Table of Contents

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 March 31, 2011

o 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 1-9735

BERRY PETROLEUM COMPANY LOGO

BERRY PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE   77-0079387
(State of incorporation or organization)   (I.R.S. Employer Identification Number)

1999 Broadway, Suite 3700
Denver, Colorado 80202
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (303) 999-4400

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  o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  ý NO  o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o

Non-accelerated filer o
 
Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  o NO  ý

        As of April 21, 2011 the registrant had 51,557,180 shares of Class A Common Stock ($.01 par value) outstanding. The registrant also had 1,797,784 shares of Class B Stock ($.01 par value) outstanding on April 21, 2011, all of which is held by an affiliate of the registrant.

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BERRY PETROLEUM COMPANY
INDEX TO FORM 10-Q
March 31, 2011

 
   
  Page

PART I. FINANCIAL INFORMATION

   
 

Item 1.

 

Financial Statements (Unaudited)

   

 

Condensed Balance Sheets at March 31, 2011 and December 31, 2010

  3

 

Condensed Statements of Operations for the three months ended March 31, 2011 and 2010

  4

 

Condensed Statements of Cash Flows for the three months ended March 31, 2011 and 2010

  5

 

Condensed Statements of Shareholders' Equity for the three months ended March 31, 2011

  6

 

Notes to Condensed Financial Statements

  7
 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  23
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  34
 

Item 4.

 

Controls and Procedures

  37

PART II. OTHER INFORMATION

   
 

Item 1.

 

Legal Proceedings

  38
 

Item 1A.

 

Risk Factors

  38
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  38
 

Item 3.

 

Defaults Upon Senior Securities

  38
 

Item 4.

 

Removed and Reserved

  38
 

Item 5.

 

Other Information

  38
 

Item 6.

 

Exhibits

  39

Signatures

  40

2

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BERRY PETROLEUM COMPANY

Condensed Balance Sheets

(Unaudited)

(In Thousands, Except Share Information)

 
  March 31,
2011 		  December 31,
2010 		 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 80   $ 278  
 

Restricted short-term investments

    65     65  
 

Accounts receivable

    110,199     93,406  
 

Deferred income taxes

    64,024     32,342  
 

Derivative instruments

    2,519     2,742  
 

Prepaid expenses and other

    12,371     14,033  
           
   

Total current assets

    189,258     142,866  

Oil and gas properties (successful efforts basis), buildings and equipment, net

    2,725,567     2,655,792  

Derivative instruments

    1,562     2,054  

Other assets

    35,742     37,904  
           

  $ 2,952,129   $ 2,838,616  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current liabilities:

             
 

Accounts payable

  $ 107,351   $ 106,459  
 

Revenue and royalties payable

    23,685     37,812  
 

Accrued liabilities

    55,100     36,234  
 

Line of credit

    13,500     5,300  
 

Derivative instruments

    139,721     84,846  
           
   

Total current liabilities

    339,357     270,651  

Long-term liabilities:

             
 

Deferred income taxes

    322,990     329,207  
 

Senior secured revolving credit facility

    205,000     170,000  
 

8.25% Senior subordinated notes due 2016

    200,000     200,000  
 

10.25% Senior notes due 2014, net of unamortized discount of $10,376 and $11,035, respectively

    439,624     438,965  
 

6.75% Senior notes due 2020

    300,000     300,000  
 

Asset retirement obligation

    55,520     53,443  
 

Derivative instruments

    87,035     33,526  
 

Other long-term liabilities

    18,231     18,271  
           

    1,628,400     1,543,412  

Shareholders' equity:

             
 

Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares outstanding

    —     —  
 

Capital stock, $.01 par value:

             
   

Class A Common Stock, 100,000,000 shares authorized; 51,524,080 and 51,426,232 shares issued and outstanding, respectively

    516     514  
   

Class B Stock, 3,000,000 shares authorized;1,797,784 shares issued and outstanding (liquidation preference of $899)

    18     18  

Capital in excess of par value

    334,220     327,369  

Accumulated other comprehensive loss

    (34,283 )   (43,806 )

