Good day, and welcome to the California Resources Corporation Q3 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I'd now like to turn the conference over to Joanna Park, Vice President, Investor Relations. Please go ahead.
Welcome to California Resources Corporation's Q3 2021 Conference Call. Participating on today's call is Mark McFarland, President and Chief Executive Officer, and Francisco Leon, Executive Vice President and Chief Financial Officer, as well as several members of the CRC executive team. I'd like to highlight that we have provided slides on our investor relations section of our website, www.crc.com. These slides provide additional information into our operations and Q3 results, and we've also provided information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures on our website as well as in our earnings release. This conference call contains certain projections and other forward-looking statements, and these statements are subject to risks and uncertainties and may cause actual results to differ. Additional information on factors that could cause our results to differ are available in the company's 10-Q and 10-K.
A replay will be made available for at least 30 days following the call on our website. As a reminder, we've allotted additional questions time for question and answer at the end of our prepared remarks. We would ask participants to limit their question to a primary and one follow-up. With that, I will now turn the call over to Mark McFarland.
Thank you, Joanna, and good morning, good afternoon, everyone, and thanks for joining the call. In honor of Veterans Day, we would like to thank all of those women and men who served and continue to serve our great nation. Thank you for your service. In the Q3 , we continued our strong performance, maintaining production of low carbon intensity oil, demonstrating our disciplined investment and generating significant free cash flow. I'd like to thank the employees of CRC for their dedication to make all of this possible during the pandemic. Their strong and consistent performance has enabled us to generate $328 million of free cash flow year to date and announce the following.
First, we are updating our annual free cash flow guidance for the year, which we are increasing to a range of $460 million-$510 million. Second, I am pleased to announce that the board has approved a dividend of $0.17 per share payable in the Q4 of quarter of 2021 and has extended the $250 million share repurchase program until the end of the Q2 of 2022, thus highlighting CRC's dedication to shareholder returns. I'd also like to point out that even with these strong cash returns to shareholders, we still expect to have over $325 million of cash on our balance sheet at year-end. Lastly, we continue to advance our commitment to the energy transition in the sector.
Building upon our carbon management strategy, CRC has adopted a 2045 full scope net zero goal for Scope 1, 2, and 3 emissions. This puts us among a handful of industry peers to include Scope 3 emissions in our net zero goals and puts us on a timeframe five years sooner than most, which aligns us with the state of California's 2045 net zero ambitions. CRC's low carbon intensity production, combined with our unique asset position and carbon management opportunities, are the key differentiators which allow us to have a clear line of sight to achieving the full scope net zero goal. Said simply, CRC provides low carbon intensity fuel for today and net zero fuel for the future.
When we couple our unique position with the economic incentives available in California, CRC's opportunity stands apart even further because we have the opportunity to reach our net zero goal economically. As previously disclosed, Carbon TerraVault's near-term focus targets up to 200 million metric tons of storage potential or injection of up to five million metric tons per annum by 2027. This represents nearly double our Scope 1 and 2 emissions and provides a clear direction to meaningful progress towards our goals. As I said before, we do not expect it to be easy to achieve, but these are our goals, they are ambitious, and we are committed. As we committed before, we have submitted our second permit to the EPA for 26R reservoirs plan.
Combined with our initial permit for the A one, A two reservoir at Elk Hills, these make up an approximately 40 million metric ton project for Carbon TerraVault I, and supports our goal for first-mover advantage in California and the U.S. when it comes to carbon management. We continue to have discussions with various emitters, as we stated before, and we are targeting an announcement on these advancements in 2022. On the solar side, we are progressing our partnership with SunPower on 24 MW of behind the meter solar projects at the Kern Front and North Shafter fields. This is in addition to the previously announced 12 MW project at Mount Poso and advances projects on a total of 36 MW of the up to previously announced 45 MW behind the meter. Again, I'd like to thank the employees for their dedication and hard work.
Our operations team continues to deliver strong results on our maintenance and development programs, which have exceeded expectations from a cost and type curve perspective. Thank you for being here today, and I'll turn the call over to Francisco.
Thanks, Mark. Good afternoon, everyone, and thank you for joining us on this call. As Mark highlighted, CRC continued its strong operational and financial performance in the Q3 of 2021. During the quarter, CRC produced 102,000 net barrels of oil equivalent per day and 62,000 net barrels of oil per day, resulting in modest growth year to date in both gross and net oil production. This is largely due to our inventory of high return, quick payback maintenance projects, and is also supported by only $98 million in drilling, completion, and workover CapEx year to date. With much of our backlog addressed at current prices, we're beginning to increase our development program to a more normalized level. In September, we added a third drilling rig in our Los Angeles Basin, and year to date, our development program has brought online 58 new wells.
In the Q3 , we were running 35 maintenance rigs and were able to bring online an additional 216 maintenance wells as part of our previously announced shift of capital from drilling to downhole maintenance. In Q3, this shift allowed us to return to production an additional 2,600 BOE per day while sustaining our controllable operating costs. Our commodity realizations remain strong across all of our streams, with oil realizations at 100% of Brent, NGLs at 73% of Brent, and natural gas at 126% of NYMEX. Realizations are expected to remain healthy across all three hydrocarbon streams, particularly for natural gas, which has seen a large increase in the second half of the year. The rise in natural gas prices increases CRC's operating costs, which I will discuss further shortly.
However, it is important to recall that CRC benefits from this increase since we realize higher prices on the sale of natural gas, which we also produce. Moving on to the cost side of the business, and as shown on slide nine, our Q3 2021 G&A cost rose sequentially quarter-over-quarter an average $5.44 per BOE. This is primarily due to increased compensation-related items. Our Q3 2021 operating costs, excluding PSC effects, rose by $1.69 per BOE compared to the Q2 of 2021, primarily due to the rise in natural gas prices. We purchased natural gas, which is used as fuel for our steamflood operations and to generate electricity from our Elk Hills power plants.
Excluding the effects of higher natural gas prices on our cost structure in the Q3 of 2021, our operating costs on a per barrel basis were in line with the first two quarters of this year. A true testament to the operations team's ongoing efforts to manage costs that we control. When we look at the effect of natural gas pricing in total, we can see the benefit we derive as the largest natural gas producer in California and the positive impact on our margins. Year to date, CRC produced an average of 160 million cubic feet per day and purchased less than half of that amount for our internal consumption.
As we show on slide 10, for every dollar rise in realized natural gas price in the Q4 , we expect to see incremental revenue of $15 million, more than offsetting the incremental operating cost of approximately $7 million. During the Q3 , CRC reported an adjusted EBITDAX of $242 million, our highest quarter since we exited bankruptcy a year ago. Furthermore, this year's modest CapEx requirements helped to generate $131 million of free cash flow in this quarter, our best quarter so far this year, and $328 million of free cash flow year to date. Results reflect strong operational performance, higher commodity pricing, and higher margin electricity sales from our Elk Hills power plant. Underpinning CRC's strong financial performance has been our successful drilling program.
Our 2021 development program has predominantly been focused on the Mount Poso, Elk Hills, and Buena Vista fields, with a combined program IRR of over 90%. By focusing on high value, high margin horizontals, we have seen large capital efficiency improvements across the fields. Currently, about 90% of our drilling efforts are focused on these promising horizontal opportunities, reflecting stronger economics and lower capital intensity needs. Due to the strength of the drilling program to date, along with the rise in commodity prices, we accelerated certain projects to the Q4 of 2021, which were previously scheduled for 2022, including adding a fourth rig in the Buena Vista Shale in incremental workover opportunities. As a result, we are adjusting our guidance to account for changes in our activity in the current price environment as we look towards our year-end.
We are raising CRC's total net production guidance by approximately 2% at the midpoint to 100,000 BOE per day. Also increasing capital investments to a range of $180 million-$200 million, and increasing free cash flow guidance by approximately 8% to a range of $460 million-$510 million. The combination of our strong operating results and streamlining of our asset portfolio continues to enhance our financial strength. Earlier this month, we closed on the sale of the majority of our Ventura Basin operations, which was our highest operating cost area. This helps foster our already strong liquidity position. Post-closing, our cash balance as of 3 November was $280 million, bringing our pro forma liquidity to approximately $639 million.
Our updated guidance takes into account the sale of our Ventura Basin operations. I'll also like to point out that the preferred interest held by Benefit Street Partners was redeemed in September, further simplifying our balance sheet and financial flexibility. To conclude, CRC continued to demonstrate our commitment to prioritize shareholder returns. As of November fifth, CRC repurchased 3.1 million shares for $104 million for an average share price of $33.99 per share, which represent an over 25% discount to our current share price. With $280 million of cash on our balance sheet, our strong financial position has further optionality with our shareholder return strategy. As Mark mentioned, the board has approved a quarterly dividend of $0.17 per share payable in the Q4 .
