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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 day and welcome to the California Resources Corporation Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference call over to Mr. Scott Espenshade, Senior President, Investor Relations. Mr. Espenshade, the floor is yours, sir.
Thank you. I’m Scott Espenshade, Senior Vice President of Investor Relations. Welcome to California Resources Corporation’s second quarter 2018 conference call. Participating on today’s call is Todd Stevens, President and Chief Executive Officer of CRC; and Mark Smith, Senior Executive Vice President and Chief Financial Officer, as well as several members of the CRC’s executive team.
I would like to highlight that we have provided slides in our Investor Relations section on our website, www.crc.com. These slides provide additional insights into our operations, and second quarter results, plus additional information. Also, information reconciling non-GAAP financial measures discussed to their most directly comparable GAAP financial measures is available in the Investor Relations portions of our website and in our earnings release.
Today’s conference call contains certain projections and other forward-looking statements within the meanings of federal securities laws. 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 is available in the company’s 10-Q, which is being filed later today. We would ask that you review it when available and the cautionary statement in our earnings release.
A replay and a transcript will be made available on our website following today’s call and will be available for at least 30 days following the call. Please note, CRC will be hosting an Analyst Day on October 3 in New York City for institutional investors and self-side analysts. We believe this will be a great opportunity to get an update on our operations and run through our strategic plans in detail.
As a reminder, we have allotted similar time for earnings Q&A at the end of our prepared remarks; and would ask that participants limit their questions to a primary and a follow-up.
I’ll now turn the call over to Todd.
Thank you, Scott, and thank you to everyone for attending today’s earnings call. During the second quarter of 2018, CRC delivered solid value for our shareholders. We continue to strengthen our balance sheet and demonstrated strong operational execution. We’ve increased capital investment to build momentum in 2018 and lean into 2019.
Our strategic approach is to drive long-term value-oriented growth with operations purposely aligned to deliver strong cash margins. Our focused execution and strengthening financial position underpin our strategy and we have a clear runway to deliver enhanced shareholder value.
Over the past several months, we’ve had the opportunity to discuss our business with many new investors. The feedback we received is that the scope of CRC’s assets is unmatched among our peers in North America and our California operating expertise is unrivaled.
We lead the way with 3P Reserves of more than $1.64 billion across 2.3 million net acres with rich stacked reservoirs. So we’re simply not limited to shallow steamfloods, like most California players. Rather, the breadth of our portfolio allows for exceptional flexibility and optionality to produce from recovery mechanisms, all across the value chain, from primary and waterflood to steamflood and shale.
We also have the optionality to capture high premiums based on Brent pricing. Simply put, we are a conventional company, characterized by significant upside to unconventional and expiration opportunities and differentiated by our integrated infrastructure.
We have management and operational teams, who have been pressure tested and successfully navigating through the commodity cycle. Now our assets are generating significant cash flow, particularly as our hedges we put in place in 2016 with price ceilings roll off at the end of this year.
We look to drive value-oriented production growth from our robust low-decline asset base to extend the life of our fields and to sustain our momentum around high VCI projects. Additionally, we expect our focus on improved operating efficiencies and cost savings to deliver enhanced returns as CRC continues to deliver double-digit EBITDAX compound annual growth rate over the coming years.
We intend to accomplish all of this, while continuing to bring down our absolute level of debt, which has been a top priority since it’s been. Of course, CRC strength is our resilient business model in which our high-degree of operational control allows us to invest capital flexibility across diverse assets in a disciplined manner. With this mindset, that we have prudently increased our capital program to reflect the current mid-cycle pricing environment.
We’re taking a very measured approach increasing our capital investment by $100 million to an annualized range of between $650 million to $700 million for 2018. This includes capital commitments from our JV partners of approximately $100 million or more.
Our increased capital program for the year supported by a higher realized cash flows due to our strong operational performance, increased oil and NGL prices in addition to expanded cost synergies and enhanced revenue generations from the consolidation of Elk Hills. We’re keenly monitoring crude oil fundamentals and commodity markets and reflects our capital plans accordingly to enhance our value-oriented production growth and cash flow performance.
As we continue to maximize the optionality and value of our portfolio, we expect that our demonstrability within cash over the long-term remain a key competitive differentiator for CRC. We’re managing our strong slate of project inventories to drive value-oriented production growth with cash flow supplemented by JV Capital, which serves to further enhance our operational flexibility.
BSP committed the third tranche of $50 million in the second quarter of 2018, increasing their total commitment to $150 million. To date, aggregate JV capital deployed or committed is now approximately $300 million. This includes MIRA’s first tranche commitment of which $86 million has been deployed.
To underscore our operational flexibility, we believe we have – currently have the human capital and project inventory to invest up to $1.5 billion annually. Our robust inventory is depicted on Slide 5. The consolidation of interest at Elk Hills is proving to be a significant catalyst for driving the next stage of growth at our flagship asset.
As a reminder, the Elk Hills field is one of the largest fields in the United States. Regional oil in place estimates are approximately 11 billion barrels of oil equivalent, and it has a surface area larger than Washington DC or approximately the size of the 610 Loop in Houston.
With the acquisition of 100% of the working interests, 100% of the minerals, and 100% of the surface, we’re now fully able to optimize this 47,000 acre of legacy field. I couldn’t be more proud of the team and the ideas coming from our field operators. The team is outpacing our near-term integration targets, implementing approximately $15 million in annualized synergies in just four short months by streamlining operations and consolidating infrastructure.
