Q4 2022 Berry Corporation (Bry) Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
Good day, and thank you for standing by and welcome to the Berry Corporation quarter, four and full year 2022 earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Can I ask a question during your session you will need to press star one one on your telephone you won't hear an automated message advising that your hand is raised to withdraw your question Press Star one one again.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, Todd Crabtree Investor Relations Todd. Please go ahead.
Thank you Amber and welcome everyone and thank you for joining us for Berry's fourth quarter and full year 2022 earnings teleconference. Earlier today Berry issued an earnings release, highlighting full year 2022, and fourth quarter results speaking this morning will be Fernando <unk>, Our Chief Executive Officer, and Mike <unk>, Our Chief Financial Officer.
Before we begin I would like to call your attention to the Safe Harbor language found in our earnings release that was issued this morning.
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 expressed or implied in these statements.
Include risks and other factors outlined in our filings with the SEC, including our 10-K, which we filed last week.
Our website B O 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 table.
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 also post the replay link of this call and the transcript on our website I will now turn the call over to Fernando.
Thanks, Todd welcome everyone and thank you for joining US 2022 was a good year for Berry, both financially and operationally.
Once again, we showed a remarkable quality of our assets and our ability to navigate the California regulatory environment.
We have done for so many years I'm pleased to announce yesterday the board of directors approved searching enhancements.
Our shareholder return model, including doubling the quarterly fixed dividend to <unk> 12 cents per share.
Starting with the first quarter 2023, showing our confidence in our ability to continue to generate significant returns to shareholders.
Testament to our high quality low declining reserves, our long term view of executing our business plan.
This ability to our cash flows Mike will expand on these value, creating changes to our shareholder return model in a few minutes.
Looking at our performance in 2022, I'd like to highlight some of our key accomplishments and the strong returns that we delivered as promised.
In 2022, we generated $200 million of adjusted free cash flow.
As of March we will have returned a $189 million in the form of fixed and variable dividends and share repurchases to shareholders.
27% of the current market capitalization returned to shareholders in one year, there's this industry, leading and a record for our company.
We have proven that we can generate significant free cash flows and we believe we have the assets and the ability to efficiently manage the business to consistently deliver strong shareholder returns.
We delivered those returns while maintaining flat production levels net of A&D activity by applying the right technology reservoir management tools, and increasing workover and sidetrack activity to access more of the tremendous amount of oil resources and our assets.
We also achieved a reserve replacement ratio of 236%.
Our operations team continues to look for other opportunities to increase our base production without relying on new well permits.
A great example of this is our thermal diatomite asset, which we show on slide 12 of our February investor presentation without additional drilling without additional development drilling in thermal diatomite, we kept production flat in 2021 'twenty to 'twenty two.
Through innovative re completions and by optimizing our steam injection and strategy. We have seen strong results from applying a similar strategy to our south Bell rich property.
We believe the quality of our assets, including the tremendous amount of oil in place.
Gives us a competitive advantage over other energy companies, we have decline curves in low teens and in 2022 achieved 94% of our total annual production from our existing warehouse our base production.
Finally in its first full year as a very young company C. N J Walsh services performance generated healthy margins. We believe Sanjay has upside potential is benefited by the regulatory environment.
And we expect another solid year of steady growth and performance.
I will discuss our 'twenty to 'twenty three outlook in my concluding remarks, so with that I will turn the call over to Mike.
Thank you Fernando I'm glad to join the call today and look forward to getting to know all of you I'm excited about my new role and the opportunity to tell the Berry story.
And regarding various performance I'll keep my comments brief and refer you to our earnings release issued earlier this morning.
Our 10-K to be filed next week for more in depth information.
The fourth quarter and the full year of 2022 results.
For fiscal 2022.
We produced $200 million.
And adjusted free cash flow of which $56 million or 28% was attributable to the fourth quarter for the year, we returned $138 million of fixed and variable dividends and we've repurchased $51 million of shares for a total of $189 million of shareholder returns.
That amount is inclusive of the 50 cent per share dividends related to the fourth quarter announced in our earnings release. This morning.
