# California Resources Corp (CRC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from California Resources Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1609253/000160925323000017/crc-20221231.htm
Accession: 0001609253-23-000017
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/CRC/
All MD&A years: /company/CRC/mda/
Previous year: /company/CRC/mda/fy2021/ (FY 2021)
Next year: /company/CRC/mda/fy2023/ (FY 2023)

Consolidated Results of Operations

Our consolidated results of operations include financial information related to oil and natural gas operations and our carbon management business. Our carbon management business is still in the early stages of development and was insignificant for 2021. For the year ended December 31, 2022, we have separately identified the results of our carbon management business included in consolidated general and administrative expenses and other operating expenses, net.

Year Ended December 31, 2022 vs. 2021

The following table presents our consolidated revenue and other income items:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Year ended December 31,"],["","2022","","2021"],["","(in millions)"],["Oil, natural gas and NGL sales","$","2,643","","","$","2,048"],["Net loss from commodity derivatives","(551)","","","(676)"],["Sales of purchased natural gas","314","","","312"],["Electricity sales","261","","","172"],["Interest and other revenue","40","","","33"],["Total operating revenues","$","2,707","","","$","1,889"]]
[[/GREPCENT_TABLE]]

Oil, natural gas and NGL sales – Oil, natural gas and NGL sales, excluding the impact of settled hedges, were $2,643 million for the year ended December 31, 2022, which is an increase of 29% or $595 million, compared to $2,048 million for the year ended December 31, 2021. The increase was primarily due to higher realized prices, partially offset by lower production volumes, as shown in the following table:

[[GREPCENT_TABLE]]
[["","Oil","","NGLs","","Natural Gas","","Total"],["","(in millions)"],["Year ended December 31, 2021","$","1,555","","","$","250","","","$","243","","","$","2,048"],["Changes in realized prices","614","","","51","","","200","","","865"],["Changes in production","(201)","","","(37)","","","(32)","","","(270)"],["Year ended December 31, 2022","$","1,968","","","$","264","","","$","411","","","$","2,643"]]
[[/GREPCENT_TABLE]]

Note: See Production, Prices and Realizations for volumes and realized prices by commodity type for each period.

The effect of cash settlements on our commodity derivative contracts is not included in oil, natural gas and NGL sales. Including the effect of net payments on settled commodity derivatives described below, our oil, natural gas and NGL sales increased by $176 million or 10% in 2022 compared to the same prior year period.

68

Net loss from commodity derivatives – Net loss from commodity derivatives was $551 million for the year ended December 31, 2022 compared to a net loss of $676 million for the year ended December 31, 2021. The change primarily resulted from non-cash changes in the fair value of our outstanding commodity derivatives from the positions held at the end of each measurement period as well as the relationship between contract prices and the associated forward curves. Gains and losses from our commodity derivative contracts are shown in the table below:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Year ended December 31,"],["","2022","","2021"],["","(in millions)"],["Non-cash commodity derivative gain (loss)","$","187","","","$","(357)"],["Net payments on settled commodity derivatives","(738)","","","(319)"],["Net loss from commodity derivatives","$","(551)","","","$","(676)"]]
[[/GREPCENT_TABLE]]

Electricity sales — Electricity sales increased by $89 million to $261 million during the year ended December 31, 2022 compared to $172 million for the year ended December 31, 2021. The increase was predominantly due to higher electricity prices in 2022 resulting from higher natural gas prices.

Interest and other revenue — Other revenue increased by $7 million to $40 million for the year ended December 31, 2022, compared to $33 million for the year ended December 31, 2021 primarily due to increased sales of purchased NGL volumes which were acquired to meet our delivery commitments while one of our cryogenic gas processing facilities was down for planned maintenance in the first quarter of 2022.

