California Resources Corp (CRC) 2021 Q3 法說會逐字稿

Good day, and welcome to the California Resources Corporation Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I'd now like to turn the conference over to Joanna Park, Vice President, Investor Relations. Please go ahead.

Welcome to California Resources Corporation's third quarter 2021 conference call. Participating on today's call is Mac McFarland, President and Chief Executive Officer; and Francisco Leon, Executive Vice President and Chief Financial Officer; as well as several members of the CRC executive team.

I'd like to highlight that we have provided slides on our Investor Relations section of our website, www.crc.com. These slides provide additional information into our operations and third quarter results, and we've also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website as well as in our earnings release.

This conference call contains certain projections and other forward-looking statements, and these statements are subject to risks and uncertainties and may cause actual results to differ. Additional information on factors that could cause our results to differ are available in the company's 10-Q and 10-K.

A replay will be made available for at least 30 days following the call on our website. And as a reminder, we've provided additional questions, time for question-and-answer at the end of our prepared remarks. We would ask participants to limit their questions to a primary and one follow-up.

And with that, I will now turn the call over to Mac.

Thank you, Joanna, and good morning -- good afternoon, everyone, and thanks for joining the call. In honor of Veterans Day, we would like to thank all of those women and men who served and continue to serve our great nation. Thank you for your service.

In the third quarter, we continued our strong performance, maintaining production of low-carbon intensity oil, demonstrating our disciplined investment, and generating significant free cash flow. I'd like to thank the employees of CRC for their dedication to make all of this possible during the pandemic. Their strong and consistent performance has enabled us to generate $328 million of free cash flow year-to-date and announce the following: first, we are updating our annual free cash flow guidance for the year, which we are increasing to a range of $460 million to $510 million.

Second, I am pleased to announce that the Board has approved a dividend of $0.17 per share payable in the fourth quarter of 2021 and has extended the $250 million share repurchase program until the end of the second quarter of 2022, thus highlighting CRC's dedication to shareholder returns. I'd also like to point out that even with these strong cash returns to shareholders, we still expect to have over $325 million of cash on our balance sheet at year-end. And lastly, we continue to advance our commitment to the energy transition in the sector.

Building upon our carbon management strategy, CRC has adopted a 2045 Full-Scope Net Zero goal for Scope 1, 2, and 3 emissions. This puts us among a handful of industry peers to include Scope 3 emissions in our net zero goals and puts us on a time frame five years sooner than most, which aligns us with the state of California's 2045 net zero ambitions.

CRC's low carbon intensity production, combined with our unique asset position and carbon management opportunities are the key differentiators, which allow us to have a clear line of sight to achieving the Full-Scope Net Zero goal. Said simply, CRC provides low carbon intensity fuel for today and net zero fuel for the future. When we couple our unique position with the economic incentives available in California, CRC's opportunities stand apart even further because we have the opportunity to reach our net zero goal economically.

As previously disclosed, Carbon TerraVault's near-term focus targets up to 200 million metric tons of storage potential or injection of up to 5 million metric tons per annum by 2027. This represents nearly double our Scope 1 and 2 emissions and provides a clear direction to meaningful progress towards our goals. As I said before, we do not expect it to be easy to achieve, but these are our goals. They are ambitious, and we are committed. As we committed before, we have submitted our second permit to the EPA for 26R reservoirs plan, combined with our initial permit for the A1/A2 reservoir at Elk Hills. These make up an approximately 40 million metric ton project for Carbon TerraVault I and supports our goal for first-mover advantage in California and the U.S. when it comes to carbon management. We continue to have discussions with various emitters, as we stated before, and we are targeting an announcement on these advancements in 2022.

On the solar side, we are progressing our partnership with SunPower on 24 megawatts of behind-the-meter solar projects at the Kern front and North Shafter fields. This is in addition to the previously announced 12-megawatt project of Mount Poso and advances projects on a total of 36 megawatts, of the up to previously announced 45 megawatts behind the meter.

Again, I'd like to thank the employees for their dedication and hard work. Our operations team continues to deliver strong results on our maintenance and development programs, which have exceeded expectations from a cost and type curve perspective.

Thank you for being here today, and I'll turn the call over to Francisco.