Retained earnings

    683,901     740,458  
           
   

Total shareholders' equity

    984,372     1,024,553  
           

  $ 2,952,129   $ 2,838,616  
           

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

3

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BERRY PETROLEUM COMPANY

Condensed Statements of Operations

(Unaudited)

(In Thousands, Except Per Share Data)

 
  Three months ended
March 31, 		 
 
  2011   2010  

REVENUES

             
 

Sales of oil and gas

  $ 187,389   $ 147,807  
 

Sales of electricity

    6,412     9,933  
 

Gas marketing

    3,685     8,272  
 

Interest and other income, net

    128     164  
           

    197,614     166,176  

EXPENSES

             
 

Operating costs—oil and gas production

    57,083     47,036  
 

Operating costs—electricity generation

    6,113     9,670  
 

Production taxes

    7,391     5,204  
 

Depreciation, depletion & amortization—oil and gas production

    52,109     35,907  
 

Depreciation, depletion & amortization—electricity generation

    501     795  
 

Gas marketing

    3,516     7,786  
 

General and administrative

    16,291     13,835  
 

Interest

    15,655     17,447  
 

Realized and unrealized loss (gain) on derivatives, net

    127,516     (1,603 )
 

Gain on purchase

    (1,046 )   (1,358 )
 

Transaction costs on acquisitions

    —     2,085  
 

Dry hole, abandonment, impairment and exploration

    113     1,369  
           

    285,242     138,173  
           

(Loss) earnings before income taxes

    (87,628 )   28,003  

Income tax (benefit) provision

    (35,131 )   10,334  
           

Net (loss) earnings

  $ (52,497 ) $ 17,669  
           

Basic net (loss) earnings per share

 
$
(0.98
)
$
0.34 		 
           

Diluted net (loss) earnings per share

  $ (0.98 ) $ 0.34  
           

Dividends per share

 
$
0.075 		 
$
0.075 		 
           

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

4

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BERRY PETROLEUM COMPANY

Condensed Statements of Cash Flows

(Unaudited)

(In Thousands)

 
  Three months ended
March 31, 		 
 
  2011   2010  

Cash flows from operating activities:

             
 

Net (loss) earnings

  $ (52,497 ) $ 17,669  
 

Depreciation, depletion and amortization

    52,610     36,702  
 

Gain on purchase

    (1,046 )   (1,358 )
 

Amortization of debt issue costs and net discount

    2,099     2,098  
 

Dry hole and impairment

    —     1,207  
 

Derivatives

    124,459     2,476  
 

Stock-based compensation expense

    3,052     3,031  
 

Deferred income taxes

    (44,321 )   8,548  
 

Other, net

    679     —  
 

Cash paid for abandonment

    (103 )   (22 )
 

Change in book overdraft

    4,736     (1,377 )
 

Changes in operating assets and liabilities:

             
   

Accounts receivable

    (16,330 )   (10,412 )
   

Inventories, prepaid expenses, and other current assets

    1,662     (3,767 )
   

Accounts payable and revenue and royalties payable

    6,577     3,083  
   

Accrued interest and other accrued liabilities

    18,857     5,637  
           

Net cash provided by operating activities

    100,434     63,515  
           

Cash flows from investing activities:

             
 

Exploration and development of oil and gas properties

    (130,672 )   (47,958 )
 

Property acquisitions

    (2,413 )   (132,515 )
 

Capitalized interest

    (10,392 )   (5,967 )
 

Deposits on potential property acquisitions

    —     (500 )
           

Net cash used in investing activities

    (143,477 )   (186,940 )
           

Cash flows from financing activities:

             
 

Proceeds from issuances on line of credit

    124,100     76,100  
 

Repayments of borrowings under line of credit

    (115,900 )   (76,100 )
 

Long-term borrowings under credit facility

    63,500     125,000  
 

Repayments of long-term borrowings under credit facility

    (28,500 )   (227,000 )
 

Financing obligation

    (92 )   (83 )
 