We are proud to have delivered industry, leading returns based on our market cap.
Our fourth quarter results were impacted by weather lower oil prices and much higher natural gas prices. As a reminder, we are a gas consumer in our California steam operations in December of 2022, unusually poor weather cause operational challenges production downtime and much higher natural gas prices in California.
While we have seen improvement the bad weather and the related impact did carry into 2023.
Additionally, our hedging strategy, coupled with our midstream access to gas from the Rockies helped mitigate the impact of the high natural gas prices on our costs.
After analyzing the value creation of the first year of our shareholder return model and soliciting feedback from shareholders and the Investor community. We are adjusting the allocations effective for 2023, we're now targeting a high single digit dividend yield with the goal of increasing the value of our shares and lowering our cost of capital.
Effective January one adjusted free cash flow will be allocated such that 80% will go primarily towards share repurchases and debt reduction while the remaining 20% will be allocated to variable dividends.
And as Fernando mentioned, we are also doubling our quarterly fixed dividend to <unk> 12 per share or from 24 to 48 per share annually.
You'll see these changes take effect with our first quarter results.
Keep in mind, the first quarter of each year is typically our low point for adjusted free cash flow due to the timing of payments that our quarterly such as interest royalties and bonuses.
But I have one housekeeping item that I'd like to point out after receiving comments from the SEC. We have modified how we discuss our operating costs, what we used to call Opex. Our operating expenses, we have not changed the structure of the operations with just altered the disclosure of the associated items you can see this change as demonstrated on page.
Pages, 16, and 17 of our investor deck and in the tables of the earnings release again. This does not reflect a change in the way, we view or manage the business.
And now I will turn the call back to Fernando.
Mike in 'twenty to 'twenty, three we are sharpening our efforts to find strategic bolt ons production opportunities in California.
Given the current regulatory environment of neutral permits we are pursuing a bolt on strategy as an alternative to deploying the drill bit which to be clear. We will also continue to pursue.
Bolt ons can be used to protect our base production and even grow up production, we believe that universe of producing bolt on opportunities in California is improving.
Barry is well positioned to be an unfortunate mystic.
Data.
Our current plan and the issued guidance on earnings release reflect the slight decline in annual production year over year due to recent developments in the ongoing legal challenges to current counties permitting process in short the Kern County E. I R has again been state and sequent responsibility has reverted to Cal Jim.
Accordingly based on experience, we expect the permitting process for new drugs to be lengthy.
As a reminder, historically, we have received permits for sidetracked and workovers utilizing existing well bores without delay under a similar permitting environment.
The permitting environment change, we are ready to pivot quickly and we are well positioned to do so.
But there are several unknowns that could work out to our advantage. One is weather Cal Jim will recognize Kern County permits that we received prior to the current stay as valid. Additionally, there is a chance that this stay will be lifted in the near term.
While we expect 2023 production to be slightly lower than 2022, the cash flow impact will be fully offset by lower capital needs until the permitting issues are resolved.
We are confident in our ability to generate strong free cash flow and deliver significant shareholder returns based on current strip pricing. The difference in our 2023 expected adjusted free cash flow as compared to 2022 is driven primarily by the price of oil.
And were working capital and a doubling of the fixed dividend.
Brent oil pricing averaged $99 per barrel for 2022, and our current plan is based on $85 per barrel. Brent in 2023, we expect to generate nearly a $100 million of adjusted free cash flow, which after the fixed dividend.
It means we have the potential to return about $130 million or almost 20% of our current market cap to investors in 2023.
To be clear 2023 expected adjusted free cash flow is not impacted by the slight decline in production through lower capital capital requirements.
We remain focused on controlling what we can control. This means we will be prudent in how we spend and manage our expenses and we will employ hedging strategically to help us cover the fixed cost of our business. We also plan to maintain or Laura our leverage profile. Our goal is to be the most cost effective producers.
Producer, where we operate without compromising the quality or safety of our operations.
The strategy and priorities are very remained the same opt.
Optimizing production and generating significant adjusted free cash flow that we can return to shareholders. While all rich, California has its challenges we have demonstrated our ability to navigate those challenges with innovation.
