You may have seen the recent headlines around Chevron’s (CVX – Get Rating) purchase of Hess (HES – Get Rating) or Exxon’s (XOM – Get Rating) big merger with Pioneer (PXD – Get Rating). Splashy headlines, and lots of CNBC interviews, but those deals will likely take years to integrate and the CVX/HES deal in particular may take a lot longer to be profitable.
I prefer less “splash” and more immediate return, which is why I like the strategy of oil company Berry Corp (BRY – Get Rating) with what it calls its “enhanced shareholder return” model.
Berry is an oil and gas exploration company that has been in business since 1909, with a bit of a twist. It also has a well servicing division which brings in a stable approximately $25M annually to the company.
Servicing and decommissioning wells in California in particular, where Berry does a large part of its business, is very lucrative given the state’s extensive environmental laws.
Those same laws have prevented the extensions of pipelines into California from non-western states, which in essence gives Berry (and other oil producers in the region) a quasi monopoly when it comes to selling oil in California, Nevada, and Arizona, what Berry calls a “structurally advantaged market”.
BRY’s enhanced shareholder return model, is a combination of a fixed dividend, a variable dividend (the just released earnings put the current dividend at over 6%, with a long term target of 8-9% announced by the company), share buybacks, debt reduction, and bolt-on acquisitions which are quickly accretive to earnings (as opposed to headline grabbing acquisitions that may or may not pan out).
Berry takes on less risk in its acquisitions by focusing on conventional, or simpler, wells that have shallow reservoirs and proven reserves. Their California base of operations provides for local refining, with the oil products mainly used in the Los Angeles area with Berry’s wells located just north in Kern county.
The stock trades at just 2.4x earnings and 8.5x projected earnings, and has a price to book value of just 0.76. For reference Exxon trades at 2.3 times book value.
Given those numbers, it’s no surprise that the highest component rating for Berry in our POWR Ratings is in the Value component where it outscores over 97% of the companies in our database with an A rating.
Berry is on a steady path which values a consistent and attentive focus on rewarding shareholders without the need to make headlines. For an under $10 stock, this well managed company may have a better strategic plan than many of its much larger competitors.
What To Do Next?
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