Torsten Asmus

Berry Corporation (NASDAQ:BRY) made a major upwards revision to its guidance for operating expenses, increasing its full-year operating expense expectations by around $5 per BOE. This was on account of a mix of cost inflation and continuing high energy costs.

I had expected Berry to extend its operating expense guidance and had been a bit puzzled why it hadn’t done so before provided that its operating expenses had trended well above guidance through the first half of the yr.

That being said, despite the increased operating expenses, I consider Berry might be value around $12 per share in a long-term (after 2023) $75 Brent environment. At that commodity price, Berry should have the opportunity to take care of production levels and generate a bit over $2 per share (before income taxes) in unhedged money flow.

Guidance On Operating Expenses

I previously thought it might be difficult for Berry to hit its full-year guidance of $20 to $22 per BOE for operating expenses, after its first half operating expenses averaged $25.80 per BOE. Thus, I used to be a bit perplexed that Berry still maintained its full-year guidance for operating expenses at $20 to $22 per BOE after its Q2 2022 earnings report.

I estimated that in an optimistic scenario, Berry might find yourself with full-year operating expenses of a bit over $23 per BOE, although I had typically modeled its operating expenses at $24 per BOE since May.

Berry ended up significantly revising its full-year guidance for operating expenses to a spread of $25.75 to $26.50 per BOE after its Q3 2022 earnings report. In Q3 2022, its operating expenses increased further to $26.46 per BOE.

Berry probably must have revised its guidance earlier, provided that costs were already trending well above the high end of its original guidance range through the first half of the yr.

Berry noted that its non-energy operating expense increased in Q3 2022, primarily on account of inflationary pressures, while its energy operating expenses decreased by $1 per BOE in Q3 2022 in comparison with Q2 2022, primarily on account of realizing additional gas hedges through the quarter.

Potential 2023 Outlook

Berry has accelerated its development plan and increased its 2022 development and production capex budget barely from a spread of $125 million to $135 million to a brand new range of $140 million to $145 million. This is anticipated to mostly impact 2023 production. Because of this, I’m now modeling Berry’s 2023 production at 27,000 BOEPD.

Berry’s realized price for its California oil has taken a short lived hit on account of a third-party pipeline outage that’s leading to Berry selling 25% of its California oil at a reduction. Berry expects the outage to increase into Q1 2023, so this will have a modest (probably lower than 1%) on its overall realized prices for 2023.

With 2023 Brent Strip around $84, I estimate that Berry can generate $712 million in revenues after hedges. Berry has swaps covering roughly 57% of its oil production at $76.67 Brent, and these swaps have an estimated value of negative $38 million. I’ve assumed that its net well servicing and abandonment segment results remain the identical as 2022.

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I’ve modeled Berry’s 2023 operating expenses at $25 per BOE. Fuel gas is on the right track to be cheaper in 2023, but Berry has hedged a major amount of its consumption with swaps at a reasonably high price ($5.48 NWPL).

This leads to a projection that Berry will generate $183 million in positive money flow in 2023 at $84 Brent.

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Berry’s fixed dividend adds as much as around $18 million per yr currently. Based on its capital return framework, it might put around $99 million (around $1.29 per share with its current share count) towards variable dividends and $66 million towards share repurchases and growth capex.

Valuation Estimates

Despite the increased operating costs, Berry has reduced its share count and net debt enough to take care of its estimated value at $12 per share in a long-term (after 2023) $75 Brent environment.

At $75 Brent, 27,000 BOEPD in average production and $25 per BOE in operating expenses, Berry should have the opportunity to take care of production levels and generate roughly $160 million in unhedged free money flow before income taxes. This could be roughly $2.08 per share with Berry’s current share count.

This could be around a 17% FCF yield (before income taxes) at $12 per share, and around a 13% to 14% FCF yield once full money income taxes are factored in. This seems reasonable for Berry’s equity provided that its unsecured bonds due 2026 are yielding 9% to 10% to maturity.

Conclusion

Despite operating expenses remaining elevated, Berry still appears able to generating around $183 million in positive money flow in 2023 at current strip. With $25 per BOE in operating expenses, it might also generate $160 million per yr in unhedged free money flow (before money income taxes). Berry’s FCF yield (at its current share price and factoring in full money income taxes) could be roughly 19% at $75 Brent, and I consider that a $12 per-share price for Berry could be a greater reflection of its actual value.