Berry Corporation: Could Pay Out Over $1.70 Per Share In Dividends For 2022

Summary

• Berry announced its new shareholder return plan, allocating 60% of discretionary cash flow to cash variable dividends and debt repurchases.
• At current 2022 strip of high-$70s Brent, this translates into the potential for $1.72 per share in total dividends.
• At $70 Brent (and no hedges), Berry could pay $1.43 per share in dividends.
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Berry Corporation (NASDAQ:BRY) (also known as BRY now) announced its new shareholder return model. With 60% of its discretionary cash flow going towards cash variable dividends, that means that Berry could pay out as much as $1.72 per share in total dividends based on 2022 results at current high-$70s Brent strip. In a scenario with long-term $70 Brent and no hedges, it may be able to support $1.43 per share in total dividends. At $9 per share, Berry looks like a reasonably good value despite some remaining California regulatory risk.

New Shareholder Return Model

Berry's new shareholder return model went into effect at the start of 2022. It is based on discretionary cash flow, which it defines as cash flow from operations less regular fixed dividends and maintenance capex (the amount needed to hold production flat).

This can be estimated by calculating Berry's EBITDA and then subtracting $28 million per year in interest costs for its 7.0% unsecured notes due 2026, $19 million per year in fixed dividends (at $0.24 per share per year) and approximately $110 million in maintenance capex. The maintenance capex figure is based on Berry's estimates of $11 per BOE in costs to "protect the base" and production of around 27,500 BOEPD. This production number reflects Berry's potential 2021 exit rate production after its Placerita asset sale.

Berry is planning on allocating its discretionary cash flow on a quarterly basis, with 60% going towards cash variable dividends (and potentially debt repurchases). The other 40% would go towards discretionary capital for items such as organic growth, share repurchases, sustainability initiatives and capital retention.

2022 Outlook With Maintenance Capex

Brent strip is currently around $78 to $79 for 2022. This is a scenario where Berry could generate $687 million in revenues before hedges with 27,500 BOEPD in average production (flat compared to the end of 2021).

After subtracting the $36 million in negative hedge value, Berry would have $651 million in revenue for 2022.

Type	Units	$/Unit	$ Millions
Oil	8,833,000	$74.50	$658
NGLs	146,000	$35.00	$5
Natural Gas	6,351,000	$3.75	$24
Hedge Value			-$36
Total Revenue			$651

Click to enlarge

Source: Author's Work

In a maintenance capex scenario for 2022, Berry is projected to have $454 million in cash expenditures (including its current fixed dividend).

Expenses	$ Millions
Operating Expenses	$176
Taxes, Other than Income Taxes	$51
Cash G&A	$55
Cash Interest	$28
Capital Expenditures	$110
Plugging & Abandonment	$15
Dividend	$19
Total Expenses	$454

Click to enlarge

Source: Author's Work

This leaves $197 million for Berry's discretionary cash flow.

2022 Discretionary Cash Flow Allocation

That calculation results in around $118 million in discretionary cash flow going towards cash variable dividends and opportunistic debt repurchases. Berry's variable dividend could be as much as $1.48 per share in 2022, bringing its total dividend payment to $1.72 per share after adding the $0.24 per share in fixed dividends.

Berry would also have $79 million to put towards organic growth, share repurchases, capital retention and sustainability initiatives.

Discretionary Cash Flow At $70 Brent

A scenario with $70 Brent instead (and no hedges) would result in Berry having around $159 million in discretionary cash flow. This would allow it to put $95 million (or $1.19 per share) towards cash variable dividends and opportunistic debt repurchases. Berry's total dividends could end up at $1.43 per share in that scenario.

My previous estimate was that Berry would be worth around $10.50 in a long-term $70 Brent environment, so Berry could end up yielding around 13.6% at that share price and $70 Brent (assuming no debt repurchases).

Conclusion

With high-$70s Brent in 2022 (current strip), Berry may be able to pay out as much as $1.72 per share in total dividends while also having $79 million to put towards items such as share repurchases, capital retention and organic growth.

It could also pay around $1.43 per share in dividends in a longer-term $70 Brent environment and looks like a reasonably good value at around $9 per share now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[1bambam]

"Based on the current oil strip and our hedge position, ....."
Question - what was the current Brent oil strip price on Feb 22?

[JGould1836]

@1bambam
I think next month Brent was $93.

[1bambam]

@JGould1836 Update - I learned that the "current brent oil strip" on 2/22 was $84-$87.. .so let's say $85.50 to split the difference.

