Berry Corporation (NASDAQ:BRY) Q4 2023 Earnings Call Transcript

Berry Corporation (NASDAQ:BRY) Q4 2023 Earnings Call Transcript March 6, 2024

Berry Corporation misses on earnings expectations. Reported EPS is $0.13 EPS, expectations were $0.22. BRY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Berry Corporation Q4 and Full Year 2023 Earnings Call. [Operator Instructions] Please note that today’s conference is being recorded. I would now like to pass the call over to Todd Crabtree with Investor Relations.

Todd Crabtree: Thank you, Carmen, and welcome, everyone, and thank you for joining us for Berry’s fourth quarter and full year 2023 earnings teleconference. Earlier today, Berry issued an earnings release, highlighting full year 2023 and fourth quarter results. Speaking this morning will be Fernando Araujo, our Chief Executive Officer; and Mike Helm, our Chief Financial Officer. Before we begin, I would like to call your attention to the safe harbor language found in our earnings release that was issued this morning. The release and today’s discussion contain certain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements.

These include risks and other factors outlined in our filings with the SEC, including our 10-K, which will be filed this week. Our website, bry.com, has a link to the earnings release and our slides for this call. Any information, including forward-looking statements made today are contained in the earnings release and that presentation reflect our analysis as of the date made. We have no plans or duty to update them, except as required by law. Please refer to the tables in our earnings release and on our website for a reconciliation between all adjusted measures mentioned in today’s call and the related GAAP measures. We will also post a replay link of this call and the transcript on our website. I will now turn the call over to Fernando.

Fernando Araujo: Thanks, Todd. Welcome, everyone, and thank you for joining us. A year ago, during my first earnings call as Berry’s CEO, I highlighted 3 priorities: One, we’re committed to delivering top-tier shareholder returns by being a cost-effective producer, optimizing production without compromising safety. Two, we have the assets and the technical team to achieve that goal and successfully navigate California’s regulatory environment. And three, we would pursue accretive bolt-on opportunities in California. 2023 was a strong year for Berry, and we delivered on all fronts. We generated top-tier returns to our shareholders. We held production essentially flat with less CapEx than planned, and we expanded our production base and future cash flow with 2 financially accretive acquisitions.

In 2023, we generated $97 million of adjusted free cash flow and returned $65 million to shareholders. More than half of the adjusted free cash flow, $55 million was attributable to the fourth quarter, which is typically our largest adjusted free cash flow quarter of the year, compared to the third quarter that represents a 54% increase or $19 million. Total annual production was at the top end of our updated guidance, and we achieved that with a strong safety performance, highlighted by zero lost time incidents during the year. Our full year average production of 25,400 barrels a day was driven by innovative reservoir management practices, a successful drilling and workover campaign and bolt-on acquisitions that benefited the fourth quarter.

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Q&A Session

Also in Q4, our overall daily production increased to 25,900 barrels a day. We improved reservoir management practices in our thermal diatomite assets and increase the asset’s base performance by 5% without additional drilling activity. At year-end, Berry had 103 million barrels of proved reserves and replaced 176% of our California production through reservoir extensions and acquisitions. We continue to be encouraged by test results of deeper stacked oil and gas reservoirs in our North Midway-Sunset field, which can be produced without steam. We are producing light oil from 2 wells into low triple digits per day, which is higher than our average new well production from shallow reservoirs in California. We will continue to appraise the area with additional wells.

One of our priorities for 2023 was identifying accretive producing bolt-on opportunities. With the Macpherson acquisition and the smaller working interest acquired at the end of the year, we are seeing the benefits of that focus in both cash flow and production. Berry remains well positioned to be a consolidator in California. We continue to aggressively pursue acquisitions that support production, generate operational and corporate synergies, increase future cash flow and maximize shareholder value. With that, I will turn the call over to Mike.

