AERA MERGER

9 Months Ended

Sep. 30, 2024

Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]

On July 1, 2024, we obtained by way of merger all of the ownership interests in Aera. Aera is a leading operator of mature fields in California, primarily in the San Joaquin and Ventura basins, with high oil-weighted production. The Aera Merger adds significant proved developed reserves to CRC. In connection with the closing of the Aera Merger, we issued 21,315,707 shares of common stock to the former Aera owners (Sellers). We also paid approximately $990 million in connection with the extinguishment of all of Aera's outstanding indebtedness using the proceeds from the issuance of our 8.25% senior notes due 2029 (2029 Senior Notes) and cash on hand. For more information on the 2029 Senior Notes and recent amendments to our Revolving Credit Facility, refer to Note 4 Debt and Note 15 Subsequent Events.

As of July 1, 2024, and immediately following closing of the Aera Merger, our existing stockholders prior to the Aera Merger owned 76% of CRC and the Sellers owned 24% of CRC.

At the date of this filing, our assessment of the fair value of assets acquired and liabilities assumed is not complete. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, final appraisals of Aera's assets, evaluation of Aera's materials and supplies inventory, measurement of leases and preparation of final tax returns that will provide underlying tax basis of the assets acquired and liabilities assumed. We expect to complete the purchase price allocation during the 12-month period subsequent to the Aera Merger closing date and adjustments may be made to the provisional amounts recorded as of September 30, 2024.

The following table summarizes the consideration transferred:


	Merger Consideration
	(in millions, except share and per share data)
Shares of common stock (dividend adjusted)	21,315,707
Common stock per share fair value on July 1, 2024	$	53.28
Fair value of share consideration	$	1,136
Settlement of Aera debt	990
Member taxes	(1)
Total purchase consideration	$	2,125

The following table represents the preliminary purchase price allocation of the identifiable assets acquired and the liabilities assumed based on their estimated fair values as of the closing date of the Aera Merger:


	Preliminary Purchase Price Allocation
	(in millions)
Assets Acquired
Cash	$	137
Other current assets	202
Investment in unconsolidated subsidiary	59
Property, plant and equipment	3,119
Pension and other postretirement benefits	73
Other noncurrent assets	67
Total Assets Acquired	3,657

Liabilities Assumed
Accounts payable	(157)
Accrued liabilities	(132)
Asset retirement obligations	(700)
Fair value of derivative contracts	(351)
Other long-term liabilities	(192)
Total Liabilities Assumed	(1,532)
Net Assets Acquired	$	2,125

We recorded cash based on Aera's bank balances as of July 1, 2024, which included restricted cash of $27 million. The measurements for predominately all of the other current and other noncurrent assets acquired and accounts payable, accrued liabilities and other long-term liabilities assumed are based on contracts in place at Aera on the acquisition date. Assets and liabilities related to Aera's pension and other postretirement benefit plans were measured based on actuarial valuations using Level 3 inputs. For more information on Aera's pension and other postretirement benefit plans, see Note 11 Pension and Postretirement Benefit Plans.

The fair value of an investment in an unconsolidated subsidiary was based on a preliminary appraisal using both the cost approach and available market data. The fair value of derivative instruments was based on observable inputs, primarily forward commodity-price curves. These inputs are considered Level 2 inputs in the fair value hierarchy.

The fair value of certain acquired property, plant and equipment, primarily consisting of proved oil and natural gas properties, land, gas processing plants and corporate assets including software and computer equipment, was based on preliminary appraisals. The fair value of proved oil and natural gas properties as of the acquisition date is based on estimated discounted future net cash flows incorporating market participant assumptions on an after-tax basis. Significant inputs to the valuation include estimates of future production volumes, future operating and development costs, future commodity prices, a weighted average cost of capital and a projected inflation rate. When estimating the fair value of proved properties, additional risk adjustments were applied to proved undeveloped reserves to reflect the relative uncertainty of the reserve class. These inputs are classified as Level 3 unobservable inputs, including the underlying commodity price assumptions which are based on the five-year NYMEX forward strip prices, escalated for inflation thereafter, and adjusted for price differentials.

The liability for future asset retirement obligations was determined by calculating the present value of estimated future abandonment costs. We utilized several assumptions, including a credit-adjusted risk-free interest rate, estimated remediation costs, estimated timing of when the work will be performed and a projected inflation rate.

Deferred income taxes, included in other noncurrent assets and long-term liabilities, represent the tax effects of differences in the tax basis and merger-date fair values of assets acquired and liabilities assumed. Refer to Note 7 Income Taxes for additional information on the deferred tax liability.

Lease-related assets and liabilities acquired are remeasured as if the leases were new at the merger date. These agreements are still under review for measurement at an updated incremental borrowing rate. Lease assets are included in property, plant and equipment and the liabilities are included in accrued liabilities and other long-term liabilities.

Supplemental Unaudited Pro Forma Financial Information

The following supplemental unaudited pro forma financial information presents the condensed consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 as if the Aera Merger had occurred on January 1, 2023.


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023

	(in millions)				(in millions)
Total operating revenue	$	1,353	$	438	$	3,006	$	3,165
Net income	$	386	$	(459)	$	341	$	43

EPS
Basic	$	4.32	$	(5.10)	$	3.53	$	0.47
Diluted	$	4.23	$	(5.10)	$	3.45	$	0.45

The pro forma information is presented for illustration purposes only and is not necessarily indicative of the operating results that would have occurred had the Aera Merger been completed on January 1, 2023, nor is it necessarily indicative of future operating results of the combined entity. The pro forma financial information for the three and nine months ended September 30, 2024 and 2023 is a result of combining our three and nine months statements of operations with Aera's pre-merger results from January 1, 2024 and 2023 and includes adjustments for revenues and direct expenses. The pro forma results do not reflect any cost savings anticipated as a result of the Aera Merger and exclude the impact of any severance and merger-related costs. The pro forma results include adjustments to depreciation, depletion and amortization (DD&A) based on the purchase price allocated to property, plant, and equipment and the estimated useful lives as well as adjustments to interest and accretion expense. The pro forma adjustments include estimates and assumptions based on currently available information. Management believes the estimates and assumptions are reasonable, and the relative effects of the Aera Merger are properly reflected. Future results may vary significantly from the results reflected in the following pro forma information.

For the period of July 1, 2024 through September 30, 2024, revenue and income before income taxes associated with Aera totaled $765 million and $400 million, respectively.

The following table summarizes the merger-related costs incurred:


	Three months ended September 30, 2024		Nine months ended September 30, 2024

	(in millions)
Employee severance and related costs	$	27	$	28
Transaction and integration costs	$	30	$	56
Total merger-related costs	$	57	$	84

Transaction and integration costs related to the Aera Merger and employee severance and related costs are included in other operating expenses, net on our condensed consolidated statement of operations.

In August 2024, management committed to a reduction in force as part of the integration process following the Aera Merger, which, when complete, will result in a 12% reduction in the combined company's employee headcount. We initiated this workforce reduction to align the size and composition of our workforce with expected future operating and capital plans. In addition, employee severance and related costs includes expenses from a voluntary separation program for eligible employees.

The accelerated vesting of certain awards for former Aera executives was $7 million, and is included in general and administrative expenses for the three and nine months ended September 30, 2024. This amount for accelerated vesting is not included in the table above. The accelerated vesting was based on existing change of control provisions within the former Aera employee award agreements.