Q4 2019 Earnings Call

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That's on your lines will be again, you said.

Ladies and gentlemen, thank you for standing by conference call will begin momentarily until that time, He alliance will begin to get something.

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[music].

Before and for your 2019 earnings call.

So I'm all participants are in listen only mode.

We will conduct a question answer session and instructions will follow what that's fine.

Anyone should the question is concerned the conference. Please press Star then numbers on the telephone keypad.

As a reminder, this conference call is being recorded.

I like to have the Colbert your host.

Manager of Investor Relations pod maybe.

Thank you Rusty and welcome to everyone.

Thank you for joining us on this teleconference to discuss berries fourth quarter and for your 2019 results yesterday afternoon very issued an earnings release. What these results speaking. This morning, we'll be Travelsmith Board Chair and CEO, Gary grows Chief operating officer in Executive Vice President and carry base, Chief Financial Officer and Executive Vice.

<unk> travel will review highlights from the fourth quarter and full year 2019, and also discuss some important strategic initiatives that are in the works Gary and then Terry will discuss our key operational and financial results before turning it over to questions from will make a few concluding remarks.

Before we begin I want to call your attention to the Safe Harbor language spell in our earnings release the earnings release in today's discussion contain certain projections and other forward looking statements within the meaning of federal securities laws.

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 FCC, including our 2019 form 10-K that will be filed later today.

Website, <unk> dot com cause away to the earnings release, and our most recent investor presentation, which will be referenced in this call any information, including forward looking statements made on this call or contained in the earnings release and that presentation reflect our analysis as up to date made we have no plans or duty to update them access.

As required by law.

Please refer to the tables in our earnings release and on our website for reconciliation between all adjusted measures mentioned during today's call and the related GAAP measures. We will also post the replay link of this call and the transcript on our website I will now turn the call over to our CEO trim Smith.

Thank you Todd and thanks, everyone for joining us today for berries fourth quarter and for your 29 team earnings call. Shortly ill provide an update on the California regulatory environment and address the successful steps, we're taking to proactively in collaboratively work with the state.

However, I will first talked about our successful efforts in those matters that we control our strong fourth quarter and our for your 2019 operating and financial results and or planned 2020 program.

29 to was a great year for Berry, and we finish up with a great fourth quarter. Our business model is working this as demonstrated by our total returns to shareholders and strong production and reserve profile, which we delivered while generating excess levered free cash flow, notably we finished the strong year with robust.

Production growth as our fourth quarter, California production was 11% more than the prior quarter, an 18% more than the fourth quarter 20 team.

We have gained great momentum into critical areas of focus Ross diversity, and inclusion and being an industry leader for example, we enhanced our leadership across the company with the addition of true exceptional female executives to our senior leadership team.

Secondly, we exemplified being an industry leader by following what you've often heard me reference as very first this is the principle of leaving not following what others in the industry may be doing our commitment to an accelerated idle well plan is one example of this as is our participation in the ongoing.

Conversations about fossil fuels in fact helped pave the way to agreed or future.

As we promised a year ago, we remain committed to California and are striving to align with the state's goals as a responsive and responsible energy partner in 29 team, we deployed more than 90% of our capital in California or assets responded just as we expected with 29 team total year, California production growing.

15% year over year, we also grew our California reserves, which are entirely oil 23% before production on a year over year basis. This means we replaced nearly 300% of the reserves that we produced during the year. We also replaced a 159% of our total company Bruce.

Undeveloped inventory confirming that they're all robust opportunities in California.

We produce these results while generating nearly 20 million in excess levered free cash flow, our key financial benchmark that includes peg, our dividends interest and maintenance capital.

We are uniquely positioned to create shareholder value through out energy market cycles, and you several value maximizing mechanisms to accomplish this goal during the year our business model is not solely reliant on production growth to maximize shareholder value.

To start very paid 39 million in dividends during 2019, which is generously covered by free cash flow since our IPO. We have returned more than 65 million of capital to shareholders in the form of regular quarterly dividends and our board recently approved our first quarter 2020 dividend.

Working our seventh consecutive quarter.

We have repurchased more than 6% of our outstanding shares for approximately $50 million and the board recently authorized an additional 50 million of opportunistic repurchases.

We have maintained enviable financial leverage with debt to EBITDA at about 1.4 times well within our stated financial policy.

And we have the flexibility to opportunistically repurchase our outstanding bonds.

Finally, we are continuously looking for attractive acquisition targets that meets great value creation and returns focused financial and strategic criteria.

Turning to 2020 now we're building on the momentum from 29 team I'm excited to augment our work in the year ahead, primarily through three key focus areas, one operational execution and capital discipline.

To regulatory engagement and three focus on environmental social and governance or E G initiatives.

First we remain intently focused on planning for and executing operational and financial strategies.

Our 2020 capital program reflects our disciplined and returns focused approach and commitment to cut value creation.

Given shareholder expectation for greater returns the volatility and current rig weakness in commodity prices and the challenging market environment. We're moderating our 2020 capital budget to a range of $125 million to $145 million down from the 211 million in 2019.

It is worth noting that our 2020 plans anticipate primarily sandstone development.

Which does not require high pressure cyclic steam or hydraulic stimulation.

Our abundant inventory of opportunities and rolling to your budget planning enables us to adapt to the evolving regulatory environment in California, without changing our financial or value creation principles.

We expect our 2020 plan to generate year over year production growth, while producing attractive excess levered free cash flow, we expect California production, which is entirely oil with Brent based pricing to grow in the low double digits year over year.

This brings me to our second key focus area regulatory engagement.

Let me to address the issue on most of our minds, the Governor, California announced in November 2019, a temporary moratorium on quote high pressure cyclic steam unquote projects.

This moratorium only put on hold our new thermal diameter might drilling.

However, it does not impact our existing thermal dynamite production or approved permits.

It also does not impact or sandstone development projects, which as I just mentioned comprised the bulk of our 2020 plans.

We are proactively engaged in the regulatory and legislative process in California remaining steadfast in our commitment to the state both in energy production and safeguarding its citizens wellbeing.

By working with the legislators and regulators at all levels of the government on the front end of the regulatory process, we are gaining insight, making progress and effectively minimizing the impact of new regulations and legislation and mitigating the risk of permitting delays.

In 2019, California state regulators imposed new idle well management regulations, we have and we will continue to comply with these new regulations. In addition, we also abandoned wells earlier than required as part of our planned development in certain reservoirs.

Accordingly for both these reasons, we increased our plugging and abandonment spending in 2019 to approximately 27 million.

And our 2020 plans include a similar level of activity.

Barry is committed to being responsible educate responsible and conscientious producer.

So leaves me to our third area to focus area SG initiatives.

As seen on slide seven of our Investor presentation, we are formalizing, how we monitor and manage our SG performance and engage with our stakeholders on these important issues.

We believe that the oil and gas industry is and will remain an important part of the energy landscape in California, specifically that means locally producing in supplying affordable and reliable energy to ensure a safe healthy and proper prosperous future Ford's communities and reducing California's rely.

Science upon for imported foreign oil that comes from countries that do not sure.

And in fact, flagrantly disregard, our environmental and social Justice principles.

We will provide more details about our iasci performance in initiatives via our new web site, which we will roll out in mid March I will now I'll turn it over to Gary. Thank you trim and thanks, everyone for joining us our operational results in the final quarter of 2019 continued the strong performance, we achieved in the third quarter and our full year.

2019 production was principally inline with our plan.

Full details are contained in the 10-K, but I'd like to focus on a few items in particular first our production results, we concentrate on creating long term value and focus more on growth rates over a longer period of time, and just sequentially quarter to quarter, our fourth quarter total company production of 31300 Boe per day.

Hey grew 12% over the fourth quarter of 2018.

In California, specifically fourth quarter production of 25500 BOE per day was 18% greater than the fourth quarter of 2018 with a large majority of our capital program focused on California. This is exactly what we expect from our property said, an addition to executing on our plan we've added significantly to.

Inventory of opportunities.

As we continue to invest the majority of our capital on high margin, California, only 100% oil producing projects our production mix in the fourth quarter rose to 89% oil, 10% gas and 1% NGL with California, making up 81% of total production.

For the entire year, our production mix was 87% oil.

