Berry Corporation (Bry)

NASDAQ:BRY

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Berry Corporation Q4 and Full Year 2024 Earnings Conference Call. [Operator Instructions]

Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker today, [ Todd Crabtree, Head of Investor Relations ]. Please go ahead.

[Todd Crabtree, executive]

Thank you, Lisa, and welcome, everyone, and thank you for joining us for Berry's Fourth Quarter and Full Year 2024 Earnings Call. Yesterday afternoon, Berry issued an earnings release, highlighting our 2024 results. Speaking this morning will be Fernando Araujo, our CEO; Danielle Hunter, our President; and Jeff Magids, our CFO. .

I would like to call your attention to the safe harbor language found in the earnings release. The release in today's discussion contain 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. These include risks and other factors disclosed in our filings with the SEC, including our 10-K, which will be filed shortly.

Our website has a link to the earnings release and our updated investor presentation. Any information, including forward-looking statements 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 also post a replay link of this call on our website.

I will now turn the call over to Fernando.

[Fernando Araujo, executive]

Thanks, Todd, and good morning, everyone. We appreciate your time today and your interest in Berry. Our fourth quarter and year-end 2024 results highlight our continued success executing on our strategy to create long-term shareholder value and generate sustainable free cash flow, underpinning our strategy. We are proud to have an innovative team operating our high-quality assets with the highest health, safety and environmental standards.

2024 was a strong year, demonstrated by our financial and operational results. We delivered on key goals and position Berry for greater future success by unlocking the development potential from our thermal diatomite reservoir in California, and laying the groundwork for our horizontal well development program in the Uinta Basin. I will share details on the significant value drivers in a moment.

Last year, we generated $292 million of adjusted EBITDA, 9% higher than 2023, and we reduced hedged LOE by 12% and our adjusted G&A by more than 6% year-over-year. In 2024, we improved our top-tier capital efficiency. We drilled better wells, exceeding type curves in most operational areas. Our average annual production of 25,400 barrels of oil equivalent per day, was near the top of our guidance range and even to 2023. It is notable that Berry has been able to sustain total production levels during the last 6 years net of divestments, while during the same time period, California statewide oil production has declined by 35%.

This is a testament to the quality of Berry's assets and the strength of our team. In 2024, we drilled a total of 56 gross wells, 46 in California, which includes 10 new drills and 36 sidetracks, plus 10 in Utah, which includes 4 vertical, plus 6 horizontal wells via farmings. In 2025, we plan to sustain production year-over-year and drill approximately 50 gross wells. We entered the year with an active rig in California, and we started our horizontal drilling campaign in the Uinta Basin in February.

In fact, we reached total depth on our first horizontal well this week with 93% of the lateral within target range and positive indication of hydrocarbons throughout on cost and on schedule. At year-end, Berry's total proved reserves of 107 million barrels of oil equivalent at a PV-10 value of $2.3 billion at SEC pricing.

Our 2024 reserve replacement ratio was 147%, which is a great achievement by our technical teams. In California, we added reserves in our thermal diatomite asset based on production performance and new sidetrack opportunities. In the Uinta Basin, we added reserves due to the farmings and Berry's change in focus from vertical to horizontal development. Our thermal diatomite reservoir continues to deliver value-enhancing results and is a catalyst for future opportunities.

In 2024, we successfully drilled 28 side tracks with exceptional results and a rate of return exceeding 100%. These results have unlocked the potential to drill an additional 115 sidetracks in this asset over the next few years, including 34 planned for 2025. As an important side note, I want to emphasize that we have identified another 110 sidetrack opportunities in other locations across our California assets. Turning to the interbasin. We have another exciting catalyst with significant growth potential. In 2024, we took steps towards proving up the value of our 100,000-acre operated position, over 90% of which is held by production. In the second quarter, we entered our first firming to drill 4 horizontal wells in the Uteland Butte reservoir. The results confirm significant potential value.

In the fourth quarter, we executed on the second farming to drill an additional 12 horizontal wells in the same reservoir over the course of the next 18 to 24 months. The first 2 wells were put on production in January, with initial peak production rates of 1,900 and 2,000 barrels of oil equivalent per day, which is better than the peak production from the wells drilled in the first format.

