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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2020
OR
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☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______________ to _______________
Commission file number 001-38606
Berry Corporation (bry)
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware (State of incorporation or organization) | | 81-5410470 (I.R.S. Employer Identification Number) |
16000 Dallas Parkway, Suite 500
Dallas, Texas 75248
(661) 616-3900
(Address of principal executive offices, including zip code
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class Common Stock, par value $0.001 per share | Trading Symbol BRY | Name of each exchange on which registered Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ | | Accelerated filer ☐ | | Non-accelerated filer ☒ | | Smaller reporting company ☐ |
Emerging Growth Company ☒ | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Shares of common stock outstanding as of July 31, 2020 79,870,874
Table of Contents
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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The financial information and certain other information presented in this report have been rounded to the nearest whole number or the nearest decimal. Therefore, the sum of the numbers in a column may not conform exactly to the total figure given for that column in certain tables in this report. In addition, certain percentages presented in this report reflect calculations based upon the underlying information prior to rounding and, accordingly, may not conform exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers, or may not sum due to rounding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| June 30, 2020 | | December 31, 2019 |
| (in thousands, except share amounts) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | — | | | $ | — | |
Accounts receivable, net of allowance for doubtful accounts of $2,303 at June 30, 2020 and $1,103 at December 31, 2019 | 48,880 | | | 71,867 | |
Derivative instruments | 84,681 | | | 9,166 | |
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Other current assets | 23,041 | | | 19,399 | |
Total current assets | 156,602 | | | 100,432 | |
Noncurrent assets: | | | |
Oil and natural gas properties | 1,383,672 | | | 1,675,717 | |
Accumulated depletion and amortization | (179,570) | | | (209,105) | |
Total oil and natural gas properties, net | 1,204,102 | | | 1,466,612 | |
Other property and equipment | 111,275 | | | 135,117 | |
Accumulated depreciation | (26,533) | | | (25,462) | |
Total other property and equipment, net | 84,742 | | | 109,655 | |
Derivative instruments | 5,268 | | | 525 | |
Other noncurrent assets | 9,788 | | | 12,974 | |
Total assets | $ | 1,460,502 | | | $ | 1,690,198 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 94,687 | | | $ | 151,811 | |
Derivative instruments | — | | | 4,817 | |
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Total current liabilities | 94,687 | | | 156,628 | |
Noncurrent liabilities: | | | |
Long-term debt | 394,262 | | | 394,319 | |
Derivative instruments | 366 | | | 141 | |
Deferred income taxes | 12,208 | | | 9,057 | |
Asset retirement obligation | 137,800 | | | 124,019 | |
Other noncurrent liabilities | 31,664 | | | 33,586 | |
Commitments and Contingencies - Note 4 | | | |
Equity: | | | |
Common stock ($0.001 par value; 750,000,000 shares authorized; 84,983,120 and 84,655,222 shares issued; and 79,870,874 and 79,542,976 shares outstanding, at June 30, 2020 and December 31, 2019, respectively) | 85 | | | 85 | |
Additional paid-in-capital | 908,662 | | | 901,830 | |
Treasury stock, at cost, (5,112,246 shares at June 30, 2020 and at December 31, 2019) | (49,995) | | | (49,995) | |
(Deficit) retained earnings | (69,237) | | | 120,528 | |
Total equity | 789,515 | | | 972,448 | |
Total liabilities and equity | $ | 1,460,502 | | | $ | 1,690,198 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands, except per share amounts) | | | | | | |
Revenues and other: | | | | | | | |
Oil, natural gas and natural gas liquids sales | $ | 70,515 | | | $ | 136,908 | | | $ | 192,613 | | | $ | 268,010 | |
Electricity sales | 4,884 | | | 5,364 | | | 10,345 | | | 15,093 | |
(Losses) gains on oil derivatives | (42,267) | | | 27,276 | | | 168,962 | | | (37,963) | |
Marketing revenues | 292 | | | 414 | | | 745 | | | 1,244 | |
Other revenues | 29 | | | 104 | | | 53 | | | 221 | |
Total revenues and other | 33,453 | | | 170,066 | | | 372,718 | | | 246,605 | |
Expenses and other: | | | | | | | |
Lease operating expenses | 40,733 | | | 47,879 | | | 91,485 | | | 105,807 | |
Electricity generation expenses | 3,022 | | | 3,164 | | | 6,968 | | | 10,924 | |
