Following a 10% reduction in the second quarter, Oaktree Capital Management revealed earlier this week it further trimmed its stake in Berry Corp. (BRY, Financial) by 8.60%.
The alternative asset management firm headquartered in Los Angeles, which was founded by renowned guru Howard Marks (Trades, Portfolio) and several fellow investors in 1995, focuses on delivering superior results while observing its six-tenet investment philosophy of risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing. Specializing in credit strategies, the firm also invests in high-yield bonds, convertible securities, distressed debt, real estate, control investments and listed equities.
According to GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, the firm sold 1 million shares of the upstream energy company headquartered in Dallas and Bakersfield, California on Oct. 10. The trade had an impact of -0.12% on the equity portfolio. The stock traded for an average price of $9 per share on the day of the transaction.
Oaktree now holds 10.62 million shares total, which account for 1.24% of the equity portfolio. GuruFocus data shows the firm has lost an estimated 23.88% on the investment since the first quarter of 2019.
While the market as a whole is lower for the year on the back of high inflation, rising interest rates and other geopolitical and macroeconomic factors, the energy sector is outperforming. Year to date, it has posted a 31.73% return.
While Berry has seen its shares rise around 1.51% so far this year, its performance has lagged other energy players that have jumped on the back of elevated gas prices.
Despite its long history in the oil production industry, California has become increasingly difficult to operate in due to the state’s initiative to entirely phase out of oil extraction by 2045. As such, oil and gas companies may have to reassess their future plans in the Golden State.
Citing people familiar with the matter, Reuters reported on Oct. 6 that Berry, which primarily operates in the San Joaquin Basin of California, is “considering a wide range of options as it undertakes the strategic review with the help of a financial adviser.” While one potential outcome could be a sale, the sources, who asked to remain anonymous, cautioned that a final decision has not yet been made on any course of action.
The company has also not issued any statements on the matter.
Valuation
The oil and gas producer has a $661.59 million market cap; its shares were trading around $8.31 on Thursday with a price-earnings ratio of 209.75, a price-book ratio of 1.03 and a price-sales ratio of 0.72.
The GF Value Line suggests the stock is modestly undervalued currently based on historical ratios, past financial performance and future earnings projections.
Berry’s GF Score of 65 out of 100, however, indicates it has poor future performance potential based on a high momentum rank and middling marks for GF Value, financial strength and profitability. Since there is not enough data to support a growth rank, though, the score may not accurately reflect the company’s potential.
Financials
Berry posted its second-quarter results on Aug. 3.
For the three months ended June 30, the company posted net income of $43 million, or earnings of 52 cents per share, on $293.79 million in revenue. Both figures were up from the prior-year quarter.
The company is scheduled to release its financials for the third quarter on Nov. 2.
Berry’s financial strength and profitability were both rated 5 out of 10 by GuruFocus. Despite having adequate interest coverage, the low Altman Z-Score of 0.93 warns the company could be at risk of bankruptcy. The return on invested capital, however, slightly exceeds the weighted average cost of capital, so value is being created as the company grows.
The company’s returns on equity, assets and capital are underperforming a majority of competitors. Its margins are healthy, however. Berry is also supported by a high Piotroski F-Score of 7 out of 9, meaning operations are healthy even though it has recorded a decline in revenue per share in recent years.
Guru ownership
Despite the continued reductions, Marks’ firm remains the largest guru shareholder of Berry with a 13.49% stake. As of the end of the second quarter, 13F filings show Hotchkis & Wiley, Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Azvalor Managers FI (Trades, Portfolio) also have positions in the stock.
Portfolio composition
Oaktree's $7.69 billion equity portfolio, which the 13F filing showed was composed of 267 stocks as of June 30, is most heavily invested in the energy sector, followed by smaller exposures to the financial services, industrials and utilities spaces.
Other energy stocks the firm held as of the end of the second quarter included Chesapeake Energy Inc. (CHK, Financial), TORM PLC (TRMD, Financial), Petroleo Brasileiro SA Petrobas (PBR, Financial), Weatherford International PLC (WFRD, Financial) and Civitas Resources Inc. (CIVI, Financial). See all of Oaktree's holdings here.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