With additional cost saving opportunities identified, we’re confident Elk Hills can exceed our target of $20 million in annualized synergies over 18 months. Consolidation efforts are also leading to new ideas from field operations and how to reconfigure the production infrastructure in and around the Elk Hills field as we rapidly combine various equity zones.
As we continue to eliminate inefficiencies, integrate facilities and redeploy the equipment, Elk Hills will showcase how we leverage our scale of operations in California to enable low-cost production from adjacent fields. We’re very excited about the future of Elk Hills and plan to share more details on our progress at our Investor Day in October.
Now I’d like to cover highlights of our second quarter 2018 performance, starting with production. Production for the quarter was 134,000 BOE per day, which was above the midpoint of guidance. Our base production performed better than expected, supported by active surveillance and maintenance, particularly in our thermal operations, as well as in Ventura. The consolidation of Elk Hills with another boost for production in addition to increase the activity within our key fields.
At our Wilmington waterflood in the Los Angeles Basin, we achieved exemplary well performance in the second quarter, with a single well delivering a 30-day IP of 525 barrels a day. This is more than three times higher than the program average, reflecting a VCI exceeding seven at $65 Brent. This demonstrates that our technical team can still find by bypass pay to deliver significant value in mature fields.
We believe more of these opportunities are available, we have also had success at the Buena Vista [indiscernible] discovery, which is being further delineated with two wells coming in at 500 barrels of oil per day. Additionally, in Ventura, we maintained flat based production with low-cost, high-margin workover rigs rather than a drilling rig. Our active exploration program, primarily funded through smaller exploration joint ventures continues to deliver industry-leading success.
Over the last 12 months, we have evaluated multiple conventional exploration prospects with a modest CRC net investment of approximately $15 million. The new resources discovered through the successful drilling program have been met P50 NPV of $85 million to us assuming current prices. This equates to almost $2 per share of value and has the potential to increase further with additional appraisal.
We’re really proud of its outstanding results as it performs the quality of our high-grade portfolio. We also have a deep inventory of analog prospects and continue to engage with third parties to discuss additional exploration joint ventures.
With our current capital plan aligned to mid-cycle pricing, we expect production growth in the second-half of 2018 to be driven from the strong performance of our drilling inventory, with more meaningful growth in 2019. Specifically, in the third quarter in that current pricing, we anticipate production to range between 134,000 to 138,000 BOE per day.
Our Brent price realizations remained stronger in the second quarter of 2018, coming in at 98% before hedges and 86% after the effects of hedges. Since our spin, CRC portfolio has averaged approximately 93% of Brent. This makes our oil one of the more valuable barrels produced by an independent E&P in the United States garnering some of the highest premiums and further supporting our improving margin profile.
California’s complex refineries that were built for A&S in California grade crude. With no oil pipelines in the California, an economy, which was recently elevated to the fifth largest in the world, we believe the favorable quality of CRC’s production we highly sought after to optimize the state’s refinery yields. Given these market dynamics, we expect strong realizations to continue into 2019.
Our assets are generating significant cash flow. Our core adjusted EBITDAX was $337 million for the second quarter of 2018, which demonstrates our strong cash generation ability. You may recall that we initiated hedges in 2016 that provided downside protection for our cash flow. And that during that period, cash crunch we paid for those hedges by selling 2017 and 2018 calls. At this time – at that time, this helped us protect our balance sheet and preserve cash during the low point in the commodity cycle.
However, now we are in mid-cycle pricing, our strategy is shifted. We’re building our 2019 hedge position to protect our downside risk without significantly limiting our upside. We are laser-focused on realizing value and we are positioning and mobilizing our team to bring this value forward.
During the quarter, we continue to see real benefits from our internal restructuring designed to align our organization in a way that maximizes the value of our assets from a cash margin and VCI perspective, while ensuring that our teams are working collaboratively, safely and creatively to achieve operational goals.
As a part of the process, we empowered our line supervisors with greater authority along with increased accountability. Our team has stepped up to the play in a big way with increased collaboration in an entrepreneurial approach that truly breaks the forward leaning one CRC mindset. This has translated to tangible operating improvements and cost savings that will expand our margin – margins well into the future.
Throughout this process, we remain vigilant on safety. It’s our top priority to see that our team returns home each day in the same condition they arrive to work. As you can tell, since the spin and through the downturn, CRC has effectively managed our business and strengthened our financial position. Accordingly, we believe that our evaluation should be more reasonably reflect our net asset value.
With the current strip, we have continued to address our balance sheet through operational execution and growing EBITDAX, with our focus on achieving near investment-grade status over time. Although our credit agreements currently limit our ability to repurchase our bonds, we will continue to be opportunistic and chip away at our debt and move toward a streamlined balance sheet.
Our longer-term objectives is to return to the traditional structure of a secured revolving credit facility with our banks and combination with several tranches of unsecured notes. We feel that we are on a path to make that happen and the market is beginning to recognize this. The increasing financial flexibility we see on the horizon reflects the strength of our production profile, portfolio and the strong trajectory of our margin expansion efforts as we continue to execute on significant growth opportunities ahead of us.
For more on strengthening our balance sheet, as well as details on our second quarter 2018 performance, I’d like to now turn the call over to Mark.
Thanks, Todd. We continue to make strides in both the operational front, as well as the financial front of the business. We’re executing our plan and strengthening our balance sheet in a thoughtful, deliberate and strategic fashion.
As we’ve discussed before, our financial focus is to continue to simplify the balance sheet and reduce our fixed charges. We must balance the cost of repurchasing our debt versus the benefits of interest rate savings and balance sheet simplification. Ultimately, we’re focused on returning our balance sheet to near investment grade to fully complement our world-class investment grade asset.
