Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 001-38606


BERRY PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation or organization)
 
81-5410470
(I.R.S. Employer Identification Number)
16000 Dallas Parkway, Suite 500
Dallas, Texas 75248
(661) 616-3900
(Address of principal executive offices, including zip code
Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol
BRY
Name of each exchange on which registered
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer x
 
Smaller reporting company ¨
        Emerging growth company ý
 
 
 
 
 
 
     
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No ý


Shares of common stock outstanding as of October 31, 2019                 80,997,405



Table of Contents

 
 
Page
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 

The financial information and certain other information presented in this Form 10-Q have been rounded to the nearest whole number or the nearest decimal. Therefore, the sum of the numbers in a column may not conform exactly to the total figure given for that column in certain tables. In addition, certain percentages presented here reflect calculations based upon the underlying information prior to rounding and, accordingly, may not conform exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers, or may not sum due to rounding.




Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2019
 
December 31, 2018
 
(in thousands, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$

 
$
68,680

Accounts receivable, net of allowance for doubtful accounts of $1,377 at September 30, 2019 and $950 at December 31, 2018
63,673

 
57,379

Derivative instruments
50,029

 
88,596

Other current assets
16,335

 
14,367

Total current assets
130,037

 
229,022

Noncurrent assets:
 
 
 
Oil and natural gas properties
1,685,269

 
1,461,993

Accumulated depletion and amortization
(186,578
)
 
(123,217
)
Total oil and natural gas properties, net
1,498,691

 
1,338,776

Other property and equipment
132,066

 
119,710

Accumulated depreciation
(22,947
)
 
(15,778
)
Total other property and equipment, net
109,119

 
103,932

Derivative instruments
13,663

 
3,289

Other non-current assets
14,068

 
17,244

Total assets
$
1,765,578

 
$
1,692,263

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
145,360

 
$
144,118

Derivative instruments
3,534

 

Total current liabilities
148,894

 
144,118

Noncurrent liabilities:
 
 
 
Long-term debt
402,290

 
391,786

Deferred income taxes
65,129

 
45,835

Asset retirement obligation
122,733

 
89,176

Other noncurrent liabilities
29,188

 
14,902

Commitments and Contingencies - Note 4

 


Equity:
 
 
 
Common stock ($.001 par value; 750,000,000 shares authorized; and 80,997,405 and 81,202,437 shares outstanding, at September 30, 2019 and December 31, 2018, respectively)
85

 
82

Additional paid-in-capital
899,421

 
914,540

Treasury stock, at cost, (3,648,823 shares at September 30, 2019 and 448,661 shares at December 31, 2018)
(39,225
)
 
(24,218
)
Retained earnings
137,063

 
116,042

Total equity
997,344

 
1,006,446

Total liabilities and equity
$
1,765,578

 
$
1,692,263



The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share amounts)
Revenues and other:
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
141,250

 
$
147,004

 
$
409,259

 
$
410,013

Electricity sales
7,460

 
14,268

 
22,553

 
25,691

Gains (losses) on oil derivatives
45,509

 
(18,994
)
 
7,546

 
(131,781
)
Marketing revenues
413

 
486

 
1,657

 
1,788

Other revenues
40

 
183

 
261

 
500

Total revenues and other
194,672

 
142,947

 
441,276

 
306,211

Expenses and other:
 
 
 
 
 
 
 
Lease operating expenses
50,957

 
51,649

 
156,765

 
137,468

Electricity generation expenses
3,781

 
6,130

 
14,705

 
13,855

Transportation expenses
2,067

 
2,318

 
5,935

 
7,640

Marketing expenses
398

 
437

 
1,670

 
1,424

General and administrative expenses
16,434

 
13,429

 
46,932

 
37,896

Depreciation, depletion, and amortization
27,664

 
21,729

 
75,904

 
62,017

Taxes, other than income taxes
9,249

 
8,317

 
28,683

 
25,288

Losses (gains) on natural gas derivatives
3,008

 
(1,879
)
 
10,342

 
(1,879
)
Other operating (income) expenses
(550
)
 
400

 
3,814

 
522

Total expenses and other
113,008

 
102,530

 
344,750

 
284,231

Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(8,597
)
 
(9,877
)
 
(26,362
)
 
(26,828
)
Other, net
(77
)
 
347

 
79

 
135

Total other income (expenses)
(8,674
)
 
(9,530
)
 
(26,283
)
 
(26,693
)
Reorganization items, net
(170
)
 
13,781

 
(426
)
 
23,192

Income before income taxes
72,820

 
44,668

 
69,817

 
18,479

Income tax expense
20,171

 
7,683

 
19,294

 
3,145

Net income
52,649

 
36,985

 
50,523

 
15,334

Series A preferred stock dividends

 
(86,642
)
 

 
(97,942
)
Net income (loss) attributable to common stockholders
$
52,649

 
$
(49,657
)
 
$
50,523

 
$
(82,608
)
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.65

 
$
(0.70
)
 
$
0.62

 
$
(1.70
)
Diluted
$
0.65

 
$
(0.70
)
 
$
0.62

 
$
(1.70
)


The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)

 
Nine-Month Period Ended September 30, 2018
 
Series A Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained Earnings (Accumulated Deficit)
 
Total Equity
 
(in thousands)
December 31, 2017
$
335,000

 
$
33

 
$
545,345

 
$

 
$
(21,068
)
 
$
859,310

Stock based compensation

 

 
1,042

 

 

 
1,042

Cash dividends declared on Series A preferred stock, $0.158/share

 

 
(5,650
)
 

 

 
(5,650
)
Net income (loss)

 

 

 

 
6,410

 
6,410

March 31, 2018
335,000

 
33

 
540,737

 

 
(14,658
)
 
861,112

Stock based compensation

 

 
1,278

 

 

 
1,278

Shares withheld for payment of taxes on equity awards

 

 
(176
)
 

 

 
(176
)
Cash dividends declared on Series A preferred stock, $0.15/share

 

 
(5,651
)
 

 

 
(5,651
)
Purchase of rights to common stock

 

 

 
(20,006
)
 

 
(20,006
)
Net income (loss)

 

 

 

 
(28,061
)
 
(28,061
)
June 30, 2018
335,000


33


536,188


(20,006
)

(42,719
)

808,496

Conversion of Series A preferred stock into common stock
(335,000
)
 
40

 
334,960

 

 

 

Cash payment to Series A preferred stockholders

 

 
(60,273
)
 

 

 
(60,273
)
Issuance of common stock in initial public offering

 
10

 
134,352

 

 

 
134,362

Repurchase of common stock

 
(2
)
 
(23,710
)
 

 

 
(23,712
)
Shares withheld for payment of taxes on equity awards

 

 
(246
)
 

 

 
(246
)
Stock based compensation

 

 
1,188

 

 

 
1,188

Purchase of rights to common stock

 

 

 
(259
)
 

 
(259
)
Dividends declared on common stock, $0.09/share

 

 
(7,431
)
 

 

 
(7,431
)
Net income

 

 

 

 
36,985

 
36,985

September 30, 2018
$


$
81


$
915,028


$
(20,265
)

$
(5,734
)

$
889,110




The accompanying notes are an integral part of these condensed consolidated financial statements.


















