Q3 2021 Berry Corporation (Bry) Earnings Call
Yeah.
Good day and thank you for standing by welcome to the Derby Corporation Q3, 2021 earnings conference call.
Despite all participants are in a recent only mode.
<unk> began I want to call your attention to the Safe Harbor language founding our earnings release the earnings release in today's discussion contain projections and other forward looking statements within the meetings a 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.
Includes risks and other factors outlined in our filings with the SEC our website B R Y Dot Com has a link to the earnings release in our most recent investor presentation any information, including forward looking statements made on this call are contained in the earnings release and that presentation reflect our analysis as of the date made we have no plans or duty.
Update them, except as required by law, please refer to the tables and our earnings release and on our website for reconciliation between all adjusted measures mentioned in today's call and the related GAAP measures. We will also post a repay link of this call and the transcript on our website I will now turn the call over to Trevor Smith. Thank.
Thank you John Good morning, everyone and thanks for joining us today.
Continue to execute our core business, which is the production and sale of affordable energy, primarily in California successfully the.
The most recent upturn in oil prices presents an exceptional opportunity for Barry as we believe it is different than previous cycles is our view that for him.
And possibly fundamental change for the industry for several key reasons.
First while demand for oil is continuing to grow globally and is expected to continue increasing overdone you increasing over decades. The long term supply is and will continue to be limited after years of global Underinvestment.
In fact, Bloomberg reported last week, the Saudi Aramco CEO said oil.
Capacity across the world is dropping quickly and companies need to invest more in production.
It is now getting to a situation where there is limited supply.
Second numerous major projects have been delayed or cancelled and third exploration is as low as it has been in at least the last few decades, the delays in major projects and the lack of new discoveries means there are very few new sources of world coming onto the market in the next few years.
For some time now we've been working on an outside the box approach to return even more value to our shareholders. We were excited to announce that the board approved a shareholder return model that will continue to position Bury as a top tier return of capital to shareholders.
In fact, it should put very firmly in the top tier of E&P companies of all sizes.
We are creating a model that provides significant returns which could be more than 20% annually based on our stock price and the current strip the.
The model will consist of a mix of returns through variable cash dividends. In addition to our current dividend share repurchases in debt retirement, while keeping a portion available for organic growth and bolt on acquisitions.
There is uniquely positioned to implement this new model successfully we already have all the critical elements in place and are proven simple business model, such as low corporate decline rate, a predictable cost structure and abundance of inventory.
Rent pricing and a simple clean balance sheet, which collectively with the increased pricing. We are currently enjoying generates extensive levered free cash flow.
Just on current industry fundamentals, we should generate considerable levered free cash flow for many years to come.
Again, we defined Levered free cash flow is cash flow after paying all of our costs, including our interests are fixed dividend and the cost to keep production flat.
This is an exciting development for Barry and our shareholders and as an obvious extension of our business model, which is unique in the industry. We look forward to unveiling the full details of the model later this quarter and implementing it beginning in 2022 I will come back to highlight some additional strategic items in my concluding.
Remarks, now I will turn it over to Fernando who will highlight the operational results of a highly successful quarter. Thank.
Thank you tram as usual I wanted to begin my comments are affirming that safety protection of the environment regulatory compliance on operational excellence remaining top priorities.
This is reflected in our excellent Q3 health safety and environmental results. In fact, we are approaching 600 day, Mark with a recordable and last time Ms.
As as best in class.
Moving to operational performance production in Q3 continues to grow quarter on quarter as it has done all year with an average of 27400 barrels of oil equivalent.
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In fact, our production September was the highest for the year at 27900 miles a day and will continue to grow into Q4.
In Q3, we operated with an average of two and a half Julie and California drilling 54 producers and two delineation once we focused on drilling activity on steel plant expansion projects and our giant midway Sunset field.
We did shift our drilling plans for high impact horizontal wells from cute from Q3 to queue for due to a combination of issues.
In Q3, we experience supply chain challenges similar to other industries, causing delays and drilling completing and connecting wells to production.
There's also gave the technical teams additional time to evaluate data from delineation wells drilled in queue to another to drill better wells in queue for ambien.