Transportation expenses | 1,789 | | | 1,694 | | | 3,611 | | | 3,867 | |
Marketing expenses | 280 | | | 421 | | | 710 | | | 1,272 | |
General and administrative expenses | 18,777 | | | 16,158 | | | 38,114 | | | 30,498 | |
Depreciation, depletion, and amortization | 37,512 | | | 23,654 | | | 72,841 | | | 48,240 | |
Impairment of oil and gas properties | — | | | — | | | 289,085 | | | — | |
Taxes, other than income taxes | 10,449 | | | 11,348 | | | 14,801 | | | 19,434 | |
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Losses on natural gas derivatives | 925 | | | 9,449 | | | 12,960 | | | 7,334 | |
Other operating (income) expenses | (1,192) | | | 3,119 | | | 1,010 | | | 4,364 | |
Total expenses and other | 112,295 | | | 116,886 | | | 531,585 | | | 231,740 | |
Other (expenses) income: | | | | | | | |
Interest expense | (8,676) | | | (8,961) | | | (17,596) | | | (17,766) | |
Other, net | (6) | | | — | | | (12) | | | 155 | |
Total other (expenses) income | (8,682) | | | (8,961) | | | (17,608) | | | (17,611) | |
Reorganization items, net | — | | | (26) | | | — | | | (257) | |
(Loss) income before income taxes | (87,524) | | | 44,193 | | | (176,475) | | | (3,003) | |
Income tax (benefit) expense | (22,623) | | | 12,221 | | | 3,726 | | | (877) | |
Net (loss) income | $ | (64,901) | | | $ | 31,972 | | | $ | (180,201) | | | $ | (2,126) | |
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Net (loss) income per share: | | | | | | | |
Basic | $ | (0.81) | | | $ | 0.39 | | | $ | (2.26) | | | $ | (0.03) | |
Diluted | $ | (0.81) | | | $ | 0.39 | | | $ | (2.26) | | | $ | (0.03) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
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| Six-Month Period Ended June 30, 2019 | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Total Equity |
| (in thousands) | | | | | | | | |
December 31, 2018 | $ | 82 | | | $ | 914,540 | | | $ | (24,218) | | | $ | 116,042 | | | $ | 1,006,446 | |
| | | | | | | | | |
Shares withheld for payment of taxes on equity awards and other | — | | | (270) | | | — | | | — | | | (270) | |
Stock based compensation | — | | | 1,498 | | | — | | | — | | | 1,498 | |
Purchases of treasury stock | — | | | — | | | (24,375) | | | — | | | (24,375) | |
Purchase of rights to common stock(1) | — | | | (20,265) | | | 20,265 | | | — | | | — | |
Common stock issued to settle unsecured claims | 3 | | | (3) | | | — | | | — | | | — | |
Dividends declared on common stock, $0.12/share | — | | | — | | | — | | | (10,072) | | | (10,072) | |
Net loss | — | | | — | | | — | | | (34,098) | | | (34,098) | |
March 31, 2019 | 85 | | | 895,500 | | | (28,328) | | | 71,872 | | | 939,129 | |
Shares withheld for payment of taxes on equity awards and other | — | | | (675) | | | — | | | — | | | (675) | |
Stock based compensation | — | | | 2,497 | | | — | | | — | | | 2,497 | |
Purchases of treasury stock | — | | | — | | | (10,897) | | | — | | | (10,897) | |
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Dividends declared on common stock, $0.12/share | — | | | — | | | — | | | (9,710) | | | (9,710) | |
Net income | — | | | — | | | — | | | 31,972 | | | 31,972 | |
June 30, 2019 | $ | 85 | | | $ | 897,322 | | | $ | (39,225) | | | $ | 94,134 | | | $ | 952,316 | |
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| Six-Month Period Ended June 30, 2020 | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | (Deficit) Retained Earnings | | Total Equity |
| (in thousands) | | | | | | | | |
December 31, 2019 | $ | 85 | | | $ | 901,830 | | | $ | (49,995) | | | $ | 120,528 | | | $ | 972,448 | |
| | | | | | | | | |
Shares withheld for payment of taxes on equity awards and other | — | | | (794) | | | — | | | — | | | (794) | |
Stock based compensation | — | | | 3,036 | | | — | | | — | | | 3,036 | |
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Dividends declared on common stock, $0.12/share | — | | | — | | | — | | | (9,564) | | | (9,564) | |
Net loss | — | | | — | | | — | | | (115,300) | | | (115,300) | |
March 31, 2020 | 85 | | | 904,072 | | | (49,995) | | | (4,336) | | | 849,826 | |
Shares withheld for payment of taxes on equity awards and other | — | | | (140) | | | — | | | — | | | (140) | |
Stock based compensation | — | | | 4,730 | | | — | | | — | | | 4,730 | |
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Net loss | — | | | — | | | — | | | (64,901) | | | (64,901) | |
June 30, 2020 | $ | 85 | | | $ | 908,662 | | | $ | (49,995) | | | $ | (69,237) | | | $ | 789,515 | |
__________
(1) In 2018, we entered into several settlement agreements with general unsecured creditors from our bankruptcy process. We paid approximately $20 million to purchase their claims to our common stock. These claims were settled in February 2019 with no shares issued.
