Berry Petroleum: Customer Bankruptcy Manageable

Jan.26.09 | About: Linn Energy, (LINEQ)

We expect the December 22 bankruptcy of the independent refiner that buys Hold-rated Berry Petroleum's (BRY) California oil production to have limited impact on BRY’s financial position. Though almost half of the company’s total oil equivalent production is affected, there are alternative buyers who would likely pay almost as much as the purchaser who declared bankruptcy.

BRY disclosed on December 29, that payment of $38 million not received for past production is at risk. Meanwhile the main story is the almost 90% decline in stock price from the 52 week high of $62 a share. Taking account of the company’s high leverage, the decline of 60% in Enterprise Value from the high is greater than a median of 54% for small cap and income stocks in our coverage.

Protecting against the worst, BRY has hedges on oil price that would give it positive cash flow of perhaps $100 million in 2009 if oil price were to be just $20 a barrel. Thus, with the downside likely covered, the opportunity remains on the upside characterized by estimated Net Present Value (NPV) of $40 a share.

Originally published on December 30, 2008.