During the second quarter of 2018, we continue to opportunistically delever purchasing $143 million face value of our second lien and secured notes for $118 million. This was accomplished due to leveraging baskets that were previously built into our credit agreements and filled during the areas joint venture transaction-related equity issuance.
We’re also shifting our commodity hedging strategy as we continue to thoughtfully manage our positions. Given our leverage to Brent pricing and a healthy commodity price environment, we’ll work proactively to lift some of our prior 2018 ceilings and are implementing more floors into our 2019 strategy. This provides protection for us in 2019, while preserving our upside potential.
Similarly, on the interest rate hedging side, we’ve taken proactive steps to initiate cash through May 2021 on our floating rate debt. This protection notional amount of $1.3 billion from increases in interest rates if one month LIBOR exceeds 2.75%.
As time noted, we’re prudently increasing our capital plan for 2018, using our joint venture investments to augment our capital flexibility. This additional capital will allow us to strategically manage our activity to derisk our inventory and to fund targeted expansion.
Additionally, as Todd highlighted, BSP committed to its third tranche of $50 million of capital, of which $18 million was deployed during the second quarter. We’re also funded $6 million of capital during the second quarter and has invested $86 million since the initiation of the agreement.
And all, we drilled 48 wells during the second quarter with internally funded capital of 35 wells with joint venture capital. Our value-driven capital allocation has delivered tangible results to transition our production to a growth profile in the second-half of the year. We expect this will be amplified into 2019.
For the second quarter of 2018, we produced an average of 134,000 BOE per day above the midpoint of our guidance. We’ve made good progress on reducing well costs, applying improved processes and capital efficiencies that will accelerate value-oriented production in the second-half of the year and beyond. While the impact of production sharing contracts, or PSC, has affected reported production and unit costs in recent quarters, PSC has had a minimal sequential impact in the second quarter.
We ended the second quarter of 2018 running 10 rigs, including three rigs operating in the Los Angeles basin and seven rigs in the San Joaquin basin. In terms of drive mechanisms, we had two rigs focused on steamfloods, four focused on waterfloods, three focused on conventional primary production, and one rig focused on exploration. Again, this highlights exceptional diversity of our field. As we move into back-half of the year, we have the flexibility to lean into 2019.
During the quarter, we continue to benefit from premium Brent-based pricing in favorable realizations, as Todd addressed. Oil differentials were healthy registering a strong 98% of Brent before hedges and 86% after the effect of hedges, which impacted oil realizations by approximately $9 per barrel. Slightly lower NGL realizations reflected seasonality, but remain strong and they continue to reflect strength in exports, which carried over from last year. Lower natural gas realizations continue to reflect seasonality trends.
Production cost for the second quarter of 2018 were $231 million, or $18.93 per BOE within our stated guidance range. Absolute production costs were higher year-over-year largely due to the incremental production from the Elk Hills acquisition, increased CRC stock price, higher activity levels and higher energy costs. This was partially offset by lower well-servicing costs and greater uptime for wells in the facilities, as well as cost savings from the acquisition.
This uptime resulted from the sharp focus in adjustments we made during the downturn. Production cost, excluding PSC effects would have been $17.41 per BOE. On a sequential basis, excluding higher equity compensation, second quarter unit production cost would have been $18.52, or $0.56 per BOE lower in the first quarter 2018 costs of $19.08.
This sequential unit cost decrease reflected the effect of additional barrels in the Elk Hills transaction, which are produced in the lower unit cost of the company average. The decrease also reflected cost efficiencies resulting from continued review of surface operations and maintenance and strategic equipment planning at Elk Hills.
Looking forward, please note that energy costs are a meaningful portion of our operating expenses and we pay higher rates in the summer months of May through October. These elevated rates will continue to affect us through the third quarter of 2018.
General and administrative costs $7.38 per BOE, which were higher than expected, primarily due to increased long-term incentive compensation that was granted in phantom shares and cash settled, as well as the timing of certain corporate expenses. The rise in our stock price, increased long-term, non-executive compensation component of G&A, and operating costs, which is paid over three years in cash based on our stock price.
For the second quarter of 2018, we reported a net loss of $82 million attributable to our common stock, or $1.70 per diluted share. Adjusting for unusual and infrequent items that are generally excluded from core earnings by investment analysts, such as non-cash derivative losses, our net loss would have been $14 million, or $0.29 per diluted share.
Our core adjusted EBITDAX, which excludes cash hedge losses and stock-based compensation expense for the second quarter was $337 million, which provides one with a better sense of CRC’s underlying cash generation capability.
As reported, adjusted EBITDAX for the second quarter was $245 million, up 52% from the prior year period, reflecting margin expansion from 33% to 38%. This improvement reflected the impact of a consolidated Elk Hills interest, as well as the benefit of stronger pricing. This was offset by $68 million of settled hedges, as well as approximately $24 million of increased incentive compensation prior to our higher stock price performance.
We reported cash flow from operating activities of $34 million in the second quarter and $234 million for the first six months of 2018. Recall that due to timing of interest and tax payments, which included greenhouse gas and property taxes, we generally experience larger working capital use in the second and fourth quarter.
CRC’s team continues to demonstrate strong execution of our strategy. We expect to deliver enhanced value-driven production growth and margin expansion, while continuing to strengthen our financial position. We remain balanced in our approach, responding quickly to opportunities and addressing any challenges proactively as they arise. And as always, we remain focused on delivering value for our shareholders.
