Q4 2020 Berry Corporation (Bry) Earnings Call
Thank you for standing by and welcome to be Berry Corporation, Q4, and full year 'twenty 'twenty earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
Mr. Todd Crabtree of Investor Relations you may begin.
Thank you Andrea and welcome to everyone. Thank you for joining us for Berry fourth quarter in 2020 full year earnings teleconference. Yesterday afternoon Berry issued an earnings release, highlighting full year 2020, and fourth quarter results as well as our ongoing response to the COVID-19, uncertainties addressing these and other issues. This morning shrimp Smith Board chair.
And CEO Fernando <unk>, Chief operating officer, and Executive Vice President and Cary Baetz, Chief Financial Officer, and Executive Vice President Trump will discuss our 2020 performance as well as our expectations for 2020, Fernando and then Kari will share further details on how we are addressing the operational and financial aspects of our business.
Before turning it over to questions Trent will make a few concluding remarks before we begin I want to call your attention to the Safe Harbor language found in our earnings release the earnings release and this discussion today contains 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.
Our 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 our website be on why Dot Com has a link to the earnings release and our most recent investor presentation any information, including forward looking statements made on this call were contained in the earnings release and that presentation reflect on.
Our analysis as of the date paid no plans, where do you see 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 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 transfer.
Thank you Todd good morning, everyone and thank you for joining US today as you all know 'twenty 'twenty was a year unlike any other.
<unk> numerous challenges, including the economic issues spurred by the Covid. The COVID-19, pandemic and the OPEC plus created oversupply as well as a fraught political environment, but despite these remarkably difficult and ever evolving headwinds Berry delivered on its commitment. It made in early 2022 all of its true.
Like holders that we would enter 2021 in a strong position poised for growth.
In 2020 as planned or predict our production for the year was essentially flat compared to 2019 with California production up for the year, we generated 131 million in Levered free cash flow for the year at year and currently we have more than $100 million in the bank and no debt.
Part of this is due to the significant sustainable cost reductions we achieved in both non energy Opex, which was down about 9% year on year and energy Opex, which was down about 13% year on year.
We are confident we will continue to reduce our opex from 'twenty to 'twenty, one and this is fully integrated into our budget.
As OPEC plus was making its decision to oversupply the market in March of last year, we had definitely hedged 100% of our oil production for the remainder of 2020 at slightly less than $60 per barrel Brent.
Quick data driven decision, making is a hallmark of Berry.
Even in a downturn our fundamental principle of living out of Levered free cash flow did not change nor will it change in the future.
The health and safety of our employees and the environments have always been critically important in the COVID-19 pandemic highlighted its importance even more we never shut down operations throughout this difficult year I'm thrilled to report in 2020, our total recordable incident rate or T. Our IR was zero point.
Five our lowest rate ever this is well below the United States' average for all industries, which is a tier I or a three point O.
Turning to 'twenty 'twenty, one now with the oil price strip, well above $50 per barrel, Brent and our drive to return value to our shareholders a key financial tenant for Berry. We are pleased to announce that the Berry Board recently approved reinstituting, a quarterly dividend at <unk> per share beginning in the first.
Quarter.
Operationally, we remained focused on our value, adding California portfolio, we are planning to keep companywide year over year production flat and anticipate a strong a very strong fourth quarter exit rate compared to 2020.
We have realized month to month production improvements following our fall reorganization that included the addition of our new COO Fernando Rahho.
Our current plans include a total capital budget of $120 million to $130 million in 2021.
Included in the budget is our renewed focus on workover activity on existing wells. This activity is something that is extremely judicious in California and is a highly efficient use of our capital dollars.
In addition, as mentioned we are continuing to reduce costs across the organization.
I am confident we will be successful.
Fernando will expand on all of this more in a moment.
Finally, and importantly, we are laser focused on increasing our scale our growth strategy continues to be directed toward conventional low corporate decline assets with strong cash flow on.
Now I'll turn it over to Fernando thank.
Thank you tram as I completed my first full quarter with Berry I want to emphasize that safety protection of the environment on operational excellence remain our top priorities moving.
We'll continue to create value by optimizing the performance of our current assets on generating meaningful growth in conventional and predictable place.
I am proud to report that we achieved excellent environment health and safety results in 2020 exceeding all of our targets from 2020, we did not have a single lost time incident.
<unk> noted we had on total recordable incident rate of 0.5, which translates to only two recordable incidents all year in.
In 2021.
We will continue to dedicate the necessary resources to protect the safety of our employees on contractors to safeguard our respect the environment to meet all regulatory commitments and to guarantee the integrity of our infrastructure.