3

Table of Contents

BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)

 
Nine-Month Period Ended September 30, 2019
 
Series A Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained Earnings (Accumulated Deficit)
 
Total Equity
 
(in thousands)
December 31, 2018
$

 
$
82

 
$
914,540

 
$
(24,218
)
 
$
116,042

 
$
1,006,446

Shares withheld for payment of taxes on equity awards and other

 

 
(270
)
 

 

 
(270
)
Stock based compensation

 

 
1,498

 

 

 
1,498

Purchases of treasury stock

 

 

 
(24,375
)
 

 
(24,375
)
Purchase of rights to common stock(1)

 

 
(20,265
)
 
20,265

 

 

Common stock issued to settle unsecured claims

 
3

 
(3
)
 

 

 

Dividends declared on common stock, $0.12/share

 

 

 

 
(10,072
)
 
(10,072
)
Net income (loss)

 

 

 

 
(34,098
)
 
(34,098
)
March 31, 2019

 
85

 
895,500

 
(28,328
)
 
71,872

 
939,129

Shares withheld for payment of taxes on equity awards and other

 

 
(675
)
 

 

 
(675
)
Stock based compensation

 

 
2,497

 

 

 
2,497

Purchases of treasury stock

 

 

 
(10,897
)
 

 
(10,897
)
Dividends declared on common stock, $0.12/share

 

 

 

 
(9,710
)
 
(9,710
)
Net income (loss)

 

 

 

 
31,972

 
31,972

June 30, 2019


85


897,322


(39,225
)

94,134


952,316

Shares withheld for payment of taxes on equity awards and other

 

 
(294
)
 

 

 
(294
)
Stock based compensation

 

 
2,393

 

 

 
2,393

Dividends declared on common stock, $0.12/share

 

 

 

 
(9,720
)
 
(9,720
)
Net income (loss)

 

 

 

 
52,649

 
52,649

September 30, 2019
$


$
85


$
899,421


$
(39,225
)

$
137,063


$
997,344

__________
(1) In 2018, we entered into several settlement agreements with general unsecured creditors from our bankruptcy process. We paid approximately $20 million to purchase their claims to our common stock. These claims were settled in February 2019 with no shares issued.

The accompanying notes are an integral part of these condensed consolidated financial statements.



4

Table of Contents

BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
September 30,
 
2019
 
2018
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
50,523

 
$
15,334

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation, depletion and amortization
75,904

 
62,017

Amortization of debt issuance costs
3,786

 
4,042

Stock-based compensation expense
6,277

 
3,502

Deferred income taxes
19,294

 
3,146

Increase (decrease) in allowance for doubtful accounts
427

 
(20
)
Other operating expenses
4,744

 
522

Reorganization expenses, net (non-cash)

 
(24,199
)
Derivative activities:
 
 
 
Total losses
2,796

 
129,902

Cash settlements on derivatives
26,731

 
(47,161
)
Cash payments on early-terminated derivatives

 
(126,949
)
Changes in assets and liabilities:
 
 
 
Increase in accounts receivable
(6,690
)
 
(11,546
)
Increase in other assets
(10,547
)
 
(774
)
(Decrease) increase in accounts payable and accrued expenses
(12,344
)
 
5,574

Decrease in other liabilities
(5,108
)
 
(6,056
)
Net cash provided by operating activities
155,793

 
7,334

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
Development of oil and natural gas properties
(153,420
)
 
(74,447
)
Purchases of other property and equipment
(12,394
)
 
(11,305
)
Acquisition of properties
(2,819
)
 

Proceeds from sale of property and equipment and other
969

 
3,377

Net cash used in investing activities
(167,664
)
 
(82,375
)
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Borrowings under RBL credit facility
252,182

 
197,210

Repayments on RBL credit facility
(242,182
)
 
(576,210
)
Dividends paid on common stock
(29,431
)
 

Purchase of treasury stock
(36,139
)
 
(20,265
)
Shares withheld for payment of taxes on equity awards and other
(1,239
)
 
(422
)
Issuance of 2026 Senior Unsecured Notes

 
400,000

Debt issuance costs

 
(9,173
)
IPO proceeds net of issuance costs

 
134,362

Repurchase of common stock

 
(23,712
)
Payment to preferred stockholders in conversion

 
(60,273
)
Dividends paid on Series A Preferred Stock

 
(11,301
)
Net cash (used in) provided by financing activities
(56,809
)
 
30,216

Net decrease in cash, cash equivalents and restricted cash
(68,680
)
 
(44,825
)
Cash, cash equivalents and restricted cash:
 
 
 
Beginning
68,680

 
68,738

Ending
$

 
$
23,913


The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents
BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)






Note 1 - Basis of Presentation
“Berry Corp.” refers to Berry Petroleum Corporation, a Delaware corporation, which is the sole member of Berry Petroleum Company, LLC ("Berry LLC").
As the context may require, the “Company”, “we”, “our” or similar words refer to (i) Berry Corp. and Berry LLC, its consolidated subsidiary, as a whole or (ii) either Berry Corp. or Berry LLC.
Nature of Business
Berry Corp. is an independent oil and natural gas company that was incorporated under Delaware law on February 13, 2017. Berry Corp. operates through its wholly-owned subsidiary, Berry LLC. Our properties are located in the United States (the “U.S.”), in California (in the San Joaquin and Ventura basins), Utah (in the Uinta basin), and Colorado (in the Piceance basin).
Principles of Consolidation and Reporting
The condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In management’s opinion, the accompanying financial statements contain all normal, recurring adjustments that are necessary to fairly present our interim unaudited condensed consolidated financial statements as of September 30, 2019. We eliminated all significant intercompany transactions and balances upon consolidation. For oil and gas exploration and production joint ventures in which we have a direct working interest, we account for our proportionate share of assets, liabilities, revenue, expense and cash flows within the relevant lines of the financial statements.
    
We prepared this report pursuant to the rules and regulations of the U.S. Security and Exchange Commission ("SEC") applicable to interim financial information, which permit the omission of certain disclosures to the extent they have not changed materially since the latest annual financial statements. We believe our disclosures are adequate to make the disclosed information not misleading. The results reported in these unaudited condensed consolidated financial statements may not accurately forecast results for future periods. This Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Adopted Accounting Standards
During 2016, the FASB issued rules clarifying the new revenue recognition standard issued in 2014. The new rules are intended to improve and converge the financial reporting requirements for revenue from contracts with customers. We are an emerging growth company and elected to delay adoption of these rules until they are applicable to non-SEC issuers which is for fiscal years beginning after December 31, 2018. As such, we adopted these rules in the first quarter of 2019 and applied the modified retrospective approach, meaning the cumulative effect of initially applying the standard is recognized in the most current period presented in the financial statements. We have performed an analysis of existing contracts and determined adoption did not have a material impact on our condensed consolidated financial statements. In addition, we have evaluated the changes to relevant business practices, accounting policies and control activities and we did not experience a material change in our revenue accounting as a result of the adoption of these rules. Refer to Note 8 for additional disclosure information.
New Accounting Standards Issued, But Not Yet Adopted

In February 2016, the FASB issued rules requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months and to include qualitative and quantitative disclosures with respect to the amount, timing, and uncertainty of cash flows arising from leases. As an emerging growth company, we have elected to delay the adoption of these rules until they are applicable to non-SEC issuers which is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently identifying our lease population in accordance with the new lease standard. We expect the adoption of these rules to increase other assets and other liabilities on our balance sheet and we do not expect a material impact on our consolidated results of operations.