Please note that we’ve provided detailed analysis of adjusted items and key third quarter 2018 guidance information in the attachments to our earnings release, as well as in our supplementary earnings presentation. Additionally, we provided enhanced disclosure on the impact of equity compensation on G&A expenses and production costs.
Our IR team is ready to walk through these details if you have any questions, also be happy to take any questions you might have on that information on other aspects of our results during the Q&A portion of our call.
Thanks. And I’ll now turn the call back over to Todd.
Thanks, Mark. We’re very excited about the second-half of 2018. We had a strong foundation for value-add production growth, effectively transitioning to a measured mid-cycle investment plan. We’re investing to return sustained production growth, going forward our large inventory to optimize high-value assets. We’ll deploy our deep operating experience, expertise to drive synergies and efficiencies and savings with a focus on margin expansion.
As we capture the full potential of our investment-grade assets, we’ll steadily move toward a near investment-grade balance sheet. Our strategic approach along with the elimination of hedging caps will lead to more meaningful production growth and significantly increase EBITDAX performance into 2019 and serve as the driving force for enhanced shareholder value going forward.
We now welcome your questions.
Tank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.
Hey, guys. This is actually Kalei on for Doug.
Hey, Kalei.
First off, congratulations. You’d be good to see CRC return to growth this quarter, definitely been a long road.
Thanks, Kalei.
So it looks like the portfolio will have a lot of momentum going into 2019, and I’m just hoping that you can share some early thoughts? So I just wonder if you can talk about your spending plan and how they evolve for the coming year? And what I’m expecting to see is a bigger focus on primary opportunities and therefore, a bigger near-term production response from capital as we think about modeling 2019? And then I’ve got a follow-up, please.
Yes. You can look at the kind of the balance, as Mark outlined, the rigs where they’re going, about – currently about half of them are dedicated towards conventional type projects and the other half would be the waterflood and steamflood. The back-half of the year, clearly, we’re going to get some delayed response to the activity there. But it should – we start to show up here in the 4Q and then going into 2019 with more effect.
We’re excited about the opportunity, but we’re going to still be measured as we have been. Historically, utilizing our JV capital and our operational control to be flexible and manage our cash flow accordingly. We’ll have the hedges obviously that we put in place in 2016, that were paid for in 2017, 2018 calls roll off. And the one thing I wouldn’t forget about and I try to highlight in my remarks is really exploration.
We’ve had a successful program that just started again in June 2017 with – our guys doing a great job of putting together a program, a lot with other people’s money. But it’s creating real value and that’s just starting to get kind of a head of steam here. So we’re excited about that opportunity going into the back-half of this year and 2019.
Got it. And my follow-up, can you just remind us of your organizational capacity to spend capital? I think, you talked about $1 billion as being the most efficient level for CRC spending. And you’re getting closer to this level of spending about $700 million this year. So has this capacity becomes more scares as your appetite for more JV capital change?
I think, our real capacity, as I outlined, is probably $1.5 billion. We typically like to flex with contractors as opposed to adding a bunch of employees. But you’ll see as we get closer or we move to that $1 billion number, we’ll flex accordingly to be successful. But we really feel like we can from a value perspective utilize our human capital also %1.5. And that would include JV capital, because remember, most cases there, almost all cases, we’re actually operating and doing that work.
So from our perspective, we feel pretty good about where we are at, where we can manage and the kind of the inventory and the opportunity set, because we don’t want to cause inflation too by – being ramping up too fast or drawing too many resources. So I think for us, we feel at the measured approach. The balanced approach is underpinned by our hedging going into next year and our strategy that change obviously coming out of the downturn.
Great. Thanks, guys.
Thank you, Kalei.
Next we have Jason Wangler of Imperial Capital.
Good afternoon, guys.
Hey, Jaason.
Wanted to may be ask that last question in a different way, and you’ve kind of answered some of it, Todd. As you think about getting into the financial position you’re in, which is obviously much stronger and getting that CapEX is also approaching $800 million or so. Do you see any real need to even look at JVs anymore, or you’re really just looking at what you can do on your own and maybe some one offs, or maybe how you think about that, because the activity levels obviously get pretty robust now?
Yes. So if you think about when we do our license deal plans of our all of our inventory of 130-plus deals, you’re going to high-grade that account. And these are the ones – you’re going to say, these are the ones that can draw investment internally or from our current joint ventures, or you’re going to look at it from the standpoint of, you need a joint venture to bring that value forward to that too far out in the future from a cash flow perspective being prudent about managing cash or maybe you look to monetize or divest them. If they’re too far out, you just don’t think you’re going to get them in an appropriate manner.
But I think from our perspective, it is a quandary, good quandary to have, as you generate more and more cash, particularly as our hedges roll off, is how you want to balance the joint ventures. So I think, right now, it gives us maximum flexibility and it provides many things, as you know, helps us de-risk reserve, manages our cash flow, manages our activity set. So it’s something from our perspective, we think it’s very important.
So when we talk about huge large-scale joint ventures like BSP and Macquarie, I think, I there could be at least one more of those. But I would try to think they’re going to be more like our exploration joint ventures, which I think at the end of the year, we’ve had five or six discrete different ones coming into this year and we continue to look at more of those and we’ve done some small development joint ventures, too.
So the larger-scale ones are more difficult to execute even more sophisticated counterparty and the smaller ones are usually with the party interested in particular drive mechanism or particular base and a particular field. So I wouldn’t rule them out, because they’re important part of our business model, given our enormous level of inventory, but more economic with the sustainability of current prices. So – but it’s being more picky from our perspective, but also getting better terms going forward.
