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Berry Petroleum Co. (BRY)

Q4 2008 Earnings Call

February 25, 2009 3:00 pm ET

Executives

Robert F. Heinemann – President and Chief Executive Officer

Michael Duginski – Chief Operating Officer

David D. Wolf – Chief Financial Officer

Analysts

David Tameron – Wachovia Capital Markets

Brian Singer – Goldman Sachs

Mike Jacobs – Tudor, Pickering, Holt & Co.

Philip McPherson – Global Hunter Securities

[Rocky Rasley] – Vaquero Energy

Gregg Boddy – JP Morgan

Duane Grubert – CRT Capital

Presentation

Operator

Welcome to the fourth quarter 2008 Berry Petroleum Company earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today’s call, Mr. Bob Heinemann, President and CEO. Please proceed, sir.

Robert F. Heinemann

I’d like to remind everyone we are conducting this call under Safe Harbor provisions. Joining me today are Michael Duginski our Chief Operating Officer, and David Wolf our Chief Financial Officer.

Today, Berry Petroleum has posted its 2008 results. The company earned $134 million of net income or $2.94 a share. This result is 3% higher than last year’s number of $130 million or $2.89 a share. The full year results for 2008 include a $12 million loss in the fourth quarter due to a $38.5 million write-off of receivables from the bankruptcy of Bay West of California, a subsidiary of Flying J Incorporated.

We also wrote off certain rig related charges and dry hole expense in the fourth quarter. For the full year 2008, these write-offs reduced our net income by approximately $25 million or $0.56 a share. The Flying J bankruptcy accounted for about 85% of this loss.

Overall, 2008 was another year of growth for Berry. Our operating cash flow increased by 71% to $410 million supported by the commodity prices of last year and due to the company’s production growth. Production averaged right at 32,000 barrels a day supported by increases from the developments in our diatomite, Poso Creek and Piceance assets, as well as the east Texas acquisition.

Obviously, our proved reserves of the third leg of the growth story from last year. Proved reserves increased 45% to 246 million barrels and we replaced 756% of the 11.7 million barrels equivalent produced last year. The oil and F&D cost, including the East Texas acquisition, was $12.30 a barrel. Our proved reserves now stand at 51% oil and 49% natural gas, 55% of the proved reserves are classified as proved developed. The reserve to production ratio increased to 19 years.

Before asking Michael and David to provide you with additional operational and financial details, I’d like to make a few comments about the forward outlook in Berry. In the second half of last year we experienced a sharp drop in commodity prices, the anticipation of a significant California severance tax on production, as well as the retraction of credit markets as part of the global financial crisis.

While a number of these are beyond our control, we’ve been very focused on addressing those issues that we can proactively influence to put the company on a firm financial footing. I’d like to point out six things that we’ve done.

We reduced our activity sharply late last year in expectation of the commodity downturn. We also focused very early on cost reductions because of the impact on year end reserves. We’re now targeting a 20% to 25% reduction in operating capital and G&A costs compared to 2008.

Secondly, we marketed our crude successfully in January and February and now into March under short-term agreements with a variety of refiners in California. These agreements are based on the differential between the posted price for San Joaquin, heavy oil and West Texas Intermediate. That differential has decreased to less than $8.00 today.

Thirdly, we hedged 90% of our crude production for 2009 such as if WTI averages $40 a barrel, the company will realize $65.50 a barrel. These hedging levels and realizations make the recent decline in the heavy oil differential even more important to our cash flow projections.

Fourth, we amended our credit facility to ensure that we would not violate the covenants under that facility. While this was described in an 8-K filing last week, I want to emphasize that this amendment was entirely due to the Flying J bankruptcy. It would have not been needed if that event had not transpired.

Fifth, we locked in LIBOR rates through 2012 in the 2% range using interest rate hedges and swaps. And then lastly, we’ve developed a 2009 capital program that invests in our higher return projects, balances expenditures to be within cash flow, and produces over 32,000 barrels a day.

Now, while we’re pleased with the progress on cost reductions, true to our marketing hedging amendments in 2009 that we’ve made in a relatively short period of time we are pursuing additional steps that we believe will improve the company.

With that, let me know turn the call over to David Wolf who will provide more detail on our financial results.

David D. Wolf

First I’ll go over the full year 2008 results, a four quarter review and then walk through some of our 2009 guidance. The full year 2008 oil and gas revenues were $698 million, oil revenues comprised $519 million, and gas revenues $179 million.

Total revenues, including electricity sales, gas marketing and other items were just over $800 million. As Bob highlighted, our net income was $134 million or $2.94 per diluted share. Our oil prices per barrel after hedging for 2008 was approximately $70, our gas price after hedging was $7. This gave us an average BOE price after hedging of $59.81.

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