Thanks, Mac. Good afternoon, everyone, and thank you for joining us on this call. As Mac highlighted, CRC continued its strong operational and financial performance in the third quarter of 2021.

During the quarter, CRC produced 102,000 net barrels of oil equivalent per day and 62,000 net barrels of oil per day, resulting in modest growth year-to-date in both gross and net oil production. This is largely due to our inventory of high return, quick payback maintenance projects and is also supported by only $98 million in drilling, completion, and workover CapEx year-to-date.

With much of our backlog addressed at current prices, we're beginning to increase our development program to a more normalized level. In September, we added a third drilling rig in our Los Angeles Basin, and year-to-date, our development program has brought online 58 new wells. In the third quarter, we were running 35 maintenance rigs and were able to bring online an additional 216 maintenance wells as part of our previously announced shift of capital from drilling to downhole maintenance. In Q3, this shift allowed us to return to production an additional 2,600 BOE per day, while sustaining our controllable operating costs.

Our commodity realizations remained strong across all of our streams with oil realizations at 100% of Brent. NGL is at 73% of Brent and natural gas at 126% of NYMEX. Realizations are expected to remain healthy across all three hydrocarbon streams, particularly for natural gas, which has seen a large increase in the second half of the year. The rise in natural gas prices increases CRC's operating costs, which I will discuss further shortly. However, it is important to recall that CRC benefits from this increase since we realized higher prices on the sale of natural gas, which we also produce.

Moving on to the cost side of the business. And as shown on Slide 9, our third quarter 2021 G&A cost rose sequentially quarter-over-quarter at an average $5.44 per BOE. This is primarily due to increased compensation-related items. Our third quarter 2021 operating costs, excluding PSC effects, rose by $1.69 per BOE compared to the second quarter of 2021, primarily due to the rise in natural gas prices. We purchased natural gas, which is used as a fuel for our steam flood operations and to generate electricity from our Elk Hills Power Plant. Excluding the effects of higher natural gas prices on our cost structure in the third quarter of 2021, our operating costs on a per barrel basis were in line with the first two quarters of this year, a true testament to the operation team's ongoing efforts to manage costs that we control.

When we look at the effect of natural gas pricing in total, we can see the benefit we derive as the largest natural gas producer in California and the positive impact on our margins. Year-to-date, CRC produced an average of 160 million cubic feet per day and purchased less than half of that amount for our internal consumption. As we show on Slide 10, for every dollar rise in realized natural gas price in the fourth quarter, we expect to see incremental revenue of $15 million, more than offsetting the incremental operating cost of approximately $7 million.

During the third quarter, CRC reported an adjusted EBITDAX of $242 million, our highest quarter since we exited bankruptcy a year ago. Furthermore, this year's modest CapEx requirements helped to generate $131 million of free cash flow in this quarter. Our best quarter so far this year and $328 million of free cash flow year-to-date. Results reflect strong operational performance, higher commodity pricing, and higher-margin electricity sales from our Elk Hills Power Plant.

Underpinning CRC's strong financial performance has been our successful drilling program. Our 2021 development program has predominantly been focused on the Mount Poso, Elk Hills and Buena Vista fields with a combined program IRR of over 90%. By focusing on high-value, high-margin horizontals, we have seen large capital efficiency improvements across the fields. Currently, about 90% of our drilling efforts are focused on these promising horizontal opportunities, reflecting stronger economics and lower capital intensity needs.

Due to the strength of the drilling program to date, along with the rising commodity prices, we accelerated certain projects to the fourth quarter of 2021, which were previously scheduled for 2022, including adding a fourth rig in the Buena Vista Shale and incremental workover opportunities. As a result, we are adjusting our guidance to account for changes in our activity in the current price environment as we look towards our year-end. We are raising CRC's total net production guidance by approximately 2% at the midpoint to 100,000 BOE per day. Also increasing capital investments to a range of $180 million to $200 million and increasing free cash flow guidance by approximately 8% to a range of $460 million to $510 million.

The combination of our strong operating results and streamlining of our asset portfolio continues to enhance our financial strength. Earlier this month, we closed on the sale of the majority of our Ventura Basin operations, which was our highest operating cost area. This helps foster our already strong liquidity position. Post-closing, our cash balance as of November 3rd was $280 million, bringing our pro forma liquidity to approximately $639 million.