Turning to capital our spending for the quarter and for the full year, where as planned capex for the fourth quarter of 2019 was 42 million and we spent a total of 211 million in 2019.

In California, we drilled a total of 46 wells in the fourth quarter 34 thermal sandstone wells.

Which 29, where producers three were continuous injectors in two or delineation wells, along with 10 thermal data might wells and we also drilled two wells in Utah during the quarter.

In aggregate during 2019, well drilled a totaled 338 wells consisting of 184 thermal sandstone at a 151 thermal data might wells in California, and three wells in Utah.

As Tim said, we plan to decrease capital in 2020 compared to 2019, we're currently running one rig in California and plan to add up to two additional rigs during the last three quarters of the year.

To adhere to the plugging and abandonment acquirements like California implemented as well as our desire to banamex necessary for our thermal dynamite development. We spent 27 million in well in surface abandonments or asset retirement obligations, a our ROE over the year and 7 million in the fourth quarter.

We have submitted our full multiyear idle wealth management plan to Cal Jim and we are actively executing on that plant.

Next I'll touch on expenses, our fourth quarter Opex was $20.37 per bailey versus $18.90 per via we in the third quarter, an increase of 8%.

Our annual Opex for 2019 was $20.32 per BLE up from $18.33 per BOE in 2018 as expected the increase from year to year was mainly due to higher hedge fuel pricing and increased oil mix of our properties, which generally have higher costing gas properties and increased spending to maintain enough.

Demise or infrastructure, while accelerating activities related to the state's goals of proactively managing idle or mature assets.

We are committed to operate in our properties at the highest levels. For example in the fourth quarter. We spent approximately 2.9 million to address some inherited long term delayed maintenance on some of our equipment and we additionally rolled out our new computerized maintenance management system to ensure the reliability of all of our equipment moving forward.

Our natural gas fuel usage rate increase from the third quarter to the fourth quarter by approximately 3000 Mmbtu per day from 75300, and then Bts per day to 78700 Mg per day.

This is mainly a result of bringing on more thermal dynamite wells during the quarter.

We again, we remain focused on reducing steam oil ratios are esso our across our properties as part of our focus on operating margin and cost.

Cost controls a key item for us as we move forward.

Even as we move more of our production to 100% oil operations, we focused on Opex control opportunities, we remain committed to being a top tier operator, Interstate and believe we can meet both operational and future SG goals collectively.

Finally, looking forward to 2020, our plans for 2020 are to drill 195 to 225, new sandstone wells using capital of approximately 125 million to 145 million and we're targeting average daily production range of 29, and a half thousand Boe per day to 32, and a half thousand Boe per day.

As part of the 2020 plan 36 thermal data might wells, we drilled in 2019 are expected to be placed on production during the year.

Now I'll turn it over to carry for some financial results. Thanks, Gary the financial and explanation of variances are located in the press release and will be available later today in our 10-K, so I won't repeat hash. It here as trimming Gary have both pointed out things that Barry or moving up into the right. We've seen the assets responded.

Capital as we expected and we've seen substantial value created in our California reserves, our hedging portfolio continues to provide us with clarity to our cash flow for 2020.

Our oil hedge portfolio now has 16000 barrels per day of our 2020 production hedged at $64.15 ramp.

And another 1000 barrels per day hedged through April of 2020 at $61 and 75% Wtvr.

On the Opex side, we are also well hedged on our gas through October of this year and have begun adding to our 2021 position at about $2.50 and the MBT. Your range. Please seats slides 2021, and 31 of our February Twentyth investor presentation for more details.

In the earnings release, we gave some highlights to our 2020 budget. We are again expecting solid growth oil growth in California in the range of 10% to 12%. Most of this growth should come in the first three quarters, a 2020 as our 2019 production growth started the second half of 2019.

We are looking at similar fourth quarter exit rates in 2020, as the fourth quarter of 29 team and we should achieve these numbers spending between a 125 and 145 million on capital. There are few other items I'd like to highlight one opex is expected to be up year over year.

As Gary discussed we are being proactive in our make this program and spending additional opex dollars to stay ahead of any potential problems. We also see higher opex on a per barrel basis as we continue to get Oilier, we should be roughly 90% oil in 2020 more than 3%.

