Berry Corporation
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Thank you for standing by and welcome to the Berry Corporation Q4 and Full Year 2020 Earnings Call. Thank you. Mr. Todd Crabtree of Investor Relations, you may begin.

[Todd Crabtree:]

Thank you, Andrea and welcome to everyone. Thank you for joining us for Berry's fourth quarter and 2020 full year earnings teleconference. Yesterday afternoon, Berry issued an earnings release highlighting full year 2020 and fourth quarter results, as well as our ongoing response to the COVID-19 uncertainties. Addressing these and other issues this morning will be Trem Smith, Board Chair and CEO; Fernando Araujo, Chief Operating Officer and Executive Vice President; and Cary Baetz, Chief Financial Officer and Executive Vice President.

[Trem Smith:]

Thank you, Todd. Good morning, everyone, and thank you for joining us today. As you all know, 2020 was a year unlike any other. We faced numerous challenges, including the economic issues spurred by the COVID-19 pandemic and the OPEC+ created oversupply as well as fraught political environment. But despite these remarkably difficult and ever evolving headwinds, Berry delivered on its commitment it made in early 2020 to all of its stakeholders that we would enter 2021 in a strong position poised for growth. In 2020, as planned, our production for the year was essentially flat compared to 2019, with California production up for the year. We generated $131 million in levered free cash flow for the year. And currently, we have more than $100 million in the bank and no debt. Part of this is due to the significant sustainable cost reductions we achieved in both non-energy OpEx, which was down about 9% year-on-year and energy OpEx, which was down about 13% year-on-year. We were confident we will continue to reduce our OpEx in 2021, and this is fully integrated into our budget.

[Fernando Araujo:]

Thank you, Trem. As I completed my first full quarter with Berry, I want to emphasize the safety protection of the environment on operational excellence remain our top priorities. We will continue to create value by optimizing the performance of our current assets and generating meaningful growth in conventional and predictable place.

[Cary Baetz:]

Thank you, Fernando. As the pandemic impacted the global economy in 2020, we delivered on the promise that we made last spring to successfully bridge to the end of 2021. At the time, we planned for a two-year down-cycle in our industry. We immediately began to cut costs, reduce planned capital and leverage our strong hedge position in effort to preserve cash for 2021. Our efforts were and continue to be successful. At the end -- at year-end, we had more than $80 million of cash in the bank, and we continue our cash build in 2021. As Trem mentioned, we currently have more than $100 million in the bank. By managing our costs and capital, we generated more than $130 million of levered free cash flow for 2020. Our business model is unique for the industry and our 2020 results highlight the benefits of the Berry model. In these extraordinary times, we maintained our total production level, which was nearly flat year-over-year, and we even grew our California production, while we generated cash. I'm extremely proud of our team and the results we generated. We are in an excellent position to manage our development plans for the year and to return capital back to our shareholders.

[Trem Smith:]

Thanks, Cary and Fernando. I want to close with speaking about our ESG efforts and about the legislative and political environment in which we operate.

[Operator:]

Your first question comes from the line of Leo Mariani of KeyBank.

[Leo Mariani:]

Hey, guys. Morning. Wanted to follow-up on comments you made about M&A being a priority for Berry here. Just wanted to -- trying to get a sense, if you guys have been able to start to identify any potential targets, just trying to get a sense of where you might be in the process? Are you guys confining yourself to California versus just a much broader search?

[Cary Baetz:]

Leo, this is Cary and I'll let Trem fill in on the holes. The answer is, we've had -- we've always had identified assets out there and opportunities we want to look at targets. The bid/ask has always been a little wide that we continue to work on managing that. Scale is very important. As you know the market is looking for larger. They're looking for more liquidity. They're looking for companies with larger floats, secure balance sheet. So I'd say it's very high on our priority list. But again, it's got to work for Berry. Identify targets, yes. Opportunity, yes. TBB on execution.

[Leo Mariani:]

Okay.