Our updated guidance takes into account the sale of our Ventura Basin operations. I'd also like to point out that the preferred interest held by Benefit Street Partners was redeemed in September, further simplifying our balance sheet and financial flexibility.

To conclude, CRC continues to demonstrate our commitment to prioritize shareholder returns. As of November 5th, CRC repurchased 3.1 million shares for $104 million for an average share price of $33.99 per share, which represents an over 25% discount to our current share price. With $280 million of cash on our balance sheet, our strong financial position has further optionality with our shareholder return strategy. As Mac mentioned, the Board has approved a quarterly dividend of $0.17 per share payable in the fourth quarter. When annualized, this will equate to approximately $56 million in shareholder returns.

Our healthy free cash flow generation allows us to continue to self-fund our capital needs and will allow us to fund our carbon management activities as we continue to evaluate alternative capital deployment options benefiting our business. 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 for closing remarks.

Great. Thank you, Francisco. CRC has a uniquely positioned asset base that allows us to provide the needed energy today and to meet the goals of tomorrow with a net zero fuel of the future. CRC continues to exhibit disciplined capital investment in our asset base, which is low decline and low-carbon intensity and provides resilient cash flows. We remain committed to our cash flow priorities of building upon our carbon management business and shareholder returns. We've made progress on both with two important announcements: our commitment to 2045 Full-Scope Net Zero and a quarterly dividend.

Thank you again for your interest in CRC, and thank you for joining us on today's call. With that, we'll now open the line for questions.

(Operator Instructions) Today's first question comes from Scott Hanold with RBC Capital Markets.

First, congratulations on the target to net zero Scope 3. I think you're one of the only oil and gas companies to have a good visibility toward that. So congrats on that. My first question is probably for Mac and maybe, Chris, just I understand the sensitivity around the discussions with emitters, but can you give us some sense of -- based on your discussions, what are you all hearing from them in terms of the interest level, key criteria that they're looking for? And just some sense of where the interest is in playing the opportunity? Are they looking to participate in any of the start to end of the process? Or are they just looking to find a solution and whatever is the easiest?

Scott, I'll -- Chris is here with us. So I'll let him jump in. But let me just start by saying that I think that when -- at least as we consider opportunities for sources, we are working with people who are interested in reducing their overall carbon intensity of the products that they make. And so therefore, being able to hopefully either avoid having to produce LCFS credits or creating a product that has a premium associated with it due to lower carbon intensity. So that is the high level, but I'll let Chris jump in and provide some additional comments.

Yes. So I think that's a great context. And of course, that's going to vary by source, right? There are some emission sources when you start to look at how do they price their downstream product, whether there are conventional refiner or a renewable refiner or any other source out there, they're all going to have unique attributes. And so I'm encouraged in the work and the discussions that we're having with each of them, and it really speaks to the model that we have approached our go to market, which is allowing for the flexibility in these very early stages to engage with these emission sources and be able to tailor with them the type of -- to the types and the needs that they need, where they can monetize the low carbon intensity of their product. So very much advancing the ball across those different sources, Scott, and very encouraged with the response that we are receiving.

Let me just add on to that. So with the LCFS construct that's in California, obviously, people can either view that as a carrot for the economics, which have to pay for the capture through the injection system or the stick, if you will, if it eventually becomes somewhat of a penalty that you have to buy credits for the deficiency. That's one avenue. The other one I would tell you is, obviously, you've seen and we've included a slide on the proposed changes to 45Q. We also see, in addition to those that are LCFS eligible, we also see increased interest in non-LCFS that are 45Q with the uptick in 45Q that might be interested in citing greenfield type opportunities. So I think there are the brownfield opportunities that are LCFS compliant and the greenfield opportunities with the increase in 45Q that is driving a lot of interest.

Got it. And could you just mention on just the last part of that question was whether they're interested in actually the capture process, doing part of the capture process, and then having you sync the CO2 from there, transport and sync? Or is there any interest in them taking some of the opportunity here as well?

I think it -- without getting into any one particular discussion, it's all over -- it's kind of all over the map. It depends on the source. It depends on the capital funding. It depends on a lot of variables there, Scott. I think that there are some that say, "You know what, provide an entire solution for me." And there are some that say, "Hey, I'd like to deploy capital and put it to work and possibly look at things that look more like a partnership around the capital -- around the capture system," et cetera. So it really spans the gamut as we laid out on our October 6th carbon update on that business model. It really does cut across all those different business models.