Deploying the necessary technical capabilities to produce oil safely and efficiently for the people of California. We are committed to delivering top tier shareholder returns with that I will turn the call over to the operator for questions.
Thank you at this time, we will conduct a question and answer session as a reminder to ethics.
You will need request star one on your telephone and wait for your name to be announced you withdraw your question from FBR One one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from Charles Meade with Johnson Rice.
Charles Your line is open.
Good morning, Fernando to you and the whole Berry team.
Good morning, Charles good to hear from you.
Thank you.
Fernando I wanted to go back to the comments you made during your prepared remarks about about bolt odds being a bigger part of the 2023 plan.
I know the bolt ons have always been a.
I'd say, it's something that you guys are looking at have been looking for it but your success with getting attractive once it's been sporadic so.
I'm wondering if you could talk about would be what do you see the change in the opportunity set for bolt ons and perhaps if thats related to this.
This permitting.
This change in permitting and the difficulty of getting the permits if that's what's driving more assets to market.
Yes, good question Charles.
And the good news is that in California that market, especially lately.
In terms of M&A activity has been active.
There's been several transactions made here over the last few months. So people are talking and people are willing to listen.
And we truly believe that the future of California in terms in terms of of assets is consolidation.
In industry, we have to be able to.
To capture the different synergies that we have operationally and then at a corporate level as well and especially now under the tighter regulatory environment, that's becoming more and more and more important I think and that's why people are beginning to lessen.
Now in terms of what we're actually looking for you know, we're obviously looking for accretive transactions transat.
Transactions that can help us replace our production help us replace our drilling wedge.
If if necessary at the same time.
Looking for areas are bolt ons that are close to where we're currently operating to be able to capture those those operational synergies.
You know we have been very successful with our surveillance techniques and the assets that we have and whenever you're able to apply those same techniques to bolt on opportunities and create more value from those assets.
Got it got it that's helpful. And then a second question I think this is maybe a two part question. So forgive me for squeezing me, but.
It sounds like it sounds like you guys are planning on no new well permits, but but but the likely the likelihood is that there will be new permits, but that but that is just going to be slower and it's all I can say is I'm asking is your it sounds like your baseline is a conservative one about no new well permits.
And then the second part of the question is is can you compare.
The rates of return.
The workovers that youre talking to in 'twenty, three versus the new drills that up better.
There'll be a smaller component.
Yeah again very good question on permits Charles remember that we've been drilling in California since the beginning of the year.
We've been drilling Bullycide, new wells, and sidetrack and and we've got we've got permits in hand to take us into the second second quarter of the year.
And <unk>.
Our current plan, that's assume that we will not be getting any new well permits but at the same time remember that industry in California is getting sidetracked permits and workover permits and factors as Marty when you receive an additional seven workover permits which is really really good news.
Because if you remember the current environment.
Today similar to the environment that we had last year and last year, we were able to capture workover and sidetrack permits throughout the year.
So the current plan is based on the assumption that we will not get additional newbuild permits at this year. So from that from that perspective. It is it is conservative.
Tell me again about the Uh huh.
Compared to the.
Our rates of return.
Right for Workovers versus new drills.
The rates of returns for Workovers because of low capital intensity of the project is very very good at it tends to be north of a 100% rate of return and that's what we've seen there.
Throughout here in the last couple of years at least and for our new wells in California also because of the pricing environment and because of that all of the low cost to drill and complete wells the rates of returns are.
So you know on the order of 100% and that is why do we have.
I assumed for the year in 2023 as well so we get very good rates of return for both workhorse sidetracked and new drills in California.
That's what I was looking for Fernando Thank you.
Thank you.
Please hold for our next question.
Our next question comes from Nicholas Pope with Seaport Research Nicholas Your line is open.
Thanks, Good morning, everyone.
Good morning, Nicholas how are you great.
Alright, great.
I was hoping you could when you look at the size of the resource opportunity on doing the Workover is doing the sidetrack.
How what's the I guess, what's the running room that you have.
On on that side of things is that every well that youre looking at I mean, what what do you. How do you think about how do you think about inventory length I guess.