The first six of these high impact horizontal wells are nonproduction in queue for most of which are exceeding top curves with eyepiece and that 150 to 200 Berlin de range, but currently in the process of drilling another attractive 12 horizontal wells.
Also in queue for.
We're testing new development concepts and drilling step out opportunities in order to further expand our robust inventory base I.
I want to emphasize that our entire company's development program year to date has been very successful yielding an unhedged way to return in excess of 80% based on the current strip.
Furthermore, in Q3, we continued to realize excellent results from our work covert activity, which based on the current strip is yielding a right of return greater than 100%.
As mentioned in past calls in queue for we expect to reach our production plateau for the year and with a higher exit rate compared to last year.
We are still the most active company in California in terms of operational activity. We are currently operating with three drilling rigs. In addition to the rigs dedicated toward Workover maintenance and PNA activities.
We expect to finish the year, having drilled approximately 190 wells.
Performed approximately 280 workovers as planned.
Now, let's turn to capital Capex in Q3 was $38 million as planned there's been slightly lower than Q2 and within our budget for the first nine months of the year or.
Capital outlook for full year 2021 remains unchanged.
Terms of operating expenses and keep three we athletes on opex of $17.18 per Bowie. This is 1% lower than Q too.
We have been able to keep operating expenses consistently flat throughout 2021 and materially lower compared to previous years.
To summarize.
We're achieving outstanding safety results are production has sequentially grown since the beginning of the year and we expect to have a strong Q whore.
We are within plan with our capital expenditures.
Haven't sustainably taken $3 per Bowie out of our Opex structure says 2019.
And with that I'll turn it over to Canada.
Thanks, Fernando trimmed did a great job of outlining our thoughts on the new shareholder return model that we are excited to introduced and implement the model will be simple and the returns of capital will be easy to calculate we are currently finalizing the details and look forward to announcing the bully approved plan later this quarter.
As you know Barry is a cash flow machine and we believe this new return model further exemplifies that fact referencing are illustrative simple cash flow model on slide 15 of our Investor presentation. The quick map that today's strip price would show is generating almost 250.
Dollars of Levered free cash flow in 2022.
That is more than 30% of our current market cap and the simple math works beyond 2022.
During the third quarter, we completed our new rbf facility, which has a $500 million commitment and extend the terms to 2025, we maintained our borrowing base and elected commitment of 200 million.
A condition of the new <unk> with extensive hedging.
We are required to have a minimum of 75% of our PDP for oil hedges hedged. The first two years of the agreement, which then drops to 50% in year three or new hedges are highlighted on slide 16 of our investor deck. Our current oil hedge program is focused on protecting that down.
Inside while leaving us upside as we remain bullish on oil prices.
Further we have been gaining additional access to the Kern River midstream natural gas line, which connect to gas supply lines in the lower 47 States. We currently have access to about 15500 Indian Btu per day, which increases to almost 48.
Mmm Btu today a day in May of 2022. These are long term agreement, some which are in place for up to 15 years and allows us to move hours and other purchase gas from the Rockies to our operations in California, effectively creating a physical hedge.
And with the recent cell of our plants read assets, we will only be about 5000 Indian Btu per day short of our daily demand when we gain full access at the current line capacity.
Over the next couple of months, we expect natural gas prices to remain high due to supply and demand imbalance, especially on the west coast that said, we protected our exposure through April of 2022 at roughly at maximum of $6 per M. M. BTA, if the natural gas market softens.
Over the winter months, then we should see some improvement in our hedged fuel cost.
Lastly, we are busy on the A&D front, we've purchased C N J well services and successfully integrated the business into our operations and as I. Just mentioned, we divested are placer Rita asked that due primarily to the divestiture of the plas read asset coupled with timing delays Fernando.
Highlighted we have refined and narrowed our total production range for 2021 to be in the 27200 to 2000 7700 range that said we are very pleased with the trajectory of the current production as we closed out the year or 10-Q will be filed later today if you.
You wanted to take a deeper dive into the financials now I'll turn it back over to trim for final remarks.
As you heard Barry is executing on our business plan, we have an exceptional company driven by a successful and simple business model and now a first rate shareholder return model.
Before we go I would like to highlight a few more of our recent successes first of all our A&D efforts in the quarter were fruitful with the sale of Plaza reader R. Last remaining producing property in La County, all of our California operations are now concentrated in Kern County, not only does Kern.