Got it. Understood. And as my follow-up question, just on the shareholder return, maybe this one's, Mac, for yourself, but also Francisco. But as you step back, you initiated a dividend, you have a stock buyback. You've also made a statement of wanting to utilize 50% of your free cash flow to get toward that Scope 3, net zero. Can you, at a high level, discuss a couple of things? One, where do you go from here on that shareholder return proposition? Because even if I take half of the projected $2.5 billion, it still is -- leaves you a lot of flexibility going forward. So if you had some commentary on that. And then as you -- and the second part of the question is, with the 50% sort of allocated to getting toward that scope through net zero, like you're looking to potentially use your upstream free cash flow, but -- and this is probably for Francisco. But as you look across the other maybe cheaper sources of capital, like what is the opportunity to utilize that to lean more into giving it back to shareholders?

Yes, Scott, this is Francisco. I'll take the question first. So we have to start with, as we said in the script, we're projecting cash of $325 million by the end of the year. So really good accumulation of cash this year, and that's post already over $100 million put to work on the SRP and the dividend that we're going to pay out in a few weeks. So the cash flow potential, the cash flow generation of the business continues to deliver. And as we discussed earlier, the framework is to first invest in the core business. And we're going to invest less than 50% of our discretionary cash flow into maintaining our core business. So then you have 50% remaining. We'll split it in roughly half between shareholder returns and investment in our carbon management business.

Right now we like the value proposition to the investor to put a dividend forward, but we're also going to keep the share repurchase program alive. So we'll have two different avenues to returning cash to shareholders. I like the optionality that the share repurchase program gives us. I still see a lot of value in our stock, and we're going to continue putting dollars to work to buy back our shares. But it's something that we'll continue to assess, and it gives us an opportunity to pull back at some point. But right now, we're going to be entering the year with both of them open, and we'll see what the market dictates. And so we'll allocate accordingly to that 50%. And there's two frameworks to do it now, two particular paths to do it.

And then the carbon management business, we see a kind of a ramp-up of investments over the next few years. Right now, we're talking to emitters, we're making the initial steps to creating this new business segment. That's going to ramp up naturally as you get closer to FID, and as you get closer to making a decision on a go and no-go for the capture system or the pipelines or the storage things. So naturally, you're going to see a progression from potentially heavier weighting in the first few years to shareholder returns in terms of the proportions and then the ramp-up in carbon management.

So there's a little bit of timing associated with the split of capital. What we're seeing is the financing side of the equation is maturing rapidly. There's a lot of good sources and from private equity to government loans to the bond market being attractive to participate in the carbon management business. Now we said we're not afraid to put our balance sheet forward, and we may use some of the cash that we're generating towards these initiatives, but to me, the best point to negotiate, the highest potential negotiating leverage is to have cash on the balance sheet that then unlocks the financing sources.

I don't want to commit to one -- only one way of doing this and say we're definitely going to put this much money to work by this stage because if we find a cheaper source of financing, we'll definitely do that. And I think that the stage is set for us to be able to have a lot of different options and then just optimize on the best financial structure as we try to pursue this, the carbon management business.

Got it. So in theory, if you all were able to find that cheaper source over time, the shareholder return would take up a larger portion of that free cash flow. Is that what I'm hearing?

Yes, I would say, carbon -- so yes, shareholder returns. Ultimately, we have discretion on what that incremental source of -- where that cash goes to, we'll see what the best avenue is. But I don't want to commit to all kind of shifting back in that instance, just kind of more of it, you're saying, well, what if this happens, and I'm trying to provide some feedback. But ultimately, we'll see. The shareholder return aspect of our business is going to be there, given our very low capital intensity assets and the type of assets that we own.

But there's other going to be opportunities. And whether it's acquiring a bolt-on near Elk Hills, for example, then we might put the cash forward towards that end, and we might see really good value there. So don't want to box us in to just saying, yes, if you get sources of financing in carbon management, it all flicks back to shareholder returns. We're going to look at it. We're going to explore it. If that's the best avenue, we'll do it. But we also have dry powder to do other things with it.