From 2019 oil production costs more than gas.

And as we get Oilier, we see higher costs, but also realized.

Higher prices slightly higher costs, coupled with slightly higher prices should equate to slightly better margins in short it's just math.

Second our adjusted DNA, which excludes non cash stock comp and non recurring items is expected to be about $5 a barrel at the mid range. This is in line with our 2019 annual number we're planning for increased expenses in our regulatory and legislative areas, including.

Around permitting as well as some system enhance enhancements the rest of our adjusted DNA component should be at or below the 2019 run rate.

Third while we expect to generate production growth in 2020, our focus remains on building value for our shareholders. Our goal is to continue to pay one of the industry's best dividend yields at todays pricing, we expect to generate solid levered free cash flow and we should have a lot of option now.

The with the excess cash, including but not limited to increase in our regular dividend or special dividend stock or debt repurchases bolt on acquisitions and building of cash as trim pointed out we aren't shy about returning capital in 2019 between dividends and share repurchases we returned.

Over 17% based upon the current market value.

In the coming year, we plan to move our financial performance by focusing on our margins being proactive in the market and staying committed to our disciplined and return focused financial policy and as I've already stated we expect to continued oil growth with excess free cash flow.

After our capital program My last comment or on our reserves trim gave some highlights to our reserve growth in California, where reserves were up 24.5 million barrels or 23% before production on a year over year basis. In addition, we also saw our reserve replacement ratio.

Increased to nearly 300% from 275% and our PD one PD to pay three inventory locations grew to approximately 11000 drilling locations exemplifying, our California assets respond to capital and that we are creating long term value at Barry. Thank you and I will turn it back over to you.

Correct.

Summarizing 29 team.

Barry grew production by double digits, and returned 85 million of capital back to its shareholders.

Barry is a cash flow machine.

In light of this and before turning it over for questions I'd like to make a comment on the 2020 budget market sentiment and the importance of oil in the energy sector.

First our budget.

Ability to meet our budget depends in large part on the timing of permits the permitting process of the state level has evolved over the last year and continues to do so.

Hi, like this because on Tuesday, Kern County received and adverse court ruling that impacts the counties ability to issue permits requiring companies to revert to the pre 2015 permitting process.

The County is working with council and industry groups to develop their next steps regardless of how the county decides to respond we are moving forward with our very first approach to mitigate the impact of this issue on Barry we're confident we have the awareness ability and credibility to mitigate permitting issues and.

We are working proactively with Cal Jem and the county to receive time, we permits.

However, we must recognize that certain things are out of our control.

If permit timing does indeed slowdown we won't spend as much capital, we will generate more cash and we will see a lower fourth quarter to fourth quarter X Ray remember various corporate decline rate is only 13%.

Second on market sentiment.

We know we compete in this space in industry in the United States is over the last several years has been driven by a lack of capital discipline and accountability and the capital markets thirst for production growth.

That has created a surplus of light sweet crude and a global markets of requires actually demands heavy oil our model does not manage so the short term, but focuses on creating long term value for our shareholders. As we are clearly demonstrated in 2019.

California has been producing conventional heavier oil for well over 100 years.

And that is not changing anytime soon.

Barry as clear visibility to value creation, as we understand our long term cost decline curves and the reinvestment capital required to sustain flat production.

We know how to generate free cash flow.

Now on the two onto the energy sector look we understand that renewable energy as a good thing for California, and the globe and Barry whole heartedly supports its growth as part of the energy mix.

However, the world and in particular, California is using more oil today than it did yesterday and that isn't likely to change in the near term and the reality is renewables have their impact on the environment too in fact, according to Mark Mills with the Manhattan Institute to grow the number of electric vehicles on the road to 400.

<unk> million by 2040, or 100 times would only displace about 5% of global oil demand.

Further mills remind us mines us that to fabricate 1000 pound electric vehicle battery pack requires digging up moving and processing more than 500000 pounds of raw materials somewhere on the planet.

Please do not come without a significant environmental costs. This means oil isn't going anywhere we need a balanced environmental strategy that leverages. The best of all energy resources to create an achievable affordable and environmentally sensitive solution for every one for us.