Thanks, Todd. I appreciate that. And then maybe, Mark, for you. On the repurchase debt, I assume that came out of the basket that you guys still do have. Could you maybe just update us where you are in terms of being able to repurchase debt under the current agreements?
Good question. Those baskets were developed back in the seventh amendment they were filled and as a result of the Ares transactions, both in terms of monetization and borrowing-based assets, as well as the equity issuance. There are significant baskets built. We executed under a portion of that and they ere both time constraints, as well as pricing constraints on those bonds. But we ended up lapsing on time before we get fully – get those baskets fully utilized.
Okay. And then just – go ahead.
Jason, this is Todd. I was going to say, one of our priorities is to be able to have more flexibility around that going forward, because as the opportunity set that, that trade to the discount given the stronger enhanced financial position we have. We want to maximize our flexibility to take advantage of those baskets. So you’re going to see us try to make some moves to affect that outcome.
That’s why I asked. I appreciate and look forward to it. Thanks very much.
You, bet.
And next we have Tarek Hamid of JPMorgan
Hi, good evening. This is actually John in for Tarek.
Hey, John.
So you guys had a really great job realizing synergies on the Elk Hills acquisition this quarter. And I was just wondering, what drove that? Could you guys provide a little more color surrounding the acquisition, the integration of it, and I mean, the rapid acceleration versus the 18-month timeline?
Yes, I think you have to understand going into this. This is a fairly complex thing. It was Elk, it’s not a typical field, where you think of one discrete producing horizon. Elk Hills has numerous five major discrete producing horizons and they all had different equity interests Chevron versus CRC.
So we had to have separate lack units, separate compressions, separate facilities and account for it that way. And then our part – our partner, Chevron, was auditing us and then we had to deal with those aspects of it. So when you think about just manpower and how we do that, we really spent sometime and effort and got through and realized how we could eliminate duplicative surface equipment, duplicative lack units.
And the other neat thing was when it was an Elk Hills unit facility last time, we couldn’t take and move it to other fields of ours. We couldn’t use excess inventory, excess pipes elsewhere. Here, when we are finished consolidating parts of the field and taking costs out of the system, we can now move that to an adjacent field that we own because of the 100% nature of ownership. And I think, I could argue that our guys were sandbagging, but I think really they were really working that hard and they’re really trying to achieve the synergies I know Shawn Kerns’ tells me that we’re going to get this Chevron acquisition for free from the – from a cost savings perspective. So I don’t know if that’ll happen, but that’s the kind of goals and objectives our guys have in front of them.
Understood. So just going off of that, do you guys think there’s any potential to increase the potential synergies from that acquisition?
Definitely. I think, the $20 million were probably a little low, particularly given the quick $15 million we’ve gotten within four months, I think, we’ll see that target I just don’t think we’re ready to give a real meaningful target to hit yet, because they are working so diligently on this. But clearly, probably by the next call or our Analyst Day, you’ll hear a lot more about this.
For sure. And then just last question on, just – how much production do you guys or do you think came from the Elk Hills the newly acquired assets. I know you were previously guiding to around 11.5,000 barrels a day?
I think, it was a little bit less than that, and got to remember, we closed a little bit into the quarter.
Okay. Thanks.
Next we have Pavel Molchanov of Raymond James.
Thanks for taking the question. By my count, you guys currently have two-thirds of all the drilling rigs in the state of California, which essentially means that the rest of the producers in the state are investing little to nothing in their assets. In that context, do you anticipate other kind of mature below the radar assets coming up for sale along the lines of what you were able to do with Chevron?
I think, when you look at Chevron and the Exxon and Shell joint venture in Aera, they are run by a huge enormous worldwide company and they have different priorities and investment criteria. So I can’t really speak to what we think will happen there with their asset.
The smaller producers, I think, if you’re owned by a private equity sponsor, you would assume at some point they want to get their money out of it. But other than that, I think, that there’s a lot of activity, but you also got to remember the activity set in California because of the enormous amount of stack pay, we have 400 discrete reservoirs ourselves.
Our workover rig gets you a lot of value as opposed to necessarily needing a drilling rig. But I would expect the activity set to pick up from our competitors here in this day. But I can’t really speak to what’s going on in their heads and what they’re trying to execute on.
Okay, understood. As you’re putting more rigs to work in various geographies kind of going back to the pre-2014 days when permits from the state were hard to come by and caused various delays. Could that be an issue increasingly, or is that off the table given your current level of activity?
I think, from our perspective, we see getting permits. We have good line of sight for almost 90 days of permits of our activity set. We strive to have more than that going into next year. We work for kind of 12 to 18 months of activity going forward kind of getting ready for the calendar year, it’s really something here forward. But wherever you sit in a country, there’s going to be some kind of challenge getting permit.
But I think in California, generally, it’s more thoughtful, and there’s more stringent regulations in some case, but it just takes longer. But we know how to work that. We’ve been here again a little longer, but we plan through that to ensure that we hit all our marks and our timing on our projects.
So I’m not concerned with how the pace of those – of that activity. But I think it’s – we’ve had a good run here. And when I talked to the folks who are engaged in getting permits and the activity set, we feel real good about our investment profile going forward.
Right. Appreciate it, guys.
Thanks, Pavel.
Next we have Brian Singer, Goldman Sachs.
Thank you. Good afternoon.
Hey, Brian.
