stock is reacting favorably to that here today. But you also talked about other potential return of capital strategies that may come later in the year. How do you guys kind of think internally about those different options and kind of weigh them against each other? Clearly, it looks like the buyback won in the near term, but it sounds like you might be looking at supplementing this with maybe some kind of dividend later on.
Leo, it's Mac. Yes. Look, the share repurchase program, we felt was in the best interest of the deployment of capital and return to shareholders at this point in time, given where the stock has not necessarily participated, as we mentioned, with the rebound in the sector. And so we thought that, that's the best first step, and that's the first step we're taking. As we go through the remainder of the year, we'll continue to evaluate all different forms of ability to return cash to shareholders as well as potentially looking at little, I'll say, potential add-ons or recycling of capital into the business. But we'll make those decisions as we progress through the second quarter. Anything you want to add, Francisco?
No. I mean, I think we had a good quarter building cash, ready to announce the first step, and we'll circle back when we have anything else to announce.
Okay. Great. And I guess, just wanted to touch base with you guys on the regulatory environment. Obviously, you guys, in your prepared comments, discussed the potential frac ban in California. But maybe just aside from that, which sounds like it would be a very limited impact on most people's businesses in California so far. Are you guys aware of any other regulatory developments that may be percolating in the state? I know there was a Senate bill that was -- could have been somewhat deleterious that was shut down, didn't make it out of committee recently, but are you guys expecting any other energy bills that may come up in the legislative sessions this year? And just any thoughts you might have on the potential for 2,500-foot setbacks that -- could that eventually emerge in California? If it did emerge, do you guys have a rough idea of the impact on your business?
Yes, Leo. So we've discussed this previously. Obviously, there are 2 bills in the Senate, SB-467 and SB-419. 467 which had a -- in its early stages, had a fairly significant impact on the E&P space, did not make it out of subcommittee on vote, was being reconstituted, and I think it is still -- hasn't even made it to subcommittee. And then 419, obviously, is the labor bill and how it impacts upstream E&P as it did to refinery -- not that particular bill, but as the refineries were impacted with using union labor. 419, we don't think will have an impact on our projections, given that we already have an agreement to use trade on surface operations or for a lot of our surface and facilities types of operations. But look, let me ask Mike Preston, the General Counsel to add on to that.
Thanks, Mac. I would agree. Those were the 2 primary bills that we've been watching this year. Setback bills have been introduced over the last 2 years and haven't advanced. And there may be some rulemaking relating to setback that proceeds in the future. We're obviously keeping track of that. As you may be aware, the lion's share of our operations are in Kern County and relatively remote locations. But in any event, we're fully engaged with the rest of industry in analyzing that legislation and keeping an eye on it. We don't anticipate anything in the near-term that will significantly impact us.
The next question will be from Noel Parks with Tuohy Brothers.
Just a couple of things. You were talking a bit about the credit line and just some of the restricted payment conditions. They're not a topic that usually comes up a lot. But I guess, since it's a new revolver and everything like that, Could you just talk a little bit more about the implications for various means of returning cash to shareholders with the -- with those conditions?
Sure, Noel. It's Mac. Just real quick. Yes, it's not often you get to discuss the arcane covenants inside of our capital structure. But when we exited from bankruptcy, we had some cleanup work to do, that's why we had the high-yield notes that came out and then this RBL amendment that -- it just trying to put everything regular way as we came out of bankruptcy. It was optimized to get out of bankruptcy, but not necessarily optimized in what I'd consider regular way capital structure. And so that's what Francisco and the team have been working on. But I'll let Francisco give you the finer points of the RP covenant.
Yes, absolutely. So we want to make the RBL more -- much more of a standard form. So the biggest changes are to distributable free cash flow going through a last 12 months calculation, which is very typical. And that allows us to really reflect the cash that we're building currently into the business and build that over time to think about distribution of capital to the shareholders. That's one.