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Table of Contents
BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 2 - Debt
The following table summarizes our outstanding debt:
 
September 30, 2019
 
December 31, 2018
 
Interest Rate
 
Maturity
 
Security
 
(in thousands)
 
 
 
 
 
 
RBL Facility(1)
$
10,000

 
$

 
variable rates
3.8% (2019) and 4.5% (2018), respectively
 
June 29, 2022
 
Mortgage on 85% of Present Value of proven oil and gas reserves and lien on other assets
2026 Senior Unsecured Notes
400,000

 
400,000

 
7.0%
 
February 15, 2026
 
Unsecured
Long-Term Debt - Principal Amount
410,000

 
400,000

 
 
 
 
 
 
Less: Debt Issuance Costs
(7,710
)
 
(8,214
)
 
 
 
 
 
 
Long-Term Debt, net
$
402,290

 
$
391,786

 
 
 
 
 
 
__________
(1)
As of September 30, 2019 our RBL Facility had $10 million outstanding at a LIBOR rate of 3.8%.

Deferred Financing Costs

We incurred legal and bank fees related to the issuance of debt. At September 30, 2019 and December 31, 2018, debt issuance costs for the RBL Facility (as defined below) reported in "other noncurrent assets" on the balance sheet were approximately $12 million and $16 million net of amortization, respectively. The amortization of debt issuance costs is presented in interest expense on the condensed consolidated statements of operations. At September 30, 2019 and December 31, 2018, debt issuance costs, net of amortization, for the 2026 Senior Unsecured Notes were both approximately $8 million.
For the three months ended September 30, 2019 and September 30, 2018, the amortization expense for the RBL Facility and 2026 Senior Unsecured Notes were both approximately $1 million. For the nine months ended September 30, 2019 and September 30, 2018, these amounts were both approximately $4 million.
Fair Value
Our debt is recorded at the carrying amount on the balance sheets. The carrying amount of the RBL Facility approximates fair value because the interest rates are variable and reflect market rates. The fair value of the 2026 Senior Unsecured Notes was approximately $385 million and $368 million at September 30, 2019 and December 31, 2018, respectively.
The RBL Facility
On July 31, 2017, we entered into a credit agreement (“RBL Facility”), with Wells Fargo Bank, N.A. as administrative agent and certain lenders with up to $1.5 billion of commitments, subject to a reserves-based borrowing base. In April 2019, we completed a borrowing base redetermination under our RBL Facility that resulted in our borrowing base being set at $750 million and we reaffirmed our elected commitment amount at $400 million. The RBL Facility matures on July 29, 2022, unless terminated earlier in accordance with the RBL Facility terms.
We were in compliance with all financial covenants as of September 30, 2019.
As of September 30, 2019, we had approximately $381 million of available borrowing capacity under the RBL Facility.
As of September 30, 2019 and December 31, 2018, we had letters of credit outstanding of approximately $9 million and $7 million, respectively, under our RBL facility. These letters of credit were issued to support ordinary course of business marketing, insurance, regulatory and other matters. As of October 31, 2019 we had letters of credit outstanding of approximately $7 million, under our RBL facility.

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Table of Contents
BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Corporate Organization

Berry Corp., as Berry LLC’s parent company, has no independent assets or operations. Any guarantees of potential future registered debt securities by Berry Corp. or Berry LLC would be full and unconditional. Berry Corp. and Berry LLC currently do not have any other subsidiaries. In addition, there are no significant restrictions upon the ability of Berry LLC to distribute funds to Berry Corp. by distribution or loan other than under the RBL Facility. The RBL Facility permits Berry LLC to make distributions to Berry Corp. provided certain conditions are met. The conditions are currently met with significant margin. None of the assets of Berry Corp. or Berry LLC represent restricted net assets.
Note 3 - Derivatives

We utilize derivatives, such as swaps, puts, and calls to hedge a portion of our forecasted oil production and gas purchases to reduce exposure to fluctuations in oil and natural gas prices. We target covering our operating expenses and a majority of our fixed charges, including maintenance capital expenditures, interest and dividends, with the oil hedges for a period of up to two years out. We have hedged a portion of our exposure to differentials between ICE Brent oil (“Brent”) and NYMEX West Texas Intermediate oil (“WTI”). Additionally, we target fixing the price for a large portion of our natural gas purchases used in our steam operations for up to two years. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations, which we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions.
For fixed-price oil swaps, we make settlement payments for prices above the indicated weighted-average price per barrel of Brent or WTI and receive settlement payments for prices below the indicated weighted-average price per barrel of Brent or WTI.
For oil basis swaps, we make settlement payments if the difference between Brent and WTI is greater than the indicated weighted-average price per barrel of our contracts and receive settlement payments if the difference between Brent and WTI is below the indicated weighted-average price per barrel.
For purchased oil puts, we receive settlement payments for prices below the indicated weighted-average price per barrel of Brent. For some of our purchased puts we paid a premium at the time the positions were created and for others, the premium payment is deferred until the time of settlement. We have mitigated the exposure to a substantial portion of the deferred premium payments by entering into offsetting put positions. We paid approximately $1 million and $21 million of the net deferred premiums during the three and nine months ended September 30, 2019, which included premiums we received during these periods. As of September 30, 2019 we have offsetting put positions with an outstanding net deferred premium of approximately $1 million, which is reflected in the mark-to-market valuation and will be payable through the first quarter of 2020.
For our sold oil calls, we would make settlement payments for prices above the indicated weighted-average price per barrel of Brent.
For fixed-price gas purchase swaps, we are the buyer so we make settlement payments for prices below the weighted-average price per MMBtu and receive settlement payments for prices above the weighted-average price per MMBtu.
We use oil swaps and puts to protect against decreases in the oil price and natural gas swaps to protect against increases in natural gas prices. We do not enter into derivative contracts for speculative trading purposes and have not accounted for our derivatives as cash-flow or fair-value hedges. We did not designate any of our contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. Gains (losses) on oil hedges are classified in the revenues and other section of the condensed consolidated statements of operations and (gains) losses on natural gas hedges are presented in the expenses and other section of the condensed consolidated statements of operations.

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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

As of September 30, 2019, we had the following crude oil production and gas purchases hedges.
 
Q4 2019
 
FY 2020
 
FY 2021
Fixed Price Oil Swaps (Brent):
 
 
 
 

  Hedged volume (MBbls)
1,656

 
5,856

 
730

  Weighted-average price ($/Bbl)
$
70.20

 
$
64.25

 
$
58.50

Fixed Price Oil Swaps (WTI):
 
 
 
 
 
  Hedged volume (MBbls)
92

 
121

 

  Weighted-average price ($/Bbl)
$
61.75

 
$
61.75

 
$

Oil basis differential swaps (Brent-WTI basis swaps):
 
 
 
 
 
  Hedged volume (MBbls)
46

 

 

  Weighted-average price ($/Bbl)
$
(1.29
)
 
$

 
$

Sold Oil Calls Options (Brent):
 
 
 
 
 
Hedged volume (MBbls)
92

 

 

Weighted-average price ($/Bbl)
$
81.00

 
$

 
$

Fixed Price Gas Purchase Swaps (Kern, Delivered):
 
 
 
 
 
  Hedged volume (MMBtu)
4,905,000

 
17,385,000

 
900,000

  Weighted-average price ($/MMBtu)
$
2.90

 
$
2.88

 
$
2.50

Fixed Price Gas Purchase Swaps (SoCal Citygate):
 
 
 
 
 
  Hedged volume (MMBtu)
460,000

 
1,525,000

 

