Berry Corporation (BRY)

Executive Summary / Key Takeaways

• Berry Corporation is a contrarian California oil play that has survived decades of regulatory hostility while building a low-cost, high-return conventional asset base that is now poised to benefit from unprecedented regulatory clarity in Kern County.

• The company's Utah acreage represents a free call option on unconventional horizontal development, with costs already 20% below regional peers and a management-outlined path to increase production from 5,000 to 40,000 barrels of oil equivalent per day over the next decade.

• Despite a headline-grabbing $158 million impairment that pushed margins negative, underlying operations generate robust free cash flow, with the stock trading at just 5.35 times free cash flow and management on track to reduce debt by approximately 7% of enterprise value annually.

• The pending all-stock merger with California Resources Corporation (CRC) provides immediate scale, anticipated cost synergies, and a stronger negotiating position in Sacramento, with the transaction expected to close in Q1 2026 and exchange ratio of 0.07 CRC shares per BRY share.

• The central investment case hinges on three variables: successful merger integration, the pace of Kern County permit issuance following recent legislative wins, and execution of the inaugural Utah horizontal pad to validate sub-$700 per foot costs.

Setting the Scene: The California Oil Play That Refused to Die

Berry Corporation, founded in 1909 and headquartered in Dallas, Texas, has spent over a century developing oil fields in California while the state's production declined 35% over the past six years. This endurance is not accidental. The company built its strategy around onshore, low-geologic-risk, long-lived reserves that require minimal capital to maintain, generating steady cash flows even as competitors fled the state's complex regulatory environment. The business model is straightforward: produce high-margin crude from mature fields, hedge aggressively to protect cash flow, and control costs through an integrated well servicing subsidiary.

The industry structure explains why this matters. California's onshore production has been in structural decline, not due to geology, but because regulatory friction made new development uneconomic for all but the most efficient operators. Berry's survival reflects a moat built from deep local knowledge, existing environmental approvals, and an ability to execute low-cost sidetrack wells that generate returns exceeding 100% even at current oil prices. While the market has long discounted any California oil company as uninvestable, this consensus created an opportunity: Berry accumulated thousands of drilling locations, including approximately 500 proved undeveloped (PUD) sites with 200 sidetrack opportunities, at virtually no cost because no one else wanted them.

Competitively, Berry occupies a unique niche. California Resources Corporation dominates the state's production but lacks Berry's operational cost discipline and hedging sophistication. SM Energy (SM) and Ovintiv (OVV) have superior scale in Utah's Uinta Basin but target riskier, higher-cost unconventional plays without Berry's integrated gas infrastructure. Berry's 400 miles of owned pipelines in Utah provide a structural cost advantage that peers cannot replicate, while its CJ Well Services subsidiary ensures control over plugging and abandonment costs that third-party operators must pay at market rates. This integration translates directly to lower lease operating expenses and higher netbacks per barrel.

Technology, Strategy, and the Utah Optionality

Berry's core technological advantage lies not in proprietary software but in operational engineering that consistently delivers sub-peer costs. The thermal diatomite sidetrack program exemplifies this: 28 wells drilled in 2024 achieved returns exceeding 100% by targeting bypassed oil in reservoirs with the highest oil-in-place per acre in the world. These are not speculative exploration wells but capital-efficient projects that cost less than $1 million each and pay back in under a year. The success unlocked 115 additional sidetrack opportunities in the same asset, with 34 planned for 2025 and another 110 identified across other California properties. This inventory depth provides a visible production runway through 2027 without requiring a single new environmental permit in contested areas.

The Utah transformation narrative is more compelling because it remains undervalued by the market. Berry's first operated four-well horizontal pad in the Uinta Basin began flowback in August 2025 at costs of approximately $680 per lateral foot—20% below the average of six non-operated wells in the same basin. The company achieved $500,000 per well savings through a dual-fuel fleet and utilizing 50% produced water in fracs, demonstrating operational leverage that larger competitors cannot match. Management has identified approximately 200 potential horizontal locations across multiple benches, including Castle Peak and Uteland Butte formations. The strategic implication is stark: Berry could theoretically grow Utah production from 5,000 barrels per day currently to nearly 40,000 barrels over the next decade, transforming a peripheral asset into a core value driver.

