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California Resources Corp
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Good afternoon, and welcome to the California Resources Corporation Third Quarter 2019 Conference Call. [Operator Instructions]. Please note today's event is being recorded.
I would now like to turn the conference over to Scott Espenshade. Please go ahead, sir.
Thank you. I'm Scott Espenshade, Senior Vice President, Investor Relations. Welcome to California Resources Corporation's Third Quarter 2019 Conference Call. Participating on today's call is Todd Stevens, President and Chief Executive Officer of CRC; and Mark Smith, Senior Executive Vice President and Chief Financial Officer; as well as several members of the CRC executive team.
I'd like to highlight that we have provided slides in our Investor Relations section on our website, www.crc.com. These slides provide additional insight into our operation and our third quarter results, plus additional information. Also, information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measure is available in the Investor Relations portion of our website and in our earnings release.
Today's conference call contains certain projections and other forward-looking statements within the meaning of federal security laws. These statements are subject to risks and uncertainties that may cause the actual results to differ from those expressed or implied in these statements. Additional information on factors that could cause results to differ is available in the company's 10-Q, which is being filed later today. We ask that you review it when available and the cautionary statement in our earnings release.
A replay and a transcript will be made available on our website following today's call and will be available for at least 30 days following the call. As a reminder, please have -- we have allotted similar time for Q&A at the end of our prepared remarks. We would ask that participants limit their question to a primary question and a follow-up.
I will now turn the call over to Todd.
Thank you, Scott and thank you to everyone for attending today's earnings call. First and foremost, I'd like to thank all of California's firefighters and first responders for their continued efforts to battle fires across our state. Turning to CRC, our large portfolio of low-decline conventional assets and significant inventory of projects with low capital intensity continue to uniquely position us for superior value creation even at lower commodity prices. I'd like to reiterate that we believe that the maintenance capital required to hold oil production flat will continue to be between $300 million and $400 million annually of internal drilling, completion and workover capital. With continued operational efficiencies and our recent organizational redesign, we expect maintenance capital to trend down from current levels.
Our sustained, strong, safety environmental record, combined with our deep geologic insight across 4 of California's distinct basins, continues to distinguish CRC as the operator of choice for our partners and state and local governments. We operate in a market that has a large thirst for our crude oil. CRC's native production provides a reliable base supply for refineries that import over 70% of their crude by tanker, with the large majority traveling from Saudi Arabia and its neighbors to the volatile Strait of Hormuz. As a result, we have achieved realizations averaging above the premium Brent benchmark for much of the year.
Our asset base supports a future business model predicated on reasonable growth and strong free cash flow. To get there, we will remain focused on strengthening the balance sheet to enhance our equity value.
In the third quarter of 2019, we saw many external events influence the market's opinions of the exploration and production sector, plus a wide range of perceptions on the 2020 petroleum market balance. While market uncertainty remains, CRC has continually received validation from external partners of our quality assets' strong realizations and operating expertise in this environment. At CRC, we remain laser focused on what is within our control, and that means continuing to show capital discipline and success in controlling the controllables.
Through these efforts, CRC again delivered consistent results. Third quarter results came in largely as expected, with production within our guidance range, and costs and margin at or better than anticipated. This led to free cash flow of $151 million in the quarter, and we are pleased to report additional progress in strengthening our balance sheet and improving our credit position.
Turning to our balance sheet. Our bank group reaffirmed our borrowing base of $2.3 billion, once again confirming the value of our predictable, diverse underlying reserves. This was in the face of the lowest-for-longest price deck we've seen since the spin. We're committed to strengthening and simplifying our balance sheet. As we take next steps to reduce our debt, we continue to follow an all-of-the-above approach in a disciplined and thoughtful manner. We are actively discussing multiple paths to achieve our balance sheet objectives, recognizing the first set of significant debt matures in 2021.
We're finding interest among prospective partners and to participate in developing a variety of our diverse assets, including producing properties, exploration, minerals and infrastructure. As we pursue these opportunities, we seek to maximize value from our asset sales and monetizations and optimize the use of proceeds to meet our key objective of strengthening the balance sheet.
We've continued to demonstrate our valuation fundamentals through several completed transactions this year. In May, we divested a 50% interest in our Lost Hills steamflood operation at a value of $88,000 per flowing barrel of oil. The transaction opened the door to more capital investment in that field by the new operator, and we will share in the added revenues through our retained working interest.
In August, we announced our third major development joint venture with Alpine, formerly known as our Colony joint venture, with our most favorable terms to date, including warrants at a $40 strike price.
We are proud of our safety and environmental record and our progress towards our 2030 sustainability goals for water recycling, renewables integration, methane emission reduction and carbon capture and sequestration that align with state goals.