  Weighted-average price ($/MMBtu)
$
3.80

 
$
3.80

 
$


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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 Our commodity derivatives are measured at fair value using industry-standard models with various inputs including publicly available underlying commodity prices and forward curves, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. These commodity derivatives are subject to counterparty netting. The following tables present the fair values (gross and net) of our outstanding derivatives as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
Balance Sheet
Classification
 
Gross Amounts
Recognized at Fair Value
 
Gross Amounts Offset
in the Balance Sheet
 
Net Fair Value Presented 
on the Balance Sheet
 
(in thousands)
Assets:
 
 
 
 
 
 
 
  Commodity Contracts
Current assets
 
$
59,600

 
$
(9,571
)
 
$
50,029

  Commodity Contracts
Non-current assets
 
14,982

 
(1,319
)
 
13,663

Liabilities:
 
 
 
 
 
 
 
  Commodity Contracts
Current liabilities
 
(13,105
)
 
9,571

 
(3,534
)
  Commodity Contracts
Non-current liabilities
 
(1,319
)
 
1,319

 

Total derivatives
 
 
$
60,158

 
$

 
$
60,158


 
December 31, 2018
 
Balance Sheet
Classification
 
Gross Amounts
Recognized at Fair Value
 
Gross Amounts Offset
in the Balance Sheet
 
Net Fair Value Presented 
on the Balance Sheet
 
(in thousands)
Assets:
 
 
 
 
 
 
 
  Commodity Contracts
Current assets
 
$
89,981

 
$
(1,385
)
 
$
88,596

  Commodity Contracts
Non-current assets
 
3,289

 

 
3,289

Liabilities:
 
 
 
 
 
 
 
  Commodity Contracts
Current liabilities
 
(1,385
)
 
1,385

 

Total derivatives
 
 
$
91,885

 
$

 
$
91,885

By using derivative instruments to economically hedge exposure to changes in commodity prices, we expose ourselves to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk. We do not receive collateral from our counterparties.
We minimize the credit risk in derivative instruments by limiting our exposure to any single counterparty. In addition, our RBL Facility prevents us from entering into hedging arrangements that are secured, except with our lenders and their affiliates that have margin call requirements, that otherwise require us to provide collateral or with a non-lender counterparty that does not have an A- or A3 credit rating or better from Standards & Poor’s or Moody’s, respectively. In accordance with our standard practice, our commodity derivatives are subject to counterparty netting under agreements governing such derivatives which partially mitigates the counterparty nonperformance risk.
Note 4 - Lawsuits, Claims, Commitments and Contingencies
In the normal course of business, we, or our subsidiary, are subject to lawsuits, environmental and other claims and other contingencies that seek, or may seek, among other things, compensation for alleged personal injury, breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief.
We accrue reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. We have not recorded any reserve balances at September 30, 2019 and December 31, 2018. We also evaluate the amount of reasonably possible losses that we could incur as a result of these matters. We believe that reasonably possible losses that we could incur in excess of reserves accrued on our balance sheet would not be material to our consolidated financial position or results of operations.

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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

We, or our subsidiary, or both, have indemnified various parties against specific liabilities those parties might incur in the future in connection with transactions that they have entered into with us. As of September 30, 2019, we are not aware of material indemnity claims pending or threatened against us.
As of September 30, 2019, we had entered into agreements to replace our Bakersfield, California office lease for approximately $11 million in aggregate over 8 years beginning August 2019. The annual costs under our former office lease, which ended in October 2019, were similar to the costs under the new leases.
Note 5 - Equity
Cash Dividends
Our board of directors approved a $0.12 per share quarterly cash dividend on our common stock each quarter in 2019. We paid the third quarter dividend in October 2019 and declared the fourth quarter dividend in November 2019, which is payable in January 2020.
Stock Repurchase Program
In December 2018, our Board of Directors adopted a program for the opportunistic repurchase of up to $100 million of our common stock. Based on the Board’s evaluation of market conditions for our common stock they authorized initial repurchases of up to $50 million under the program. Purchases may be made from time to time in the open market, in privately negotiated transactions or otherwise. The manner, timing and amount of any purchases will be determined based on our evaluation of market conditions, stock price, compliance with outstanding agreements and other factors, may be commenced or suspended at any time without notice and does not obligate Berry Petroleum to purchase shares during any period or at all. Any shares acquired will be available for general corporate purposes. For the three months ended September 30, 2019, we did not repurchase shares under the stock repurchase program. For the nine months ended September 30, 2019, we repurchased 3,200,162 shares at an average price of $11.02 per share for $35 million, which is reflected as treasury stock. The Company has repurchased a total of 3,648,823 shares under the stock repurchase program for $39 million as of September 30, 2019.

Stock-Based Compensation
In March 2019, the Company granted awards of 706,314 shares of restricted stock units ("RSUs"), which will vest annually in equal amounts over three years and 553,902 performance-based restricted stock units ("PSUs"), which will cliff vest at two or three years. The fair value of these awards was approximately $16 million.
The RSUs awarded are service-based awards. The PSUs awarded include a market objective measured against both absolute total stockholder return (“Absolute TSR”) and total stockholder return relative (“Relative TSR”), to the Vanguard World Fund - Vanguard Energy ETF index (the “Index”) over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the two or three year performance period, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the Target Shares granted.

The fair value of the PSUs was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company, including a comparison against the Index over the performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on blended historical average volatility rates for the Company and selected guideline public companies. The dividend yield assumption was based on the current annualized declared dividend. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate two and three year performance measurement period.

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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 6 - Supplemental Disclosures to the Financial Statements
Other current assets reported on the condensed consolidated balance sheets included the following:  
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Prepaid expenses
$
4,533

 
$
4,656

Materials and supplies
8,143

 
5,461

Oil inventories
3,193

 
3,786

Other
466

 
464

Total
$
16,335

 
$
14,367

Other non-current assets at September 30, 2019 and December 31, 2018, included approximately $12 million and $16 million of deferred financing costs, net of amortization, respectively.
Accounts payable and accrued expenses on the condensed consolidated balance sheets included the following:
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Accounts payable-trade
$
14,118

 
$
13,564

Accrued expenses
59,579

 
66,417

Royalties payable
20,148

 
26,189

Taxes other than income tax liability
10,919

 
10,766

Accrued interest
3,516

 
10,500

Dividends payable
10,063

 
9,992

Asset retirement obligation - current portion
26,659

 
6,372

Other
358

 
318

Total
$
145,360

 
$
144,118


The increase in the long-term portion of the asset retirement obligation largely reflected revisions to timing and cost estimates of $57 million, $6 million for new wells, and accretion expense of $5 million. A significant portion of the change in estimate was a result of California's new idle well regulations which became effective in the second quarter and accelerated the timing of abandonment of certain long existing idle wells. These increases were partially offset by liabilities settled during the period of $15 million and an increase to the current portion of the asset retirement obligation of $20 million due to the change in timing and estimated costs.
Other non-current liabilities at September 30, 2019 and December 31, 2018 included approximately $29 million and $15 million of greenhouse gas liability, respectively.
Supplemental Information on the Statement of Operations
Other operating (income) expenses mainly consist of excess abandonment costs, as well as gain (loss) on sale of assets.

