# A MESSAGE TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_CRC_2017/NYSE_CRC_2017.mmd` · pages 2-8_

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A MESSAGE TO OUR SHAREHOLDERS

Dear Shareholder,

In 2017, California Resources Corporation continued its role as the Golden State's largest producer of oil and natural gas on a gross-operated basis, with operating control over nearly half the oil and gas fields in California. Our workforce is proud to share California's values and to operate under the world's leading safety, labor, human rights and environmental standards. Throughout the year, our value-driven approach to developing our world-class assets allowed us to grow our reserves and improve our financial position.

We exited 2017 with proved reserves of 618 million barrels of oil equivalent (MMBOE), organically replacing 119% of our production despite a limited capital program. In addition, our probable and possible reserves \( ^{1} \)  grew by 303 million barrels, a 37% increase from the prior year. We drilled 110 gross wells with internally funded capital and 119 gross wells from joint venture (JV) capital.

Financial discipline continued to be a focus and we lived within our cash flow in 2017 just as we have done every year since our inception — a rarity in the E&P sector. We generated a net loss of \(266 million, adjusted EBITDAX \( ^{1} \)  of \)761 million and delivered a cash margin of 36%. Including \(96 million of JV funded capital, our capital investments amounted to \)371 million. Our internally funded development program of approximately \(240 million is expected to deliver returns of 30%, on a fully burdened basis, over the life of the investment and an expected value creation index \( ^{1} \)  ("VCI") of 1.7 at a flat \)55 Brent price. At the same time, we delivered organic finding & development costs of \(6.82 per barrel of oil equivalent, marking the third year in a row that these costs have been in the single digits with recycle ratios in excess of 2.0x. We also used our hedging program to protect our cash flow and underpin our capital investment.

Our financial position meaningfully strengthened in 2017 through a successful credit amendment and refinancing that provides us with significant liquidity and a clear runway to deliver value through 2021. Since our spin through February 2018, we have eliminated approximately $2.3 billion of net debt on a pro forma basis during one of the most challenging times in our industry's history.

CRC possesses a deep inventory of actionable projects at \(65 Brent pricing that we expect will create real value for our shareholders in the years to come. To ensure we capture that potential value, we develop our capital plan by ranking all of our projects by drive mechanism on a fully burdened, full cycle cost basis. The result is nearly 750 MMBOE of net resources \( ^{1} \)  with full cycle costs of \)35 per BOE or less.

With a total capital commitment of up to \(550 million, the JVs we entered into during 2017 with Benefit Street and Macquarie go a long way to accelerate the value of and de-risk our inventory of actionable projects. These JVs provide for development funding by our partners in specific areas and allow us to participate in all stages of production growth, including a meaningful portion of the initial growth wedge and a substantial increase in our participation once the JV partners achieve their targeted rates of return.

More recently, we monetized power and gas processing assets through a midstream JV with a portfolio company of Ares Management, L.P. The Ares portfolio company invested \(750 million for certain common and preferred equity interests in the venture, and an Ares-led investor group purchased approximately 2.34 million shares of CRC's common stock in a private placement for an aggregate purchase price of \)50 million in cash, or $21.33 per share. Approximately $297 million of proceeds were used to repay the Company's outstanding bank revolver balance. With our ongoing focus on value creation, we intend to deploy remaining proceeds to the best value alternative — whether that is reinvestment, acquisitions or additional debt reduction — to drive long-term shareholder returns.

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Our focus for 2018 can be summed up in one word: EXECUTION. It will be a year dedicated to extending our track record of operational and financial discipline into a mid-cycle commodity environment ripe with upside. With our VCI investment criteria as a guiding principle, we will strategically invest to drive cash flow and margin growth. Including funds provided by our JV partners, we will begin with a 425 to 450 million program, which could potentially ramp through the year as confidence in the current commodity price environment grows.

Our 2018 capital plan will be deployed primarily on low decline crude oil development and delineation projects in our Buena Vista and Kettleman North Dome fields. Some of our largest assets, including the greater Elk Hills area, Wilmington, Huntington Beach and Kern Front, will also see investments focused on new conventional opportunities, as well as expanding waterflood and steamflood projects. Additionally, we intend to fund continued investment in our capital workovers, which have proven to be highly valuable.

At CRC, we are constantly focused on adapting our business model to best generate shareholder value given market dynamics. Our business opportunities dictate our structure, not the other way around. To that end, as we entered 2018, we redeployed our human capital in a new, flatter organizational structure to enable quicker decision-making and improved accountability. This organizational shift is designed to maximize the value of our assets from a cash margin and VCI perspective, while ensuring that teams are working collaboratively and creatively to achieve operational goals and sustain our exacting standards for health, safety and environmental protection.

In 2018, we expect to build upon our disciplined execution in a mid-cycle commodity environment to capture the upside that is imbedded in our business and deliver value to our shareholders. We intend to play to the strength of our low-capital intensity, low-decline rate resources, prudently allocating capital investments to the best value alternative as we deliver much-needed energy for California by Californians.

Regards,

![](images/3_0.jpg)

Todd A. Stevens

President and Chief Executive Officer

California Resources Corporation