Executive Summary / Key Takeaways

• California Resources Corporation (CRC) has transformed into California's largest oil and gas producer following the Aera merger, creating significant operational scale and enhancing the durability of its cash flows through low-decline assets and high net revenue interests.
• The company is rapidly realizing substantial synergies from the Aera integration, targeting $235 million in annual run-rate savings with over 70% already actioned by Q1 2025, driving improved margins and cost efficiency.
• CRC is uniquely positioned to lead California's energy transition through its Carbon TerraVault (CTV) business and integrated power assets, leveraging proprietary pore space and existing infrastructure to develop carbon capture and storage (CCS) projects and provide low-carbon power solutions for industries like data centers.
• Despite commodity price volatility and California's regulatory environment, CRC maintains robust financial health, supported by a strong hedge book (70% of 2025 oil/gas hedged), significant liquidity ($1.182 billion), low leverage (<1x), and a commitment to returning capital through a growing fixed dividend and opportunistic share buybacks.
• Key catalysts include the first CO2 injection at CTV I expected by year-end 2025, progress on additional Class VI permits and brownfield/greenfield emitter MOUs, potential power purchase agreements with data centers, and a clearer path for oil and gas permitting in the second half of 2025.

Setting the Stage: An Integrated Energy Leader in California

California Resources Corporation (NYSE: CRC) operates as a distinct entity within the U.S. energy landscape, primarily focused on the exploration, development, and production of oil and natural gas exclusively within California. Unlike many of its peers concentrated in prolific shale basins, CRC leverages a unique asset base characterized by low-decline conventional reservoirs, high net revenue interests, and extensive land and mineral ownership across the state's key basins. This positioning is not merely geographic; it underpins CRC's overarching strategy to be an integrated energy solutions provider, committed to supplying local, responsibly sourced energy while simultaneously leading California's ambitious decarbonization efforts.

The company's strategic vision is centered on maximizing shareholder value by enhancing cash flow per share, maintaining a robust balance sheet, and returning capital, all while building a growing platform in carbon management and clean power generation. This dual focus positions CRC at the intersection of traditional energy production and the evolving energy transition, aiming to capitalize on opportunities presented by California's unique regulatory and market dynamics.

In the competitive arena, CRC operates as a significant regional player, particularly after recent strategic moves. While it competes with global majors like Chevron (CVX) and large U.S.-focused independents such as Coterra Energy (CTRA) and Occidental Petroleum (OXY), its competitive profile is shaped by its California concentration. Compared to these larger, more diversified rivals, CRC's scale is smaller, and it faces specific regulatory challenges inherent to operating in California. However, its deep regional expertise, integrated infrastructure, and unique asset base provide distinct advantages, particularly in navigating the state's complex environmental and energy policy landscape and pursuing niche opportunities in decarbonization.

A Foundation Built on Transformation: From Spin-off to Scale Leader

CRC's journey is marked by significant transformations. Originally spun off from Occidental Petroleum, the company initially focused on optimizing its legacy California assets. In the years leading up to 2023, despite facing permitting headwinds that constrained growth, CRC demonstrated a capability for capital efficiency and cost management, successfully growing cash flow per share through operational improvements and consistent share repurchases. This period also saw the nascent development of its Carbon TerraVault business, recognizing the long-term value of its subsurface pore space for CO2 storage.

The most pivotal event in CRC's recent history was the merger with Aera Energy, which closed on July 1, 2024. This transaction fundamentally reshaped the company, effectively doubling its daily production volumes and solidifying its position as the largest oil and gas producer in California. The strategic rationale was clear: gain critical scale, enhance asset durability by integrating complementary low-decline fields, increase average net revenue interests (now averaging 90% across the portfolio, significantly higher than typical Permian levels), and unlock substantial cost synergies. The merger also significantly expanded CRC's potential in the carbon management space by adding Aera's valuable land and subsurface assets. This combination was designed to create a more resilient business capable of generating significantly higher cash flow, even in volatile commodity price environments.

The Engine Room: Driving Efficiency in Conventional E&P

The core of CRC's business remains its conventional oil and gas operations. These assets are characterized by low natural decline rates, which management effectively mitigates through a disciplined capital program focused on workovers and sidetracks. This approach offers high capital efficiency compared to high-decline shale plays, allowing the company to manage production levels with relatively modest investment.

The integration of Aera's assets has been a key focus since the merger. Management reports being ahead of schedule on synergy realization, having actioned over 70% of the targeted $235 million in annual run-rate savings by the first quarter of 2025. These synergies stem from operational efficiencies, supply chain optimization, and G&A reductions. For instance, the company expects to reduce operating costs in the first half of 2025 by nearly 10% compared to the second half of 2024, a tangible benefit flowing directly from the integration efforts. This cost discipline is a critical driver of margin expansion and cash flow generation.

In the first quarter of 2025, the company reported solid operational performance, with net production holding flat quarter-over-quarter at 141 MBoed, demonstrating the stability of the combined asset base. Realized oil prices remained strong at 98% of Brent, reflecting the preferential market for California crude used by local refineries.