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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Supplemental Cash Flow Information
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
Nine Months Ended
September 30,
 
2019
 
2018
 
(in thousands)
Supplemental Disclosures of Significant Non-Cash Investing Activities:
 
 
Material inventory transfers to oil and natural gas properties
$
8,474

 
$
1,115

Supplemental Disclosures of Cash Payments (Receipts):
 
 
 
  Interest, net of amounts capitalized
$
30,136

 
$
19,199

  Income taxes
$

 
$

  Reorganization items, net
$

 
$
1,007

Supplemental Disclosures of Investing Activities:
 
 
 
Decrease in accrued liabilities related to purchases of property and equipment
$
4,613

 
$
8,832

The following table provides a reconciliation of cash, cash equivalents and restricted cash as reported in the condensed consolidated statements of cash flows to the line items within the condensed consolidated balance sheets:
 
Nine Months Ended
September 30,
 
2019
 
2018
 
(in thousands)
Beginning of Period
 
 
 
Cash and cash equivalents
$
68,680

 
$
33,905

Restricted cash

 
34,833

Cash, cash equivalents and restricted cash
$
68,680

 
$
68,738

 
 
 
 
Ending of Period
 
 
 
Cash and cash equivalents
$

 
$
23,856

Restricted cash

 
57

Cash, cash equivalents and restricted cash
$

 
$
23,913

Restricted cash was associated with cash reserved to settle claims with general unsecured creditors. Cash and cash equivalents consist primarily of highly liquid investments with original maturities of three months or less and are stated at cost, which approximates fair value. As part of our cash management system, we use a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances for accounting purposes in the accounts payable and accrued expenses account.
Note 7 - Earnings Per Share
We calculate basic earnings (loss) per share by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the three and nine months ended September 30, 2019 which is approximately 81 million and 82 million shares, respectively. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement, are considered common shares outstanding and are included in the computation of net income (loss) per share. Our initial capitalization included the issuance of 32,920,000 shares of common stock and another 7,080,000 shares reserved to settle claims of unsecured creditors, all of which were included in our computation of net income (loss) per share until the claims were settled and the shares issued. At the end of February 2019, we finalized settlement of these claims and issued approximately 2,770,000 shares. In all prior periods presented we retrospectively adjusted the weighted average shares in our earnings per share calculations for the ultimate shares issued.

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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Series A Preferred Stock was not a participating security, therefore, we calculated diluted EPS using the “if-converted" method under which the preferred dividends are added back to the numerator and the convertible preferred stock is assumed to be converted at the beginning of the period. No incremental shares of Series A Preferred Stock were included in the diluted EPS calculation for the three and nine months ended September 30, 2019, as all outstanding shares of our Series A Preferred Stock were converted to common shares in connection with the IPO of our common stock in July 2018. No Series A Preferred Stock were included in the diluted EPS calculation for the three and nine months ended September 30, 2018 as their effect was anti-dilutive under the "if converted" method. The RSUs are not a participating security as the dividends are forfeitable. We included 69,000 and 145,000 incremental RSU shares in the diluted EPS calculation for the three and nine months ended September 30, 2019. No incremental RSU shares were included in the diluted EPS calculation for the three and nine months ended September 30, 2018, as their effect was anti-dilutive under the "if-converted" method. No PSU's were included in the EPS calculations for any of the periods presented due to their contingent nature.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands except per share amounts)
Basic EPS calculation

 

 

 

Net income
$
52,649

 
$
36,985

 
$
50,523

 
15,334

less: Series A Preferred Stock dividends and conversion to common stock

 
(86,642
)
 

 
(97,942
)
Net income (loss) attributable to common stockholders
$
52,649

 
$
(49,657
)
 
$
50,523

 
$
(82,608
)
Weighted-average shares of common stock outstanding
80,982

 
70,940

 
81,703

 
48,587

Basic earnings (loss) per share(2)
$
0.65

 
$
(0.70
)
 
$
0.62

 
$
(1.70
)
Diluted EPS calculation

 

 
 
 
 
Net income
$
52,649

 
$
36,985

 
$
50,523

 
$
15,334

less: Series A Preferred Stock dividends and conversion to common stock

 
(86,642
)
 

 
(97,942
)
Net income (loss) attributable to common stockholders
$
52,649

 
$
(49,657
)
 
$
50,523

 
$
(82,608
)
Weighted-average shares of common stock outstanding
80,982

 
70,940

 
81,703

 
48,587

Dilutive effect of potentially dilutive securities(1)
69

 

 
145

 

Weighted-average common shares outstanding - diluted
81,051

 
70,940

 
81,848

 
48,587

Diluted earnings (loss) per share(2)
$
0.65

 
$
(0.70
)
 
$
0.62

 
$
(1.70
)
__________
(1)
No potentially dilutive securities were included in computing earnings (loss) per share for the three and nine months ended September 30, 2018, because the effect of inclusion would have been anti-dilutive.

Note 8 - Revenue Recognition

We account for revenue in accordance with the Accounting Standards Codification 606, Revenue from Contracts with Customers, which we adopted on January 1, 2019, using the modified retrospective method, which was applied to all contracts that were not completed as of that date. Prior period results were not adjusted and continue to be reported under the accounting standards in effect for the prior period. The new standard did not affect the timing of our revenue recognition and did not impact net income; accordingly, we did not record an adjustment to the opening balance of retained earnings.

We adopted the practical expedient related to disclosing the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied at the end of the reporting period. The performance obligations that are unsatisfied at the end of a reporting period relate solely to future volumes that we have yet to sell. As such, these are wholly unsatisfied performance obligations as each unit of product represents a separate performance obligation as well as a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation.

We derive substantially all of our revenue from sales of oil, natural gas and natural gas liquids ("NGL"), with the remaining revenue generated from sales of electricity and marketing activities.


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BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following is a description of our principal activities from which we generate revenue. Revenues are recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration we expect to receive in exchange for those goods or services.

Oil, Natural Gas and NGLs

We recognize revenue from the sale of our oil, natural gas and NGLs production when delivery has occurred and control passes to the customer. Our oil and natural gas contracts are short term, typically less than a year and our NGL contracts are both short and long term. We consider our performance obligations to be satisfied upon transfer of control of the commodity. Our commodity sales contracts are indexed to a market price or an average index price. We recognize revenue in the amount that we have a right to invoice once we are able to adequately estimate the consideration (i.e., when market prices are known). Our contracts with customers typically require payment within 30 days following invoicing.

Electricity Sales

The electrical output of our cogeneration facilities that is not used in our operations is sold to the California market based on market pricing, which includes capacity payments. The majority of the portion sold from three of our cogeneration facilities is sold under long-term contracts to two California utility companies, based on the market pricing. Revenue is recognized over time when obligations under the terms of a contract with our customer are satisfied; generally, this occurs upon delivery of the electricity. Revenue is measured as the amount of consideration we expect to receive based on average index pricing with payment due the month following delivery. Capacity payments are based on a fixed annual amount per kilowatt hour and monthly rates vary based on seasonality, which is consistent with how we earn the capacity payment. Capacity payments are settled monthly. We consider our performance obligations to be satisfied upon delivery of electricity or as the contracted amount of energy is made available to the customer in the case of capacity payments. We report electricity revenue as electricity sales on our consolidated statements of operations.

Marketing Revenue

Marketing revenue primarily includes our activities associated with transporting and marketing third-party volumes. These sales are made under the same agreements with the same purchaser as our natural gas sales discussed above. We consider our performance obligations to be satisfied upon transfer of control of the commodity. Revenues are presented excluding costs incurred prior to transferring control of these volumes to the customer, or the costs to purchase these volumes when we are acting as the principal. The revenues and expenses related to the sale and purchase of third-party volumes are presented separately as marketing revenue and marketing expenses on the condensed consolidated statements of operations.