This potential is not reflected in the stock price because the market views Berry as a declining California producer. However, the 2025 capital allocation shift—directing 40% of the $110-120 million budget to Utah versus 25% in 2024—signals management's conviction. The recent farm-in agreements and working interest acquisitions de-risk the acreage while maintaining capital efficiency. If the four-well pad meets cost and production targets, Berry can scale development with two rigs starting in 2026, creating a growth trajectory that none of its California-focused peers can replicate.

Financial Performance: Impairment Headlines Mask Cash Flow Strength

The nine-month 2025 financial results appear weak at first glance: total revenue declined 9% to $543.9 million, and the company posted a negative 12.4% profit margin. However, this narrative collapses under scrutiny. The $158 million non-cash impairment on a non-thermal diatomite property reflects legacy asset write-downs, not operational deterioration. Excluding this one-time charge, underlying E&P segment performance shows resilience despite a $67 million headwind from lower oil prices and $22 million from natural decline.

The cash flow statement tells the real story. Berry generated $210.2 million in operating cash flow over the trailing twelve months and $107.9 million in free cash flow, supporting a 5.35 price-to-free-cash-flow multiple that ranks among the lowest in the upstream sector. Management has used this cash flow to reduce debt by $23 million year-to-date, targeting at least $45 million for the full year—equivalent to approximately 7% of the company's $658.5 million enterprise value. This pace of debt reduction de-risks the balance sheet while the 10% annual amortization on the $545 million term loan provides a clear path to financial independence.

Cost control validates the low-cost operator thesis. Lease operating expenses fell 1% to $169 million despite inflationary pressures, while natural gas fuel costs increased only $1 million due to volume optimization. The hedging program delivered $57.2 million in derivative gains, transforming what would have been a cash flow crisis into a stable funding source for development. With 71% of remaining 2025 oil production hedged at $75 Brent and 63% of 2026 production at $70, Berry has visibility to continue debt reduction while funding the Utah expansion entirely from operating cash flow.

Segment performance reveals strategic progress obscured by headline numbers. The E&P segment's $17.1 million pre-tax loss for nine months includes the $158 million impairment; without it, profitability improved year-over-year despite lower prices. Utah production increased 31% quarter-over-quarter to offset a 7% California decline from a temporary steam-to-surface event, demonstrating the portfolio's balancing effect. Meanwhile, CJ Well Services generated $4 million in segment profit on $67.3 million revenue, providing a natural hedge against service cost inflation while positioning for growth from California's tightening idle well regulations.

Outlook and Execution: The Path to 40,000 Barrels Per Day

Management's guidance remains unchanged despite macro volatility, reflecting confidence anchored in permit certainty and cost control. The company holds permits to support development projects into 2027, with only 5% of its California PUD reserves constrained by current permitting limitations. This clarity is crucial because it means production can remain stable through at least 2026 while Utah ramps up. The thermal diatomite drilling program, front-loaded in the first half of 2025, sets up production and cash flow growth through the second half as new wells come online.

The regulatory environment has shifted decisively in Berry's favor. Kern County's revised oil and gas permitting ordinance, approved in June 2025, could allow approximately 2,700 new wells annually. Senate Bill 237, effective January 1, 2026, deems the supplemental environmental impact report sufficient for CEQA compliance, removing a major source of project delays. Assembly Bill 1207 extends the cap-and-invest program through 2045, creating a Climate Mitigation Fund that could support infrastructure investments. While AB 1207 may increase compliance costs, the net effect is greater regulatory certainty—the primary constraint on California oil development for the past decade.

The Utah execution timeline is critical. The four-well pad's results, expected to be fully online in Q3 2025, will validate the $680 per foot cost model. If successful, Berry can justify deploying two rigs in 2026 to begin developing the 200+ location inventory. The theoretical path to 40,000 barrels per day over ten years assumes sustained capital allocation of $40-50 million annually to Utah—entirely feasible given the company's $110-120 million total capex budget and growing free cash flow. This transformation would increase total company production by over 150% from current levels, directly accreting to shareholders because the development is funded from internal cash flow.

Risks and Asymmetries: What Could Break the Thesis

The CRC merger introduces integration risk that could derail the standalone investment case. While the all-stock transaction provides immediate scale and is expected to be accretive across key metrics, combining two California operators with different corporate cultures presents execution challenges. The $12 million termination fee payable to CRC if the deal fails under certain circumstances adds financial risk, while restrictions on Berry's operations during the pendency period may delay Utah development. If synergies fail to materialize, the combined entity could trade at a discount to the sum of its parts, wiping out the premium implied by the exchange ratio.

