California Resources Corp (CRC)

Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We are an independent energy and carbon management company advancing the energy transition. We are committed to environmental stewardship while safely providing local, responsibly sourced energy. We are also focused on maximizing the value of our land, mineral ownership, and energy expertise for decarbonization by developing carbon capture and storage (CCS) and other emissions-reducing projects.

Except when the context otherwise requires or where otherwise indicated, all references to ‘‘CRC,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to California Resources Corporation and its consolidated subsidiaries as of the date presented.

Business Environment and Industry Outlook

Commodity Prices

Our operating results, and those of the oil and natural gas industry, are heavily influenced by commodity prices. Oil and natural gas prices and differentials can fluctuate significantly due to various market-related factors, making it challenging to predict realized prices reliably. We may respond to changing economic conditions by adjusting the amount and allocation of our capital program or by pursuing additional cost reductions. Significant changes in oil and natural gas prices may also affect the quantities of reserves that we can economically produce over the longer term.

Global oil prices were volatile during the first half of 2026 and continuing into the third quarter of 2026. During the second quarter of 2026, oil prices generally remained elevated due to the ongoing conflict in Iran and neighboring countries, disruptions to shipping through the Strait of Hormuz and concerns regarding the impact of supply disruptions on global energy markets. Oil prices declined sharply during the second half of June 2026 as tensions in the Middle East eased following an agreement to reopen the Strait of Hormuz. Prices were further impacted by continued tepid demand from Chinese refiners and the release of strategic petroleum reserves. In July 2026, oil prices increased as tensions in the Middle East re-escalated. We expect oil prices to remain volatile as these geopolitical circumstances continue to evolve. Refer to Results of Our Oil and Natural Gas Operations, Production, Prices and Realizations below for information on our realized prices.

The following table presents the average daily benchmark prices for oil and natural gas during the periods presented:

Supply Chain and Inflation

We continued to experience relatively flat pricing from our suppliers during the first six months of 2026 compared to the prior year. However, high fuel costs are adversely impacting transportation and equipment prices, and high oil prices are impacting oil-based products such as chemicals and lubricants. We expect these prices to impact our full year 2026 costs by approximately $9 million.

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Marketing Arrangements

In the three months ended June 30, 2026, we were informed by a pipeline operator that it had received nominations in excess of available capacity on a segment of its pipeline and the volume of crude oil we were allowed to transport was pro-rated along with other shippers. This led to both lower realizations, higher transportation costs and the incurrence of capital expenditures related to additional storage capacity as we sought alternative routes to market. We also experienced a temporary crude oil inventory build of approximately 137,000 barrels that negatively impacted our net production sold for the period. A substantial majority of this inventory was sold in July 2026.

Furthermore, our realized prices were negatively impacted during the period due to force majeure claims made by certain counterparties that affected pricing and offtake commitments.

The negative impact of these disputes to our pre-tax income for the three months ended June 30, 2026 was approximately $25 million.

We are disputing the pipeline operator's ability to pro-rate our nominations under the applicable tariff as well as the validity of the force majeure claims. We expect to prevail in these disputes, however, the timing and outcome of such disputes are inherently uncertain. If we are not able to resolve these disputes on favorable terms or in a timely manner, we could experience an adverse effect on our realizations, our ability to market our crude oil and our financial results.

Regulatory Updates

Well Permitting

We currently hold sufficient permits to support our 2026 capital program and we continue to build our permit inventory in anticipation of our expected operations in 2027. Refer to Liquidity and Capital Resources, Capital Program for additional information on our 2026 capital program.

California Cap-and-Invest (AB 1207 and SB 840)

In May 2026, CARB adopted amendments updating the existing cap-and-invest program. The amendments include the inclusion of carbon capture and sequestration projects as activities that could qualify for reducing a reporting entity’s cap-and-invest reporting requirements. Before this credit mechanism can take effect, however, CARB must adopt additional rules under SB 905 defining a "quantification methodology" for how such reductions resulting from the projects will be measured and verified. The amendments also create a new “Manufacturing Decarbonization Incentive” under which an entity may be eligible for incentive allowances for carbon capture and sequestration projects. The amendments also revise the cap-and-invest program’s allowance budgets between 2027 and 2030. However, these changes to the allowance budgets are not expected to materially affect CRC’s compliance with the program or its operations thereunder. In July 2026, Communities for a Better Environment filed a lawsuit challenging the regulatory amendments alleging violations of the California Environmental Quality Act. We cannot predict whether or not this challenge will ultimately be successful or how CARB may revise the amendments if the challenge is successful.

