BRY - Berry Corporation Turns To Acquisitions To Offset Permitting Challenges

2023-07-18 23:36:05 ET

Summary

• Berry made a $70 million acquisition of Macpherson Energy.`.
• This gives it another 2,400 BOEPD (100% oil) in production at a 2.7x multiple to adjusted EBITDA at $75 Brent.
• Operating costs for the acquired assets appear to be around $36 per barrel.
• This helps stabilize production levels despite challenges in getting new well permits.
• California new well permits have largely stalled this year.

Berry Corporation ( BRY ) recently announced a $70 million acquisition of a private Kern County operator. This helps mitigate some of the potential for Berry's production to decline amidst challenges in getting new well drilling permits.

Berry is reducing its 2023 capex budget by $35 million and thus expects its net debt to be approximately the same in mid-2024 (with the acquisition) as it would have been without the acquisition. I've reduced my estimate of Berry's value to approximately $9 to $10 per share in a long-term high-$70s Brent scenario to reflect the high level of uncertainty about Berry's ability to get new well permits and the unfavorable overall regulatory situation in California.

Berry does have the potential to continue acquiring assets to keep its production stable despite minimal drilling of new wells. Berry's recent acquisition appears to be at a fairly good price, although there is no guarantee that it will be able to make future acquisitions at favorable prices.

Acquisition Notes

Berry is acquiring Macpherson Energy for $70 million in cash, before the customary purchase price adjustments. Berry is paying $50 million in cash at closing (expected in Q3 2023), while the remainder due in July 2024.

Macpherson is a privately held Kern County operator with assets that are expected to produce around 2,400 BOEPD (100% oil) in 2024. At $75 Brent in 2024, these assets are also expected to generate approximately $26 million in adjusted EBITDA. Operating expenses (not including production taxes) for the acquired assets appear to be around $36 per barrel based on available information.

Berry is reducing its 2023 capital expenditure budget by $35 million to help pay for the acquisition, which is a move that makes sense given the current challenges with getting new well permits in California. Berry thus believes that its net debt will be similar by mid-2024 to what it previously projected (before the acquisition) after factoring in the cash flow it is generating from the acquisition.

The reduction in 2023 capex should mostly affect 2024 production volumes since the reductions are coming late in the year. Thus Berry's Q4 2023 production will probably end up above 26,000 BOEPD, benefiting from the full impact of the acquisition and only seeing a minor impact from the 2023 capex reductions.

Potential Strategy

If new well permits remain largely halted in Kern County, then this deal indicates that it may be a viable alternative strategy for Berry to acquire assets to help keep its production roughly stable. I am now expecting Berry's production for 2024 to end up around at 24,000 to 25,000 BOEPD, before any further acquisitions. This would be similar to its 2023 production expectations before the Macpherson acquisition, and also assumes that Berry goes with a noticeably below maintenance capex budget that focuses on sidetrack, workover and recompletion activity, with minimal new drilling activity.

Estimated Value

I've trimmed Berry's estimated value to approximately $9 to $10 per share in a long-term high-$70s Brent environment, due to increasing concerns about the ability to get new well drilling permits. The estimated value mentioned above assumes that the situation with minimal numbers of new drilling permits continues indefinitely.

It will be interesting to see if Berry changes its calculations around adjusted free cash flow if it goes with a substantially below maintenance development capex budget combined with acquisitions to help make up the shortfall.

Currently Berry mentions that maintenance capital is the capital required to keep annual production substantially flat, and this is basically calculated as E&P capex less some minor items. If Berry's capex budget is decreased significantly, then the maintenance capex number cannot be based mostly on actual capex anymore.

Conclusion

Berry's $70 million acquisition of Macpherson Energy appears to be at a good price, with a 2.7x multiple to adjusted 2024 EBITDA at $75 Brent. This should help Berry maintain production levels in 2024 despite the challenges it is facing in getting new well drilling permits.

Berry has reduced its 2023 capex budget to help pay for the acquisition and its mid-2024 net debt should now be similar to what it would have been without the acquisition.

The permitting and regulatory issues in California remain points of concern, although acquisitions can help stabilize (or potentially slightly increase) production.

I believe that Berry still has some upside (to $9 to $10 per share) in a long-term high-$70s Brent environment despite the regulatory issues. It should also be able to generate a substantial amount of free cash flow, although there is some uncertainty about how much it will put towards share and debt repurchases compared to acquisitions.

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