Berry Corporation (bry)

Q2 2022 Earnings Conference Call

8/3/2022

spk02: Good day, and thank you for standing by, and welcome to Barry Corporation's Q2 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Danny Hunter, General Counsel. You may begin.
spk01: Thank you. Welcome, everyone. Thanks for joining us for Barry's second quarter 2022 earnings teleconference. Earlier today, Barry issued an earnings release highlighting second quarter results. Speaking this morning will be Trump Smith, board chair and CEO, Fernando Araujo, chief operating officer and executive vice president, and Kerry Bates, chief financial officer and executive vice president. Before we begin, I want to call your attention to the safe harbor language found in our earnings release. The release in today's discussion contains certain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in those statements. These include risks and other factors outlined in our filings with the SEC. Our website, vry.com, has a link to the earnings release and our most recent investor presentation. Any information, including forward-looking statements made on this call, are contained in the earnings release in 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 reconciliation with all adjusted measures mentioned in today's call and the related gap measures. We'll file our 10-Q later today and also post the replay link of this call and the transcript on our website. I will now turn the call over to Trim Smith.
spk05: Welcome everyone and thank you for joining us this morning. We delivered solid results in the second quarter of 2022 and the year is trending in line with our expectations. Barrie continues to be a cash flow machine. We have a strong track record of returning capital to our shareholders as we remain on pace to deliver top tier returns going forward. Barrie is uniquely positioned to continue returning capital well beyond the current cycle. Last quarter, we delivered our first variable dividend through our new shareholder return model. We are excited to report that we are delivering an even larger dividend this quarter. For the quarter, our combined dividend, variable and fixed, is $0.62 per share, more than three times larger than last quarter's return. This positions us as one of the highest returners of capital in the industry. We still anticipate the cash dividends for the fiscal year 2022 will be in the range of $1.60 to $1.90 per share, based on the current plan and commodity strip prices. As a reminder, our shareholder return model is based on discretionary cash flow we generate, which is calculated after the payment of the regular fixed dividend and then allocates 60% of that discretionary cash flow primarily in the form of cash variable dividends. The remaining 40% is for discretionary capital to be used opportunistically, including in the form of share repurchases. We generated 74 million of discretionary cash flow in the second quarter, which means we are delivering 44 million or 56 cents per share to our shareholders for the variable dividend. On top of the fixed dividend, of $0.06 per share. In the second quarter, we also repurchased 2 million shares for $23 million, utilizing a portion of our board-approved share repurchase authorization of $150 million in aggregate. Over the last few years, we have repurchased more than 7.5 million shares, or almost 10% of Barry's outstanding shares. Since going public in July 2018 and inclusive of the 62 cents per share dividend that will be paid in August, we will have returned more than 225 million to shareholders in the form of dividends and share repurchases, which is more than two times the 110 million of net IPO proceeds. This includes the 92 million announced so far this year. Looking forward to the remainder of the year, we see our production holding relatively steady and our discretionary cash flow remaining strong. In addition, we expect full-year capital to be at the lower end of its guidance range due to a shift in our development plan to focus on reusing existing wellbores, further optimizing our use of capital. Fernando will expand on this further.
spk03: Thank you, Trent. For details of operational performance in Q2, please refer to the earnings release on 10Q. Here are a few key achievements I'd like to highlight from Q2. Production remained essentially flat from Q1 to Q2, net of our Colorado divestment in January. We improved our capital efficiency by allocating more resources to working over existing wellbores in Q2, which is our most efficient use of capital. So far this year, we have completed 169 work over jobs with a rate return greater than 100% for the program. Also in Q2, we began implementing a robust surveillance program which includes enhanced data gathering and reservoir management. The program helps us maximize all recovery from our fields, has generated additional work over scope, and is helping us optimize new well placement. This is another effective way to enhance base production performance. We expect that on average, base production will account for more than 90% of our total production this year. Non-energy operating expenses increase quarter on quarter, mainly driven by higher inflationary pressures. Also, we identified and executed expense workover activity in Q2 above and beyond what we have done in previous quarters. We plan to continue the current pace of workover activity the remainder of 2022 as it generates additional oil production today energy effects decrease quarter on quarter by 2.19 cents per boe this was mainly driven by additional gas hedges realized in q2 we currently have two-thirds of our demand hedge at four dollars per mmbtu and we plan to have most of our demand hedged in q4 also the additional physical natural gas line capacity in the current river line covers up to 80% of our total gas demand. This pipeline brings a reliable supply of gas from the Rockies to California at prices that historically have been less expensive. All of these conditions help us mitigate the volatility in the gas markets. To summarize, we have delivered production according to plan year-to-date, and our production guidance remains unchanged. During the quarter, we accelerated the pace of our workover activity, which delivered outstanding results, and our operating margins significantly increased quarter-on-quarter, both in Utah and California. I will now pass it to Kerry.