Debt issuance costs

    (4 )   —  
 

Dividends paid

    (4,060 )   (4,040 )
 

Proceeds from issuance of common stock, net

    —     224,337  
 

Proceeds from stock option exercises

    1,573     75  
 

Excess income tax benefit and other

    2,228     (118 )
           

Net cash provided by financing activities

    42,845     118,171  
           

Net decrease in cash and cash equivalents

    (198 )   (5,254 )

Cash and cash equivalents at beginning of period

    278     5,311  
           

Cash and cash equivalents at end of period

  $ 80   $ 57  
           

Noncash investing activities:

             
 

(Decrease) increase in accrued capital expenditures

  $ (24,967 ) $ 9,513  
 

Increase in asset retirement obligations

    917     1,024  

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

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BERRY PETROLEUM COMPANY

Condensed Statement of Shareholders' Equity

(Unaudited)

(In Thousands, Except Per Share Data)

 
  Class
A 		  Class
B 		  Capital in
Excess of Par
Value 		  Retained
Earnings 		  Accumulated
Other
Comprehensive
Loss 		  Total
Shareholders'
Equity 		 

Balances at December 31, 2010

  $ 514   $ 18   $ 327,369   $ 740,458   $ (43,806 ) $ 1,024,553  
 

Issuance of stock

    —     —     —     —     —     —  
 

Stock options and restricted stock issued

    2     —     1,571     —     —     1,573  
 

Stock based compensation

    —     —     3,052     —     —     3,052  
 

Income tax effect of stock option exercises

    —     —     2,228     —     —     2,228  
 

Dividends ($0.075 per share)

    —     —     —     (4,060 )   —     (4,060 )
 

Comprehensive loss:

                                     
   

Net loss

    —     —     —     (52,497 )   —     (52,497 )
   

OCI amortization of de-designated hedges, net of income taxes

    —     —     —     —     9,523     9,523  
                                     
 

Total comprehensive loss

    —     —     —     —     —     (42,974 )
                           

Balances at March 31, 2011

  $ 516   $ 18   $ 334,220   $ 683,901   $ (34,283 ) $ 984,372  
                           

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

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BERRY PETROLEUM COMPANY

Notes to Condensed Financial Statements

(Unaudited)

1. Basis of Presentation

        These Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting. All adjustments which are, in the opinion of management, necessary to present fairly Berry Petroleum Company's (the Company) Condensed Financial Statements have been included herein. Interim results are not necessarily indicative of expected annual results because of the impact of fluctuations in prices received for oil and natural gas, as well as other factors. In the course of preparing the Condensed Financial Statements, management makes various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenues and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events, and, accordingly, actual results could differ from amounts previously established.

        The Company's Condensed Financial Statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company's audited financial statements as of and for the year ended December 31, 2010. The year-end Condensed Balance Sheet was derived from audited Financial Statements included in such report, but does not include all disclosures required by GAAP.

        Certain amounts in the prior year financial statements have been reclassified to conform to the 2011 financial statement presentation. The Company revised Comprehensive (loss) earnings for the three months ended March 31, 2010 from $14.3 million to $21.1 million to reflect the correction of a prior period error. The Company has concluded that the presentation error was immaterial to the previously filed financial statements.

        The Company's cash management process provides for the daily funding of checks as they are presented to the bank. Included in accounts payable at March 31, 2011 and December 31, 2010 are $21.0 million and $16.3 million, respectively, representing outstanding checks in excess of the bank balance (book overdraft).

2. Acquisitions

        In March, April and November 2010, the Company completed three separate acquisitions of producing properties located in the Wolfberry trend in the Permian for an aggregate purchase price of approximately $327 million (the Permian Acquisitions). The Permian Acquisitions were financed with net proceeds from the issuance of 8 million shares of the Company's Class A Common Stock in January 2010, cash generated from operations and net proceeds from the issuance of $300 million aggregate principal amount of the Company's 6.75% senior notes due in November 2020.