These 2 farmings helped us to derisk and accelerate the appraisal phase of our Uinta assets. While our analysis is still evolving, we have identified approximately 200 potential horizontal locations. I also want to highlight the significant cost advantage we have in the basin. We estimate that our development wells could be approximately 20% less expensive on a per foot basis compared to other operators in the basin.

In addition to operating in the shallower end of the basin, we can leverage our extensive existing infrastructure to drive synergies and cost savings. Our ability to utilize lease gas to fuel our drilling and completion operations is another important cost advantage. Plus, we have no entry cost or time pressures from lease expirations. In summary, we are excited about the future. We have the capability to deliver on the significant near-term value drivers I've mentioned. Our team has a proven track record of delivering on key objectives through commodity cycles and regulatory challenges, and we have a compelling pipeline of value-adding opportunities. We see tremendous value in our stock price and are confident in our ability to create significant sustainable value for our stakeholders.

Now I will turn the call over to Dennis.

[Danielle Hunter, executive]

Thanks, Fernando. Good morning, everyone. First, HSC, conducting our business safely, responsibly and in a manner that protects our stakeholders and minimizes our environmental impact is an integral part of our day-to-day operations and incorporated into our decision-making process. We had an annual TRIR of 0.64, which is below the industry average and only 1 lost time incident and no vehicle incidents in all of 2024.

These accomplishments were the results of our teams working in unison to deliver excellent results. Moving to permitting. As we shared on prior calls, we continue to receive permits to drill sidetracks and new wells in areas with existing CEQA compliance as well as for workovers. Similar to 2024, our 2025 capital program in California is focused on sidetracks and workovers. And we expect that we will timely receive the permits to execute our plans. Our applications are technically sound, consistent with other permits being approved and not reliant on the Kern County EIR.

That said, we have the flexibility to shift capital to further development in Utah, if needed or determined optimal. As for the reinstatement of the Kern County EIR, which facilitates efficient new drill applications. There are no significant developments to share at this time. We know that the county is working hard to address the court identified efficiencies, and we expect the draft to be released for public comment very soon. This will be an important milestone in the reinstatement process. While, of course, we look forward to the reinstatement of the EIR and the additional optionality it provides, I want to emphasize that Berry's ability to sustain production over the next few years is not dependent on the EIR.

In fact, even if the EIR were reinstated tomorrow, we wouldn't necessarily change our near-term plans, not 2025. As Fernando explained, we have a proven track record, quality proved reserves and a deep inventory of high-return projects for which permits have been and should continue to be available. Importantly, based on our 2024 year-end audited reserves, only 5% of Berry's California PUD reserves are in areas where new drill permits are currently constrained and where we're not pursuing alternative CEQA compliance.

This means that almost all of our PUD locations can be accessed through available permitting processes. On the sustainability front, we're continuing to enhance our disclosures to provide greater transparency about Berry's strategy to ensure a sustainable enterprise. In April, in coordination with our annual report, we're planning to publish expanded and updated data tables, highlighting our performance across key sustainability focused, environmental, social and governance-related factors. And we plan on releasing our full 2025 sustainability report midsummer, which is when emissions for the prior year finalized. As a reminder, in 2024, we completed our methane emissions reduction project, are achieving our goal to reduce methane emissions by more than 80% compared to 2022 baseline, and we did so over a year ahead of schedule.

We expect this will result in an approximately 10% reduction in our Scope 1 emissions compared to 2022. A preview of a few initiatives we plan to launch in 2025 include deploying continuous filled methane detection technology in California and expanding our methane leak detection and repair program in Utah. We're also engaging with other operators in California with carbon capture projects to potentially deliver our CO2 emissions to them.

Finally, I want to introduce our new CFO, Jeff Magids. Jeff joined us in late January and brings to Berry more than 15 years of experience in the oil and gas industry, with a strong background in finance, investor relations, treasury and risk management functions as well as M&A experience. We're excited to have him as a member of the team.

With that, I will turn the call over to Jeff.