Just one question on my end. How do you look at the pluses and minuses as you think about your leverage focusing on the numerator and the net debt to EBITDA calculation versus the denominator, i.e., it seems the focus here was multiple CapEx increases that let’s get production growing again and move that, that EBITDA and denominator higher. How do you weigh that relative to debt pay down via free cash flow? And how the decision – how could the decisions you’re making now change if oil prices are not sustained at these levels?
I think, Brian, from our perspective, obviously, some limit based on us by our bank facility and some things like that. And like I said, we’re working to change those. But a balanced approach to value from our perspective is both getting back into growing value through our EBITDAX and through our gross margins on our cash margins on our barrels and our natural gas molecules, and also by paying down debt, our debt still trade at a discount.
So if you can do the balance of bringing down your absolute debt whether it’s paying it down or buying it at a discount or paying down the revolver, it’s something that we continue to do. But I think there’s going to be some real value as I hinted at over time. We came out on the spin with a very simple structure from a capital structure. We had senior unsecured facility that became secured later and we had a bunch of unsecured notes.
I think we’d like to get and we purposely made our balance sheet more complicated during the downturn to create value by debt liability in liability management. And now we’re going to have the opportunity since we’ve made it through the worst part of the cycle to now try to restructure our balance sheet as we get closer to opportunities when you look at the May calls and some of our debt instruments that were issued during the downturn and get back to a simpler balance sheet. Will that happen overnight? Maybe.
But you have to just evaluate on a daily basis what the markets will give you, what makes the most sense for our shareholders. So I think, for us, it’s not just the numerator attack that you do to create value. It’s really a balanced approach of getting after the numerator and the denominator.
Great. Thank you very much.
Thanks, Brian.
Next we have John Herrlin of Societe Generale.
Yes. Hi, a couple of quick ones.
Hi, John.
Looking at sequential production [indiscernible] gas here, I was wondering if you could explain why and also why you didn’t get any sort of NGL uplift where deal close by?
NGL prices typically, this time of year, it’s seasonal. They weaken a little bit this time of year. So you see a little weakening of NGL prices. We had a really good first quarter with NGL prices. We think that, that seasonality will continue into the fall into the next winter.
Natural gas prices were a little bit weaker in the quarter. We’ve had some credible volatility in the current quarter. It actually through June – end of June weather was fairly mild in California. And since July started it, we’ve gotten some real hot spells and then natural – the gas market has gone a little bit, I’ll say, pricy on a daily basis.
Okay. While I was talking about volumes and biometrically you had more gas production 2Q?
That really was – yes, the volumes in Elk Hills obviously we – the associated gas, there is an important part of the production. That’s really what’s enhanced the value from that perspective, because the Sacramento Basin was fairly flat.
Yes. Okay, next one for me. On a net basis, it looks like your Cap Ex bump is like 20% has to come up with a kind of allocation. Just curious if you had basically…?
Yes. When we look at it, you’ve got to think about rig lines in California. So a rig line for the year is going to be sometime – somewhere between $40 million and $50 million a year, depending on the type of rig. So think about it from – if you’re going to add to the back-half of the year two rigs, you’re effectively $40 million, $50 million. That’s not including facilities or any other spending. But that’s just give us an idea of the thought process behind it.
So then what are you splitting between, say, workover rig versus a natural drilling rig?
So if you look at our kind of…
[Multiple Speakers] more workovers?
Yes. So if you look at our pie chart of how we invest, I think that pie chart stays fairly consistent, about 15% to 20% goes workovers, 15%, 20% goes to facility. And just the facility investment for this year was really front-loaded. There’ll be less facilities in the back-half of the year. But that gives you a kind of a feel for where it goes and how we look at it.
But we look at this, but also understanding that we could flex for cash flow purposes or other purposes with our partners at BSP and Macquarie, some of our smaller partners that we have in smaller joint ventures. So I think that’s one thing. We look at to try to manage the cash flow going forward. We feel comfortable going into the end of the year and into 2019 by enabling ourselves to have the flexibility to go up or down if prices moved accordingly.
Okay. That’s fine. Thanks, Todd.
Thanks, John.
Next we have Sean Sneeden of Guggenheim.
Hi, thanks for taking the question. Maybe as a quick follow-up to one of the prior questions. Todd, I think, you mentioned desire to reduce the absolute level of debt here. Is that just through for cash flow generation, or how do we think about that? And I think, you had mentioned that there are some limitations on paying down debt, or are you just referring to the ability to repurchase the discount like on some of the junior stuff?
Yes. I think, the right proper way to think about it was, we were spun off in 2014. We understood our absolute level of debt wasn’t acceptable even in that price environment. So we were looking at different ways to bring down the debt level monetization than otherwise, and then quickly we got into a much different price environment and liability management became an opportunity for us to bring down the debt level.
Now we survived the cycle. We’ve gotten back to a point where we’re not going to be conducting fire sale to try to raise proceeds to bring down the absolute debt levels. But for us, it’s really the same thing on the table. I think, it will be all of the above approach. We’ll grow EBITDAX some through inventory and cash flow and enhancing cash margins. We’ll probably have some monetization. We’ll probably do some more joint ventures.
I think, people think about are missed every time. One is exploration, and we try to highlight that a littlie bit for you and the opportunities set there; and two is reversions of the joint ventures that will occur. And those occur well in advance of any of our significant debt maturity. So I think people forget to put those in their models and understand that, that material cash flow to the company and material value to the company.
And then as far as limitations, I’ll let Mark give you an idea of what we’re talking about, because we do actually have still more of that basket, where we can buy in debt, but if there are some limitations on it.