When annualized, this will equate to approximately $56 million in shareholder returns. Our healthy free cash flow generation allows us to continue to self-fund our capital needs and will allow us to fund our carbon management activities as we continue to evaluate alternative capital deployment options benefiting our business. Please note that we have provided detailed analysis of our quarterly financial and operational results and our 2021 guidance in the attachments to our earnings release. Thanks, and I'll now turn the call back over to Mark for closing remarks.
Great. Thank you, Francisco. CRC has a uniquely positioned asset base that allows us to provide the needed energy today and to meet the goals of tomorrow with the net zero fuel of the future. CRC continues to exhibit disciplined capital investment in our asset base, which is low decline and low carbon intensity and provides resilient cash flows. We remain committed to our cash flow priorities of building upon our carbon management business and shareholder returns. We've made progress on both with two important announcements, our commitment to 2045 full scope net zero, and a quarterly dividend. Thank you again for your interest in CRC, and thank you for joining us on today's call. With that, we'll now open the line for questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.
Thanks. You know, first congratulations on the target to net zero scope three. I think you're one of the only oil and gas companies to have a good visibility toward that. So congrats on that. You know, my first question is probably for Mark and maybe Chris. Just I understand the sensitivity around the discussions with emitters, but can you give us some sense of, you know, based on your discussions, what are you all hearing from them in terms of the interest level, key criteria that they're looking for, and just some sense of, you know, where the interest is in playing, you know, the opportunity?
Are they looking to, you know, participate in any of the sort of the start to end of the process, or are they just looking to, you know, find a solution and whatever's easiest?
Scott, Chris is here with us, so I'll let him jump in, but let me just start by saying that I think that when at least as we consider opportunities for sources, we are working with people who are interested in reducing their overall carbon intensity of the products that they make. They're therefore being able to hopefully either avoid having to produce LCFS credits or creating a product that has a premium associated with it due to lower carbon intensity. That is the high level, but I'll let Chris jump in and provide some additional comments.
Yeah. I think that's a great context. Of course, that's gonna vary by source, right? There are some emission sources when you start to look at how do they price their downstream product, whether they're a conventional refiner or a renewable refiner or any other source out there, they're all gonna have unique attributes. I'm encouraged in the work, in the discussions that we're having with each of them, and it really speaks to the model that we have approached our go-to-market, which is allowing for the flexibility in these very early stages to engage with these emission sources and be able to tailor with them to the types and the needs that they need where they can monetize the low carbon intensity of their product.
Very much advancing the ball across those different sources, Scott, and very encouraged with the response that we are receiving.
Let me just add on to that. With the LCFS construct that's in California, obviously people can either view that as a carrot for the economics, which have to pay for the capture through the injection system or the stick, if you will, if it eventually becomes somewhat of a penalty to have to buy the credits for the deficiency. That's one avenue. The other one I will tell you is, obviously you've seen, and we've included a slide on the proposed changes to 45Q. We also see in addition to those that are LCFS eligible, we also see increased interest in non-LCFS that are 45Q with the uptick in 45Q that might be interested in siting greenfield type opportunities.
I think there are the brownfield opportunities that are LCFS compliant and the greenfield opportunities with the increase in 45Q that is driving a lot of interest.
Got it. Could you just mention on just the last part of that question was, you know, whether they're interested in actually the capture process, you know, doing part of the capture process and then having you sink the CO2 from there transport and sink, or is there any interest in them taking, you know, some of the opportunity here as well?
I think without getting into any one particular discussion, it's all over the map. It depends on the source. It depends on the capital funding. It depends on a lot of variables there, Scott. I think that there are some that say, "You know what? That'll provide an entire solution for me." There are some that say, "Hey, I'd like to deploy capital and put it to work and possibly look at things that look more like a partnership around the capital around the capture system," et cetera. It really spans the gamut as we laid out on our 6 October carbon update on that business model. It really does cut across all those different business models.
Got it. Understood. As my follow-up question, just on the shareholder return, you know, maybe this one's, you know, Mark for yourself, but also Francisco. You know, as you step back, you've initiated a dividend, you have a stock buyback. You know, you've also made a statement of, you know, wanting to utilize 50% of your free cash flow, you know, to, you know, get toward that scope three, net zero. Can you at a high level discuss a couple of things? One, where do you go from here on that shareholder return, you know, proposition? Because even if I take half of, you know, the projected $2.5 billion, it still is, you know, leaves you a lot of flexibility, you know, going forward. If you had some commentary on that.
