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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

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

(Exact name of registrant as specified in its charter)

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 x 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 o 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.

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

As of April 19, 2010, the registrant had 51,131,921 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 19, 2010 all of which is held by an affiliate of the registrant.

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BERRY PETROLEUM COMPANY

FIRST QUARTER 2010 FORM 10-Q

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BERRY PETROLEUM COMPANY

Unaudited Condensed Balance Sheets

(In Thousands, Except Share Information)

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

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BERRY PETROLEUM COMPANY

Unaudited Condensed Statements of Income

Three Months Ended March 31, 2010 and 2009

(In Thousands, Except Per Share Data)

Unaudited Condensed Statements of Comprehensive Income

Three Months Ended March 31, 2010 and 2009

(In Thousands)

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

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BERRY PETROLEUM COMPANY

Unaudited Condensed Statements of Cash Flows

Three Months Ended March 31, 2010 and 2009

(In Thousands)

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

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Berry Petroleum Company

Notes to Unaudited Financial Statements

1.                      Basis of Presentation

These unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial reporting.   All adjustments which are, in the opinion of management, necessary for a fair statement of Berry Petroleum Company’s (the Company) financial position at March 31, 2010 and December 31, 2009 and results of operations and accumulated other comprehensive loss (AOCL) for the three months ended March 31, 2010 and 2009, and its cash flows for the three months ended March 31, 2010 and 2009 have been included. In the opinion of management, all adjustments, which are of a normal recurring nature, have been made which are necessary for a fair presentation of the financial position. 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 initially established.

The unaudited Condensed Financial Statements have been prepared on a basis consistent with the accounting principles and policies reflected in the December 31, 2009 Financial Statements.  For a more complete understanding of the Company’s operations, financial position and accounting policies, the Unaudited Condensed Financial Statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 previously filed with the SEC. The year-end Condensed Balance Sheet was derived from audited Financial Statements, but does not include all disclosures required by GAAP.

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, 2010 and December 31, 2009 is $14.4 million and $15.7 million, respectively, representing outstanding checks in excess of the bank balance (book overdraft).

2.                      Fair Value Measurements

The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. The Company utilizes a mid-market pricing convention (the mid-point price between bid and ask prices) for valuation as a practical expedient for assigning fair value. Oil swaps, natural gas swaps and interest rate swaps are valued using models which are based on active market data and are classified within Level 2 of the fair value hierarchy. Derivatives that are valued based upon models with significant unobservable market inputs (primarily volatility), and that are normally traded less actively are classified within Level 3 of the valuation hierarchy. These models are industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  The fair value of all derivative instruments are estimated using a combined income and market valuation methodology based upon forward commodity price and volatility curves. The curves are obtained from independent pricing services, and the Company has made no adjustments to the obtained prices.  The pricing services publish observable market information from multiple brokers and exchanges.  No proprietary models are used by the pricing services for the inputs.  All valuations were compared against counterparty valuations to verify the reasonableness of prices. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.  Level 3 derivatives include oil collars, natural gas collars and natural gas basis swaps.  The Company recognizes transfers between levels at the end of the reporting period for which the transfer has occurred.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

The following tables set forth by level within the fair value hierarchy the Company’s derivative assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009.

Assets and liabilities measured at fair value on a recurring basis

Changes in Level 3 fair value measurements

The table below includes a rollforward of the Condensed Balance Sheet amounts (including the change in fair value) for financial instruments classified by the Company within Level 3 of the fair value hierarchy. When a determination is made to classify a financial instrument within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources).

The $3.4 million of transfers out of Level 3 for the three months ended March 31, 2009 represent crude oil collars that were converted to crude oil swaps during the first quarter of 2009.

For further discussion related to the Company’s derivatives see Note 3 to the Condensed Financial Statements.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

Fair Market Value of Financial Instruments

The Company used various assumptions and methods in estimating the fair values of its financial instruments. The carrying amounts of cash and cash equivalents and accounts receivable approximated their fair value due to the short-term maturity of these instruments. The carrying amount of the Company’s credit facilities approximated fair value, because the interest rates on the credit facilities are variable. The fair values of the 8.25% senior subordinated notes due 2016 and the 10.25% senior notes due 2014 were estimated based on quoted market prices. The fair values of the Company’s derivative instruments and other investments are discussed above.

3.                      Derivative Instruments

The Company uses financial derivative instruments as part of its price risk management program to achieve a more predictable, economic cash flow from its oil and natural gas production by reducing its exposure to price fluctuations. The Company has entered into financial commodity swap and collar contracts to fix the floor and ceiling prices received for a portion of the Company’s oil and natural gas production.   The terms of the contracts depend on various factors, including management’s view of future crude oil and natural gas prices, acquisition economics on purchased assets and future financial commitments.  The Company periodically enters into interest rate derivative agreements in an attempt to normalize the mix of fixed and floating interest rates within its debt portfolio.

The Company’s derivative contracts have been executed primarily with counterparties that are party to its senior secured revolving credit facility.

Neither the Company nor its counterparties are required to post collateral in connection with its derivative positions and netting agreements are in place with each of the Company’s counterparties allowing the Company to offset its derivative asset and liability positions.  The credit rating of each of these counterparties was AA-/Aa3, or better as of March 31, 2010.  As of March 31, 2010, the Company’s largest three counterparties accounted for 74% of the value of its total derivative positions.

As of March 31, 2010, the Company had the following commodity derivatives:

For further discussion related to the fair value of the Company’s derivatives see Note 2 to the Condensed Financial Statements.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

The Company entered into the following crude oil collars during the three months ended March 31, 2010:

Discontinuance of cash flow hedge accounting

Prior to January 1, 2010, the Company designated most of its commodity and interest rate derivative contracts as cash flow hedges, whose unrealized fair value gains and losses were recorded to AOCL.  Effective January 1, 2010, however, the Company elected to de-designate all of its commodity and interest rate derivative contracts that had been previously designated as cash flow hedges as of December 31, 2009.  As a result, subsequent to December 31, 2009, the Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in AOCL.

At December 31, 2009, AOCL consisted of $97.4 million, ($60.4 million, net of tax) of unrealized losses, representing the change in the fair value of the Company’s open commodity and interest rate derivative contracts designated as cash flow hedges as of that balance sheet date, less any ineffectiveness recognized.  As a result of discontinuing hedge accounting on January 1, 2010, such fair values at December 31, 2009 are frozen in AOCL as of the de-designation date and reclassified into earnings as the original hedge transactions settle.  During the three months ended March 31, 2010, $5.5 million ($3.4 million, net of tax) of derivative losses relating to de-designated commodity and interest rate hedges were reclassified from AOCL into earnings.  As of March 31, 2010, AOCL consisted of $91.9 million ($57.0 million, net of tax) of unrealized losses on commodity and interest rate derivative contracts that had been previously designated as cash flow hedges.  The Company expects to reclassify into earnings from AOCL after-tax net losses of $22.7 million related to de-designated commodity and interest rate derivative contracts during the next twelve months.

At March 31, 2010, the net fair value derivative liability was $94.1 million as compared to a net fair value liability of $97.4 million at December 31, 2009 which reflects changes in commodity prices and interest rates. Based on NYMEX strip pricing as of March 31, 2010, the Company expects to make payments under the existing derivatives of $35.3 million during the next twelve months.

The related cash flow impact of all of the Company’s derivatives is reflected in cash flows from operating activities.