Yes. John, just to add what Todd was saying. We went through the downturn. We – as you know, we gone through a series of [indiscernible] essentially timed up our restricted payment baskets. And so, we’ve got some provisions in there that allow us to build baskets for debt repayment. Those are essentially triggered by monetizations or other limited factors. And we’ll work to try to recapture some of those baskets to the extent we can.
As Tood said, as we look at some of these other actions, we’ve got the ability to build the baskets, and we’ll look at executing on those in order to reduce the absolute levels of debt we have outstanding. Does that help?
Yes. And I think that makes sense. So just like a rough ballpark, how should we think about the current basket size?
Well, we had – we built baskets approaching $500 million as a result to the Ares transaction and the monetization of the equity issuance. And you’ve got a sense for how much we actually utilize. So a significant amount of it expired. And that’s of the things we plan on working on to try to get some restoration of that. And then we’ve got the ability, to the extent, that we executed additional monetizations, et cetera. We’ve got the ability to build those baskets.
Gotcha. I think that makes sense.
Okay.
And then just another one is on the balance sheet for you Mark. Is the – how do you think about the potential push out maturities here. You have a couple in 2021 and specifically relative to the expensive term loan there. Is that something that’s kind of on the table for you guys to think about in terms of interest savings and as well as kind of building more runway?
Well, I think, you – I think you’ve highlighted a good point. Of our capital structure, that is probably the most challenging period if you want to refer to that in terms of – you want to refer to that way in terms of interest cost. You’ve seen us act in a very proactive fashion thoughtfully over the long-term perspective and you’ve seen us act in ways that were to try to position ourselves and take advantage of market windows as they open up.
And so you’re right, those are the kinds of things that we’re thinking about. We’re thinking about the long-term and we’re thinking about the steps we need to take. As you know, we have a very good relationship with our banks and we work to keep those guys right in the front seat with us.
And so we have ongoing dialogue with them in terms of ways in which we can work together to take advantage of modifying our capital structure as opportunities arise to extend our maturities and put in place that perhaps has, well, reduced our fixed charge as simple as a key focus for us.
As Todd said in his introduction, we’re working proactively to think about ways in which we can simplify the balance sheet and reduce our fixed charges. And then we will take that, that will give us the ability to further ramp up our – you had more capital to back in the ground and further ramp our growth and further delever organically. So that’s the way we can think about.
Okay, that’s helpful. And then just one housekeeping question on G&A. I know you had $24 million of cash settlements in there. So it’s something we should be anticipating going forward, or is that just a one-time event?
Yes. Sean, that’s a mark-to-market. It’s below the executive level. The – we have firm stock units employees that are cash settled. So there’s a mark-to-market every quarter, but the stock price appreciates materially like it did in the quarter. We’re going to have that kind of upward movement and obviously could have a mark-to-market downward, too, depending on what your stock price does, but that’s simply what it is.
Yes. And just to underscore, Todd’s point, those were put in place sometime back when we were at the depths of the …
That was in the downturn yes.
That’s the downturn.
Got it. Are those programs still in place today for I think new awards or is that – was that simply kind of?
To give you an idea our comp committee Chairman at the time during the downturn felt like we need to have more cash sort of awards for the employees, because if there was a restructuring that could occur that would have easier preservation by during a restructuring. So, there was a time period, I think it was two offerings of employee compensation that was stock-based, but cash settled. And – but now we’re back to more traditional utilizing stock for compensation.
Okay that make sense. Thank you very much.
Thanks, John.
Next, we have Gregg Brody Bank of America Merrill Lynch.
Hi guys. All the deck questions were asked. So, I will not ask any. Just on the, we haven’t talked about the midstream JV in awhile. I’m just curious what type of opportunities you might see to create value there. And then maybe you could remind us maybe just what you think are leading candidates for monetization today that may help you create some room to deleverage further?
Yes, Gregg, I think when you look across the board everything is still there with the exception about to the Elk Hills power plant and the Elk Hills processing plant, which were part of Ares joint venture. I mean, when we do our life of field plants and look at our assets, things that might not compete for capital. We made it through the downturn. We don’t need to conduct fire sales. There’s other infrastructure that could be monetized in different ways. And there’s a lot of things that’s in and around Elk Hills. We could do potentially inside or outside the Ares joint venture, particularly it is concerned the power plant and looking at one of the big long-term projects at Elk Hills, which is CO2 flood [ph], we’re potentially capturing anthropogenic CO2 from the power plant that’s well in excess of 100 million barrels of food preserves.
So, I think there’s some opportunities like that where we’re actively looking at and looking at bringing partners and monetize in a different way. So, it really goes back to, we preserved all of our assets in the downturn to get to here and now we’re looking to do things to make us a better company and create value for our shareholders. We preserved all that value during the depth of the downturn and do silly things and now we’re looking to create the value and capture our net asset value like I outlined in my comments.
You guys have been very consistent. I appreciate that you’ve been delivering on that. Maybe just I don’t know it’s in there, you said outside of the JV, but there is, is there anything specific that’s about the JV that’s interesting that you kind of point out or just early days in terms of opportunities?
No, the joint venture is around the power plant and the processing plant. And we could tweak things over time. I think Ares if you talk to them, you’d see they’d be very pleased with how things are going. And we’re very pleased they’re a great partner and not easy to work with. And that was one of the criteria for us we want to have folks who are good long-term partners. So, yes, I mean there’s other things you could do because there’s a huge amount of infrastructure at PRC and a fair amount of that at Elk Hills just like a fair amount of our reserves and production is at Elk Hills.