69

The following table presents our consolidated expenses, income tax (provision) benefit and income attributable to noncontrolling interest:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Year ended December 31,"],["","2022","","2021"],["Operating expenses","(in millions)"],["Energy operating costs","$","323","","","$","255"],["Gas processing costs","17","","","20"],["Non-energy operating costs","445","","","430"],["General and administrative expenses","222","","","200"],["Depreciation, depletion and amortization","198","","","213"],["Asset impairments","2","","","28"],["Taxes other than on income","162","","","145"],["Exploration expense","4","","","7"],["Purchased natural gas expense","273","","","196"],["Electricity generation expenses","167","","","96"],["Transportation costs","50","","","51"],["Accretion expense","43","","","50"],["Other operating expenses, net","48","","","29"],["Total operating expenses","$","1,954","","","$","1,720"],["Net gain on asset divestitures","59","","","124"],["Operating income (loss)","812","","","293"],["Non-operating (expenses) income"],["Reorganization items, net","\u2014","","","(6)"],["Interest and debt expense","(53)","","","(54)"],["Net (loss) gain on early extinguishment of debt","\u2014","","","(2)"],["Loss from investment in unconsolidated subsidiary","(1)","","","\u2014"],["Other non-operating expenses, net","3","","","(2)"],["Income (loss) before income taxes","761","","","229"],["Income tax (provision) benefit","(237)","","","396"],["Net income (loss)","$","524","","","$","625"],["Net (income) loss attributable to noncontrolling interests","$","\u2014","","","$","(13)"]]
[[/GREPCENT_TABLE]]

Energy operating costs – Energy operating costs were $323 million for the year ended December 31, 2022, which was an increase of 27% or $68 million compared to $255 million for the year ended December 31, 2021. The increase was predominantly a result of higher prices for purchased natural gas, which we use to generate electricity for our operations and steam for our steamfloods, and for purchased electricity.

Non-energy operating costs – Non-energy operating costs for the year ended December 31, 2022 were $445 million, which was an increase of $15 million or 3% from $430 million for the year ended December 31, 2021 was primarily a result of increased surface and downhole maintenance activity in 2022.

70

General and administrative expenses – General and administrative expenses were $222 million for the year ended December 31, 2022, which was an increase of $22 million from $200 million for the year ended December 31, 2021. The increase in G&A expenses was primarily attributable to compensation-related expenses and additional headcount related to developing our carbon management business. The table below shows the portion of total G&A expenses which are directly attributable to our carbon management business:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021"],["","(in millions)"],["Exploration and production, corporate and other","$","210","","","$","200"],["Carbon management business","12","","","\u2014"],["Total general and administrative expenses","$","222","","","$","200"]]
[[/GREPCENT_TABLE]]

Depreciation, depletion and amortization – Depreciation, depletion and amortization decreased $15 million to $198 million for the year ended December 31, 2022 from $213 million for the same prior year period. The decrease was primarily the result of a lower carrying value in our exploration and production assets due to asset divestitures which occurred during the fourth quarter of 2021 and the first quarter of 2022. For further detail about our asset divestitures see Part II, Item 8 – Financial Statements and Supplementary Data, Note 3 Divestitures and Acquisitions.

Asset impairments – Asset impairments were $2 million for the year ended December 31, 2022 compared to $28 million for the year ended December 31, 2021. The asset impairment charge in 2022 related to the write-down of a commercial office building located in Bakersfield, California to fair market value. For the year ended December 31, 2021 we recorded a write-down of $25 million related to the same commercial office building and a $3 million write-off of capitalized costs related to projects which were abandoned. The decline in asset value of our commercial office building primarily related to limited demand for office space of this size and type in the Bakersfield market and general trends in commercial real estate in 2021 due to the COVID-19 pandemic. For further detail about our asset impairments see Part II, Item 8 – Financial Statements and Supplementary Data, Note 2 Property, Plant and Equipment.

Taxes other than on income – Taxes other than on income were $162 million for the year ended December 31, 2022, which was an increase of $17 million from $145 million for the year ended December 31, 2021. Taxes other than on income were higher in 2022 due to increased production taxes from higher tax rates and GHG taxes which increased as market prices for GHG allowances rose. This increase was partially offset by a decrease in ad valorem taxes.

Purchased natural gas expense – Purchased natural gas expense was $273 million for the year ended December 31, 2022, which was an increase of $77 million, or 39%, from $196 million for the year ended December 31, 2021 primarily due to higher prices in 2022 for purchased natural gas related to our trading activities.

Electricity generation expense – Electricity generation expenses increased to $167 million for the year ended December 31, 2022 from $96 million for the year ended December 31, 2021. The increase of $71 million, or 74%, was predominantly a result of higher natural gas prices used in electricity generation.

Other operating expenses, net – Other operating expenses, net was $48 million for the year ended December 31, 2022, which was an increase of $19 million, or 66%, from $29 million for the year ended December 31, 2021. The table below shows the portion of other operating expenses, net directly attributable to our carbon management business:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021"],["","(in millions)"],["Exploration and production, corporate and other","$","34","","","$","29"],["Carbon management business","14","","","\u2014"],["Total other operating expenses, net","$","48","","","$","29"]]
[[/GREPCENT_TABLE]]

71

Other operating expenses, net for exploration and production, corporate and other includes higher maintenance costs for offshore platforms and purchased NGL volumes which were acquired to meet our delivery commitments while one of our cryogenic gas processing facilities was undergoing maintenance. The prior comparative period included $15 million of severance costs related to the reduction in our workforce and the departure of certain executive and other senior officers. Other operating expense, net for our carbon management business includes lease cost for sequestration easements, advocacy, and other startup-related costs.

Net gain on asset divestitures – Net gain on asset divestitures for the year ended December 31, 2022 was $59 million primarily related to the sale of our 50% non-operated working interest in certain horizons within our Lost Hills field and certain Ventura basin assets. Gain on asset divestitures for the year ended December 31, 2021 was $124 million related to the sale of the majority of our Ventura basin operations, unimproved land and other non-core assets. For more information on our asset divestitures, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 3 Divestitures and Acquisitions.

Income tax (provision) benefit – The income tax provision for the year ended December 31, 2022 was $237 million (effective tax rate of 31%), which included a $35 million provision for a valuation allowance recorded in the first quarter of 2022 at the time of our Lost Hills divestiture. This compares to an income tax benefit of $396 million for the year ended December 31, 2021 which included the release of a valuation allowance in the fourth quarter of 2021. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 9 Income Taxes for more information on our ability to realize deferred tax assets.

Net income attributable to noncontrolling interests – BSP's preferred interest in the BSP JV was automatically redeemed in full in September 2021 and income was allocated to BSP up to the redemption date. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 11 Stockholders' Equity for more information on the redemption of the preferred member interest from BSP.

Year Ended December 31, 2021 vs. the Successor and Predecessor Periods of 2020

See Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations, Statement of Operations Analysis in our 2021 Form 10-K for our analysis of the changes in our consolidated statements of operations for the year ended December 31, 2021 compared to the Successor period from November 1, 2020 through December 31, 2020 and the Predecessor period from January 1, 2020 through October 31, 2020 along with supplemental information for the combined year ended December 31, 2020.

Liquidity and Capital Resources

Liquidity

Our primary sources of liquidity and capital resources are cash flows from operations, cash and cash equivalents on hand and available borrowing capacity under our Revolving Credit Facility which matures in April 2024. We also generated additional cash flow of $80 million from strategic asset divestitures during 2022. Our primary uses of operating cash flow for 2022 were capital investments, repurchase shares of our common stock and dividends.

The following table summarizes our liquidity:

[[GREPCENT_TABLE]]
[["","December 31, 2022"],["","(in millions)"],["Cash and cash equivalents","$","307"],["Revolving Credit Facility:"],["Borrowing capacity","602"],["Outstanding letters of credit","(144)"],["Availability","$","458"],["Liquidity","$","765"]]
[[/GREPCENT_TABLE]]

72

The aggregate commitments from our Revolving Credit Facility increased to $602 million from $492 million at December 31, 2021 due to additional commitments from new lenders that joined this facility. As of December 31, 2022, we were in compliance with all of the covenants of our Revolving Credit Facility. For a description of the terms and conditions of our long-term debt, see Part II, Item 8 – Financial Statements and Supplementary Data, Note 4 Debt.

We consider our low leverage and ability to adjust our capital plan and overall spending to be a core strength and strategic advantage, which we are focused on maintaining. At current commodity prices, we expect to generate operating cash flow to support and invest in our core assets and preserve financial flexibility. We regularly review our financial position and evaluate whether we may (i) increase investments in our drilling program to accelerate value, (ii) return available cash to shareholders through dividends or stock buybacks to the extent permitted under our Revolving Credit Facility and Senior Notes indenture, (iii) advance carbon management activities, or (iv) maintain cash on our balance sheet. We believe we have sufficient sources of liquidity to meet our obligations for the next twelve months. See Other Uses of Cash below for our long-term obligations.

We are evaluating options to amend and extend or replace our Revolving Credit Facility, as well as refinancing options for our Senior Notes, which we expect to provide us with greater operating and financial flexibility to bolster our ongoing shareholder return program. We also intend to pursue financing options for our carbon management business that are separate from the rest of our business.

Derivatives

Significant changes in oil and natural gas prices may have a material impact on our liquidity. Our hedging strategy seeks to mitigate our exposure to commodity price volatility and ensure our financial strength and liquidity by protecting our operating cash flows. Prior to April 2022, our Revolving Credit Facility included covenants that required us to maintain a certain level of hedges at all times. We also entered into hedges above and beyond those that were required for certain periods. In prior years, these hedges prevented us from realizing the full benefits of price increases. Our existing hedges, including the 2023 hedges entered into by us in 2020 to comply with our Revolving Credit Facility, may also negatively impact our realized prices in the future. Following an amendment to our Revolving Credit Facility in April 2022, we are only required to maintain hedges in the event the ratio of our consolidated total debt to consolidated EBITDAX (as defined in our Revolving Credit Facility) exceeds 1:1. As of December 31, 2022, this ratio was not exceeded. We will continue to evaluate our hedging strategy based on prevailing market prices and conditions.

Unless otherwise indicated, we use the term “hedge” to describe derivative instruments that are designed to achieve our hedging requirements and program goals, even though they are not accounted for as cash-flow or fair-value hedges. We did not have any commodity derivatives designated as accounting hedges as of and during the year ended December 31, 2022.

Refer to Part II, Item 8 – Financial Statements and Supplementary Data, Note 7 Derivatives for more information on our open derivative contracts as of December 31, 2022 and Note 4 Debt for more information on an amendment to the hedging requirements included in our Revolving Credit Facility.

Uses of Cash

2023 Capital Program

We expect our 2023 capital program to range between $200 and $245 million assuming normal operating conditions. Of this amount, $165 to $195 million is related to oil and natural gas development (including approximately $10 to $15 million to build replacement water injection facilities which will allow us to use one of our depleted oil and natural gas reservoirs for CCS), $5 to $15 million for carbon management projects and $30 to $35 million for corporate and other activities (including procuring long-lead time items for planned maintenance at our Elk Hills power plant in 2024). We expect our capital program related to oil and natural gas development to be focused primarily on executing projects using existing permits outside of Kern County. The foregoing amounts related to carbon management projects do not include amounts funded by Brookfield through the Carbon TerraVault JV. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 8 Investment in Unconsolidated Subsidiary and Related Party Transactions for more information on our joint venture with Brookfield.

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The actual amount of spending under our 2023 capital program will depend on a variety of factors. In particular, our ability to obtain additional permits during the course of the year may cause us to adjust our capital spending. There are also a number of other factors that could affect the size of our capital program, including other changes in regulation and permitting, commodity prices, the success of our drilling program, operating costs and other general market conditions. In particular, as the Kern County EIR Litigation remains ongoing and in order to reduce the uncertainty surrounding permitting in Kern County, we will seek CEQA permits for updated field level EIRs to reduce reliance on the Kern County EIR in future years. Because we own and operate substantially all of our assets, the amount and timing of our capital spending is largely within our control and we are able to shift our development activities to projects so as to minimize the impact of external factors. Any curtailment of the development of our oil and natural gas properties for regulatory or operational reasons could lead to a decline in our production and may lower our reserves. A continued decline in our production and reserves would negatively impact our cash flow from operations and the value of our assets.

Other Uses of Cash

Other than our 2023 capital program, our expected material uses of cash during 2023 include: (1) dividends and share repurchases; (2) settlements on commodity derivative contracts; (3) income taxes; (4) settlement of asset retirement obligations; (5) funds used in operations; and (6) costs related to advancing our carbon management activities not included in our capital program, such as employee costs and engineering studies.

The table below summarizes our current and long-term material cash requirements as of December 31, 2022 that we expect to fund with operating cash flow (in millions):

[[GREPCENT_TABLE]]
[["","Payments Due by Year"],["","Total","","Less than 1 Year","","Years 2 and 3","","Years 4 and 5","","More than 5 Years"],["On-Balance Sheet","(in millions)"],["Long-term debt(a)","$","600","","","$","\u2014","","","$","\u2014","","","$","600","","","$","\u2014"],["Interest on long-term debt","132","","","43","","","85","","","4","","","\u2014"],["Pension and postretirement(b)","86","","","14","","","18","","","15","","","39"],["Operating leases(c)","85","","","21","","","27","","","17","","","20"],["Off-Balance Sheet"],["Purchase obligations(d)","112","","","61","","","15","","","11","","","25"],["Total","$","1,015","","","$","139","","","$","145","","","$","647","","","$","84"]]
[[/GREPCENT_TABLE]]

(a)Represents the outstanding long-term debt balance as of December 31, 2022. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 4 Debt for more information on our long-term debt agreements.

(b)Represents undiscounted future obligations for defined benefit and post-employment benefit plans.

(c)Our operating leases include drilling rigs, commercial office space, fleet vehicles, easements and certain facilities.

(d)Reflects amounts that will become due under long-term agreements to purchase goods and services used in the normal course of business. Purchase obligations for pipeline capacity include ship or pay arrangements that are based on contractual volumes and current market rates for firm transportation capacity during the contract period. Oil and natural gas leases reflect obligations for fixed payments under our contracts.

Cash Flow Analysis

Cash flows from operating activities – Our net cash provided by operating activities is sensitive to many variables, particularly changes in commodity prices. Commodity price movements may also lead to changes in other variables in our business, including adjustments to our capital program.

Our operating cash flow for the year ended December 31, 2022 was $690 million, which was an increase of $30 million, or 5%, from $660 million for the year ended December 31, 2021. The increase was primarily related to higher average realized prices (including the effects of settlements on our commodity derivatives) partially offset by declining production and increased operating costs. The increase in operating costs in 2022 as compared to 2021 primarily related to higher prices for purchased natural gas and electricity used in our operations as well as cost increases we experienced due to inflation.

74

Cash flows from investing activities - The table below summarizes net cash used in investing activities:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Year ended December 31,"],["","2022","","2021"],["","(in millions)"],["Capital investments","$","(379)","","","$","(194)"],["Changes in capital accruals","1","","","20"],["Proceeds from divestitures, net","80","","","67"],["Acquisitions","(17)","","","(52)"],["Distributions related to the Carbon TerraVault JV","12","","","\u2014"],["Capitalized joint venture transaction costs","(12)","","","\u2014"],["Other","(2)","","","(2)"],["Net cash used in investing activities","$","(317)","","","$","(161)"]]
[[/GREPCENT_TABLE]]

The increase in the use of cash primarily related to a higher capital program in 2022 as compared to 2021. In 2022, we invested $16 million in our carbon management activities including $12 million to build replacement water injection facilities which will allow us to use one of our depleted oil and natural gas reservoirs for CCS. Proceeds from divestitures, net for the year ended December 31, 2022 included the sale of our 50% non-operated working interest in certain horizons within our Lost Hills field, certain of our Ventura basin assets and our commercial office building in Bakersfield, California. We sold the majority of our Ventura basin operations in 2021 and other non-core assets including unimproved land. In 2022, our acquisitions related to our carbon management business. In 2021, we acquired working interests in certain joint venture wells held by MIRA. Part II, Item 8 – Financial Statements and Supplementary Data, Note 3 Divestitures and Acquisitions for more information on our divestitures and acquisitions.

Cash flows from financing activities – The table below summarizes net cash used by financing activities:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Year ended December 31,"],["","2022","","2021"],["","(in millions)"],["Debt transactions","$","\u2014","","","$","(12)"],["Distributions to noncontrolling interest holders","\u2014","","","(50)"],["Repurchases of common stock","(313)","","","(148)"],["Issuance of common stock","1","","","2"],["Common stock dividends","(59)","","","(14)"],["Net cash used by financing activities","$","(371)","","","$","(222)"]]
[[/GREPCENT_TABLE]]

Our net cash used in financing activities for the year ended December 31, 2022 related to repurchases of our common stock under our Share Repurchase Program and dividends. See Part II, Item 8 – Financial Statements and Supplementary Data, Note 11 Stockholders' Equity for more information on our cash dividends.

Our net cash used in financing activities for the year ended December 31, 2021 primarily related to distributions to BSP as well as repurchases of our common stock under our Share Repurchase Program. Part II, Item 8 – Financial Statements and Supplementary Data, Note 11 Stockholders' Equity for additional information on our BSP JV.

Lawsuits, Claims, Commitments and Contingencies

We are involved, in the normal course of business, in lawsuits, environmental and other claims and other contingencies that seek, among other things, compensation for alleged personal injury, breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief.

We accrue reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. Reserve balances at December 31, 2022 and 2021 were not material to our consolidated balance sheets as of such dates.

75

In October 2020, Signal Hill Services, Inc. defaulted on its decommissioning obligations associated with two offshore platforms. The Bureau of Safety and Environmental Enforcement (BSEE) determined that former lessees, including our former parent, Occidental Petroleum Corporation (Oxy) with a 37.5% share, are responsible for accrued decommissioning obligations associated with these offshore platforms. Oxy sold its interest in the platforms approximately 30 years ago and it is our understanding that Oxy has not had any connection to the operations since that time and challenged BSEE's order. Oxy notified us of the claim under the indemnification provisions of the Separation and Distribution Agreement between us and Oxy. In September 2021, we accepted the indemnification claim from Oxy and we are now appealing the order from BSEE.

We also evaluate the amount of reasonably possible losses that we could incur as a result of these matters. We believe that reasonably possible losses that we could incur in excess of reserves cannot be accurately determined.

See Part II, Item 8 – Financial Statements and Supplementary Data, Note 6 Lawsuits, Claims, Commitments and Contingencies.