Then as you know, and the second part of the question is, with the 50% sort of allocated to, you know, getting toward that Scope 3 net zero, like, you know, you're looking to potentially use your upstream free cash flow. But, you know, and this is probably for Francisco, but as you look across the other, you know, maybe cheaper sources of capital, like, you know, what is the opportunity to utilize that to lean more into giving it back to shareholders?
Yeah. Scott, this is Francisco Leon. I'll take the question first. We have to start with, as we said in the script, we're projecting cash of $325 million by the end of the year. Really good accumulation of cash this year, and that's post already over $100 million put to work on the SRP and the dividend that we're gonna pay out in a few weeks. The cash flow potential, the cash flow generation of the business continues to deliver. And as we discussed earlier, the framework is to first invest in the core business, and we're gonna invest less than 50% of our discretionary cash flow into maintaining our core business. You have 50% remaining.
We'll split it in roughly half between shareholder returns and investment in our carbon management business. Right now, we like the value proposition to the investor to put a dividend forward, but we're also gonna keep the share repurchase program alive. We'll have two different avenues of returning cash to shareholders. I like the optionality that the share repurchase program gives us. You know, I still see a lot of value in our stock, and we're gonna continue putting dollars to work to buy back our shares. It's something that we'll continue to assess, and it gives us an opportunity to pull back at some point. Right now, we're gonna be entering the year with both of them open, and we'll see what the market dictates.
We'll allocate accordingly to that 50%. You know, there's two frameworks to do it now, two particular paths to do it. The carbon management business, we see you know, a kind of ramp up of investments over the next few years. Right now, we're talking to emitters. We're making the initial steps to creating this new business segment. That's gonna ramp up naturally as you get closer to FID and as you get closer to making a decision on a go or no-go for the capture system or the pipelines or the storage tanks. Naturally, you're gonna see a progression from potentially heavier weighting in the first few years to shareholder returns in terms of the proportions and then the ramp-up in carbon management.
There's a little bit of timing associated with the split of capital. What we're seeing is the financing side of the equation is maturing rapidly. There's a lot of good sources from private equity to government loans to the bond market being attractive to participate in the carbon management business. Now we said we're not afraid to put our balance sheet forward, and we may use some of the cash that we're generating towards these initiatives. To me, the best point to negotiate, the highest potential negotiating leverage is to have cash on the balance sheet that then unlocks the financing sources.
I don't wanna commit to one, only one way of doing this and say, "We're definitely gonna put this much money to work by this date," because if we find a cheaper source of financing, we'll definitely do that. I think that the stage is set for us to be able to have a lot of different options and then just optimize on the best financial structure as we try to pursue this, the carbon management business.
Got it. In theory, if you all were able to find that, you know, cheaper source over time, the shareholder return would take up a larger portion of that free cash flow. Is that what I'm hearing?
Yeah, I would say, so yeah, shareholder returns, ultimately, do we have discretion on what that incremental source of cash or where that cash goes to? You know, we'll see what the best avenue is. I don't wanna commit to all kind of shifting back in that instance, right? It's kind of more of a you're saying, "Well, what if this happens?" I'm trying to provide some feedback, but ultimately we'll see, right? The shareholder return aspect of our business is gonna be there given our very low capital intensity assets and the type of assets that we own. There's certainly gonna be opportunities. You know, whether it's acquiring a bolt-on near Elk Hills, for example, we might put the cash forward towards that end, and we might see really good value there.
don't wanna box us in to just saying, "Yeah, if you get sources of financing in carbon management, it all flows back to shareholder returns." We're gonna look at it. We're gonna explore it. If that's the best avenue, we'll do it. We also have dry powder to do other things with it.
Scott, just to add a bit from my perspective, what Francisco has said is absolutely true. What we have is a framework, and we're committed to both sides of that after we spend and reinvest in maintaining BOE production, both sides, shareholder return and carbon management. We're committed to both. What we have is because of the strong cash flows of the core business, E&P business, we have ultimate flexibility, and we've demonstrated that now for three quarters. I think Francisco is saying, projecting out into the future, we remain committed, but we remain flexible. As we see opportunities, we have the ability to either return the cash to shareholders or reinvest in projects that we think are shareholder accretive.