The accompanying notes are an integral part of these condensed consolidated financial statements.
BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| (in thousands) | | |
Cash flows from operating activities: | | | |
Net loss | $ | (180,201) | | | $ | (2,126) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation, depletion and amortization | 72,841 | | | 48,240 | |
Amortization of debt issuance costs | 2,681 | | | 2,517 | |
Impairment of oil and gas properties | 289,085 | | | — | |
Stock-based compensation expense | 7,501 | | | 3,918 | |
Deferred income taxes | 2,750 | | | (877) | |
Increase in allowance for doubtful accounts | 1,200 | | | 427 | |
Other operating expenses | 317 | | | 395 | |
| | | |
Derivative activities: | | | |
Total (gains) losses | (156,002) | | | 45,297 | |
Cash settlements on derivatives | 71,499 | | | 11,578 | |
| | | |
Changes in assets and liabilities: | | | |
Decrease in accounts receivable | 21,802 | | | 2,108 | |
Increase in other assets | (3,642) | | | (8,001) | |
Decrease in accounts payable and accrued expenses | (32,102) | | | (8,319) | |
(Decrease) increase in other liabilities | (11,307) | | | 336 | |
Net cash provided by operating activities | 86,422 | | | 95,493 | |
| | | |
Cash flows from investing activities: | | | |
Capital expenditures: | | | |
Development of oil and natural gas properties | (52,988) | | | (94,966) | |
Purchases of other property and equipment | (3,415) | | | (9,190) | |
Changes in capital investment accruals | (7,256) | | | (5,592) | |
| | | |
Acquisition of properties and equipment and other | (2,076) | | | (2,689) | |
Proceeds from sale of property and equipment and other | 217 | | | 38 | |
| | | |
Net cash used in investing activities | (65,518) | | | (112,399) | |
| | | |
Cash flows from financing activities: | | | |
Borrowings under RBL credit facility | 222,550 | | | 123,400 | |
Repayments on RBL credit facility | (223,100) | | | (118,200) | |
| | | |
Dividends paid on common stock | (19,420) | | | (19,662) | |
Purchase of treasury stock | — | | | (36,139) | |
Shares withheld for payment of taxes on equity awards and other | (934) | | | (946) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net cash used in financing activities | (20,904) | | | (51,547) | |
Net increase (decrease) in cash and cash equivalents | — | | | (68,453) | |
Cash and cash equivalents: | | | |
Beginning | — | | | 68,680 | |
Ending | $ | — | | | $ | 227 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1—Basis of Presentation
“Berry Corp.” refers to Berry Corporation (bry), a Delaware corporation, which is the sole member of Berry Petroleum Company, LLC ("Berry LLC").
As the context may require, the “Company”, “we”, “our” or similar words refer to (i) Berry Corp. and Berry LLC, its consolidated subsidiary, as a whole or (ii) either Berry Corp. or Berry LLC.
Nature of Business
Berry Corp. is an independent oil and natural gas company that was incorporated under Delaware law in February 2017 and its common stock began trading on NASDAQ under the symbol "bry" in July 2018. Berry Corp. operates through its wholly-owned subsidiary, Berry LLC. Our properties are located onshore in the United States (the “U.S.”), in California (in the San Joaquin and Ventura basins), Utah (in the Uinta basin), and Colorado (in the Piceance basin).