The second one runs around the ability to have more flexibility on our hedging. So we looked at both the maximum and minimums of the hedging capacity, raising the ceiling on the maximum hedging that we could choose to do. We went up to 85% and -- but also lowering the minimum hedging capacity to 33% of PDP volumes subject to a leverage ratio.
So ultimately, we're bringing a lot of flexibility into our RBL that we didn't have on emergence, and just going to more of a regular way, as Mac said, way of distributing cash to shareholders.
Great, thanks for the clarification. And in terms of the different decarbonization and alternative energy projects that you're looking at. Just curious if you had an investment hurdle in mind for what you think would be worthy of capital? And just wondering what other considerations are in play as you look at the various projects that you might take on?
Yes. Noel, it's Mac. As I outlined at a fairly high level because we're still doing the detailed work, and that's why we said "more on this in the second half". We're looking at a number of things, including -- in addition to the Elk Hills project continuing to advance the CCUS project there. And obviously, we're completing the FEED study there and that will be out in September of this year, the completed study.
We're also looking at using a number of our depleted fields for CCS as well as, as I mentioned, self-supply through renewables, primarily solar in this case, as well as providing grid supply using some of our surface acreage, using solar on those acres. And when I look at those things, we have not necessarily fully developed the entire, I'll call it, project plan, including how we're going to look at the financing, but we would also look for alternative financing structures to bring in, or potential partners, because the renewables space, for example, has a different cost of capital than we do as an oil and gas company, so we'd be looking for bringing in the right type of capital structure, but leveraging our assets in order to be a part of that energy transition.
So a lot there, probably not specifically answering your question, but we would not enter into an uneconomic transaction from our perspective. And that's why we would look at alternative sources of capital, both equity and debt, to fund some of these activities.
And the next question is from Ray Deacon with Petro Lotus.
I had a question about your -- yes, I had a question about your JV, the dollars that were going to be spent to exit some of the drilling JVs? What quarter do you think those will hit in?
Yes, this is Francisco, Ray. As we outlined in the earnings release, we anticipate 1 of the JVs with Benefit Street Partners to be reverting sometime this year, late third quarter, early fourth quarter. That's part of the pre-agreed conditions on the contract, and it's a natural exit point for them, and there's no residual ownership of any of our wells when they revert.
Okay. Got it. And I guess, just lastly, given that the free cash flow looks like it's at the high end of your prior guidance. Do you still feel the $1.5 billion over 5 years of free cash flow is the right number? Or could it be a number higher than that?
Yes, we guided in our Strategy Day to $1.5 billion, assuming the midpoint of our guidance at $60 Brent. We do see things rolling off, like BSP and our hedges improve into next year. But we're not changing guidance at this point. We're staying with the $1.5 billion. But certainly, the price environment has continued to strengthen, and we'll see how -- where we end up later in the year. But for now, we're staying with $1.5 billion guidance that we've given for 5 years. Mac?
No, I think that's right. We see a backlog of opportunity -- go ahead.
Go ahead, Ray.
Right. Yes. And I guess just lastly, if I could, a quick one. I agree that 18% free cash flow yield seems much too high. What -- if the dividend doesn't resolve that, what would be your preferred way to get the market to look harder at the story?
Yes. So today, we announced the share repurchase program, $150 million. We certainly think this is the first move to -- because we see this stock being undervalued on a relative basis to the entire sector. So there's -- the good thing is our -- if you see our free cash flow projections, they're very strong for the year. We don't have to make any of that repayments. We have -- we're sitting well with our high-yield transaction that we did earlier in the year, very low leverage. So we have a lot of opportunities available to us, and we'll continue to assess how the stock performs, and then we'll think about what comes next. But right now, we felt this was the right first move on the share repurchase program. And we have several other options that could go from eventually paying a dividend to doing -- to investing in the business and putting more money into our wells and a number of other options as well. So we feel we have -- we've built up the cash. We cleaned the contractual aspect of our restrictions. And as we continue to perform, we'll look at other ways to return capital to shareholders and move the stock price.