I'd like to highlight a few milestones in the third quarter that are central to our long-term development plans. Most importantly, CRC received 22 safety awards in the quarter from the National Safety Council, displaying our continued diligence to make sure our workers return home safely each day. We surpassed our 2013 methane goal by cutting methane emissions from our operations by 60% between 2013 and 2018. The U.S. Department of Energy awarded CRC and the Electric Power Research Institute a grant for front-end engineering design study to retrofit our 550-megawatt Elk Hills power plant with carbon capture technology. Our team expects to capture CO2 produced by the plant, which will be injected into deep oil and gas formations for enhanced oil recovery and sequestration at Elk Hills. We believe capturing the plant CO2 for EOR has the potential to add well over 150 million barrels of oil equivalent of resources, reduce our need to acquire greenhouse gas allowances and, in turn, significantly lower cost. This is just one of the many opportunities available to us across our large asset portfolio.
We provided more details about our sustainability targets and projects in our recent voluntary report to the CDP, formerly known as the Carbon Disclosure Project. Last year, we received the CDP's second-highest score among U.S. independents, and we anticipate the 2019 scoring to be released in the coming months.
California's 2019 legislative year ended in September. Only a handful of bills were passed and signed that focus on the oil and gas sector. These bills mainly expand the duties of the state oil and gas regulators, require our regulators to reevaluate abandonment cost and indemnity bonds, and tighten leasing of state lands. We don't expect these bills to have a significant effect on CRC's production or project inventory, particularly given our integrated infrastructure under the state's leading standards and our comprehensive agreements governing our operations on state lands.
Several oil and gas bills garnered much media attention in 2019 but failed to advance. We believe they would face similar widespread and vocal opposition from labor and community groups who'll pursue it again the next year. Events over the past few months have further highlighted the susceptibility of California's energy supply and cost of living to both international turmoil and outages in the state's electrical grid. These events reinforce California's need to grow a balanced local supply of energy, including native oil and natural gas production, as well as renewable sources in order for it to serve affordability, reliability and resilience.
As we look toward 2020, we remain well situated with our drilling permit inventory. We continue to benefit from a balanced mix of production from diverse fields and are not dependent on any single drive mechanism or play type. Additionally, our production comes from minerals held by a variety of ownership types, with approximately 55% of our production from CRC-owned lands, 21% from private owners, 20% from state lands and 4% on federal lands. To put this in economic context, our Long Beach operation alone has provided nearly $5 billion to the state, L.A. County and the City of Long Beach over the past 15 years from operations on state lands in Long Beach.
We continue our constructive dialogue with our coalition partners to better California communities as we prepare for next year's legislative session.
In terms of our operational performance, CRC remains intensely focused on our efforts to control our controllables. Innovation of our operations and engineering teams has yielded what we believe will be significant sustained cost reductions and improved efficiencies. As a result, we will continue to review and refine our organizational design and have recently taken steps to reduce our head count. We believe that our actions will reduce our annual cash cost by about $50 million, helping us to sustain margins for debt reduction and value creation. To put this in context, we're now operating our assets with little over half the number of employees we have prior to the spin. We expect to see the impact of our recent cost reductions beginning in the fourth quarter.
Our 2019 capital investment program is focused on enhancing cash margins and at maximizing the value of our investment as we continue to strengthen our balance sheet while living within cash flow. We continue to apply our disciplined capital allocation process to ensure that we create the most value, relying on our internal VCI metrics to adjust quickly to market conditions and align our investments with an expected cash flow. To that end, we have currently reduced our CRC rigs to 2 and we expect to invest less than $60 million of total internally-funded capital in the fourth quarter, of which about 2/3 is expected to be drilling completion and workover capital. We also expect to operate 7 rigs on behalf of our joint ventures. As noted in our slides, joint venture investments to date have delivered gross production volumes in line with our expectations and should exit the year close to 12,000 BOE per day.
Our debt is trading at levels that provide a very compelling opportunity for us to reduce principal and associated interest expense. With our operating cash flow, we will continue to balance debt repurchases with investing in our resource base to drive value for our shareholders. I'm pleased our debt is near its lowest level since our spin, under $5 billion, which we reduced from a peak post-spin level of over $6.7 billion while remaining free cash flow positive for the year.
We see a risk-free investment opportunity in our debt with a VCI in excess of 2 based on the dislocation within current solid fundamental -- commodity market fundamentals and the pricing of our publicly-traded debt. We will approach 2020 with the same mindset, living within cash flow and balancing open market purchases of our deeply discounted debt, with investment in our assets.
We will continue to utilize our joint venture capital to flex our spending, de-risk our portfolio and bring production forward. We will summarize our 2020 capital plan in our next earnings call. As we have stated in prior calls, we plan to utilize 10% to 15% of discretionary cash flow to enhance the balance sheet and advance our deleveraging.