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Statements of Operations Analysis

Our consolidated results of operations include the results of Berry beginning on December 18, 2025, the closing date of the Berry Merger. For more information on the Berry Merger, see Part I, Item 1 – Financial Statements, Note 2 Business Combination. The Berry Merger affected the comparability of our financial results for the three and six months ended June 30, 2026 as compared to the prior-year comparative periods.

Consolidated Results of Operations

Three months ended June 30, 2026 compared to March 31, 2026

The following table presents our consolidated operating revenues for the periods indicated:

Oil, natural gas and natural gas liquids sales — Oil, natural gas and natural gas liquids sales, excluding the effects of cash settlements on our commodity derivative contracts, were $1,056 million for the three months ended June 30, 2026, which was an increase of $151 million compared to $905 million for the three months ended March 31, 2026.

The following table shows changes in oil, natural gas and natural gas liquids sales for the three months ended June 30, 2026 compared to the three months ended March 31, 2026:

Note: See Production for volumes by commodity type and Prices and Realizations for index and realized prices for comparative periods.

Net gain (loss) from commodity sales derivatives — We report gains and losses on our derivative contracts related to sales of our oil and marketing activities in operating revenues. Net gain from commodity sales derivatives was $205 million for the three months ended June 30, 2026 compared to a net loss of $848 million for the three months ended March 31, 2026. The change primarily resulted from the non-cash changes in the fair value of our outstanding commodity derivatives from the positions held at the end of each measurement period.

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Revenue from marketing of purchased commodities — Revenue from marketing of purchased commodities was $26 million for the three months ended June 30, 2026 compared to $41 million for the three months ended March 31, 2026. The decrease was mainly related to lower crude oil volumes purchased and used in blending in the three months ended June 30, 2026 compared to the three months ended March 31, 2026.

The following table presents our consolidated operating and non-operating expenses and income for the three months ended June 30, 2026 and March 31, 2026.

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Operating costs — The following table presents our operating costs for the three months ended June 30, 2026 and March 31, 2026:

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ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with other sections of this report, including but not limited to, Part I, Item 1 and 2 – Business and Properties and Part II, Item 8 – Financial Statements and Supplementary Data.

See Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2024 (2024 Annual Report) for our analysis of the changes in our consolidated statements of operations and statements of cash flows for the year ended December 31, 2024 compared to December 31, 2023.

Basis of Presentation

All financial information presented consists of our consolidated results of operations, financial position and cash flows unless otherwise indicated. We have eliminated all intercompany transactions and accounts. We account for our share of oil and natural gas production activities, in which we have a direct working interest by reporting our proportionate share of assets, liabilities, revenues, costs and cash flows within the relevant lines on our balance sheets and statements of operations and cash flows. In applying the equity method of accounting, our investments in our unconsolidated subsidiaries are recognized either at cost, as is the case with Carbon TerraVault JV HoldCo, LLC, or at fair value if acquired in a business combination, as is the case for Midway Sunset Cogeneration Company. These investments are then adjusted for our proportionate share of income or loss in addition to contributions and distributions.

Supply Chain and Inflation

We continued to experience relatively flat pricing from our suppliers during the year ended December 31, 2025 compared to the prior year. U.S. tariff policy regarding both country of origin and material type remains highly uncertain and subject to future changes. During 2025, the United States expanded tariff rates on imported goods including a 50% tariff on the steel and aluminum value of imported products. If sustained, these expanded tariff rates could increase our cost of oilfield goods and extend delivery lead times over the longer term. We have taken measures to limit the effects of potential price increases caused by the recent expansion of U.S. tariffs by entering into fixed price contracts with terms of one to three years for a significant majority of our materials and services based on our current expected development plans. We also pre-purchased inventory prior to the implementation of the tariffs and continue to purchase from vendors who source domestic content to limit the impact of foreign tariffs on our business. Overall, we expect minimal impact from tariffs on our supply chain in 2026. However, if the current tariff regime persists or expands, our inventory, capital and operating costs could increase over the long term.

