BRY - A Look At Berry Corporation's Potential 2023 Results

Summary

• Berry is doubling its fixed dividend to $0.12 per quarter.
• Berry is planning on devoting more free cash flow to share and debt repurchases in 2023 compared to 2022 and focusing less on variable dividends.
• Berry's total dividend for 2023 is currently projected at approximately $0.80 per share.
• Berry is continuing to deal with higher operating expenses, with net operating expenses approaching $29 per BOE for 2023.
• Berry is projected to generate a bit over $2 per share in positive cash flow in 2023, albeit with some production declines from Q4 2022 levels.

Berry Corporation ( BRY ) announced that it was doubling its quarterly fixed dividend from $0.06 per share to $0.12 per share. It also expanded its share repurchase authorization to $200 million.

Berry is focusing less on variable dividends in 2023, so its total dividend may end up at around $0.80 per share in 2023. Using its 2022 capital allocation framework and fixed dividend amount would have resulted in a total dividend of around $1.30 per share with Berry's projected $154 million in free cash flow at current 2023 strip.

Berry continues to deal with increased operating expenses, with net operating expenses higher than what I had modeled for 2023 before . Berry should still be able to generate a significant amount ($154 million) in free cash flow at $80 Brent in 2023 though. This is partially achieved through reduced capex, with Berry's 2023 production potentially declining mid-single digits from Q4 2022 levels. Berry's new drilling plans have been reduced to take into account the permitting slowdowns in Kern County as the ongoing court cases affect permitting authority there.

Increased Share Repurchases And Fixed Dividend

Berry announced that it intends to increase its fixed quarterly dividend from $0.06 per share to $0.12 per share. It is also modifying its shareholder return model to prioritize share repurchases and debt repurchases over variable dividends.

Berry's previous shareholder return model essentially allocated 60% of its adjusted free cash flow (net cash from operating activities less maintenance capex and fixed dividends) towards variable dividends and debt repurchases. Since Berry did not do any debt repurchases, all 60% of the adjusted free cash flow went towards variable dividends. The other 40% was for share repurchases, capital retention and discretionary growth.

Berry's updated shareholder return model calls for 80% of its adjusted free cash flow to go towards share repurchases and debt repurchases (along with potentially capital retention and discretionary growth as needed). The other 20% goes towards variable dividends.

Notes On Production

Berry is focusing more on maximizing cash flow generation rather than strictly maintaining production. Thus Berry expects some production declines in 2023, primarily due to delays in receiving new drilling permits. The permitting environment in Kern County has been unsettled due to court actions. CalGEM is currently in charge of permitting while Kern County's ability to issue permits has been temporarily suspended.

Berry noted that its planned capital program for 2023 focuses on workovers and sidetracks along with a limited number of new wells for which it already has permits in hand.

Berry expects production to average between 24,000 to 25,200 BOEPD in 2023, which is a -2% to -7% decline from Q4 2022's approximately 25,800 BOEPD in average production.

Potential 2023 Results

I've modeled Berry's 2023 results using the midpoint of its production guidance, which would be 24,600 BOEPD. At current strip of roughly $80 Brent for 2023, Berry would generate around $645 million in oil and gas revenues before hedges. Berry's 2023 producer hedges have around negative $17 million in estimated value, while it projects its Well Servicing & Abandonment segment EBITDA at $27 million.

Berry's realized natural gas prices tend to be well above Henry Hub, although it doesn't sell much in the way of natural gas volumes.

Berry expects its net operating expenses to remain fairly high at close to $29 per BOE in 2023. Net operating expenses are based on its expenses from field operations, which are reduced by consumer gas hedges and revenues from E&P non-production sources. Berry's net operating expenses were $27.20 per BOE in 2022, including $30.78 per BOE in Q4 2022.

Berry's capital expenditure budget is expected to be lower in 2023 at roughly $100 million for E&P capex along with $8 million capex for the Well Servicing and Abandonment division.

This leads to a projection that Berry can generate around $154 million in free cash flow during 2023. Berry's increased fixed dividend adds up to around $36 million per year. That would leave $118 million for Berry's variable dividend as well as debt repurchases and share repurchases. Thus Berry may put $24 million towards its variable dividend, or approximately $0.32 per share at its current share count. This would bring its total dividend up to $0.80 per share, or a 8.5% yield after its share price increased to $9.39 per share.

Berry would also have $94 million to put towards debt repurchases and share repurchases. Berry's variable dividend per share could increase later on as its share count is reduced. If it focused on share repurchases it may be able to reduce its share count by around 13% to 66 million by the end of 2023. Berry may also put some of that money towards bolt-on acquisitions to help it maintain production levels.

The above calculations do not include the potential impact of cash income taxes, but Berry believes that it won't pay federal tax in 2023 and estimates that state taxes are likely to be in the mid-single digit millions.

Notes On Valuation

I estimate Berry's value at around $11.00 to $11.50 per share in a long-term (after 2023) $75 Brent oil environment as a one-year target price. This is based on Berry reducing its share count to approximately 66 million and also factors in the higher operating costs and its lower base production levels after 2023.

In addition to that share value, Berry is expected to offer around $0.80 per share in total dividends related to 2023 results.

Conclusion

Berry is focusing on workovers and sidetracks along with a reduced amount of new well drilling in 2023 as it deals with an unsettled permitting situation in Kern County. This is expected to lead to mid-single digit production declines from Q4 2022 levels, although the reduced capex will also allow Berry to generate $154 million in positive cash flow (around $2.03 per share) at current $80 Brent strip.

Berry is planning on putting much of this cash flow towards share repurchases, and could reduce its share count by over 10% by the end of 2023. I estimate that Berry is worth around $11.00 to $11.50 per share in a long-term $75 Brent environment.

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