Berry : Q4 2020 Earnings Call Transcript

Berry Corporation (bry) (NASDAQ:BRY) Q4 2020 Earnings Conference Call

February 24, 2021 9:00 AM ET

Company Participants

Todd Crabtree - Manager, Investor Relations Trem Smith - Chief Executive Officer

Fernando Araujo - Executive Vice President and Chief Operating Officer Cary Baetz - Executive Vice President and Chief Financial Officer Conference Call Participants

Leo Mariani - KeyBank Charles Meade - Johnson Rice Nicholas Pope - Seaport Global

Operator

Thank you for standing by and welcome to the Berry Corporation Q4 and Full Year 2020 Earnings Call. [Operator Instructions]

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 will discuss our 2020 performance as well as our expectations for 2020. Fernando and then Cary will share further details on how we are addressing the operational and financial aspects of our business. Before turning it over to questions, Trem will make a few concluding remarks.

Before we begin, I want to call your attention to the safe harbor language found in our earnings release. The earnings release and this discussion today contain certain projections and other forward-looking statements within the meaning of Federal Security 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 outlined in our filings with the SEC. Our website, bry.com, has a link to the earnings release and our most recent investor presentation.

Any information, including forward-looking statements, made on this call or contained in the earnings release and that presentation 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 during today's call and the related GAAP measures. We will also post the replay link of this call and the transcript on our website.

I will now turn the call over to Trem Smith.

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.

As OPEC+ was making its decision to oversupply the market in March of last year, we had adeptly hedged 100% of our oil production for the remainder of 2020 at slightly less than $60 per barrel Brent. Quick data-driven decision-making is a hallmark of Berry. Even in a downturn our fundamental principle of living out of levered free cash flow did not change nor will it change in the future.

The health and safety of our employees and the environment have always been critically important. And the COVID-19 pandemic highlighted its importance even more. We never shut down operations throughout this difficult year. I'm thrilled to report in 2020, our total recordable incident rate, or TRIR was 0.5. Our lowest rate ever. This is well below the United States average for all industries, which is a TRIR of 3.0.

Tuning to 2121 now. With the oil price strip well above $50 per barrel Brent and our drive to return value to our shareholders, a key financial tenant for Berry, we are pleased to announce that the Berry Board recently approved reinstituting a quarterly dividend at $0.04 per share beginning in the first quarter.

Operationally, we remain focused on our value adding California portfolio. We are planning to keep company-wide year-over-year production flat and anticipate a strong -- a very strong fourth quarter exit rate compared to 2020. We have realized month-to-month production improvements following our fall reorganization then included the addition of our new COO, Fernando Araujo.

Our current plans include a total capital budget of $120 million to $130 million in 2021. Included in the budget is our renewed focus on workover activity on existing wells. This activity is something that is extremely judicious in California and is a highly efficient use of our capital dollars. In addition, as mentioned, we are continuing to reduce costs across the organization. I am confident we will be successful. Fernando will expand on all of this more in a moment.

Finally, and importantly, we are laser focused on increasing our scale. Our growth strategy continues to be directed toward conventional low corporate decline assets with strong cash flow.

I'll now turn it over to Fernando.

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 tocreate value by optimizing the performance of our current assets and generating meaningful growth in conventional and predictable place.

I am proud to report that we achieved excellent environment, health and safety results in 2020, exceeding all of our targets. In 2020, we did not have a single lost time incident. Trem noted, we had our total recordable incident rate of 0.5, which translates to only two recordable incidents all year. In 2021, we will continue to dedicate the necessary resources to protect the safety of our employees and contractors, to safeguard and respect the environment, to meet all regulatory commitments and to guarantee the integrity of our infrastructure.

Moving to performance. I'll start with production. Our California oil production, which constitutes about 80% of our total production, was up by 1.3% in 2020 versus 2019. We paused drilling activity from April through October of last year, which resulted in a 3.6% decline in production from Q3 to Q4. Drilling assumed during the fourth quarter, as we drilled 22 wells, all in thermal sandstone reservoirs in California. We anticipate big production for this 22-well package later this quarter.