Through the first three quarters of 2019, we repurchased $229 million in face value of second lien notes for $149 million in cash. We posted solid cash flow during the first 3 quarters of 2019, with EBITDAX totaling $834 million, an increase of 4% over the prior year period. We also delivered $195 million of free cash flow year-to-date after internally-funded capital, a record for CRC. I should also note this is over 40% of our current market cap.
Year-to-date, we have benefited from higher crude oil realizations which have averaged over 100% of Brent. As you know, we receive attractive Brent-based pricing as waterborne crude sets the price for the California market. Looking ahead to the impact of IMO 2020, we expect CRC's price realizations to remain strong relative to similar worldwide grade of crude. Demand for California production is steady, and CRC's portfolio of crude is well positioned against global alternatives. Of interest in California, CRC's average sulfur content is competitive compared to that of crude imported to California. As other in-state production sources decline, the demand for our California crude remains high and our refinery runs remains stable. At the same time, we are thoughtfully putting crude oil hedges in place to underpin our cash flow opportunistically through this cycle.
For more details on our third quarter performance, I will now turn the call over to Mark.
Thanks, Todd. CRC's high-quality, low-decline asset base has continued to perform in line with our expectations through the first 3 quarters of 2019. Thanks to the hard work of our teams and organizational efficiencies, we reduced overall cost while strengthening our balance sheet through significant debt repurchases, all while keeping production within guidance. We secured our 9th credit amendment, granting us more flexibility for potential royalty transactions. As Todd noted, we also received our 8th straight affirmation of our $2.3 billion borrowing base in a semiannual redetermination by our bank group on November 1.
Balance sheet strengthening continues to be a top priority. The third quarter marks the 6th consecutive quarter that we repurchased our second lien notes and marks the largest repurchases in a single quarter-to-date. During the quarter, we repurchased $153 million in face value for $90 million in cash, for a discount of 41%. This brings our debt below $5 billion, nearly the lowest level since our spin. The face value of our second lien notes now stands well below $2 billion, and we have meaningful flexibility within our credit agreement to opportunistically repurchase additional notes. We continue to take advantage of the trading levels of our debt and utilize our JV capital to maintain investments in our assets, all while living within cash flow and focusing on our commitment to balance sheet strengthening.
CRC's operational focus continues to be on growing values we work to control the controllables. We remain disciplined in our capital allocation process and invest capital in our highest VCI projects. Total production for the third quarter was 128,000 barrels of oil equivalent per day, leading to quarterly adjusted EBITDAX of $278 million and an adjusted EBITDAX margin of 41%. Our strong oil and gas realizations and capital discipline, partially offset by continued weakness in NGL prices, led to free cash flow of $151 million and an adjusted net income of $17 million or $0.35 per diluted share.
In the third quarter, we maintained our capital discipline and held our internally-funded activity level constant. We utilized the investment of our new joint venture partner or Alpine, formerly known as our Colony joint venture, to allow us to invest within our cash flow while still increasing development of our flagship Elk Hills Field and bringing forward reserves. We internally funded $117 million of capital projects, and our joint venture partners funded an additional $71 million, for a total investment of $188 million while averaging 10 rigs, with 7 rigs operating with joint venture capital.
As Todd mentioned, we reduced our CRC rig count to 2 rigs at the start of the fourth quarter and we plan to limit the majority of fourth quarter internal capital to projects below capital intensity while continuing to deploy joint venture investments to provide additional flexibility to our capital plans through the rest of 2019 and into 2020.
This reduction in CRC capital should improve our free cash flow and give us flexibility to further reduce debt. We expect that our operating cash flow, plus revolver availability, will provide adequate capacity for the $100 million of senior notes maturing in January 2020.
Our drilling program in the third quarter of 2019 continued to focus primarily on the San Joaquin Basin, where we drilled 82 wells, and the Los Angeles Basin, where we drilled 8 wells. We also drilled 1 exploration well in Ventura with promising results, while Sacramento continued to show a modest natural gas production decline with no CRC drilling activity. We focus the majority of our drilling capital on low-risk primary wells and waterfloods.
In terms of production, we produced an average of 128,000 BOE per day during the quarter, while oil production averaged 79,000 barrels per day. Production was down 4% compared to the third quarter of 2018, excluding approximately 2,000 barrels per day of decrease due to Lost Hills divestiture, with the remainder due to our low natural decline and decreased capital investment. As a reminder, the third quarter of 2019 reflects the first quarter of full effects from the Lost Hills divestiture, so sequential results were affected by over a 700-barrel per day reduction in oil production from Lost Hills as well as other factors, offset by positive PSC effects of approximately 1,300 barrels per day.
