Berry Petroleum Company

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Berry Petroleum Company

28700 Hovey Hills Road
Taft, California 93268
U.S.A.
Telephone: (661) 769-8811
Fax: (661) 768-8960
Web site: http://www.bry.com

Public Company
Incorporated: 1985
Employees: 115
Sales: $138.5 million (2001)
Stock Exchanges: New York
Ticker Symbol: BRY
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Berry Petroleum Company is a small independent oil producer whose reserves are mostly located in the California counties of Kern, Los Angeles, and Ventura. Virtually all of the company’s reserves are heavy crude oil, which must be heated and then pumped to the surface (unless the deposits are located deep in the earth and thereby naturally heated). Berry uses steam in order to facilitate drilling and pumping, then blends with lighter crudes in order to transport the heavy crude through pipelines. Because of its dependence on steam, Berry owns three cogeneration plants that run on natural gas. Not only do these facilities supply 60 percent of the company’s steam needs, their turbines produce secondary electricity which is then sold to California utilities. As a result, Berry is able to turn a profit on steam and maintain a low-cost in its drilling operation. Berry also owns its oil-producing properties rather than leasing, freeing the company of royalty payments. In addition, the company owns other aspects of the field operation, including transportation, treating facilities, and storage. By maintaining an ownership position in so many facets of its operation, Berry has been able to remain profitable under difficult economic conditions, unlike many competitors whose financial health is overly dependent on the fluctuating price of oil.

Striking Gold in the Yukon: Clarence J. Berry and the 1890s

The founder of the oil companies that would one day be combined to form Berry Petroleum Company was Clarence J. Berry. He grew up in Fresno, California, the son of a struggling fruit farmer. Anxious to avoid the hardscrabble life of his parents, Berry grew into an ambitious young man who was eager to make his fortune. In 1894, he borrowed money from friends and relatives to travel to Alaska, but not before convincing his childhood sweetheart, Ethel Bush, who lived on a neighboring farm, to wait for him. Although the major gold discovery in the Klondike was still two years away, Alaska had already experienced an influx of prospectors because of the 1886 discovery of gold on the Fortymile River (east of Fairbanks, close to the Canadian border). Berry arrived in Alaska with only a few dollars in his pocket, yet stayed for 18 months before returning home to marry Ethel in March 1896. Along with his younger brother, Fred, the newlyweds caught a boat from Seattle to Skagway, Alaska, where they then trekked north by foot and dog team to the mining town of Fortymile. The area had now been combed over by prospectors for a decade, and Berry had no luck in his attempts to find gold. Instead of continuing to prospect for gold, he went to work as a bartender for a man named Bull McPhee. He was practically broke when news came of the Yukon gold strike upriver, which would prove to be one of the richest discoveries in history. In order to take advantage of a once-in-a-lifetime chance, Berry borrowed money from McPhee to quickly outfit an attempt to strike a claim in the new gold fields. Wasting no time, he dispatched Ethel to hail a boat headed upriver, while he and his brother took only enough time to gather food, bedding, a tent, and essential tools. Because of Berry’s quick actions, they were among the first to reach the Yukon and stake a claim on Eldorado Creek, one that soon made them wealthy. (McPhee’s help would also be amply rewarded. A decade later when McPhee’s Fairbank’s establishment burned down, Berry allowed his old boss to draw on his funds in order to rebuild and restock. In addition, he arranged a lifelong pension for McPhee.) After working the claim for a year, the Berry party returned home to California for the winter, taking the steamship Portland to Seattle. Once the Portland arrived in Seattle and word of the Yukon strike became general knowledge, the famous Alaskan gold rush was launched.

Unlike so many other Yukon millionaires, Berry kept both his head and his wealth. In fact, he continued to work hard in Alaska and made even more money. He and his family worked the Yukon claim for the next five years. Interestingly enough, he was credited with introducing the use of steam to the area’s mining efforts. Attaching a steam hose to a rifle barrel, he helped develop the steam point, which thawed the hard frozen ground by injecting steam under the surface. After 1902, he and his brothers relocated to the Ester Creek areas near Fairbanks, where he made yet another fortune, followed by a third in Circle, Alaska.

