10-Q: Berry Corp. Reports Q2 Profit Amid Production Decline

Berry Corporation posted a net income for Q2 2025, driven by derivative gains, despite lower oil and gas sales and a significant year-to-date impairment charge, with production volumes declining.

Summary

• Net income for Q2 2025 was $33.6 million, a significant improvement from a net loss of $8.8 million in Q2 2024.
• Total revenues and other increased by 5% to $210.1 million in Q2 2025 compared to $199.6 million in Q2 2024, primarily due to substantial gains on oil and gas sales derivatives.
• Oil, natural gas, and natural gas liquids sales decreased by 26% to $125.6 million in Q2 2025 from $168.8 million in Q2 2024, driven by lower oil prices and volumes.
• Gains on oil and gas sales derivatives were $56.4 million in Q2 2025, a significant positive swing from losses of $5.8 million in Q2 2024.
• For the six months ended June 30, 2025, the company reported a net loss of $63.1 million, compared to a net loss of $48.9 million for the same period in 2024.
• A non-cash pre-tax asset impairment charge of $158 million ($113 million after-tax) was recorded in Q1 2025 on a non-thermal diatomite proved property in California.
• Average daily production decreased by 6% to 23.9 mboe/d in Q2 2025 from 25.3 mboe/d in Q2 2024, mainly due to natural decline and temporary curtailment from sidetrack drilling in California.
• Free Cash Flow for the six months ended June 30, 2025, was negative $8.1 million, a substantial decrease from positive $38.9 million in the same period of 2024.
• Capital expenditures increased to $82.6 million for the six months ended June 30, 2025, from $59.3 million in the prior year, with approximately 40% allocated to Utah development opportunities.
• The company maintains $427.5 million outstanding on its 2024 Term Loan and has $49 million of available borrowing capacity under its 2024 Revolver as of June 30, 2025.
• Quarterly cash dividends of $0.03 per share were declared in March and May 2025, with another $0.03 per share approved for August 2025.

Sentiment

Score: 4

Explanation: While Q2 2025 showed a net income, the year-to-date performance is significantly impacted by a large impairment charge and negative free cash flow. Production is declining, and interest expenses are rising. The positive outlook for H2 production and continued dividends offer some stability, but the overall financial health for the first half of the year is weaker, and regulatory risks persist.

Positives

• Net income for Q2 2025 was $33.6 million, a positive turnaround from a net loss in the prior year quarter.
• Significant gains on oil and gas sales derivatives ($56.4 million in Q2 2025) substantially offset declines in direct commodity sales.
• No impairment of oil and gas properties was recorded in Q2 2025, unlike Q2 2024 which saw a $44 million charge.
• Lease operating expenses decreased slightly by 1% in Q2 2025 compared to Q2 2024, indicating cost management.
• Long-term debt, net, decreased to $364.6 million at June 30, 2025, from $384.6 million at December 31, 2024.
• The company has secured all necessary permits for its 2025 operating plan and for sidetrack drilling and workover activity into 2026.
• Initial production rates from four acquired lateral wells in Utah (April 2024) exceeded initial expectations.
• The company expects to fund the remainder of its 2025 capital program from cash flow from operations.
• The company anticipates continued quarterly cash dividends of $0.03 per share.

Negatives

• Net loss for the six months ended June 30, 2025, was $63.1 million, an increase from $48.9 million in the same period of 2024.
• Free Cash Flow for the six months ended June 30, 2025, was negative $8.1 million, a significant decline from positive $38.9 million in the prior year.
• Oil, natural gas, and NGL sales decreased by 26% in Q2 2025 compared to Q2 2024, primarily due to lower oil prices and volumes.
• Average daily production declined by 6% in Q2 2025 compared to Q2 2024, and by 4% for the six months ended June 30, 2025, compared to the same period in 2024.
• A substantial non-cash pre-tax asset impairment charge of $158 million was recorded in Q1 2025.
• Interest expense increased by 54% in Q2 2025 compared to Q2 2024, and by 60% for the six months ended June 30, 2025, due to prevailing interest rates and increased amortization of deferred financing costs.
• Service revenue from the well servicing and abandonment business decreased by 27% in Q2 2025 compared to Q2 2024 due to lower activity and rates.
• Total assets decreased to $1.43 billion at June 30, 2025, from $1.52 billion at December 31, 2024, largely due to the impairment charge.
• Total stockholders' equity decreased to $664.9 million at June 30, 2025, from $730.6 million at December 31, 2024, primarily due to the net loss and dividends.