[Trem Smith:]

And then, Leo, we continue to maintain our strategy, which is conventional -- basically focused on what we're good at, conventional, low corporate decline, oily assets with strong cash flow. It's not a matter of geography, as much as it is a matter of that. Okay?

[Leo Mariani:]

Got it. Okay. And then, I just wanted to ask about the current legislative session in California. I guess, I recently saw that there's a new Senate bill that's been proposed that contemplating a potential frac ban in the state. I think there was also some language around there that was contemplating, eventually banning cyclic theme operations as well. Just wanting to get a sense of, what you guys may have heard locally and in California from legislators or the governor's office. And you think this bill having real legs?

[Trem Smith:]

Leo, this is Trem. I'm going to answer this because this is not a surprise question. The bill was long anticipated. Senator Wiener telegraphed very early that he was going to be proposing such a bill. It is much broader than maybe he had originally intended. The -- let me just say that the time it will take for that bill to get through the whole legislative process is extensive. And we fully expect that bill to be amended significantly as we move forward. And we are working ourselves obviously, but also with all the industry groups and labor groups to make sure it has minimal impact on Berry and the industry in California.

[Leo Mariani:]

Gotcha. Okay. That's helpful. And I guess, you're talking about the ones that are more steady, sounds like coming due next month in terms of when you guys will receive it here. Do you have any early indications from other them directly or in the governor's office, or you just still wait and see mode here?

[Trem Smith:]

Leo, what we -- we've been told by CalGEM that will be released at the end of the first quarter. I think Fernando said that. And we'll see -- hopefully they'll deliver on that. But we've also been told by CalGEM that they -- they're developing a process to evaluate those operators and those assets that are least troublesome to them. We don't know where we stand on that list, but we fully expect to be high on the list in terms of being contacted by CalGEM. Does that make sense?

[Leo Mariani:]

Yes, for sure. Thanks for the color.

[Cary Baetz:]

Thanks, Leo.

[Operator:]

Your next question comes from the line of Charles Meade with Johnson Rice.

[Cary Baetz:]

Good morning, Charles.

[Charles Meade:]

Good morning to you and your whole team there. I have to say I really liked Leo's questions because I had written down on my piece of paper to ask also. But let me just ask a couple of questions following up on the Livermore. On the Livermore question is, I guess it's kind of a two-part question. One, if assuming you can -- assume Berry can go back to doing some of your thermal diatomite development, would that be attractive to not enough that it would compete with some of the sandstone projects that you currently have slated for 2021? And if it is attractive enough, would it possibly slot into 2021, or is that more something we should look forward 2022?

[Fernando Araujo:]

No. That's a very good question. And our thermal diatomite development is very attractive in terms of a rate of return. And it competes very, very well with the rest of our portfolio. So, if we do have the ability to do some work in the thermal diatomite in 2021 in the second half of the year, we would. But as you heard in the call -- by the comments that I've made, currently our plans do not include any thermal diatomite development in 2021, but we expect to have a development in 2022.

[Charles Meade:]

Okay. Thank you for that, Fernando. And then, perhaps as my follow-up, maybe a derivation off that. I think the conventional wisdom is that -- and it certainly seems to fit what we've seen in A&D over the last 12 months is that as oil prices rise, like they have done for the last month and a half, and we're happy to see it, but it makes the bid and ask get a little wider in the A&D market. And so, I wondered if you guys are seeing that and that -- that some of these possibilities of receding on the A&D side. And if maybe there aren't other dynamics at play, particularly in the California market, like if you have this -- I think Trem, you mentioned that CalGEM might have one way of dealing with less troublesome operators and another way of dealing with more troublesome auditors that maybe if it plays out like that, that might shake some assets loose out of some operator's hands, and if that might be an opportunity?