Disaggregated Revenue

As a result of adoption of this standard, we are now required to disclose the following information regarding revenue from contracts with customers on a disaggregated basis.

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Oil sales
$
136,710

 
$
138,699

 
$
392,325

 
$
387,065

Natural gas sales
4,067

 
6,437

 
14,867

 
18,400

Natural gas liquids sales
473

 
1,868

 
2,067

 
4,548

Electricity sales
7,460

 
14,268

 
22,553

 
25,691

Marketing revenues
413

 
486

 
1,657

 
1,788

Revenues from contracts with customers
149,123

 
161,758

 
433,469

 
437,492

Gains (losses) on oil derivatives
45,509

 
(18,994
)
 
7,546

 
(131,781
)
Other revenues
40

 
183

 
261

 
500

Total revenues and other
$
194,672

 
$
142,947

 
$
441,276

 
$
306,211


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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018 (the "Annual Report") filed with the Securities and Exchange Commission ("SEC"). When we use the terms “we,” “us,” “our,” the “Company” or similar words in this report, we are referring to Berry Corp. and its subsidiary, Berry LLC.
Our Company
We are a western United States independent upstream energy company with a focus on low risk, long-lived, oil reserves in conventional reservoirs. Most of our assets are in the San Joaquin basin of California. Our long-lived, high-margin asset base is uniquely positioned to support our objectives of generating top-tier corporate-level returns and positive levered free cash flow through commodity price cycles. We target onshore, low-cost, low-risk, oil-rich reservoirs in the San Joaquin basin of California and, to a lesser extent, our Rockies assets including low-cost, oil-rich reservoirs in the Uinta basin of Utah and low geologic risk natural gas resource plays in the Piceance basin in Colorado. Successful execution of our strategy across our low-declining production base and extensive inventory of identified drilling locations will result in long-term, capital efficient, consistent and predictable production growth, as well as the ability to continue returning capital to our stockholders.
How We Plan and Evaluate Operations
We use Levered Free Cash Flow to plan our capital allocation for maintenance and internal growth opportunities as well as hedging needs. We define Levered Free Cash Flow as Adjusted EBITDA less capital expenditures, interest expense and dividends.
We use the following metrics to manage and assess the performance of our operations: (a) Adjusted EBITDA; (b) operating expenses; (c) environmental, health & safety (“EH&S”) results; (d) cash general and administrative expenses; and (e) production.
Adjusted EBITDA
Adjusted EBITDA is the primary financial and operating measurement that our management uses to analyze and monitor the operating performance of our business. We define Adjusted EBITDA as earnings before interest expense; income taxes; depreciation, depletion, and amortization; derivative gains or losses net of cash received or paid for scheduled derivative settlements; impairments; stock compensation expense; and other unusual, out-of-period and infrequent items, including restructuring costs and reorganization items.
Operating expenses
We define operating expenses as lease operating expenses, electricity generation expenses, transportation expenses, and marketing expenses, offset by the third-party revenues generated by electricity, transportation and marketing activities, as well as the effect of derivative settlements (received or paid) for gas purchases. Lease operating expenses include fuel, labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Taxes other than income taxes are excluded from operating expenses. The electricity, transportation and marketing activity related revenues are viewed and treated internally as a reduction to operating costs when tracking and analyzing the economics of development projects and the efficiency of our hydrocarbon recovery. Additionally, we strive to minimize the variability of our fuel gas costs for our steam operations with gas hedges. Overall, operating expense is used by management as a measure of the efficiency with which operations are performing.
Environmental, health & safety
We are committed to good corporate citizenship in our communities, operating safely and protecting the environment and our employees. We monitor our EH&S performance through various measures, holding our employees and contractors to high standards. Meeting corporate EH&S metrics is a part of our incentive programs for all employees.


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Table of Contents

General and administrative expenses
We monitor our cash general and administrative expenses as a measure of the efficiency of our overhead activities. Such expenses are a key component of the appropriate level of support our corporate and professional team provides to the development of our assets and our day-to-day operations.
Production
Oil and gas production is a key driver of our operating performance, an important factor to the success of our business, and used in forecasting future development economics. We measure and closely monitor production on a continuous basis, adjusting our property development efforts in accordance with the results. We track production by commodity type and compare it to prior periods and expected results.
Capital Expenditures
For the three and nine months ended September 30, 2019, our capital expenditures were approximately $63 million and $169 million, respectively, on an accrual basis excluding acquisitions. For the three and nine months ended September 30, 2019, approximately 93% and 91%, respectively, of this total was directed to California oil operations.

Our 2019 anticipated capital expenditure budget is approximately $195 to $225 million. Using the mid-point of this range, this represents an increase of approximately 42% over 2018 capital expenditures. Based on current commodity prices and a drilling success rate comparable to our historical performance, we believe we will be able to fund our 2019 capital development programs while producing positive Levered Free Cash Flow. Our 2019 capital program is focused on growing our oil production in California. We anticipate oil production will be 86% to 88% of total production in 2019, compared to 82% in 2018. We structured our 2019 capital program to result in more drilling in the first half of the year than we expect in the second half. Consistent with our plan, we drilled 292 wells during the nine months ended September 30, 2019, including 82 wells in the third quarter of 2019. For 2019, we expect to drill approximately 360 to 380 gross development wells, almost all of which will be in California for oil production. During the remainder of 2019, we plan to employ up to three drilling rigs in California. We also expect to continue generating growth in the fourth quarter as wells continue to come online and we realize the full effects of steam injection.
The table below sets forth the expected allocation of our 2019 capital expenditure budget by area as compared to the allocation of our 2018 capital expenditures.
 
Capital Expenditure by Area
 
2019 Budget
2018 Actual
 
 
(in millions)
California
$
185-209
$
126

Rockies
 
4-9
17

Corporate
 
6-7
5

Total
$
195-225
$
148


The amount and timing of these capital expenditures is within our control and subject to our discretion. We retain the flexibility to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, natural gas and NGLs, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. Any postponement or elimination of our development drilling program could result in a reduction of proved reserve volumes and materially affect our business, financial condition and results of operations.

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Table of Contents

2019 Guidance
The table below sets forth our 2019 Guidance for certain metrics.
 
 
2019 Guidance
 
Low
 
High
Average daily production (MBoe/d)
 
28
 
31
% Oil
 
~86%
Operating expenses ($/Boe)
 
$18.00
 
$19.50
Taxes, other than income taxes ($/Boe)
 
$4.25
 
$4.75
Adjusted General & Administrative Expenses ($/Boe)
 
$4.25
 
$4.75
Capital Expenditures (millions)
 
$195
 
$225
Business Environment, Market Conditions and Seasonality
The oil and gas industry is heavily influenced by commodity prices. Average oil prices were lower for the three months ended September 30, 2019 compared to the three months ended June 30, 2019 and the three months ended September 30, 2018. Brent crude oil contract prices ranged from $56.23 per Bbl to $69.02 per Bbl during the third quarter of 2019. In California, the price we pay for fuel gas purchases is generally based on the Kern, Delivered Index which was as low as $1.74 per MMBtu and as high as $4.09 per MMBtu during the third quarter of 2019, while we paid an average of $2.67 in this period. Our revenue, costs, profitability and future growth are highly dependent on the prices we receive for our oil and natural gas production and the prices we pay for our natural gas purchases which will continue to be affected by a variety of factors, as discussed in Risk Factors in our Annual Report.
The following table presents the average Brent, WTI, and Kern, Delivered prices for the three months ended September 30, 2019, June 30, 2019 and September 30, 2018 and for the nine months ended September 30, 2019 and September 30, 2018:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
June 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Brent oil ($/Bbl)
$
62.03