<unk> appreciate the value provided by our industry. It also is primarily a rural low population area with about 103 people per square mile compared to L. A county, which has more than 20 times that at more than 2400 people per square mile. Among other benefits.
The political environment and regulatory challenges posed less risk to our operations.
Hmm.
The acquisition of seeing J, well services was a strategic and value, adding transition transaction. There was purchased at a competitive price with strong underlying business fundamentals CJ has significant growth opportunities in California.
Building on his existing customer base, adding new customers and helping the state and federal governments fulfill their goals to plug in abandoned orphaned wells.
And importantly, it aligns with our vision and environmental social and governance ESG goals to reduce greenhouse gas emissions two day safely and with proven technology.
With C J well services, we can reduce statewide fugitive emissions, which are primarily methane the most damaging of the greenhouse gasses by plugging in abandoning orphan and idle wells today.
We are continuing to hone our medium and long term environmental priorities as it relates to USG right now we're on track to reduce our own greenhouse gas emissions by at least 15% by the end of 2021 compared to 2020.
In the next six months to a year, we will be implementing new solar projects to reduce our carbon intensity in the hill lease and at the Bakersfield office.
Additionally, we are currently evaluating solar projects and our other locations and opportunities to maximize our reuse of water through agriculture and other reuse avenues.
We are evaluating the feasibility of carbon capture and storage Ccs because we have a significant number of suitable reservoirs for C. O. Two storage our goal is to learn from others and implement economically viable and effective Ccs in the areas, we have significant storage capacity.
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We will only pursue Ccs if it makes sense for our shareholders.
In conclusion, I am extremely pleased with our performance in all aspects of our business.
We have a great company with an exceptionally simple and proven business model, which is being further enhanced by our new shareholder return model.
As a reminder, please look for our shareholder return model rollout in just a few weeks I will now turn it over for questions.
As a reminder to ask a question you will need to France, Thailand on your telephone.
On your question pressed it down.
Please stand by while we can file that Kunayev us Sir.
Our first question comes from the line of Neil Miami friend Keybanc Your line.
Just wanted to touch base.
Just wanted to touch base on the shareholder return model certainly sounds very significant in terms of the 20% number you folks are throwing out there.
I just wanted to check in on those details that will be forthcoming, but it sounds as though this might be a bit of a formulaic.
Model.
It depends on future kind of oil prices and just wanted to get a sense that this is going to be like a quarterly look and then at the end of each quarter <unk>.
<unk> returns to shareholders and Additionally, how does the production growth component fit into that model.
Yes, good question Leo and this is Kerry.
You're right, we want to make it very formulaic, we have a very predictable cost structure as we lay out in our investor presentation. So.
The idea is to use that cost structure used our hedged oil price and the stripped for people to have predictability of what that excess lebrecht free cash flow will be and then from there. We will have it set out for what percentage is going to be paid out in cash what percentage will be used for share repurchase and debt reduction.
And then what percentage will be retained by the company for discretionary uses such as bolt ons and organic growth. So those are the three I think the egg.
Probably the lot larger portion of that will be in and cash.
And and then the other two will be fairly equal to each other at least conceptually and I think the idea will be looking at it on a quarterly basis as well.
Again, we want we want this to return capital to create value for our shareholders in order to create value. It also needs to move the stock price and I think Keith keeping it quarterly and keeping people from getting in and out on a time and basis makes a lot more sense as well, so but exactly right very formulae.
Very predictable and then people can put their own strip pricing in there and understand truly what the return capabilities are.
Okay. That's great absolutely that was great I appreciate that.
And then I was hoping I could just get a bit of a regulatory.
Date.
Hmm you folks wanted to get a sense that there's any updated thoughts on when you might hear back.
From the state Cal Jam and as a result of this Lawrence Livermore steady and the impact obviously it might have on the diatomite and I was also hoping you guys could comment on sort of current setback provisions.
Provisions that are bouncing around the state think they're calling for 3200 feet and know that you guys are Kern County only.
Any high level thoughts on what the impact might be in Kern County.
Leo This is trim I'll I'll take that one.
Good to hear from you as always.
On the regulatory front first of all we are we continue to manage the regulatory front extremely well and we've demonstrated that over the last four and a half years.