Principles of Consolidation and Reporting
The condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In management’s opinion, the accompanying financial statements contain all normal, recurring adjustments that are necessary to fairly present our interim unaudited condensed consolidated financial statements. We eliminated all significant intercompany transactions and balances upon consolidation. For oil and gas exploration and production joint ventures in which we have a direct working interest, we account for our proportionate share of assets, liabilities, revenue, expense and cash flows within the relevant lines of the financial statements.
We prepared this report pursuant to the rules and regulations of the U.S. Security and Exchange Commission (“SEC”) applicable to interim financial information, which permit the omission of certain disclosures to the extent they have not changed materially since the latest annual financial statements. We believe our disclosures are adequate to make the disclosed information not misleading. The results reported in these unaudited condensed consolidated financial statements may not accurately forecast results for future periods. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2019.
Reclassification
We reclassified certain prior year amounts in the cash flow statements to conform to the current year presentation. These reclassifications had no material impact on the financial statements.
New Accounting Standards Issued, But Not Yet Adopted
In February 2016, the FASB issued rules requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months and to include qualitative and quantitative disclosures with respect to the amount, timing, and uncertainty of cash flows arising from leases. As an emerging growth company, we have elected to delay the adoption of these rules until they are applicable to non-SEC issuers. During the second quarter of 2020, this adoption date was further delayed by FASB until fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We are currently identifying our lease population in accordance with the new lease standard. We expect the adoption of these rules to increase other assets and other liabilities on our balance sheet and we are currently evaluating the impact on our consolidated results of operations.
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In December 2019, the FASB issued rules which simplify the accounting for income taxes. As an emerging growth company, we have elected to delay the adoption of these rules until they are applicable to non-SEC issuers which is for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We are currently evaluating the impact of these rules on our consolidated financial statements.
In March 2020, the FASB issued rules providing optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the reference rate reform, if certain criteria are met. The optional expedient for contract modifications applies to contract modifications that replace a reference rate affected by the reference rate reform, such as the London Interbank Offered Rate (“LIBOR”). Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. We are currently evaluating the impact of these rules on our consolidated financial statements.
Note 2—Debt
The following table summarizes our outstanding debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | Interest Rate | | Maturity | | Security |
| (in thousands) | | | | | | | | |
RBL Facility | $ | 1,300 | | | $ | 1,850 | | | variable rates 4.0% (2020) and 5.5% (2019), respectively | | July 29, 2022 | | Mortgage on 85% of Present Value of proven oil and gas reserves and lien on other assets |
2026 Notes | 400,000 | | | 400,000 | | | 7.0% | | February 15, 2026 | | Unsecured |
Long-Term Debt - Principal Amount | 401,300 | | | 401,850 | | | | | | | |
Less: Debt Issuance Costs | (7,038) | | | (7,531) | | | | | | | |
Long-Term Debt, net | $ | 394,262 | | | $ | 394,319 | | | | | | | |
Deferred Financing Costs
We incurred legal and bank fees related to the issuance of debt. At June 30, 2020 and December 31, 2019, debt issuance costs for the RBL Facility (as defined below) reported in “other noncurrent assets” on the balance sheet were approximately $9 million and $11 million net of amortization, respectively. At June 30, 2020 and December 31, 2019, debt issuance costs, net of amortization, for the unsecured notes due February 2026 (the “2026 Notes”) reported in Long-Term Debt, net were approximately $7 million and $8 million, respectively.
For each of the three month periods ended June 30, 2020 and June 30, 2019, the amortization expense for both the RBL Facility and 2026 Notes was approximately $1 million and was included in “interest expense” in the condensed consolidated statements of operations. For each of the six month periods ended June 30, 2020 and June 30, 2019, the amortization expense for both the RBL Facility and 2026 Notes was approximately $3 million.
Fair Value
Our debt is recorded at the carrying amount on the balance sheets. The carrying amount of the RBL Facility approximates fair value because the interest rates are variable and reflect market rates. The fair value of the 2026 Notes was approximately $320 million and $376 million at June 30, 2020 and December 31, 2019, respectively.
