Q3 2022 Berry Corporation (Bry) Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day and thank you for standing by welcome to the Berry Corporation third quarter 2022 earnings call. At this time participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
Ask questions. During the session you will need to press star one one on your phone you will then hear an automated message advising us at your hand is raised.
Please be advised today's conference is being recorded.
I'd now like to hand, the conference over to Todd Crabtree Director of Investor Relations. Please go ahead.
Thank you Curt and welcome to everyone. Thank you for joining us for various third quarter 2022 earnings teleconference earlier today Berry issued an earnings release, highlighting third quarter results speaking. This morning will be trimmed Smith Board chair and CEO , Fernando <unk>, Chief operating officer, and Executive Vice President and Cary Baker.
Chief Financial Officer, and Executive Vice President before we begin I would like to call your attention to the Safe Harbor language found in our earnings release, the release and today's discussion 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 results to differ materially from those.
Breast or implied in these statements. These include 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 and our most recent investor presentation any information, including forward looking statements made on this call or contained in the earnings release and that presentation reflect our analysis as of.
The date made we have no plans or duty to update them, except as required by law. Please refer to the tables in our earnings release and on our website for a reconciliation between all adjusted measures mentioned in today's call and the related GAAP measures. We will file. Our 10-Q later today. We will also post the replay link of this call and the transcript on our website I will now.
I'll turn the call over to tram Smith.
Welcome everyone and thank you for joining us this quarter, we continued our solid track record of creating value and delivering strong shareholder returns.
Through the first three quarters of 2022, we have returned $148 million in the form of dividends and share repurchases, which is more than 20% of our current market capitalization. This.
This is inclusive of the quarter as variable and of this quarter's variable and fixed dividends totaling <unk> 47 per share, which the board declared and will be paid on November 28, 2022 to shareholders of record at the close of business on November 15th 2022.
We initiated our shareholder return model January one, which drives the return of our capital to our shareholders. This clear and simple shareholder return model is based on the discretionary cash flow, we generate which is calculated as cash flow from operations less the regular accordingly fixed dividend of <unk> <unk> per share.
And the capital needed to hold oil and gas production flat.
Currently the model allocated 60% of that discretionary free cash flow primarily in the form of cash variable dividends with the remaining 40% to be used opportunistically, including in the form of share repurchases.
In the third quarter, we generated $53 million of discretionary free cash flow producing our 41 cents per share variable dividend compared to the second quarter of 2022, this quarter's discretionary free cash flow.
Flex lower oil prices as well as the semi annual interest payment made in July equating to <unk> <unk> per share.
We also bought back 2 million shares of common stock in August for $19 million and the <unk>.
Total this year, we have repurchased $4 million of Berry's outstanding shares, which is representative of 5% of our total shares outstanding as of September 32022.
4 million shares were bought back from one of our largest long term private shareholders since going public we have repurchased nearly 10 million barrels up ending shares or 12% of our total outstanding shares as of September 32022.
In addition to our robust financial performance, we continue to generate significant value through our operational performance, which Fernando will address in a few moments.
This year, we have focused our capital program on protecting and optimizing our base, which is currently more than 94% of our total production our focus remains.
Based on what we can control and as always we are proactively managing and mitigating those external factors outside of our control.
I will conclude my opening comments by saying that based on current oil strip pricing and our strategy to maintain flat production year over year, we expect to be able to return to our shareholders. The value of our current market capitalization over three plus years.
We are confident that our shareholder return model will deliver dividends in the range of $1 60 to $1 75 per share based on the performance expectations for this fiscal year I will now turn it over to Fernando.
Thank you Tran for details of our operational performance in Q3, please refer to the earnings release and 10-Q.
There are a few achievements I'd like to highlight from Q3 <unk>.
Production was essentially flat from Q2 to Q3, we're currently experiencing our highest production levels of the year. This is driven primarily by the timing of development activity and an increased contribution from our base production in California.
We are optimizing our steam injection strategy through our enhanced data gathering and surveillance activity, which is improving our oil production from our California fields.
We currently expect our base production, which is the production that comes from our existing producing wells will account for 94% of our total production for the year.
In Q3, we allocated additional resources to Workover activity, which is our most efficient use of capital. So far this year. We have completed 235, workover jobs with a rate of return greater than 100% for the program.
Non energy operating expenses increased quarter on quarter, mainly driven by inflationary pressures also in Q3, you had higher power expenses due to increased seasonal rates and expenses related to our surveillance campaign.
We expect operating expenses to remain essentially flat in Q4.
Energy Opex decreased quarter on quarter by $1 per BOE. This is mainly.
Driven by additional gas hedges realized in Q3, as we head into the winter months, we'll be fully hedged in November and December also.