So given that we are let me handle the setbacks first.
The setbacks were announced.
They start a rulemaking process, which is well well established in the state, which is likely to take a year and a half or two or even more with no shorter to come through which involves public hearings input from the government.
And the 3200 feet is and the way. The thing is actually currently written is very is modeled after Colorado.
It started and.
As the regulators have said over and over again, that's their intent and they intend to have it modified in that timeframe. So the final will allow the industry to do work, while truly addressing some public health concerns and areas of high population density.
So if that's the case, we will work that and work it well and were positioned to do it now obviously I mentioned the population numbers in the population density numbers.
Impact on Barry is.
Is who though it does impact us in Kern County, if it were taken.
Point blank verbatim.
We expect it to have minimal impact by.
By the time that it actually becomes a rule in two two years or so okay.
The high pressure cyclic steam that remains with the Governor's office.
And the industry continues to have it as a priority to remind the governor that there's nothing to keep it from from occurring as you know as a reminder, we currently produce from the thermal diatomite, we continue to inject steam and use heat to produce there. It's a great reservoir for us and we're actually.
Doing some creative wells in the thermal diatomite here hopefully in the fourth quarter.
To test ways to take advantage of the existing heat in.
In the reservoir to see that.
That we can enhance it without injecting new steam which is really what the moratorium is so we've taken the opportunity to be creative there. So.
Okay. That's that's very helpful and I just.
Walk me through you guys wanted to see if we could get the sale price on the placer reader assets and was hoping you could maybe provide a little bit more color on the ccas projects is this something that's kind of a big study that you've undertake hearing in 2022. It sounds like you may be all you identified some some reservoirs my understanding.
You'd have to be under.
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So maybe any thoughts on the potential there.
I'll take placer read a real quick Plas Rita.
Again.
A good opportunity transaction for both parties we.
We do about 800 barrels.
Year annually to a little less than that in the third quarter. Thank down below 750, right around that area.
On a flowing barrel, we got a little less than 20000 on a flowing barrel and reduced by about $20 million. So.
Kind of the parameters around what what that was.
And then I'll, let DRAM kind of talk about the ccas and kind of thoughts and strategies around down.
We also have a significant decrease in the amount of steam required by the company as well.
Yes, yeah Leo for modeling purposes, we usually burn about 65 to 67000, Emmett Btu today without becoming down to about 52 to 53 with the reduction of Plaza read as well going forward. So again talking about what I was talking about that the access.
The current line in the short and you can kind of see where reduced our natural gas demand significantly and especially that's expensive natural gas because it's primary so cal gas as well. So that's good okay, great that's great to hear.
And on the Ccs.
We are.
If I understood your question.
Generally.
We don't have.
The biggest generators of carbon dioxide for us or the cogent we have.
Those are the point sources. So we will always be looking at ways to capture C. O two and reduce C. O two from them. So the seals Ccs efforts come into two parts, one is reducing the amount of carbon dioxide generated by a cogent, which reduces our carbon intensity by definition, but the other.
Is.
Is providing storage in reservoirs that that we have that are.
Below are existent generally below our existing field. So I think the cut off point is.
Is it becomes a liquid below 2700 feet or something like that so we have lots of storage you can calculate that number many different ways.
And but we have a lot of storage down there and as we've refined that Leo I am going to be happy to reverse represented I think you'll see it eventually and our ESG report that we file quarterly.
So I would look forward, but I don't want to project now on something that's got huge error bars on it. It's just a big it's a big number and and again, what our goal would be is to follow or to learn from others to.
Make that an economic project and make it available state and two other operators to store C. C. O. Two that is generated by both other oil operators, but also other industries.
And the state.
Thanks.
Okay. Thanks Leal.
Our next question comes from the line Charles need from Johnson writes your line is all things.
Hi, Good morning. This is Michael for filling in for Charles Meade.
Leah hit on a pretty good questions. We were trying to ask and we appreciate the details relating to classify to volumes in pricing.
Is there any way y'all can provide for.
For the details based upon like the activity levels at a class or even maybe like well count or capital spending there over the last couple of years.
Capital spending at Plas re has basically been it's been in a decline.
It is not a it was not our best returning assets. So we tried to Michael move.
