# A MESSAGE TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_CRC_2018/NYSE_CRC_2018.mmd` · pages 2-8_

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A MESSAGE TO OUR SHAREHOLDERS

Dear Shareholder,

California continued its strong demand for energy and petroleum products in 2018. As the world's fifth largest economy, California consumes every drop of oil and natural gas produced in the state and imports approximately 90% of the natural gas, 74% of the oil and 30% of the electricity it consumes. California Resources Corporation (CRC) remains well-positioned to develop California's vast oil and natural gas resources in a safe and responsible manner to make our state's energy future more sustainable, self-sufficient and secure. Produced under the most stringent safety, labor, human rights and environmental standards, the native oil and natural gas production that CRC provides helps California reduce its reliance on imported petroleum from around the world. Native production also increases access to reliable and affordable energy and provides thousands of good local careers for a diverse workforce of Californians from all educational backgrounds.

CRC benefits from a world-class asset base and a team that has been pressure-tested. In 2018, we relied upon our flexible business model, the optionality of our portfolio and our differentiated integrated infrastructure to successfully respond to a variety of pricing conditions. Throughout the year, we remained dedicated to our value-driven strategy that centers on 1) capturing the full value of our portfolio; 2) driving operational excellence; 3) ensuring effective capital allocation; and 4) strengthening the balance sheet. As a result, CRC delivered a strong performance for 2018, which included profitable production growth supported by increased activity, managed operating costs, a strategic and accretive acquisition, as well as reserves growth over 2017 levels.

In 2018, CRC's dynamic capital program increased to our highest level as a public company to address production declines and deliver organic oil production growth in the second half of the year. Utilizing \(641 million of internally funded capital, supplemented by \)106 million of joint venture (JV) capital, CRC generated value-driven organic growth, which yielded higher average total production year-over-year and reflected a healthy Value Creation Index (VCI) \( ^{1} \)  of 1.5 based on a \(60 Brent price deck for 2018. Prioritizing capital investment toward oil-focused opportunities, we increased reserves to 712 million barrels of oil equivalent (BOE) and delivered a strong all-in reserve replacement ratio of 296%, reflecting 127% from the capital program alone, while adding to our inventory and actionable projects. We also reduced operating costs on a per barrel basis each quarter sequentially throughout the year and enhanced our overall margin performance for 2018. As a result, we ended 2018 in a strengthened position with production growth in the second half of the year and annual adjusted EBITDAX \( ^{1} \)  of \)1.1 billion, growing an impressive 43% compared to the prior year.

Complementing our operational focus on safety, quality, innovation and efficiency in 2018, CRC completed two major transactions early in the year that earned a S&P Global Platts Energy Award for "Corporate Deal of the Year" from among a global array of transactions across the energy sector. In February of 2018, we contributed our Elk Hills power and gas processing assets into a midstream JV with a portfolio company of Ares Management, L.P. in exchange for $750 million. This strategic move allowed CRC to monetize midstream assets that were not being fully valued by the market, deploy the proceeds toward debt reduction and acquire the remaining working, surface and mineral interests at our flagship Elk Hills field. Completed with $460 million in cash and the issuance of 2.85 million shares of CRC common stock, the Elk Hills acquisition immediately added value to CRC, improving both cash flow and credit metrics, in addition to delivering approximately $34 million of annualized synergies from consolidated operations by the end of 2018 — well ahead of initial expectations.

We also continued ongoing debt reduction efforts by opportunistically repurchasing $232 million of face value of our debt at a discount for $199 million in 2018. As we demonstrated in each of the past four years, CRC's balance sheet strengthening activities center on prioritizing the best value alternatives that further our goals to reduce overall levels of debt, simplify our capital structure and

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enhance our credit metrics. With many options available, we will continue to be thoughtful in our approach and disciplined in our execution for maximum benefit to our shareholders as we move toward our long-term leverage target.

At CRC, we pursue opportunities and investments that play to our strength as California's operator of choice and lead with our deep experience of operating successfully within California's prolific, stacked reservoirs, multiple drive mechanisms and comprehensive regulatory system. Our workforce comes from our state's diverse communities and their dedication and hard work provide energy that is essential to a beneficial, affordable quality of life for all Golden State residents. CRC's workforce prioritizes safeguarding people and the environment, and we achieved our annual safety, environmental stewardship and water conservation targets in 2018. Our workforce earned one of its highest safety ratings in the history of our operations and received 14 National Safety Council awards. We served as a net water supplier once again, delivering a record 5.3 billion gallons of treated, reclaimed water to agricultural water districts in 2018. In addition, our team continued to advance projects to attain our 2030 Sustainability Goals for water, renewables, methane and carbon. A key example is CRC's strategic project at Elk Hills to design carbon capture technologies to enhance oil production, while sequestering carbon dioxide in oil and gas formations, which would contribute meaningfully to meeting the state's long-term sustainability goals.

In 2019, CRC will continue to execute our value-driven strategy with dynamic operating and capital plans that can be quickly adjusted to match prevailing market conditions. We will utilize our technical knowledge and experience to target high-margin production and reserves that will enhance value and strengthen the balance sheet. With our disciplined capital allocation approach, diverse asset base and a workforce dedicated to sustained operational excellence in providing energy for California by Californians, CRC represents a compelling investment that is set to deliver long-term value creation for our shareholders for years to come.

Regards,

![](images/3_0.jpg)

Todd A. Stevens

President and Chief Executive Officer

California Resources Corporation