IFR International - 21.07.2018

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EQUITIES AMERICAS

Berry Petroleum ripens for IPO return

„ US E&P cleans up act through bankruptcy

Once bankrupt, BERRY PETROLEUM is taking a

conservative approach in its return to public

markets by promising to live within cashflow and

agreeing to pay a dividend to shareholders as

proof of its discipline.

Berry’s up to US$318.8m IPO launched last

Monday will allow creditors to begin to cash out.

Goldman Sachs, Wells Fargo, BMO Capital

Markets, Evercore and UBS plan to sell 18.75m

Berry shares, including 6.6m from secondary

sellers, at US$15–$17 each. The IPO will

give Berry a market capitalization of roughly

US$1.4bn at high-end pricing.

The IPO terms value Berry at about six times

2018 EV/Ebitda and 4.8 times for 2019.

In addition to the secondary shares, the

company is using a portion of the proceeds to

repurchase 4.2m shares from former creditors

Benefit Street Partners and Oaktree Capital.

Benefit Street and Oaktree would reduce

their stakes to 20.3% and 9.3%, respectively,

while other creditors such as Goldman Sachs

Asset Management (7.5%), Western Asset

Management (7.4%) and CarVal (7.1%) are also

selling.

“Investors are familiar with their assets, but

it is a different management team and different

board of directors,” said one banker involved in

the underwriting.

“They’ve turned around a shrinking company

into growing company.”

Berry, whose main assets are located in the

San Joaquin basin of California, tapped former

Chevron exec Arthur Smith as its new CEO in

March 2017 after emerging from bankruptcy

protection a month earlier.LINE OUT

The company was purchased by onetime

E&P LP Linn Energy for US$4.6bn in stock and

assumed debt in 2013, but was forced to seek

bankruptcy protection in May 2016.

Berry wiped out US$1.3bn of debt through the

bankruptcy reorganization and received $335m

of new capital in the form of preferred equity.

Berry has also accelerated development.

It plans to increase capex this year to

US$140m–$160m, from the US$73m in 2017,

and to US$210m–$230m in 2019. That will fund

the development of 180 to 190 conventional

wells this year, of which at least 175 will be in

California, and 430 to 490 wells in 2019, all in

California.

Berry’s focus on the San Joaquin basin,

one of the oldest oilfields in the country, is a

differentiator.

The company estimates production

averaged 25,700–27,300 barrels daily in the

second quarter and that it realized prices of

US$55.25–$58.75 per barrel, up from 26,200

and US$52.74, respectively, in the first, based on

preliminary results.

Berry’s California focus ties pricing closer to

Brent crude than WTI crude.

“Because of transport and takeaway

constraints out of the Permian there is a price

differential between Brent and WTI,” said a

second banker. “They’re going to play up that

Brent exposure.”

Brent trades at about US$73 and WTI closer

to US$70.

Unlike higher-growth Permian operators,

Berry is focused on living within cashflow.

Having pumped out US$24.6m of free

cashflow in the first quarter, the company plans

to pay a 12-cent quarterly dividend.

Future dividends will be based on cashflow

generated and to maintain net debt leverage at

1.5 to two times throughout the cycle.

If successful, Berry would be the first E&P

IPO since Jagged Peak Energy in January 2017,

excluding royalty trusts.

Stephen Lacey