Drilling Down Into Berry Petroleum’s Earnings

Berry Petroleum (UNKNOWN: BRY.DL2  ) reported fourth-quarter and full-year earnings before markets opened on Feb 28. This is the company's first report since it announced that it was being acquired by LinnCo (NASDAQ: LNCO  ) on Feb 21. Let's drill a little deeper in the report so that investors in both LinnCo and LINN Energy (NASDAQ: LINE  ) will have a better idea of how the soon to be acquired company is performing.

The basics
Berry reported net earnings of $172 million, or $3.09 a share for 2012. Revenues for the year were just shy of a billion dollars at $937 million with net cash provided by operating activities of $501 million. These numbers are all higher than the prior year's, when the company reported a loss of $228 million on revenue of $871 million. 

That loss in 2011 was the result of a large impairment charge relating to its East Texas natural gas assets and a non-cash loss on derivative investments. If you back out those charges the company still managed to deliver cash from operating activities of $456 million. Still, 2012 was a year of improvement for the company, especially in production and reserves.

The drill down
Overall production averaged 36,402 barrels of oil equivalent per day for the year, with even better results in the fourth quarter as production averaged 39,500 barrels of oil equivalent per day. Oil production growth was the big news item here as it rose from 70% of Berry's production mix in 2011 to 75% of production in 2012.

Berry also delivered fantastic oil margins with the sales of its California heavy oil being priced at a $9 average premium to West Texas Intermediate. Overall, the company's operating margins rose from $45 per barrel of oil equivalent in 2011 up to $49 in 2012. That high-margin oil would make any producer salivate.

If you've been following the energy story over the past year you'll know that we've experienced a great bottleneck in takeaway capacity which has resulted in a glut of oil. This has depressed prices with West Texas Intermediate trading at a large discount to global benchmark Brent Crude oil while oil out of the Bakken and the Canadian oil sands have traded at even steeper discounts.

The other number of importance, especially for LinnCo and LINN investors, is that total reserves were up year over year. As of the end of 2012, proved oil and gas reserves were estimated to be 275 million barrels of oil equivalent. The company added 38 million barrels of oil equivalent of proved reserves at its oil properties while removing 24 million barrels of oil equivalent at its gas properties. Those removed gas reserves were due to low natural gas prices and the SEC's five-year development rule, not from poor asset performance. At current estimates, 74% of Berry's total reserves are oil, which is what you want in this low natural gas price environment.

My Foolish take
It was a really solid quarter and year for Berry Petroleum. The company delivered everything you'd want as an energy investor as production, reserves, margins and cash flow all went higher. If you're an investor in LINN or LinnCo you should be quite happy with the report; it appears that the assets soon coming into the fold are very solid and should produce nice returns for years to come.

Looking for more solid returns?
Another company that's likely to keep producing solid returns is Enterprise Products Partners. The growing production of natural gas from hydraulic fracturing and horizontal drilling is flooding the North American market and resulting in record-low prices for natural gas. Enterprise Products Partners, with its superior integrated asset base, can profit from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.


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