BRY Stock Has 116% Upside Potential
For a myriad of reasons, the outlook remains robust for beaten-down oil and gas companies like Berry Corporation (NASDAQ:BRY).
The International Energy Agency (IEA) expects demand to weaken for oil over the coming years as countries to electrify their economies. The Paris-based watchdog said that global oil demand needs to fall from the current level of 103 million barrels per day to around 85 million barrels per day in order to put the world on pace to hit its net-zero target by 2050. (Source: “World Energy Outlook 2024,” IEA, October 2024.)
That would mean a reduction of three to four million barrels of oil per day, per year, until 2030.
However, this 15% reduction is not expected to happen. For starters, 85 million barrels of crude per day is six million barrels less than we used during the 2020 health-care crisis. And, of course, the global economy is not currently heading toward a pandemic economy.
On top of that, the electric vehicle revolution is facing headwinds, especially in light of President-elect Donald Trump’s proposed sky-high 60% tariffs against China and 25% tariffs against imports from Mexico and Canada. (Source: “Trump vows new Canada, Mexico, China tariffs that threaten global trade,” Reuters, November 16, 2024.)
Over the near term, the outlook for oil is a little more robust than crude bears would have us believe. The oil market surplus could be smaller than the IEA has warned, with global inventories drawing down much more quickly than the the organization anticipates.
Global oil inventories fell by 47.5 million barrels in September to their lowest level since January. And data suggest that total global oil stock decreased for a fifth consecutive month in October.
This, coupled with ongoing Organization of the Petroleum Exporting Countries (OPEC) oil production cuts, could lead to a modest uptick in oil prices. Goldman Sachs expects OPEC+ cuts to last until at least April 2025. And any increase in oil production beyond that is expected to be modest. (Source: “OPEC+ production cuts may support oil prices in near term, Goldman Sachs says,” Reuters, November 26, 2024.)
The fact remains that global oil demand is expected to increase by one million barrels per day in 2024 and 1.2 million barrels per day in 2025. U.S. crude production, meanwhile, is projected to grow from 12.9 million barrels per day in 2023 to 13.2 million barrels per day in 2024 and to 13.5 million barrels per day in 2025. (Source: “Short-Term Energy Outlook November 2024,” U.S. Energy Information Administration, November 2, 2024.)
All of this should help support the country’s energy sector and oil and gas exploration and production (E&P) companies like Berry Corporation.
About Berry Corporation
Berry is an independent upstream energy company with a focus on onshore, low geologic risk, low decline, and long-lived oil and gas reserves. The Dallas-Texas-based company operates in two business segments: E&P and well servicing and abandonment. (Source: “2024 Q3 Earnings,” Berry Corporation, November 7, 2024.)
The company’s E&P assets, characterized by high oil content, are predominantly located in rural areas in California and Utah with low populations. Its California assets are in the San Joaquin Basin (100% oil), while its Utah assets are in the Uinta Basin (60% oil and 40% gas).
The following are Berry’s key operational metrics as of the third quarter of 2024:
- Average production: 24,800 barrels of oil equivalent per day (BOE/D)
- Oil production: 22,800 BOE/D
- California production: 20,100 BOE/D
- Utah production: 2,700 BOE/D
“Another Good Operational Quarter”
For the third quarter ended September 30, 2024, Berry reported total revenue of $259.7 million, a 121% increase over the $118.8 million recorded in the same period last year. Oil, natural gas, and natural gas liquids revenue came in at $154.4 million, while services revenue was $25.4 million. (Source: “Berry Corporation Reports Third Quarter 2024 Results,” Berry Corporation, November 7, 2024.)
The company’s third-quarter net income was $70.0 million, or $0.91 per share, up significantly over the third-quarter 2023 net loss of $45.0 million, or a loss of $0.60 per share. Adjusted net income was $11.0 million, or $0.14 per share.
Berry’s cash flow from operations advanced 29% to $71.0 million, while its free cash flow (FCF) rallied 17% on an annual basis and 55% on a quarterly basis to $45.0 million.
On the financial front, the company entered a new $545.0-million term loan facility that will allow it to successfully complete transformative debt refinancing.
Commenting on the results, Fernando Araujo, the company’s chief executive officer, said, “Berry delivered another good operational quarter with production ramping up as we exited September, and we are on track to reach the mid-point of our full year production guidance.
“We have now completed our 2024 drilling plan and have permits in-hand to support activities well into the new year, including drilling new wells and sidetracks and working over existing wells. Based on current permitting processes and our healthy California inventory, we are confident we can maintain consistent production levels for 2025, as we have for the last six years.
“We are also excited about promising upside opportunities in Utah and California that should yield increasing benefits in 2025 and beyond.”
Q3 Dividend of $0.03 Per Share
Thanks to its strong FCF, Berry Corporation is able to provide investors with a reliable dividend. It pays a quarterly fixed dividend and sometimes adds on a variable dividend. In the second quarter, the company paid a dividend of $0.17 per share, including a $0.12 fixed price per share and $0.05 per share variable dividend. (Source: “Stock Information,” Berry Corporation, last accessed December 3, 2024.)
In the third quarter, Berry declared a fixed dividend of $0.03 per share, or $0.58 per share on an annual basis, for a forward yield of 14.8%.
Of note, the company has paid a dividend for the last seven years. This means that it didn’t suspend its dividend during the 2020 health crisis; however, at $0.12 per share, the annual dividend was a lot smaller than in previous or subsequent years.
BRY Stock Has Triple-Digit Upside
Berry Corporation stock has struggled over the last two quarters, slipping to a 52-week low of $3.89 on November 27. For contrarian income investors, BRY stock has a compelling risk/reward trade-off.
On one hand, investors sent BRY lower in November following Berry’s third-quarter results, which included a reduced dividend payout. At the same time, more broadly, the company delivered a solid quarter and is excited about upside opportunities in California and Utah.
This isn’t lost on Wall Street, with analysts providing a 12-month share price target range of $4.70 to $9.00. This points to potential upside of 13% and 116%.
Chart courtesy of StockCharts.com
The Lowdown on Berry Corporation
To summarize, Berry Corporation is an E&P company with properties in Texas and Utah. It delivered another solid quarter with average production increasing and total revenue more than doubling and swinging to third-quarter profitability. Cash flow from operations and FCF also both registered double-digit gains.
The company also entered a new credit facility allowing it to redeem all of its notes due in 2026 and refinance its existing credit facility. Berry is able to do this while deploying capital into high-rate-of-return ventures, including significant opportunity in its Uinta position.
Looking ahead, analysts expect earnings to increase from $0.51 per share in 2023 to $0.57 per share in 2024 and $0.61 per share in 2025. However, there is a high estimate for 2025 earnings to come in at $0.84 per share.