Most of our capital to a higher returning assets in Plas Rita based upon its cost structure location and all that was basically in decline note. So number of active wells is beyond my expertise that Fernando may may know that off the top of his head, but the other thing Michael It did have our largest coach.
Generation facility, so that was.
42 megawatt facility and that also goes but that's.
That's the reason the natural gas users comes down tremendously as well.
Great. Thank you.
I appreciate it that's that's all I got.
Thanks, Michael until Charles.
Well.
Our last question comes from the line S. Nicholas Health friends Sepoy can research your line is open.
Yeah.
Can you hear me yes.
Yes.
Good morning.
I was trying to get a little more detail on the well servicing business what was the final.
Once the final closing price on that and I think you guys mentioned and that press release.
Kind of a trailing three year EBITDA kind of looking like what the projection would be for the next year I want to make sure I just want to make sure I get those numbers right and also to understand how that is going to flow through.
The company's financial statements.
Great question $43 million was the closing price and we said about 112 times trailing EBITDA. So that kind of gives you the idea on the EBITDA.
And that EBITDA fairly consistent the last several years and based upon at Jack continued dialogue with the customers and the.
The level of service quality and what he's doing we don't see that number deteriorating. So again. We're excited I think also if you. If you heard kind of tramp talk about the methane side of things and the methane capturing in the PNA side I think we see upside in that.
I think like everybody else.
Pinch point on growth. These days, it's binding really good employees to get out there to to be able to manned workover rigs and snubbing units.
But I think Jack's extremely excited to be part of Berry because now he has a strong company with good benefits that will attract those people. So I think we do have some positive trajectory on that side of the business that we're excited about so.
You ask one other question, Nick and I can't remember off the top of my head.
Let's get a flow through.
Financial part Premier So we are going to be very transparent with that business.
It will have its own line.
And the financials and we will also do selected summaries within the financials as well so people can truly breakout Halle Berry's doing and how <unk> is doing.
We will even highlight we plan to highlight the G&A that's associated with C. N. J. So you can break that out of the corporate G&A as well we don't we just don't want people to end up.
Confusing our cost structure of the oil and gas operations with the surfaces side. So we will give a lot of clarity to make sure that does not happen.
That's great.
And is it is their activity.
Weighted towards Barry.
Like how much of their business is actually related to kind of the current operations.
Nick Nick This is tram right now Barry is not a customer of seeing Jay.
And we had two critical pass to acquire she and J one was to keep the management, which is Jack Renshaw and his team.
Who do an excellent job and have a proven track record we accomplish that and then the second was that the major customers in the existing business come along with it and we spent time in Jack spent a lotta time with the major customers.
Assuring them that we would keep.
Or a wall between the E&P business and the service business and I think I know Jack is I've actually doubled back and talk to the leaders of the major customers in and they are all quite satisfied and actually pleased with with very now being the owners and J because of that.
And just to build off of Kerry's comment about the people one of the reasons.
At least a couple of the major customers that I've spoken to are really appreciative of this is a guarantee with doesn't guarantee anything with people, but it does assure them and give them confidence that they will be able to keep the same crews and the same workforce on their well opportunities which is a big.
Deal in the service industry, keeping the same people and keep them. The same cruise you get you get confidence you're going to get the same result.
Again so.
So I think it's a win win for the existing customer base and I think it is going to be.
Great for Barry we will compete for new business growth business, but not to replace existing business, but to add new business too.
Two and so Fernando and his team will be will be doing that and that's already started actually talking to Jack about that.
And then Ah.
Business is about 20% of their current current.
Current business and that's the strategic piece for us, which we look to grow and hopefully bring in.
Government and other other entities intuitive customers focus on reducing methane emissions grows.
As you may be reading.
Okay.
Great Yeah, that's very helpful. I appreciate the time, thanks again.
Thanks, Nick.
Again, if you would like to ask a question.
There are no.
Question at this time I.
I would now like to turn to call back over.
John Smith, correct hosting web market.
I want to thank everybody for taking the time. This morning, it's a very exciting time for Barry and I Hope everyone has a good day. Thank you for joining us today.
Yeah.
He didn't.
Squall few weeks.
Today's conference call you May now disconnect. Thank you for it.
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