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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 September 30, 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 x 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 October 15, 2010 the registrant had 53,032,471 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 October 15, 2010 all of which is held by an affiliate of the registrant.

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BERRY PETROLEUM COMPANY

INDEX TO FORM 10-Q

September 30, 2010

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BERRY PETROLEUM COMPANY

Condensed Balance Sheets

(Unaudited)

(In Thousands, Except Share Information)

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

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BERRY PETROLEUM COMPANY

Condensed Statements of Income (Loss)

(Unaudited)

(In Thousands, Except Per Share Data)

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

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BERRY PETROLEUM COMPANY

Condensed Statements of Cash Flows

(Unaudited)

(In Thousands)

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)

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

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Berry Petroleum Company

Notes to Condensed Financial Statements

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) financial position at September 30, 2010, the results of operations for the three and nine months ended September 30, 2010 and 2009,  its cash flows for the nine months ended September 30, 2010 and 2009 and shareholders’ equity for the nine months ended September 30, 2010 have been included. 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, 2009.  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.  The Company has revised comprehensive income (loss) to reflect the correction of a prior period presentation error.  The Company has concluded that the presentation error was immaterial to the previously filed financial statements. See Note 4 to the Condensed 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 September 30, 2010 and December 31, 2009 is $24.0 million and $15.7 million, respectively, representing outstanding checks in excess of the bank balance (book overdraft).

2.       Acquisitions and Divestitures

Acquisitions

In March 2010, the Company acquired interests in producing properties principally on 6,900 net acres in the Permian basin of West Texas (W. Texas) for $133 million, comprised of an initial purchase price of $126 million, and customary post-closing adjustments of approximately $7 million (the March Acquisition).  The March Acquisition was financed with the proceeds from the issuance of the Company’s Class A Common Stock in January 2010.  In April 2010, the Company closed on the acquisition of an additional 3,200 net acres in the Permian basin for approximately $14 million, including normal post closing adjustments (the April Acquisition and, together with the March Acquisition, the Permian Basin Acquisitions).  The Permian Basin Acquisitions included properties with total proved reserves of approximately 13 MMBOE, of which 83% were crude oil and 21% were proved developed.

The Permian Basin Acquisitions qualify as business combinations and, as such, the Company estimated the fair value of each property as of the 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.

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The following table summarizes the consideration paid to the seller and the amounts of the assets acquired and liabilities assumed in the March Acquisition.

The March Acquisition had an effective date of January 1, 2010, and activity from January 1, 2010 through March 4, 2010 was treated as purchase price adjustments.  The preliminary purchase price allocation included an estimate for activity between January 1, 2010 and March 4, 2010; however, actual amounts were greater than the Company’s estimate which resulted in an increase to the total cash consideration paid to the seller.  As a result, the initial $1.4 million of gain on purchase of oil and natural gas properties recorded in the first quarter of 2010 was reversed in the second quarter of 2010 to reflect the purchase price adjustments.

The following table summarizes the consideration paid to the seller and the amounts of the assets acquired and liabilities assumed in the April Acquisition.

Acquisition costs of $0.0 million and $2.6 million have been recorded in the Condensed Statements of Income (Loss) under the caption Transaction costs on acquisitions in the three and nine months ended September 30, 2010, respectively.  Revenues of $8.4 million and $17.1 million generated by the acquired properties have been included in the accompanying Condensed Statements of Income (Loss) in the three and nine months ended September 30, 2010, respectively.  Earnings of $2.9 million and $5.5 million generated by the Permian Basin Acquisitions have been included in the accompanying Condensed Statements of Income (Loss) in the three and nine months ended September 30, 2010, respectively.

Divestitures

On March 3, 2009, the Company entered into an agreement to sell its assets in the Denver-Julesburg basin in Colorado (DJ basin) 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 reflected within the $6.3 million Income (loss) from discontinued operations, net of taxes, on its Condensed Statement of Income (Loss) for the nine months ended September 30, 2009.

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Income (loss) from discontinued operations, net of taxes, on the accompanying Condensed Statements of Income (Loss) is comprised of the following (in thousands):

3.       Shareholders’ Equity

In January 2010, the Company issued 8 million 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 March Acquisition (as defined above) and to repay a portion of the outstanding borrowings under the senior secured revolving credit facility.  See Note 2 to the Condensed Financial Statements.

4.       Earnings per Share and Comprehensive Income (Loss)

Basic (loss) earnings per common share is calculated by dividing adjusted income (loss) available to common shareholders by the weighted average number of common shares outstanding during each period.  Diluted (loss) earnings per common share is calculated by dividing (loss) income available to common shareholders 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 (loss) 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 stock incentive plans no longer has the right to receive non-forfeitable dividends.  Stock units issued to directors under the Company’s nonemployee directors deferred compensation plan also have the right to be credited with non-forfeitable dividends, participating on an equal basis with common stock.  Therefore, unvested restricted stock and stock units issued to directors issued prior to January 1, 2010 must be allocated to both common stock and these participating securities under the two-class method.  Stock options issued under the Company’s stock incentive plans do not participate in dividends.

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

Options to purchase 2.2 million shares and 1.2 million shares were not included in the diluted earnings per share calculation for the three and nine months ended September 30, 2010, respectively, because their effect would have been anti-dilutive.  Options to purchase 1.2 million and 1.6 million shares were not included in the diluted earnings (loss) per share calculation for the three and nine months ended September 30, 2009, respectively, because their effect would have been anti-dilutive.

Comprehensive Income (Loss)

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

(1) The Company revised comprehensive income (loss) to reflect the correction of a prior period presentation error.  The table below summarizes the changes:

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5.                      Asset Retirement Obligation (ARO)

The following table summarizes the change in the ARO for the nine months ended September 30 (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.

6.                    Debt Obligations

Short-term line of credit

Borrowings under the Company’s senior secured money market line of credit (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.

There were no outstanding borrowings on the Secured Line of Credit at September 30, 2010 or December 31, 2009.  Interest on amounts borrowed is charged at LIBOR plus a margin of approximately 1.4%.

Senior secured revolving credit facility

As of September 30, 2010, the Company’s senior secured revolving credit facility (the Agreement) has a 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 or loss.

The Agreement also contains a current ratio covenant which, as defined, must be at least 1.0.  The total outstanding debt at September 30, 2010 under the Agreement, as amended, and the Secured Line of Credit was $240 million and $24 million in letters of credit have been issued under the facility, leaving $674 million in borrowing capacity available under the Agreement.  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.

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

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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 $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 Notes and Sub 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 September 30, 2010.

The weighted average interest rate on the Company’s total outstanding borrowings was 7.7% and 7.0% at September 30, 2010 and December 31, 2009, respectively.

7.         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. Fair value of all derivative instruments are estimated with 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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The following tables set forth by level within the fair value hierarchy the Company’s net derivative assets and liabilities that were measured at fair value on a recurring basis as of September 30, 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 nine months ended September 30, 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 8 to the Condensed Financial Statements.

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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 and could be at similar rates today. 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.

8.                      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 to protect against changes in interest rates on its floating rate debt.  For further discussion related to the fair value of the Company’s derivatives see Note 7 to the Condensed Financial Statements.

As of September 30, 2010, the Company had the following commodity derivatives:

The Company entered into the following crude oil two-way collars during the nine months ended September 30, 2010: