# A MESSAGE TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_CRC_2019/NYSE_CRC_2019.mmd` · pages 2-8_

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A MESSAGE TO OUR SHAREHOLDERS

Dear Shareholders,

Access to affordable, reliable energy has driven economic growth, environmental progress and an increased standard of living at all socioeconomic levels across America and throughout the world. The ingenuity of the exploration and production industry has provided the essential building blocks for this progress, along with complementary technological innovations in energy efficiency and renewables. As we move into the next decade, the demand for sustainably produced energy continues to grow.

California is a global leader in setting long-term climate goals. These ambitious goals must be balanced with meeting the constant need for affordable and reliable energy to produce and deliver massive quantities of food, water, medicine and goods upon which all Californians depend. Recent events including power outages, international turmoil and the Coronavirus have exposed risks resulting from the State's excessive dependence on imported goods and energy. To create and sustain the inclusive, equitable society to which Californians aspire, we need a diversified energy portfolio of traditional and renewable energy to ensure affordability, reliability and resilience.

CRC serves an essential role in California by operating critical energy infrastructure and providing locally produced energy for California by Californians under leading safety, labor, human rights and environmental standards. Our in-state production ensures fundamental energy security for the Golden State. Even as the rest of the United States becomes more energy independent, California imports a continually growing share of its energy needs. Why does this matter? Because as California imports more energy, the State outsources its environmental stewardship to other states and countries that do not share our standards or values. At CRC, we believe being a leader in safe and environmentally sustainable oil and gas operations drives value for our shareholders and provides future economic and energy security for California's diverse communities.

## Energy for Californians by Californians

California, the fifth largest economy in the world, consumes significant amounts of energy. Based on the most recent data from the U.S. Energy Information Administration, Californians consume 7.9 quadrillion BTUs per year to: (i) energize the homes and communities of 40 million residents, (ii) drive 344 billion miles a year, (iii) support more port traffic than any other state, (iv) fuel well over 600,000 airlines flights, and (v) power the vast agricultural, commercial, service and industrial sectors that employ most working Californians. To support this level of energy consumption, California imports approximately 70 percent of its crude oil, 90 percent of its natural gas and 32 percent of its electricity from other states and countries. In 2018 alone, California imported about 370 million barrels of foreign oil, equating to Californians sending approximately $25 billion per year to countries like Saudi Arabia, Ecuador, and Iraq. Californians, who comprise 12% of the U.S. population, consume nearly twice their share of net energy imports for the entire U.S. on a BTU basis, often at a higher cost from places that do not share California's strict environmental, safety, labor and human rights standards. However, the Golden State has its own vast oil, natural gas and renewable resources. CRC is well positioned as California's largest oil and natural gas producer to help make Californians more self-sufficient and less dependent on energy imports.

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CRC's values are California's values. CRC operates under the strictest health, safety and environmental (HSE) regulations in the U.S. and our California workforce proudly implements HSE programs and long-term sustainability goals that surpass regulatory requirements. Health and safety are always our primary focus. In 2019, CRC's workforce achieved our best health and safety rating in the history of our operations, with zero recordable employee injuries. Our overall health and safety rating, which includes our contractors, is better than most office-based sectors. We continue to set the standard for our industry and believe our track record, recognized by leading organizations including the CDP (formerly the Carbon Disclosure Project), National Safety Council and Wildlife Habitat Council, along with our Environmental, Social and Governance (ESG) policies are a strategic differentiator.

Our 2030 Sustainability Goals, which are measured from a 2013 baseline, include increasing the volume of recycled produced water by 30 percent, integrating at least 10 megawatts (MW) of renewable power into our oil and gas operations, reducing our methane emissions by 50 percent, and designing and permitting California's first carbon capture and sequestration project at Elk Hills to reduce our statewide  \( CO_{2} \)  emissions by 30 percent.

We have made significant progress toward these goals, which we believe are an essential component to a balanced energy future for California. In the past year, we received financial support from the Department of Energy to advance our carbon capture and sequestration project through a FEED study. We have initiated solar projects to provide up to 44 MW of power to our fields and facilities in the San Joaquin Basin and Long Beach, and we have surpassed our methane emissions reduction target and look to further these reductions. We are halfway to our 2030 goal of increasing our volume of recycled produced water, and we delivered over 5.3 billion gallons of much needed reclaimed water to agricultural water districts in the San Joaquin Valley in 2019. Further, we continue to build strong community relationships throughout California as we focus on supporting upward economic mobility and reducing energy poverty.

CRC's long-term strategy is focused on value creation and is directly tied to our ESG policies and goals. We remain consistent and predictable with this strategy based on our Value Creation Index that ensures we invest our capital in our highest value projects. Our large portfolio of low-decline assets and extensive infrastructure provides optionality as we strive to deliver value to our shareholders and support our community stakeholders. In 2019, we continued to live within our means and invested at a level that delivered $269 million of free cash flow after internally funded capital. We produced 47 million barrels of oil equivalent of local production, supplying critical energy to Californians.

Balance sheet strengthening remained a top priority in 2019. We reduced the face value of our debt by \(274 million through free cash flow generation and proceeds from a strategic asset sale which targeted discounted debt repurchases, reducing both our principal and fixed interest payments. Additionally, in early 2020, \)100 million of our unsecured notes were repaid in full upon maturity, further reducing our overall debt level to \(4.9 billion, the lowest level since our spin. We remain diligently focused on reducing our debt through an all-of-the-above approach in a disciplined and thoughtful manner.

We are intently concentrating on the items within our control. Innovations by our operations and engineering teams continue to drive significant cost reductions, improved efficiencies and sustained HSE performance. We continuously review and refine our organizational design, which recently led us to take steps to reduce our workforce. We are now operating our assets with a little over half the number of employees we had prior to the spin. We believe these steps will reduce our annual cash costs, while retaining our vigilance on health and safety, helping us to uphold margins for debt reduction and enhance value creation.

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We have a world-class portfolio of assets, and we increased our unproved reserves in 2019. Our development joint ventures allow us to de-risk resources in our portfolio, accelerate production and provide additional flexibility to remain disciplined in our capital allocation. In 2019, we entered into our largest development joint venture to date with Alpine Energy Capital, LLC, which provides for up to $500 million to invest in our assets, with $320 million already committed to our flagship Elk Hills field.

We are seeing a change in investor sentiment towards underlying asset diversification with longer resource duration and the ability to sustain free cash flow generation. This has been CRC's trademark since the spin. We have consistently increased our resource base and lived within cash flows. Our oil-weighted production allows us to further benefit from California's premium Brent-based pricing. These factors, along with continued balance sheet strengthening, further support the value of our world-class assets for our shareholders.

In 2020, our dedicated and innovative workforce is committed to delivering safe, affordable and reliable energy for California by Californians. We will advance our direct engagement with key stakeholders in our communities to drive a sustainable energy future for working families. CRC will remain focused on strengthening the balance sheet. Our dynamic capital allocation and operational excellence help us capture the full value of our world-class portfolio. CRC maintains optionality to monetize assets, and we continue to use free cash flow to reduce our overall level of debt. Our value-driven capital allocation process targets the highest value projects in our portfolio, while our operational teams remain dynamic in addressing commodity price volatility. Across CRC, we continue to drive efficiencies as we strive to maintain operational excellence, improve margins and generate free cash flow. CRC's strategy positions us for long-term shareholder value creation and represents a strong investment opportunity.

Regards,

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Todd A. Stevens
President and Chief Executive Officer
California Resources Corporation