Berry Petroleum (BRY): MLP, oil price, Diatomite represent three catalysts for upside - Goldman Sachs
MLP, oil price, Diatomite represent three catalysts for upside October 08, 2007
News
After recently meeting with Berry management, we are reiterating our Buy rating relative to an Attractive coverage view. We continue to see a value creation opportunity for Berry in pursuing an MLP, and believe an MLP announcement is possible in the near term. We also believe Berry’s key Diatomite asset in California is ramping up well and will provide the company with oil production growth for the next several years – a rarity among E&Ps of all sizes, especially small caps.
Analysis
Between MLP potential, oil production growth from the Diatomite, and exposure to our bullish outlook for oil prices, we believe Berry shares continue to offer investors several attractive potential avenues of value creation. Oil production is expected to be up 2,000 bpd in 2008 and we believe our estimates for yearend 2008 Diatomite volumes could be conservative. This offsets in our view a slightly slower production rampup in the Piceance Basin. We would view any reaction in Berry shares to volatility in Rockies gas – related to either production volumes or price realizations – as a strong buying opportunity given the MLP and oil-related catalysts we expect.
Implications
Berry trades at 6.9X 2008E EV/DACF, a slight premium to other small and mid-cap E&Ps. We believe Berry can achieve further multiple expansion given its strong catalysts and oil price exposure. While Berry shares have rallied in the past month, we continue to see 23% upside to our discounted cash flow based $50 target price. Depending on how aggressively Berry pursues an MLP, we believe our target price could ultimately prove conservative, and we see the potential for a theoretical breakup value for Berry shares of $58 per share, 43% above current levels. |