We have physical capacity and the Kern River pipeline, which covers up to 80% of our total gas delivered this pipeline brings a reliable supply of gas from the Rockies to California at prices that historically has been less expensive.
Both initiatives are helping us mitigate the volatility in the gas works.
To summarize our production guidance remains unchanged based on our current performance. We continued we continued our enhanced focus on base production during the quarter, which is delivering positive results.
Operating margins continued to be strong current commodity price levels.
I will now pass it to Karen Thank you Fernando.
We expect to continue generating significant free cash flow, which drives our top tier shareholder return model as we have demonstrated our model is sound and it's a perfect fit for our low decline asset base and highly visible cost structure on the visibility side of equation, we work to minimize the impact of natural gas volatility.
<unk> on our operations through hedging our current gas hedge position can be found on slide 22 of our November Investor day.
We remain bullish on oil based upon global fundamentals. However, some of our production is hedged into 2025 as required by RBI. All these oil hedges, our discretionary free cash flow generating and our current Brent oil hedges can be found on slide 20 of our Investor day.
We are updating some of our annual guidance ranges based upon cost and activity changes, we began to experience mid year.
The changes we are experiencing include deflation driven driven higher than budgeted natural gas fuel cost and steel prices as well as certain field operating costs, our full year production will be within our guidance and we expect our production rate to grow from the third to the fourth quarter to keep up the momentum into <unk>.
2023, we are accelerating our development program, which is largely responsible for our full year capital guidance change to a range of $140 million to $145 million. We are also revising G&A slightly due to labor inflation and increased professional service activities going into 2023.
We currently expect some of these increases in the 'twenty two G&A to fall away for updated guidance. Please see our earnings release distributed earlier today and the third quarter.
Oh earlier.
Earlier today in the third quarter, we experienced an unplanned third party pipeline outage that is now expected to be resolved in Q1 of 2023. This has had a negative impact on our differentials on about 25% of our California production during the quarter. Please note. This only impacts dollars received not.
<unk> sold.
All said, we continue to manage what we can control, we provide clear visibility into our cash flow and production and we continued to deliver on our promise to be a leader in the return of capital to shareholders in the oil and gas space back to you Trevor.
Thank you again for joining us for our third quarter earnings call from our collective comments it should be clear that our focus at Berry continues to be on creating value and delivering strong shareholder returns. We will continue to prioritize proactively managing and mitigating external factors that are out of our control.
Speaking frankly this is just part of being a good oil producer anywhere and especially in California, as well as being a good fiduciary for shareholders.
Going public in July 2018 over four years ago, we have returned more than $280 million and based on our current plan and commodity strip prices, we anticipate that going forward. We will return our current market capitalization over three plus years.
Our strategy to maintain production and maximize shareholder returns is tested and effective.
Did have an excellent track record of success.
Finally, we wish all of you a safe and happy holiday season, and with that I am pleased to take questions.
Okay.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
And our first question comes from Michael <unk> from Johnson Rice and company go ahead Sir.
Hi, good morning, and thanks for taking my questions.
Alright.
So my first question is just on the accelerated development plan that's.
Should results in production growth in the fourth quarter versus the third quarter.
As this growth is something that we should expect to see a trickle into 2023.
Yes, Michael This is Fernando good question actually most of the accelerated drilling.
That will be executed in Q4, most of that production is going to be seen in 2023.
So it's going to be part of our 2023 base, which is going to be.
Later than if we didnt drill those wells.
Alright. Thank you that's helpful.
My next question is just on the thermal diatomite activity I was wondering if you and your team could provide an update on that.
That activity and the status of the two horizontal wells that were drilled last quarter.
Yeah, No I'll give you an update on that we are confirming and we're excited that we have proven the technical success.
And our ability to produce thermal diatomite wells.
Produce those reserves with horizontal wells.
That said that's a success at the same time obviously.
We are currently still in the evaluation phase.
<unk> secured permits to drill additional wells next year.
And we will be testing different different theories around.
Lateral direction landing zone and other another issues as well.
And then at the same time, we're also evaluating additional technologies to be able to produce the thermal diatomite resource, which is a huge resource.
That we have in our in our in our field. So.
The results so far are very.
Good and we'll be following up those results with activity next year.
Yes.
Great. Thank you I appreciate the color.
Thank you Michael.
We'll queue up our next caller now.
And.
Just waiting for the connection to the BN and our next caller is Steve Busch from Everglades Resources incorporated. Please go ahead Steve.
Good morning, guys. Thank you for taking my call.
So good morning.
Okay.
Plans you just described so I won't spend too much time on that but more or less on.
What's the situation in California now.
With permitting or are there any problems, we should be aware of that.
California could causes.
Sure.
Ending oil by 2045.