The Company presents its derivative assets and liabilities on its Condensed Balance Sheets on a net basis.  The Company nets derivative assets and liabilities whenever it has a legally enforceable master netting agreement with a counterparty to a derivative contract.  The Company uses these agreements to manage and reduce its potential counterparty credit risk.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

The following table disaggregates the Company’s net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to master netting arrangements.  Finally, the Company identifies the line items on its Condensed Balance Sheets in which these fair value amounts are included.  The gross asset and liability values in the table below are segregated between those derivatives designated in qualifying hedge accounting relationships and those not designated in hedge accounting relationships.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

The tables below summarize the location and the amount of derivative instrument gains and losses reported in the Condensed Statements of Income for the periods indicated. (in millions):

Amount of gain or (loss) recognized in income on derivatives not designated as hedging instruments under authoritative guidance for the three months ended March 31, 2010 and 2009:

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Berry Petroleum Company

Notes to Unaudited Financial Statements

Three Months Ended March 31, 2009

During the three months ended March 31, 2010, the Company recorded a $1.6 million gain under the caption Realized and unrealized gain on derivatives, net resulting from a gain for the change in fair value of $3.3 million, net of a loss for cash settlements of $1.7 million.

During the three months ended March 31, 2009, the Company recorded a $37.2 million gain under the caption Realized and unrealized gain on derivatives, net.  In conjunction with the sale of the DJ basin assets, during the first quarter of 2009, the Company concluded that the forecasted transaction in certain of its hedging relationships was not probable of occurring.  As such, the Company reclassified a gain of $14.3 million from AOCL to the Condensed Statements of Income under the caption Realized and unrealized gain on derivatives, net.  The Company also recognized an unrealized gain of $22.9 million on the Condensed Statements of Income under the caption Realized and unrealized gain on derivatives, net for the three months ended March 31, 2009, as a result of ineffectiveness related to sales prices that were not highly correlated with the Company’s hedges.  The Company recorded an unrealized net loss of $0.5 million on the Condensed Statements of Income under the caption Loss from discontinued operations, net of taxes during the first quarter of 2009 related to natural gas derivatives entered into on behalf of the purchaser of the Company’s DJ assets for which the Company did not elect hedge accounting.

4.                      Shareholder’s Equity

In January 2010, the Company issued 8,000,000 shares of Class A Common Stock at a price of $29.25 per share. Net proceeds from this offering were $224.3 million after deducting underwriting discounts and commissions and offering expenses. The Company used the net proceeds from the offering to fund the purchase of the Wolfberry Acquisition and to repay a portion of the outstanding borrowings under the senior secured revolving credit facility.  See Note 5 to the Condensed Financial Statements.

5.                      Acquisitions and Divestitures

Acquisitions

On March 5, 2010, the Company acquired interests in producing properties principally on 6,900 acres in the Wolfberry trend in the Permian basin of West Texas (W. Texas) for $132 million, including an initial purchase price of $126 million, and customary post-closing adjustments of approximately $6 million (Wolfberry Acquisition).  The acquisition had an effective date of January 1, 2010 and activity from January 1, 2010 through March 4, 2010 was a purchase price adjustment.  The acquisition was financed with the proceeds from the issuance of the Company’s common stock in January of 2010.  The Company operates approximately 70% of, and has an average 68.5% working interest (54.1% net revenue interest) in, the properties acquired in the Wolfberry trend.

The Wolfberry Acquisition qualifies as a business combination and, as such, the Company estimated the fair value of this property as of the March 5, 2010 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 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.  These assumptions represent Level 3 inputs.

The fair value of the properties acquired exceeded the consideration paid to the seller by $1.4 million which the Company recorded in the Condensed Statements of Income under the caption Transaction costs on acquisitions, net of gain.  The gain resulted from the changes in oil and natural gas prices used to value the reserves.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

The acquisition related costs totaling $2.1 million have been recorded in the Condensed Statements of Income under the caption Transaction costs on acquisitions, net of gain.  Revenues of $1.7 million and earnings of $0.5 million generated by the acquired properties from March 5, 2010 to March 31, 2010 have been included in the accompanying Condensed Statements of Income.

The following table summarizes the consideration paid to the seller and the amounts of the assets acquired and liabilities assumed as of March 5, 2010.  The purchase price allocation is preliminary and subject to customary adjustments.

In February 2010, the Company entered into an agreement and paid a deposit of $0.5 million with a private seller to acquire interests in producing properties in the Wolfberry trend in W. Texas for approximately $14 million cash.  This transaction closed in April 2010. The initial accounting for the business combination is not complete pending detailed analyses of the facts and circumstances that existed as of the acquisition date.

Divestitures

On March 3, 2009, the Company entered into an agreement to sell its DJ basin assets and related hedges for $154 million before customary closing adjustments. The closing date of the sale of the assets was April 1, 2009.  The Company recorded a pre-tax impairment loss of $9.6 million related to the sale, which is aggregated within the $6.8 million Loss from discontinued operations, net of taxes, on its Condensed Statement of Income for the three months ended March 31, 2009.

Loss from discontinued operations, net of taxes, on the accompanying statements of income is comprised of the following (in thousands):

6.                    Dry hole, abandonment, impairment and exploration

In the first quarter of 2010 the Company incurred dry hole, abandonment, impairment and exploration expense of $1.4 million, which was primarily a result of mechanical failure encountered on one well in the Piceance basin. The well was abandoned in favor of drilling a replacement well from the same well pad.  In the first quarter of 2009 the Company had dry hole, abandonment, impairment and exploration charges of $0.1 million.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

7.                      Asset Retirement Obligation (ARO)

The following table summarizes the change in the ARO for the three months ended March 31 (in thousands):

The ARO reflects the estimated present value of the amount of dismantlement, removal, site reclamation and similar activities associated with the Company’s oil and gas properties. Inherent in the fair value calculation of the ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance.

8.                      Debt Obligations

Short-term lines of credit

Borrowings under the Secured Line of Credit may be up to $30 million for a maximum of 30 days.  The Secured Line of Credit may be terminated at any time upon written notice by either the Company or the lender.  In conjunction with the amendment to the Company’s senior secured credit facility, on July 15, 2008, the Secured Line of Credit was collateralized by oil and natural gas properties representing at least 80% of the present value of the Company’s proved reserves.

There were no outstanding borrowings on the Secured Line of Credit at March 31, 2010 or December 31, 2009.  Interest on amounts borrowed is charged at LIBOR plus a margin of approximately 1.4%.  The weighted average interest rate on outstanding borrowings on the Secured Line of Credit at March 31, 2010 and December 31, 2009 was 0%.

Senior secured revolving credit facility

The Company’s senior secured revolving credit facility (the Agreement) has a current borrowing base and lender commitments of $938 million.  The LIBOR and prime rate margins are between 2.25% and 3.0% based on the ratio of credit outstanding to the borrowing base and the annual commitment fee on the unused portion of the credit facility is 0.50%.

Covenants under the Agreement are as follows:

(1) Net income before interest expense, income tax expense, depreciation and amortization expense, exploration expense and non-cash items of income.

The Agreement contains a current ratio covenant which, as defined, must be at least 1.0.  The total outstanding debt at March 31, 2010 under the Agreement, as amended, and the Line of Credit was $270 million and zero, respectively, and $4 million in letters of credit have been issued under the facility, leaving $664 million in borrowing capacity available.  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 gas reserves, in April and October of each year in accordance with the lenders’ customary procedures and practices.  Both the Company and the banks have the bilateral right to one additional redetermination each year.  The Company’s borrowing base was reconfirmed in April 2010.  The Agreement is collateralized by oil and natural gas properties representing at least 80% of the present value of the Company’s proved reserves.  The Agreement matures on July 15, 2012.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

10.25% senior notes due 2014

On May 27, 2009, the Company issued in a public offering $325 million principal amount of 10.25% senior notes due 2014 ($325 million Notes).  Interest on the $325 million Notes is paid semi-annually in June and December of each year.  The $325 million Notes were issued at a discount to par value of 93.546%, and are carried on the Condensed Balance Sheet at their amortized cost. The deferred costs of approximately $9.5 million associated with the issuance of this debt are being amortized over the five year life of the $325 million Notes.