Berry and his wife then returned to live in California, where as early as 1899 he had become involved in starting up oil companies. For decades area tar pits had been drilled for oil, but it was not until the success of hand-dug oil wells in the Kern River field in 1899 that a regional oil boom resulted. By the time Berry left Alaska, Kern River, along with the nearby Midway-Sunset field, had made California into the leading oil producing state in the nation. With the wealth he had accumulated in Alaska, Berry was able to buy up promising tracts of land in Kern County, and soon he began drilling for oil. In 1909, he completed his first successful well in the Midway-Sunset field. To exploit this property he created the Ethel D. Company, named after his wife, which continued to produce oil some 90 years later.

Family Operation Leading to Formation of Berry Petroleum Company: 1900s–80s

Berry, the former farmer turned gold prospector, was now an oilman who relished his new line of endeavor. He formed a wide array of oil companies to exploit his various properties, often forming partnerships with friends and family, who shared in the rewards of such operations, including B & E, BB & O, Berry & Ewing, Tightwad, and Surprise. To manage some of his various business interests, Berry formed Berry Holding Company in 1916. When he died suddenly in 1930, members of his family continued to run the operation until 1983, when professional managers were brought in, led by Harvey L. Bryant. In 1985, in order to streamline the operation, Berry Petroleum Company was incorporated in Delaware. It became the surviving company after merging with Berry Holding and a number of other family enterprises. Also in 1985, Eagle Creek Mining and Drilling Company was created to hold non-oil and gas producing assets, including a well servicing and drilling company. The next step in the transformation of Berry was the December 1986 purchase of an 80 percent stake in the Norris Oil Company from ABEG, Inc. The balance of the company was then acquired in June 1987. Not only did Berry pick up oil and gas properties in the Rincon field in Ventura County, as well as gas reserves in Colorado, it also, through the Norris purchase, became a publicly traded company, available over the counter on the NASDAQ. In June 1989, the company increased the number of total shares, making more than 1.5 million shares priced at $25.50 available to the public. Berry subsequently moved to the New York Stock Exchange. Nevertheless, the company remained very much a family-controlled business, with at least three-quarters of the company’s stock in the hands of Clarence Berry’s descendants.

Berry was a small but profitable company through the 1980s. Nevertheless, while it generally enjoyed the benefits of controlling so many aspects of the production process, it was at the mercy of the major oil companies in transporting its Kern County crude to California refineries. The situation improved somewhat with the opening of the All-American pipeline, which allowed crude to be transported to refineries on the Gulf Coast. In addition, the independent Four Corners pipeline opened, transporting product to Los Angeles refineries. Because Four Corners was not heated, however, Berry had to build a blending station in order to mix its heavy crude with lighter grades of oil in order to create a blend capable of being piped. Because of the heavy crude, Berry also invested in cogeneration plants, at first relying on its own fuel to fire the turbines, then moving to natural gas in order to meet state environmental regulations.

Throughout the 1980s the major oil companies invested heavily in Kern County. The price for this crude would be suppressed by the influx of Alaskan oil transported by pipeline into the California market. When the entire world was glutted with oil in the early 1990s following the Gulf War, the result was a price per barrel for California’s heavy oil that was less than it cost most companies to produce. While the majors and many independents were forced to shut down their wells, Berry, with its lower cost structure, was still able to turn a profit. Nevertheless, the company needed to initiate some retrenching efforts. Approximately 400 of the company’s 1,300 wells were shut down, as was an unprofitable blending plant. The budget for drilling was suspended. Electricity and steam usage was trimmed, as was the well-service fleet (from nine units to just four). Overall, staff was cut by 20 percent; the salaries of those that remained were reduced by 10 percent, and for the first time in a generation there was no Christmas bonus for workers. With zero debt, $35 million in cash, and the ability to make money on California crude in the harshest of economic conditions, Berry was much better situated than its competitors.

Despite this advantage, management felt the need to spread to other regions of the country, in particular south Texas and Louisiana. Such attempts at diversification, however, did not amount to much. Berry remained a California oil company, and once oil prices rebounded in the mid-1990s it renewed its focus on its traditional core oil fields.

Company Perspectives:

Berry Petroleum Company is an independent oil producer with significant experience in heavy crude production.

