SBOW (2019 - Q2)

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the SilverBow Resources Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the call over to Mr. Jeff Magids. Jeff Mag

Thank you, Amy, and good morning, everyone. Thank you very much for joining us for our second quarter 2019 conference call. With me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Gleeson Van Riet, our CFO. We posted a new corporate presentation onto our website and will occasionally refer to it during this call. We encourage investors to review it. Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release. Our discussion today will include forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on the SilverBow’s website. And with that, I’ll turn the call over to Sean.

Thank you, Jeff, and thank you, everyone, for joining on our call this morning. SilverBow’s second quarter results released yesterday, highlighting – highlighted our execution on our development program, opportunistic investments and further improvements to our operations as we better position the company across multiple fronts. Our key objectives on the path to sustainable free cash flow are growing our liquids production, increasing operational efficiencies and expanding a portfolio balance between oil and gas inventory. This will give us a unique optionality to quickly shift near-term development based upon prevailing commodity prices. We expect to achieve these goals while also protecting the strength of our balance sheet. Our development program in the second quarter delivered 56% growth in oil production and 32% growth in NGLs compared to the first quarter. We also compared favorably to our cost guidance, even as liquids have become a higher mix of our total production. Our beat across-the-board for the second quarter speaks to the quality of our asset portfolio and our highly talented team. I’m very proud of our accomplishments to date. As announced yesterday, and which Steve will go over in more detail, we maintained maintain our 2019 capital budget range in midpoint of our production guidance while increasing our oil production guidance and lowering our LOE costs. Overall, our capital program supports a 25% growth in total production and 85% increase in liquids production and a 17% reduction in capital spending year-over-year. During the quarter, our La Salle condensate and McMullen Oil areas generated some of our best wells to date, and we expect continued strong performance from these areas going forward. Additionally, in our Webb County gas area, we made some opportunistic additions to our acreage, including 12 high-return locations through a farm-in-agreement directly adjacent to our Fasken property. As Gleeson will highlight, our adjusted EBITDA of $58.4 million for the quarter represents an 87% increase compared to a year ago. On a per unit basis, our adjusted EBITDA continues to benefit from our low-cost structure and focus on liquids development. Our second quarter adjusted EBITDA of $2.73 per Mcfe was a 27% increase compared to a year ago, even in the face of lower realized prices. Looking across the E&P sector, investors are focused on free cash flow and capital efficiency. For SilverBow, this complements our strategy of growing liquids production and adding inventory locations at attractive full-cycle returns. Despite gas and NGL price volatility of late, we still see a path to positive free cash flow for the fourth quarter. However, we are not focused on near-sighted goals, instead, we are building a scalable, best-in-class operational platform with deep in-basin technical expertise, admits declining sector valuations, our favorable balance sheet, low-cost structure and repeatable execution presents us with a compelling path towards becoming a larger, more efficient and more profitable Eagle Ford basin leader. Specifically, in regards to M&A, deal flow is active within the basin and we are currently evaluating the timing of our next acquisition. The number of deals on the market, combined with the harsh reality for some and the synergistic potential for others, we believe the A&D market will present opportunities for us to acquire quality assets at favorable valuations. Meanwhile, we are uniquely positioned to avoid chasing high-cost growth, instead, focusing our efforts on successful organic development and complementary bolt-on inventory additions. Finally, we continue to benefit from strong basis pricing in the Eagle Ford and our geographically advantaged position near the Gulf Coast in the international export markets. By focusing on two key variables within our control, liquids production growth and greater operational efficiency, we remain on-track to achieve our stated objectives for 2019. And with that, I will hand the call over to Steve.