Risks

• Volatility of oil, natural gas, and NGL prices due to global geopolitical and economic conditions, including tariffs, political instability, armed conflicts, and economic sanctions.
• Potential for future asset impairments if commodity prices remain low or decline further, unproved property values decrease, or reserve estimates are revised downward.
• Significant delays in the issuance of permits to drill new oil and gas wells in Kern County, California, which could adversely impact future operating plans (e.g., 2026 and beyond) if court approval for the SSREIR is not obtained.
• Impact of current, pending, and future laws and regulations, including those related to environmental protection, land use, and GHG emissions, particularly in California.
• Uncertainty and potential negative impact from refinery closures in California on the ability to market crude production.
• Inflationary pressures and tariffs could significantly increase operating and capital costs.
• Disruptions, capacity constraints, or other limitations on pipeline systems for oil and natural gas delivery.
• Ability to recruit and retain key senior management and technical employees.
• Inability to generate sufficient cash flow from operations or obtain adequate financing if oil prices significantly decline and remain weak.
• Compliance with financial covenants and other restrictive covenants under the 2024 Term Loan and 2024 Revolver, which limit actions like dividend payments, debt prepayments, and capital expenditures.
• Effectiveness of derivative instruments in managing commodity price risk and the creditworthiness of counterparties.
• Uncertainties associated with estimating proved reserves and related future cash flows.
• Drilling and production results, including higher-than-expected decline rates or lower-than-expected production/reserves.
• Potential liability from pending or future legal and administrative proceedings, including securities litigation and regulatory matters like the CalGEM injection well issue.

Future Outlook

The company anticipates total 2025 production volume to be consistent with last year, with approximately 93% oil. The majority of 2025 capital expenditures for California and Utah E&P operations are expected to be incurred by the end of Q3 2025. Four horizontal wells in Utah are expected to be brought online within August 2025, and a Castle Peak horizontal well is expected online in Q4 2025. Production from thermal diatomite wells in California is expected to be fully brought online in Q3 2025. The company expects to fund the remainder of its 2025 capital program from cash flow from operations and anticipates continuing quarterly cash dividends. The recently enacted One Big Beautiful Bill Act (OBBBA) is not expected to have a material impact on 2025 results. Refinery closures are not currently expected to negatively impact price realizations, but additional closures could have an adverse impact. Inflation rates stabilized in H1 2025, with no material change to cost structure, but tariffs could cause future inflationary pressure.

Management Comments

• We have secured all of the permits necessary to execute our 2025 operating plan, as well as permits to support sidetrack drilling and workover activity into 2026.
• The initial production rates from those four wells (Utah lateral wellbores acquired in April 2024) exceeded our initial expectations.
• This activity (four-well horizontal pad in Utah) marks the development of our first operated horizontal pad on our Uinta Basin acreage, and the results will inform our plans for further horizontal development across our acreage in Utah.
• We believe CJWS has upside opportunity based on the significant inventory of idle wells within California, coupled with existing and new regulations that will increase the annual idle well management obligations of operators.
• We strive to minimize the variability of our fuel gas costs for our California steam operations with natural gas purchase hedges.
• We expect our operations to generate sufficient cash flows at current commodity prices including our current hedging positions.
• We currently believe that our liquidity, capital resources and cash will be sufficient to conduct our business and operations and meet our obligations for at least the next 12 months.

Industry Context

The oil and gas industry continues to be heavily influenced by volatile commodity prices, driven by global geopolitical and economic conditions, including OPEC+ production cuts and rollbacks. President Trump's executive orders aimed at increasing oil production and decreasing commodity prices have introduced uncertainty. California's refining capacity is expected to decrease with announced refinery closures, though the company does not anticipate immediate negative impacts on its price realizations. The Uinta Basin is experiencing increased activity and successful horizontal drilling, indicating significant development potential. Regulatory environments, particularly in California, remain stringent, impacting permitting and operational costs.

Comparison to Industry Standards

• The company's California oil market is tied to Brent-influenced pricing, which has typically realized premium pricing relative to West Texas Intermediate (WTI), a competitive advantage compared to producers tied solely to WTI.
• The drilling and completion of wells in the San Joaquin Basin are described as relatively low-cost compared to unconventional resource plays, suggesting a cost efficiency advantage in its California operations.
• The company's acquisition of a 21% working interest in four two-to-three mile lateral wellbores in Utah in April 2024, with initial production rates exceeding expectations, indicates successful expansion into horizontal drilling, a trend seen with other operators in the Uinta Basin.
• The company's first operated four-well horizontal pad in the Uteland Butte reservoir in Utah, with first production expected in Q3 2025, positions it to leverage successful horizontal development strategies observed across the Uinta Basin by other operators.
• C&J Well Services, as one of the largest upstream well servicing and abandonment services businesses in California, provides a competitive advantage by offering access and control over a critical supply chain component, potentially reducing reliance on external vendors and costs compared to competitors without in-house services.

Management Changes

Corporate Governance

Legal Proceedings

• No material updates to previously reported securities litigation matters.
• CalGEM notified the company about uncompleted mechanical integrity testing on certain injection wells by April 1, 2024. The company has confirmed compliance or disconnection for all subject wells and expects an immaterial civil penalty.

Stakeholder Impact

• Shareholders: Experienced a net loss for the first half of 2025 and negative free cash flow, potentially impacting share value. However, the company continues to pay quarterly dividends and has a stock repurchase program in place (though no repurchases in H1 2025).
• Employees: Key employee agreements were updated, providing clarity on compensation and restrictive covenants. Stock-based compensation was granted in March 2025.
• Customers: The well servicing and abandonment services segment (CJWS) experienced decreased activity and rates, indicating potential reduced demand from third-party operators.
• Creditors: The company is prioritizing debt reduction and is in compliance with financial covenants under its 2024 Term Loan and 2024 Revolver, which are secured by a first lien on substantially all assets.
• Regulatory Authorities: The company is actively engaging with CalGEM regarding compliance issues and is navigating complex state and local regulations impacting permitting.

Next Steps

• Bring all four horizontal wells in the Uteland Butte reservoir online within August 2025.
• Bring a horizontal well targeting the Castle Peak reservoir of the Uinta Basin online in Q4 2025.
• Fully bring production from thermal diatomite wells in California online in Q3 2025.
• Incur the substantial majority of annual California and Utah capital expenditures by the end of Q3 2025.
• Continue to pay quarterly cash dividends, with the next expected in August 2025.
• Monitor the economic effects of U.S. trade policy and opportunities to mitigate impacts on costs and prices.
• Evaluate the impact of the One Big Beautiful Bill Act (OBBBA) on 2025 results.

Key Dates

Recommendation

While Berry Corporation reported a net income for Q2 2025, this was largely driven by derivative gains, masking a decline in core oil and gas sales and production volumes. The year-to-date performance shows a net loss and, more critically, negative free cash flow, indicating that operations are not currently generating sufficient cash to cover capital expenditures. The significant impairment charge in Q1 2025 also reflects a reduction in asset value. However, the company is actively managing its debt, maintaining liquidity, and has a positive outlook for increased production in the second half of 2025 from new wells. Given the mixed financial signals, the ongoing regulatory challenges in California, and the reliance on hedging to offset commodity price volatility, a 'Hold' recommendation is appropriate. Investors should monitor the company's ability to execute on its H2 production targets, improve free cash flow, and navigate the complex regulatory and commodity price environment before considering further investment.

Keywords

Oil and Gas, Exploration and Production, E&P, Well Servicing, California, Utah, San Joaquin Basin, Uinta Basin, Crude Oil, Natural Gas, Derivatives, Hedging, SEC Filings, Quarterly Report, Financial Results, Capital Expenditures, Production Volumes, Asset Impairment, Free Cash Flow, Debt, Regulatory Risk, Permitting, Corporate Governance, Executive Compensation