With respect.
The kind of the near term stuff that the capital programs going to be focused on.
Okay. Let me, let me start with Workovers Workovers, we have.
An extensive number of wells that are currently shut in.
We probably have a pool of over 500 wells right now that we can that we're looking at for Workover opportunities.
Which is which is very very expensive at the same time, you have to remember that work over and re completion opportunities.
Yeah.
The health of the whole opportunity set is very dynamic because as wells fail.
New opportunities created so it's so it changes every day.
So in terms of Workover potential we have we have a good a good solid full of opportunities in terms of Sidetracked says you know sidetracked. So are mechanically a bit more risky also from the reservoir perspective are also a little bit.
More risky than drilling new wells before you want to drill new wells, but we do have that same pool of of shut in wells for sidetrack opportunities as well currently.
Currently the team has as identified on the order of 70 to 80 additional sidetrack opportunities that we're working through but the main thing that you have to remember is that that our asset is one of the best assets in the world in terms of oil in place there.
The oil in place that we have you know some of the assets in California are comparable to some of the best assets in the world.
So so that's the that's the great advantage that we have we have a great asset base.
Got it.
Helpful. Thank you.
And then flipping over to the financial side.
Looking at <unk>, it looks like Youll prepaid on.
Income tax was curious about projections for 2003, and maybe even the 24 as you look at what you all are expecting in terms of.
Income tax rate and how much how much might be deferred.
23.
Yeah. Nick this is Mike I'll take that one.
We still have a significant amount of federal Nols and other tax credits that will cover we think that will cover all of our debt.
All of our tax season in 2023, so we don't expect we don't expect to be a taxpayer federally in 2023.
We do expect to have to pay some state taxes in California based on their tax regime, but it should be.
Probably in there.
$5 million to $6 million based on our current projections.
Got it that's all I had I appreciate the time everyone.
Thank you Nicholas.
Please hold for our next question.
Our next question comes from Lloyd Burn.
Jefferies LLC your line is open.
Thank you.
I just wanted to highlight how are you.
Good I'm good congratulations I just wanted to ask about <unk>.
Maybe something that Nic and Charles we're kind of getting at but.
If you look forward into even 24 and you look at the capital efficiency you guys talked about your Capex is down almost 30% versus expectations, yet you're production to lay down.
Maybe seven versus what we thought.
Can you just.
Are you able to replicate that in 'twenty four like what's the trajectory of capital efficiency.
Going forward and is that sustainable I guess.
Kind of the way Nick asked the same question.
Okay. Yeah, Let me let me answer this way we did a really good question to begin with Laurie do now we have the confidence that the courts work.
Revert back in favor of Kern counties E I R.
And we will return to that process and without process you know because remember there is not the first time that this has happened.
So once that processors reverted we've got plenty of potential opportunities to still drill new wells in the assets that we have in California.
And.
The county, they've proven to the courts that they have the capability to be the leading agency for sequel. So this is just a matter of time for next year, we're hoping and end with some certainty that this is this process is going to revert itself like it has in the past.
We should be able to add to drill new wells like we have in previous years and keep our production levels as as we've talked about before.
Okay. That's great. Thank you and then.
Just on the.
Change in the return policy just your thought process on <unk>.
Buybacks versus dividends and.
Kind of where youre going going forward.
Yes. This is Mike I'll take that one.
As we said we did talk to.
Investors owners, we've talked to the investment community.
It became clear that.
With the size of our returns for that we were able to generate.
That.
That the appreciation would be more towards the share and debt repurchases. We did feel is important to leave a little bit in the variable dividend.
Again with the fixed and a variable dividend, we are targeting high single digit cash yields based on our market cap.
Feedback we got was that.
That was also an important component to our return model.
Okay. Thank you very much.
Yeah.
As a reminder to ask a question you will need to press star one one on your telephone.
I would now like to turn it back over to Fernando <unk>.
Ohio for closing remarks.
Yeah. Once again I want to thank everyone for listening to the call. We're excited about the future of Berry and we're excited about executing our plan in 2023.
Thank you very much.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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