Our average production in Q4 was 26,600 barrels a day and we exited the year producing nearly 27,000 barrels a day. Our plan in 2021 is to keep production flat year-on-year, with a positive year-end exit rate compared to last year with continued growth in California.

Next, let's turn to operating expenses. In 2020, we averaged an operating expense of $18.51 per BOE. This is a $1.81 per BOE improvement when compared to 2019. We used non-energy OpEx by 9% with improvements in all major categories. And we reduced energy OpEx by 13% driven by a 16% reduction in steam rates. Importantly, we achieved this without affecting production.

Non-energy operating expenses are expected to be sustainable for a total OpEx of around $18 per BOE for 2021. We are dedicating resources. We improve our cost structure even more through a combination of optimizing contracts, generating ideas from the field and executing facility projects that can reduce LOE in the long-term. We are determined to become the lowest cost operator in the basins where we operate.

Now, let's turn to capital. CapEx in Q4 and for the full year was in line with our plan at $12 million and $69 million, respectively. We maintain our plan for reduced capital investments in 2020. However, as mentioned before, we restarted our drilling campaign in October.

I want to highlight the 15 wells drilled in Q4 in the Tillery sandstone reservoir in our Hill property in California. This is a clear example of a shallow mature steam flood with predictable geology on low decline. Peak production for these 15 wells is higher than pre-drill estimates with drilling and completion costs 26% below the 2019 development campaign. As a result, the field is currently producing at a 30- year high.

Our capital program in 2021 will be in the $120 million to $130 million range. We'll drill approximately 185 development wells and performed roughly 200 workovers and recompletions. We're putting a strong emphasis on workovers this year compared to previous years. Workover activity is some of the best capital investment in terms of the capital efficiency.

We continue to be fully committed to our obligations under the California mandated Idle Well Management plan. In 2020, we exceeded our idle well abandonment commandments spending $17 million to abandon 194 wells, well above the required 164 wells. The additional 30 wells were abandoned to accelerate production.

Similarly, in 2021, we intend to plug an abandoned approximately 280 wells, of which 223 wells are required and 57 are to accelerate production at a total cost of $20 million.

The Lawrence Livermore technical study on high pressure cyclic steam operations in the thermal diatomite reservoir is complete and under review by CalGEM. We've been told by CalGEM this study will be released by the end of Q1. We anticipate the opportunity to further work with CalGEM to obtain new permit approvals for future thermal diatomite operations.

Remember, our 2021 plans do not include new thermal diatomite development. Our anticipated development program for 2021 is targeting sandstone reservoirs and only in California where we enter the year with almost 200 new permits in hand.

And with that, I'll turn it over to Cary.

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.

On another liquidity note, in November, we completed our scheduled semi-annual RBL borrowing base redetermination, which resulted in reaffirmed borrowing base and the company's electric commitment of $200 million. As of December 31st, 2020, we had liquidity of $273 million consisting of cash on hand and the RBL borrowing availability. As a reminder, we primarily use the RBL facility to manage working capital fluctuations, have no outstanding on the borrowing on the line today.

Due to lower SEC pricing, our 2020 reserves were down. However, I want to reaffirm that for 2021, we anticipate to see a substantial improvement in our calculate reserves as the current strip prices are more than 40% higher than the SEC prices used for 2020 reserve calculations, assuming current prices hold.

Our 2021 capital of $120 million to $130 million should keep our production relatively flat on annual basis going back to 2019, with an accelerated exit rate in 2021. Like 2020, this year we planned to see oil growth in our attractive basins in California. At the current strip pricing, we expect to fund our development plans with cash flow from operations.

We currently have oil sells hedges of approximately 19,000 barrels a day at nearly $46 per barrel in the first half of 2021 and approximately 14,000 barrels in the second half of 2021. We recently added 3,000