While California's regulatory environment, particularly regarding new well permits, remains a challenge, CRC is actively pursuing multiple avenues to build its permit inventory. This includes progress on the Kern County Environmental Impact Report (EIR) process and pursuing conditional use permits (CUPs) for key fields. Management expresses confidence in seeing a clearer path for permitting in the second half of 2025, which would support future drilling activity. For 2025, the company plans a capital program of $285 million to $335 million, with $250 million to $280 million allocated to the E&P segment, supported by existing permits for workovers and sidetracks, and potentially adding a second rig in the latter half of the year.

The Future Platform: Pioneering Carbon Management and Power Solutions

Beyond conventional E&P, CRC is strategically building a platform in carbon management and power generation, leveraging its unique asset base to address California's energy transition needs. The Carbon TerraVault (CTV) business is central to this strategy, focused on developing large-scale carbon capture and storage (CCS) projects. CRC's key differentiator here is its vast portfolio of proprietary subsurface pore space across California, estimated at over 300 million tonnes under permit review with the EPA (including CTV I, IV, and VI).

The company achieved a significant milestone in December 2024, receiving the nation's first Class VI EPA permits for CO2 injection and storage into depleted oil and gas fields at the 26R reservoir at Elk Hills. This paved the way for California's first CCS project at the Elk Hills cryogenic gas plant, with FID and groundbreaking planned for Q2 2025 and first CO2 injection targeted by the end of 2025. This initial project, estimated at less than $20 million in capital, demonstrates the feasibility of CCS using existing infrastructure.

CRC is actively pursuing agreements with emitters across various hard-to-abate sectors, including cement, power, and agriculture. Recent MOUs, such as the brownfield agreement with National Cement for California's first net-zero cement facility and a separate MOU with Hull Street Energy for power sector decarbonization (up to 1.5 million tonnes per annum), highlight the growing market demand and the strategic value of CRC's storage solutions. These partnerships are crucial for scaling the CTV business, although the full potential is linked to the development of CO2 pipeline regulations in California, which management sees momentum building for in 2025.

Complementing the CTV business is CRC's significant power generation capacity, totaling over 850 megawatts. While a portion is used for oilfield operations, the excess capacity participates in California's resource adequacy market, providing reliable standby power and generating substantial revenue ($104 million in 2024, expected to increase 50% to $150 million in 2025). CRC sees a significant opportunity to provide low-carbon, reliable power for the rapidly growing demand from industries like AI data centers. Leveraging its land, existing power infrastructure, and proximity to potential CCS sites, CRC is uniquely positioned to offer integrated solutions, including the potential to retrofit natural gas power generation with CCS to provide carbon-free baseload power. This integrated approach to power and carbon management is a key strategic differentiator and a potential source of significant future value.

Financial Strength and Performance: Delivering Cash Flow and Returns

CRC's financial performance in the first quarter of 2025 reflects the benefits of the Aera merger and ongoing cost discipline. The company reported Adjusted EBITDAX of $328 million and Free Cash Flow of $131 million, exceeding consensus expectations. This performance was driven by stable production, strong price realizations, and better-than-guided operating and G&A costs ($388 million combined).

The company maintains a strong balance sheet, a core tenet of its strategy. As of March 31, 2025, CRC had $214 million in cash and cash equivalents and $1.182 billion in total liquidity, including availability under its revolving credit facility. Net debt stood at approximately $1.01 billion, resulting in a leverage ratio below 1x. Management is committed to further debt reduction, having redeemed $123 million of its 2026 senior notes in Q1 2025 and planning to address the remainder later in the year.

Shareholder returns are a key priority. In Q1 2025, CRC returned a record $258 million to stakeholders through dividends ($35 million) and share repurchases ($101 million), representing over 100% of quarterly free cash flow. The company has a track record of consistently growing its fixed dividend and opportunistically buying back shares, with $457 million remaining under its current share repurchase authorization as of March 31, 2025. Management views the current stock price as presenting a compelling value opportunity, supporting aggressive buyback activity.

Comparing CRC's financial profile to its peers using TTM data reveals a nuanced picture. CRC's Gross Profit Margin (78.00%) and EBITDA Margin (33.72%) are competitive, sometimes exceeding those of larger, more diversified players like Chevron (29% Gross Margin, 33.72% EBITDA Margin) and Occidental Petroleum (36% Gross Margin, 33.72% EBITDA Margin), and comparable to Coterra Energy (37% Gross Margin, 33.72% EBITDA Margin). This suggests operational efficiency within its specific asset base. However, CRC's Net Profit Margin (13.59%) is lower than Coterra Energy (21%) and Occidental Petroleum (11%), and comparable to Chevron (9%), potentially reflecting higher regulatory or other costs specific to California. Its Debt/Equity ratio (0.31) is higher than Chevron (0.16) and Coterra Energy (0.29) but lower than Occidental Petroleum (0.79), indicating a solid but not industry-leading balance sheet relative to equity. Valuation metrics like P/E (8.30) and P/S (1.11) suggest the market may not be fully valuing its asset base or future growth opportunities compared to some peers.