Alright, let me let me take that question starting on the permitting I want to start by saying that we have been getting permits from college I mean areas with sequel coverage.
And also we have been getting permits for workover activity and sidetrack activity with no issues at all that process has not changed.
At the same time.
The pace of approval for the rest of the permits we will get better ones CCAR approval that CCAR approval responsibility goes back to the county.
Basically the restoration of the Kern County, and we expect that matter to be resolved in a matter of days. So we're really really optimistic about that.
The meantime for our 2023 activity, we have received over 50 permits in California, So we've got unsecured.
In addition to that we've submitted on the order of 150 permits that will be approved by <unk> over the next few a few.
Weeks and months. So we've got plenty of permits in hand, and submitted to be able to take care of our 2023 activity and beyond so in short we don't expect to have any issues with permits in order to execute our 2023 program.
Perfect that's good to hear.
I guess a couple of other things.
Our plan is to.
Return.
Capital to investors such as myself over three years equal to the current market cap would you expect that.
Same kind of three to five year return to current market cap value to shareholders over the next decade or two.
Hey, Steve This is Cary I'll jump and I would say obviously based upon the current strip we are comfortable with that.
All on the price of oil right, but you keep in a range of how the math works and of course stay the same at.
At an $80 number.
It's an easy wash rinse and repeat model that goes over and over again.
Brian again.
Alright, I guess like what would be the <unk>.
Five to seven year term would be maybe $50 oil or is that.
At what price.
Oil exposure.
With the low price, where we double it every five years seven years.
Oh yeah.
Yes, if you think about that I think youre, probably look closer at holding production flat and everything Youre still looking probably about a $60 number.
Brent <unk> and extra rate, which Brent.
Correct, yes, okay perfect. That's good to know and then I guess my final question is kind of housekeeping can you explain the buyback program to me who's in charge of executing it because.
I realized you bought back 2 million shares I guess oaktree.
I wasn't aware you are going to do that but.
At 950 and have traded down I mean, I was buying in the sevens and low eights.
Why are we ever buying why don't.
Why do we not just make themselves in the open market buyback when the stock goes down.
Yes, I think the answer is you will continue to see that program round out over a period of time, but we also don't want to have a large sum.
Shares hit the market at one time, causing damage to the price as well. So I think we will do it youll see a combination of open market purchases and large transactions as we go forward with the program.
Alright, I guess I guess, whereas in the $9 50 number come from because it only traded there briefly on one one or two days during the whole quarter.
I think it's a historical look back is how it was done.
Alright, it's usually done on a volume be lap over a period of time.
Alright, alright, because I watch the daily volume and I see 1003.
300000 share blocks going through in the Aix and I'm, just I would hope that we could be.
What's our ability to buy that was kind of blocks in the market.
At these lower prices.
Yes, I think.
The objective is unrestricted for us to buy going forward in the open market.
And again, we'll see a combination of open market purchases and blocked.
Block trades as we go forward, but the idea again is going to be focused on total shareholder return based upon cash and share repurchases and also debt reduction.
Alright, okay. Good.
Okay, Hey, listen it all looks good demand so keep at it. Thank you.
Thank you Sir appreciate it.
Thank you, Steve and just as a reminder, again if you would like to ask a question. Please press star one one on your telephone.
And we're.
We're queuing up our next caller right now Carter Dunlap with Dunlap equity management is on the line. Please go ahead Sir.
Hi, gentlemen.
We're trying to get something clarified in late September you had the non deal roadshow.
I wrote down in my notes that of the 3500, California, producing wells two of them 2000 of them had never been worked over.
And sidetrack to Workover.
Assuming I got that right, where do those fall in the future plans.
We have.
Fernando Carter.
We have a lot of wells in California, as you know.
Some of those wells are going to be testing to <unk>.
P&A activities, but a lot of them are going to be corporately destined to workover activities or sidetrack and activities.
I don't have that number yet, but it's in the hundreds.
But it's a significant number.
Part of our active capital campaign and capital expenditures going forward will be both on the on the Workover sidetracked and new well. So I think it's a permanent part of our tool chest as we look for holding our production and growing production is going to be workover of existing wells. Both from an expense point of view and from a capital point of view.
So it's safe to say that those were incorporated in what you talked about 'twenty three and beyond activity levels, Yes, yes correct.
Thank you very much.
Yes.
Thank you Sir that was our last question I will now turn it back over to <unk> Smith for closing comments.
I want to thank everybody for joining us today and look forward to a great fourth quarter, and culminating a great year in 2022, and I wish everybody again, a very happy and safe holiday season.
Susan Thank you.
Thank you for your participation today's conference. This does conclude the program you may now disconnect.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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Yeah.
Okay.
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So.
Dan.
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