        The Permian Acquisitions qualify as business combinations and, as such, the Company estimated the fair value of each property as of each acquisition date (the date on which the Company obtained control of the properties). The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements also utilize assumptions of market participants. The Company used a discounted cash flow model based on an income approach and made market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates. Due to the unobservable nature of the inputs, business combinations are deemed to use Level 3 inputs.

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BERRY PETROLEUM COMPANY

Notes to Condensed Financial Statements (Continued)

(Unaudited)

2. Acquisitions (Continued)

        For the three months ended March 31, 2011, the Company recorded a $1.0 million gain (net of deferred income taxes of $0.7 million) in conjunction with usual and customary post-closing adjustments in the first quarter of 2011 to the purchase price of the November 2010 Permian acquisition. The gain was recorded in the Condensed Statements of Operations under the caption Gain on purchase.

        The following table summarizes the consideration paid to the sellers and the amounts of the assets acquired and liabilities assumed in the Permian Acquisitions.

 
  (In thousands)  

Consideration paid to sellers:

       

Cash consideration

  $ 327,032  
       

Recognized amounts of identifiable assets acquired and liabilities assumed:

       
 

Proved developed and undeveloped properties

    332,214  
 

Other assets acquired

    342  
 

Asset retirement obligations

    (3,498 )
 

Deferred income tax liability

    (647 )
 

Other liabilities assumed

    (333 )
       

Total identifiable net assets

  $ 328,078  
       

3. Debt

Short-Term Line of Credit

        The Company has an unsecured uncommitted money market line of credit (Line of Credit) with borrowing capacity of up to $40.0 million for a maximum of 30 days. As of March 31, 2011 and December 31, 2010 there were $13.5 million and $5.3 million in outstanding borrowings under the Line of Credit, respectively. Interest on amounts borrowed is charged at LIBOR plus a margin of approximately 1.4%. The $13.5 million of outstanding borrowings under the Line of Credit at March 31, 2011 had a weighted average interest rate of 1.7%.

Senior Secured Revolving Credit Facility

        The Company has a senior secured revolving credit facility (Credit Agreement) with a borrowing base and lender commitments of $875 million. As of March 31, 2011 and December 31, 2010 there were $205 million and $170 million in outstanding borrowings under the Credit Agreement, respectively. The Company's total outstanding debt at March 31, 2011 under the Line of Credit and Credit Agreement was $219 million, and $23 million of letters of credit have been issued under the Credit Agreement, leaving $633 million in borrowing capacity available under the Credit Agreement. At March 31, 2011, the LIBOR and prime rate margins are between 1.75% and 2.75% based on the ratio of credit outstanding to the borrowing base, and the annual commitment fee on the unused portion of the Credit Agreement is 0.50%.

        The maximum amount available is subject to semi-annual redeterminations of the borrowing base based on the value of the Company's proved oil and natural gas reserves in April and October of each year in accordance with the lenders' customary procedures and practices. The Company and the banks

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BERRY PETROLEUM COMPANY

Notes to Condensed Financial Statements (Continued)

(Unaudited)

3. Debt (Continued)


each have the unilateral right to one additional redetermination each year. The Credit Agreement is collateralized by the Company's oil and natural gas properties.

        The Credit Agreement contains restrictive covenants that may limit the Company's ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of its lenders. The Credit Agreement contains restrictive covenants which, among other things, require the Company to maintain the following ratios: (i) an interest coverage ratio, as defined, of 2.75 to 1.0 and (ii) a minimum current ratio, as defined in the Credit Agreement, of 1.0 to 1.0. The Company is currently in compliance with all financial covenants and has complied with all financial covenants for all prior periods.

        On April 13, 2011, the Company entered into a First Amendment (Amendment) to its Credit Agreement. See Note 12 to the Condensed Financial Statements.

