Berry Corporation (NASDAQ:BRY) is a net consumer of natural gas (primarily purchased from the Rockies), so its results have been negatively affected by high regional gas prices early in 2023. Rockies and California natural gas averaged over $20 per mmbtu in Q1 2023, so despite a large amount of consumer natural gas hedges, Berry’s margins were still compressed by about $6 per BOE due to the abnormally high natural gas prices.
However, the situation looks much better during the rest of the year, with Rockies gas potentially averaging $3 or less during the last three quarters of 2023. This may push down its net operating expenses below its guidance range and partially make up for lower Brent prices.
At the current strip of high-$70s Brent, I now believe that Berry can generate around $149 million in free cash flow (before working capital changes) in 2023. The potential for lowered operating expenses later in the year helps keep Berry’s projected free cash flow close to what I estimated for it before, despite weaker oil prices.
Berry appears capable of repurchasing 15+% of its shares during 2023, helping potentially support a value of $10 to $11 for its stock.
Regional Natural Gas Prices
During Q1 2023, natural gas prices increased wildly in California and the Rockies. Berry reported that the SoCal Gas city-gate index averaged $24.81 per mmbtu in Q1 2023, while the Northwest, Rocky Mountains index averaged $22.36. On the other hand, Henry Hub averaged only $2.64 during the quarter.
High natural gas prices are a net negative for Berry as it typically purchases around 50,000 to 60,000 mmbtu per day of natural gas (primarily from the Rockies) for use in its steamflood operations and cogeneration facilities. Berry produces and sells under 10,000 mmbtu per day of natural gas in the Rockies.
Thus, when Rockies gas prices are very high, Berry’s lease operating expenses soar, although this is largely mitigated by its consumer hedges. For example, in Q1 2023, Berry’s lease operating expenses reached $61.65 per BOE, up $35.40 compared to Q1 2022. Berry received $25.11 per BOE in settlements for its gas consumer hedges, though, offsetting a large proportion of the cost increase.
Berry also received around $17.39 for its natural gas sales in Q1 2023, so increased natural gas prices account for approximately a $4 per BOE increase in the realized price for its production compared to Q1 2022.
The net impact of high natural gas prices in Q1 2023 is to decrease Berry’s margins by around $6 per BOE (independent of prices for NGLs and oil) compared to Q1 2022.
Rockies natural gas prices may average around $3 or less during the rest of 2023, potentially dropping Berry’s net operating expenses to the low-to-mid-$20s per BOE after ending up over $35 per BOE in Q1 2023.
Potential 2023 Results
Berry’s Q1 2023 production took a bit of a hit due to the impact of severe weather and ended up at 24,300 BOEPD, down from 25,800 BOEPD in Q4 2022.
Berry is still maintaining its guidance for 24,000 to 25,200 BOEPD in average production during 2023, and I am modeling its average production at 24,400 BOEPD for the full year now. Berry mentioned that production rebounded to expected levels in March.
At the current high-$70s Brent strip, Berry is projected to generate $655 million in revenues after hedges now.
| Type | Units | $/Unit | $ Millions |
| Oil | 8,313,386 | $73.50 | $611 |
| NGLs | 139,175 | $33.00 | $5 |
| Natural Gas | 2,720,634 | $6.75 | $18 |
| Well Servicing & Abandonment EBITDA | $27 | ||
| Producer Hedge Value | -$6 | ||
| Total Revenue | $655 |
Due to the fall in natural gas prices (for the Rockies and California), I now believe that Berry’s net operating expenses end up at around $27 per BOE, which is slightly below the low end of its guidance. This would involve roughly $24 to $25 per BOE net operating expenses during the last three quarters of 2023 after it was above $35 per BOE in Q1 2023.
| Expenses | $ Millions |
| Net Operating Expenses | $240 |
| Taxes, Other than Income Taxes | $45 |
| E&P Cash G&A | $61 |
| Cash Interest | $30 |
| Asset Retirement Obligation | $22 |
| Capital Expenditures | $108 |
| Total Expenses | $506 |
This results in a projection that Berry can generate approximately $149 million in free cash flow before working capital changes in 2023 at high-$70s Brent.
Berry may put $59 million (about $0.77 per share) towards its fixed and variable dividends, leaving $90 million for debt and share repurchases.
Berry’s 7.0% unsecured notes due in 2026 are currently trading at around 93 cents on the dollar, allowing it to reduce its net debt slightly through debt repurchases.
Estimated Value
Berry may also be able to repurchase a large amount of its shares. At its current sub-$7 share price, $90 million would allow it to repurchase over 13 million shares. That would be approximately 17% of its outstanding share count. However, Berry’s share price would likely go up if it did a large amount of share repurchases, making it hard to maintain an average share repurchase price of under $7.
I estimate that Berry is worth around $10 to $11 per share in a long-term high-$70s Brent oil environment. This factors in concerns over the California regulatory environment.
At that oil price (and a reduced share count from share repurchases), Berry should be able to generate over $2 per share in free cash flow at that oil price with a maintenance capex budget.
Conclusion
Berry appears capable of generating around $149 million in free cash flow in 2023 at current strip prices. It should benefit from weaker regional natural gas prices after Q1 2023, helping significantly reduce its net operating costs.
With Berry’s share price under $7, it can also potentially repurchase over 15% of its shares while offering a total (fixed plus variable) dividend yield of over 10%.
The California regulatory situation remains a concern, but I believe that Berry’s free cash flow at high-$70s Brent should be impressive enough to make it a good value at its current share price.
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