Understood. Appreciate the color.
Our next question today comes from Leo Mariani with KeyBank. Please go ahead.
Hey, guys. Just wanted to ask a question on the fourth rig that you're adding here. Just wanted to get a sense, I guess as you guys look into 2022, do you think four rigs is kind of the right number to roughly achieve your goals of holding, you know, roughly flattish in 2022? Or do you think there may have to be, you know, an additional rig that may have to come in here?
Yeah, Leo, this is Francisco. Yeah, we, you know, we ramped up from one rig to four here as we exited the year, and we like that entry point into 2022. As we guided before we talked about it, you know, we see once this backlog inventory is no longer there, we're gonna switch more dollars to capital, and we see the maintenance capital of our business about $275 million. So that implies, you know, somewhere between four to five rigs. We feel really good about the four rigs that we have right now going into the year. Shawn Kerns is here with us, our Head of Operations. I don't know if you have anything else.
I just wanna be clear, the $275 include. It's not just D&C. It's a capital number. So. Yeah.
Yeah, I'll just add, Francisco. You know, the four-rig program, you know, is very consistent with what we've been drilling this year in 2021. We have our plans laid out, and we'll just kind of roll into 2022 with that four-rig program.
Okay, thanks. Just additionally, wanted to see if you could provide a little bit more color just around the commercial progress on some of the, you know, negotiations with some of these industrial emitters. You know, this might be a bit of a tough way to frame it, but just wanted to get a high-level sense if there's any way to like ballpark quantify like the number of like very serious conversations you're having. Is it just a handful or is it like 50 conversations with emitters? Just wanted to get a sense like have some of these discussions progressed to a fairly late stage. How would you maybe characterize how far you are down the road on some of these key discussions?
Morning, Leo, it's Mark. What I would say is I'd probably go back to some statements that we've said before, that if we signed everything up, we would be way oversubscribed for Carbon TerraVault one. I think that the discussions are advancing. I think that we based off of the continuation of discussions, we would stick with our type curve as still being the type curve that we see, that we put out on 6 October . So it's been affirmation of continued affirmation and continued interest in Carbon TerraVault one.
Okay. I guess, apart from Carbon TerraVault I know obviously you guys have plans to do, you know, more of these, you know, classic sequestration projects. I guess, did the discussions also, you know, potentially look at other sites down the road? I'm just trying to get a sense of, you know, what the kind of size of the opportunity can be here. Is there just a lot of folks looking at, some of the other fields in the future that have yet to be permitted as well?
In short, the answer is yes. Again, I'll go back and say, Leo, that what we described before was we're putting Carbon TerraVault I together. We filed the permits on it, but we're focused on the next 160 that get us to 200 million tons. Chris is here. Chris has been working with the team to prioritize our opportunities. As we said, we thought we have a fair amount of unique assets that we can convert into Carbon TerraVault two, three, four or five . To get us somehow in some form or fashion, get us to the 200 metric tons that we're focused on first. Chris, you wanna provide some insights on that?
Yeah, I think those conversations, in addition to CTV I, are occurring, right? We are active. We have our focus on, as we talked about, we submitted the EPA permit application for 26 R. We wanna deliver on what we promised and committed to on CTV I. In parallel with that, with the goals that we've put out, are 200 million tons. We are advancing in discussions with, scoping out different sources across those geographies and prioritizing where we think the next set of opportunities are. That is to say we're working on it. We are not stopping with CTV I. We're focused on that, but we're progressing at the next 160.
Just to add a quick overlay to what Chris said, we have teams that are advancing the permitting and the defining of the next tons to get us to 200. Concurrent to that, we also have commercial engineering and operations teams that are working on the source of CTV I. Concurrent to that, as we structure through and where we hope to get with a project, we are working, and Francisco and the finance organization are looking at opportunities for how to finance that, either through the debt or equity market. It's all going on concurrently. You know, we're excited about the prospects.
Okay. Thanks, guys.
Thanks, Leo.
Our next question today comes from Kalei Akamine with Bank of America. Please go ahead.
Hey, good morning, guys. Can you hear me?
Yes. Hey, Kalei.
