Berry Corporation (BRY) Q4 2022 Earnings Call Transcript

Berry Corporation (NASDAQ:BRY) Q4 2022 Earnings Conference Call February 22, 2023 11:00 AM ET

Company Participants

Todd Crabtree - IR

Fernando Araujo - CEO

Michael Helm - CFO

Conference Call Participants

Charles Meade - Johnson & Rice

Nicholas Pope - Seaport Research

Lloyd Byrne - Jefferies LLC

Operator

Good day, and convey you for opinionated by. Welcome to nan Berry Corporation Quarter Four and Full Year 2022 Earnings Call. [Operator Instructions] Please beryllium advised that today's convention is being recorded.

I would now for illustration to manus nan convention complete to your speaker today, Todd Crabtree pinch Investor Relations. Todd, please spell ahead.

Todd Crabtree

Thank you, Amber, and welcome, everyone, and convey you for joining america for Berry's 4th fourth and afloat twelvemonth 2022 net teleconference. Earlier today, Berry issued an net merchandise highlighting afloat twelvemonth 2022 and 4th fourth results. Speaking this greeting will beryllium Fernando Araujo, our Chief Executive Officer; and Mike Helm, our Chief Financial Officer.

Before we begin, I would for illustration to telephone your attraction to nan safe harbor connection recovered successful our net merchandise that was issued this morning. The merchandise and today's chat incorporate definite projections and different forward-looking statements wrong nan meaning of national information laws. These statements are taxable to risks and uncertainties that whitethorn origin existent results to disagree materially from those expressed aliases implied successful these statements. These see risks and different factors outlined successful our filings pinch nan SEC, including our 10-K, which we revenge adjacent week. Our website, bry.com, has a nexus to nan net merchandise and our astir caller investor presentation.

Any information, including forward-looking statements, made connected this telephone aliases contained successful nan earning merchandise and that presentation, bespeak our study arsenic of nan day made. We person nary plans aliases work to update them, isolated from arsenic required by law. Please refer to nan tables successful our net merchandise and connected our website for a reconciliation betwixt each adjusted measures mentioned successful today's telephone and nan related GAAP measures. We will besides station a replay nexus of this telephone and nan transcript connected our website.

I will now move nan telephone complete to Fernando.

Fernando Araujo

Thanks, Todd. Welcome, everyone, and convey you for joining us.

2022 was a bully twelvemonth for Berry, some financially and operationally. Once again, we showed nan singular value of our assets and our expertise to navigate nan California regulatory situation arsenic we person done for truthful galore years.

I'm pleased to denote yesterday nan Board of Directors approved definite enhancements to our shareholder return model, including doubling nan quarterly fixed dividend to $0.12 per stock starting pinch nan first 4th 2023, showing their assurance successful our expertise to proceed to make important returns to shareholders. This is simply a testament to our precocious quality, debased declining reserves, our semipermanent position of executing our business scheme and our visibility to our rate flows. Mike will grow connected these value-creating changes to our shareholder return exemplary successful a fewer minutes.

Looking astatine our capacity successful 2022, I'd for illustration to item immoderate of our cardinal accomplishments and nan beardown returns that we delivered arsenic promised. In 2022, we generated $200 cardinal of adjusted free rate flow. As of March, we will person returned $189 cardinal successful nan shape of fixed and adaptable dividends and stock repurchases to shareholders. That's 27% of nan existent marketplace capitalization returned to shareholders successful 1 year. This is industry-leading and a grounds for our company. And we person proven that we tin make important free rate flows, and we judge we person nan assets and nan expertise to efficiently negociate nan business to consistently present beardown shareholder returns.

Notably, we delivered those returns while maintaining level accumulation levels nett of A&D activity by applying nan correct technology, reservoir guidance devices and expanding workover and sidetrack activity to entree much of nan tremendous magnitude of lipid resources successful our assets. We besides achieved a reserve replacement ratio of 236%.

Our operations squad continues to look for different opportunities to summation our guidelines accumulation without relying connected caller good permits. A awesome illustration of this is our thermal diatomite asset, which we showed connected Slide 12 of our February investor presentation. Without further improvement drilling successful thermal diatomite, we kept accumulation level successful 2021 and 2022 done innovative recompletions and by optimizing our steam injection strategy. We person seen beardown results from applying a akin strategy to our South Belridge property.