Moving to performance I'll start with production or.
Our California oil production, which constitutes about 80% of our total production was up by one 3% in 2020 versus 2019.
We past drilling activity from April through October of last year resulted in a three 6% decline in production from Q3 to Q4.
Drilling resumed during the fourth quarter as we drill 22 wells all in thermal sandstone reservoirs in California.
We anticipate peak production for these 22 well package later this quarter.
Our average production in Q4 was 26600 barrels a day and we exited the year producing nearly 27000 barrels a day are planning 2021 is to keep production flat year on year with a positive year end exit rate compared to last year with continued growth in California.
Next let's turn to operating expenses in 2020, we averaged on operating expense of $18 51 per BOE. This is a $1.81 per Boe improvement when compared to 2019.
We reduced non energy opex by 9% with improvements in all major categories, and we reduced energy opex by 13% driven by a 16% reduction in steam rates.
Importantly, we achieved this without affecting production.
Non energy operating expenses are expected to be sustainable for a total opex of around $18 per Boe for 'twenty and 'twenty one we.
We are dedicating resources to improve our cost structure, even more through a combination of optimizing contracts generating ideas from the field and executing facility projects that can reduce low E and the long term.
We are determined to become the lowest cost operator in the basins, where we operate now.
Now, let's turn to capital.
Capex in Q4 and for the full year was in line with our plan at $12 million and $69 million, respectively. We maintain our plan for reduced capital investments in 2020, However, as mentioned before we restarted our drilling campaign in October I want to highlight on.
On the 15 wells drilled in Q4 unit two Larry sandstone reservoir in our Hill property in California.
There is a clear example of a shallow mature steam flood with predictable geology on low decline.
Peak production for these 15 wells is higher than pre drill estimates with drilling and completion costs, 26% below that 2019 development campaign as a result, the field is currently producing at a 30 year high.
Our capital program in 'twenty, and 'twenty, one will be in the $120 million to $130 million range.
We will drill approximately 185 development wells on performed roughly 200, Workovers and re completions, we're putting strong emphasis on workovers this year compared to previous years Workover activity as some of the best capital investment in terms of the capital efficiency.
We continue to be fully committed to our obligations under the California mandated idle well management plan in 2020, we exceeded our idle well abandonment commitments spending $17 million to abandon 194 wells well above the required 164 wells and additional 30 wells were abandoned.
Salary production.
Similarly in 'twenty and 'twenty, one we intend to plug and abandon approximately 280 wells of which 223 wells are required and 57 are to accelerate production at a total cost of $20 million.
The Lawrence Livermore Technical study on high pressure cyclic steam operations in the thermal Diatomite reservoir is complete and under review by Cal Jim.
We've been told by Cal Jim The study will be released by the end of Q1, we anticipate the opportunity to further work with Cal Jim to obtain new permit approvals for future thermal diatomite operations.
Remember our 2021 plans do not include new thermal diatomite development on anticipated development program for 'twenty 'twenty, one is targeting sandstone reservoirs and only in California, where we entered the year with almost 200, new permits in hand, and with that I'll turn it over to Carrie. Thank you Fernando as the pandemic.
Impacted the global economy in 2020, we delivered on the promise that we made last spring to successfully bridged to the end of 'twenty 'twenty. One at the time, we planned for a two year down cycle in our industry. We need immediately began to cut cost reduced planned capital and leverage our strong hedge position.
Effort to preserve cash for 2021, our efforts were and continued to be successful at the end at year end, we had more than $80 million of cash in the bank and we continue our cash build in 'twenty and 'twenty. One as trim mentioned, we currently have more than $100 million in the bank by managing our cost and capital we generated more.
$130 million of Levered free cash flow for 2020, our business model is unique for the industry and our 2020 results highlight the benefits of the Berry model in these extraordinary times, we maintained our total production level, which was nearly flat year over year and we even grew our California production wise.
We generated cash I'm extremely proud of our team and the results. We generated we are in an excellent position to manage our development plans for the year and to return capital back to our shareholders.
On another liquidity note in November we completed our scheduled semiannual or B L borrowing base Redetermination, which resulted in reaffirmed borrowing base and the copies elected commitment of $200 million as of December 31, 2020, we had liquidity of $273 million consisting of cash on.
Hand and.
And the RV L barring availability as a reminder, we primarily use the RV El facility day manage working capital fluctuation have no outstanding on the borrowing borrowings on the line today.
Due to lower FCC pricing, our 'twenty 'twenty reserves were down however, I want to reaffirm that for 'twenty and 'twenty, one we anticipate to see a substantial improvement in our calculate reserves as the current strip prices are more than 40% higher than the SEC prices used for 2020 reserve calculations.