Critical Accounting Estimates

Our critical accounting estimates that could result in a material impact to the consolidated financial statements due to the levels of subjectivity and management judgment include the following:

76

[[GREPCENT_TABLE]]
[["Title","","Description","","Estimation and Uncertainties","","Sensitivities"],["Oil and Natural Gas Properties","","The carrying value of our property, plant and equipment represents the costs incurred to acquire or develop the asset, including any asset retirement obligations, net of accumulated depreciation, depletion and amortization and impairment charges, if any. We use the successful efforts method of accounting for our oil and gas producing activities. Under this method, we capitalize the costs of acquiring properties, development costs and the costs of drilling successful exploration wells. The estimated amount of proved reserve volumes are used as the basis for recording depletion expense. We determine depletion on our oil and natural gas producing properties using the unit-of-production method. Under this method, acquisition costs are amortized based on total proved oil and gas reserves and capitalized development and successful exploration costs are depleted based on proved developed oil and natural gas reserves. Future cash flows from expected reserve volumes for producing properties may be used in an impairment analysis or a determination of whether sufficient future taxable income will be generated to permit realization of existing deferred tax assets. We also use reserves to predict when a producing well will become inactive, and then idle, to schedule the timing of abandonment in estimating certain of our asset retirement obligations.","","The determination of quantities of proved reserves is a highly technical process performed by our petroleum engineers and geoscientists. The analysis is based on drilling results, reservoir performance, subsurface interpretation and future development plans. Production rate forecasts are primarily derived from estimates from decline-curve analysis and type-curve analysis. Secondary inputs may include material balance calculations, which consider the volumes of substances replacing the volumes produced and associated reservoir pressure changes. Additional inputs may also include seismic analysis and computer simulations of reservoir performance. These field-tested technologies have demonstrated reasonably certain results with consistency and repeatability in the formations being evaluated or in analogous formations. The data for a given reservoir may also change over time as a result of numerous factors including, but not limited to, additional development activity and future development costs, production history and continuous reassessment of the viability of future production volumes under varying economic conditions. Several other factors could change our proved oil and gas reserves including changes in energy costs, inflation, deflation and the political and regulatory environment, all of which are beyond our control.","","Our total proved reserves were 417 MMBoe and our total proved developed reserves were 363 MMBoe at December 31, 2022. We estimate our 2023 depletion rate for oil and natural gas producing properties using the unit-of-production method will be approximately $5.80/Boe. A 5% change in our reserves would increase or decrease this DD&A rate by approximately $0.30/Boe. If realized prices used in our year-end reserve estimates increased or decreased by 10%, our proved reserve quantities at December 31, 2022 would have increased by 3 MMBoe or decreased by 4 MMBoe, respectively."]]
[[/GREPCENT_TABLE]]

77

[[GREPCENT_TABLE]]
[["Title","","Description","","Estimation and Uncertainties","","Sensitivities"],["Asset Retirement Obligations","","The majority of our asset retirement obligations relate to the plugging and abandonment of oil and natural gas wells. We determine our asset retirement obligation for oil and natural gas wells by calculating the present value of estimated future cash outflows related to the abandonment obligation. The asset retirement cost is capitalized as part of the carrying amount of the related long-lived asset. In periods subsequent to initial measurement, the asset retirement cost is depreciated using the unit-of-production method, while increases in the ARO liability resulting from the passage of time (accretion expense) is included in operating expenses on our consolidated statements of operations.","","The recognition of an asset retirement obligation requires us to make assumptions including an estimate of future abandonment costs and inflation rates, timing of activity and our credit-adjusted discount rate among others. Changes in the legal, regulatory and political environment could also affect our estimated future cash outflows.","","As of December 31, 2022 and 2021, we had asset retirement obligations of $491 million and $489 million, respectively. Excluding liabilities associated with our assets held for sale, a 1% increase in the inflation rate would increase our liability by $32 million and a 1% decrease in the inflation rate would decrease our liability by $29 million as of December 31, 2022."]]
[[/GREPCENT_TABLE]]

78

FORWARD-LOOKING STATEMENTS

This document contains statements that we believe to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical facts are forward-looking statements, and include statements regarding our future financial position, business strategy, projected revenues, earnings, costs, capital expenditures and plans and objectives of management for the future. Words such as "expect," “could,” “may,” "anticipate," "intend," "plan," “ability,” "believe," "seek," "see," "will," "would," “estimate,” “forecast,” "target," “guidance,” “outlook,” “opportunity” or “strategy” or similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements.

Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, they are inherently subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. No assurance can be given that such forward-looking statements will be correct or achieved or that the assumptions are accurate or will not change over time. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:

•fluctuations in commodity prices, including supply and demand considerations for our products and services;

•decisions as to production levels and/or pricing by OPEC or U.S. producers in future periods;

•government policy, war and political conditions and events, including the war in Ukraine and oil sanctions on Russia, Iran and others;

•regulatory actions and changes that affect the oil and gas industry generally and us in particular, including (1) the availability or timing of, or conditions imposed on, permits and approvals necessary for drilling or development activities or our carbon management business; (2) the management of energy, water, land, greenhouse gases (GHGs) or other emissions, (3) the protection of health, safety and the environment, or (4) the transportation, marketing and sale of our products;

•the impact of inflation on future expenses and changes generally in the prices of goods and services;

•changes in business strategy and our capital plan;

•lower-than-expected production or higher-than-expected production decline rates;

•changes to our estimates of reserves and related future cash flows, including changes arising from our inability to develop such reserves in a timely manner, and any inability to replace such reserves;

•the recoverability of resources and unexpected geologic conditions;

•general economic conditions and trends, including conditions in the worldwide financial, trade and credit markets;

•production-sharing contracts' effects on production and operating costs;

•the lack of available equipment, service or labor price inflation;

•limitations on transportation or storage capacity and the need to shut-in wells;

•any failure of risk management;

•results from operations and competition in the industries in which we operate;

•our ability to realize the anticipated benefits from prior or future efforts to reduce costs;

•environmental risks and liability under federal, regional, state, provincial, tribal, local and international environmental laws and regulations (including remedial actions);

• the creditworthiness and performance of our counterparties, including financial institutions, operating partners, CCS project participants and other parties;

•reorganization or restructuring of our operations;

•our ability to claim and utilize tax credits or other incentives in connection with our CCS projects,

•our ability to realize the benefits contemplated by our energy transition strategies and initiatives, including CCS projects and other renewable energy efforts;

•our ability to successfully identify, develop and finance carbon capture and storage projects and other renewable energy efforts, including those in connection with the Carbon TerraVault JV;

•our ability to successfully develop infrastructure projects and enter into third party contracts on contemplated terms; and

•uncertainty around the accounting of emissions and our ability to successfully gather and verify emissions data and other environmental impacts.

•changes to our dividend policy and share repurchase program, and our ability to declare future dividends or repurchase shares under our debt agreements;

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•limitations on our financial flexibility due to existing and future debt;

•insufficient cash flow to fund our capital plan and other planned investments and return capital to shareholders;

•changes in interest rates;

•our access to and the terms of credit in commercial banking and capital markets, including our ability to refinance our debt or obtain separate financing for our carbon management business;

•changes in state, federal or international tax rates, including our ability to utilize our net operating loss carryforwards to reduce our income tax obligations;

•effects of hedging transactions;

•the effect of our stock price on costs associated with incentive compensation;

•inability to enter into desirable transactions, including joint ventures, divestitures of oil and

natural gas properties and real estate, and acquisitions, and our ability to achieve any expected synergies;

•disruptions due to earthquakes, forest fires, floods or other natural occurrences, accidents, mechanical failures, power outages, transportation or storage constraints, labor difficulties, cybersecurity breaches or attacks or other catastrophic events;

•pandemics, epidemics, outbreaks, or other public health events, such as the COVID-19; and

•other factors discussed in Part I, Item 1A – Risk Factors.

We caution you not to place undue reliance on forward-looking statements contained in this document, which speak only as of the filing date, and we undertake no obligation to update this information. This document may also contain information from third party sources. This data may involve a number of assumptions and limitations, and we have not independently verified them and do not warrant the accuracy or completeness of such third-party information.

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