[Cary Baetz:]

Yeah. I will say on oil prices, Charles, a rising tide lifts all boats. But again, I think -- again, people understand the importance of scale. People understand the importance of cash flow, living with the cash flow, even the resource guys are having to go that route. So I think there is still some willingness regardless of where prices are to -- for combinations to get larger. So, I don't think that's impacting the market from an A&D perspective, as far as we see at this point in time. And again, investors are looking for companies that are bigger, lower cost and scaled gets you there. So.

[Trem Smith:]

And Charles, I'll add to that. This is Trem. The -- remember, there's over 400 operator entities that report production in California, as an example. And consolidation is for that industry to really survive long-term consolidation is a requirement. Many of those companies have gotten themselves into financial difficulty last year and are available regardless of the price. So, I'm not sure the rising price is going to impact it. I think it's brought a lot of people to the table.

[Charles Meade:]

Got it. Thank you, Trem. Thank you, Cary for your comments.

[Cary Baetz:]

Thanks, Charles.

[Trem Smith:]

Thanks, Charles.

[Fernando Araujo:]

Thanks.

[Operator:]

Your next question comes from the line of Michael Shelton with FRC .

[Cary Baetz:]

Hi, Michael.

[Trem Smith:]

Hi, Michael.

[Unidentified Analyst:]

Good morning, guys. Hey. So, I'm a family office and have a stake in Berry. And I just want to try and reconcile a few things. It looks as though the RSUs that you guys deployed yesterday for your exec team, amount to about $3.5 billion in value to the executive team. And the dividend distribution looks to be about $3.2 million for the period. And I just want to know, many oil companies in this space have sort of offered to take discounts in their compensation. And I'm wondering how do you reconcile that for your shareholders and trying to figure out your capital allocation going forward for the stock buyback that's still outstanding from the previous board approval process. So I appreciate if you could just talk to all that in terms of understanding what you're going to do on those initiatives?

[Cary Baetz:]

Yeah. Good question. The LTIP, again, it is that -- the shares that were issued were associated with the annual LTIP plan. Year-over-year, we're going to see about a 30% reduction in LTIP. So that is a good question. And actually below requirements under contractual obligations under employment contracts. So compensation from LTIP is coming down. As far as the dividend, I think we had a very attractive dividend prior to the downturn. It's still attractive today. I think we want to build back into a sustainable dividend. Don't forget the market has just recently turned around and it's gotten very bullish. But again, when we were looking at this in 2020, we were looking at a black hole. We put the company a good position to manage through 2020. It's in good position to manage through 2021. But again, with our heads -- our current hedges and all that, we'd like to see a little more running room before we get a lot more value back into the dividends. But we'll also look at returning shareholder value in other ways, as we bought back shares in the past and also looked at debt in the past as well. And limitation on debt, we did not -- we were restricted for awhile based upon RBL covenants that we have that removed to be able to go forward. But I think again, overall, we've demonstrated that we do return capital. I think over prior to cutting the dividend, we had returned over $120 million of capital back to investors. So, for a company our size, I think that's been fairly attractive and something that -- again, it's a financial tenant for us and it's something that we will continue to move forward with. Does that answer?

[Unidentified Analyst:]

Hey, Cary -- I think that was Cary, right?

[Cary Baetz:]

Yeah, it was.

[Unidentified Analyst:]

Yeah. Thanks for that detailed response. So that just leads to one other follow-up. In terms of your debt structure, I don't know -- I took this out of context, but Trem had mentioned that there was no debt earlier in the call, which -- I think you guys got approximately $400 million of debt outstanding. That's refinanceable at this point in time. And it's sitting at about a 7% interest rate. Is there an opportunity to restructure that debt? And if so, is it available at a better rate? And can you structure it and time it out as opposed to having one lump sum due in 2026?