spk07: Thank you, Fernando. We achieved strong discretionary free cash flow this quarter and further demonstrated our commitment to delivering top-tier yields and total returns. Our second quarter variable dividend met our expectations. and we are well positioned to have strong payout for the rest of 2022 as well as over the next few years based upon the current strips. One housekeeping item. We have aligned the record dates and payable dates of the fixed and bearable dividends going forward as highlighted in our earnings release. Regarding hedging, we have roughly 60% of our planned production swapped at about $77 a barrel Brent for the rest of this year. This provides certainty around our free cash flow and leaves upside pricing for a significant portion of our production as we anticipate continued strong oil prices throughout the rest of the year and over the near term. Please look at slide 19 of the investor presentations for more detail on our hedging program. Our guidance ranges remain in place. However, operating expenses are tracking on the higher side of guidance due to the increase in workovers expensed. We will also incur some additional costs associated with our improved surveillance program for existing wells to optimize our base production. We expect slightly lower capital expenditures due primarily to the increase in reusing existing well bores and due to the anticipated lower overall new well count for the year. In closing, we continue to provide investors with strong predictability and visibility into our cash flows. With that, we have the confidence to plan for and deliver significant cash returns and to deliver additional value to shareholders. Back to you, Trenton.
spk05: Thank you. Barry's strong team continues to deliver on its promises, generating strong cash flow, distributing best-in-class returns, and successfully executing our plan. Before we take your questions, I'd like to briefly highlight three more items of note. First, we are extremely proud to report that our C&J Well Services team won the Energy Workforce and Technology Council's Gold Award in Group 5 for the 2021 safety record. which will be presented tomorrow at the Council's summer meeting. C&J has won this award 20 times over the last 23 years. Second, we continue to focus on reducing our carbon footprint. Notably, we have signed letters of intent with operators of major carbon capture and sequestration projects to capture up to 80% of our current direct operational CO2 emissions in California. These are long-term projects in the early stages of definition and planning. Finally, we have some exciting news regarding our thermal diatomite production. We have encouraging results from early testing of two new horizontal wells. The wells target our thermal diatomite reservoir in North Midway Sunset Field, using a new development concept that takes advantage of existing reservoir energy. In short, the wells leverage the heat from existing thermal steam operations and therefore do not need new steam injection. This application opens up a lot of exciting potential and, with continued success, represents an important opportunity for Berry. Now I'll open it up for questions.
spk02: and thank you as a reminder to ask a question you'll need to press star one one on your telephone please stand by we compiled a q a roster and one moment for questions and our first question comes from michael furrow from johnson rice and company your line is now open hi good morning michael thank you my questions
spk06: I appreciate the color on the thermal diatomite. That was going to be my first question regarding if you still need to inject steam, but it seems like that's a good advantage to use the current energy that's already down there. So in regards to this new development program, is it too early to determine how that's going to have an impact on production or the number of locations that this could be applicable to?
spk05: This is Tram, and I'll let Fernando follow if necessary. It is too early to overall production. However, with continued success, this opens up hundreds of opportunities for us in terms of well locations throughout our diatomite acreage.
spk03: Yeah, and we have very encouraging results from the first two wells that we've drilled. You know, we're moving fluids. We're producing oil. We're getting heat to the wells. We have a fracture system that's connecting the heat to the wells, and we're gathering lots of data. So it's a very exciting opportunity that we have. And the next phase of that opportunity is to continue with the development program, and we're in the middle of preparing that next phase right now. So it's very exciting.
spk06: Thank you. That's helpful. I guess my next question is how does it look like or what does the path look like going forward to actually developing more than just a couple test wells for these thermal diatomite wells in regards to the current regulatory environments or other challenges that you might face?
spk05: Very simply here, Michael, a good question. This is something we will be doing in light of the fact that it's successful. It does not take away from our desire to see the high pressure cyclic steam moratorium lifted, which will give us opportunities to build safely. and efficiently more steam injection capabilities which would just increase this opportunity even more we looked at these activities in parallel and uh and not one in excluding the other and uh that's uh that's uh where we're headed in terms of the planning and the additional item to note is this entire area is already covered by a CEQA-approved process. In other words, new drill locations are available to us in this area while the Kern County EIR is finalizing its reentry into the regulatory world. Does that make sense, Michael?
spk06: That does make sense, actually. I appreciate the information. That's a very good thing for us. It sounds like it. I'm looking forward to hearing more about the development of these thermal diatomite prospects going forward.
spk05: So are we.
spk02: And thank you. And again, if you would like to ask a question, that is star 11. Again, if you'd like to ask a question, that is star 11. And one moment for questions. One moment. And our next question comes from Steven Bush from Everglades. Your line is now open.
spk04: Good morning, gentlemen. Thank you for taking my call.
spk02: Morning, Steven.
spk04: So, can you just give us an update on the permit situation in California?
spk05: Sure. The permit update, the Kern County EIR is in final stages of being put in an adequate position that hopefully the court system will approve its reentry and allow us to move forward with new drilling well opportunities throughout the Central Basin, in Kern County in particular. And so that's going on. In the meantime, We currently get all the workovers, sidetracks, and plugging and abandoning permits we need because these are re-entries into existing wellbores. And we have over 2,000 wells with workover opportunities that we know of today. So that's a very positive outcome because that's a great use of capital. And then there's a large area in North Midway Sunset, as I just responded, that has CEQA coverage already approved, and we're able to get new drill locations there, which includes our potter sandstone trends as well as our thermal diatomite.
spk04: Okay. So would you say if the permit process loosens up, you'll have a potential upside this year, or you're pretty much –
spk05: We have upside in terms of drilling activity. Remember, sometimes it takes a little while for the actual production to ramp up from new wells, but yes, that would be upside that would extend into early 2023 and beyond. Yes, sir.
spk04: Okay. And on this thermal diatomite process, is this something you guys developed or you developed with someone else? Is it a technology, patentable, anything like that?
spk05: We have done a We have done a – this is something that was developed internally. Looking at the reservoir, it's a result of an increased surveillance program in terms of the reservoir characterization. And one of the outcomes was there should have been, and it turns out there is, some stored energy and migratory paths. inside the reservoir, which allows these wells to flow. So, no, it was just good reservoir and geologic work that led to this technique.
spk04: Okay. All right. Well, it looks good so far. I appreciate the dividend, and it looks like we're steady as we go. Thank you.
spk05: That's great. If you could say that louder, that would be great. Thank you. Enjoyed the question. Have a good one.
spk02: Thank you. And one moment for our next question. And our next question is a follow-up from Michael Furrow from Johnson, Rice & Company. Your line is now open.
spk06: Hey, thanks, guys. Thought I'd have a quick follow-up just regarding the full-year cash dividend expectation range of $1.60 to $1.90 per share. Can you clarify what oil price assumption is being used in that range?
spk07: Yeah, we still look at it based upon our hedge position in the current strip. Okay, great. That's helpful. Thank you. All right. Thanks, Michael.
spk02: And thank you. And I'm showing no further questions. I would now like to turn the call back over to Trent Smith for closing remarks.
spk05: I want to thank everybody for taking the time. It was a good quarter for Barry, and I hope everybody appreciates the significant impact of the variable dividend. Thanks, and have a great day.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect. To raise your hand during Q&A, you can dial star 1 1.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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