So Scott, just to add that from my perspective, what Francisco said is absolutely true. What we have is a framework, and we're committed to both sides of the -- after we spend and reinvest in maintaining BOE production. Both sides, shareholder return, and carbon management. We're committed to both. But what we have is because of the strong cash flows of the core business, E&P business. We have ultimate flexibility. And we've demonstrated that now for three quarters. I think Francisco is saying, projecting out into the future, we remain committed, but we remain flexible. And as we see opportunities, we have the ability to either return the cash to shareholders or invest in projects that we think are shareholder accretive.

And our next question today comes from Leo Mariani with KeyBanc.

Just wanted to ask a question on the fourth rig that you're adding here. Just wanted to get a sense. I guess as you guys look into 2022, do you think four rigs is kind of the right number to roughly achieve your goals of holding roughly flattish in 2022? Or do you think there may have to be an additional rig that may have to come in here?

Yes, Leo, this is Francisco. Yes, we ramped up from one rig to four here as we exited the year. And we like that entry point into 2022. As we've guided before, we talked about it, we see -- once this backlog inventory is no longer there. We're going to switch more dollars to capital, and we see the maintenance capital of our business about $275 million. So that implies somewhere between four to five rigs. We feel really good about the four rigs that we have right now going into the year. Shawn Kerns is here with us, our Head of Operations. I don't know if you have anything...

But I just want to be clear, the $275 million include -- it's not just D&C. It's a capital number. So -- but yes...

Yes, I'll just add, Francisco. The 4-rig program is very consistent with what we've been drilling this year in 2021. And so we have our plans laid out, and we'll just kind of roll into 2022 with that four rig program.

Okay. And then just additionally, I wanted to see if you could provide a little bit more color just around the commercial progress on some of the negotiations with some of these industrial emitters. This might be a bit of a tough way to frame it, but just wanted to get a high-level sense, if there's any way to like ballpark, quantify like the number of like very serious conversations you're having? Is it just a handful? Or is it like 50 conversations with emitters? And then just wanted to get a sense like have some of these discussions progressed to a fairly late stage? How would you maybe characterize how far you are down the road on some of these key discussions?

Yes. Leo, it's Mac. The -- what I would say is, I'd probably go back to some statements that we've said before that if we signed everything up, we would be way oversubscribed for Carbon TerraVault I. I think that the discussions are advancing. I think that we -- based off of the continuation of discussions, we would stick with our type curve is still being the type curve that we see that we put out on October 6th. So it's been affirmation of -- continued affirmation and continued interest in Carbon TerraVault I.

Okay. And I guess, apart from Carbon TerraVault I, I know, obviously, you guys have plans to do more of these Class VI sequestration projects. I guess, did the discussions also potentially look at other sites down the road? I'm just trying to get a sense of what the kind of size of the opportunity can be here. Is there just a lot of folks looking at some of the other fields in the future that are yet to be permanent as well?

In short, the answer is yes. But again, I'll go back and say, Leo, that the -- what we described before was we put Carbon TerraVault I together. We filed the permits on it, but we're focused on the next 160 that get us to 200 million tons. Chris is here, Chris has been working with the team to prioritize our opportunities. As we said, we thought we have a fair amount of unique assets that we can convert into Carbon TerraVault II, III, IV, or V. And to get us somehow to -- in some form or fashion, get us to the 200 metric tons that we're focused on first. But Chris, do you want to provide some insights on that?

Yes. I think those conversations in addition to CTV I are occurring, right? We are active. We have our focus on, as we talked about, we submitted the BPA permit application for 26R. We want to deliver on what we promised and committed to on CTV I. But in parallel with that, with the goals that we've put out, are 200 million tons. We are advancing in discussions with scoping out different sources across those geographies and prioritizing where we think the next set of opportunities are. So that is to say we're working on it. We are not stopping with CTV I. We're focused on that, but we're progressing at the next 160.

So -- and just to add a quick overlay to what Chris said, we have teams that are advancing the permitting and the defining of the next tons to get us to 200. But concurrent to that, we also have commercial engineering and operations teams that are working on the source of CTV I and concurrent to that, as we structure through and where we hope to get with a project, we are working and Francisco and the finance organization are looking at opportunities for how to finance that either through the debt or equity markets. So all of it, it's all going on concurrently. And we're excited about the prospects.

Okay, and our next question today comes from Kalei Akamine with Bank of America.

Mac, I want to hit a couple of topics here. And these first will be on the base business, which I feel is getting perhaps overlooked by the market that's really focused on low carbon at the moment. So I think the market is trying to understand how CRC fits into this new E&P landscape, which requires you to have a track record. So I'll commend you for coming out of the gates very strong this year and showing the gas returns and the capital discipline, but we want to know how long you can do it for. So I'm hoping that you can help put some parameters around the free cash capacity. So what I'm looking for is, what's the maintenance capital? What's the oil breakeven? And what production plateau does that support? And how deep is the inventory to support it? So in other words, how long?

Yes. Sure. So great question. I appreciate the interest in the core business because it's a lot of what we do. I mean, there's a lot of conversation around our carbon management activities, but you're absolutely right. We did highlight some of this in the Carbon Strategy Day, but not for the level of details that you asked, but we provided a five-year type projection there. I'm going to let Francisco pick it up from here and talk about maintenance capital, maintaining production. There were some assumptions there. Maybe you want to go through some of those?

Yes. No, I'd be happy to. So, Kalei, the inventory, we've always felt CRC was inventory rich. And the issue we've had since we came out of the gate that CRC has been the balance sheet, which we addressed this past year. So inventory looks, it's very attractive. Now it's not shale. So you're not going to hear us talk about this 24-hour IPs and move into that way of guiding to the market. So we have -- for us, it's really good tanks, really good oil and gas, rocks that we can get the oil out of the ground through waterflood and scheme flood or primary drilling.

So it's not always the drilling and completion side of the equation that solves for how attractive your inventory is. If you can get the oil by injecting water, that's a very, very attractive, very high-return business for us. Now in the inventory, what we talked about in the past is at about four rigs, which is our current pace, we have about 10 years of inventory. We're focusing on riding this year on some of the shallower zones in the San Joaquin Basin, but we also have a rig in the LA Basin. I mean, that's a pretty good sustained level. I mean, we can expand LA Basin, but we're seeing a lot of really good returns in the San Joaquin Basin. So we see about 10 years of inventory.

Now that's a dynamic view. When we came out and we talked about this, prices were lower than they are today, price point, at 86% expands that inventory in a pretty significant way. And if you look at our historical filings, you see reserves in a much higher -- up to 1 billion barrels of 3P Reserves. So we see a lot of good projects there. In terms of a breakeven, right now, we see -- we have a pretty attractive hedging program that's protecting, giving us a nice floor to work with. So on 2020, Q2, we see a breakeven into the $30 per barrel range before we have to pull back on the capital. So we're hedging to support the capital, to support the dividend, and we see a very attractive runway here as we go forward.

Yes. And, Kalei, this is Shawn. If I could add, speaking to our inventory that Francisco was talking about, I think, a notable change that we've seen lately that's doing really well is drilling more horizontal wells. That's a little bit different than we've done from the past, and we're seeing really performance there. And when we talk about horizontals in this regard, these are unstimulated because the quality of the rock in California is so good. So we're able to drill these wells, target some horizontal areas in the reservoir, and we're able to be more efficient with our capital dollars going forward.

I appreciate that. Maybe if you could just hit the maintenance capital spending level. And I'll throw a twist on this. What do you say to those that argue that it's going to take longer to stabilize due to the inconsistent spending in the past several years and the long lead time between spending and the production response and add to the fact that we haven't seen production hold flat for a sustained period of time?

Yes. I mean, I think the evidence, Kalei, is this year, 3 consecutive quarters. I understand your point. You need to have multiple quarters, but this year has been a really exceptional year from an operating perspective, where we're holding production flat with lower capital, we're below $200 million to hold it flat. I mean, we will guide to a higher number next year. Just to be clear, we're seeing about $275 million, and that is only to clarify the point to hold oil production. So we do see this year as being a year where we had a good backlog of wells we can return back to production. Next year, we'll go more into a kind of a drilling, building that wedge over time to get back to that -- to maintain their production.

But the way to think about conventional assets, in CRC assets, I understand your point that it's -- you don't have the shale production that immediately comes in. But you get on the treadmill. If you're chasing those barrels, then you cannot stop production. For us, it's like a slow rising tide. If we continue putting dollars toward in both OpEx and CapEx and OpEx is a very important tool that we used to invest in getting production out of the ground. If we have a sustained level of investment, what you see is one of the best decline, sort of one of the lowest declines in the industry. So you're in the low teens, say, 10% to 15% decline, and that allows you to project the business that's very sustainable and has high confidence in those cash flows over time.

