Berry Corporation (BRY) is a value-driven western United States independent upstream energy company with a focus on onshore, low geologic risk, long-lived oil and gas reserves. The company operates in two business segments: (i) exploration and production ("E&P") and (ii) well servicing and abandonment.

Business Overview

Berry's E&P assets are located in California and Utah, are characterized by high oil content, and are predominantly located in rural areas with low population. The company's California assets are in the San Joaquin basin (100% oil), while its Utah assets are in the Uinta basin (60% oil and 40% gas). With respect to its E&P business in California, Berry focuses on conventional, shallow oil reservoirs. The drilling and completion of such wells are relatively low-cost in contrast to unconventional resource plays. The California oil market is primarily tied to Brent-influenced pricing, which has typically realized premium pricing relative to West Texas Intermediate ("WTI"). All of Berry's California assets are located in oil-rich reservoirs in the San Joaquin basin, which has more than 150 years of production history and substantial oil remaining in place.

Berry also has upstream assets in Utah, located in the Uinta basin, which produce oil and natural gas at depths ranging from 4,000 feet to 8,000 feet. The company has high operational control of its existing acreage (99,000 net acres), which provides significant upside for additional development and recompletions.

In its well servicing and abandonment segment, Berry operates one of the largest upstream well servicing and abandonment businesses in California, which operates as C&J. C&J provides wellsite services in California to oil and natural gas production companies, including well servicing and water logistics. Additionally, C&J performs plugging and abandonment services on wells at the end of their productive life, which Berry believes creates a strategic growth opportunity based on the significant market of idle wells within California.

Strategy

The core of Berry's strategy is to create value by generating significant free cash flow in excess of its operating costs, while optimizing capital efficiency. In doing so, the company seeks to maximize enterprise value through overall returns. Since its initial public offering in July 2018, Berry has demonstrated its commitment to maximizing enterprise value and returning free cash flow to shareholders through dividends and share repurchases. The company has also made accretive acquisitions that contribute to its goal of maintaining existing production volumes.

Financials

For the full year 2023, Berry reported annual net income of $37.4 million, annual revenue of $863.5 million, annual operating cash flow of $198.7 million, and annual free cash flow of $117.6 million. In the first quarter of 2024, the company generated adjusted EBITDA of $69 million and produced 25,400 barrels of oil equivalent per day, in line with projections. Berry expects to deliver full-year 2024 results consistent with the guidance provided in March.

Recent Developments

The company's operational excellence includes keeping production essentially flat, acquiring accretive producing bolt-on assets, efficiently allocating capital, managing its cost structure, and prioritizing safety and compliance. In the first quarter of 2024, Berry's production remained flat compared to the 2023 full-year average, with base production remaining strong, especially from its thermal diatomite reservoirs. The company drilled and completed sidetracks as planned and is in the process of drilling a 20-well sidetrack campaign in its Midway Sunset field. Additionally, Berry made progress reducing costs, highlighted by a 10% reduction in lease operating expenses compared to the previous quarter.

Moreover, the company is currently in the process of acquiring additional working interest in its Ron Mountain field by reallocating capital from its development plan. This acquisition represents approximately 100 barrels of oil per day on an annualized basis. Underpinning these accomplishments is Berry's commitment to superior health, safety, and environmental (HS&E) performance and regulatory compliance. The company's safety performance remains strong, with zero recordable incidents, zero lost time incidents, and no reportable spills for the second quarter in a row.

Since the company's last earnings call, there has been a development in the ongoing Kern County EIR litigation, which Berry's President, Danielle Hunter, addressed in her remarks. The Appeals Court issued a ruling that did not reinstate the current County EIR, and the EIR will remain stayed until the county can remedy the three areas the court found deficient. Based on the company's current understanding, this process is expected to take 18 to 24 months to be fully resolved. However, Berry's 2024 plans do not require new drill permits and are not reliant on the reinstatement of the EIR. The company believes it has sufficient inventory of workover and sidetrack opportunities that should allow it to sustain production in 2025, similar to its plans for 2023 and 2024.

In addition to its operational excellence, Berry is focused on improving its capital structure by refinancing its notes due in 2026 at the right time under the most favorable conditions. The company is also continuing to pursue growth opportunities in its E&P business, focusing on cash-enhancing, accretive transactions that will provide scale and geographic diversification.

One such growth opportunity is in the Uinta Basin, where Berry is making progress on a horizontal play. In April 2024, the company formed a 21% working interest in four horizontal wells that are expected to be put on production in the second quarter of 2024. These wells are adjacent to Berry's existing operations in Utah, and the results will be used to evaluate future development opportunities in the company's acreage, which it believes has the potential to develop approximately 22,000 net acres with horizontal wells.

Sustainability Efforts

Berry's commitment to sustainability is also an integral part of its strategy. Last month, the company issued its updated sustainable business report, which highlights its goal to eliminate at least 80% of methane emissions associated with its existing operations from a 2022 baseline by the end of 2025. This achievement is expected to reduce the company's total Scope 1 greenhouse gas emissions from that baseline by approximately 10%. Berry plans to replace all regulated natural gas pneumatic devices with zero-emission devices in the second half of 2024 to help achieve this goal.

Conclusion

In conclusion, Berry Corporation is off to a strong start in 2024, and the company is confident it will achieve another solid year of performance. The focus for the rest of the year remains optimizing the base business, improving the capital structure, and pursuing growth opportunities in its E&P business, all while maintaining its commitment to safety, environmental stewardship, and regulatory compliance.