A BRIGHT FUTURE
Today, the fundamentals underlying Berry’s oil business are strong. In California, the long-term oil to gas price ratio of approximately 14:1, combined with the favorable heavy oil differential averaging around $8 per barrel, allows our assets to generate exceptional margins.
The Company expects to grow production from oil assets 20% by year end 2010, driven by the diatomite asset in California and newly acquired assets in the Wolfberry trend of the Permian basin. The Wolfberry acquisition provides exposure to a high margin, scalable oil resource play that can be accelerated at higher commodity prices. Finally, we are developing a next generation of heavy oil projects such as the McKittrick 21Z asset which should grow production in the long term and offset the low decline rate of our base oil assets.
Reserve Replacement of 200% with $149 Million of Investment
Berry’s 2009 capital program and acquisition activities were primarily focused on investment in the diatomite and other California oil projects. With capital investment of $135 million and acquisitions of $13.5 million, Berry replaced 200% of 2009 production at a finding and development cost of $8.30 per BOE. Including acquisitions, the Company added 21.5 million BOE of proved reserves. At year-end 2009 proved oil and gas reserves were estimated at 235 million BOE.
The Company’s proved reserve mix at year-end 2009 includes 130 million barrels of crude oil, condensate and natural gas liquids, and 632 billion cubic feet of natural gas, or a ratio of 55% oil to 45% natural gas.
Geographically, 48% of 2009 proved reserves are in California, 35% are in the Rocky Mountain region and 17% in east Texas. Proved developed reserves represent 53% of total proved reserves. The year-end 2009 reserve estimates do not include the Company’s Permian acquisition which closed in March 2010 and added approximately 11.2 million BOE of proved reserves, bringing the Company’s total proved reserves to 246 million BOE on a pro forma basis.
OVERVIEW OF ASSETS
Asset Development and Plans
With the April 2009 divestiture of our Denver-Julesburg assets and the early 2010 acquisition of oil assets in the Permian basin in western Texas, we have six asset teams:
- South Midway-Sunset
- North Midway-Sunset (including diatomite)
- Permian
- Uinta
- East Texas
- Piceance
South Midway
Our legacy assets are located in Kern County at the south end of California’s San Joaquin Valley. In 2009 we drilled 19 horizontal wells and 18 vertical producers at the South Midway-Sunset Field, though future development at this location is limited due to the maturity of the field. These new wells were targeted to be deeper and closer to the oil-water contact. Production from this area has a low decline rate and a reserve life of approximately 18 years. Our efforts here are to minimize the base decline by optimizing the placement of steam into the reservoir.
Of note, this asset includes our Ethel D. property, first developed 100 years ago, located about a mile from the historic Lakeview Gusher. Drilled by Union Oil, the Lakeview #1 blew out on March 15, 1910, and sent a roaring column of sand and oil 20 feet in diameter and 200 feet high into the air. Flowing initially at over 125,000 barrels per day, it gushed for 544 days until it was brought under control.
The Poso Creek properties, north of Bakersfield, California, have benefited from successful thermal EOR redevelopment. Average production from these properties increased from 50 BOED at acquisition in 2003 to 3,200 BOED in 2009.
In 2010 we expect to invest $19 million in new wells and $22 million in other improvements for the South Midway assets. At the Homebase and Formax properties we will be completing our horizontal drilling program and expanding the continuous steam injection project by drilling 15 horizontal wells and 10 vertical steam injectors. Capital will also be focused on further thermal development at Ethel D. by drilling 24 producers. We will continue to expand the steam flood at Poso Creek, drilling 10 producers and three steam flood injectors as well as the installation of water processing facilities.
The Legacy of Ethel D. — 100 Years Later
If you mention Ethel D. in the offices of Berry Petroleum today, chances are someone will ask how the latest steamflood is going or if oil production is still climbing on that Berry property in Kern County, California. But the namesake behind Berry’s Ethel D. property was a tough young lady from central California who knew a good thing when she saw it. Ethel, her four sisters and a brother lived on a farm near the Berry family in Selma, California. Having met Clarence Berry, the founder of today’s Berry Petroleum in the early 1890s, she was taken with him. They were married on March 10, 1896, in her mother’s front parlor. Shortly thereafter, Ethel and C.J. set out on a “honeymoon" to Alaska to search for gold. After 18 months in the North, Clarence and Ethel came home having great success with their gold claims.
“Clarence went to the Yukon every year until 1902 when things started winding down in the Klondike," according to Bill Berry, grand-nephew of C.J. and former Berry Petroleum board member who retired in 2006. “When gold was discovered in the Fairbanks and Circle districts of Alaska, Clarence bought claims there which they operated until 1914."
The Berrys took a million and a half dollars from their claims on Bonanza and Eldorado alone. But the winding down of one adventure was just the beginning of another. Not satisfied with Klondike gold, C.J. set his sights on another kind — “Black Gold." Clarence founded many oil operations during his lifetime such as Berry Holding Company, known now as Berry Petroleum Company. One early well drilled in 1909 was located on a property named for his wife, Ethel D.
100 years later the Ethel D. property is not only still producing oil in paying quantities, but it has been the focus of quite a bit of development over the past five years.
In fact, some of the South Midway-Sunset’s upside comes from improved recovery through steam optimization and development of Ethel D.
