New Wells In California And Utah Expected To Increase Future Production And Efficiency

Key Takeaways

• Berry's infrastructure and cost efficiencies in the Uinta Basin position it for improved margins through reduced operational expenses.
  
• Strategic reserve additions and planned sidetrack opportunities suggest potential production growth, supporting future revenue and earnings expansion.
  
• Regulatory challenges and market volatility may limit Berry's production growth and profitability, with high debt and hedging impacting financial flexibility and revenue.

Catalysts

Operates as an independent upstream energy company in the western United States.

• Berry's continued development in California's thermal diatomite and the horizontal well program in the Uinta Basin positions the company to potentially enhance production levels and improve capital efficiency, which may positively impact future revenue growth.
  
• The reserve replacement ratio of 147% indicates a successful reserves addition strategy, which could support sustained or increased production levels and drive future revenue growth.
  
• Berry's cost advantages in the Uinta Basin, including a 20% lower well cost per foot compared to peers and existing infrastructure synergies, could lead to improved net margins by reducing operational expenses.
  
• Planned sidetrack opportunities (115 in thermal diatomite and 110 elsewhere in California) and the 200 identified horizontal well locations in Utah suggest significant potential for production growth, which could bolster future earnings.
  
• The recent debt refinancing provides Berry with flexibility for strategic development, potentially facilitating capital allocation towards high-return opportunities and strengthening future earnings and shareholder value.

Berry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Berry's revenue will decrease by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 7.2% in 3 years time.
• Analysts expect earnings to reach $43.8 million (and earnings per share of $0.59) by about April 2028, up from $19.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.0%, as per the Simply Wall St company report.

Berry Future Earnings Per Share Growth

Risks

• California's regulatory environment poses a risk, with potential delays from the Kern County EIR process and reliance on alternative CEQA compliance, which could impact Berry's ability to sustain production growth and therefore revenue.
  
• Berry's strategy involves significant future drilling in Utah, but any downturn in commodity prices could hinder profitability, affecting cash flow and earnings.
  
• The potential increase in market volatility and the company's high level of hedging (75% of estimated oil production for 2025) could cap potential revenue upside from higher market prices.
  
• Berry's debt levels, with a total debt of $450 million, and reliance on reserve-based credit facilities could limit financial flexibility for future investments and impact net margins.
  
• The market for joint ventures or partner collaborations in Utah could be limited, affecting capital efficiency and ability to accelerate production, thus restraining revenue growth.

Valuation

• The analysts have a consensus price target of $4.8 for Berry based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.5, and the most bearish reporting a price target of just $2.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $608.0 million, earnings will come to $43.8 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 11.0%.
• Given the current share price of $2.34, the analyst price target of $4.8 is 51.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.