Michael Helm: Thank you, Fernando. I will highlight a few additional financial takeaways. For more in-depth information on the fourth quarter and the full year 2023 results, I refer you to our earnings release issued earlier this morning and to our 10-K to be filed this week. Our strong 2023 financial results provided $65 million in cash returns to our shareholders through $55 million in fixed and variable dividends and $10 million in share repurchases. For the fourth quarter, we declared $0.26 per share of fixed and variable dividends, resulting a total dividend of $0.73 per share for the year. Combined, this resulted in a top-tier sector total dividend yield of 10% for our shareholders. We also purchased 2% of our stock in the second quarter for $10 million.

Additionally, we put some of the adjusted free cash flow we generated to work in another tenet of our strategy, funding accretive acquisitions. In the fourth quarter, we repaid the $53 million of borrowings on the RBL from the Macpherson acquisition, which brought our revolver to 0. The RBL balance at year-end was due to the funding of the second acquisition in late December. Our actions in 2023 show our commitment to keeping our leverage low as well as making cash flow accretive acquisitions, which we intend to continue doing. We will also look opportunistically to refinance our notes, which mature in early 2026 as well as renew Berry’s and C&J’s revolvers, both of which expire in mid-2025. Throughout 2023, we had a clear focus on executing initiatives to lower our G&A, and our adjusted G&A was approximately 4% lower than 2022.

In 2024, we expect to reduce G&A by about another 6% and also make meaningful reductions in our operating expenses, both of which are included in our 2024 guidance. The expected operating expense reduction will be driven primarily by reduced energy cost. We will continue to explore investments that create long-term value for our business. An example of this is the Hill Solar project that became fully operational in 2023 and is capable of offsetting 30% of our power demand at the property. This project not only reduces our carbon footprint, but delivers annual cost savings of about $300,000. Fourth quarter 2023 greenhouse gas prices continue to rise beyond our expectations. Consequently, our taxes — other net income taxes increased 47% in ’23 compared to 2022.

This exceeded our revised guidance, having an unexpected $6 million noncash impact on our adjusted annual EBITDA and EPS. As shown in our earnings slide deck, I would remind you that historically, the first quarter of each year is our highest use of working capital and therefore, the lowest for our adjusted free cash flow. In the first quarter of 2024, for example, we will have semiannual interest payments on our notes and the typically large annual royalty payment. In 2024, we expect to generate most of our adjusted free cash flow in the second half of the year, just like we did in 2023. Much of our adjusted free cash flow in ’24 will be used to manage our revolver lower. A few items to note — a few other items to note. Overall, we have more than 80% of our expected 2024 oil production hedged.

Our crude oil hedge position in 2024 will have more attractive pricing than last year, consisting mostly of swaps at $78 per barrel they make up about 70% of the midpoint of our expected oil production. While we expect that the recent storms will have an impact on various production in the first quarter, it has not been as consequential as it was in the first quarter of last year. Additionally, for your reference, we published our annual guidance ranges for our expected production, capital expenditures and other important metrics in our press release issued this morning. Finally, some housekeeping on our calculation of adjusted free cash flow. We believe Berry’s corporate and C&J Well Services capital expenditures are essential to maintaining the business and are really no different than our maintenance expense for our production.

These capital amounts generally approximate about $8 million per year. Going forward, adjusted free cash flow will now be calculated after accounting for all of these capital expenditures. Thank you. And now I’ll return it back to Fernando.

Fernando Araujo: Thanks, Mike. Our 2023 results demonstrate our ability to deliver top-tier shareholder returns on operational excellence. We are confident that we will achieve another year of solid performance in 2024. Our planned 2024 activity is expected to keep production levels flat to 2023, and we will remain diligent in managing our expenses. Also we will continue to strategically employ hedging to help us cover the fixed energy cost of the business. Regarding the permitting process in California, I want to emphasize that our 2024 development activity and production plan do not depend on the appellate court’s ruling on the current county EIR. The ruling is expected in mid-April, and we will adjust activities if it is positive.