As Todd noted, our oil realizations continue to be strong, registering 101% of Brent before the effect of hedges. We continue to believe that realizations will remain strong throughout the remainder of the year and into 2020. Our hedge program continues to help mitigate the downside of this fall from market environment by supporting our cash flow which, in turn, can be used to help strengthen the balance sheet. Hedges enhanced our realized oil price by $5.56 per barrel during the quarter, for an average realized price of $68.41 per barrel. NGL realizations came in at 38% of Brent, the midpoint of guidance, primarily due to excess supply in local and national markets and weaker demand due to L.A. and Bay Area refinery downtimes.
We're beginning to see NGL realizations increase in the fourth quarter as demand strengthens and refineries begin to increase their utilization levels after scheduled maintenance is completed. Natural gas realizations registered 120% of Nymex above our guidance, primarily due to increased demand in local markets.
Production costs for the third quarter of 2019 were $221 million or $18.82 per BOE. Due to our team's efforts and our focus on controlling costs, we were able to lower our production costs on both an overall and per barrel basis compared to the prior year period as well as sequentially. These were primarily due to reduced cost in both downhole and surface operations, partially offset by heightened energy costs. Excluding PSC effects, our third quarter production costs would have been $17.44 per BOE.
Adjusted general and administrative costs were $5.54 per BOE or $1.03 below the previous quarter and well below our guidance range. Most of the decrease from the previous quarter resulted from lower cash-settled equity-based compensation, which was about an $8 million reduction due to a lower stock price at the end of the quarter.
As we previously discussed, changes in our stock price introduced volatility in our income statement because a significant portion of our stock-based awards are cash settled and are marked to market every quarter.
As Todd mentioned, operational and organizational efficiencies implemented by our teams resulted in a recent reduction of our workforce. We report a total related charge in the range of $35 million to $40 million in the fourth quarter of 2019. As a result, we anticipate ongoing cost savings of approximately $50 million annually, with slightly more than 50% of the reduction in G&A expenses, with the remaining in production costs at the beginning of the fourth quarter of 2019.
Cash other than on income, which are largely comprised of ad valorem taxes based on the value of minerals on the ground and are paid to the counties as well as our GHG cost, came in as we expected. In the third quarter of 2019, we reported net income of $94 million attributable to our common stock or $1.89 per diluted share. Adjusting for unusual and infrequent items and other noncash items such as gains on early extinguishment of debt that are generally excluded from core earnings by investment analysts, our net income would have been $17 million or $0.35 per diluted share.
Adjusted EBITDAX for the third quarter of 2019 was $278 million compared to $308 million for the prior year quarter, primarily due to a 6% year-over-year decrease in production including the Lost Hills divestiture and lower natural gas trading income, while adjusted EBITDAX margins improved sequentially to 41% from 39%. The increase in adjusted EBITDAX for the second quarter of 2019 was largely driven by higher natural gas trading activity and improved cost.
CRC reported cash flow from operating activities of $268 million in the third quarter of 2019, significantly higher than the second quarter due primarily to the timing of cash interest payments and ad valorem cash taxes. In the third quarter, we generated approximately $153 million in discretionary cash flow and $419 million to the first 9 months of the year, comparing favorably to our internally-funded capital investments of $345 million through the first 9 months of the year.
As we pointed out, CRC has a high level of operational control over our diverse portfolio which allows us to pivot during volatile periods and rapidly recalibrate our activity with expected cash flows. We have a proven track record of focusing on value, and we'll continue to respond and adapt accordingly to succeed through a wide range of price environments. We believe our success is evident with the amount of free cash flow that CRC has generated in 2019. In the third quarter, we provided $151 million of free cash flow and $195 million for the first 9 months after internally-funded capital. We believe we will generate additional free cash flow in the fourth quarter with our prudent capital investment plan.
In the fourth quarter, CRC will deploy capital only to the highest VCI projects in our inventory. We front-end loaded our capital for the year to offset part of our national decline rate and plan to primarily use -- utilize our joint venture capital for added flexibility and to continue bringing forward cash flow.
Also please note that we've provided detailed analysis of adjusted items as well as key fourth quarter 2019 guidance information and current hedge positions in the attachments to our earnings release.
I will be happy to take any questions you may have on that information and on other aspects of our results during the Q&A portion of the call.
Thanks, and I'll now turn the call back over to Todd.
Thanks, Mark. CRC remains laser focused in our strategy to capture the full value of our asset portfolio. Our team continue to deliver solid results in the first 3 quarters of 2019 with a disciplined capital program that is focused on value since our inception. Our diverse low-decline asset base with exposure to healthy Brent-based realizations and a continued focus on cost margins and controlling our controllables allow CRC to achieve reliable and consistent results. These attributes, combined with the optionality of our resource base and our capital discipline, have enabled us to continue to generate free cash flow.
We remain keenly focused on strengthening and simplifying our balance sheet, lowering our absolute level of debt, while utilizing joint ventures to provide capital flexibility and to de-risk and unlock the full value potential of CRC's large asset base.
We'd now be happy to take your questions.
[Operator Instructions]. Today's first question comes from Pavel Molchanov of Raymond James.
This is Muhammed Ghulam on behalf of Pavel Molchanov. So first, wildfires have been in the headlines a lot. I don't think any of your assets are affected by this directly. But I'm curious, even the grunts have varying frequency of this kind of events. Can you talk a bit about your fire protection, about the fire protection measures you've taken across your asset base?
Yes. Thanks, Muhammed. The California wildfire season, our mudslide season and earthquake preparedness is something that we take very seriously. And this is not the first time we dealt with this kind of issues. We're well prepared for this, and we work regularly with the local first responders and different agencies of government.
To give you an idea, we do have minor impacts and some of the impacts could be directly related to something like the Maria fire which is around our operations but also some of the fires where they do safety shutoffs of power in anticipation of high-wind events by SoCal Edison and PG&E. So we do have some of that. But we take that into our guidance and it's not a material thing from a CRC perspective. But, yes, it is something, and as I noted at the outset, we take very seriously. We really appreciate the work being done by all the firefighters and all the first responders as they react to these events that occur here, unfortunately, in California every year pretty much.
Okay. And let me also ask a bit about the policy landscape. The Governor seems to be coming into more and more pressure to restrict oil and gas drilling in the state. Do you guys anticipate something like AB 345 getting revived during next year's legislative session?
I think every year there's legislation that's brought up. That, and you can look at even the severance tax that's been brought up for decades in some form. In California, they deal with things that have real impacts like a severance tax which would take money out of the county coffers and put it in the state coffers. But there is always the irresponsible legislation push for political purposes. AB 345 was something. A lot of cities and local governments already have their own setbacks than deal with these issues. Again, I think if it got to be more than vague language, it might be something that even industry could get behind in support but it's a -- it was a 2-year bill, so it probably will come back. And there will be other things that we can think of today that will happen, but that is the nature of the world we live in. We're in a hyper-politicized landscape that we deal with here in California and other parts of the country. This just happens every year, but I think things that are responsible and serve the people of California and make sure they ensure that we have a diverse reliable local energy supply that is resilient into the challenges of wildfires and the like are something that is important to everyone here.
And our next question today comes from Karl Blunden of Goldman Sachs.
Taking a look at some of the uses of cash, you've obviously bought back bonds at a discount. On the liquidity front, though, it does pressure the metrics just a little bit. Interested in your take on choosing just minimum liquidity you'd need to manage intra-quarter swings in working capital, for example. And then, second, I noticed that the borrowing base is reaffirmed which is a positive, but what would it take for you guys to take a look at increasing your commitments under that facility? We've seen a couple of other issuers do that just to give themselves a bit of more flexibility given where commodities are right now.
I think for us -- two different questions you asked there. We're always trying to balance out as we look to simplify the balance sheet. Remember, we started with a simple balance sheet. We knowingly complicated the balance sheet to protect, preserve and create value for our shareholders. And now we're looking to resimplify the balance sheet with a few things in mind. We're trying to break down the absolute quantum of debt. We're trying to break down our fixed charges and we're trying to balance that with liquidity and, ultimately, the maturities. So, for us, we view ourselves in a unique opportunity from a value perspective to be able to bring down the absolute quantum of debt. Like I noted in my comments, we're sitting here at a $60 Brent environment. It's not a $30 Brent environment. But that's what the market's acting like with regards to the way our debt's trading. I think it's a unique opportunity for us to bring down our quantum of debt, our fixed charges, and balance that out against liquidity, and it's something we're always looking at. When I talked about working capital swings, I think we swing a few hundred million dollars each month as we look, depending on the investment and the bills that come due each month.
That's helpful. And then in your restricted payment capacity, can you try and update on where that stands right now.
I will let Mark walk you through that.
You want to clarify for us what you mean whenever you say, "our restricted payment capacity?" There are several different aspects. I want to make sure I understand what you are referring to.
In this one, ability to buy back bonds.
We have roughly $200 million of availability under what we refer to as the non-borrowing base asset sale basket.
And the next question today comes from Gregg Brody of Bank of America.
You've been through those cost-cutting numbers. I missed some of it and maybe you could just clarify some things. So if you run through it and then just clarify, the $35 million to $40 million of charges that's going to take place this quarter, how much of that is cash and then I think you said you allocate it where we'd see the savings. I heard 50% reduction cost, but I missed the rest.
Yes. So it's about $50 million a year reduction in overall cost, and about 60% of that is related to G&A and about 40% of that is related to OpEx.
And then how much going forward?
Going forward, we should start seeing it in the fourth quarter. And as far as the charges, I'll let Mark tell you exactly what that was.
Yes. Gregg, we expect to take $35 million to $40 million onetime charge and then, on a cash basis, that will be paid out over the remainder of, roughly, next year.
Remainder of next year.
Yes.
Got it. But all that is cash, so the $50 million?
So we'll be taking -- so I just want to make sure we're really clear here, Gregg. That $35 million to $40 million will be the accrual we take and then that will flow out in terms of cash over the next year.
So nothing in the fourth quarter?
The charges all will be in the fourth quarter.
I get it. I'm thinking about cash. So you're saying most of it charged in the fourth quarter but you'll see the cash impact of $30 million to $40 million throughout 2020?
Yes.
But that's really $50 million in savings over the...
Yes. That's correct. Over roughly the next 12 months, right.
And you expect to be full run rate in 12 months?
I want to make sure I've got it -- I've got you clear on it, Gregg. We'll take the accrual in the fourth quarter and so that will bring our run rate, on an ongoing basis, down to normalized levels.
You're saying there in the fourth quarter?
Right.
Got it. Sorry for complicating that one. And then maybe, I don't -- maybe just a second question there and then I'll leave it there. Just on the asset sale process, can you kind of give us an update? Sort of where things are today, what you're thinking about? Can you just give us some color?
I know I mentioned in my opening comments it's all about strategy, but it truly is. And I know some people would like to have a bunch of specifics. Some of it is confidential. But when you think about it, again, we don't just have some leases and pumping units. We actually have a vibrant business that you typically would see inside of a super major. So when we say we're really looking at all of the above, we're looking at things from the standpoint -- any part of our infrastructure assets, in our midstream assets, monetizations there, monetization of existing producing assets. We went through the downturn, preserved our asset value to get to a point where we had stable prices like now, around $60 Brent, so we wouldn't conduct fire-sales. We have surface land. I think everybody knows we have a large position at Huntington Beach and elsewhere, which we're looking at creative ways to monetize. And there's all kinds of financial engineering ways you can dream up. But you could talk about M&A, whether it be us acquiring something else here in California. It could be a deleveraging event, depending on how you capitalize things. Do business with development opportunity elsewhere. So I could expound all day long about all the things we're looking at, but it is not just one shot. We have lots of ammunition, and we're pursuing a lot of paths here.
Our next question comes from Paul Sankey at Mizuho.
I was thinking at sort of a high level about what it was like back in February 2016. The stock was a bit lower, but nevertheless the argument back then was that if you believe in oil at $60 Brent, this would be an enormous [indiscernible]. I was just wondering, and I think operationally you would say, and tell me if I'm wrong, that over the period between '16 and now, there haven't been essentially negative operational surprises as regards to how well the company performs at the different oil prices. I think it's fair to say. It would seem to be more, as you say, market perception trade that's occurring insofar as, I guess, the sell down in equity, oil equities across the board. Maybe less appetite for risk in oil debt. I just wanted what your perception is on all of that stuff.
Paul, I think it's still the same thing. We have -- we screened poorly on debt, but I don't think people try to peel back the onion too often to look at what are the underlying assets. We're not a capital-intensive asset business. We've been able to be free cash flow since -- positive since the spin, even in February 2016. We've been able to do what we say we're going to do from February '16, which is much more bleak times than now. And I think right now, my perception is that energy is definitely out of favor for whatever reason. I think too many people have been burned too many times in the last 5 years. But I also think that there's a perception with CRC, the debt investors want to have a self-fulfilling prophecy of a reorganization when, in reality, there is maturity well out there in 2021. It's not like we're not aware of it. Again, we're trying to work through methodically things that we have been contemplating since the spin, but conditions haven't been right to do this kind of monetizations, where it wouldn't be fire-sale type of values. We've seen the start through that early this year. We've been very methodical, very strategic. You know my background. We're going to keep our cards close to the vest and do things that are going to maximize value for our shareholders. And we have plenty of time left to execute on that prior to all these assumptions about what's going to happen, and I view the distressed debt pricing as an opportunity for us to delever. Again, Brent is plus $52 something today. It's not $30 a barrel.
Yes. I mean it was kind of an obvious point but I just wanted you to go give your thoughts on that, given that you mentioned it in your comments. And so could you update on the potential for royalty or other deals. I'm sure you must have referenced it. Is it because it's far fell pricing you're reluctant to do, or what's happening?
