Wells Fargo Downgrades Berry Petroleum On Heightened Regulatory Risk

The initiatives announced Tuesday by California’s Department of Conservation severely cloud Berry Petroleum Corp’s BRY ability to budget and execute a stable operational plan going forward, according to Wells Fargo.

The Analyst

Wells Fargo’s Gordon Douthat downgraded Berry Petroleum from Outperform to Market Perform, lowering the price target from $13 to $9.

The Thesis

Berry Petroleum now faces heightened risk to future production and cash flow generation potential, Douthat said in the downgrade note.

He mentioned that the California Division of Oil, Gas, and Geothermal Resources had made an unexpected announcement, among which the most pertinent for Berry Petroleum is the placing of a moratorium on high pressure steam injection operations.

The company uses these at its thermal diatomite development and these operations span 27% of Berry Petroleum’s future tier 1 locations and 36% of the total drilling locations in California, the analyst noted.

The announcement has cast greater uncertainty over the company’s production, capital expenditure and EBITDAX (Earnings before interest, taxes, depreciation, amortization and exploration expenses) in 2020, Douthat said, while reducing these estimates by 24%, 20% and 25%, respectively.

He added that the new initiatives do not seem to pertain to low pressure steam injection operations at Berry Petroleum’s thermal sandstone operations.

Price Action

Shares of Berry Petroleum had plummeted more than 19% to $7.19 at the time of publishing on Wednesday.