So, if we’ve – there’s something there particularly as we look to consolidate and create synergies with adjacent field that – where you’ll see a lot of value creation along the lines of you know the $15 million we’ve got in four months on annualized. I can’t promise that kind of continuing factor. But I think there’s a lot of opportunities like that that will add up over time to be significant.
Got it. And just last question. So, you gave 3Q CapEx guidance and full-year updated guidance. Is it fair to assume that in fourth quarter you’ll maintain the same pace as 3Q or is there a possibility or two that is stuffing down little bit?
We’ll managing it going into obtaining what prices are, but you’ve got to remember there’s a few issues going off from our perspective with one is, we go into 2019 or relatively almost unhedged we do have floors in place, you can preserve our upside. There’s a little bit of swaps in the first quarter, but after that it’s really just floors and then preserving our upside. So, in 4Q this year we do have some swaps that you again were – not swaps, but calls we sold to pay for our puts in 2016.
So, the cash flow change will be very stark from 4Q to 1Q. And managing that cash flow is going to be important for us going into the year, but also managing the momentum and in the activity set, because whenever you go up and down activity you got to manage safety and all the issues that are important for the enterprise. And the activity set in preserving those synergies. So, you’re going to see us try to do our best to manage that and we’ll continue to manage within cash flow and we’ll have that challenge where we could have a huge shift in cash flow from quarter-to-quarter because of the hedging.
Got it. Thank you very much.
Thanks, Gregg.
Sorry sir, our final question this afternoon will come from Jacob Gomolinski-Ekel of Morgan Stanley. Please go head.
Hi, good evening and thanks for squeezing me in here. As you ramped CapEx up by about $100 million and accelerate growth into 2019, can you just help provide some goalpost in terms of what kind of production growth that you translate into for 2019? And it just seems like growth in 2019 will be far more – far substantial to the 1.5% growth implied Q2 to Q3 for this year. So, any framing for how we should think about 2019 will be great?
Yes, I think if you look at how we’ve invested since it’s been. Coming into this year was the first time we’ve invested from the standpoint of getting investing beyond maintenance capital level to investing for growth. Last year, we had more JV capital, but when you look at our level of our net investment, I think if you look at our investment deck when we talk about a scenario where we reinvest all of our cash flow into the business and there’s no other things that happen and we give it a scenario between $55 and $75 brand.
You can see how, I think you can talk about production growth, but I think the important part of the cash flow growth, which is more than twice that, but you got to remember too we’re given what I talked about earlier about half of the rigs are dedicated towards conventional half forms water flood and steam flood. Water floods and steam floods typically did not have longer response times. So, you’re going to see us have a back-half of the year that will be elevated relative to now. And then we more into 2019 where we’ll have much more response as we get into 2019.
Got it. So, I mean – I guess that’s kind of what I meant was just inter I can see the 1.5% implied growth from Q2 to Q3. And I guess if we assume something similar to the Q4, but I guess I’m more around 2019 as those water floods and steam floods ramp up into next year. I see Slide 9, I mean I guess I could use that. I have all it, but I just, I don’t know if you had any goal posts or how we should be thinking about it?
Yes, I think it is Slide 10, but I think that’s the best way to look at that point in time and kind of gauge yourself where you sit in the brand price deck as we have it there between 55 and 75 Brent. And if you have any other questions along those lines give Joanne or Scott a call.
Okay. And then just on the net cash, you mentioned earlier, we’ve obviously seen some kind of craziness recently in California, particularly Citigate and [indiscernible], are you able to capitalize on those gas price hikes in the physical market or have all the volumes sort of been dedicated to an off-taker?
We can capitalize on it.
Okay, great.
And we have.
So, you must feel liking that?
Yes. When I thought, but it’s not necessarily a bad thing.
Yes, as long as your AC is working. I mean, and then one real quick housekeeping question. Do you still have that ATM available? And if so, can you help us understand how you’re thinking about it in terms of the right time or opportunity to use it?
We do have it available. We haven’t used it. Again, it’s more of a – as we said before it was a tool and tool box. We want to preserve and have all of the tools available to us. I don’t think the opportunity set to use it is there. I mean from our perspective, we worked at it from the standpoint to be over simplistic as creating synthetic 309s. As you know during the downturn, we had some 309s we did that we’ve self created a real value for our shareholders. But if that opportunity presented itself again, we felt like we could do that most synthetic basis by utilizing this and not paying the big on both sides of the deal. So, I think from our standpoint that was what we looked at. And it’s not the kind of environment where we would look to utilize that at this point in time.
Okay, thanks very much appreciate it.
Thanks, Jacob.
Well that will conclude our question-and-session. I would now like to turn the conference call back over to Mr. Todd Stevens for the closing remarks. Sir.
Thanks Mike. Thank you everyone for joining us on today’s call. CRC’s focus on value and preserving the most robust operating capital plan since the time of our spin. We expect our shareholders to benefit from our increase in capital investment with high VCI projects in this mid-cycle commodity environment.
We’ll leverage our flexible business model and deploy our talent in their deep operating expertise to capture the full potential of our large investment grade resource base. This is going to steadily move us toward a near investment grade balance sheet as we’ve outlined and delivered significant value for our shareholders along the way. Also, please join us at our Analyst and Investor Day in New York on October 3 where we will further showcase CRC’s value creation. We look forward to seeing you in the next quarter, seeing you on the road. Thank you everyone.
And we thank you sir and to the rest of management team also for your time today. Again, the conference call is now concluded. At this time, you may disconnect your lines everyone. Thank you, take care and have a great day.