Positioning in a Competitive Landscape

CRC's competitive position is defined by its concentration in California and its integrated energy transition strategy. While it lacks the global scale and diversification of majors like Chevron or the operational footprint across multiple U.S. basins like Coterra Energy and Occidental Petroleum, its regional focus provides distinct advantages.

CRC's deep understanding of California's geology, regulatory environment, and market dynamics allows for operational efficiencies specific to the state's complex reservoirs and infrastructure. Its high net revenue interests boost profitability per barrel compared to lower NRI basins. The integrated nature of its business, combining E&P with power generation and carbon management, creates synergistic opportunities that are difficult for competitors without a similar localized asset base to replicate. The ability to use produced gas for power generation, sell excess power, and potentially capture and store CO2 from its own operations or third parties on its land provides a unique value chain.

However, operating in California also presents challenges, including stringent environmental regulations that can lead to higher operating costs compared to less regulated basins and permitting delays that can constrain development activity. CRC's smaller scale relative to majors means it has less financial flexibility for massive global investments or weathering prolonged regional downturns.

Strategically, CRC positions itself not just as an oil and gas producer, but as a partner in California's decarbonization. Its CTV business directly addresses a critical need for emissions reduction solutions for hard-to-abate industries, leveraging its proprietary pore space as a key asset. The pursuit of opportunities in providing low-carbon power for data centers and other industries further differentiates CRC, offering a unique value proposition that combines reliable energy supply with environmental goals. This strategy aims to create new revenue streams and enhance the long-term sustainability of the business in a state actively pursuing a low-carbon future.

Outlook and Catalysts

Management's 2025 guidance reflects confidence in the durability of the business and the impact of the Aera merger. The company expects average annual production of approximately 136 MBoed and Adjusted EBITDAX between $1.1 billion and $1.2 billion. This outlook is supported by the realized synergies, the robust hedge book protecting cash flows from commodity price downside, and the stable performance of the combined asset base.

Key catalysts for value realization in the near to medium term include:

• Successful execution of the first CO2 injection at CTV I by the end of 2025, demonstrating the viability of CCS in California.
• Progress on additional EPA Class VI permit applications, expanding the inventory of certified storage capacity.
• Conversion of existing MOUs with emitters (National Cement, Hull Street Energy, NLC Energy) into definitive agreements and securing new partnerships.
• Development of CO2 pipeline regulations in California, enabling the scalability of the CTV business by connecting more emitters to storage sites.
• Securing power purchase agreements with data centers or other large power consumers, unlocking the value of CRC's excess power generation capacity and potentially driving investment in CCS for power plants.
• Improvements in the oil and gas permitting environment, allowing for a potential return to a more normalized drilling cadence beyond 2025.

The company's focus on debt reduction and shareholder returns is expected to continue, providing a direct path to enhancing per-share metrics and investor value while maintaining financial flexibility.

Key Risks

Despite the positive outlook and strategic positioning, CRC faces several key risks. Commodity price volatility remains a fundamental risk, although mitigated by the company's hedging strategy. Regulatory risk in California is significant, particularly regarding the pace of oil and gas permitting and the development of clear frameworks for CO2 pipelines and other energy transition initiatives. Delays or unfavorable regulations could impact development activity and the timeline for CTV project execution. Operational risks inherent in oil and gas production and CCS project development, including geological uncertainties, equipment failures, and environmental incidents, could affect performance and costs. Successful integration of the Aera assets and full realization of targeted synergies also carry execution risk. Finally, market adoption of CCS and demand for low-carbon power solutions need to materialize at scale for the CTV and power strategies to reach their full potential.

Conclusion

California Resources Corporation has emerged from a period of transformation as a larger, more integrated, and strategically focused energy company uniquely positioned within California. The Aera merger has provided critical scale, enhanced operational efficiency through significant synergies, and strengthened the foundation of stable cash flows from a high-quality, low-decline conventional asset base.

Beyond its core E&P business, CRC is actively building a compelling future platform in carbon management and power generation. Leveraging its proprietary pore space, existing infrastructure, and regional expertise, the company is pioneering CCS projects and pursuing opportunities to provide low-carbon energy solutions for hard-to-abate industries and growing sectors like data centers. While challenges remain, particularly regarding California's regulatory environment and the need for CO2 pipeline infrastructure, recent progress on permits and strategic partnerships underscore the tangible momentum in these growth areas.

Supported by a robust balance sheet, strong liquidity, and a commitment to returning capital, CRC offers investors a differentiated value proposition. The company is executing well today, delivering solid financial results and operational efficiencies, while simultaneously building for tomorrow by advancing its energy transition initiatives. The successful realization of synergies, progress on CTV projects, and potential new agreements in the power sector represent key catalysts that could unlock significant value, positioning CRC as a compelling investment opportunity at the intersection of conventional energy and California's evolving low-carbon future.