 
$
68.47

 
$
75.84

 
$
64.75

 
$
72.74

WTI oil ($/Bbl)
$
56.33

 
$
59.86

 
$
69.60

 
$
57.03

 
$
66.83

Kern, Delivered natural gas ($/MMBtu)
$
2.50

 
$
2.07

 
$
4.12

 
$
3.19

 
$
3.01

California oil prices are Brent-influenced as California refiners import approximately 70% of the state’s demand by waterborne supply, primarily from the Middle East and South America. There is a closer correlation of prices in California to Brent pricing than to WTI. Without the higher costs associated with importing crude via rail or supertanker, we believe our in-state production and low-cost crude transportation options, coupled with Brent-influenced pricing, will allow us to continue to realize strong cash margins in California.
Utah oil prices have historically traded at a discount to WTI as the local refineries are designed for Utah oil's unique characteristics and the remoteness of the assets makes access to other markets logistically challenging.
Prices and differentials for NGLs are related to the supply and demand for the products making up these liquids. Some of them more typically correlate to the price of oil while others are affected by natural gas prices as well as the demand for certain chemical products for which they are used as feedstock. In addition, infrastructure constraints magnify pricing volatility.
Natural gas prices and differentials are strongly affected by local market fundamentals, availability of transportation capacity from producing areas and seasonal impacts. We purchase substantially more natural gas for our steamfloods and cogeneration facilities, than we produce and sell. Consequently, higher gas prices have a negative impact on our operating costs. However, we mitigate a portion of this exposure by selling excess electricity from our cogeneration operations to third parties at prices linked to the price of natural gas. Additionally, we strive to minimize the variability of our fuel gas costs for our steam operations by hedging a portion of such gas purchases and have recently increased the amount of gas purchases we hedge. Also, the negative impact of higher gas prices is partially offset by higher gas sales for the gas we produce. We have negotiated terms of a new power purchase agreement for our 18 MW cogeneration facility which begins in December 2019 for a period of seven years.

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Our earnings are also affected by the performance of our natural gas powered cogeneration facilities. These cogeneration facilities generate both electricity and steam for our properties and electricity for off-lease sales. While a portion of the electric output of our cogeneration facilities is utilized within our production facilities to reduce operating expenses, we also sell electricity produced by three of our cogeneration facilities under long-term contracts. The most significant input and cost of the cogeneration facilities is natural gas. We generally receive significantly more revenue from these cogeneration facilities in the summer months, June through September, due to negotiated capacity payments we receive.
Seasonal weather conditions can impact a portion of our drilling and production activities. These seasonal conditions can occasionally pose challenges in our operations for meeting well-drilling objectives and increase competition for equipment, supplies and personnel, which could lead to shortages and increase costs or delay operations. For example, our operations may be impacted by ice and snow in the winter and by electrical storms and high temperatures in the spring and summer, as well as by wild fires and rain.
Summary By Area
The following table shows a summary by area of our selected historical financial information and operating data for the periods indicated.
 
California
(San Joaquin and Ventura basins)
 
Rockies
(Uinta and Piceance basins)
 
Three Months Ended
 
Three Months Ended
 
September 30, 2019
 
June 30, 2019
 
September 30, 2018
 
September 30, 2019
 
June 30, 2019
 
September 30, 2018
($ in thousands, except prices)
 
 
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
124,540

 
$
120,917

 
$
124,007

 
$
16,711

 
$
15,991

 
$
22,998

Operating income(a)
$
49,185

 
$
47,809

 
$
62,791

 
$
1,241

 
$
954

 
$
7,176

Depreciation, depletion, and amortization (DD&A)
$
24,360

 
$
20,460

 
$
17,908

 
$
3,303

 
$
3,194

 
$
3,268

Average daily production (MBoe/d)
23.0

 
20.8

 
19.5

 
6.6

 
6.6

 
7.9

Production (oil % of total)
100
%
 
100
%
 
100
%
 
41
%
 
41
%
 
35
%
Realized sales prices:
 
 
 
 
 
 
 
 
 
 
 
Oil (per Bbl)
$
59.00

 
$
63.91

 
$
69.13

 
$
48.82

 
$
44.92

 
$
57.45

NGLs (per Bbl)
$

 
$

 
$

 
$
12.10

 
$
16.86

 
$
37.75

Gas (per Mcf)
$

 
$

 
$

 
$
2.12

 
$
2.16

 
$
2.55

Capital expenditures(b)
$
59,076

 
$
52,374

 
$
35,124

 
$
2,064

 
$
1,443

 
$
2,624

__________
(a)
Operating income comprises oil, natural gas and NGL sales, offset by operating expenses, general and administrative expenses, DD&A, and taxes, other than income taxes.
(b)
Excludes corporate capital expenditures.


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Production and Prices
The following table sets forth information regarding average daily production, total production and average prices for each of the periods indicated.
 
Three Months Ended
 
September 30, 2019
 
June 30, 2019
 
September 30, 2018
Average daily production:(1)(3)
 
 
 
 
 
Oil (MBbl/d)
25.7

 
23.5

 
22.3

Natural Gas (MMcf/d)
20.9

 
20.8

 
27.4

NGL (MBbl/d)
0.4

 
0.4

 
0.5

Total (MBoe/d)(2)
29.6

 
27.4

 
27.4

Total Production:(3)
 
 
 
 
 
Oil (MBbl)
2,360

 
2,142

 
2,049

Natural gas (MMcf)
1,920

 
1,894

 
2,523

NGLs (MBbl)
39

 
39

 
49

Total (MBoe)(2)
2,719

 
2,497

 
2,520

Weighted-average realized sales prices:
 
 
 
 
 
Oil without hedges ($/Bbl)
$
57.92

 
$
61.69

 
$
67.67

Oil with hedges ($/Bbl)
$
65.23

 
$
61.82

 
$
67.23

Natural gas ($/Mcf)
$
2.12

 
$
2.16

 
$
2.55

NGL ($/Bbl)
$
12.10

 
$
16.86

 
$
37.75

Average Benchmark prices:
 
 
 
 
 
Oil (Bbl) – Brent
$
62.03

 
$
68.47

 
$
75.84

Oil (Bbl) – WTI
$
56.33

 
$
59.86

 
$
69.60

Gas (MMBtu) – Kern, Delivered(4)
$
2.50

 
$
2.07

 
$
4.12

__________
(1)
Production represents volumes sold during the period. We also consume a portion of the natural gas we produce on lease to extract oil and gas.
(2)
Natural gas volumes have been converted to Boe based on energy content of six Mcf of gas to one Bbl of oil. Barrels of oil equivalence does not necessarily result in price equivalence. The price of natural gas on a barrel of oil equivalent basis is currently substantially lower than the corresponding price for oil and has been similarly lower for a number of years. For example, in the three months ended September 30, 2019, the average prices of Brent oil and Henry Hub natural gas were $62.03 per Bbl and $2.38 per MMBtu respectively, resulting in an oil-to-gas ratio of approximately 4 to 1 on an energy equivalent basis.
(3)
On November 30, 2018, we sold our non-core gas-producing properties and related assets located in the East Texas basin.
(4)
Kern, Delivered Index is the relevant index used for gas purchases in California.
The following table sets forth average daily production by operating area for the periods indicated:
 
Three Months Ended
 
September 30, 2019
 
June 30, 2019
 
September 30, 2018
Average daily production (MBoe/d):(1)
 
 
 
 
 
California
23.0

 
20.8

 
19.5

Rockies
6.6

 
6.6

 
7.1

East Texas(2)

 

 
0.7

Total average daily production
29.6

 
27.4

 
27.4

__________
(1)
Production represents volumes sold during the period.
(2)
On November 30, 2018, we sold our non-core gas-producing properties and related assets located in the East Texas basin.
Average daily production, including sales of inventory, increased 8% for the three months ended September 30, 2019 compared to the three months ended June 30, 2019, due to production response from our development capital focused on California oil. Our California production of 23.0 MBoe/d for the third quarter of 2019 increased 10% from the second quarter of 2019.