[richard48]

Oil is now $100 a barrel and unfortunately BRY is hedged at around $70 a barrel for 2022. Management was hedged for $50+ in 2021 when most of the year oil was selling for $70. I do not think management has a handle on hedging or the world wide demand for oil. Experts have been publishing since 2020 that we are going to be in deficit 1-2 million barrels per day in terms of production vs. demand and prices would be going up. I saw these articles by two of the most renowned experts on energy and bought three oil stocks including BRY in 2020. All appreciated 50-100%. Unfortunately BRY management has done a mediocre job on handling its hedging during the same time period.

[Dutchtender]

@richard48 nobody can predict oil prices. nobody. it was prudent to hedge while the pandemic was in full motion. they had just emerged from BK and bry still was a leveraged entity. most energy CEOs did the exact same thing. long game.

it's wildly undervalued on STRIP. 20-25% FCF yield.

[JGould1836]

@richard48
I don't know if you worked out the figures, but they're only hedged for about 4.3 bbls million barrels in 2022 at ~$70/bbl. That's about half their production. They were required to hedge as a condition of their RBL agreement.
If oil remains where it is now, they'll still make a lot of money and pay out about $1.60 in dividends in 2022 if I understood their earnings call correctly.

[Dutchtender]

my numbers come directly from the CEO. the earnings transcript has been posted on SA. Here is the relevant passage.

"Based on the current oil strip and our hedge position, we expect to generate discretionary cashflow, as defined as cashflow from operations less regular fixed dividends and capital needed to hold production flat, of about $200 million in 2022. If the $200 million of discretionary cashflow seems like an impressive number, which I think it is, we expect to generate our current market capitalization in a little over four years, based upon the current strip, including the steep backwardation in the outer years, and with our current budgeted cost structure and spending $125 million in capital to maintain our product flat."

YMMV

[Dutchtender]

there was ONE analyst on the conference call. this company is lost in the wilderness. which is s good thing if you are searching for value. would not surprise me to see it sold or taken private in the next two years.

[anthbutler]

When do you see the non quarterly dividends distributions starting to payout?

[Dutchtender]

why would investors be willing to pay only $10.50 for bry in a long term brent environment of $70? the author estimates here that the LOWEST yield investors should accept for this security is 13.6% annually, when prevailing lt treasuries are ~ 2%. Keep in mind that bry has 30 years of drillable inventory at current pace of drilling. It seems to me that once investors are confident that bry can payout $1.36 per share in a $70s brent environment, the minimum they will pay for the bry income stream would be $13.60. that's the Minimum. this stock is stupid cheap.

[JGould1836]

@Dutchtender
I agree with your opinion. However, BRY may have 30 years of drilling inventory, but oil drilling is currently planned to be phased out in California by 2045.

[Dutchtender]

@JGould1836 Good point. But i don't think that matters much. besides I find it hard to believe politicians know what the the circumstances will be in California 23 years from now. I think it's cheap because it's OIL, it's post BK, it's small cap, and controlled by private equity. the value is there.

[JGould1836]

@Dutchtender
I live in California and spent more than half my career working in the oil industry here, both in upstream and in refining. I agree with you that it's hard to know what the circumstances will be here in 2045; however, I would not be surprised to see oil drilling to be phased out on schedule regardless of the economic cost. More than 2/3rds of the oil input to California refineries is already imported, largely from Iraq and Saudi Arabia. The vast majority of state production is concentrated in Kern County. Kern County is such an ideological outlier that it does not seem to have political influence at the state level. Eliminating 400,000 BPD of California oil production would decrease GDP by about $11 billion. That's ~0.3 percent of California GSP.

That being said, Berry is probably trading at 4X forward earnings, so it doesn't really matter what happens in 20+ years.

[richard48]

BRY is not going to have a problem drilling in California. Their wells are in Kern County which is drilling country in California and the county controls the permit process whether you build a house, apartment, shopping center or water or energy well, not the state . Kern County Board of Supervisors last year voted to allow up to 1500 permits per year over the next decade for oil and gas.

[Mistic]

The fundamentals on this firm will be generating between $1.50 to $2.00 per share in cash to shareholders of record via quarterly dividend payouts in 2022 and 2023. Picking up these shares at around $9.00 per share now will be a hugh win in any investor’s portfolio in 2022. It’s that simple. Long BRY.