California regulatory risk remains the single largest threat to the investment thesis. While SB 237 and the Kern County ordinance provide near-term clarity, California's political environment can shift rapidly. A change in administration or successful legal challenge to the revised environmental impact report could reinstate the permitting moratorium that has constrained development since 2020. This risk is amplified by refinery closures—Phillips 66 (PSX)'s Wilmington facility shutting down in late 2025 and Valero (VLO)'s Benicia refinery by April 2026—which could weaken crude differentials if California's remaining 1.3 million barrels per day of refining capacity becomes oversupplied with local production.

Oil price volatility poses a persistent risk despite Berry's hedging program. The company's guidance assumes current strip pricing holds, but a sustained decline below $60 Brent would eventually exhaust hedge protection and impair free cash flow generation. Management acknowledges that if oil prices were to significantly decline and remain weak, liquidity and capital resources may not be sufficient to conduct operations until prices recover. The 67% increase in interest expense year-over-year demonstrates the cost of carrying debt in a higher-rate environment, making debt reduction even more critical to maintaining financial flexibility.

Execution risk in Utah is material. The four-well pad represents Berry's first operated horizontal project in the basin. While early results are promising and costs are below peer averages, the company lacks the scale and experience of SM Energy or Ovintiv in manufacturing-mode horizontal development. If production rates disappoint or costs creep above $700 per foot, the entire 200-location inventory becomes less economic, and the path to 40,000 barrels per day becomes speculative rather than probable.

Valuation Context: Deep Value with a Catalyst

At $3.48 per share, Berry Corporation trades at an enterprise value of $658.5 million, representing 0.97 times trailing twelve-month revenue and 2.57 times adjusted EBITDA. These multiples place it at a significant discount to direct peers: California Resources trades at 1.41 times revenue and 4.24 times EBITDA, SM Energy at 1.47 and 2.14 respectively, and Ovintiv at 1.87 and 3.92. The valuation gap is most pronounced in free cash flow metrics, where Berry's 5.35 price-to-free-cash-flow ratio is higher than CRC's 4.84 and significantly higher than SM's 1.05, suggesting it is relatively more expensive on this metric compared to these peers, though SM Energy benefits from higher margins.

The price-to-book ratio of 0.42 suggests the market values Berry's assets at less than half their carrying value, reflecting skepticism about both California regulatory viability and Utah execution. However, this ignores the company's hedging value—71% of 2025 production locked at $75 Brent provides a floor on cash flow—and the strategic optionality of 500+ PUD locations that become drillable under the new Kern County ordinance. If Berry can convert even 10% of these locations into production over the next three years, the asset value understated on the balance sheet becomes earnings power on the income statement.

The fixed $0.12 per share annual dividend, yielding 3.47% at current prices, provides income while investors wait for catalysts to play out. This dividend is supported by free cash flow generation and aligns with the new capital allocation policy prioritizing debt reduction. With $94 million in total liquidity and no borrowings on the revolver, Berry has sufficient runway to execute its 2025 capital program and maintain the dividend even if oil prices moderate.

Conclusion: Asymmetric Upside with Downside Protection

Berry Corporation's investment thesis centers on a rare convergence of regulatory clarity in California and unconventional optionality in Utah, available at a valuation that prices in failure rather than success. The company's century-long survival in California's hostile environment has created an inventory-rich asset base that competitors cannot replicate, while recent legislative wins provide a visible path to monetization. The Utah horizontal program offers a free call option on transformational growth, with early cost advantages that suggest Berry can compete effectively against larger, more experienced operators.

The pending CRC merger provides a near-term catalyst that de-risks the standalone execution story while creating a California energy leader with enhanced scale and political influence. If the deal closes in Q1 2026 as expected, shareholders gain exposure to a combined entity with superior debt capacity, cost synergies, and a dominant market position in the state's most productive basins. The key variables to monitor are merger approval, the pace of Kern County permit issuance beginning January 1, 2026, and production results from the inaugural Utah horizontal pad.

Trading at 0.42 times book value and 5.35 times free cash flow, Berry offers asymmetric upside with downside protection from aggressive hedging, low-cost operations, and a sustainable dividend. The market's skepticism is understandable given California's history and recent impairments, but this overlooks the fundamental inflection in regulatory risk and the strategic value of assets accumulated during decades of industry retreat. For investors willing to look beyond headline numbers, Berry represents a unique opportunity to buy a high-quality, cash-generating energy company at deep value prices while getting a free option on transformational growth.