Perfect. Thanks for getting me on. Mark, I wanna hit a couple of topics here. These first will be on the base business, which I feel is getting perhaps overlooked by the market that's really focused on low carbon at the moment. I think the market is trying to understand how CRC fits into this new E&P landscape, which requires you to have a track record. I'll commend you for coming out of the gates very strong this year and showing the gas returns and the capital discipline, but we want to know how long you can do it for. I'm hoping that you can help put some parameters around the free cash capacity. What I'm looking for is, what's the maintenance capital? What's the oil breakeven? And what production plateau does that support?
How deep is the inventory to support it? In other words, how long?
Yeah, sure. Great question, and I appreciate the interest in the core business because it's a lot of what we do. I mean, there's a lot of conversation around our carbon management activities, but you're absolutely right. We did highlight some of this in the Carbon Strategy Day, but not to the level of details that you asked, but we provided a five-year type projection there. I'm gonna let Francisco pick it up from here and talk about maintenance capital, maintaining production. There were some assumptions there, and maybe you wanna go through some of those.
Yeah, no, I'd be happy to. Kalei, the inventory, we've always felt CRC was inventory rich. The issue we've had since we came out of the gate at CRC has been the balance sheet, which we addressed this past year. The inventory looks, it's very attractive. Now, it's not shale, so you're not gonna hear us talk about, you know, these 24-hour IPs and move into that way of guiding to the market. We have, for us, it's really good tanks, really good oil and gas.
Rocks that we can get the oil out of the ground through water flood and steam flood or primary drilling. It's not always the drilling and completion side of the equation that solves for how attractive your inventory is, right? If you can get the oil by injecting water, that's a very attractive, very high return business for us. Now, in the inventory, what we talked about in the past is, at about four rigs, which is our current pace, we have about 10 years of inventory. We're focusing on, Ryan, this year on some of the shallower zones in the San Joaquin Basin, but we also have a rig in the L.A. Basin. I mean, that's a pretty good sustained level.
I mean, we can expand L.A. Basin, but we're seeing a lot of really good returns in the shallow zones at, in San Joaquin Basin. We see about 10 years of inventory. Now, that's a dynamic view. When we came out and we talked about this, prices were lower than they are today. Price point at $86 expands that inventory in pretty significant way. If you look at our historical filings, you see a reserves in a much higher, you know, up to one billion barrels of 3P reserves. We see a lot of good projects there. In terms of a break even, right now we see we have a pretty attractive hedging program that's protecting, giving us a nice floor to work with.
In 2022, we see a breakeven in the $30 per barrel range before we have to pull back on the capital. We're hedging to support the capital, to support the dividend, and we see a very attractive runway here as we go forward.
Yeah. Kalei, this is Shawn. If I could add, you know, speaking to our inventory that Francisco was talking about, I think a notable change that we've seen lately that's doing really well is drilling more horizontal wells. That's a little bit different than we've done from the past, and we're seeing really good performance there. When we talk about horizontals in this regard, these are unstimulated because the quality of the rock in California is so good. We're able to drill these wells, target some horizontal areas in the reservoir, and we're able to be more efficient with our capital dollars going forward.
Thank you. I appreciate that. Maybe if you could just hit the maintenance capital spending level, and I'll throw a twist on this. What do you say to those that argue that it's gonna take longer to stabilize due to the inconsistent spending in the past several years and the long lead time between spending and the production response, and add to the fact that we haven't seen production hold flat for a sustained period of time?
Yeah. I mean, I think the evidence, Kalei, is this year, three consecutive quarters. I understand your point of, you know, you need to have, you know, multiple quarters, but this year has been a really exceptional year from an operating perspective, where we're holding production flat with lower capital. We're below $200 million to hold it flat. I mean, we will guide to a higher number next year, right? Just to be clear, we're seeing about $275 million, and that is only to clarify the point, to hold oil production. So we do see this year as being a year where we had a good backlog of wells we can return back to production.
Next year, we'll go more into a kind of a drilling, you know, building that wedge, over time to get back to that, to keep, to maintain that production. The way to think about conventional assets and CRC assets, I understand your point that it's, you don't have the, you know, the shale production that immediately comes in, but you get on the treadmill, right? If you're chasing those barrels, then you cannot stop production. For us, it's like a slow rising tide. If we continue putting dollars toward, in both OpEx and CapEx, and OpEx is a very important tool that we use to invest in getting production out of the ground. If we have a sustained level of investment, what you see is one of the best declines or one of the lowest declines in the industry, right?