[Cary Baetz:]

Again, I think the focus for us is to keep the balance sheet fairly simple. The unsecured debt at 7%, still a very attractive rate today. Obviously, a high yield market's been attractive. But for E&P names, it's still not wildly attractive. There were some hesitant is still probably the highest yielding industry sector out there from a high yield point of view. I think as we look at going forward, and if there was a major transaction out there, that gives you the opportunity to do something different with the balance sheet and keep it clean. But again, from our point of view, keep it as simple, our story, simple. I want to keep the balance sheet simple and the unsecured structure -- the unsecured nature of the high yields always very attractive for us.

[Unidentified Analyst:]

All right. Thank you guys.

[Cary Baetz:]

Thanks. Appreciate it.

[Operator:]

Your next question comes from the line of Nicholas Pope with Seaport Global.

[Nicholas Pope:]

Good morning, guys.

[Cary Baetz:]

Good morning, Nick.

[Nicholas Pope:]

Morning. I had a little quick question on the reserves numbers and I know there's going to be more detail on the K. But it looked to me like the PDP reserves had dropped a bit more than production. And I was trying to understand -- I'm looking at kind of last year's K, it seems like maybe some PDP and P had been taken out, or maybe that's not included in this year's number. So, I was trying to get a little bit of a -- little help on the reconciliation from the -- just PDP drop from year-over-year.

[Cary Baetz:]

I think most of it is really on -- there were some PUD drop, but that's the only location. Obviously, if any PDP fell off it within -- it would be in the Rockies area where pricing was challenging based upon -- the returns were challenging based upon the current pricing at that -- on the SEC pricing. We did lose some PUDs in California, that we expect that to come back. And part of the PUD loss was associated with the thermal diatomite and the moratorium put out there and the five-year requirements under the SEC pricing and guidelines. So, I think it's just a little bit of time as Lawrence Liver -- If the Lawrence Livermore study turns out to be positive, obviously those PUDs come back and as pricing comes back we see a substantial amount of reserves come back. So, does that help Nick? I am sorry …

[Nicholas Pope:]

Yeah.

[Trem Smith:]

Hey, Nick. Let me -- Nick, This is Trem. Let me just add some color to that, please. The -- 91% of our drop in reserves was due to price, the SEC pricing rule. Just to be clear, that's the 12-month trailing average, which drives some of us a little bit nuts. Okay? And then -- but the other rule that's out there remember is the commitment to spend capital over a five-year period. And that's what impacted our Rockies in particular. Okay? So, we're -- as we were focused in California. So we expect with the price to have well over 90% of that comeback. But it won't be complete given the five-year commitment rule.

[Cary Baetz:]

And the five years also is what guides the thermal diatomite, just because of the moratorium.

[Trem Smith:]

Yeah. Does that help?

[Nicholas Pope:]

Yeah. That's helpful. I'll probably follow up with whenever the K comes out tomorrow.

[Trem Smith:]

Yeah. And if you have more questions, call us.

[Nicholas Pope:]

And one other item, just a clean up item. The last two quarters you've had a non-recurring component of G&A, which I think was part of just management changes. And how much is left of that non-recurring? How long should we expect that number? Because I think we've seen a couple -- several million each of the past two quarters that you all are kind of categorizing as non-recurring in the G&A.

[Cary Baetz:]

Yeah. I think it -- there'll be just a minimal amount this quarter, as all of those contractual obligations are finished up. But that should be in it.

[Nicholas Pope:]

Okay. That's all I had.

[Cary Baetz:]

Thanks. Appreciate it.

[Nicholas Pope:]

Thanks for the time.

[Operator:]

Your next question comes from the line of Jeff Robinson of Water Tower Research .

[Trem Smith:]

Hi, Jeff. Jeff?

[Operator:]

Jeff, your line is open.

[Cary Baetz:]

Must've dropped.

[Operator:]

At this time, there are no audio questions. I would like to turn it back over to management for closing remarks.

[Trem Smith:]

Thank you very much. Thank you everyone for listening today and look forward to any further questions. The 10-K will be out shortly and really appreciate the interest in the company. Thanks. Bye.

[Operator:]

Thank you for your participation. This concludes today's call. You may now disconnect.