Is Berry Petroleum an Opportunity You Shouldn’t Miss?

Berry Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="BRY" markup="(NASDAQ: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has set the market on fire in 2019, rising more than 30% thanks to a recovery in oil prices. That should come as a relief for shareholders as the oil producer has struggled since it made its stock market debut last year. The company’s IPO was priced below its target range, and soon after the listing was done, oil prices started tumbling.

As such, recovering oil prices in 2019 seem to have sparked investor enthusiasm, who probably believe that Berry will now be able to realize its true potential. But will that be the case? Let’s find out.

Coming Off a Solid Year

Oil prices were in good shape for much of 2018, and that allowed Berry to close the year on a strong note. The company’s adjusted EBITDA came in at $258 million last year, a substantial increase over the $178 million it recorded in 2017. The company attributes strong oil pricing and higher production for this massive adjusted EBITDA improvement.

Berry’s realized price of oil shot up to $64.76 per barrel in 2018 from $48.05 per barrel in 2017.

More specifically, Berry’s production in 2018 averaged 27,000 barrels of oil equivalent per day. Of this, 22,000 BOE/day was oil, up from the prior-year period’s oil production of 20,600 BOE/day. Berry’s realized price of oil shot up to $64.76 per barrel in 2018 from $48.05 per barrel in 2017. So, stronger oil prices for the entire year turned out to be a huge tailwind for Berry.

Now, Berry is planning to increase its production in 2019, and an upswing in oil prices will ensure an improvement in its financial profile as well.

A Closer Look at 2019 Plans

Berry estimates production between 28,000 and 31,000 BOE/day this year, approximately 86% of which will be crude oil. The mid-point of the guidance represents an increase of just over 10% as compared to 2018 levels. This increase in production will be achieved at a capital expense between $195 million and $225 million.

For comparison, Berry’s 2018 capital expenditure stood at $148 million, and it had directed 88% of the same toward its assets in California to drill 224 wells. So Berry is on track to grow its capital spending once again this year after doubling its outlay in 2018.

However, the company will need the aid of higher oil prices to capitalize on the increased production. The good part is that WTI oil prices have rallied in 2019, increasing from the lows of $42 per barrel witnessed in December last year to more than $56 per barrel now. But they are still below the levels witnessed by Berry last year.

As such, it is not surprising to see why analysts expect a mid-single digit improvement in Berry’s top line this year after a period of terrific growth. But if oil prices keep improving, there’s a good chance that Berry will be able to outperform estimates.

However, investors should also keep in mind the fact that any downturn in oil prices will prove to be a headwind for Berry thanks to the precarious situation of its balance sheet. With long-term debt of nearly $392 million and not much cash in hand, Berry will have to live within its cash flow. In that case, it will have to cut corners in case of an oil price decline.

So, if you’re confident that the oil price rally is here to stay, Berry will make for a good bet, but any downturn on the pricing front will spell trouble for the stock.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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