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Berry Petroleum (BRY)

Q3 2012 Earnings Call

November 01, 2012 12:00 pm ET


Robert F. Heinemann - Chief Executive Officer, President and Director

David D. Wolf - Chief Financial Officer and Executive Vice President

Michael Duginski - Chief Operating Officer, Executive Vice President and Assistant Secretary


Brian M. Corales - Howard Weil Incorporated, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division



Good day, ladies and gentlemen, and welcome to the Berry Petroleum Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Bob Heinemann, President and Chief Executive Officer. Sir, you may begin.

Robert F. Heinemann

Thank you, and welcome to our call. And let me begin by reminding you we'll conduct it under Safe Harbor. Michael Duginski, our COO; and David Wolf, our CFO, are with me today. They will make operational and financial comments after my opening remarks.

As we've been stating since 2010, our strategy at Berry is simply to focus our resources on growing production from our oil assets, and our third quarter results for 2012 reflect the implementation of this strategy. The company produced 27,500 barrels of oil per day, which represented 5% quarter-on-quarter growth in oil production, with solid increases from all 4 of our development assets. Diatomite led the way with an 18% increase over Q2. Our New Steam Floods grew 10%, our Permian production increased 6% and the Uinta delivered 5% growth.

Total production for the quarter was 36,300 BOE per day, up 3% sequentially, and this includes a 3% decline in natural gas production. Our mix was 76% oil and 24% gas for the quarter, and our overall operating margin was $47 a barrel. These results enabled the company to generate $125 million of discretionary cash flow, while net cash from operating activities totaled $144 million.

Our reported net income was $18 million, which included nonrecurring items of $21 million. Excluding these, adjusted net earnings for Q3 were $39 million or $0.71 per share. Oil and gas revenues were $233 million.

You may recall from our Q3 earnings call last year, we discussed the need to redesign our development plan for our Diatomite resource based on the performance of the reservoir, new regulations from California and the rate of regular well failures that we were likely to incur under those regulations. Today, I would like to provide you an update on our progress. Diatomite production for Q3 was 3,500 barrels of oil per day compared to 2,960 in Q2 and 2,700 in the first quarter this year. Our goal for the asset is to deliver reliable, steady growth for the company over the next several quarters. To accomplish this goal, we're focused on 3 things: first, reducing our well failures by using smaller steam injection volumes with more frequent cycling. Compared to the summer of 2011, we have cut our steam injection volumes into a Diatomite well by roughly a factor of 3 by doubling the frequency of cycling. As a result of this change, reservoir dilation or reservoir expansion is now about 60% lower than in July of 2011, and we have experienced no wellbore failures in our 2012 wells. It also appears this approach is generating the pressure and temperature in the reservoir needed for heavy oil production in the Diatomite.

Second, we're focused on developing the asset in a more continuous manner. We need to implement a more flexible development plan as motivated as to accelerate capital investment in our infrastructure so that we can develop any part of the field without project management constraints or delays. This acceleration has increased our 2012 capital, which is now expected to be approximately $675 million. We've also worked closely with our engineering and drilling partners to develop the ability to drill wells near areas that may contain active steam. We have begun testing this concept in October and are optimistic that this will eliminate the need to reduce injection in neighboring areas as we drill new wells or replacement wells.

Third, we're improving the reliability of our operations from increased reservoir surveillance and well testing. Our people have worked diligently to improve our real-time surveillance in the field. The objective here is to have the capability to monitor the zonal isolation of our steam injection to measure the productivity of all of our wells and to monitor their integrity.

Of course, when you're altering your development plan in real-time, you also discover concepts do not work. For example, during the third quarter, we tested the use of low temperature injection in a portion of the field. This caused an increase in the production of formation solids that resulted in a temporary processing outage and a decrease in oil production in September. We have since gone back to higher temperature steam, and production has rebounded nicely. We do not expect this event to be repeated.

Overall, we believe our redesign development plan will enhance the long-term net asset value of the Diatomite. The use of high-frequency cycling, continuous development and improved surveillance are also encouraging us to take an earlier look at the potential of infill drilling.

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