The RBL Facility
On July 31, 2017, we entered into a credit agreement that provided for a revolving loan with up to $1.5 billion of commitment, subject to a reserve borrowing base (“RBL Facility”). In June 2020, we completed our scheduled
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
semi-annual borrowing base redetermination under our RBL Facility, which resulted in a decrease to the borrowing base to $200 million from $500 million; decrease to the elected commitments to $200 million from $400 million; limitation on the maximum borrowing availability under the RBL Facility to $150 million until the next semi annual borrowing base redetermination (scheduled to occur on or about November 1, 2020); the implementation of certain anti-cash hoarding provisions, including the requirement to repay outstanding loans on a weekly basis in the amount of any cash on the balance sheet (subject to certain exceptions) in excess of $30 million; and further limits dividends and share repurchases. The RBL Facility matures on July 29, 2022, unless terminated earlier in accordance with the RBL Facility terms. Borrowing base redeterminations generally become effective each May and November, although each of us and the administrative agent may make one interim redetermination between scheduled redeterminations.
The RBL Facility contains customary events of default and remedies for credit facilities of a similar nature. If we do not comply with the financial and other covenants in the RBL Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the RBL Facility and exercise all of their other rights and remedies, including foreclosure on all of the collateral.
The RBL Facility requires us to maintain on a consolidated basis as of each quarter-end (i) a Leverage Ratio of no more than 4.0 to 1.0 and (ii) a Current Ratio of at least 1.0 to 1.0. The RBL Facility also contains customary restrictions. As of June 30, 2020, our Leverage Ratio and Current Ratio were 1.4 to 1.0 and 2.3 to 1.0, respectively. In addition, the RBL Facility currently provides that to the extent we incur unsecured indebtedness, including any amounts raised in the future, the borrowing base will be reduced by an amount equal to 25% of the amount of such unsecured debt. We were in compliance with all financial covenants under the RBL Facility as of June 30, 2020.
As of June 30, 2020, we had approximately $1 million in borrowings outstanding, $7 million in letters of credit outstanding, and approximately $142 million of available borrowings capacity under the RBL Facility.
Bond Repurchase Program
In February 2020, our Board of Directors adopted a program to spend up to $75 million for the opportunistic repurchase of our 2026 Notes. The manner, timing and amount of any purchases will be determined based on our evaluation of market conditions, compliance with outstanding agreements and other factors, may be commenced or suspended at any time without notice and does not obligate Berry Corp. to purchase the 2026 Notes during any period or at all. We have not yet repurchased any bonds under this program.
Corporate Organization
Berry Corp., as Berry LLC’s parent company, has no independent assets or operations. Any guarantees of potential future registered debt securities by Berry Corp. or Berry LLC would be full and unconditional. Berry Corp. and Berry LLC currently do not have any other subsidiaries. In addition, there are no significant restrictions upon the ability of Berry LLC to distribute funds to Berry Corp. by distribution or loan other than under the RBL Facility. None of the assets of Berry Corp. or Berry LLC represent restricted net assets.
The RBL Facility permits Berry LLC to make distributions to Berry Corp. so long as both before and after giving pro forma effect to such distribution no default or borrowing base deficiency exists, availability equals or exceeds 20% of the then effective borrowing base, and Berry Corp. demonstrates a pro forma leverage ratio less than or equal to 2.5 to 1.0. The conditions are currently met with significant margin.
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3—Derivatives
We utilize derivatives, such as swaps, puts and calls, to hedge a portion of our forecasted oil production and gas purchases to reduce exposure to fluctuations in oil and natural gas prices, which addresses our market risk. We target covering our operating expenses and a majority of our fixed charges, including capital for sustained production levels, interest and dividends, with the oil hedges for a period of up to two years out. Additionally, we target fixing the price for a large portion of our natural gas purchases used in our steam operations for up to two years. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations, which we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions.
For fixed-price oil swaps, we make settlement payments for prices above the indicated weighted-average price per barrel of Brent and receive settlement payments for prices below the indicated weighted-average price per barrel of Brent.
For our purchased oil calls, we would receive settlement payments for prices above the indicated weighted-average price per barrel of Brent.
For fixed-price gas purchase swaps, we are the buyer so we make settlement payments for prices below the weighted-average price per MMBtu and receive settlement payments for prices above the weighted-average price per MMBtu.
We use oil swaps and puts to protect against decreases in the oil price and natural gas swaps to protect against increases in natural gas prices. We do not enter into derivative contracts for speculative trading purposes and have not accounted for our derivatives as cash-flow or fair-value hedges. The changes in fair value of these instruments are recorded in current earnings. (Gains) losses on oil hedges are classified in the revenues and other section of the statement.
As of June 30, 2020, we had the following crude oil production and gas purchases hedges.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Q3 2020 | | Q4 2020 | | FY 2021 |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Fixed Price Oil Swaps (Brent): | | | | | | | | | |
Hedged volume (MBbls) | | | | | 2,208 | | | 2,208 | | | 4,678 | |
Weighted-average price ($/Bbl) | | | | | $ | 59.85 | | | $ | 59.85 | | | $ | 45.99 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Purchased Oil Calls Options (Brent): | | | | | | | | | |
Hedged volume (MBbls) | | | | | 276 | | | 276 | | | — | |
Weighted-average price ($/Bbl) | | | | | $ | 65.00 | | | $ | 65.00 | | | $ | — | |
Fixed Price Gas Purchase Swaps (Kern, Delivered): | | | | | | | | | |
Hedged volume (MMBtu) | | | | | 5,060,000 | | | 5,060,000 | | | 14,580,000 | |
Weighted-average price ($/MMBtu) | | | | | $ | 2.89 | | | $ | 2.76 | | | $ | 2.72 | |
Fixed Price Gas Purchase Swaps (SoCal Citygate): | | | | | | | | | |
Hedged volume (MMBtu) | | | | | 460,000 | | | 155,000 | | | — | |
Weighted-average price ($/MMBtu) | | | | | $ | 3.80 | | | $ | 3.80 | | | $ | — | |
In July 2020, we added fixed price oil swaps (Brent) of 4,663 Bbls/d at nearly $46 beginning January through June 2021.
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our commodity derivatives are measured at fair value using industry-standard models with various inputs including publicly available underlying commodity prices and forward curves, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. These commodity derivatives are subject to counterparty netting. The following tables present the fair values (gross and net) of our outstanding derivatives as of June 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | |
| Balance Sheet Classification | | Gross Amounts Recognized at Fair Value | | Gross Amounts Offset in the Balance Sheet | | Net Fair Value Presented on the Balance Sheet |
| (in thousands) | | | | | | |
Assets: | | | | | | | |
Commodity Contracts | Current assets | | $ | 92,943 | | | $ | (8,262) | | | $ | 84,681 | |
Commodity Contracts | Non-current assets | | 6,341 | | | (1,073) | | | 5,268 | |
Liabilities: | | | | | | | |
Commodity Contracts | Current liabilities | | (8,262) | | | 8,262 | | | — | |
Commodity Contracts | Non-current liabilities | | (1,439) | | | 1,073 | | | (366) | |
Total derivatives | | | $ | 89,583 | | | $ | — | | | $ | 89,583 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| December 31, 2019 | | | | | | |
| Balance Sheet Classification | | Gross Amounts Recognized at Fair Value | | Gross Amounts Offset in the Balance Sheet | | Net Fair Value Presented on the Balance Sheet |
| (in thousands) | | | | | | |
Assets: | | | | | | | |
Commodity Contracts | Current assets | | $ | 17,799 | | | $ | (8,633) | | | $ | 9,166 | |
Commodity Contracts | Non-current assets | | 773 | | | (248) | | | 525 | |
Liabilities: | | | | | | | |
Commodity Contracts | Current liabilities | | (13,450) | | | 8,633 | | | (4,817) | |
Commodity Contracts | Non-current liabilities | | (389) | | | 248 | | | (141) | |
Total derivatives | | | $ | 4,733 | | | $ | — | | | $ | 4,733 | |
By using derivative instruments to economically hedge exposure to changes in commodity prices, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk. We do not receive collateral from our counterparties.
We minimize the credit risk in derivative instruments by limiting our exposure to any single counterparty. In addition, our RBL Facility prevents us from entering into hedging arrangements that are secured, except with our lenders and their affiliates that have margin call requirements, that otherwise require us to provide collateral or with a non-lender counterparty that does not have an A- or A3 credit rating or better from Standards & Poor’s or Moody’s, respectively. In accordance with our standard practice, our commodity derivatives are subject to counterparty netting under agreements governing such derivatives which partially mitigates the counterparty nonperformance risk.
Note 4—Lawsuits, Claims, Commitments and Contingencies
In the normal course of business, we, or our subsidiary, are subject to lawsuits, environmental and other claims and other contingencies that seek, or may seek, among other things, compensation for alleged personal injury,
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief.