Pipeline Rupture: 1993

Berry lost $1.1 million in 1994 after essentially breaking even in 1993. The company would have actually turned a slight profit in 1994 had it not incurred a $1.3 million charge related to an oil spill that occurred in December 1993, an accident that not only resulted in bad publicity but threatened criminal prosecution of Berry’s senior officers. An underground pipeline used by Berry subsidiary Bush Oil Co. began to leak on December 16, then suffered a major rupture five days later and spewed oil for four days before being stopped. All this activity went undetected by workers despite the fact that approximately 84,000 gallons of oil failed to reach a storage tank. Instead, the crude seeped into McGrath Lake, located in the wildlife habitat of McGrath State Park, as well as the ocean near Oxnard. To make matters worse, at least seven area public safety agencies were alerted to the spill by witnesses, but none of them took the trouble to investigate. Thousands of additional gallons continued to pour from the ruptured pipeline before a federal Minerals Management Service worker happened to notice offshore oil slicks from a helicopter while on his way to inspect an offshore oil platform. It was Ventura County’s worst oil spill, contaminating miles of beach, dunes, and sensitive wildlife refuges. Cleanup efforts ultimately cost around $15 million, although Berry’s insurance covered much of the expense.

In the aftermath of the spill, as cleanup efforts made significant progress, local prosecutors threatened Berry’s management with felony charges, although this was more than likely only a plea-bargaining ploy. The facts surrounding the spill certainly left Berry in a vulnerable position. The company had acquired the 40-year-old pipeline from Chevron in 1990 after it had been abandoned for some ten years. The line had been used to transport natural gas, yet Berry began to pump crude oil through it without making any upgrades. Moreover, it was revealed that ten months before the oil spill occurred, a safety valve that might have prevented the leak had broken, and no one supervising the pipeline bothered to repair it. Both Berry and the state negotiated through the press, with Berry countering prosecutors threats with talk of suing the agencies that neglected to investigate witness reports and notify company officials of the leak. Several months later Berry agreed to pay a $600,000 settlement and pleaded no contest to a single misdemeanor charge of failing to report the leak. In addition, the foreman on duty during the spill pleaded no contest to a charge of illegally releasing oil into marine water and was ordered to perform 320 hours of beach cleanup. Although free of criminal charges, Berry still faced a civil case from the state attorney general’s office. That matter was not to be settled until January 1992, when the company agreed to a $3.2 million fine.

Berry returned to profitability in 1995 and initiated a five-year growth strategy that resulted in the acquisition of a number of valuable oil properties in the South-Midway-Sunset field as well as three cogeneration facilities. As a result, Berry’s reserves increased significantly and the company was well positioned to increase production to take advantage of oil prices that rebounded after a 1998 collapse in the market. Early in 1999, California crude was selling at $7 per barrel. A year later, it sold at $19 per barrel. The company’s profit was also enhanced by an improved infrastructure, especially its cogeneration capabilities. Not only did its turbines supply most of the company’s need for steam and electricity, Berry also began selling off excess electricity at a profit. Sales of electricity grew from $11.5 million in 1996 to $52.77 million in 2000. Although the cost to operate the facility also rose dramatically, due in large part to the rising cost of natural gas, the company began to turn a profit on electricity by the end of the 1990s. Overall, Berry enjoyed record results in 1999 and 2000, posting net earnings of $18 million and $37.2 million, respectively.

The energy crisis that gripped California in 2000 and 2001 had an adverse effect on Berry. Two of its major customers for electricity, Pacific Gas and Electric Company and Southern California Edison Company, were pushed to the edge of bankruptcy and in early 2001 were unable to pay for the power that Berry had delivered in the previous months. Berry cut back on its production of electricity, shutting down four of its five turbines. Because there was less steam as a result, the company was forced to curtail its 2001 capital development program and took on a modest debt load. Despite these developments, Berry enjoyed another profitable year in 2001, with net earnings of nearly $22 million.

The power situation in California stabilized, and by March 2002 Edison was able to repay Berry $13.5 million, which was earmarked to reduce the company’s long-term debt from $25 million to around $12 million. Because of its cogeneration plants, 100 percent ownership of most of its oil-bearing properties, and financial stability, Berry appeared to be well positioned for years of profitable operation.

Principal Competitors

ChevronTexaco Corporation; Key Production; Royal Dutch Petroleum Company.

Key Dates:

1909:: Clarence Berry first strikes oil in California.
1916:: The Berry Holding Company is formed.
1930:: Clarence Berry dies.
1985:: Berry Holding is merged into newly formed Petroleum Company.
1987:: Berry becomes a publicly traded corporation after acquiring Norris Oil.
1993:: A major oil spill results from ruptured pipeline.
1997:: A civil case resulting from oil spill is settled.