Berry Petroleum (BRY): Lowering rating to Neutral from Buy on more balanced risk/reward - Goldman Sachs - 11/01/07
What happened
We are lowering our rating on Berry Petroleum to Neutral from Buy based on the shares’ strong recent absolute and relative performance and consequently more balanced risk/reward versus other E&Ps. Since being added to the Americas Buy List on June 11, 2007, Berry shares are up 28% versus 2.7% for the S&P 500 and 14% for E&Ps we cover. Over the last 12 months, shares have risen 63.2% vs a 12.4% rise for the S&P 500.
Current view
We continue to favorably view Berry’s significant crude oil exposure and visible production growth opportunities, and expect the shares to continue performing well on an absolute basis. Underpinned by better than expected results from the company’s key Diatomite drilling program in California, we believe Berry can grow oil production at a 10% CAGR through at least 2010. At this point, we believe the Street is beginning to better understand the Diatomite opportunity and it is to some degree reflected in Berry’s share price. We expect continued noisy results from the Piceance Basin as Berry fine-tunes its drilling techniques there. Berry shares trade at 8.0X 2008E EV/DACF, a premium to the small-cap E&P average of 6.9X. We believe this premium is justified by Berry’s strong returns, visible production growth, and oil exposure. We see 9% upside for Berry shares to our $53 12-month target price, slightly below the 13% we see for E&Ps. Our target price is based on a discounted cash flow analysis of proved reserves and select unbooked resources; the key risks are commodity price volatility, drilling results, and government pronouncements. In general, we believe Berry shares have been revalued based on the key catalysts we highlighted when we upgraded the shares on June 11. Given the shares’ recent strong outperformance, we believe profit taking is warranted. |