On August 13, 2009, the Company issued in a public offering an additional $125 million principal amount of its 10.25% senior notes due 2014 ($125 million notes and, together with the $325 million notes, the Notes).  The $125 million Notes were issued at a premium to par value of 104.75%, and are carried on the Condensed Balance Sheet at their amortized cost. The deferred costs of approximately $1.9 million associated with the issuance of this debt are being amortized over the five year life of the $125 million Notes.

The $125 million Notes and the previously issued $325 million Notes are treated as a single series of debt securities and are carried on the Condensed Balance Sheet at their combined amortized cost.

8.25% senior subordinated notes due 2016

In 2006, the Company issued in a public offering $200 million of 8.25% senior subordinated notes due 2016 (the Sub notes).  Interest on the Sub notes is paid semiannually in May and November of each year.  The deferred costs of approximately $5.2 million associated with the issuance of this debt are being amortized over the ten year life of the Sub notes.

Financial Covenants

The Agreement contains restrictive covenants as described above.  Under the Company’s Sub Notes and Notes as long as the interest coverage ratio (as defined) is greater than 2.5 times, the Company may incur additional debt.  The Company was in compliance with all of these covenants as of March 31, 2010.

The weighted average interest rate on the Company’s total outstanding borrowings was 7.5% and 7.0% at March 31, 2010 and December 31, 2009, respectively.

9.                      Income Taxes

The effective income tax rate was 36.9% for the first quarter of 2010 compared to 33.9% for the first quarter of 2009. The increase in rate for the first quarter is primarily due to one-time reductions in deferred state taxes in the prior quarter.  Reductions in the rate during the prior quarter were the result of acquisitions in more tax favorable jurisdictions, reducing future state tax obligations in addition to favorable state tax incentives.  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, 2010, the Company had a gross liability for uncertain tax benefits of $6.5 million of which $5.3 million, if recognized, would affect the effective tax rate. There were no significant changes to the calculation since December 31, 2009. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense, which is consistent with the recognition of these items in prior reporting periods. The Company had accrued approximately $0.8 million and $0.7 million of interest related to its uncertain tax positions as of March 31, 2010 and December 31, 2009, respectively.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

10.               Earnings per Share

Basic net income per common share is calculated by dividing adjusted net income available to common shareholders by the weighted average number of common shares outstanding during each period.  Diluted net income per common share is calculated by dividing adjusted net income by the weighted average number of diluted common shares outstanding, which includes the effect of potentially dilutive securities.  Potentially dilutive securities for the diluted 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 earnings per share accordingly.

The two-class method of computing 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 stock 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 stock incentive plans no longer has the right to receive non-forfeitable dividends.  Stock units issued to directors under the Company’s stock incentive plans also have the right to receive non-forfeitable dividends, participating on an equal basis with common stock.  Stock options issued under the Company’s stock incentive plans do not participate in dividends. Therefore, restricted stock issued to employees prior to January 1, 2010 and stock units issued to directors are participating securities and earnings must now be allocated to both common stock and these participating securities under the two-class method.

The following table shows the computation of basic and diluted net income (loss) per share from continuing and discontinued operations for the three months ended March 31, 2010 and 2009 (in thousands):

Options to purchase $1.2 million and $2.3 million shares were not included in the diluted earnings (loss) per share calculation for the three months ended March 31, 2010 and 2009, respectively, because their effect would have been anti-dilutive.

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Berry Petroleum Company

Notes to Unaudited Financial Statements

11.               Commitments and Contingencies

The Company’s contractual obligations not included in its Condensed Balance Sheet as of March 31, 2010 (except Long-term debt and ARO) are as follows (in millions):