C. J. died unexpectedly in 1930 of a burst appendix. Ethel lived out her days as a wealthy widow in Beverly Hills, California, until her death in 1948. The oil property which bears her name continues their legacy 100 years later, and with the proved reserves associated with that property, there is a good chance that the legacy will continue for many years to come.
North Midway
Our North Midway assets include the diatomite and the McKittrick property acquired during 2009. Total proved reserves from the North Midway diatomite assets were 35.3 MMBOE, representing a 15% increase from 2008. During 2009 we drilled 51 diatomite wells and installed additional steam generation and water treating facilities. Average production in 2009 was 3,100 BOED. We believe the recoverable resource in the diatomite is between 75 and 130 MMBOE. During the fourth quarter of 2009, we initiated a four-pattern steam flood pilot on our recently acquired McKittrick property.
In 2010, approximately $65 million of capital will be focused on drilling an additional 100 diatomite wells, major infrastructure upgrades that will support future development, increasing steam injection, and further optimization of our thermal recovery techniques. In addition, capital will be invested in four-pattern steam flood pilots at McKittrick, North Midway and Placerita.
Permian
In March 2010, we closed on the acquisition of properties primarily in the Wolfberry trend in west Texas from a private seller for approximately $126 million.
This acquisition provides Berry with the opportunity to diversify its oil resources and add a high margin, scalable oil resource to our portfolio. The Wolfberry is an excellent fit with Berry’s engineering and execution competencies and complements our existing stable base of low geologic risk oil assets.
At December 31, 2009, we estimate that the properties included total proved reserves of 11.2 MMBOE, of which 85% were crude oil and 23% were proved developed, although these barrels are not included in our 2009 proved reserve totals. Production for 2010 is expected to average 1,300 BOE per day.
We expect to invest $30 million in 2010 and have identified over 130 drilling locations on 40-acre spacing in the Wolfberry trend targeting the Spraberry, Dean, Wolfcamp and Strawn formations. We plan to test 20-acre downspacing in late 2010 which would provide an additional 150 drilling locations on 20-acre spacing. We operate approximately 70% of, and have an average 68.5% working interest (54.1% net revenue interest) in, the properties acquired in the Wolfberry trend.
In 2010 the Company plans to drill approximately 27 wells on the Permian assets, drilling with one rig. We expect the acquired properties to provide self-funded production growth over the coming years.
Uinta
Total production in Uinta averaged 4,929 BOED in 2009. In 2009, capital was primarily directed at facility upgrades, pursuing the remaining Lake Canyon completions, and the Ashley Forest Environmental Impact Study (EIS). Implementation of a water flood pilot in Brundage Canyon began in the fourth quarter of 2009. While the Ashley Forest Development EIS continues to progress with approval now expected in 2010, we obtained a category exemption for 25 wells in the Ashley Forest in 2009. In 2010 we plan to run a one-rig program in the Uinta basin focused toward developing areas of higher oil potential with a capital budget of $33 million.
East Texas
The east Texas Cotton Valley assets represent a core area covering 4,500 net acres in Limestone and Harrison Counties. This low-risk repeatable development provides an inventory of drilling and recompletion projects. In Limestone County, we are targeting seven productive sands including the Cotton Valley and Bossier sands at depths between 8,000 and 13,000 feet. In Harrison County, we are targeting five productive sands and Haynesville Shale with average depths between 6,500 and 13,000 feet. During 2009 we drilled 11 vertical wells in east Texas and production averaged 24 million cubic feet per day in 2009.
We have an inventory of 30 Haynesville shale wells and plan to run a one-rig program to drill horizontal Haynesville wells during 2010.
Piceance
Although there was no drilling in the Piceance in 2009, we did acquire additional working interest in Garden Gulch and we tested a new completion design in 20 recompletions. We were encouraged by the results of the recompletions which allowed us to increase our recovery per well from 1.45 billion cubic feet (Bcf) to approximately 1.7 Bcf. We will run a one-rig program in the Piceance basin during 2010.
DIVESTITURES
Berry closed on the approximately $140 million sale of its mature, non-core assets in the Denver-Julesburg basin in April of 2009, using proceeds to repay outstanding debt.
FINANCING ACTIVITIES
Berry executed two high-yield offerings in 2009. The offerings were in total $450 million of senior notes due 2014, which bear interest at a rate of 10.25% per year.
Berry also completed a secondary stock offering in January 2010, the first since the 1989 initial public offering, selling eight million shares of common stock at a public offering price of $29.25 per share. Net proceeds from the offering were used to fund the acquisition of the Wolfberry properties and repay debt.
LOOKING AHEAD: 2010 ACTIVITIES FOR GROWTH
To recap, the Company expects to have a price-sensitive capital budget for 2010 between $250 million and $290 million, focused on growth through the development of our crude oil assets. We expect around 70% of our budget to be invested in these oil projects and expect to increase Company-wide production by 8% to 10% in 2010 with production for the year to average between 32,250 and 33,000 BOED. We will operate within our internally generated cash flow, supported by strong hedge positions.
We plan to maximize production from base oil assets with reservoir management technology and to grow crude oil production by developing our diatomite and Permian basin assets along with a set of next generation heavy oil projects. We also expect to continue to add new opportunities and scalable resources into the portfolio and to continue the legacy C.J. Berry created 100 years ago.