Hold-rated Berry Petroleum (BRY) offers unlevered appreciation potential of 18% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $35 a share. On July 14 we reduced NPV from $40 when we reduced estimated Present Value of North American Natural Gas by 20%.
Released August 4, second quarter results exceeded our estimate for unlevered cash flow (Ebitda) from three months ago on the strength of a 50% increase in BRY’s oil price. In the current property mix, oil drives 69% of NPV in our valuation that capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P).
Heavy oil production in California, 57% of Berry’s total production in the second quarter, benefitted not only from the increase in Light, Sweet Crude Oil, but also from the smaller discount for heavy crude and low natural gas cost for generating steam to make heavy oil flow. Berry’s resources are rising in value with oil futures prices for the next six years, which crossed the 40-week average into an uptrend at the end of May. We like the company’s prospects and management, but debt is too high for a buy recommendation.
Originally published on August 5, 2009.