California in particular this means that until the usage rates substantially declines the state needs environmentally and socially aware local producers like Barry it needs to rely less on waterborne imports from OPEC nations, which do not share, California, social justice and environmental goals.

Barry does support these goals and is committed to being a short or long term oil producer and therefore part of the NRC solution for California.

Areas proactively taking measures to grow our business were great respect for the environment looking for opportunities to reduce our carbon footprint, while keeping our communities safe. This is what the very first leadership mentality is all about.

We'll now turn it over for questions.

Yes.

Sorry.

Bar and the number one.

It's a question.

So from the Q.

Okay, that's far one.

Cash.

Our first question comes from the line.

From Keybanc.

Good morning Liam.

Hi, good morning, guys.

I wanted to follow up on.

Do you guys were talking about in terms of potential uses of free cash flow.

Certainly based on his budget oil stabilizes looks like will be significant free cash flow. In 2020, you had mentioned a number of initiatives, including a special dividend.

Bond buybacks potentially M&A in stock buybacks I was just hoping maybe you guys could kind of rank. Some of these in in terms of what you think the priorities would likely be in 2020.

I'd say Leo this is Kerry I don't know one ranks better than the other I think it's really about what what we feel is the best return back to the shareholders at the time and opportunistic share buybacks or our oil is attractive to us as well if the debt trades down because we've seen debt at times trade way lower than it should.

Be based upon Barry fundamentals, so, it's an easy way to de lever as well so I think.

Everything's on the table on a on a on a special dividend I think we need to had visibility that something that we could repeat on a consistent basis, it really get value for but again I think what we're highlighting as Barry like you're pointing out has the ability to generate a lot of cash which gives us a lot of options and again from our point of view.

It's what's going to be back to use those options for.

Will be determined kind of at the time, when we decided to pull a trigger.

Okay Thats helpful and I guess, just from a regulatory perspective apart from Tuesday's legal ruling there and Kern County wanted to just get a sense of how generally the regulatory environment in the state has been progressing I think you guys. It started to kind of get.

Just more regular stance down permits kind of starting in January I wanted to see how that was going thus far in February and just any updated thoughts you guys have on the current moratorium on 16 permits and WCS t. permits and how long that can last year in 2020.

Leo This is true all all start with the answer to that.

First off as you know and 20 million team, we spent a fair amount of money.

And we're very focused on building or what we call or corporate affairs.

And Megan Silver runs that group and has given us the platform to build and the network and relationships in Sacramento, and Lawrence Livermore and the county in particular.

That.

Keeps us as a where as any company of what's going on and how to respond.

We've also done through our very first Kent I can't say enough. Our very first approach in terms of building our credibility as a true partner.

Weve, California, we do what we say we're going to do.

So just so you know the foundation for the conversation that you're talking about as well established.

That said, we believe that we are participate where we know we are participating in the discussions around the moratorium our processes are communicated and well are beginning to be well understood. So I fully anticipate that study to progress I cannot project exactly.

In the moratorium will be lifted, but I am confident it is truly the intend to the state to to lift that with the goal of being.

Save for the communities and also the environment and so I'm pretty confident today and as far as our sandstones go.

Those permits as you pointed out R&D R&D coming through so called Jim in the and the state of low lived up to the words that they said truly appreciated for that so thank goodness, we Gary and his teams have a huge inventory of opportunity that allows us to adapt and I think we've demonstrated.

Well over the last couple of years dairy has a few comments to add to that.

Yes Leo.

So just a couple of those things. So just to recognize that are planned for this year, we do not have any thermal data might wells in our plan.

And we also don't have anything that requires a WSP. So we don't have anything that will require any hydraulic fracturing during the year as well so as Troy mentioned.

We are looking at San some development for this particular calendar year now that being said, if if and when inventory I Miss is lifted that might change some plans for us and more nimble enough to be able to make those changes as we move forward and we're continuing to be ready for that opportunity when it arrives.

And in fact, we've built a bullpen of thermal dynamite wells to be permitted.

So when that when that occurs Leo.

Okay. That's that's good color and I guess.

