Berry Petroleum (BRY): Execution and deal flow are key catalysts for 2008 - Goldman Sachs - February 15, 2008
What's changed
Berry reported adjusted 4Q 2007 EPS of $0.66 versus our estimate of $0.76. Production of 28.0 MBOE/d was slightly below our estimate of 28.3 MBOE/d. Operating cash flow of $77 million was above our estimate of $70 million as depreciation expense was above expectations. Unit operating costs were $33.46 per BOE versus our estimate of $29.77 per BOE. Management released production guidance for 2008 of 29.5 – 30.5 MBOE/d versus our estimate of 31.1 MBOE/d. We have updated our 2008-2010 EPS estimates to reflect revisions to our assumptions for production, realized commodity prices, unit costs, and minor other adjustments.
Implications
Berry’s 4Q results and operational update were generally in line with our expectations and neutral for the shares, in our view. Key drivers of the shares in coming months are execution in the Diatomite and Piceance Basin assets as well as potential acquisition activity, which management indicated on the conference call is possible. Operationally, the Diatomite appears to be on track, with steam oil ratios averaging 5 to 1, a strong performance that is better than management’s original guidance of 6 to 1. We continue to believe that Berry’s rare position among E&Ps of being able to visibly grow domestic crude oil production should allow the shares to perform well. However, we see either even more attractive risk/reward or greater exposure to our bullish natural gas view in our Buy rated top picks. We rate Berry Neutral relative to an Attractive coverage view.
Valuation
Berry shares trade 6.7X 2008E enterprise value/debt-adjusted cash flow, a slight discount to the small-cap E&P peer group average of 6.9X. We see 25% upside to our $50 DCF-based 12-month target price vs. 20% for E&Ps.
Key risks
Commodity price volatility, drilling results, cost pressures, and government pronouncements. |