Assuming current prices hold.
Our 'twenty 'twenty, one capital of $120 million to $130 million should keep our production relatively flat on an annual basis going back to 2019 with an accelerated exit rate in 2021 light Twenty-twenty. This year, we plan to see oil growth and our attractive basins in California at the cash.
Current strip pricing, we expect to fund our development plans with cash flow from operations.
We currently have oil sales hedge hedges of approximately 19000 barrels a day at nearly $46 per barrel in the first half of 2021 and approximately 14000 barrels in the second half of 2021, we recently added 3000 barrels in the second half of 2021 at 58.
A barrel as we have seen recent oil price strength this year, improving our average hedge position to $49 in Q3 and Q4, we will continue to hedge our natural gas usage as shown in our latest investor presentation. We are well hedged through October of this year and throughout the year, we will.
<unk> Opportunistically look to build our 2022 position to fully hedge.
Hedge position for natural gas.
Returning capital to our shareholders continue to be one of the key financial tenants and is being demanded by investors within the energy space, we promise to revisit the quarterly dividend when oil prices strengthen with the price environment and the business fundamentals for oil improving as well as our long term liquidity.
And we felt comfortable on reestablishing at attractive attractive quarterly dividend last week. The board approved a four cent per share dividend for the first quarter of 2021, our 10-K will be filed later today. If you want a deeper dive into the financials and now I'll turn it back over to you trend for final remarks, Thanks, Kerry and Fernando I want to close.
Speaking about our ESG efforts and about the legislative and political environment in which we operate.
First we continue to be very committed to our work on ESG. We accomplished a lot from 2020 in regard to developing initiatives and we are putting together our first ever environmental social and governance report this spring and will serve as a baseline report that will show our progress on results as well as highlight areas for opportunity.
Port will be part of berries annual report as I have said before we are committed to providing locally produced affordable energy in an environmentally friendly manner.
On a national level as we all know a new Federal administration took office on January 20, <unk> on January 20th 2021, the impact of the New administration on us. So far is low while there's a temporary moratorium on federal drilling permit issuance. It does not impact current berry activity.
On the state level, we had an uneventful twenty-twenty legislative session. There were no bills passed that severely impacted berry exemplifying that our approach to working with the state and aligning our goals with those of the state has been fruitful and has created great value for all our stakeholders as we enter into the 2021.
One legislative session, we will continue to work with legislators and regulators to ensure the state prioritizes policies that support energy sources that are reliable affordable and equitable for all Californians.
To conclude we fully expect 2021 to be a year of value creation through the dividend improved capital efficiency continued cost reductions and ideally accretive growth I will now turn it over for questions.
Yes.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad once again to ask a question. Please press Star then the number one.
Your first question comes from the line of Leo Mirror theory of Keybanc.
Hey, guys.
Good morning, I wanted to follow up on comments you made about M&A.
On a priority.
For Berry here, just wanted to kind of get a sense.
If you guys have been able to start to.
Again apply any potential targets, just trying to get a sense of where you might be on the process.
You guys can find yourselves to California or is this day, just a much broader search.
Leo This is Cary and I'll, let Trent fill in on the whole. The answer is we've always had identified assets out there and opportunities we want to look at it targets. The bid ask has always been a little wide that we continue to work on managing that scale is very important as you know the market is looking for larger theyre looking for more liquidity theyre looking for comp.
He's with larger float a secure balance sheet shall I say, it's very high on our priority list, but again, it's got to work for Berry identified targets, yes opportunities, yes, TBD on execution.
And then Okay, then and then Leo.
We continue to maintain our strategy, which is conventional.
Basically focused on what we're good at conventional low corporate decline oily assets with strong cash flow.
On a matter of geography, it's automatic geography as much as it is a matter of that okay.
Got it Okay, and then just wanted to ask about the current ledge.
Legislative session in California, I guess I recently saw that Theres, a new Senate Bill that's been proposed that contemplating a potential frac ban in the state I think there was also some language around there that was contemplating eventually banning cyclic steam operations as well.
Just wanted to get a sense of.
On what you guys may have heard in a low.
Locally and in California from legislators are the Governor's office.
In English.
On the real legs.
Okay.
Leo This is trim I'm going to answer this because this is not a surprise question.
The Bill was long anticipated Senator Wiener Telegraph very early that he was going to be.
Proposing such a bill.
It is much broader than than maybe he had originally intended.
So.
Let me just say that the time it will take for that bill to get through the whole legislative process is extensive and we fully expect that bill to be amended significantly.
As we move forward.
And we are working ourselves, obviously, but also with all the industry groups and labor groups to make sure. It has minimal impact on Berry and the industry in California.
Got you. Okay. That's helpful and I guess, you guys talked about the Lawrence Livermore study it sounds like coming due.
Next month in terms of when you guys will receive it here you have any early indications.
From other them directly or in the Governor's office or you just don't totally in a wait and see mode here.
Leo what we've been told by Cal Jim that it will be released at the end of the first quarter I think Fernando said that.
And.
We will see hopefully they'll deliver on that but we've also been told by Cal Jim that they're developing a process to evaluate those operators and those assets that are leased troublesome to them.
We don't know where we stand on that list, but we fully expect to be high on the list in terms of being <unk>.
Contacted by call Jim.
Does that makes sense.
Yes for sure thanks for the color.
Thanks Lee.
And once again to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Charles Meade with Johnson Rice.
More on Charles Ramsey good.
Good morning to you on your whole team there have to say I really liked leos questions because.
Britain downhole.
Okay.
These paper to ask also but let me let me just ask a couple of questions of oil followed up on the liver more.
On the liver more question is.
I guess, it's kind of a two part question on one.
If.
Assuming you can assume Berry can go back to doing some of your thermal diatomite.
Development.
Would that be attractive to not enough that it would compete with some of the sandstone projects.
Projects that you currently have slated for 'twenty, one and if it is attractive enough would it possibly slot into 'twenty, one or is that more something we should look forward to 'twenty two.
No. That's a very good question and our thermal diatomite development is very attractive in terms of our rate of return and competes very very well with the rest of our portfolio.
So if we do have the ability to.
To do some work in the thermal diatomite in 'twenty and 'twenty one in the second half a day, yeah, we would.
But as you heard on the call by the comments that Ive made currently our plans do not include any thermal diatomite development in 2021 that we expect to have.
Development in 2022.
Thank you for that Fernando and then and then perhaps.
My follow up but it would be a derivation of that.
The conventional wisdom is that and it certainly seems to fit well we've seen it in A&D over the last.
12 months say is that is that as.
As oil prices rise like they have done for the last month and a half.
We're happy to see it but it makes the bid and ask.
Get a little wider in the A&D market and so on.
Wondering if you guys are seeing that and that day that some of these possibilities of proceedings in the on the A&D side and if maybe there aren't other dynamics at play, particularly on the California market.
If you have this up.
Tim you mentioned that.
The couch and might have one way of dealing with a with less troublesome operators and then the other way of dealing with more troublesome operators that that maybe if it if it plays out like that that might shake some assets loose out of out of some operators hands and if that might be an opportunity.
Yeah, I will say on oil prices, Charles a rising tide lifts all boats.
But again I think again people understand the importance of scale people understand the importance of cash flow, leaving with the cash flow. Even the resource guys are having to go that route. So I think there is still some willingness regardless of where prices are too for combinations to get larger so I don't think that's impacting the market from an A&D.
Perspective as far as we see at this point in time and again investors are looking for companies that are bigger low.
Cost and scale to get you there so.
And Charles I'll add to that this is trim the.
There's over 400.
Operator entities that report production in California, as an example.
And consolidation is for that for that industry to really survive long term consolidation as requirement. Many of those companies have gotten themselves into financial difficulty last year.
Our available regardless of the price so.
I'm not sure of the rising price is going to impacted I think it's brought a lot of people to the table.
Got it. Thank you tram thank you care for your comments thanks sure Charles Thanks.
Your next question comes from the line of Michael Shelton with RSV.
Good morning, Michael Hi, Michael.
Good morning, guys Hey.
So I'm a family office.
Staking Berry.
Just wanted to try and reconcile a few things.
It looks as though the RF skus that you guys.
Deployed yesterday for your exact team amount to about $3 5 million in value to the executive team.
And the dividend distribution looks to be about $3 2 million for the period I just want to know how many oil companies in this space sort of offered to take discounts on their compensation and I'm wondering how do you reconcile that for you as shareholders and I'm trying to figure out your capital allocation going forward for the stock buyback that's still out.
Standing from the previous board.
Approval process. So I appreciate if you could just talk to all of that in terms of understanding what youre going to do on those.
Initiatives.
Yeah. Good question the L tip again.
Is that the shares that ratio were associated with the annual L. Tip planned year over year, we're going to see about a 30% reduction in L. Tip. So that is a good question and actually below requirement under contractual obligations on your employment contract. So compensation from an L tip is coming down.
As far as the dividend I think we had a very attractive dividend prior to the downturn its still attractive today I think we want to build back into a sustainable dividend.