Statement of Operations Analysis

Consolidated Results of Operations

Our consolidated results of operations include the results of Berry beginning December 18, 2025, the closing date of the Berry Merger. Our consolidated results of operations include the results of Aera beginning July 1, 2024, the closing date of the Aera Merger. For more information on the Berry Merger and the Aera Merger, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 2 Business Combinations. The Aera Merger and related integration activities significantly impacted the comparability of our financial results for the year ended December 31, 2025 compared to the prior year.

For financial information related to our subsidiaries designated as Unrestricted Subsidiaries under the 2026 Senior Notes Indenture, 2029 Senior Notes Indenture and 2034 Senior Notes Indenture, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 18 Condensed Consolidating Financial Information.

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Year Ended December 31, 2025 vs. 2024

The following table presents our consolidated operating revenues:

Oil, natural gas and natural gas liquids sales – Oil, natural gas and natural gas liquids sales, excluding the effects of cash settlements on our commodity derivative contracts, were $2,910 million for the year ended December 31, 2025, which is an increase of $373 million from $2,537 million for the year ended December 31, 2024. The following table shows changes in oil, natural gas and natural gas liquids sales for the year ended December 31, 2025 compared to the year ended December 31, 2024:

Note: See Results of Our Oil and Natural Gas Operations Production for volumes by commodity type and Prices and Realizations for index and average realized prices for each period.

Net gain from commodity derivatives – We report gains and losses on our derivative contracts related to our oil production and marketing activities in operating revenue. Net gain from commodity derivatives was $266 million for the year ended December 31, 2025 compared to a net gain of $241 million for the year ended December 31, 2024. The change primarily resulted from payments to settle commodity derivative contracts and the non-cash changes in the fair value of our outstanding commodity derivatives from the positions held at the end of each measurement period. Gains and losses from our commodity derivative contracts are shown in the table below:

Electricity revenue – Electricity revenue increased by $74 million to $233 million during the year ended December 31, 2025 compared to $159 million for the year ended December 31, 2024. This increase was primarily a result of higher pricing from resource adequacy contracts and additional electricity sales in 2025 as a result of scheduled maintenance and unplanned downtime at our Elk Hills power plant in 2024.

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The following table presents our consolidated operating and non-operating expenses and income for the years ended December 31, 2025 and 2024:

Operating costs - The following table presents our operating costs for the years ended December 31, 2025 and December 31, 2024:

Energy operating costs consist of purchased natural gas used to generate electricity for our operations and steam for our steamfloods, purchased electricity and internal costs to generate electricity used in our operations. Gas processing costs include costs associated with compression, maintenance and other activities needed to run our gas processing facilities at Elk Hills. Non-energy operating costs equal total operating costs less energy operating costs and gas processing costs.

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Energy operating costs – Energy operating costs for the year ended December 31, 2025 were $374 million, which was an increase of $95 million from $279 million for the year ended December 31, 2024. Approximately $94 million of this increase is related to the addition of the Aera fields for the full year of 2025 compared to only six months in 2024. The remaining increase primarily related to higher energy prices partially offset by savings related to the additional supply of electricity generated at our Elk Hills power plant which is used at our Elk Hills field in 2025. During the year ended December 31, 2024, our Elk Hills power plant experienced unplanned downtime and scheduled maintenance resulting in lower electricity generation available the Elk Hills field. For more information on our natural gas market prices, see Segment Results of Oil and Natural Gas Operations, Production, Prices and Realizations below.

Non-energy operating costs – Non-energy operating costs for the year ended December 31, 2025 were $859 million, which was an increase of $188 million from $671 million for the year ended December 31, 2024. Of this increase, $191 million related to the operation of the Aera fields for the full year ended December 31, 2025 compared to only six months in 2024. This increase was partially offset by lower maintenance activity during the year ended December 31, 2025 as compared to 2024.

General and administrative expenses – General and administrative expenses were $333 million for the year ended December 31, 2025, which was an increase of $12 million from $321 million for the year ended December 31, 2024. The increase was primarily a result of additional compensation-related expense and other corporate expenses resulting from the Aera Merger.

Depreciation, depletion and amortization – Depreciation, depletion and amortization increased $123 million to $511 million for the year ended December 31, 2025 from $388 million for the same prior year period. The increase was primarily the result of the addition of the Aera assets included in the full year ended December 31, 2025.

Asset impairment – We recognized a $59 million asset impairment during the year ended December 31, 2025 of which $57 million related to the write-down of our proved natural gas properties in the Sacramento basin. For more informati

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