California Resources Corp

NYSE:CRC

Earnings Call Analysis

Strong Financial Performance and Strategic Growth Initiatives

California Resources Corporation reported $139 million in adjusted EBITDAX and $63 million in free cash flow in Q2, driven by strong oil sales and improved margins. The Aera merger has doubled production volumes and enhanced cash flow reliability. The company achieved $60 million in interest expense savings by refinancing debts. Looking ahead, CRC expects $235 million in total synergies and forecasts its 2024 adjusted EBITDAX to be around $1 billion, with additional free cash flow doubling. CRC continues to prioritize shareholder returns and sustainability with ongoing investments in carbon management projects.

Solid Financial Performance and Increased Shareholder Returns

California Resources Corporation (CRC) showcased strong financial results in the second quarter, driven by excellent oil sales that exceeded expectations. They generated $139 million in adjusted EBITDAX and delivered $63 million in free cash flow. The company returned $57 million to shareholders through $35 million in share buybacks and $22 million in dividends, summing up to 90% of their quarterly free cash flow. CRC anticipates their cash flow and free cash flow to more than double in the second half of 2024 due to the increased scale and strength of their business post-merger.

Strategic Merger with Aera

The acquisition of Aera Energy added significant value to CRC, doubling their daily production volumes and enhancing cash flow stability. By refinancing Aera's debt with $600 million of new unsecured notes at better rates, CRC achieved $60 million in annual interest expense savings. They predict a total of $235 million in synergies, expecting $30 million to reflect in the second half of 2024, with the rest in 2025 and beyond. The merger has strengthened CRC's financial foundation, enabling greater operational efficiencies and improved debt management .

Enhanced Guidance and Future Prospects

Looking ahead, CRC expects their adjusted EBITDAX to reach around $1 billion for 2024. They have a robust hedge book to manage revenue irrespective of volatile oil prices and have substantial hedges secured for 2025 and 2026. The free cash flow generated will support both the core and Carbon TerraVault (CTV) businesses, service their debt, and prioritize shareholder returns. The company is also focused on maintaining net leverage at 0.5 turns and plans to use excess cash for strategic buybacks and potential debt repayments .

Carbon Management and Sustainability Initiatives

CRC continues to lead in sustainability efforts, expanding its carbon management portfolio through several initiatives. They are actively pursuing various Carbon Dioxide Management Agreements (CDMAs) and have submitted a permit for a new 102 million metric tons CO2 reservoir, CTV VI. This project, along with others under review, positions CRC as a key player in California's carbon neutrality goals. The company aims to start injecting CO2 by the end of 2025, advancing their commitment to decarbonization .

Focus on Data Center Growth

CRC is exploring opportunities to support the growing demand for data centers in California. Their assets, especially the Elk Hills complex, are well-positioned to meet the requirements for large plots of land, reliable power infrastructure, and natural gas. They see significant potential in providing carbon-free power solutions to data centers, aligning with California’s Net Zero ambitions. CRC's strategy includes leveraging their resources for developing baseload power, which is crucial for the continuous operation of data centers .

Operational Excellence and Enhancements

CRC has demonstrated operational excellence through strategic connections and infrastructural advancements post-merger. For instance, they connected their largest fields in the San Joaquin Basin to improve natural gas deliverability, thus optimizing steam generation and reducing fuel costs. They have also implemented AI technology for better well performance and reduced costs in well maintenance, reflecting their commitment to operational efficiencies and cost management .

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the California Resources Corporation Second Quarter 2024 Conference Call. [Operator Instructions] And please note that this event is being recorded.

At this time, I would now like to turn the conference over to Joanna Park, Vice President of Investor Relations and Treasury. Please go ahead.

[Joanna Park, executive]

Good morning, and welcome to California Resources Corporation's second quarter conference call. This is our first call following the closing of our Aera merger, and we are excited to share our progress.

Prepared comments today will come from our CEO, Francisco Leon; and our CFO, Nelly Molina. Following their remarks, we will be available to take your questions. With us on the call, we also have other members of our senior leadership team.

By now, I hope you have had a chance to review our earnings release and our supplemental slides. We have 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.

Today, we will be making some forward-looking statements based on current expectations. Actual results may differ due to factors described in our earnings release and in our periodic SEC filings.

Thank you for joining us today. I will now turn the call over to Francisco.

[Francisco Leon, executive]

Thanks, Joanna, and welcome, everyone. We are incredibly excited about the road ahead and the value creation levers we have for existing and future shareholders. CRC is a markedly stronger company today, and we're demonstrating what it means to be a different kind of energy company.

Before discussing our second quarter financial and operating highlights, I want to spend a few minutes outlining the strength of our business strategy. We are committed to generating value for shareholders, and we do that by increasing our company's cash flow per share. Despite California permitting headwinds, our focus on improving margins, combined with our strong and consistent share repurchase program, resulted in mid-teens cash flow per share growth from 2021 to 2023.

With the closing of the Aera merger, we again are targeting to grow cash flow per share in 2024. Importantly, we achieved this 4-year growth without sacrificing our balance sheet strength. As we integrate with Aera, we will deliver our synergy targets in the next 15 months, as we head to an improved permitting backdrop by the second half of next year.

Recent economic developments have provided a riskier outlook for the domestic and global economy, placing greater importance on sustainability of earnings. Our low-decline assets, strong hedge book and cash flow capability, supported by a strong balance sheet, provide us with a significant fortress in any volatile environment.

The Aera transaction adds improved cash flow capacity and scale. And so, let me take a few minutes to discuss the merits of the Aera deal. We expanded our conventional energy business, improving the reliability of cash flows and enhanced our growing carbon management business to decarbonize California. We created operational scale and strengthened the durability of our business. Our daily production volumes doubled. California needs oil, and we will be here to provide it. The Aera transaction also increased our average NRIs. And today, our fields deliver 90% average net revenue interest. When you compare this to the Permian, where average NRIs are less than 80%, this is an advantage that boosts our profitability.

We're also capturing meaningful cost savings and see more synergies than originally forecasted. We now expect $235 million in total synergies, which reflect $60 million of savings achieved with the refinancing of Aera's debt and $25 million of additional operational synergies. We expect to capture these run rate savings over the next 15 months to improve our bottom line.

Our cash flow forecast is expected to more than double from where it would have been on a stand-alone basis and has led us to increase our dividend per share today by 25%, as we continue to consistently return more cash to shareholders.

Lastly, CRC is a sustainability leader in California, and we operate our business the right way. Today, we have more direct control of in-field emissions and more capacity to accelerate the decarbonization of our portfolio in California's emissions due to the advantage [ in unequal ] location of our assets.

Over the last 5 weeks, since the closing of the merger, we have already made great strides. We are executing on our opportunities that will optimize our field operations, combining infrastructure and leveraging our combined scale to develop more cost-efficient supply chains. As an example, our teams already connected our 2 largest fields in the San Joaquin Basin to improve and expand natural gas deliverability. The interconnect allows CRC to take natural gas from our Elk Hills field to Belridge for use in steamflood operations. This connection will provide an additional outlet for Elk Hills gas during maintenance activities at our midstream infrastructure in Elk Hills and will benefit Belridge by lowering fuel costs for steam generation for EOR.

Another early win is the streamlining of well monitoring activity through the nearby Belridge control facility. Aera made dedicated investments in this area and applied AI technology to improve well performance and uptime with fewer staff. We are adopting their best practices and optimizing nearby satellite fields to benefit from more efficient well surveillance efforts across a broader base.

Similarly, across the well service value chain, we are seeing early gains from vertical integration of services, resulting in lower cost of our well maintenance and P&A activities. These examples highlight the strong industrial logic behind the merger. The proximity of our neighboring fields position us to find the most synergies out of this powerful combination, and we're just only getting started.

On the carbon management front, we submitted another vault for permitting to the EPA for a 102 million metric tons CO2 reservoir in Central California. This will be CTV VI. As a reminder, we now have over 300 million tons under permit review. Like the other reservoirs, CTV VI is centrally located near major emission regions in California.

In terms of execution, we're targeting the receipt of California's first Class VI EPA permit and the FID of our cryogenic gas plant CCS project by year-end. Our goal is to inject CO2 into CTV I before the end of 2025.

From a greenfield emissions perspective, CTV expanded our storage-only CDMA with NLC Energy to 430,000 metric tons per annum of CO2 emissions. This project is slated for early 2028. We now have nearly 3 million metric tons per annum of CO2 projects under consideration throughout the state. You can find all the details in our CTV update release issued today.

Now, I would like to move to another important opportunity for us, and that is to support the growth of data centers to service California customers, while aligning with California Net Zero ambitions in what we refer to as the Carbon Valley, where Silicon Valley and the Central Valley meat. CTV's assets are uniquely positioned in the heart of a state that is home to 2 of the top 10 data center markets in the U.S., Silicon Valley and Los Angeles. We offer viable solutions for the demands of the tech industry today and a solid runway to meet the needs of tomorrow.

First, we can provide data centers with the key ingredients they need to operate: large plots of land, access to fiber networks, water, power infrastructure, natural gas and related interconnections. Our Elk Hills complex, for example, is in the sweet spot and can meet the data center needs and provide accelerated time-to-market benefits that other potential competitors simply cannot match.

Our second advantage is that we can utilize our resources and energy expertise to support the development of carbon-free baseload power before the end of the decade. California has few in-state dispatchable sources, and we believe retrofitting combined cycle natural gas with CCS is a solution that delivers both the market needs of low emission and reliable power. [ Alternatively ], our 320 million metric tons of pore space throughout the state to support the decarbonization of over 2 gigawatts of new or alternative power to service co-locators and big tech alike.

CTV's offerings align with the state's ambitious carbon neutrality goals without exacerbating power shortages or pressuring power prices in California, which are already among the highest in the nation.

With that, I'll hand it over to Nelly.

[Manuela Molina, executive]

Thanks, Francisco. Our second quarter financial results were solid, extending our strong track record of performance. Free cash flow in the quarter reflected strong oil sales, which were higher than we anticipated. Our earnings were in line with expectations, and we continued to strengthen our capital structure, adding deeper liquidity with an expanded credit facility. All of this was done in combination with higher cash returns to shareholders.

Let me summarize our results for the second quarter. Our business generated $139 million in adjusted EBITDAX and delivered $63 million in free cash flow. Results were driven by consistent base production from our low-decline assets with total volumes in line and oil production at the high end of expectations.

Second quarter production averaged 76,000 barrels of oil equivalent per day and oil averaged 47,000 barrels per day, above the midpoint of our quarterly oil guide. Our realized oil price in the quarter was $81.29 per barrel after hedges, or 96% of Brent. We run a 1-rig program throughout the quarter. Costs and expenses were on average in line and reflect our recent efforts to enhance margins.

One of the largest validation of synergies was demonstrated when we refinanced all of Aera's outstanding long-term debt at better rates. We issued $600 million of new unsecured notes with a coupon 625 basis points below Aera's legacy second lien loan. This reduced the annual interest expense by about $60 million.

During the quarter, we returned $57 million to shareholders, including $35 million in share buybacks and $22 million in dividends, or 90% of our quarterly free cash flow. Year-to-date, we have returned $136 million to shareholders.

As part of the merger, we also improved our liquidity position by increasing our borrowing base to $1.5 billion and [indiscernible] commitments to $1.1 billion. At merger close, we used the available cash on hand to repay $990 million of Aera's outstanding debt, transaction costs and financing fees, leaving CRC with roughly $1 billion of liquidity.

Turning now to our guidance for the second half of 2024, and building on the $60 million of interest expense savings mentioned earlier, we now expect $235 million in total synergies. We anticipate approximately $30 million will be reflected in the second half of 2024 results and the rest in 2025 and beyond. As Francisco mentioned, Aera's and CRC's assets are interconnected, and we believe there will be additional synergies that can be actioned in the near future.

Looking to the second half of 2024, we expect our cash flow and free cash flow to more than double due to the increased scale, strength of our business and our ability to enhance margins through synergies and operational efficiencies. We also expect our 2024 adjusted EBITDAX to be around $1 billion, as the business builds momentum into 2025. We will continue to have merger-related costs, which include transaction, integration and cost to achieve synergies that will be reflected in other operating expenses and which are non-recurrent in nature.

I would like to remind you about our hedge book. No matter where prices may move for the balance of the year and through 2025, we have managed our hedge book to provide the revenues necessary to: one, invest in both the core and CTV businesses; two, service our debt; and three, prioritize shareholder returns, including dividends and share buybacks. In terms of 2026, we have significant hedges in place for that year, which, depending upon the size of our drilling program, leave us in the same spot. The capital needs for our drilling program will ultimately be heavily influenced by, among other factors, prevailing market price.

We are committed to preserving a solid balance sheet and believe we have the financial flexibility to deliver on our strategic objectives.

With that, I'll turn it back to Francisco.

[Francisco Leon, executive]

We're excited to execute on our strategy across a platform that is now bigger and better. Our hedge book, durable cash flows and balance sheet flexibility provide business stability through market volatility.

Moving forward, we will have 3 primary areas of focus. First, we will drive our business decisions to deliver cash flow per share growth and strong returns to shareholders, while preserving a strong balance sheet. Second, we will continue to drive operational efficiencies and execute on $235 million of operational and financial synergies that will improve the business cost structure. And finally, we will continue to expand our California leading carbon management platform through new CDMAs and permit applications to offer sustainable energy solutions to existing and developing industries to support California's Net Zero goals.

We truly are a different kind of energy company and look forward to unlocking the value of our expanded enterprise for the benefit of our shareholders and our fellow Californians.

And with that, we can now open the line for questions. Operator?

[Operator]

[Operator Instructions] Our first question today will come from Scott Hanold with RBC.

[Scott Hanold, analyst]

It looks like the CTV assets are squarely positioned for this carbon-free data center AI demand opportunity. I know it's early, but when you look at the economics of this, how does that compare with some of the other prior CTV projects you're evaluating? And also, as you think about the different power solutions to utilize for these data centers, I know you talked about the combined cycle kind of facilities, but are there other options? And does that impact the economics?

[Francisco Leon, executive]

Scott, yes, thanks for the question. So yes, this is -- if you go to our slide deck today, we highlight the location of our reservoirs that we've been permitting now for over 2 years in the northern part of California. So this has been a long time build and execution from our team to get us to the right areas around the state where we can service all these potential emitters. So we're excited about the location of these Northern reservoirs. You can see it on the map. There's been a lot of questions as we have built our CTV strategy around where the emission is going to come from. And I think that should clear that we're targeting the Bay Area, San Francisco, Sacramento, where a lot of the existing hard-to-abate sectors of emissions are there. So we like the positioning there.

We also are looking at this data center growth with a lot of interest, as these older power plants that have been in service for a long time are going to be critical to attracting and retaining data centers in California. Data centers need 24/7 baseload power. It's a race to get to market first. Time-to-market is critical. So having existing infrastructure is absolutely going to be key. The nice thing is, with CTV, we offer not only the time-to-market opportunity, but we have an ability to bring a decarbonized power generation into the fold that also meets the other criteria.

As we move up north, and really, the strength of our business there is in the pore space availability to sequester emissions. We will look for partnerships around these existing power plants. There will be an opportunity to develop other technologies like fuel cells. Geothermal will also come into play. And those would be important, depending on what data centers ultimately want to power their AI. I don't foresee any changes to the type curve. I would say, very confident that we have the right pricing for storage-only projects. And what you're seeing here is more of the market development on both the emission side and also on the -- who is going to consume that power for future growth. So, no changes that I would say coming in our type curve, feel very good about our positioning and how we're aligned to accommodate this incremental power that will come from data centers.

[Scott Hanold, analyst]

Appreciate that color. And then, my next question is going to be on the oil and gas business. And as you kind of think forward into 2025, is the -- you now have a combined asset base with Aera. Can you talk about -- a little bit about how do you see activity on the combined basis? Like, where is it going to be focused on? And where are we at with getting oil and gas permits? I know you're all running a dual path, but can you remind us and refresh us on where we're at that gives you confidence in getting to more of a maintenance mode in 2H '25?

[Francisco Leon, executive]

Yes, for sure. So we're confident in our 1-rig inventory that we talked about before in terms of new wells. But these assets really -- it's about workovers and sidetracks. That's the bread and butter of our assets and Aera's assets as well. And so, we're able to, with 1-rig program running between the 2 assets, workovers and sidetracks, we should be able to deliver that mid-single-digit decline, even with no incremental permits. So, we feel good about the quality of the assets, the low decline and the ability to work over all their wellbores and go to different zones for incremental production. So that's the way ultimately this business runs. And now, to get to a steady state of stay flat, which is ultimately our objective is to keep production flat and keep that stability in the cash flows. We are -- we haven't really changed the timeline. We still see the second half of 2025 as the point in time where we have that line of sight to a path to getting permits back again in California. So, that hasn't changed. We still are working towards that timeline, working multiple alternatives, as we talked about before. But again, this company runs very well, as you saw with our results year-to-date, with only a 2% decline during the period. These assets run really well with just the blocking and tackling and doing surveillance and doing -- and just focusing on the base production, right? That's the great thing about the assets that we own.

[Operator]

And our next question will come from Kalei Akamine with Bank of America.

[Kaleinoheaokealaula Akamine, analyst]

I've got a follow-up there on the big thematic on data centers. I think there's no question that there's a bigger data center thematic out there, and guys on my side are obviously trying to figure out what that means for businesses like yours. Maybe at a base level, we can agree that it's positive for the gas price. I guess, where I'm a little bit less clear is what it means for volumes. So, as you think about the potential outcomes of what data centers mean for your business, is there sort of a scenario that clearly drives the volume growth in your business as a response to price?

[Francisco Leon, executive]

So, yes, as a reminder, we -- CRC has about 80% of the natural gas production in the state. The rest of it, we import from other states. So, are there scenarios of growth? Absolutely. You have to think -- if you look at the growth profile of data centers, and then you go to, okay, well, these data centers are not going to rely on renewables and intermittent power, you need to come back to baseload. California doesn't really have a lot of options. We're down to 1 nuclear plant. Hydro tends to be variable, depending on the rain. So you look at this infrastructure that's already in place with all these independent power producers, which are natural gas power generation, which are, in some cases, not fully utilized today, the plan should be in California to maximize that utilization. And if you can put the decarbonization plans that we have in place, then you can really solve for multiple variables. And that's what has us really excited, right? It's the decarbonization, which we're very committed to do, but you also bring the reliability with this infrastructure and affordability by having local production. As we've highlighted before, we don't feel like all barrels or all Mcf are created equal. Local production, where you can certify through third parties that you're low methane emissions, like we did with MiQ, or that it's responsibly sourced across the board, should matter to the consumer where their energy comes from. So if you start thinking about data center consumption needs, if you start looking at a path towards having preference to local production, then you start really getting excited about our natural gas position and the ability to service a lot of these power plants. So, yes, there's definitely scenarios out there. Things yet have to come, and we're a little bit in front of the market. But I like our assets and how positioned we are from just a production standpoint and an infrastructure point as well.

[Kaleinoheaokealaula Akamine, analyst]

I guess, when you think about it, do you see a lot of behind-the-meter sort of opportunities for your natural gas and your power?

[Francisco Leon, executive]

Yes, absolutely. I think that's something that we're really focused on. There's -- we have this power plant at Elk Hills, 550 megawatt, and we added more power with the Aera transaction. So we're above 800 megawatts combined. And the -- right now, if you look at the trading multiple of CRC, we trade at a discount to PDP. And we have a critical asset that has a lot of value. We participate in a very attractive capacity program right now, but there's no value recognition for this asset. So we're going to work towards -- whether it's data centers or other potential partners, we're going to look to unlock that value of the power plant, and you can do that through contract price and duration. And we're focused on that, and that's where the data center opportunity kind of brings a growing and exciting industry into kind of the forefront of what we're thinking. So there could be ways to unlock that value in that power plant. As you know, we use about 1/3 of that power for self consumption. That goes to -- the rest of it gets sold into the grid. So those behind-the-meter opportunities will be important to unlock over time.

[Kaleinoheaokealaula Akamine, analyst]

Got it. There's a lot changing in the long term, for sure. It's a very interesting setup. I guess my follow-up is on the nearer-term outlook for California gas. I think some of us were surprised to see SoCal under Hub in the second quarter, but that premium seems to have returned. As we sort of head into '25, that premium looks a little bit more durable, as you have Mexican LNG and perhaps siphoning some away -- some of that California imports away. But there is a lot of things happening. California renewables are growing. So, as you sort of run your scenarios for '25, how do you see the balances playing out?

[Francisco Leon, executive]

Sounds great, Kalei. So it's a great question on gas. So I'll turn it over to Jay here in a minute to cover the near-term impact. But yes, a reminder, just more macro and longer term first, California [ short gas ], we import a lot of the gas that we consume in state. As LNG projects get sanctioned and advanced, the gas will flow to great places where you can find better pricing. So that's why it's important to develop that local industry so that we can really provide that gas when the market needs it.

But the dynamics in terms of the short term, I'll let Jay speak to that.

[Jay Bys, executive]

Kalei, sorry about that. We had a little mishap here. Yes, your notation is correct. Q2, both the border and the Citygate traded below or near the screen, which is pretty unusual for the last couple or 3 years. The fact is, gas is going to go to where it's most valuable. And gas is making its way to California, particularly from the Permian, where its alternative market price would have been something close to 0 or negative, so like water is going to flow to the most attractive point. Going forward, I think you're already seeing what's going to happen. You're seeing a lot of this Permian gas gets stuck in the Rockies, for example, and unable to make it over to California today. So you're seeing differentials in price between California and, for example, the Rockies. I think you're going to see more and more of that next year. Again, we produce roughly 15% of the natural gas we consume in the state over time. That's not a good position to be in. Right now, it's great to have low-cost gas coming from somewhere else. But over time, we need to dictate our own fate.

[Operator]

And our next question will come from Betty Jiang with Barclays.

[Wei Jiang, analyst]

This is probably a data center question, but also related to CTV. So I want to ask about CalCapture project. It is a very meaningful project and it's in-house. These post-combustion projects are more capital intensive. So we'd love to understand the decision drivers around whether or not you will plan to move forward with that project. And how much of that is tied to signing a power purchase agreement with a buyer that are willing to pay out for low-carbon power?

[Francisco Leon, executive]

Betty, yes, so CalCapture, which is a -- putting a capture system on our Elk Hills power plant, so we really like the ability to control our own destiny and emissions behind the meter. We were looking for -- to provide a solution for the state that's going to require pipelines and that's going to ultimately bring the scalability to CTV. But in the meantime and until we get more -- better framework to retrofit pipelines, having those emissions behind the meter and with our power plants or steam generations is the way to bring forward the industry. So we feel good about the control points that we have.

As you mentioned, this is a natural gas combined cycle plant, low concentration of CO2. So if you look at the cost curve, it's going to be on the higher end of the sources that you can capture. So the value drivers that you need is ultimately good definition around the cost of the capture, and we've done multiple FEED studies now. So we have a good handle of how that -- how much that's going to cost. So you need to then bring in the revenue drivers around incentives, and that's a combination of federal and state incentives and also PPA from data centers, or ultimately, it doesn't have to be data centers, right? At the end of the day, what we're looking for is the right price point, where the consumer of that power not only recognizes the advantage of the power already being there, but also the ability to unlock a carbon-free power before the end of the decade. So I would say, we're kind of in that price discovery mode. We're trying to understand the value that, that can bring in terms of all the different elements to our strategy. And if we get -- we solve for all the right variables, I think this project will be a great one to bring forward. So we're not ready yet, but it's something that we're actively looking at, and we're growing in excitement around being able to do something at the Elk Hills power plant.

[Wei Jiang, analyst]

Got it. Very interesting. Look forward to that. And then my follow-up, more on the free -- uses of free cash flow. We are seeing quite a bit of free cash flow generation in 2024 -- this year and next year. And wondering what are the [ call ] on your cash maybe for the next several years? The only thing we see is there's that potential -- the 2026 maturity. Is that something that you want to preserve cash to pay off? Or as you start generating that meaningful free cash flow, that's more likely to come down to cash return via buyback?

[Francisco Leon, executive]

So yes, Betty, so we -- I guess, we have to look backwards to our track record as a company since 2021, and we've returned $894 million of cash to shareholders through a combination of dividends and buybacks. And we also were able to accumulate a significant amount of cash. So that's the business model. That's what CRC offers. It's the ability to generate a lot of cash and then aggressively return it back to shareholders. We are very comfortable with a fixed dividend model. We want to continue to offer that to our shareholders, and we like to have that as a growing fixed dividend model. This is the fourth consecutive year where we've grown that dividend. So that's a key part of our strategy. The share buybacks are important as well, in particular at levels where we're trading today. And as we wait for all these catalysts to unfold, it makes a lot of sense to us to buy back our shares at what we think is a meaningful discount, and that's where the discretionary piece ultimately comes from.

So I guess, the other point to raise on the buybacks, we no longer have effectively any restricted payment capacity on the buyback. So your question is super valid. It's about the -- what do we do with the cash? And you talked about the debt, the 2026s, what we said is we want to be at a 0.5 turn net leverage, and we're slightly above that. But we want to get to that target point quickly. And so, we'll look to preserve some cash to get there, or always look to be in the market if there's an opportunity to buy those bonds. As a reminder, the 2026s are callable at a little bit over [ 101 ], and then they step down to part next year. So it gives us some prepayability option. So we have the option to refinance prepay. But ultimately, we talk with our Board every quarter, and we decide what's the best use of that cash, and that's been buybacks [indiscernible] in the last few quarters. So we'll continue to preserve that optionality. It's a good place to be when you have cash. I would lock in the fixed dividend and then look for ways to buy more shares. And as we said, we're going to continue with our balancing strength. So we're watching the maturities and looking at that as well. So the nice thing is, as we wait for permits next year, we have that excess cash flow that we have multiple ways to put it to work in a very attractive way.

[Operator]

And our next question will come from Scott Gruber with Citigroup.

[Scott Gruber, analyst]

Francisco, turning back to the CalCapture project, what is the latest cost estimate for that project? And how would you think about funding it? And how long would it take to add [ capture in the ] plant, both in terms of permitting and construction?

[Francisco Leon, executive]

Yes, all great questions. We haven't provided information publicly yet because what I'd like to do is to present the full picture. And the full picture comes certainly on the cost and permitting side, but also on the revenue line. Once you have all those components, we can address your question, and then we can also look at different financing opportunities. We see a lot of appetite from private equity and growing support from traditional lending to deploy capital in projects like CalCapture that are decarbonizing existing infrastructure. So we feel good about where the direction of that business model is going. But we know, as I said earlier, we need to understand both the incentive packages and the long-term PPA around carbon-free power in order to make that decision, and we're still not there yet. We're still looking at doing the price discovery on that part of it. So what I would look for is an update that has a more comprehensive view of what we're going to do with timeline, with process permits, and ultimately, how do we -- can generate an attractive return on the project.

[Scott Gruber, analyst]

That's fair. We'll wait for the details. And now, I was curious if you had some more color on CTV VI. It's going to be your largest site once approved. Is that tied to a specific project that has been announced or maybe one that hasn't been announced? And I was looking at the anticipated time of EPA approval in 2027. Is that a bit longer, given the size? Are you just building in some conservatism there? So, just some more color on CTV VI.

[Francisco Leon, executive]

Scott, so, yes, absolutely. So let me start by saying I'm very pleased with the pipeline inventory that the CTV team has been building. As we talked -- when we started the strategy in 2021, we talked about having 1 billion metric tons of potential. So, having 300 million tons already in the queue for permitting in different areas, different type of reservoirs, in some assets that we own, some assets that we picked up over time, it's really truly a testament on how good this team really is in achieving our strategy. You can see, it's all there in the EPA information, but very few companies are able to show as much progress as we have. And we have more to go, right? And we continue to refine the permitting, get better at it and add land that has that pore space prospectivity as we go after the premium pore space in California.

As it relates to class -- to the CTV VI reservoir, I'll turn it to Chris to provide any additional details.

[Chris Gould, executive]

Yes. So CTV VI, if you look at the map, you can see that we essentially have some bookends, if you will, with our storage projects in the San Joaquin Basin in the south and then the Sacramento Basin in the north. And we use the description of Central California to describe CTV VI. So it's just that. It's in the middle, more in the middle of the state and essentially filling in across the Central Valley, where we can find the best intersection of high-quality, meaning high injection rates, combined with attractive acquisition costs and ease of execution going forward. This is the next step in that process. We like the area. It is -- I would anticipate that it will follow the same sort of timelines as you're seeing in the EPA tracker for CTV I through V. I don't think there's anything different about it that would cause it to go faster or slower, other than the fact that now that we've been through this and have this many permits through, we hope that overall, the timelines continue to compress at EPA, but there's nothing -- the size of the asset itself should not require a longer time frame to evaluate by EPA.

In terms of if it's associated with a particular project, part of the consideration for where we acquire pore space is just that, what are the addressable emissions in the local vicinity? And I would just say that without specifics, this asset has ample opportunities for both brownfield and greenfield emission sources.

[Operator]

And our next question will come from Kevin MacCurdy with Pickering Energy Partners.

[Kevin MacCurdy, analyst]

We appreciate all the details on the shareholder return. You mentioned that over the last several quarters, the Board found the buyback to be the most attractive use of free cash flow. My question is, what indicators are you looking at to make that decision? Is it an internal NAV or a recent share price dislocation? And do you have any flexibility to temporarily go above free cash flow if you saw a large dislocation?