You know, you're in the low teens, say 10%-15% decline, and that allows you to project a business that's very sustainable and has high confidence in those cash flows over time. Yes, it's a different model. We kind of have to reeducate the market as to how conventional assets work. It's less about drilling and completion. It's more about maintaining reservoir pressure and putting dollars to work there. But that also does, allows us to plan the business without worrying about, okay, if prices drop and we have to back away the drilling rigs, then the production goes away, right? It gives us a lot of confidence to plan forward.
Calais, this is Mark. Let me say it this way. We believe in what we're doing, and the way that we build credibility, I said this during the high yield offering that we did earlier this year, said it during strategy and say it each quarter, we're gonna build that credibility one quarter at a time. We believe that we have the inventory, we have the low decline, we have the capital discipline, and that's what we're going to execute on.
I wanna pick up on your comment about hedging. I think as you stated, CRC's balance sheet is in the best position that it's ever been in. I'm wondering on the philosophy to hedge. Why do it? Is it to fund the growth in low carbon or to fund the drilling program? What's the strategy behind it?
Yeah, sure. It's a good question and it's first, let me try to parse some things if I may. If you look at the hedging and the mark-to-market that is flowing through the income statement in the hedging, the losses that we've seen to date, and, you know, that we're gonna realize cash this year as well as the forward mark-to-market losses, those are almost entirely, as of 9/30, associated with what I'll call legacy hedges that were enacted before. The trade dates were all before 31 December 2020, and they were a requirement at that point in time as we exited bankruptcy. They were a requirement by the RBL.
If you look at the hedging that we've done since then, which I think is more applicable to your question, it's effectively as of 9:30 A.M. at the market. I know there's been some write-ups, but there are some differences on the shaping of our hedges and when they occurred, et cetera. They're effectively at market or minimally out of the money. Why do we enter into those hedges? We've done a couple things. We've rolled up the strike price on the puts for next year so that we have a higher floor. That's to protect downside. Without getting into a view on commodity, we think that that's prudent management to stabilize cash flows that allows us to have longer rig contracts, more stable production, more stable investment in production. It also provides stable cash flows. [uncertain], this is not 100%.
I mean, if you ever look at it's not 100%. We hedge up to 85% of our crude production, but that's only 75% of our revenues, right? We still have NGLs and natural gas revenues. The hedging philosophy is to provide coverage for things like doing the carbon management, reinvesting in the business, adding a dividend. We have low decline assets, but it basically helps us smooth our investment horizon over a longer period of time.
That's perfect. If I could sneak one more in, this one is on CalCapture. My understanding was that the FEED study was completed in the summer, so I'm wondering what's standing between you and FID on that project.
Yeah. The FEED study, we're still, you know, there's some things that had to go into it that we're working through on owner's costs, et cetera. We've asked to take a second look at the cost, and we've gone through with, I'll call it a 0.05 pencil or something. You know, we went through it. We gave it back to the engineers, said, "Go back and, you know, refine the cost estimates. Let's sharpen our pencil," I guess, is the phrase I was looking for. We're working through that.
Our views are there are a couple things associated with that because just everyone I think pretty much understands, but just for sake of clarity, a third of the power plant is used for hydrocarbon production. The other two-thirds goes out to market on the California ISO, okay? Right now, as we understand the way the rules are written, and our interpretation is that only one-third of the carbon capture from the plant is LCFS pathway eligible. Now, it still is at some levels of enhanced oil recovery that would be associated with it. You start to get to economics that could make sense. However, there are some regulatory changes. Right now, there is no avoidance of greenhouse gas emissions for capturing CO2 off of combined cycles in California. We think that that will change over time.
If you did that right now and it change over time, we think regulations will eventually get there because it's necessary to have combined cycles on the grid, and those combined cycles need to have an incentive to have carbon sequestered. That's the only way basically to have a combined cycle. You can't do it unless you're using hydrogen as a syn fuel, which is a whole nother ballgame. You still got to get rid of the CO2. We think that there's a movement in that direction. If we were to offset greenhouse gas emissions for the full lot of the emissions by sequestering that CO2, right now, those allowances are trading around $30-$32 a ton.
Because it produces roughly two million tons from the power plant, you start to add to the economic returns on CalCapture. When you ask a question about FEED study, we're refining it. When you ask about getting to FID, I'd say we're a ways away, and we need to see some regulatory changes. We continue to think that it is coming towards us, and that is a project that we continue to invest, I'll call it early-stage development dollars.