Let me just lastly on Utah sounds like you guys have drilled a couple of wells there recently.

Just wanted to give some color on kind of what you're seeing in terms of some of the new well performance there.

From the performance side I'm very pleased this is Gary by the way Leal from the performance side Im very pleased.

And we're seeing actually better results than we've seen there historically.

At the end of the day in Utah, It's a topline event.

And so we just need that area to have a little bit better pricing associated with it it does trade predominantly against WTMJ and so when we compare those opportunities across the board to the things that we haven't California, there just a slight tick under what we do out here. So as always we're looking to generate the most value for the company and.

We will spend the capital dollars, where we think we can create the most value at any given time.

But but again technically very happy with what we see there.

Okay. Thanks, guys.

Excellent.

Our next question comes from the line of Charles from John Johnson Rice.

Good morning trends are you in your whole team there.

When you talk more Charles.

Yes.

Could pick up I, just you guys gave us this number but in your prepared comments, but I could you said.

Hundred 20.

Sandstone wells planned this year was was that right.

No, it's a little bit more than that let me pull the number back out.

I guess you pull that up I guess the question. So I understand it's the bulk of the.

The 20 program in for for obvious reasons that you guys yes.

Yeah on Charles Thats that numbers Thats 195 to 25 is the range one nine by June but yeah got it. Thank you for that but so that's that's the bulk of your program I guess I'm curious.

I think it's on slide 11, you gave us an update where you alluded to it on your total.

Your total inventory I think it's a it's a little lower right of slide 11, but.

What is your.

What is your total inventory of those same sort of wells on what I'm really after is what how many years of just sandstone.

Might you have.

So I think when you're looking at that Youre looking at right around.

A total count.

Let's say 660, 100, 6200 and sandstone at that point in time.

Got it okay, so plenty of runway there.

Absolutely yes.

So all of that you're looking at the you're looking at the accounts there in California, it's roughly.

Most of the bulk of that so its 10800, that's roughly split 6100 6200 in the.

Thermal sandstones 3000 3200 in.

The thermal data might in the remainder then would be the non thermal data might that sits at the hill.

No you guys have broken that out in the past I just wanted to touch on that again and then if you go back and ask a bigger picture.

A question.

You guys have really strong free cash flow picture this year.

I think there that's really welcomed by the market, but but the nature of your assets alright. Thank you. It doesnt one year isn't really a sufficiently long time period to look at if you really want to give an idea of what maintenance Capex is so could you give us an idea if on a you alluded to what kind of a two year plan before but could you.

This an idea what do you think.

A multi year.

Maintenance Capex numbers.

I'm going to let Carrie star.

Go ahead and elect here I'm going to carry start with that ill put on my operations and finance had at one time here Charles So.

Historically say somewhere between 10 to $12 to hold production flat and the reason I same operations hat if were heavier in the thermal dyad termite the decline curves a little steeper there so that would that would maybe closer to $12 range. If you're doing a lot more of just thermal I mean just sandstone.

You are probably going to the 10 to $11 range city called somewhere 10 to $12 just depending on where we've developed a year before and then launches last years and so we Charles This is Gary I'll, just add to that a little bit so you're right because of the nature of our assets, especially because we have some steam flooding that occurs that has impact far.

Beyond the the month or quarter, when we drill the well.

That's a nice blended average the numbers curious given you as a blended average over a couple two to three years that we've had to date and we can see that same type of average moving forward.

Forgive me I understand that the 10 to $12.

Is that that's just another I was.

What's that thinking that capex number, but yes, the 10 to $12 per barrel to hold our production flat understood.

Thank you for that detail.

Youre welcome and Charles just this is true one one just further just to make it clear you mentioned one year, yes, that's true as a public company, it's one full year.

These data that we're giving you are since the inception of the company in 2017.

So.

So it's a your plus of public so it theres a we're pretty we're very confident in those numbers.

Got it thanks for the detail.

Sure.

We don't have any questions.

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The call back.

Sure I'm Smith.

Okay.

I want to thank everybody for participating today and.

Look forward to any further questions. If you call us up later and everyone have a nice day. Thank you.

Ladies and gentlemen, this concludes todays conference. Thank you for your participation.

All right.

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