10-Q: Berry Corporation (bry) Reports First Quarter 2024 Results Amidst Regulatory Headwinds

Berry Corporation (bry) reported a net loss for the first quarter of 2024, impacted by derivative losses and lower service revenue, while navigating ongoing regulatory challenges in California.

Summary

• Berry Corporation (bry) reported a net loss of $40.1 million for the first quarter of 2024, compared to a net loss of $5.9 million in the same period last year.
• The company's total revenues and other income decreased to $131.1 million, down from $255 million in the first quarter of 2023, primarily due to losses on oil and gas sales derivatives.
• Oil, natural gas, and NGL sales remained relatively flat at $166.3 million, while service revenue declined by 29% to $31.7 million.
• The company's lease operating expenses decreased significantly to $60.7 million, mainly due to lower natural gas fuel costs.
• Berry's average daily production was 25.4 thousand barrels of oil equivalent per day (mboe/d), with oil accounting for 93% of total production volume.
• The company's capital expenditures totaled $16.9 million for the quarter, with a focus on sidetracks and workovers.
• Berry is facing regulatory uncertainty in California, which is impacting the permitting process for new wells and causing delays in approvals for sidetrack and workover permits.
• The company has a 2024 capital expenditure budget of $95 to $110 million, which is expected to keep production essentially flat compared to 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with significant challenges. While cost reductions and hedging provide some positives, the net loss, revenue decline, and regulatory hurdles create a negative sentiment. The company's ability to navigate the regulatory environment and maintain production will be key to future performance.

Positives

• Lease operating expenses decreased significantly due to lower natural gas fuel costs.
• The company's hedging program is designed to protect against commodity price fluctuations.
• Berry has a strong focus on returning free cash flow to shareholders through dividends and share repurchases.
• The company is actively pursuing bolt-on acquisitions to maintain production volumes.
• Berry has a significant inventory of identified drilling, sidetrack, and workover locations.

Negatives

• The company reported a substantial net loss of $40.1 million for the quarter.
• Total revenues and other income decreased significantly due to derivative losses and lower service revenue.
• The company is experiencing delays in obtaining permits for new wells and approvals for sidetrack and workover permits in California.
• The company's well servicing and abandonment business saw a decrease in revenue due to lower activity.
• The company's financial results were negatively impacted by losses on oil and gas sales derivatives.

Risks

• The company faces significant regulatory risks in California, which could impact its ability to obtain permits and develop its assets.
• The volatility of oil and natural gas prices could negatively affect the company's revenues and profitability.
• Delays in obtaining permits and approvals could impede the company's ability to meet its planned drilling and workover programs.
• The company's operations are subject to complex federal, state, and local laws and regulations, which could increase costs and limit operations.
• The company is exposed to credit risk from its derivative contracts, which could result in losses if counterparties fail to perform.

Future Outlook

The company expects its 2024 capital program to result in flat production compared to 2023, with a focus on sidetracks and workovers. They anticipate funding the program from cash flow from operations. The company also expects to continue paying quarterly cash dividends, though the amount is at the discretion of the Board of Directors.

Management Comments

• The core of our strategy is to create value by generating significant free cash flow in excess of our operating costs, while optimizing capital efficiency.
• We also strive to maintain an appropriate liquidity position and manageable leverage profile that will enable us to explore attractive organic and strategic growth through commodity price cycles and acquisitions.
• Our shareholder return model is simple and demonstrates our commitment to optimize free cash flow allocation and long-term returns to our shareholders, including deleveraging through enhanced cash flows and debt reduction.

Industry Context

The company's results are heavily influenced by commodity prices, which have been volatile due to global geopolitical and economic conditions. The company is also facing increased regulatory scrutiny in California, which is impacting its ability to obtain permits and develop its assets. The company's well servicing and abandonment business is dependent on expenditures of oil and gas companies, which can in part reflect the volatility of commodity prices, as well as the impact from changes in the regulatory environment.

Comparison to Industry Standards

• Berry's production is primarily oil-weighted, which is a common strategy for companies in the current market environment.
• The company's focus on low-geologic risk, long-lived assets is similar to other independent upstream energy companies.
• Berry's hedging strategy is a common practice in the industry to mitigate commodity price risk.
• The company's challenges in obtaining permits in California are reflective of the broader regulatory environment in the state, which is impacting many oil and gas producers.
• Berry's Adjusted EBITDA of $68.5 million is a key metric used by the industry to assess operating performance, and is comparable to other companies of similar size and scale.
• The company's focus on returning capital to shareholders through dividends and share repurchases is a common practice among mature oil and gas companies.

Legal Proceedings

• The Securities Class Action lawsuit was settled for $2.5 million, and the case was terminated.
• The Shareholder Derivative Actions (Assad and Karp Lawsuits) are still pending, and the company intends to defend vigorously against them.
• The company received a stockholder litigation demand that the Board of Directors investigate and commence legal proceedings against certain current and former officers and directors.

Stakeholder Impact

• Shareholders are impacted by the net loss and the decrease in revenue.
• Employees may be impacted by the workforce reduction costs.
• Customers of the well servicing and abandonment business may be impacted by the lower activity levels.
• The company's ability to maintain production and generate free cash flow will impact its ability to return capital to shareholders.

Next Steps

• The company will continue to focus on sidetracks and workovers in its 2024 capital program.
• Berry will explore alternative permitting strategies to meet its 2024 drilling plan.
• The company will continue to monitor the progression of various bills in the California legislature.
• Berry will continue to evaluate opportunities for bolt-on acquisitions.
• The company will continue to pay quarterly cash dividends, subject to Board approval.

Key Dates

Keywords

oil and gas, production, derivatives, permitting, California, regulatory, capital expenditures, financial results, hedging, well servicing