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With Brent strip at over $100 for 2022, Berry Corporation (NASDAQ:BRY) may now be able to generate around $270 million in discretionary cash flow this year. It is dealing with increased energy operating expenses due to its use of fuel gas in its operations, but has attempted to mitigate that through consumer hedging and securing cheaper gas supplies from the Rockies.
Notes On Prior Transactions
It appears that Berry did not receive any cash for its divestiture of its Piceance Basin assets. These assets had relatively high operating costs and also $26 million in future abandonment costs. The Piceance Basin assets also seemed to produce decent results when gas prices were strong, generating $3 million in operating income in Q4 2021 with a realized gas price of $5.54 per Mcf. However, it appears to Berry was mainly interested in reducing its abandonment liabilities.
Berry also reported paying $18 million for its Antelope Creek acquisition. These assets were located adjacent to its existing Uinta assets and were producing around 600 BOEPD before the acquisition. Berry mentioned that it doubled production since it started operating that asset.
Operating Expenses
Berry is dealing with significant cost pressure with its energy operating expenses. On a hedged basis, operating expenses ended up at $25.64 per BOE in Q1 2022, compared to Berry’s full-year guidance for $20 to $22 per BOE.
Berry uses approximately 60,000 MMBTU per day in fuel gas, and natural gas prices have been rising sharply. Berry has been attempting to control its costs through a combination of gas hedges and access to Rockies gas (which is typically cheaper than California) through securing capacity from the Kern River Pipeline.
While Berry is maintaining guidance for full year operating costs currently, I think it will likely end up above the high end of its guidance since natural gas prices have increased sharply in all markets, including the Rockies.
Berry’s Hedges (bry.com)
Berry added more hedges to 2022, resulting in collars covering 67% of its fuel usage in the second half of the year. However, this came at the cost of reducing its collar coverage in 2023 and 2024 as it liquidated the majority of those hedges to pay for its additional 2022 hedges.
2022 Outlook
The current Brent 2022 strip is approximately $105, and Berry may be able to generate $931 million in oil and gas revenue before hedges at that price. Natural gas prices have also improved a lot, but that is a bit of a net negative for Berry due to its consumption of natural gas for its operations.
Berry is maintaining its guidance for approximately $27 million EBITDA for C&J Well Services for the full year, although it only reported $3 million EBITDA for that unit in Q1 2022. Berry noted that Q1 is typically a weak quarter for that unit, while increased labor and fuel costs also affected results.
Berry had a realized loss of $32 million on its derivatives in Q1 2022 and may end up with a total hedging loss of $153 million for the year at current strip prices.
| Type | Units | $/Unit | $ Millions |
| Oil | 8,898,700 | $100.50 | $894 |
| NGLs | 146,000 | $48.00 | $7 |
| Natural Gas | 3,766,800 | $8.00 | $30 |
| Well Servicing & Abandonment EBITDA | $27 | ||
| Hedge Value | -$153 | ||
| Total Revenue | $805 |
I am now modeling Berry’s operating expenses at $24 per BOE for 2022, about $2 above the high end of its current guidance range.
| Expenses | $ Millions |
| Operating Expenses | $232 |
| Taxes, Other than Income Taxes | $60 |
| Cash G&A (Development and Production) | $58 |
| Cash Interest | $28 |
| Capital Expenditures | $138 |
| Fixed Dividend | $19 |
| Total Expenses | $535 |
This results in an estimate of $270 million in discretionary cash flow with approximately $105 Brent in 2022.
This would allow Berry to put $162 million (or $2.03 per share) towards variable dividends and debt repurchase and $108 million towards share repurchases, organic growth and capital retention. Thus the total dividend (related to 2022 results) could be as high as $2.27 per share.
Share Repurchases And Valuation
Berry recently repurchased 2 million shares for a total of $22.8 million. This leaves it with approximately 78.8 million shares outstanding. I’ve bumped up its estimated value to $12 in a long-term $75 Brent environment due to improved projections for near-term cash flow. When Berry’s estimate dividend is factored in, there is the potential for an approximately 30% return over the next year based on current strip.
Conclusion
Berry is now projected to generate $270 million in discretionary cash flow in 2022 despite the impact of higher energy operating costs. Berry is attempting to manage energy operating costs through consumer hedges and securing pipeline capacity from the Rockies. It liquidated around half of its natural gas consumer hedges for 2023 and all of its natural gas consumer hedges for 2024, so there is some energy operating cost risk in future years. This would be more of an issue if oil and gas prices diverge significantly in terms of direction. In the current commodity pricing environment though, Berry may be able to offer solid returns over the next year, with a total dividend estimated at $2.27 per share (related to 2022 results).