We judge nan value of our assets, including nan tremendous magnitude of lipid successful place, gives america a competitory advantage complete different power companies. We person diminution curves successful debased teens. And successful 2022, we achieved 94% of our full yearly accumulation from our existing wells, our guidelines production.

Finally, successful its first afloat twelvemonth arsenic a Berry-owned company, C&J Well Services capacity generated patient margins. We judge C&J's upside imaginable is benefited by nan regulatory environment, and we expect different coagulated twelvemonth of dependable maturation and performance. I will talk our 2023 outlook successful my concluding remarks.

So pinch that, I will move nan telephone complete to Mike.

Michael Helm

Thank you, Fernando.

I'm gladsome to subordinate nan telephone coming and do look guardant to getting to cognize each of you. I'm excited astir my caller domiciled and nan opportunity to show nan Berry story. And regarding Berry's performance, I'll support my comments little and mention you to our net merchandise issued earlier this greeting and our 10-K to beryllium revenge adjacent week for a much in-depth accusation of nan 4th fourth and nan afloat twelvemonth 2022 results.

For fiscal 2022, we produced $200 cardinal successful adjusted free rate flow, of which $56 cardinal aliases 28% was attributable to nan 4th quarter. For nan year, we returned $138 cardinal of fixed and adaptable dividends, and we repurchased $51 cardinal of shares for a full of $189 cardinal successful shareholder returns. That magnitude is inclusive of nan $0.50 per stock dividends related to nan 4th fourth announced successful our net merchandise this morning. We are proud to person delivered industry-leading returns based connected our marketplace cap.

Our 4th fourth results were impacted by weather, little lipid prices and overmuch higher earthy state prices. As a reminder, we are a state user successful our California steam operations. In December of 2022, unusually mediocre upwind caused operational challenges, accumulation downtime and overmuch higher earthy state prices successful California. While we person seen improvement, nan bad upwind and nan related effect did transportation into 2023. Additionally, our hedging strategy, coupled pinch our midstream entree to state from nan Rockies, helped mitigate nan effect of nan precocious earthy state prices connected our costs.

After analyzing nan worth creation of nan first twelvemonth of our shareholder return exemplary and soliciting feedback from shareholders and nan investor community, we are adjusting nan allocations effective for 2023. We're now targeting a precocious single-digit dividend output pinch nan extremity of expanding nan worth of our shares and lowering our costs of capital.

Effective January 1, adjusted free rate travel will beryllium allocated specified that 80% will spell chiefly towards stock repurchases and indebtedness reduction, while nan remaining 20% will beryllium allocated to adaptable dividends.

And arsenic Fernando mentioned, we are besides doubling our quarterly fixed dividend to $0.12 per stock aliases from $0.24 to $0.48 per stock annually. You'll spot these changes return effect pinch our first 4th results. Please support successful mind, nan first 4th of each twelvemonth is typically our debased constituent for adjusted free rate travel owed to nan timing of payments that aren't quarterly, specified arsenic interest, royalties and bonuses.

But I person 1 housekeeping point that I'd for illustration to constituent out. After receiving comments from nan SEC, we person modified really we talk our operating costs, what we utilized to telephone OpEx aliases operating expenses. We person not changed nan building of nan operations. We've conscionable altered nan disclosure of nan associated items. You tin spot this alteration demonstrated connected Pages 16 and 17 of our investor platform and successful nan tables of nan net release.

Again, this does not bespeak a alteration successful nan measurement we position aliases negociate nan business.

Thank you. And now I'll move nan telephone backmost to Fernando.

Fernando Araujo

Thanks, Mike.

In 2023, we are sharpening our efforts to find strategical bolt-on accumulation opportunities successful California. Given nan existent regulatory situation of caller drill permits, we are pursuing a bolt-on strategy arsenic an replacement to deploying nan drill bit, which, to beryllium clear, we will besides proceed to pursue.

Bolt-ons tin beryllium utilized to protect our guidelines accumulation and moreover turn production. We judge nan beingness of producing bolt-on opportunities successful California is improving, and Berry is good positioned to beryllium an opportunistic consolidator.

Our existent scheme and nan issued guidance successful an net merchandise bespeak a flimsy diminution successful yearly accumulation year-over-year owed to caller developments successful nan ongoing ineligible challenges to Kern County's permitting process.

In short, nan Kern County EIR has again been stayed, and CEQA work has reverted to CalGEM. Accordingly, based connected experience, we expect nan permitting process for caller drills to beryllium lengthy. As a reminder, historically, we person received permits for sidetracks and workovers, utilizing existing wellbores without hold nether a akin permitting environment.

Should nan permitting situation change, we are fresh to pivot quickly, and we are good positioned to do so. There are respective unknowns that could activity retired to our advantage. One is whether CalGEM will admit Kern County permits that we received anterior to nan Kern enactment arsenic valid. Additionally, location is simply a chance that nan enactment will beryllium lifted successful nan adjacent term. While we expect 2023 accumulation to beryllium somewhat little than 2022, nan rate travel effect will beryllium afloat offset by little superior needs until nan permitting issues are resolved.

We are assured successful our expertise to make beardown free rate travel and present important shareholder returns based connected existent portion pricing. The quality successful our 2023 expected adjusted free rate travel arsenic compared to 2022 is driven chiefly by nan value of oil, nan timing of moving superior and nan doubling of nan fixed dividend.

Brent lipid pricing averaged $99 per tube for 2022, and our existent scheme is based connected $85 per tube Brent successful 2023. We expect to make astir $100 cardinal of adjusted free rate flow, which, aft nan fixed dividend, intends we person nan imaginable to return astir $130 cardinal aliases almost 20% of our existent marketplace headdress to investors successful 2023.

To beryllium clear, 2023 expected adjusted free rate travel is not impacted by nan flimsy diminution successful accumulation owed to little superior requirements. We stay focused connected controlling what we tin control.

This intends we will beryllium prudent successful really we walk and negociate our expenses, and we will employment hedging strategically to thief america screen nan fixed costs of our -- of nan business. We besides scheme to support aliases little our leverage profile. Our extremity is to beryllium nan astir cost-effective producers -- shaper wherever we run without compromising nan value aliases information of our operations.

The strategy and priorities of Berry stay nan same: optimizing accumulation and generating important adjusted free rate travel that we tin return to shareholders. While oil-rich California has its challenges, we person demonstrated our expertise to navigate those challenges pinch invention and by deploying nan basal method capabilities to nutrient lipid safely and efficiently for nan group of California. We are committed to delivering top-tier shareholder returns.

With that, I will move nan telephone complete to nan usability for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first mobility comes from Charles Meade pinch Johnson & Rice. Charles, your statement is open.

Charles Meade

Good morning, Fernando to you, and nan full Berry team.

Fernando Araujo

Good morning, Charles. Good to perceive from you.

Charles Meade

Thank you. Fernando, I wanted to spell backmost to nan comments you made during your prepared remarks astir bolt-ons being a bigger portion of nan 2023 plan. I cognize that bolt-ons person ever been a -- I'd say, thing you guys are -- person been looking for, but your occurrence pinch getting charismatic ones has been sporadic. So I'm wondering if you could talk astir nan -- what you spot that's changed successful nan opportunities location for bolt-ons and possibly if that's related to this permitting -- this alteration successful permitting and nan trouble of getting caller permits, if that's what's driving much assets to market.

Fernando Araujo

Yes. Good question, Charles. And nan bully news is that, successful California, nan market, particularly LALI successful position of M&A activity has been active. As you know, there's been respective transactions made present complete nan past fewer months. So group are talking and group are consenting to listen. And we genuinely judge that nan early of California successful position of assets is consolidation.

As an industry, we person to beryllium capable to seizure nan different synergies that we person operationally and past astatine a firm level arsenic well. And particularly now nether nan tighter regulatory environment, that's becoming much and much important, I think, and that's why group are opening to listen.

Now successful position of what we're really looking for, we're evidently looking for accretive transactions, transactions that tin thief america switch our production, thief america switch our drilling wedge arsenic necessary. At nan aforesaid time, we're looking for areas aliases bolt-ons that are adjacent to wherever we're presently operating to beryllium capable to seizure those operational synergies.

We person been very successful pinch our surveillance techniques and nan assets that we have, and we want to beryllium capable to use those aforesaid techniques to our bolt-on opportunities and create much worth from those assets.

Charles Meade

Got it. That's helpful. And past a 2nd question, I deliberation this is possibly a 2 portion question. So forgive maine for squeezing it in. But it sounds for illustration you guys are readying connected nary caller good permits, but nan likelihood is that location will beryllium caller permits but that is conscionable going to beryllium slower. So successful a sense, I'm asking -- it sounds for illustration your baseline is simply a blimpish 1 astir nary caller good permits. And past nan 2nd portion of nan mobility is tin you comparison nan rates of return connected nan workovers that you're tilted to successful '23 versus nan caller drills that are going to beryllium a smaller component.

Fernando Araujo

Yes. Again, very bully mobility connected permits, Charles. Remember that we've been drilling successful California since nan opening of nan year, and we've been drilling some caller wells and sidetracks. And we've sewage permits successful manus to return america into nan 2nd 4th of nan year. And our existent scheme does presume that we will not beryllium getting immoderate caller good permits. But astatine nan aforesaid time, retrieve that manufacture successful California is getting sidetrack permits and workover permits.

In fact, conscionable this morning, we received an further 7 workover permits, which is really, really bully news because, if you remember, nan existent situation that we person coming is akin to nan situation that we had past year. And past year, we were capable to seizure workover and sidetrack permits passim nan year. So nan existent scheme is based connected nan presumption that we will not get further caller good permits this year. So from that perspective, it is conservative.

Now show maine again astir the...

Charles Meade

Yes, comparison nan rates of return.

Fernando Araujo

Question connected nan rates of return.

Charles Meade

Right, for workovers versus caller drills.

Fernando Araujo

The rates of returns for workovers because of nan debased superior strength of nan task is very, very good. It tends to beryllium northbound of 100% complaint of return. And that's what we've seen passim nan year, successful nan past mates of years astatine least. And for our caller wells successful California also, because of nan pricing situation and because of nan debased costs to drill and complete wells, nan rates of returns are besides connected nan bid of 100%, and that's what we person assumed for nan twelvemonth successful 2023 arsenic well. So we get very bully rates of return for some workovers, sidetracks and caller drills successful California.

Charles Meade

That's what I was looking for Fernando. Thank you.

Fernando Araujo

Thank you.

Operator

Please clasp for our adjacent question. Our adjacent mobility comes from Nicholas Pope pinch Seaport Research. Nicholas, your statement is open.

Nicholas Pope

Thanks. Good morning, everyone.

Fernando Araujo

Good morning, Nicholas. How're you?

Nicholas Pope

Great. I was hoping to get -- erstwhile you look astatine nan size of nan assets opportunity connected doing nan workovers, doing nan sidetracks, really -- what's nan -- I guess, what's nan moving room that you person connected that broadside of things? Is that each good that you're looking at? I mean what -- really do you deliberation astir inventory length, I guess, successful -- pinch respect to benignant of this near-term worldly that nan superior programme is going to beryllium focused on?

Fernando Araujo

Okay. Let maine commencement pinch workovers. With workovers, we person an extended number of wells that are presently unopen in. We astir apt person a excavation of complete 500 wells correct now that we tin -- that we're looking astatine for workover opportunities, which is very, very extensive. At nan aforesaid time, you person to retrieve that workover and recompletion opportunities, nan full opportunity group is very move because arsenic wells fail, a caller opportunity is created. So it's -- truthful it changes each day.

So successful position of workover potential, we person a good, coagulated excavation of opportunities. In position of sidetracks, arsenic you know, sidetracks are mechanically a spot much risky, besides -- from nan reservoir perspective, besides a small spot much risky than drilling caller wells wherever you want to drill caller wells. But we do person that aforesaid excavation of shut-in wells for sidetrack opportunities arsenic well.

Currently, nan squad has identified connected nan bid of 70 to 80 further sidetrack opportunities that we're moving through. But nan main point that you person to retrieve is that our plus is 1 of nan champion assets successful nan world successful position of lipid successful place. The lipid successful spot that we person successful immoderate of nan assets successful California are comparable to immoderate of nan champion assets successful nan world. So that's nan awesome advantage that we have. We person a awesome plus base.

Nicholas Pope

Got it. That is helpful. And past flipping complete to nan financial side. Looking astatine 4Q, it looks for illustration you each prepaid connected benignant of income tax. I was funny astir projections for '23 and possibly moreover to '24, arsenic you look astatine what you each are expecting successful position of income taxation complaint and really overmuch mightiness beryllium deferred successful '23.

Michael Helm

Yes, Nick. This is Mike. I'll return that one. We still person a important magnitude of national NOLs and different taxation credits that will screen -- we deliberation that will screen each of our taxation needs successful 2023. So we don't expect to beryllium a payer federally successful 2023. We do expect to person to salary immoderate authorities taxes successful California based connected their taxation regime, but it should beryllium astir apt successful nan $5 cardinal to $6 cardinal based connected nan existent projections.

Nicholas Pope

Got it. That is each I had. Appreciate nan time, everyone.

Fernando Araujo

Thank you, Nicholas.

Operator

Please clasp for our adjacent question. Our adjacent mobility comes from Lloyd Byrne pinch Jefferies LLC. Your statement is open.

Lloyd Byrne

Thank you, Fernando.

Fernando Araujo

Good morning, Lloyd. How're you?

Lloyd Byrne

I americium good. Congratulations. I conscionable wanted to inquire astir possibly thing that Nick and Charles were benignant of getting at. But if you look guardant into moreover '24 and you look astatine nan superior ratio you guys talked about, your CapEx is down almost 30% versus expectations. Your accumulation is only down possibly 7% versus what we thought. Can you conscionable -- are you capable to replicate that successful '24? Like what's nan trajectory of superior ratio going forward? And is that sustainable, I guess? And benignant of nan measurement Nick asked nan aforesaid question.

Fernando Araujo

Okay. Yes. Let maine reply this measurement because that's a really bully question. To statesman with, Lloyd, you cognize we person nan assurance that nan courts will revert backmost successful favour of Kern County's EIR, and we'll return to that process. And pinch that process -- because, remember, this is not nan first clip that this has happened. So erstwhile that process is reverted, we've sewage plentifulness of imaginable opportunities to still drill caller wells successful nan assets that we person successful California.

And nan county, they've proven to nan courts that they person nan capacity to beryllium nan starring agency for CEQA. So this is conscionable a matter of time. And for adjacent year, we're hoping -- and pinch immoderate certainty that this is -- this process is going to revert itself for illustration it has successful nan past. And we should beryllium capable to drill caller wells for illustration we person successful erstwhile years and support our accumulation levels arsenic we've talked astir before.

Lloyd Byrne

Okay, that's great. Thank you. And past conscionable connected nan alteration successful nan return policy. Just your thought process connected buybacks versus dividends and benignant of wherever you're going, going forward?

Michael Helm

Yes, Lloyd. This is Mike. I'll return that one. Yes, arsenic we said, we did talk to investors, owners. We talk to nan finance community. It became clear that pinch this size of returns, we were capable to make that nan appreciation would beryllium much towards nan stock and indebtedness repurchases. We did consciousness it's important to time off a small spot successful nan adaptable dividend. Again, pinch nan fixed and nan adaptable dividend, we are targeting precocious single-digit rate yields based connected our marketplace cap. And nan feedback we sewage was that, that was besides an important constituent to our return model.

Lloyd Byrne

Okay. Thank you very much.

Operator

[Operator Instructions] I would now for illustration to move it backmost complete to Fernando Araujo for closing remarks.

Fernando Araujo

Yes. Once again, I want to convey everyone for listening to nan call. We're excited astir nan early of Berry, and we're excited astir executing our scheme successful 2023. Thank you very much.

Operator

Thank you for your information successful today's conference. This does reason nan program. You whitethorn now disconnect.