[Jeff Magids, executive]

Thanks, Danny. I'm excited to be here and to collaborate with the team to advance Berry's strategy. We're well positioned with the resources to advance our strategic goals and continue delivering strong results and shareholder returns. In my comments this morning, I'll highlight our fourth quarter and full year financial results as well as our hedging program, operating costs, capital structure and guidance. For more in-depth information, please refer to our earnings release issued yesterday and our 10-K, which we expect to file shortly.

Our fourth quarter oil and gas sales were $158 million, excluding derivatives, with a realized oil price of 93% of Brent. For the full year, oil and gas sales were $648 million, excluding derivatives, with a realized oil price of 92% of Brent. Risk management is a key aspect to our business. And with various operations in California indexed to Brent, we look to mitigate price fluctuations through hedging. Based on our hedge book as of February 28, we have approximately 75% of our estimated oil production hedge for 2025 at an average strike price of $74.24 per barrel of Brent. Assuming our production guidance is held flat for future periods, our oil volume is 60% hedged for 2026.

Turning to cost and expenses. For the full year, on an unhedged basis, nonenergy LOE was $13.10 per BOE and energy LOE was $11.21 per BOE. On a hedge basis, energy LOE was $13.84 per BOE. Taxes other than income taxes were $5.08 per BOE and adjusted G&A for E&P and corporate was $6.35 per BOE. Adjusted EBITDA for the fourth quarter was $82 million, 22% higher than the third quarter. For the full year, adjusted EBITDA was $292 million, a 9% increase over 2023 and driven primarily by sustained production levels and lower operating costs.

CapEx on an accrual basis totaled $17 million for the fourth quarter and $102 million for the full year, in line with guidance. As presented in our earnings materials, we generated free cash flow of $24 million for the fourth quarter and $108 million for the full year. Turning to our balance sheet. Our year-end total debt was $450 million, liquidity was $110 million, and our leverage ratio was 1.5x. Our $450 million term loan facility is a 3-year note, which could be extended by 2 years. A key element of this agreement is that we were able to take the loan out at par for the first 2 years.

This provides us flexibility for strategic opportunities. In December, we also entered into a 3-year reserve-based credit facility. This agreement provides a $95 million borrowing base, giving us the working capital and liquidity we need to execute our development plans. 2025 capital guidance is $110 million to $120 million. For the upcoming year, we expect to deploy 40% of our capital to Utah compared to just 25% in 2024. For the fourth quarter, we will be paying a fixed dividend of $0.03 per share. At year-end 2024, we were in full compliance with our financial covenants and had sufficient headroom to execute our strategy.

And with that, I will now turn the call over to Fernando to wrap up our prepared remarks.

[Fernando Araujo, executive]

Thank you, Jeff. Looking into 2025, our strategies and priorities remain consistent. We have a proven track record of successful operations supported by low decline, low capital intensity assets quality proved reserves, significant pods and a deep inventory. We are well positioned to advance our strategic goals and generate value for our shareholders. .

Our recent debt refinancing provides us with the flexibility and ensures capital for our development plans. We have already started to execute on value-enhancing opportunities in both California and in the Uinta Basin, where we believe we have significant upside value. This really is an exciting time to be at Berry. We look forward to sharing our progress as the year goes on.

And with that, I'll turn the call over to the operator for questions.

[Operator]

[Operator Instructions] [ Our first question comes from Charles Meade ] of Johnson Rice.

[Charles Meade, analyst]

Good morning, Fernando. Danny, Jeff, and I think I heard my name in there somewhere. Was it scramble for you guys, too?

[Fernando Araujo, executive]

Yes, a little bit.

[Charles Meade, analyst]

Fernando, I want to ask about these -- about the recent Uinta wells and what they -- how they should inform our expectations for your first operated pads. So when I look back at what you guys did, the first farm-in off to the Northeast, there was about 1,000 barrel a day wells, or BOE a day, I should say.

This next set, the first 2 are 2,000 barrels a day. And so can you talk about what the what the deltas are there, whether it's -- I think they're all in the same zone, but with zone they're targeting, the lateral lengths, the depth and pressure setting. And so what drove those differences? And what does it suggest for expectations on your first operating pad?