I appreciate that. Thank you for answering all the questions, and I look forward to catching up with you more on the low-carbon part of the business next week at the Bank of America conference. Sorry for-
We look forward to it. Yeah, thanks for hosting us.
The next question today comes from Ray Deacon at Petro Lotus. Please go ahead.
Yes. Hi. My question was on the Elk Hills power plant and how much of the gas is supplied from the Elk Hills field, and would you like to put your hands on more gas resource, and is that possible?
It's effectively 100% sourced. I mean, you could talk about pipe, but it's 100% sourced, Ray. The other thing that I would tell you just as when we look at it, so you probably see we're being very effective on a cost discipline standpoint from non-energy operating expenses, but the energy costs go up. That's because when we look at that as a floating price of energy, whether it be in the steam generators or whether it be in the gas to supply the power plants. We are a net gas producer. We generate roughly 60 Bcf of gas a year, and we consume 30 Bcf of gas a year. Give or take. I mean, and so-
Right.
I mean, that's why we had the slide in there that shows the Q4 sensitivity to gas. We're a net gas producer, but 100%, give or take, for the most part is behind in our field.
In your own field. Got it. Just one more. I had read that California was gonna shut in a fairly big nuclear plant this year, and I was just wondering, do you think the gas market could get even tighter from here or no?
It's hard to say. I think that if you look at, you know, if the expectation that the plant's gonna be shut down, that somewhat makes its way into the market, but Jay?
Yeah.
Yeah. Ray, let me take these. The more incremental generation you add to the grid, the more support you need in the form of reliable resources. Yeah, there's a concern that more gas generation will be needed to support that incremental gen from the rail. If that's the case.
Okay.
You should see gas prices to be well then.
Yeah.
Got it. Thanks very much.
Thanks, Ray.
Our next question today. Oh, yes, sir. Absolutely. Our final question today comes from Eric Seeve with GoldenTree. Please go ahead.
Hey, guys. Thanks for the call. Great quarter and great to hear all the sell-side interest that's building in a great story. It was a terrific quarter. I guess one area where you guys really knocked the cover off the ball was on the natural gas trading and on electricity, where gross profit was well above what you guys guided to historically for those businesses. Can you maybe level-set and just give a sort of updated view on what we should expect for profitability from those areas going forward?
Look, with natural gas prices higher, obviously. If we beat the market heat rate with the heat rate of our unit, our unit can expand our margins by dispatching into the market with higher gas prices. Our electricity revenues have been higher. There's been some higher demand, obviously. Hydro has been a bit depleted here. It comes from the north. There's been increased demand of the unit, increased profits and increased spreads, our margins, if you will. That's what's contributed to that. Then as far as gas, we've just had opportunities to move gas around as we have several transport agreements, and we've been able to optimize that better.
You know, we generally think that Jay and the team are going to do a good job, but sometimes not everything's repeatable. Right now, as we look forward, energy margins, that being the electricity that's being sold into the future, remain strong. Anything you wanna add, Jay?
No, I think you've had one or two things change in the California gas market in the last 30 days. You've had Aliso Canyon capacity get moved up from 34 Bcf to nearly 42 Bcf. That should be filled, should be a stabilizing element and maybe a depressing element on prices. We'll see. The second thing is you've had a major line on SoCalGas be restored to greater use. It's about 800,000 MMBtu per day of capacity we didn't have before. I think we've seen the market receive that very well. Unfortunately, the producer response has been to lower gas prices. California's got a unique circumstance. We've got a limited amount of gas supply. We've got a limited amount of gas storage.
Our needs from a power perspective tend to be hinged on gas. We're meeting those incremental needs. It's likely this will be a volatile market for both gas and power for some time to come.
Eric Seeve, I mean, I think what Jay and obviously watching the market, there were some things that made the market tighter. There have been a couple things announced that should relieve the market a bit. I think time will tell. I think that, you know, as we go through this, there was an interesting report that came out recently, and I think the title was something to the effect of the turbulence of the energy transition. We, I think, in California, are perhaps at the pinnacle of that or the forefront, whatever the right saying, or the tip of the spear, mixed metaphors. We, you know, we're seeing it as the state moves through this energy transition that's creating this volatility.
You know, it's really tough to predict what will happen in the years to come other than continued volatility. With that, let me just say thanks for everyone's interest in CRC, and have a good Veterans Day.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.