BRY - Berry Corporation: Projected To Generate $86 Million In H2 2023 Free Cash Flow

2023-09-20 04:00:41 ET

Summary

• Berry is now projected to generate $86 million in free cash flow in 2H 2023.
• It has around 60% of its 2H 2023 oil production and close to 50% of its 2024 oil production hedged with swaps.
• Berry has reduced its capex budget in 2023 to help pay for its Macpherson acquisition.
• Production guidance is in line with my expectations.
• BRY's net operating costs are slightly higher than my expectations, driven by a decrease in E&P non-production revenues.

Berry Corporation ( BRY ) provided updated guidance after closing on its acquisition of Macpherson Energy. Berry's revised production guidance for the full-year has a guidance midpoint of 25,100 BOEPD, in-line with my expectations . This also suggests that 2H 2023 production may be similar to 1H 2023 levels.

Berry is reducing capex to help pay for the acquisition and may thus end up with around $86 million in free cash flow during the second half of 2023 at current strip prices. Berry's exposure to oil price upside is partially limited by its hedges, as it has around 60% of its 2H 2023 oil production and close to 50% of its 2024 oil production (assuming flat production growth) hedged with swaps at $76 to $77 Brent.

Berry still partially benefits from higher oil prices though and I now estimate its value at $9.25 to $10.25 per share in a scenario where oil prices follow current strip until the end of 2024 and then Brent oil averages in the high-$70s after that time. This is a slight increase from my prior estimate of Berry's value .

Guidance Changes

Berry increased the midpoint of its full-year 2023 production guidance by approximately 500 BOEPD to its new midpoint of 25,100 BOEPD. This increase was largely due to the mid-September close of its Macpherson Energy acquisition. Berry also tightened up its production guidance range, which now is around 600 BOEPD from the low-end to the high-end of its guidance range, compared to a 1,200 BOEPD range initially.

Berry's revised production guidance is in-line with my expectations, as I had modeled Berry's 2023 production (excluding Macpherson) at around 24,400 BOEPD (slightly below the midpoint of its guidance due to the impact of severe weather in Q1 2023). The Macpherson assets may generate around 700 BOEPD in 2023 production, so the combined production would then be 25,100 BOEPD.

Berry increased its guidance around net operating costs by approximately $1.50 per BOE. This was generally driven by reduced expectations around its E&P non-production revenues, which include revenues from electricity sales, transportation and marketing activities.

Berry also reduced its full-year E&P capex guidance by approximately $29 million as it is diverting those funds to help pay for its Macpherson acquisition.

Potential 2023 Results

Based on its full-year guidance, Berry expects to average production of approximately 25,100 BOEPD in the second half of 2023 as well.

The current 2H 2023 strip for Brent is now around $89 to $90, and at those commodity prices, Berry should be able to generate $363 million in oil and gas revenues before hedges. Berry's Well Servicing and Abandonment division may be able to add another $12 million EBITDA for the second half of the year, while its 2H 2023 producer hedges have around negative $33 million in estimated value.

Berry has approximately 60% of its 2H 2023 oil production hedged at an average Brent price of $76.57 per barrel.

Berry's revised guidance suggests that its net operating expenses may end up at around $29.50 per BOE during the second half of the year. Capital expenditures are reduced to $35 million for this period as Berry reallocates capex to pay for its Macpherson acquisition.

Berry is now projected to generate $86 million in free cash flow during the second half of 2023 before working capital changes.

Estimated Value

I am adjusting my estimate of Berry's value to approximately $9.25 to $10.25 per share in a long-term (after 2024) high-$70s Brent scenario. The current Brent strip for 2024 is approximately $87, which is $8 higher than my long-term Brent prices. The higher Brent prices for 2024 increases Berry's projected 2024 free cash flow by around $37 million net of hedges.

The Brent strip for 2025 and 2026 is approximately $79 though, more in-line with my long-term Brent prices. I have thus adjusted my estimate of Berry's value to account for higher Brent prices until the end of 2024, before it drops back to my long-term price.

I have also assumed that Berry's net operating expenses trend slightly higher than what I previously expected.

Conclusion

Berry's updated guidance was largely in-line with my expectations, with its production guidance matching my expectations and its guidance around net operating costs being slightly higher than I expected. Berry's net operating costs were affected by its E&P non-production revenues being revised downwards.

Berry is now projected to generate $86 million in free cash flow in the second half of the year as it reduces capex to help fund its Macpherson acquisition. Berry's hedges reduce its potential upside from higher oil prices in 2H 2023 and 2024 although it still has some benefit with 40% of its oil production unhedged for 2H 2023 and a bit over 50% unhedged in 2024.

I now estimate Berry's value at $9.25 to $10.25 per share in a scenario where Brent oil prices follow current strip until the end of 2024 and then average in the high-$70s after that point.

For further details see: