10-Q: Berry Corp. Reports Q3 Loss Amid Merger Progress, Asset Impairment

Berry Corporation reported a net loss of $26 million in the third quarter of 2025, driven by lower oil prices, decreased production, and a significant asset impairment, while progressing towards its merger with California Resources Corporation.

Summary

• Reported a net loss of $26.0 million for the three months ended September 30, 2025, a significant decline from $69.9 million net income in the same period of 2024.
• Incurred a net loss of $89.1 million for the nine months ended September 30, 2025, compared to a net income of $21.0 million for the same period in 2024.
• Total revenues and other decreased by 42% to $151.1 million in Q3 2025 from $261.7 million in Q3 2024, primarily due to lower oil prices and a swing from derivative gains to losses.
• Oil, natural gas, and NGL sales decreased by 17% to $128.5 million in Q3 2025 compared to $154.4 million in Q3 2024.
• Recorded a non-cash pre-tax asset impairment charge of $158 million ($113 million after-tax) on a non-thermal diatomite proved property in California during the first quarter of 2025.
• Average daily production decreased by 4% to 23.9 mboe/d in Q3 2025 compared to 24.8 mboe/d in Q3 2024, with California production down 1.7 mboe/d and Utah production up 0.8 mboe/d.
• The merger with California Resources Corporation (CRC) is pending, expected to close in the first quarter of 2026, with each Berry share converting into 0.0718 CRC shares.
• Incurred approximately $3 million in transaction costs related to the merger for the nine months ended September 30, 2025.
• Paid a civil penalty of $2,082,560 to CalGEM on October 3, 2025, for mechanical integrity testing non-compliance.
• Capital expenditures for the nine months ended September 30, 2025, were $100 million, with a full-year 2025 budget expected to be between $110 million and $120 million.

Sentiment

Score: 3

Explanation: The company reported significant net losses and revenue declines for both the quarter and nine-month periods, primarily due to lower oil prices, decreased production, and a substantial asset impairment charge. Increased interest expenses and a swing from derivative gains to losses further impacted profitability. While the pending merger with CRC and positive regulatory developments in California offer strategic long-term benefits, the immediate financial performance is considerably weaker than the prior year.

Positives

• The merger with California Resources Corporation is progressing as planned and is expected to close in the first quarter of 2026, offering a strategic exit for shareholders.
• Utah production increased by 17% to 5.5 mboe/d in Q3 2025 compared to Q3 2024, driven by new horizontal wells coming online, with initial production rates exceeding expectations.
• Regulatory clarity in California is improving, with Kern County approving revisions to its oil and gas permitting ordinance and Senate Bill 237 (SB 237) facilitating new well permits from January 1, 2026.
• The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, is expected to result in increased tax deductions and credits and reduced federal tax payments.
• The company maintains $94 million in liquidity as of September 30, 2025, including $13 million in cash, $49 million of available borrowing capacity on the 2024 Revolver, and $32 million available under the Delayed Draw Term Loan.
• An active hedging program is in place, covering a significant portion of forecasted production and gas purchases to help achieve more predictable cash flows.
• The Southern California refinery fire in October 2025 had no impact on the marketing of the company's products.

Negatives

• Reported a net loss of $26.0 million for Q3 2025 and $89.1 million for the nine months ended September 30, 2025, a significant deterioration from prior periods.
• Total revenues and other decreased by 42% in Q3 2025 compared to Q3 2024, primarily due to lower oil prices and a substantial swing from derivative gains to losses.
• Oil, natural gas, and NGL sales decreased by 17% in Q3 2025 compared to Q3 2024, mainly due to lower oil prices and reduced volumes.
• A significant non-cash pre-tax asset impairment charge of $158 million was recorded in Q1 2025, materially impacting net income.
• California production decreased by 1.7 mboe/d in Q3 2025 compared to Q3 2024, attributed to natural decline and temporary downtime from a steam-to-surface event.
• Interest expense increased by 83% in Q3 2025 and 67% for the nine months ended September 30, 2025, due to higher prevailing interest rates and increased borrowings.
• Service revenue decreased by 18% in Q3 2025 and 24% for the nine months ended September 30, 2025, due to decreased activity and rates.
• Greenhouse gas allowances and other emission costs increased significantly by over 100% in Q3 2025 compared to Q3 2024.
• Ongoing shareholder derivative lawsuits, though currently stayed, pose potential future costs and management distraction.

Risks

• Failure to complete the merger with California Resources Corporation due to unmet conditions, regulatory delays, or other factors could adversely affect the company's business and stock price.
• The merger agreement includes a termination fee of approximately $12.0 million and potential expense reimbursement payable by Berry Corp. under certain circumstances if the merger is not completed.
• Commodity price volatility, influenced by global geopolitical and economic conditions, OPEC+ actions, and domestic policies, continues to pose a significant market risk to revenues and operating costs.
• Further non-cash asset impairment charges may be required if oil and natural gas prices remain low or decline, reserve volumes are revised downward, or capitalized costs exceed future cash flows.
• The company's operations are subject to complex and stringent federal, state, and local laws and regulations, particularly in California, which may restrict operations, increase costs, or lower demand for products and services.
• The extension of California's GHG Cap-and-Invest program through 2045 (AB 1207) may increase compliance costs associated with carbon pricing and limit the availability of lower-cost offset options.
• Inflationary pressures on costs of goods, services, and personnel could continue to increase capital expenditures and operating costs.
• Refinery closures in California, such as Phillips 66 Wilmington (late 2025) and Valero Benicia (April 2026), could adversely impact the ability to market crude production, despite current expectations of no negative impact.
• The company's ability to satisfy debt obligations and comply with all covenants under the 2024 Term Loan and 2024 Revolver is critical, with restrictions on certain activities during the merger pendency.
• Credit risk associated with derivative counterparties could negatively impact cash flows if a counterparty fails to perform.

Future Outlook

The merger with California Resources Corporation is expected to close in the first quarter of 2026, subject to shareholder and regulatory approvals. The company anticipates funding the remainder of its 2025 capital program of $110 million to $120 million from cash flow from operations. Regulatory changes in California, including SB 237, are expected to facilitate increased well permitting from January 1, 2026, and the OBBBA is projected to reduce federal tax payments. However, commodity price volatility is expected to persist, and further asset impairments may be required if prices remain low.

Management Comments

• "We believe that receiving Brent-influenced pricing contributes to our ability to continue realizing strong cash margins in California."
• "The initial production rates from those four wells [in Utah] exceeded our initial expectations."
• "This activity [operated horizontal pad in Uinta Basin] 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 growth opportunities 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 believe that this legislation [SB 237] provides greater regulatory certainty for oil and gas operations in Kern County, which accounts for a substantial portion of California's crude oil and natural gas production."
• "We currently do not expect that the announced refinery closures will negatively impact our price realizations; however, additional refinery closures could have an adverse impact on our ability to market our crude production in California."

Industry Context

The oil and gas industry continues to face significant commodity price volatility influenced by global geopolitical events (e.g., Ukraine, Middle East), OPEC+ production decisions, and domestic policy shifts (e.g., President Trump's executive orders aimed at increasing production). California's regulatory environment remains stringent, but recent legislative changes like SB 237 aim to provide more certainty for in-state oil and gas operations, potentially supporting local production. Refinery closures in California could reshape local market dynamics, though the company currently anticipates no negative impact on its price realizations. The broader trend towards a low-emission economy and climate change concerns continue to influence regulatory frameworks and compliance costs, as seen with the extension of California's Cap-and-Invest program.

Comparison to Industry Standards

• The company's E&P operations in California are characterized by high oil content and are predominantly located in rural areas with low population, which is a specific characteristic compared to other operators.
• The drilling and completion of wells in the San Joaquin Basin are described as "relatively low-cost in contrast to unconventional resource plays," suggesting a cost advantage in this specific basin.
• The California oil market is primarily tied to Brent-influenced pricing, which has "typically realized premium pricing relative to West Texas Intermediate (WTI)," indicating a favorable pricing environment compared to WTI-linked regions.
• CJWS is described as "one of the largest upstream well servicing and abandonment services businesses in California," suggesting a strong market position within its niche.
• The Uinta Basin has experienced an "increase in activity by new and existing operators, driven by acquisition and divestiture activity and successful results from horizontal drilling across the basin," indicating the company's Utah operations are in a growing and active region.

Corporate Governance

Legal Proceedings

• Shareholder derivative lawsuit (Assad Lawsuit) filed October 20, 2022, alleging breach of fiduciary duties by current and former directors/officers for allegedly false/misleading statements regarding permits and permitting processes.
• Second shareholder derivative lawsuit (Karp Lawsuit) filed January 20, 2023, making similar allegations and adding a claim under Section 14(a) of the Exchange Act regarding the 2022 proxy statement's sufficiency of internal controls and board oversight.
• Both Assad and Karp lawsuits were stayed on September 24, 2025, and October 1, 2025, respectively, pending the closing of the merger.
• A stockholder litigation demand received around April 17, 2023, for the Board of Directors to investigate similar claims, with the Demand Review Committee pausing its work pending the merger.
• A civil penalty of $2,082,560 was paid to CalGEM on October 3, 2025, for non-compliance with mechanical integrity testing on certain injection wells.

Stakeholder Impact

• Shareholders will receive 0.0718 shares of California Resources Corporation (CRC) common stock for each Berry share upon merger completion, resulting in a significantly reduced ownership and voting interest in the combined company. Current shareholders will not be entitled to appraisal rights.
• Employees may experience uncertainty about their roles within the combined company following the merger, potentially leading to a loss of management and other key personnel if the merger is not completed.
• Customers, suppliers, and strategic partners may delay or defer entering into contracts or seek changes in existing business relationships due to uncertainty regarding the merger.
• Creditors' interests are protected by existing debt obligations and covenants under the 2024 Term Loan and 2024 Revolver, with the company currently in compliance, though the merger agreement restricts certain debt incurrence.
• Regulatory authorities are engaged through ongoing compliance efforts, including the recent payment of a civil penalty to CalGEM, and new legislation (SB 237, AB 1207) will impact future permitting and environmental compliance costs.

Next Steps

• Close the merger with California Resources Corporation in Q1 2026, subject to shareholder and regulatory approvals.
• Fund the remainder of the 2025 capital program ($110M-$120M) from cash flow from operations.
• Expect significantly more well permits to be issued in Kern County from January 1, 2026, following the implementation of SB 237.
• Deliver and pay for GHG compliance instruments totaling $6 million in December 2025.
• Pay a fixed cash dividend of $0.03 per share in December 2025.
• Continue to monitor economic effects of U.S. trade policy and opportunities to mitigate impacts on costs and prices.
• Address ongoing shareholder derivative lawsuits, currently stayed pending merger closing.

Key Dates

Recommendation

The company is in a transitional phase with a pending merger with California Resources Corporation, which is expected to close in Q1 2026. While the recent financial performance shows significant net losses, revenue declines, and an asset impairment, these are largely overshadowed by the impending acquisition. The fixed exchange ratio means the value for Berry shareholders is tied to CRC's stock performance. Given the uncertainty and the short timeframe until the merger, a "hold" recommendation is appropriate. Investors should monitor CRC's performance and the finalization of the merger, rather than Berry's standalone operational results, which are becoming less relevant. The regulatory improvements in California and the OBBBA are long-term positives, but the immediate focus is on the merger's completion.

Keywords

Oil and Gas, Exploration and Production, Well Servicing, SEC Filing, 10-Q, Berry Corporation, California Resources Corporation, Merger, Commodity Prices, Financial Results, Asset Impairment, Shareholder Lawsuit, California Oil, Utah Oil, Hedging, Regulatory Compliance, Energy Industry, Quarterly Report