10-K: Berry Corporation Secures Subsidiary Guarantees for Senior Notes, Files Annual Report

Berry Corporation (bry) has executed supplemental indentures to secure guarantees from its subsidiaries for its 7.000% Senior Notes due 2026, and filed its annual report on Form 10-K for the fiscal year ended December 31, 2023.

Summary

• Berry Corporation (bry) has filed its annual report on Form 10-K for the fiscal year ended December 31, 2023, detailing its financial performance and operational activities.
• The company operates in two segments: exploration and production (E&P) and well servicing and abandonment.
• Berry's E&P assets are primarily located in California and Utah, with a focus on onshore, low-risk, long-lived oil and gas reserves.
• In 2023, Berry's adjusted free cash flow was $97 million, with $19 million allocated to variable dividends, $10 million to share repurchases, and $51 million to acquisitions.
• The company's 2024 capital expenditure budget for E&P operations, CJWS, and corporate activities is between $95 to $110 million, which is expected to maintain production levels similar to 2023.
• Berry has an extensive inventory of low-geologic risk drilling opportunities, with 9,216 gross locations identified as of December 31, 2023.
• As of December 31, 2023, Berry's estimated total proved reserves were 103 million barrels of oil equivalent (mmboe), with 87% of those reserves located in California.
• The company's average daily production for 2023 was 25.4 mboe/d, with 93% being oil and 81% from California.
• Berry's well servicing and abandonment segment, C&J, operates one of the largest businesses of its kind in California, providing wellsite services and plugging and abandonment services.
• The company is facing regulatory challenges in California, particularly in obtaining permits for new well drilling in Kern County.
• Berry has also executed supplemental indentures to secure guarantees from its subsidiaries for its 7.000% Senior Notes due 2026.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company has a solid asset base and a commitment to shareholder returns, it faces significant regulatory and operational challenges, as well as a decline in financial performance. The sentiment is neutral to slightly negative due to the uncertainties and risks outlined.

Positives

• Berry has a stable, long-lived, oil-weighted conventional asset base with low and predictable production decline rates.
• The company has an extensive inventory of low geological risk drilling opportunities with attractive full-cycle economics.
• Berry has appropriate liquidity and minimal contractual obligations.
• The company benefits from premium commodity markets, with California oil prices being Brent-influenced.
• Berry has an experienced, proven, principled and disciplined management team.
• The company has a shareholder return model that demonstrates a commitment to optimize free cash flow allocation and long-term returns to shareholders.
• Berry is proactively engaging in matters related to regulation, HSE matters, and community relations.

Negatives

• Berry is facing significant uncertainties in obtaining permits for oil and gas activities in Kern County, California.
• Attempts by the California state government to restrict the production of oil and gas could negatively impact operations.
• The company's ability to operate profitably is highly dependent on volatile commodity prices.
• The marketability of Berry's production is dependent on transportation and storage facilities, most of which the company does not control.
• Estimates of proved reserves and related future net cash flows are not precise and may prove to be lower than estimated.
• The company may not drill its identified sites at the times scheduled or at all.
• Competition in the oil and natural gas industry is intense, making it more difficult to acquire properties, market oil or natural gas and secure trained personnel.

Risks

• The company's business is highly regulated, and governmental authorities can delay or deny permits and approvals.
• The conflict in Ukraine and the Israel-Hamas conflict could negatively impact the business.
• The company may not be able to use a portion of its net operating loss carryforwards and other tax attributes.
• Berry's business requires continual capital expenditures that it may be unable to fund.
• Inflation could adversely impact the company's ability to control costs.
• Hedging activities limit the ability to realize the full benefits of increases in commodity prices.
• Existing debt agreements have restrictive covenants that could limit growth and financial flexibility.
• The company may not be able to generate sufficient cash to service its indebtedness.
• Declines in commodity prices may result in write-downs of the carrying amounts of assets.
• The company has significant concentrations of credit risk with its customers.

Future Outlook

Berry expects its 2024 production to be essentially flat to 2023, with oil production anticipated to be approximately 93% of total production volume. The company plans to fund its 2024 capital development programs from cash flow from operations.

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 seek to maximize shareholder value through overall returns.
• 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.
• 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.

Industry Context

The announcement reflects the ongoing challenges and opportunities in the oil and gas industry, including regulatory hurdles, commodity price volatility, and the need for strategic acquisitions to maintain production levels. The company's focus on low-risk, long-lived assets and its shareholder return model are consistent with current industry trends.

Comparison to Industry Standards

• Berry's focus on conventional, shallow oil reservoirs in California contrasts with many peers who operate primarily in unconventional resource plays, resulting in lower drilling and completion costs.
• The company's reliance on Brent-influenced pricing in California is a strategic advantage compared to companies tied to WTI pricing.
• Berry's operational control over its properties, with approximately 98% of producing wells operated by the company, is higher than many peers.
• The company's annual corporate decline rate averaging 11-14% is relatively low compared to the higher decline rates often seen in unconventional plays.
• Berry's proved undeveloped (PUD) reserves in California are projected to average single-well rates of return of approximately 100%, which is attractive compared to industry averages.
• The company's hedging strategy, which includes fixed-price gas purchase agreements and pipeline capacity agreements, is a common practice in the industry to mitigate price volatility.

Legal Proceedings

• The company is involved in various legal and administrative proceedings in the normal course of business.
• A securities class action lawsuit was settled for $2.5 million.
• Two shareholder derivative lawsuits are pending, alleging breach of fiduciary duty and other claims.

Stakeholder Impact

• Shareholders will receive dividends and may benefit from share repurchases.
• Employees are subject to incentive programs tied to company performance on safety, environmental responsibility, and financial stewardship.
• Customers may be affected by changes in production and service availability.
• Suppliers and creditors may be impacted by the company's financial performance and capital allocation decisions.

Next Steps

• The company plans to focus on sidetracks, workovers, and other activities related to existing wellbores in 2024.
• Berry expects to benefit from a full year of production from the assets acquired in the Macpherson Acquisition and other bolt-on acquisitions at the end of 2023.
• The company will continue to seek additional permits to support future plans.
• Berry will continue to monitor its HSE performance and hold employees and contractors to high standards.
• The company will continue to assess the impacts of Senate Bill No. 1137 and the potential impacts of AB 3155 to its ability to operate and any increased exposure to liability.

Key Dates

Keywords

oil and gas, exploration and production, well servicing, abandonment, California, Utah, reserves, production, permitting, commodity prices, capital expenditures, dividends, share repurchases, acquisitions, regulation, debt, financial performance