So yes, it's a different model. We kind of have to reeducate the market as to how conventional assets work. It's less about drilling and completion. It's more about maintaining reservoir pressure and putting dollars to work there. But that also does allow us to the business without worrying about, okay, if prices drop and we have to back away the drilling rigs, then the production goes away. So it gives us a lot of confidence to plan forward.

So, Kalei, this is Mac. Let me say it this way, we believe in what we're doing and the way that we build credibility. I said this during the high-yield offering that we did earlier this year, set it during a strategy, and say it each quarter. We're going to build that credibility one quarter at a time. We believe that we have the inventory. We have the low decline. We have the capital discipline, and that's what we're going to execute on.

I want to pick up on your comment about hedging. I think as you stated, CRC's balance sheet is in the best position that it's ever been in. So I'm wondering on the philosophy to hedge, why do it? Is it to fund the growth in low-carbon or to fund the drilling program? What's the strategy behind it?

Yes. Sure. It's a good question. And it's -- first, let me try to parse some things, if I may. If you look at the hedging and the mark-to-market that is flowing through the income statement and the hedging, the losses that we've seen to date that we're going to realize cash this year as well as the forward mark-to-market losses, those are almost entirely -- as I'm stating as of 09/30, those are almost entirely associated, what I'll call, legacy hedges that were enacted before. The trade dates were all before 12/31 2020, and they were a requirement at that point in time as we exited bankruptcy to meet -- they were a requirement by the RBL.

If you look at the hedging that we've done since then, which I think is more applicable to your question, it's effectively as of 09/30 at the market. I know there's been some write-ups, but there are some differences on the shaping of our hedges and when they're heard, etc. They're effectively at market or minimally out of the money. But why do we enter into those hedges? So we've done a couple of things. We've rolled up the strike price on the puts for next year so that we have a higher floor that's to protect downside.

Without getting into a view on commodity, we think that that's prudent management to stabilize cash flows that allows us to have longer rig contracts, more stable production, more stable investment in production. It also provides stable cash flows. And this is not 100%. I mean, if you ever look at it, it's not 100%, and we hedge up to 85% -- can hedge up to 85% of our crude production, but that's only 75% of our revenues. We still have NGLs and natural gas revenues. So the hedging philosophy is to provide coverage for things like doing the carbon management, reinvesting in the business, adding a dividend, we have low-decline assets, but it basically helps us smooth our investment horizon over a longer period of time.

That's perfect. If I could sneak one more in, and this one is on Cal Capture. My understanding was that the FEED study was completed in the summer. So I'm wondering what's standing between you and FID on that project?

Yes. So the FEED study, we're still -- there's some things that had to go into it that we're working through on owners costs, et cetera, and we've asked to take a second look at the cost, and we've gone through with, I'll call it a 0.05 pencil or something. We went through it. We gave it back to the engineers said, go back and refine the cost estimates -- sharpen our pencil, I guess, is the phrase I was looking for. So we're working through that. Our views are, there are a couple of things associated with that. Because just everyone, I think, pretty much understands, but just for sake of clarity, 1/3 of the power plant is used for hydrocarbon production. The other 2/3 goes out to market on the California ISO, okay?

So right now as we understand the way the rules are written, our interpretation is that only 1/3 of the carbon capture from the plant is LCFS pathway eligible. And so now it still is at some levels of enhanced oil recovery that would be associated with it. You start to get the economics that could make sense. However, there are some regulatory changes. Right now, there is no avoidance of greenhouse gas emissions for capturing CO2 off of combined cycles in California. We think that, that will change over time. And if you did that right now, and it'll change over time, we think regulations will eventually get there because it's necessary to have combined cycles on the grid. And those combined cycles need to have an incentive to have carbon sequester. That's the only way basically to have a combined cycle, you can't do it unless you're using hydrogen as a fuel, which is a whole another ball game. You're still going to get rid of the CO2.