And don't forget the market has just recently turned around and it's gotten very bullish but again when we were looking at this in 2020 you were looking at a black hole, we put the company in good position to manage through 2020, it's in good position to manage through 2021.
But again with our hedge our current hedges on all that we'd like to see a little more running room before we get a lot more value back into the dividend, but we'll also look at returning shareholder value in other ways as we bought back shares from the past and also looked at that in the past as well and limitation on that we did not we were restricted for a while based upon.
On our BL covenants that we have that removed to be able to go forward, but I think again overall, we've demonstrated that we do return on capital I think over prior to.
Cutting the dividend, we have returned over $120 million of capital back to investors. So for a company our size I think thats been fairly attractive and something that again, it's a financial tenant for us and something that we will continue to move forward with does that answer.
I think that was carry right.
Yes.
Yeah. Thanks for that detailed response, so that just leads to one other follow up.
In terms of your debt structure I don't know.
I took this out of context, but trim had mentioned that there was no debt.
Earlier on the call, which I think you guys got approximately $400 million of debt outstanding that's refinance a bowl at this point in time.
And it's sitting on about a 7% interest rate is there an opportunity to restructure that debt and if so is it available at a better rate and can you structure. It in time it out as opposed to having one lump sum due in 2026.
I think the focus for us is to keep the balance sheet fairly simple the unsecured debt at 7% still at very attractive rate today.
Obviously, a high yield market has been attractive but for E&P named its still not wildly attractive there were some hesitant is still probably the highest yielding industry sector out there from a high yield point of view.
As we look at going forward and if there was a major transaction out there that gives you the opportunity to do something different with the balance sheet and keep it clean but again from our point of view keep it as simple our story is simple.
To keep the balance sheet simple and the unsecured struck at the unsecured nature of the high yield is always very attractive for us.
Alright. Thank you guys. Thanks appreciate it.
Your next question comes from the line of Nicholas Pope with Seaport Global.
Good morning, Good morning, guys. Good morning.
Had a little quick question on the reserves numbers and I know theres going to be more detail on the K.
But it looked to me.
Like the PDP reserves had dropped.
A bit more than than production and I was trying to understand that you know I'm looking at kind of last year's K. It seems like maybe some PDP N P had been taken out or maybe that's not included in this year's numbers. So I was trying to get a little bit of a little help on the reconciliation from the just the GDP drop from year over year.
I think most of it it really on on there were some drop but that's the only location obviously, if any PDP fell off it was in that it would be in the Rockies area.
Pricing was challenging based upon the return for challenging based upon the current price and get that pie on the SEC pricing, we did lose some pods in California that we expect that to come back and part of the blood loss was associated with the thermal diatomite on the moratorium put out there and the five year requirements under the SEC pricing and guidelines.
So I think it's just a little bit of time as Lawrence if the Lawrence Livermore study turns out to be positive obviously those touch come back in as pricing comes back we see a substantial amount of reserves come back so does that help Nick I'm sorry.
Yes.
Let me Nick This is Trevor let me just add some color to that please.
91% of our drop in reserves was due to price the SEC pricing rule just to be clear thats. The 12 month trailing average.
Which drives some of us.
A little bit nuts, Okay, and then but the other rule that's out there remember is the commitment to spend capital over a five year period, and that's that's what impacted our Rockies in particular, okay. So, whereas we were focused on California. So we expect with the price to have well over 90% of that come back.
But it won't be complete given the five year commitment rule in the five years also is what got the thermal diatomite, just because of the moratorium yes.
Yes, that's helpful I'll, probably follow up with Todd whenever the K comes out tomorrow.
If you have more questions calls.
And.
One other item just a clean up item the last two quarters you've had.
Our non recurring component of G&A, which I think was part of just management changes and how much is left of that.
Recurring.
How long should we expect that number because I think we've seen a couple of several million dollars. Each of the past two quarters that you all are kind of categorizing as non recurring in the G&A.
I think there'll be just a minimal amount this quarter as as all of those contractual obligations are finished up.
But that should be at net okay.
Okay. That's all I had appreciate it thanks for the time.
And once again to ask a question. Please press star. This on number one. Your next question comes from the line of Jeff Robinson.
On our tower research.
Hi, Jeff.
Jeff.
Jeff Your line is open.
That's the driver.
And once again to ask a question. Please press Star then the number one.
And at this time there are no audio questions.
I would like to turn it back over to management for closing remarks. Thank you very much. Thank you everyone for listening today and look forward to any further questions. The 10-K will be out shortly and really appreciate the interest in the company. Thanks Bye.
Thank you for your participation. This concludes today's call you may now disconnect.