We accrue reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. We have not recorded any reserve balances at June 30, 2020 and December 31, 2019. We also evaluate the amount of reasonably possible losses that we could incur as a result of these matters. We believe that reasonably possible losses that we could incur in excess of reserves accrued on our balance sheet would not be material to our consolidated financial position or results of operations.
We, or our subsidiary, or both, have indemnified various parties against specific liabilities those parties might incur in the future in connection with transactions that they have entered into with us. As of June 30, 2020, we are not aware of material indemnity claims pending or threatened against us.
We have certain commitments under contracts, including purchase commitments for goods and services. We previously entered a Carry and Earning Agreement with Encana in connection with our Piceance assets which, among other things, required us to either build a road or secure a license for alternative access, in lieu of paying a $6 million penalty. As of December 31, 2019, we fulfilled the obligation by delivering the access license pursuant to the agreement. Caerus Piceance LLC, the successor of Encana's interests, has since filed a claim in the City and County of Denver District Court challenging the sufficiency of such access, which we dispute. We will defend the matter vigorously, however, given the uncertainty of litigation and the preliminary stage of the case, among other things, at this time we cannot estimate the reasonable possible loss, if any, that may result from this action.
Note 5—Equity
Cash Dividends
Our Board of Directors approved a $0.12 per share quarterly cash dividend on our common stock for the first quarter of 2020, which we paid in April 2020. In April 2020, in connection with the current low oil price environment, we temporarily suspended our quarterly dividend until oil prices recover.
Stock Repurchase Program
In December 2018, our Board of Directors adopted a program for the opportunistic repurchase of up to $100 million of our common stock. Based on the Board’s evaluation of market conditions for our common stock at that time, they authorized initial repurchases of up to $50 million under the program. In February 2020, the Board of Directors authorized the repurchase of the remaining $50 million of our $100 million repurchase program. However, largely due to the uncertainty resulting from the COVID-19 and oil price environment, no such repurchases have yet been made. Repurchases may be made from time to time in the open market, in privately negotiated transactions or by other means, as determined in the Company's sole discretion. The manner, timing and amount of any purchases will be determined based on our evaluation of market conditions, stock price, compliance with outstanding agreements and other factors, may be commenced or suspended at any time without notice and does not obligate Berry Corp. to purchase shares during any period or at all. Any shares acquired will be available for general corporate purposes. The Company repurchased a total of 5,057,682 shares under the stock repurchase program for approximately $50 million as of December 31, 2019. For the three and six months ended June 30, 2020, we did not repurchase any shares under the stock repurchase program.
Stock-Based Compensation
In March 2020, the Company granted awards of 1,817,656 shares of restricted stock units (“RSUs”), which will vest annually in equal amounts over three years and 1,278,877 performance-based restricted stock units (“PSUs”), which will cliff vest, if at all, at the end of a three year performance period subject to both an absolute total stockholder return (“Absolute TSR”) performance metric and a total stockholder return relative (“Relative TSR”)
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
performance metric, as further discussed and defined below. The fair value of these awards was approximately $32 million.
The RSUs awarded are solely time-based awards. The PSUs awarded include a market objective measured against both Absolute TSR and Relative TSR to the Vanguard World Fund - Vanguard Energy ETF index (the “Index”) over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the three-year performance period, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the PSUs granted.
The fair value of the PSUs was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company, including a comparison against the Index over the performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on blended historical average volatility rates for the Company and selected guideline public companies. The dividend yield assumption was based on the then current annualized declared dividend. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
Note 6—Supplemental Disclosures to the Financial Statements
Other current assets reported on the condensed consolidated balance sheets included the following:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| (in thousands) | | |
Prepaid expenses | $ | 7,199 | | | $ | 4,577 | |
| | | |
Materials and supplies | 11,807 | | | 10,544 | |
Oil inventories | 3,189 | | | 3,432 | |
Other | 846 | | | 846 | |
Total other current assets | $ | 23,041 | | | $ | 19,399 | |
Other non-current assets at June 30, 2020 and December 31, 2019, included approximately $9 million and $11 million of deferred financing costs, net of amortization, respectively.