And the next question will come from Jeff Robertson with Water Tower Research.
My question is on the workover activity. As you add -- as you work through the backlog that you have, ultimately spending money on workovers, will that have a positive impact then on the follow-on production costs that will be noticeable in the company? And then secondly, how long would it take to work through the backlog that you reference that was built up when the company was dealing with its balance sheet and maybe deferring capital that otherwise would have been spent on this type of projects?
Yes, Jeff, it's Mac. So the backlog that we had coming out of '20, because we didn't necessarily do the same amount of maintenance last year as we typically would, provided us with this opportunity. And so the opportunity is really to shift capital dollars into OpEx dollars, and you'll see that in our guidance in the slides. And so we moved $15 million into -- shifted places in the guidance. That allows -- so that does have a -- it brings barrels back, but it also increases our operating expenses on the numerator side of things. And so I'm not sure exactly how to answer your question specifically. But we do get good high-return barrels. As far as working through the backlog, we see maintaining that 38 maintenance rigs for the balance of the year and working our way through.
And so as we go into 2022 we'll see less opportunity, and therefore, we'll shift those dollars back into CapEx. But I'm looking at Shawn Kerns here, Head of Operations. Shawn, anything to add?
No, Mac, you've got that right. And really, we'll take care of that this year. We're picking up our maintenance rig activity, working that backlog off. And as you mentioned, the incremental operating cost is really just temporary to bring those barrels back on, and then you'll see the benefit going into 2022.
I guess I was trying -- I guess, Mac, maybe I didn't word it right. But the upfront cost of spending money on workovers, which is obviously reflected in operating costs, but then you get the production benefit. So I guess my question is, does that wash out over time in operating costs, so you kind of go into a steady state where you've got the benefit of production lowering. Does that maybe have an impact on lowering production because you've already spent the upfront money to recomplete a well or some project?
Yes, Jeff, that's right. It is accretive. So once you get those barrels back online, then it -- takes -- more than takes care of the cost.
[Operator Instructions]. The next question will come from Eric Seeve with GoldenTree.
Great quarter. A couple of quick questions. Your realizations in the quarter were terrific, particularly on the NGL side. Can you provide any color in terms of what investors should expect going forward for the crude side and the NGL side in terms of realizations?
Eric, this is Jay Bys. Touching on the NGLs. Over the last year, obviously, it's been a very tumultuous marketplace for NGLs. So where we sit today compares quite favorably to the same period last year. Do we expect to see continued strength in that area? You've got some inflationary pressures. You've got some disequilibrium, however, in the economic rebound. It's hard to say that there's going to be the kind of appreciation that we've seen over the last 12 months, over the next 12.
That's terrific, thank you. And then my other question was, could you maybe give a little bit of color to investors on where you are -- you talked already about workovers, but in terms of the new drilling, can you give people a sense of where are you drilling wells today? And what kind of returns are you seeing?
Well, sure, the 17 wells that we drilled in the first quarter, which is now up to 22, has been in the Mount Poso area. And we've been, what I would say is, on target, both in terms of cost as well as initial IP across the 22 wells. I mean, obviously, some above, some below, but beating the type curve on average. And now we're -- we started a second rig in this quarter, earlier this quarter and -- in Buena Vista, and so we're starting to drill there. We are currently evaluating -- our original plan had taking that out to 3 or 4 rigs in the second half of the year, which is still the current plan, but we're evaluating whether or not we push some of that out and go with some additional dollars on workover. Shawn, anything to add on that?
Nothing to add, Mac. Just drilling in and around our core areas.
Does that answer your question, Eric?
Yes.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mac McFarland for any closing remarks.
To keep it simple. Thank you for your interest and participation on today's call and look forward to speaking with everyone at the second quarter earnings call and the upcoming investor meetings. Take care.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.