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Average daily production volumes increased 8% for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 due to production response from development capital spending throughout 2018 and 2019, which offset the natural decline of our properties as well as the sale of our East Texas properties in November 2018. Production increased 18% in California, where the substantial majority of our development capital was deployed, for the three months ended September 30, 2019 compared to the same period in 2018. This increase strongly demonstrated the ability of our California properties to respond to capital and perform as expected.
The following table sets forth information regarding total production, average daily production, average prices and average costs for each of the periods indicated.
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
Average daily production:(1)(3)
 
 
 
Oil (MBbl/d)
24.5

 
21.5

Natural Gas (MMcf/d)
20.4

 
27.7

NGL (MBbl/d)
0.4

 
0.6

Total (MBoe/d)(2)
28.3

 
26.7

Total Production:(3)
 
 
 
Oil (MBbl)
6,673

 
5,867

Natural gas (MMcf)
5,565

 
7,555

NGLs (MBbl)
116

 
157

Total (MBoe)(2)
7,717

 
7,284

Weighted-average realized sales prices:
 
 
 
Oil without hedges ($/Bbl)
$
58.79

 
$
65.97

Oil with hedges ($/Bbl)
$
63.09

 
$
57.96

Natural gas ($/Mcf)
$
2.67

 
$
2.44

NGL ($/Bbl)
$
17.74

 
$
28.93

Average Benchmark prices:
 
 
 
Oil (Bbl) – Brent
$
64.75

 
$
72.74

Oil (Bbl) – WTI
$
57.03

 
$
66.83

Gas (MMBtu) – Kern, Delivered(4)
$
3.19

 
$
3.01

__________
(1)
Production represents volumes sold during the period. We also consume a portion of the natural gas we produce on lease to extract oil and gas.
(2)
Natural gas volumes have been converted to Boe based on energy content of six Mcf of gas to one Bbl of oil. Barrels of oil equivalence does not necessarily result in price equivalence. The price of natural gas on a barrel of oil equivalent basis is currently substantially lower than the corresponding price for oil and has been similarly lower for a number of years. For example, in the nine months ended September 30, 2019, the average prices of Brent oil and Henry Hub natural gas were $64.75 per Bbl and $2.62 per MMBtu, respectively, resulting in an oil-to-gas ratio of approximately 4 to 1 on an energy equivalent basis.
(3)
On November 30, 2018, we sold our non-core gas-producing properties and related assets located in the East Texas basin.
(4)
Kern, Delivered Index is the relevant index used for gas purchases in California.
The following table sets forth average daily production by operating area for the periods indicated:
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
Average daily production (MBoe/d):(1)
 
 
 
California
21.6

 
19.0

Rockies
6.7

 
6.9

East Texas(2)

 
0.8

Total average daily production
28.3

 
26.7

__________
(1)
Production represents volumes sold during the period.
(2)
On November 30, 2018, we sold our non-core gas-producing properties and related assets located in the East Texas basin.

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Average daily production volumes increased 6% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due to production response from development capital spending throughout 2018 and 2019, which offset the natural decline of our properties as well as the sale of our East Texas properties in November 2018. For the nine months ended September 30, 2019 California production increased 14% compared to the nine months ended September 30, 2018 as the substantial majority of our development capital was deployed throughout our California operations showing the strong ability of our California properties to respond to capital and perform as expected.



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Results of Operations
Three Months Ended September 30, 2019 compared to Three Months Ended June 30, 2019.
 
Three Months Ended
 
 
 
 
 
September 30, 2019
 
June 30, 2019
 
$ Change
 
% Change
 
(in thousands)
 
 
Revenues and other:
 
 
 
 
 
 
 
Oil, natural gas and NGL sales
$
141,250

 
$
136,908

 
$
4,342

 
3
 %
Electricity sales
7,460

 
5,364

 
2,096

 
39
 %
Gain (losses) on oil derivatives
45,509

 
27,276

 
18,233

 
67
 %
Marketing and other revenues
453

 
518

 
(65
)
 
(13
)%
Total revenues and other
$
194,672

 
$
170,066

 
$
24,606

 
14
 %
Revenues and Other
Oil, natural gas and NGL sales increased $4 million, or 3%, to approximately $141 million for the three months ended September 30, 2019 compared to the three months ended June 30, 2019. This increase reflected higher oil volumes that were partially offset by lower oil prices.
Electricity sales represent sales to utilities, and increased $2 million, or 39%, to approximately $7 million for the three months ended September 30, 2019 compared to the three months ended June 30, 2019. The increase primarily reflected higher unit sales prices including seasonal capacity payments during the third quarter of 2019 compared to the second quarter.
Gains on oil derivatives were approximately $46 million, including settled gains of $17 million, for the three months ended September 30, 2019 compared to gains of approximately $27 million, primarily consisting of mark-to-market gains, for the three months ended June 30, 2019. Gains for the third quarter of 2019 were the result of lower oil prices relative to the fixed prices of our derivative contracts.
Marketing and other revenues were comparable for the three months ended September 30, 2019 and the three months ended June 30, 2019. Marketing revenues in these periods represented sales of natural gas purchased from third-parties.

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Table of Contents

 
Three Months Ended
 
$ Change
 
% Change
 
September 30, 2019
 
June 30, 2019
 
 
(in thousands, except expenses per Boe)
 
 
 
Expenses and other:
 
 
 
 
 
 
 
Lease operating expenses
$
50,957

 
$
47,879

 
$
3,078

 
6
 %
Electricity generation expenses
3,781

 
3,164

 
617

 
20
 %
Transportation expenses
2,067

 
1,694

 
373

 
22
 %
Marketing expenses
398

 
421

 
(23
)
 
(5
)%
General and administrative expenses
16,434

 
16,158

 
276

 
2
 %
Depreciation, depletion and amortization
27,664

 
23,654

 
4,010

 
17
 %
Taxes, other than income taxes
9,249

 
11,348

 
(2,099
)
 
(18
)%
Losses (gains) on natural gas derivatives
3,008

 
9,449

 
(6,441
)
 
(68
)%
Other operating (income) expenses
(550
)
 
3,119

 
(3,669
)
 
(118
)%
Total expenses and other
113,008

 
116,886

 
(3,878
)
 
(3
)%
Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(8,597
)
 
(8,961
)
 
364

 
(4
)%
Other, net
(77
)
 

 
(77
)
 
(100
)%
Reorganization items, net
(170
)
 
(26
)
 
(144
)
 
554
 %
Income before income taxes
72,820