[Fernando Araujo, executive]

That's a very good question. Yes, let me start with the first set of wells, the 4 wells, the first farm-in. Those wells targeted the Uteland Butte reservoir, which as you know, Charles, is the main reservoir being targeted by most operators, including ourselves.

In that pad, we drilled 2 3-mile lateral wells and 2 2-mile lateral wells. And as noted, those wells had a peak production of about 1,100 barrels a day on average. But remember that we've got 2 2-mile lateral wells there in the mix as well.

And then at the same time, for the next 2 wells that we put on production here in January, those are from the second farm-in. Those are 2, 3 milers, so 3-mile laterals, with a peak production averaging close to 2,000 barrels equivalent per day. also targeting the Uteland Butte reservoir.

Meanwhile as we've talked before and discussed before, the geology in the Uteland Butte reservoir is fairly uniform throughout our acreage, north, south and east and west. As you know, it's mostly a dolomitic reservoir, it's a carbonate reservoir, it has got some sandstone stringers as well. And as noted, we are at the shallow end of the basin. And because of that, our pressure gradients were a bit lower than what they are in a deep basin. But there is not much of a pressure gradient difference between the 2 sets of wells that we're drilling. And then really, the main difference between the 2 sets of wells is that in the first pad, we do have those 2-mile lateral wells.

[Charles Meade, analyst]

Got it. And any -- just any indications for what you would be satisfied with on your operated pad ?

[Fernando Araujo, executive]

Now in our operator pad, as you know, we just TD, the first of the world. In fact, we're already drilling the second one, we're at the 2,000 foot depth more or less. We'll be drilling 4 wells, targeting again the Uteland Butte reservoir. We expect very good results similar to what we've seen in the 2 pads. So we have high expectations. But as I've mentioned before, based on the results that we've seen so far from our wells in Uinta, this could really be a transformational opportunity for Berry going forward. So we're really happy with the results so far.

[Charles Meade, analyst]

Got it. And then going back to California, this is something we haven't talked much about. But can you talk about what the acquisition environment may be like in California? And if there's been any change or increase in the willingness of some privates to sell?

[Fernando Araujo, executive]

Another good question, Charles. As you know, we actively pursue bolt-on opportunities in California and in Utah, for that matter. That's part of our daily business. In California, we always focus on Kern County, which is the place where we can realize the most synergies and the place where we can apply our expertise. We have been in conversations with a handful of operators, small privates, similar to Macpherson, and there's a handful of those operators. We are advancing talks and conversations, but there is an opportunity to execute on those bolt-ons under the right deal structure. So there is something to be done there. They're not great in size, but they are significant in terms of production. .

[Operator]

And our next question will be coming from the line of [ Nate Pendleton ] of Texas Capital.

[Unknown Analyst]

Congrats on the strong quarter. I wanted to start off on Utah. In light of the recent volatility in commodity markets and the encouraging early well results we've seen, can you provide an update on how the partnership or joint venture discussions are progressing for future development?

[Fernando Araujo, executive]

Yes. Good question, Nate. We've been talking to different parties here over the last few weeks about a possible JV for our 2025 campaign and beyond. Obviously, this would help us mitigate the capital requirements in the program and help us accelerate the development activity as well. But then at the same time, we want to make sure that the deal is accretive to Berry, and that we don't give up any value because we believe we have an asset that's very valuable and with great potential. So for now, we're very comfortable drilling the wells ourselves, that first pad on our own. And we're off to a very successful start as I mentioned. So until that right deal comes across, we're not going to pull the trigger, but when it does, we will. So we're still in conversations, but just waiting for the right deal.

[Unknown Analyst]

Got it. And then perhaps for Danielle, can you speak to the opportunity that you see on the horizon for C&J, given the recent abandonment legislation that went into effect this year in California? And also, maybe any color you can provide on the competitive landscape facing C&J to take advantage of that opportunity?

