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The Berry Corp. ($BRY)

The Berry Corp. ($BRY) is a hated stock trading in one of the most hated markets in all of oil and gas - however, we believe BRY presents a compelling investment opportunity due to 1) its competitive advantages in the declining/consolidating California oil environment, 2) reduced exposure to volatility through the strategic growth of its services segment and 3) the sale of Berry to California Resources Corp. (CRC) at an attractive price to shareholders.


Berry is an upstream E&P company which also operates a services business. It operates in California (and to a lesser extent, Utah) with a focus on onshore Oil (~92% of production) and Gas (~8%). The two major segments of Berry are an E&P division involved with drilling and production, and a well abandonment/plugging services division (referred to as C&J through the rest of this writeup). O&G sales made up ~80% of revenues in 2023 with C&J accounting for ~20%. C&J’s revenues are more stable, are higher margin and less subject to volatility. The share price is at a 30% discount to TBV, trading at 3.9x EV/EBITDA as opposed to competitors such as CRC (5.3x EV/EBITDA) which trade at significant premiums.

Californian E&P companies are often under covered as the current market is onerous, to say the least; CEQA (the California Enironmental Quality Act) legislation has constrained drilling operations throughout the state. Neither Berry nor any other producer has obtained drilling permits since Q3 2023. Furthermore, Senate Bill 1137, which passed in 2022, is up for ratification in November of this year. It would prohibit drilling or reworking of any wells 3,200 feet near sensitive areas (e.g. homes, schools, parks) along with imposing a bunch of restrictions on well operation. One can go on and on about further regulatory challenges, but it's clear to see oil companies in California are often overlooked, due to their low potential for growth.

We believe that Berry possesses several advantageous characteristics which will allow it to strive in the current low-growth environment while providing investor value:

1) Lucrative plugging business:

Growing plugging market

Regulation is forcing more and more companies to come up with plans and schedules to reduce emissions from and plug idle wells. An idle well is one that hasn’t been used for two or more years and has not yet been sealed in accordance with CalGEM regulations. In April 2019, CalGEM updated its regulations for idle wells, including mandating a compliance schedule for testing or plugging and abandoning idle wells. More importantly, operators are required to either submit annual idle well management plans describing how they will plug and abandon or reactivate a specified percentage of long-term idle wells or pay additional annual fees and perform additional testing to retain greater flexibility to return long-term idle wells to service in the future. In addition, in 2019, CalGEM mandated reviews of idle wells and their emissions, giving CalGEM the power to update/associate bond amounts. Currently, there are ~34,000 idle wells in the state, of which 5,300 are orphaned (liabilities of the state due to a lack of any identifiable operator). This number has been growing steadily, up 4% from ~29,000 in 2018 – the same is true for orphan wells. What is even more reassuring is the fact that the number of idle wells being plugged has been increasing in conjunction with long-term idle wells since 2018. While operators prefer to pay smaller fees to avoid plugging idle wells and to continue extracting small amounts of oil from them, new wells require indemnity bonds to be paid upfront, increasing the cost of leaving wells unplugged.

As firms face greater regulatory challenges, the abandonment of wells will continue to increase with time, along with wells scheduled for plugging. We believe this represents a strategic growth opportunity for Berry, allowing them to grow a higher margin business while simultaneously divesting from the bleak California E&P sector. Mgmt. has not shown a steady increase in capital expenditures on C&J (specifically in FY 2023 due to the Macpherson acquisition) but they have recently expressed their interests in doing so, as this spending materializes with California E&P acquisition opportunities drying up this is likely to drive up price along with investor confidence. Activism against CCS and the small annual fees have also been ramping up – any legislation relating to this would hurt its competitors far more than itself.

2) Stable, rural, low decline E&P locations:

Unlike its competitors, Berry primarily operates predictable, well understood conventional plays with low geological risk. As the California E&P market dries up, we believe the low-decline rates of Berry’s E&P sites will lead to fewer negative earnings revisions as organic growth opportunities fade. Virtually all of Berry’s competitors engage in unconventional plays. However, since drilling permits were still being freely issued relatively recently (early 2023), this advantage has not caused improvement in comparative earnings yet. The competitive advantages of the stability of Berry’s plays will make it significantly more attractive in the case of its sale, the possibility of which is explored later in this writeup.