So we think that there's a movement in that direction. And if we were to offset greenhouse gas emissions for the full lot of the emissions by sequestering that CO2, right now, those allowances are trading around $30, $32 a ton. And so because it produces roughly 2 million tons, you start -- 2 million tonnes from the power plant, you start to add to the economic returns on Cal Capture. So when you ask a question about FEED study where we're finding it, when you ask about getting to FID, I'd say we're ways away, and we need to see some regulatory changes, but we continue to think that it is coming towards us, and that is a project that we continue to invest, I'll call it, early-stage development dollars.

Our next question today comes from Ray Deacon of Petro Lotus.

My question was on the Elk Hills Power Plant, and how much of the gas is supplied from the Elk Hills field. And would you like to put your hands on more gas resources? And is that possible?

It's effectively 100% sourced. I mean you could talk about -- it's 100% sourced, Ray. And the other thing that I would tell you, just as when we look at it, so you probably see our -- we're being very effective on a cost discipline standpoint from -- on non-energy operating expenses, but the energy costs go up. And that's because when we look at that as a floating price of energy, whether it be in the steam generators or whether they be in the gas to supply the power plants. But we are a net gas producer. We generate roughly 60 BCF of gas a year, and we consume 30 BCF of gas a year. So again, give or take. I mean -- and so that's why we had the slide in there that shows the fourth quarter sensitivity to gas. So we're a net gas producer, but 100%, give or take, for the most part, is behind the bond in our field.

In your own field. Got it. And just one more. I had read that California was going to shut in a fairly big nuclear plant this year. And I was just wondering, do you think the gas market could get even tighter from here where we're now?

It's hard to say. I think that if you look at -- if the expectation that the plant is going to be shut down, that somewhat makes its way into the market. But, Jay?

Yes, Ray, I mean the more incremental generation (inaudible), the more support you need in the form of reliable resources. So yes, there's a concern that more gas generation will be needed to support that incremental gen from the [real base]. So if that's the case, gas prices could be [well there].

Our final question today comes from Eric Seeve with GoldenTree.

I guess, wondering where you guys really blew the cover off the ball was on the natural gas trading and on electricity, where gross profit was well above what you guys have guided to historically for those businesses. Can you maybe level set and just give a sort of updated view on what we should expect for profitability from those areas going forward?

So look, with natural gas prices higher, obviously, if I'm going to get into an electricity term, if we beat the market heat rate with the heat rate of our unit, our unit can expand and expand our margins by dispatching into the market with higher gas prices. And so our electricity revenues have been higher. There's been some higher demand obviously. There's -- hydro has been a bit deplenished here. It comes from the north. So there's been increased demand of the unit, and so increased profits and increased spreads or margins, if you will, and that's what's contributed to that.

And then as far as gas, we've just had opportunities to move gas around as we have several transport agreements, and we've been able to optimize that better. We generally think that Jay and the team are going to do a good job, but sometimes not everything is repeatable. But right now, as we look forward, energy margins, that being the electricity that's being sold into the future remains strong. Anything you want to add, Jay?

No, I think we had one or two things changed in the California gas market in the last 30 days. We said the lease-up Canyon capacity had moved up from 34 BCF to nearly 42. So that should be -- Winfield should be a stabilizing element and maybe a depressing element on prices, we'll see. The second thing is, we found a major line gas be restored to greater use. It's about 800,000 MMBtu per day of capacity we didn't have before. I think we've seen the market receive that very well. Unfortunately, the producer, the response has been lower gas prices. California has got a unique circumstance. We've got a limited number -- a limited amount of gas supply. We've got a limited amount of gas storage, but our needs from a power perspective, tend to be hinged on gas to read those incremental needs. So it's likely this will be a volatile market for both gas and power for some time to come.

Eric, I mean, I think what Jay in obviously watching the market, there were some things that made the market tighter. There have been a couple of things announced that should relieve the market a bit. I think time will tell. I think that as we go through this, there was an interesting report that came out recently, and I think the title was something to the effect of the turbulence of the energy transition. And we, I think, in California are perhaps at the pinnacle of that or at the forefront, whatever the right thing with a tip of the spear, mix metaphors. But we're seeing it as the state moves through this energy transition that's creating this volatility. So it's really tough to predict what will happen in the years to come other than continued volatility. So with that, let me just say thanks for everyone's interest in CRC, and have a good Veteran's Day.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.