[Danielle Hunter, executive]

Yes, certainly. So the legislation that you're referring to is one that is increasing the P&A obligations for operators across the state. The incremental increase will be based on idle well inventory. And so for Berry, we expect it to have a pretty minimal impact. But for the larger operators, it's going to be pretty significant. What's -- maybe I think unique to California is that even though the law technically went into effect on January 1, there is a little bit of a delay in actual implementation, while CalGEM put together implementation regulations and meets with operators to determine how it would apply to each. So there will be a little bit of a lag but it is coming.

By regulation, there will be an increase in demand. And C&J is one of the largest P&A operators in California is well positioned to take advantage of that. I do think before you see any sort of material increase in either pricing or activity levels for any individual service provider consolidation is needed. And I think that's the case in -- outside of California as well.

And so that is something that we are actively considering. I think there's some right consolidation opportunities there. Some of our fellow operators may not like that too much. But the good news for Berry is that we would be well insulated if consolidation did happen and there was some change in the market dynamics.

[Operator]

[Operator Instructions] And the next question will be coming from the line of Emma Schwartz of Jefferies.

[Emma Schwartz, analyst]

I wanted to ask a little bit more on the permitting side. It's great to see this sidetrack and workover news, love that. And I wanted to ask about the current EIR. You made some comments about that, and it's great that you don't really need the current EIR to operate. But if there was a resolution, just walk me through why you would capitalize on that to increase activity in California? Or would that be more of a '26 story?

[Fernando Araujo, executive]

Yes. Good question, Emma. The great advantage that we currently have right now is that we have a lot of opportunities in California. And based on the results from our sidetrack campaign in thermal diatomite in 2024, it opened up a lot of opportunities to continue drilling sidetracks in California. We've got about 115 sidetrack opportunities in the thermal diatomite and another 100 or so side track opportunities in other area in our asset base.

So you're looking at 225 or so opportunities to drill really, really good productive wells. And again, you saw the results for the thermal diatomite sidetracks in terms of rate of return. So even if we had the Kern County EIR process opened up now, we would likely still drill those sidetrack opportunities in the thermal diatomite because they're at the highest end of our priority list of wells to drill. So even though the Kern County EIR is closed now, it's really not affecting our activity and how we're planning our business.

[Emma Schwartz, analyst]

Makes sense, and that's amazing. And then if you could just walk me through on like the conditional use permit and multi-basin permit side. What's kind of the time line in the process looking like with CEQA there?

[Fernando Araujo, executive]

Yes, for the conditional use permits and the project by project reviews, which is -- which are a couple of the alternatives that we have in the permitting process in California. The timing is similar to the Kern County EIR. So you're looking at some time in 2026 for that as well. .

[Emma Schwartz, analyst]

Okay. Amazing. And then I just had a question on Utah. Could you kind of walk me through and like frame-up, what do you think the long-term potential there is for that asset? Where do you think you could grow it to? And is there any signpost we should watch over the next like -- over '25 in the next year or 2 to track how we think -- we should be thinking about that?

[Fernando Araujo, executive]

So Utah has significant potential, as I've mentioned already. As you know, we've got 100,000 acres -- operated acres, which is a significant footprint. Based on footprint that we have and just really targeting 1 or 2 reservoirs, we've got the potential to drill 200 or so well, so significant, significant potential. The initial results are excellent. And the potential to grow in Utah is significant in our investor deck, I think, Page 19 of our deck. We've got the potential that we have. And theoretically, we could go from about 5,000 barrels a day currently to close to 40,000 barrels a day over the next 10 years or so. And that's -- obviously, that's assuming a couple of rigs drilling in Utah for the next several years starting next year. .

But obviously, we have to be cognizant of our capital needs, and that's why we're in conversations for possibly coming up with a JV partner to help us mitigate that.

[Operator]

[Operator Instructions] There are no more questions in the queue. I would like to go ahead and turn the call back over to Fernando Araujo, CEO. Please go ahead with your closing remarks.

[Fernando Araujo, executive]

Thank you so much. Thank you for your interest in Berry. Now it really is an exciting time to do with the company. We have a lot of great opportunities, and we're in the middle of executing a lot of those opportunities as we speak. So we'll be providing updates over the next few weeks and hope to see some of you in the investor meetings and conferences over the next few weeks as well. Thank you so much. .

[Operator]

Thank you. [indiscernible]