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CEO: Berry Ripe for More Deals in East Texas, Piceance

Berry Petroleum Co., which plucked a bushel of natural gas-rich acreage in East Texas last month, sees some opportunity for bolt-on acquisitions, the CEO said Friday.

The independent, which moved its corporate headquarters to Denver from Bakersfield, CA, more than doubled its net income from a year ago to $49 million ($1.08/share), compared with $21.4 million (48 cents) in 2Q2007. Revenue topped $215.4 million. Energy analysts had pegged earnings to average $1.19/share on revenue of $207.4 million. Operating costs, however, were up 55% to $55.2 million, mostly because of increased volumes of conventional steam generation from its Poso Creek facility, which required higher-priced natural gas.

Net production averaged 29,000 boe/d, which was 7% higher than in the period a year ago.

CEO Robert Heinemann, who spoke with energy analysts during a conference call Friday, said the company's natural gas assets, which now are about a third of Berry's output, are growing in Colorado's Piceance Basin, where output rose 24% sequentially from 1Q2008 to average 20.8 MMcf/d.

"We completed 12 wells in the Piceance during the quarter, and we expect to bring an additional 19 wells on production during the third quarter," he said. In the DJ [Denver-Julesburg] Basin, production "was steady at 19.6 MMcf/d and we also completed the interpretation of an additional 75 square miles of recently acquired seismic data in the DJ and expect to replenish our low-risk drilling inventory."

However, Heinemann warned that in September Berry's gas production in the Piceance will be curtailed for 23 days when the Rockies Express Pipeline (REX) performs a hydrostatic test on a section of the pipe between the Steele City and Turney stations. The work is scheduled to begin Sept. 3 and is expected to be completed around Sept. 26, according to a REX informational posting. During the work deliveries to ANR Brown and PEPL Audrain would be unavailable, the posting indicated.

Berry would have an estimated 12-13 MMcf/d shut in because of the REX testing, Heinemann told analysts. "That's the amount of production we'll lose out from firm transportation. It's prorated from contracts in place," he said. "There's a chance we'll do better than that on our guidance."

The Rockies differentials remain volatile, the CEO said. "REX filled up quickly," Heinemann noted. "We do have 35 MMcf/d of firm capacity on REX, and we're an anchor shipper on Ruby," El Paso Corp.'s proposed Ruby Pipeline LLC, which would carry Rockies gas to the West Coast (see NGI, June 30). "It looks like it's proceeding, and we'll have firm capacity on Ruby. What we are going to do is tailor our capital spending programs to decide how much additional gas to develop beyond firm transportation [agreements].

"In the Piceance, the good news is that drilling efficiencies are more than offsetting steel prices. We're pleased with the rates of return," he added.

Berry's success is not tied to the Rockies, however. Traditionally weighted to heavy oil, last month Berry secured almost half a million acres of land in the gas-prone East Texas region, which added a new core area to its operations (see NGI, June 16). On the gas side, Berry has to weigh how much to spend in its Piceance operations and how much to invest in Texas, said Heinemann.

"What will happen is we'll move beyond firm capacity [from the Rockies play], and depending on the price, the differentials, other opportunities in the company, that will guide us in the near term in what we invest in the Piceance. Now we have a portfolio of opportunities to make conscious decisions about how to allocate our capital," he said.

Berry completed its East Texas purchase earlier this month. Proved reserves are estimated to be 335 Bcfe with an all-in finding and development cost of $2.77/Mcfe. The acquisition adds around 32 MMcfe/D to Berry's production from 100 producing wells.

"Development plans include more than 100 drilling locations targeting stacked pays in various productive zones including the Pettit, Travis Peak, Cotton Valley, and Bossier sands, and the Bossier and [northwestern Louisiana] Haynesville shales," said Heinemann. "We increased our 2008 capital budget by $75 million to a total of $370 million to fund the development of this asset."

Berry, he said, conducted three 30-day vertical Haynesville tests, which averaged 1.2 MMcf/d per well.

"With the contribution of these assets, Berry's production today tops 35,000 boe/d, and we expect to deliver a 20% to 25% increase in production over 2007 and a 40% to 45% increase in net proved reserves in 2008 at a finding and development cost between $10 and $13/boe," aid the CEO.

Berry expects to end the year with between 235 million boe and 250 million boe of proved reserves and average production for the year of 32,500-33,500 boe/d.

Asked about additional acquisitions, Heinemann said "beyond producing more gas than we want to consume for steam, we've never thought of the company as set at 70% oil, 30% gas. Whatever we do, we look at an asset as what it can create in the company. We continue to see bolt-on acquisitions in East Texas, and really, that's our style at Berry. We take a proved position and expand out from that. We'll be looking for attractive bolt-ons in Texas, and use the same strategy in Colorado."

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