[Francisco Leon, executive]

Yes. So the way we look at it, it's really a view on the intrinsic value of the business. And if you do -- and you can look at it from multiple, EBITDA, but we'd also like to look at the sum of the parts. And you have an integrated business that as you look at all the value drivers from a very stable, very valuable PDP, oil and gas wedge, and then you add on top of that the power generation cash flow that we're bringing in today, the prospects of the power generation in the future, you have the very high NRIs on our reservoirs, and then you start looking at the CTV optionality of bringing in this model forward and add on that prospectivity around data centers and the ability to monetize the Huntington Beach asset over time, you get to a value of the business that's meaningfully higher than where we are today. And that's what gives us confidence, as we're trading today below 4x EBITDA, that this company, just given its solid foundation today, cash generation ability, but ultimately, the catalysts start coming within the next 5 years, this is the right place to pour our capital to work in terms of returns.

As it relates to would we go over cash flow, we have. We've done it in prior quarters where we've actually distributed more than 100% of cash flow if we had some asset sales or some timing opportunities to be more aggressive. So we've done it before. And the plan is to return as much cash as we can to shareholders. So if the opportunity is there, we are not afraid to lean in.

[Kevin MacCurdy, analyst]

Great. And as a follow-up, we noticed that you increased your oil mix for the second half of the year, basically at 79%, which is effectively increasing your oil guide. What's driving that? Is that something you're seeing in the new Aera assets? Or is that something in your legacy assets?

[Francisco Leon, executive]

Yes, absolutely, that's the answer. If you contrast, the asset base is -- Aera is almost entirely oil. And the gas and NGLs will come from the CRC portfolio. The oil is Aera's. So yes, you should expect a higher oil weighting, and you should expect higher net revenue interest, as I already mentioned, and a nice portfolio of assets throughout the state that allows you to blend the crude, to get creative around how do we move things around. So -- but yes, ultimately, that's -- you have the higher oil weighing, given the Aera portfolio is almost exclusively oil.

[Operator]

And our next question will come from David Deckelbaum with TD Cowen.

[David Deckelbaum, analyst]

I'm curious -- just to follow up on some of the other questions around the return of capital, how did you arrive at the specific fixed dividend? And should we think of it, as it grows over time, as a ratio relative to free cash at a given long-term oil price?

[Francisco Leon, executive]

So we look at the fixed dividend in terms of how it compares to other E&P companies, to indices. Obviously, we're fighting for capital from investors and want to make sure we have a competitive yield on our dividend. These assets, given how low capital-intensive they are, really are really great for that fixed dividend growth over time. So we wanted to provide a cadence that's attractive and the growths are significant. And as we are leaning in and looking at synergies, we feel like the step-up is -- require a higher incremental change than we had in prior sessions where we were closer to 10%. But we want to provide a consistent fixed dividend, and we have the runway to be able to do that over time, again, given the quality of the assets and our focus on synergies to continue to find more cash to return to shareholders.

[David Deckelbaum, analyst]

I appreciate the color. It certainly looks like there's plenty of runway left there. I wanted to ask more on the AI data center thematic, but I think for the sake of that topic being covered, I'm curious just what you're observing around the current permitting environment pro forma now with Aera having closed? Where are most of your efforts sort of focused around those initiatives? Maybe you could update us on the balance of looking at state-level permits versus what you're seeing happening at the local Kern County level.

[Francisco Leon, executive]

Yes. So, as I mentioned before, the -- we see multiple alternatives to get permits back on track. Working with different agencies in Kern County, you have -- the county themselves can issue permits. The rest of the state is pretty much CalGEM, used to be called DOGGR, that ultimately issues a permit. And CalGEM has been going through a significant realignment of their organization, and that's the primary reason we see for some delays there. But we're having really good discussions around our permitting process. And ultimately, how we see this playing forward is much more field-specific permitting, so not what we have today or had a few years ago, which is county-wide permitting, I think going to more field-specific, which is much easier to define from a permitting standpoint, in fields where -- are 100% owned by the company will be where I see the path to getting those permits reinstated. So, as an example, we have a massive inventory in Elk Hills and Belridge. These are our 2 core fields. As I mentioned before, a lot of the work that we can do is to do workovers, and that's not just repair workovers. We can recomplete uphole, downhole. We can sidetrack wells, and we see a lot of opportunity to do that, and that's basically what we do today. But we also have a lot of new production that can come online with new wells. And those are fields that are entirely owned by CRC. Elk Hills is fee simple. Belridge is pretty much fee simple, minus a couple of percent points. So we have the ability to permit on lands that we own. There's no overlap with farmers and certainly no communities nearby, and we see those as the core of the activity on a go-forward basis. So we're working through the changes at the agencies, and we're working through -- to provide more -- much more of a stable regulatory pathway. And we feel we have a lot of good data and really good practices to be able to get back on track.

[Operator]

And our next question will come from Leo Mariani with ROTH.

[Leo Mariani, analyst]

I was hoping to dive a little bit more into some of the regulatory progress/initiatives in the state. Can you kind of talk about what the current state is of some of the new potential 3,200-foot setbacks that have been proposed? And then, additionally, has there been any real movement or update on the state's push to come up with some rules and regulations for new CO2 pipeline infrastructure?