[Waffie]

@Mistic I have this stock. No one on Stocktwits to talk to

[a123456789b]

Berry has hedged their 2022 output for around 60 $/barrel, or ?
Thus we will have to wait until 2023 and thereafter.

[Mistic]

@a123456789b BRY has 75% hedged at $66 per barrel in 2022 on average. 25% at approximately 95% of Brent. That’s the oil play starting in Q2. No hedge limit in Q1 2022.

[Bodipb]

@Mistic exactly...so why is this guy doing an analysis unhedged...they are hedged 75%. it is in their investor deck. still will be solid returns.

[1bambam]

@Bodipb How do you model the cost of the Brent Puts?
Clearly - it's easy to model the Brent Swaps....but I am at a loss on the Brent Puts/Calls. My thinking is that the 10Q stated that BRY had a deferred cost of $23M related to these Puts - and my thinking is that these deferred costs are amortized over 2022 and 2023...so that's where I come up with these Puts costing about $2M-$3M/qtr. As you can see from the Investor Slide Deck or the 10Q - the Brent Puts/Calls are very much out of the money.

[Ruble Noon]

Really interesting choice at a cheap price. By year-end, could trade at three times its current price. Don't know if it will, but it has a good chance.

[1bambam]

@Ruble Noon there's 3 strikes against BRY - which you have to be able stomach:
1. It's primarily a CA O&G company, and CA politics scares off a lot of folks
2. It has low trading volume/float - so that will scare off a lot of the big fund investors.
3. It's O&G/Fossil Fuels - which the public bandwagon has labeled the Enemy. So lots of funds are decreasing the FF investments.

But all this is good news for prudent/long-term investors. If a company has monster cash flow - who needs big float/trading volume and big institutional investors who are at the whims their clients. CA politics have always existed in CA O&G.

[1bambam]

If Brent averages $70, then BRY could get close to $1.80/share dividend. BRY hedges about 9300 BOE/Day at $67/barrel. So at average Brent of $70, BRY will realize $68.8 due to the hedges (assume $69). Assume 9.5M barrels/year. Assume "all-in cost of $47/barrel". Already included in the $47 all-in costs is a $0.24/share annual dividend. Assume that the entire 60% of Cash Flow is allocated to the dividend (assume none goes to opportunistic debt repurchases). So 9.5M x ($69- $47) x 60% = $125M CF. $125M CF / 80M shares = $1.56. Add the already baked in $0.24 annual dividend on top of that and you get $1.80 annual dividend. There's some big assumptions here... but regardless of how you change/model the assumptions - the dividend should be gangbusters. The money from C&J - that's just extra money to play with...and yes - they could use extra CF from C&J for dividends/buy back stock/retire debt.

[Ruble Noon]

@1bambam Thanks for the reply. How much are the hedges costing them? They're not usually cheap.

[1bambam]

@Ruble Noon They have Brent Swaps for 9300/boe/day at $66.63 (rounded to $67).
But they've got some Brent Puts and Brent Calls. I honestly don't know the math behind these instruments (whereas swaps are easy) and these Puts and Calls are way outside the money... but as far as I can tell - it seems like these cost ~ $2-$3M/qtr and that this cost is factored into the "all-in costs".

I welcome any insight that you or anyone else would have the Puts/Calls.

The information on them is more detailed in their 10Q filing.

Thanks

[JGould1836]

@1bambam
Thanks for sharing this helpful analysis. Quick question if you don't mind:

Are you taking into account taxes on the additional $22/bbl gross margin ($69-$47)? Or is that accounted for by only allocating %60 of pre-tax cash flow to the dividend?

[Mistic]

EA left out the value of C&J Wells Services that BRY purchased on October 1, 2021. This should add approximately $40 million in more free cash flow in 2022. We should get insights on this new revenue line item when they report Q4 2021 earnings in early February. This would be in addition to what EA outlined above from BRY’s oil and gas productions. Using 60% of $40M would be $24M or an additional $0.30 per share. Adding $0.30 to $1.72 (EA best case) would be $2.02 per share. With a calculated 8.0% steady dividend yield, this stock should average $25 per share at year end. Alternative stock prices are made based on what dividend yield you think BRY will need to hold in the market.

[Bodipb]

Why do you say with no hedges when they already have the hedges in place?

[Elephant Analytics]

I've looked at 2022 results with hedges, but also believe it is good to look at longer-term scenarios without hedges to understand how Berry could perform once its hedges roll off.