Furthermore, its California production facilities are concentrated in rural areas with lower population densities (the San Joaquin basin), meaning that 1) plugging costs are lower than competitors engaging in urban production and 2) they are less sensitive to regulation (e.g. SB1137), further allowing fewer negative earning revisions than competitors such as CRC (with exposure to wells in the Los Angeles basin).

3) Bolt-on acquisitions:

M&A as the main E&P growth accelerant in California

As previously mentioned, regulation regarding new drilling permits leave little opportunities for organic growth. Shell and Exxon Mobil left in 2022. Berry itself acquired Macpherson for ~$70 mn in 2023. CRC acquired Aera Energy for ~$2.1 bn in 2024. The oil and gas industry in California is undergoing rapid consolidation. Acquisitions will allow Berry to increase its market share and will make it more compelling to any potential buyer for the same reason. It’s not hard to see CRC acquiring Berry (a company significantly less leveraged than Aera) to expand production and save on plugging costs by using Berry oilfields to trap carbon.

Successful history of acquisitions

We believe that the MP acquisition was advantageous to Berry, due to it being conducted when permits were still somewhat being issued (2023). Cost synergies from the MP acquisition will be realized in 2024. Mgmt. has since expressed its increasing focus on bolt-ons. The company also has a stellar history of acquisitions – for example, it acquired C&J in 2021, now the highest margin and most stable business (also creating the greatest value for the company). Realization of synergies from the MacPherson acquisition coupled with continued successful purchases will increase investor confidence along with analyst coverage.

4) Investor-aligned management interests:

Mgmt. has steadily increased allocation to stock repurchases since 2021. In February 2023, the board approved an increase of $102 mn to the repurchase program, bringing the total to $200 mn. By the end of Q4 2023, $190 mn remained to be purchased under the program. Furthermore, in early 2023, the board changed their allocation of adjusted FCF (free cash flow less fixed dividends and maintenance capital) to favor debt & share repurchases along with bolt-on acquisitions over variable dividends – this came after they doubled the fixed dividend. We believe the increased focus on deleveraging & share repurchases will provide greater shareholder value over time – debt repurchases will, once again, make the company a lot more attractive for an acquisition.

The possible sale of Berry

As mentioned previously in this writeup, we strongly believe that the sale of Berry is a possibility partly because in Q3 2022, management explored strategic options which could have resulted in a sale. This shows mgmt. is willing to consider selling the company. The recent focus of Berry on tuck-in M&A will increase its oilfield coverage and make it particularly attractive to California Resources Corp. (CRC) as a company.

California Resources Corp is the leading E&P operator in the state and a likely candidate for a buyer. In February, they acquired another leading operator (Aera Energy) for ~$2.1 bn in spite of significant debts. The real play behind this acquisition was to save plugging costs and extend the lives of depleted oil fields through CCS technology. Aera and CRC have a combined idle well count of 16,000 – by trapping carbon underground, they can avoid plugging costs by extending the life of oil wells. The sale of Berry (a much smaller operator with lesser debts, rapidly acquiring oil fields) seems to be well within the scope of CRC. Presently, Berry has 2,490 idle wells (with 2,613 active wells) compared to Aera (9,078 idle and 14,688 active). Out of the leading operators in the state, it has the highest ratio of 1) idle wells to total wells, 2) of idle wells to plugged wells, and 3) idle wells to active wells. In other words, Berry has the highest exposure to idle wells out of the possible viable acquisitions - making it the most obvious operator to purchase and use CCS to avoid plugging mandates.

Currently, Berry trades at a 30% discount to TBV, and given the sale of Aera at a premium to TBV (with Aera having heavy exposure to indemnity bonds), it is not hard to see this case yielding ~40% upside from a sale as California E&P properties increase in value following increased supply constraints.


Sale to California Resources Corp.

Earnings beats

Tuck-in M&A

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