4. Income Taxes

        The effective income tax rates for the three months ended March 31, 2011 and 2010 were 40.1% and 36.9%, respectively. The increase in rate in the first quarter of 2011 as compared to the first quarter of 2010 is primarily due to a one-time reduction in deferred state taxes as a result of acquisitions in more tax favorable jurisdictions, reducing future state tax obligations. This benefit increased the effective tax rate due to the Company's reported loss in the first quarter of 2011. The Company's estimated annual effective tax rate varies from the 35% federal statutory rate due to the effects of state income taxes and estimated permanent differences.

        As of March 31, 2011, the Company had a gross liability for uncertain tax benefits of $5.3 million, which if recognized would affect the effective tax rate. There were no significant changes to the calculation subsequent to December 31, 2010. The Company recognized potential accrued interest and penalties related to unrecognized tax benefits in income tax expense during the first quarter of 2011, which is consistent with the recognition of these items in prior periods.

        The Company has accrued approximately $0.8 million of interest related to its uncertain tax positions as of March 31, 2011 and December 31, 2010. The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of March 31, 2011 could decrease by a maximum of $1.9 million in the next 12 months due to the expiration of statutes of limitations and audit settlements.

5. Earnings (Loss) Per Share and Comprehensive (Loss) Earnings

        Basic (loss) earnings per share is calculated by dividing adjusted (loss) earnings available to common shareholders by the weighted average shares outstanding-basic during each period. Diluted (loss) earnings per common share is calculated by dividing (loss) earnings available to common shareholders by the weighted average shares outstanding-dilutive, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted (loss) earnings per share calculations consist of unvested restricted stock awards and outstanding stock options using the treasury method. When a loss exists, all potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted (loss) earnings per share.

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BERRY PETROLEUM COMPANY

Notes to Condensed Financial Statements (Continued)

(Unaudited)

5. Earnings (Loss) Per Share and Comprehensive (Loss) Earnings (Continued)

        The two-class method of computing (loss) earnings per share is required for those entities that have participating securities. The two-class method is an earnings allocation formula that determines earnings per share for participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. Restricted stock issued prior to January 1, 2010 under the Company's equity incentive plans has the right to receive non-forfeitable dividends, participating on an equal basis with common stock. Restricted stock issued subsequent to January 1, 2010 under the Company's equity incentive plans no longer has the right to receive non-forfeitable dividends. Stock options issued under the Company's equity incentive plans do not participate in dividends.

        The following table shows the computation of basic and diluted (loss) earnings per share for the three months ended March 31, 2011 and 2010:

 
  Three months ended
March 31, 		 
(in thousands, except per share data)
  2011   2010  

Net (loss) earnings

  $ (52,497 ) $ 17,669  

Less: earnings allocable to participating securities

    —     359  
           

(Loss) earnings available for shareholders

  $ (52,497 ) $ 17,310  

Basic (loss) earnings per share

  $ (0.98 ) $ 0.34  
           

Diluted (loss) earnings per share

  $ (0.98 ) $ 0.34  
           

Weighted average shares outstanding—basic

    53,866     51,076  

Add: Dilutive effects of stock options and RSUs

    —     365  
           

Weighted average shares outstanding—dilutive

    53,866     51,441  
           

        Options to purchase 1.9 million shares and 1.2 million shares were not included in the diluted (loss) earnings per share calculation for the three months ended March 31, 2011 and 2010, respectively, because their effect would have been anti-dilutive.

Comprehensive (loss) earnings

        Comprehensive (loss) earnings is a term used to refer to net (loss) earnings plus other comprehensive (loss) earnings. Other comprehensive (loss) earnings is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of shareholders' equity instead of net (loss) earnings. The components of other comprehensive (loss) earnings were as follows:

 
  Three months ended
March 31, 		 
(in thousands)
  2011   2010  

Net (loss) earnings

  $ (52,497 ) $ 17,669  

Amortization of Accumulated other comprehensive loss related to de-designated hedges, net of income tax benefits of $5,836 and $2,084, respectively

    9,523     3,400  
           

Comprehensive (loss) earnings

  $ (42,974 ) $ 21,069  
           

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BERRY PETROLEUM COMPANY

Notes to Condensed Financial Statements (Continued)

(Unaudited)