Accounts payable and accrued expenses on the condensed consolidated balance sheets included the following:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| (in thousands) | | |
Accounts payable-trade | $ | 8,086 | | | $ | 13,986 | |
Accrued expenses | 40,211 | | | 57,078 | |
Royalties payable | 10,647 | | | 25,385 | |
| | | |
Taxes other than income tax liability | 9,586 | | | 9,150 | |
Accrued interest | 10,500 | | | 10,500 | |
Dividends payable | 32 | | | 9,888 | |
Asset retirement obligation - current portion | 13,700 | | | 25,208 | |
Other | 1,925 | | | 616 | |
Total accounts payable and accrued expenses | $ | 94,687 | | | $ | 151,811 | |
We reclassified certain accrued expenses to accounts payable trade accounts for the prior period to conform to the current year presentation. These reclassifications had no impact on the financial statements.
The increase in the long-term portion of the asset retirement obligation from $124 million at December 31, 2019 to $138 million at June 30, 2020 was due to $5 million of accretion, $6 million of liabilities incurred and
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
reclassification of $12 million from the current to long-term portion due to changes in anticipated spending and regulatory requirements. These increases were partially offset by $9 million of liabilities settled during the period.
Other non-current liabilities at June 30, 2020 and December 31, 2019 included approximately $31 million and $33 million of greenhouse gas liability, respectively.
Supplemental Information on the Statement of Operations
For the three months ended June 30, 2020 and 2019, other operating income was $1 million and other operating expenses were $3 million, respectively. These other operating (income) expenses mainly consist of refunds, partially offset by excess abandonment costs and drilling rig standby charges in 2020 and excess abandonment costs in 2019.
For the six months ended June 30, 2020 and 2019 other operating expenses was $1 million and $4 million, respectively. These other operating expenses mainly consist of excess abandonment costs and drilling rig standby charges, partially offset by refunds in 2020 and excess abandonment costs in 2019.
Supplemental Cash Flow Information
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
| | | | | | | | | | | |
| | | |
| | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| (in thousands) | | |
Supplemental Disclosures of Significant Non-Cash Investing Activities: | | | |
Material inventory transfers to oil and natural gas properties | $ | 911 | | | $ | 5,020 | |
Supplemental Disclosures of Cash Payments (Receipts): | | | |
Interest, net of amounts capitalized | $ | 15,527 | | | $ | 15,272 | |
Income taxes | $ | 2 | | | $ | — | |
| | | |
Cash and cash equivalents consist primarily of highly liquid investments with original maturities of three months or less and are stated at cost, which approximates fair value. As part of our cash management system, we use a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances, which amounts are immaterial for these periods, for accounting purposes in the accounts payable and accrued expenses account.
Note 7—Earnings Per Share
We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the three and six months ended June 30, 2020 which is approximately 80 million shares for both. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement, are considered common shares outstanding and are included in the computation of net income (loss) per share.
The RSUs and PSUs are not a participating security as the dividends are forfeitable. For the three months ended June 30, 2020, six months ended June 30, 2020 and six months ended June 30, 2019 no incremental RSUs or PSUs were included in the diluted EPS calculation as their effect was anti-dilutive under the “if converted” method. For the three months ended June 30, 2019, 164,000 incremental RSUs were included in the diluted EPS calculation and no incremental PSUs were included in the EPS calculation due to their contingent nature.
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands except per share amounts) | | | | | | |
Basic EPS calculation | | | | | | | |
Net (loss) income | $ | (64,901) | | | $ | 31,972 | | | $ | (180,201) | | | $ | (2,126) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average shares of common stock outstanding | 79,795 | | | 81,519 | | | 79,702 | | | 82,061 | |
Basic (loss) earnings per share | $ | (0.81) | | | $ | 0.39 | | | $ | (2.26) | | | $ | (0.03) | |
Diluted EPS calculation | | | | | | | |
Net (loss) income | $ | (64,901) | | | $ | 31,972 | | | $ | (180,201) | | | $ | (2,126) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average shares of common stock outstanding | 79,795 | | | 81,519 | | | 79,702 | | | 82,061 | |
Dilutive effect of potentially dilutive securities(1) | — | | | 164 | | | — | | | — | |
Weighted-average common shares outstanding - diluted | 79,795 | | | 81,683 | | | 79,702 | | | 82,061 | |
Diluted (loss) earnings per share | $ | (0.81) | | | $ | 0.39 | | |