It's a work in progress, I'd say. If I was doing it, I would expect it would've been done by now, but it's not me. There's 2 parties involved and, in some cases, there are actually more parties involved. We're in the business of trying to create the most value so we've been working with some parties, and one party have stood out. We've been giving them some time. And we have plan B, C, D, E and F waiting to be executed on if that one doesn't go the way we anticipate it to go. Again, we have a lot of levers to pull. We have a full-some business, full of different types of assets, again, like a super major. So we're really just taking our time trying to do what's in the best interest of our shareholders and not rush and do something that we're going to regret after we do it.
Our next question today comes from Sean Sneeden of Guggenheim.
You guys called out maintenance capital in your prepared remarks and how that may ultimately trend down, I think, is what you kind of alluded to. From our perspective, how do you think about -- with the addition of the Colony JV, has that transformed how you guys think about maintenance capital at all? Or what are the levers that kind of get you to that lower level?
I think it is an added tool in the toolbox for us. Again, remember the JVs are really a powerful tool because it helps us manage our cash flow in a commodity business where there are volatile swings. It helps us de-risk opportunities, working with our partners. And it helps us bring value for the things that weren't competing for internal capital. So it's an important tool in our toolbox for us.
As we look to manage the business going forward, and ultimately people forget about this, they do have reversions in the JVs, too, which is real cash flow and they all revert differently. They all have different -- slightly different criteria. We're very pleased with the Colony JV. But talking about what you referenced, we're always striving to get better at what we do and so we're always looking to get better. So part of our restructuring, it wasn't something that we thought about, "Oh boy, let's change this." This actually started about 6 months ago where I sat down with our team and we challenged ourselves and we thought, "Hey, we can do this better, faster, be more efficient and come out leaner and meaner in the end." So we spent a really long time looking at this and working and getting to a structure at the organization that we feel is going to yield the kind of benefits, and we're starting to see that on the margin. It's not big numbers. We're starting to see it right away anyhow. We feel like, what we've always said, kind of our maintenance capital, $300 million to $400 million of drilling completion work over capital help us keep oil production flat for 3 to 5 years. That's something that we're validating even further and pushing that down with our new structure and looking to take cost out of the system from an operating standpoint and also from a G&A standpoint, and then from a capital standpoint, becoming more efficient. We're already kind of very low capital intensity so we think, over time, that will make us even bigger and faster and stronger.
Got it. And I guess some of the cost savings that come into the $50 million number you referenced was going to -- a part of that strategy in trying to lower the kind of maintenance capital business. Is that a fair way to think about it?
No. I think was twofold. A little bit was, we went into the downturn. We spun off with well over 2,000 employees and I think about 8,000 contractors, if I remember it right. We cast a member on December 1, 2014 with the Monday after the Friday when OPEC said they weren't going to support prices. So we quickly reduced our activity to remain within free cash flow and we continue to do so. And then during the downturn, we had to do things a different way to manage the business to enable us to be free cash flow positive and take the steps necessary to do so. We're trying to preserve as much organizational capacity as we could so that when we came out of the downturn, we were able to do some of those things.
What we realized is we probably preserved too much organizational capacity as we went in and started really studying how we did the work. It wasn't an exercise when you're at a larger company, where you say, I need so many heads or much money. It was really how can we make the organization better and start from the bottom up and then really look at how we work, how we do things and how we deploy our financial capital with our human capital to the highest value projects in the company up. And that's why I think it wasn't an exercise. It ended up with $50 million of absolute savings a year, in cash savings, from OpEx and G&A. But I think the reality is it started as something like we can be better at what we're doing right now and let's redesign the whole organization that way.
That makes sense. And then I guess, Mark, just to be clear, the $200 million basket for borrowing repurchases that I think you referenced earlier, that applies specifically to the second lien or the unsecured trade, and then I guess just curious to get your thoughts around how you're thinking about the significant discount on the 1.5 lien term loan, if that has changed any of the calculus around 5x. Those are all for you.
Well, I think this will go to answer both components to that question. That $200 million associated with the non-borrowing base basket can be used to repurchase any debt at a discount, Sean. So we tend to evaluate the various components of the capital structure and look at where we might get the biggest benefit and we'll call it accordingly.
Yes, Sean, I think I'd focus you on, remember when we got the 9th amendment, that was in early August, we were contemplating using proceeds from a transaction that go after the best value opportunity for the shareholders, which was the 1.5 liens because of the high coupon associated with them. But as our other debt has traded down, we now balance that opportunity set and saying, "What is the best value proposition from both a principal reduction and a fixed charge -- reducing our fixed charges. So I think from our standpoint, we're just -- we'll evaluate the landscape as we look at where the debt trades each day and try to be opportunistic in the marketplace. Some of it is extremely liquid. Some of it is not. You can see where you think it's trading based on your Bloomberg screen, but in reality, there are some of that stuff that doesn't trade and that's just some hypothetical price, or there are some particular buyers, I won't name one here but they know who they are and they're listening, who buy up everything less a dollar of when some of that stuff -- when it becomes available.
