BRY - Berry Corporation: Attractive At Current Prices

2023-05-13 08:00:00 ET

Summary

• Berry Corporation seems to be linked to the Brent price more than any other metric.
• High fuel gas prices crushed the recent quarter, but things have improved.
• We think Berry is attractive at current prices.

Introduction

Berry Corporation (BRY) is navigating a difficult environment for an oil producer. Most of their production occurs in a state that has fought oil and gas development tooth and nail. In Kern county, a court has suspended the issuance of new drilling permits, pending the outcome of environmental litigation that has no firm date for resolution. You can't get any tougher than that! You would think that might have an outsized impact on the stock price.

Not really. As you can see from the price chart of above, Berry Corporation tracks the price of Brent almost in lock step. Interestingly, it tracks ~20% moves in Brent with ~20% moves in the price of BRY's stock, mas ou menos .

Analysts are positive on the company with an Overweight ranking . Price targets range from $7.00 to $12.00 per share, intriguingly, with a median price of $11.50. Certainly intriguing that this price is ~60% higher than the current price in the upper $6's.

Let's see what sort of value we can come to for Berry.

The Berry Story

Berry Corporation operates primarily in the San Joaquin basin, in Kern County, California. The area is one of the oldest producing regions in the country, and Berry's own history goes back to the 1910's. Kern oil is thick, and viscous with a low API gravity, and heat is needed to get the oil to flow toward the well bore. One key advantage is the low decline rate of the mostly sandstone reservoirs and some diatatomite that enables these long productive times, once heat is applied.

What's going on with Berry?

Berry has been following the plan they laid out last January, when a judge handling litigation regarding future permitting issued a stay on new permits. Workovers and side tracks are the key for the near term. I made the case in the last article that this could be a successful strategy for a while-2-3 years, depending on the reservoirs being treated. I also made the point that BRY was well positioned to carry out this strategy given their well servicing subsidiary, C&J Well Servicing, and the background of CEO Fernando Araujo-SLB.

There wasn't much discussion about the strategy in the call on these topics, so we will have to wait until the next quarter for any verifiable results. CEO Araujo noted that extreme weather impacted production during the quarter, while affirming full year production goals.

We anticipate our full-year results to be in line with expectations. In March, we are able to recover fully the production downtime caused by the severe weather experience in both California and Utah earlier in the first quarter.

What we did hear was a good bit about was M&A prospects in California as some operators tire of fighting the political tides. CEO Araujo comments on M&A opportunities within the California O&G industry:

We are seeing a renewed interest in the M&A opportunities, especially in California and especially with the regulations getting much tighter than before. A lot of the groups are willing to have a conversation these days, whereas in the past, they really didn't. So we truly believe that the future of California has to be consolidation. I think everybody understands that as well. There's millions of dollars to be captured in terms of synergies, operational synergies, corporate synergies, and we're going to be right in the middle of that.

It will be interesting to watch this play out. California produces about 300K BOPD, so there are other producers that could be looking to monetize their assets and pursue an easier line of work in a more favorable setting.

Q1 2023

One area that stood out for Berry Corporation was the spike in gas prices during the early part of the quarter that drove lease costs through the roof, and resulted in a $6 mm loss for the quarter. A dramatic turnaround from the prior quarter where they earned $72 mm. The gas situation has gotten better, and is unlikely to be as severe going forward thanks to the glut of gas on the market.

Thanks to higher California and Rocky Mountain gas prices - which Berry uses to run steam generators, Lease Operating Costs - LOE were about 65% higher than in Q-4, 2023. If you divide it out by their production-24,300 BOEPD, it comes to about $68/bbl for the quarter. Hedging helped to defray some of this as noted in their press release, and highlighted in the red outline.

The good news is that gas prices are dramatically down which should lower costs the rest of the year. In effect putting as much as $35-$40 per bbl back on Berry's bottom line in coming quarters.

The company has $14 mm cash on hand, and a further availability on their RCL of $165 mm. BRY faces no short term liquidity problems.

Risks

The ever-present political risk must be noted, while also noting that the company is adapting with workovers and side tracks, as we have discussed. The risk from gas prices experienced in Q-1, could come back to haunt them again a year from now. Management's commentary addresses the exposure to Rockies gas:

We purchase substantially more natural gas for our California steamfloods and cogeneration facilities than we produce and sell in the Rockies. In May 2022, we began purchasing most of our gas in the Rockies and transporting it to our California operations using our Kern River pipeline capacity. We buy approximately 48,000 mmbtu/d in the Rockies, and the remainder comes from California markets.

Your takeaway

Using current Brent pricing, high $70's, the company has a shot at generating $691 mm in revenue on ~8,869,000 BOE of production. With LOE's in the upper $20's, EBITDA should be in $350 mm range. The company pegged about $130 mm for shareholder returns in 2023, with a likelihood of about $40 mm going to fund dividends for the year. That covers the basic $0.48 dividend with perhaps some extra in a variable if things continue to improve. The slide below discusses cash allocation priorities for 2023.

I think we have seen the low for Brent and Berry Corporation this year, making the current sub-$7.00 price a solid entry point. I think the company is on fairly solid financial ground, and it should be noted that at current prices, the fixed divided represents a ~6% yield on cost.

I think the Berry Corporation price will drift higher from here with rising Brent prices as shown in the pricing graph, but the high $8's or low $9's is probably what can be expected in the near term.

On a forward EV/EBITDA basis, Berry Corporation is trading at ~4X currently, but that could quickly drop to a 3X with improved Brent prices and lower LOE's. To keep the multiple the same, the share price should revert toward $8.0. A 4X would get us back to $9.0. On a flowing barrel basis the company trades at $41K per barrel. I don't think any of those metrics expose investors to substantial risk. I can't get to the outlier number the analysts linked suggest, but I own Berry Corporation stock primarily for steady dividend income, and so far that thesis is bearing out. At current prices, I am converting dividends to shares.

In short, investors with a modest risk profile may find Berry Corporation interesting at current levels. I have recently added to my Berry Corporation position with a large buy, and may do so again.

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