[Francisco Leon, executive]

Leo, yes, regarding the setbacks, it's now a law to have 3,200 feet setbacks in the state. We've been working towards documenting the impact for 2 years. And there's really -- we were already at a place where we felt comfortable with the law going into effect, so no impact or very insignificant impact that we see on the CRC portfolio. There's also no impact to the Aera assets. Everything is really in Kern County, in rural areas, away from communities. So we just don't see any impact on setbacks on a go-forward basis. So we'll comply with the laws and have a lot of incremental inventory to drill within those limits, so no impact there.

In terms of the pipeline regulation, that's Senate Bill 905 that had a temporary moratorium on pipeline regulation for CO2, we see a lot of support. If you -- you can't have the State of California reach its targets -- decarbonization targets without a pipeline solution. It's just not going to get there. So, as we build our CTV business and we put the permits in place for pore space, that pipeline will ultimately drive a lot of the growth in the business for us. And so, where we feel very good about launching CTV and getting to first injection of CO2 by next year at Elk Hills with our cryogenic gas project, ultimately, the scalability of the business will depend on pipeline regulations coming to fruition. So what we see, like I said, I think the -- all the decision makers at the state level are aware that they need -- we need more support as an industry to launch these projects. And we're standing by to be able to put more capital to work and make these projects a reality. So the session in California just got started after the summer break. We still have a few weeks left. Optimistic that we can get some resolution there. But again, we're trying to highlight the [indiscernible] here to the state in terms of getting to their objectives, if we can unlock the value there on the pipe regulation.

[Leo Mariani, analyst]

Okay. Appreciate that. And I just wanted to jump over to the electric generation business. So my understanding was that you guys were getting roughly a $150 million payment from the state to kind of serve as a backup electric gen provider in case you folks are needed. When I look at your guidance for full year '24, you guys are estimating around $100 million in EBIT. So just trying to reconcile those numbers there. Are you expecting kind of a loss from the business kind of regular way and then you get this $150 million kind of on top, which gets you to the $100 million EBIT guide? Can you just kind of help me out with the concepts here on some of the numbers?

[Francisco Leon, executive]

Yes. So I think the short answer is, don't forget, we had a major turnaround -- a planned major turnaround early in the year, so the plant was offline for a period of time. And when you look at power generation costs, if the plant is not running, that means you're purchasing power from the grid. So there's an offset.

But I'll turn it to Jay to see if he wants to add more color.

[Jay Bys, executive]

Two pieces of the revenue stream, Leo. There's the energy sales stream and the RA capacity stream, which you kind of touched upon. For 2024, that RA, as we call it, resource adequacy revenue stream is approximately $104 million across the year. It will be closer to that $150 million figure, a little over that for calendar '25, so just to make sure we're comparing apples-to-apples. The energy contribution this year, given the prevailing pressure provided by intermittent resources, the energy piece is not as robust as it was last year. If we get a warm summer, if we get a cold winter, we expect that to change. But for the time being, right now, the capacity piece is the larger piece of the revenue stream on the power business.

[Operator]

And our next question will come from Noel Parks with Tuohy Brothers Investment Research.

[Noel Parks, analyst]

I just had a couple of questions. One of them, just to clarify -- I apologize if you talked on this -- touched on this already. So, on the Aera properties, just wondering, are there any sort of lingering land or lease issues on the Aera side where sequestration target areas are? I was just wondering, is there anything you need to clean up that's no longer held by production anymore, for instance, or may not be, but that is valuable for sequestration?

[Francisco Leon, executive]

One of the exciting things about the Aera transaction is that it allows us to expand our premium pore space near Bakersfield with 2 additions to the portfolio. One is the project that they call CarbonFrontier. That's in the EPA tracker that now we have inherited. And then, there's another property called [indiscernible] which is adjacent to Elk Hills, that we look to permit in the future. These are -- again, one of the big advantages to California is -- and California operators in general, but CRC is the best example, is our land position is really strong. We own a lot of the assets in fee simple. That means we own surface in all depths, all rights on those reservoirs. So the nice thing is Aera has the same feature in their assets. So there's always going to be small cleanup items here and there, but nothing of significance. We feel those projects are in really good shape with a strong permit submitted, and we look forward to taking it over and accelerating some of the emission capture in the Central Valley.

[Noel Parks, analyst]

Great. And another one on Aera. Did Aera have any partnerships in place similar to, for example, CTV and Brookfield that will persist now that the combination is closed? And I was wondering if there are any contractual issues, right of first refusal or anything out there hanging with other parties that might not be immediately [ impaired ]?

[Francisco Leon, executive]

No, nothing; no partnerships, no CDMAs on their acreage or capital commitments of any kind. So this would be assets that we would anticipate contributing to the partnership and working alongside with Brookfield to bring them forward. So we caught it at the right time, in my view, right? They were -- Aera was fast following CRC in terms of permitting, and we were faster on commercial and financing. So this is kind of a really good opportunity to bring projects forward by letting the CRC team, the CTV team shape how those reservoirs get filled.

[Operator]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Francisco Leon for any closing remarks.

[Francisco Leon, executive]

Thank you for joining us today. We'll be presenting at investor conferences in September. Lots to talk about, but we're looking forward to seeing you. Thanks.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines at this time.