Got it. That's helpful. And if I could just squeeze one last one in. On the TOE grant that you guys talked about, how actionable is that in the near term here and how should we think about that? It's going to like -- it immediately -- kind of adding $150 million of reserves. Or how should we kind of think about what the capital needs of the program will be?
So this is a large capital project. This is something that -- you book reserves when they become commercially viable. So they are in a contingent category because, I think at this point in time, there are technical reserves that actually work but you have to have a commitment to invest the money and the facilities to grow this. So it is something that we are doing, the FEED study right now. We have people working on this. This isn't going to be overnight, but once you start committed to building the facility, you can start booking those reserves.
I think we have a slide on that in the deck, on Slide 7. So you can take a look at that. It gives you kind of a time frame of where we think based on today. It could be accelerated, but I would think at this point in time, if you look on Slide 7, you can see it looks like it comes on stream around 2023. But it is something that we are in the process of working on right now.
And our next question comes today comes from Andrew Ginsburg of R.W. Pressprich.
So I just wanted to ask a question in terms of the recent COSCO sanctions that the Trump administration placed on the Chinese shipping firm. So I know a lot of the crude is imported from Saudi Arabia and the Middle East, and since tanker rates have been kind of exploding lately, are you guys -- did that provide any tailwind to you guys from realization to Brent?
I think this just confirms our realizations up and it causes upward pressure on our barrels because that added cost, because remember 73%, 74% of the crude is imported into California, it's almost entirely supertankers, whether it's the 10% from Alaska or kind of the 2/3 from mostly the Middle East. Yes, that is just giving upward pressure to pricing in California and our ability to bid up our barrels.
All right. All right. Now that makes sense. And then just circling back to the carbon capture study, you mentioned that you think it could be accretive to the overall cost structure. Did you have an idea like an estimate of percentage in terms of costs on how much you'd be able to decrease cost from that?
It is probably too early to know exactly because what happens in that GHD market, it's actually a bid marketplace, so that gets bid up over time. And we've seen some financial players come in there. So we wait and see, but we think over time, that will be bid up. But we have some estimates but I think it's too premature to say how much that might be.
All right. So then really from the cost perspective, any positive momentum from that would really be from the credits that you need to pay for in terms of any kind of emissions you're saying.
Yes. We would no longer need to buy credit for our powerplant.
And our next question today comes from Tarek Hamid of JPMorgan.
Can you just talk a little bit more about sort of what you're seeing in terms of the impact of the wildfires on natural gas pricing. Obviously you sort of -- you got the impact both on supply but you've also had a bit of a demand impact as well with a bunch of power bases sort of brought up and back down over and over again.
I think we haven't seen any real impact on Citygate pricing in the state. I think with a lot of people rushing out to buy natural gas generators, it'll probably create some demand over time, as they see the grid being pretty unreliable. But that's just my commentary.
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Got it. And then you touched on this a little bit with your other comments, but if you just think about sort of a lot of the balls you have in the air, between sort of asset sales and liability management, any sort of thoughts around, kind of, when you would expect to sort of have something meaningful to announce? I hate to put you on the spot, but it's sort of an important question to ask,
No. Like I said to Paul earlier, I think we would hope we'd be across the finish line. A lot of these things we're contemplating, there isn't a lot of lawyering involved, but we are trying to work the best solution for our shareholders so we're trying to be patient, and use military term, wait for the whites of their eyes. We are not going to pull the trigger too soon. We're going to do what's best and try to get the maximum value, and if that means we have to wait a little while, we are going to wait a little while and continue to run the business and continue to generate free cash flow. Again, we're not in a rush to do anything. We'd love to be done here in a few weeks, but when you have other parties involved, you're at their whims sometimes when you're trying to work with them. So it doesn't always happen in your time frame.
Fair enough. And then just last one for me. With the borrowing base affirmation, I'm assuming no changes to the covenants from the ninth amendment. I just want to make sure that's correct.
Tar, that's correct.
Good. I just want to clarify that.
Borrowing base was reaffirmed with no other provisions.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Todd Stevens for any closing remarks.
Thank you, everyone, for participating in today's call. CRC has a track record of completing meaningful transactions, and we're keenly focused on additional transactions to further our delevering and advance our high VCI inventory. We'll continue to be guided by disciplined capital allocation aligned with expected cash flows to capture the full value of our high quality, low decline and low risk resource base. Aided by our unrelenting focus on operational excellence, our business model is built to perform throughout the cycle and can deliver consistent value to our shareholders. We will see you out there in the room. Thank you.
And thank, sir. The conference has now concluded. We thank you all for coming to today's presentation. You may now disconnect your lines and have a wonderful day.