Thank you, Sean. Moving on to our operational results. We have made strides, significant strides toward our goal of increasing liquids production in both a timely and cost-effective manner. Second quarter production of 235 MMcfe per day came in above the high end of our guidance, representing nearly 47% growth compared to a year ago. Our liquids production increased 43% from the first quarter, and 2019 production guidance reflects a higher mix of liquids and implies more than an 80% year-over-year growth in liquids production. We continue to optimize our drilling and completion designs for every well we develop. The diversified commodity mix within our Eagle Ford position is a unique advantage, but requires hands-on experience and an in-depth technical understanding of the underlying geology. The 30-plus years of operational experience that SilverBow has in the Eagle Ford continues to be an important differentiator for us against our peers. In the second quarter, the company realized 100% hybrid designs and locally sourced sands for all wells completed during the period. Overall, due to pad drilling and continued operational efficiencies, we achieved an 18% increase in completion stages per day and a 14% reduction in average cost per stage compared to the first quarter. The second quarter represented an 80% improvement in stages per day compared to the full year 2018 average. Furthermore, the company ran an average of 1.4 frac spreads for the quarter and reduced cycle times by approximately seven days compared to the prior quarter. Customized completion intensities averaged approximately 2,500 pounds of proppant and 37,000 barrels of fluid per lateral foot. In total, we drove six net wells, completed 12 net wells and brought 15 net wells online during the quarter. In our Webb County gas area, we completed one well during the quarter which was completed in less than five days in average eight stages per day for a single well operation. The well has been online for about two months and continues to produce over 10 MMcf per day. While it is early in the life of this well, performance, thus far, is in line with expectations. In our La Salle Condensate area, we drilled each of three wells under 10 days based on major averages from spud to total depth. We completed seven net wells consisting of a Briggs three-well pad and, in Evans, four wells. The three Briggs wells were completed in 10 days at an average of 10 stages per day. Initial IT from this pad was approximately 2,900 BOE per day, with a 73% liquids mix. Additionally, we completed the Evans 4- well pad in just 16 days at an average of nine stages per day. The IP 30 from this Evans pad was approximately 3,300 BOE per day, with a 51% liquids mix. Finally, late in the quarter, we brought online a 3-well Knolle pad, which had an IP 30 of 3,500 BOE per day with a 60% liquids mix. All three wells continued to perform as expected. The strong results from our La Salle condensate area are the primary driver of our liquids growth strategy, and we expect similar results from this area moving forward. In our Southern Eagle Ford gas area, we completed a 2-well Bracken pad, and both of these three string wells were brought online in late April, slightly under budget. The IP 30 for this pad was 19 MMcfe per day. In our McMullen Oil area, where we have been deploying more capital, we brought a Hayes 2-well pad online early in the second quarter with an IP 30 of over 2,500 BOE per day and an 85% liquids mix. As mentioned in our previous update, each well’s lateral length exceeded 11,000 feet, with one being a SilverBow record lateral of 11,400 feet. These two wells continued to perform in line with the McMullen Oil area type curve. We are excited about the results in this area and are preparing for a new generation infill development of this legacy liquids-rich acreage. Additionally, we have been successful in identifying new inventory locations at attractive economics such as the 1,000 net acreage position we recently added, directly offsetting our Fasken property. This will allow us to drill and complete two 6-well pads, utilizing 10,000-foot laterals in both the upper and lower Eagle Ford benches. We expect high rates of production from the first of these pads towards the end of the year. This leaves us with an additional 6-well pad, which we plan to develop in 2020. As Sean mentioned, we are maintaining our 2019 capital budget range of $250 million to $260 million. We plan to continue running one rig through the remainder of the year. We expect to drill 27 to 27 net wells and complete 30 to 31 net wells in 2019, with 19 net wells, or the majority of our completion activity, having occurred in the first half of the year. Over the past 18 months, we have added 36 wells to our inventory through bolt-on acreage acquisitions, which is about the same cadence as our annualized drilling program. Additionally, we see a pipeline in place to continue adding inventory at favorable acquisition costs over the near term. With that, I’ll hand it over to Gleeson.

Thanks, Steve. On my comments this morning, I will highlight our second quarter financial results as well as our hedging program, guidance and capital structure. Second quarter revenue was $74.7 million, with natural gas representing 77% of production and 58% of revenue. We continue to benefit from strong basis pricing in the Eagle Ford. During the quarter, our realized pricing was 103% of NYMEX WTI; 101% of NYMEX Henry Hub; and 24% of NYMEX WTI Brent deals. During the quarter, NGL prices retreated from first quarter levels on the back of lower ethane and propane prices, which did not reflect from first quarter’s winter heating seasonality – sorry, which did not benefit from first quarter’s winter heating seasonality, while WTI prices increased slightly on average. We are forecasting continued NGL pricing softness in the near term and are guiding our NGL price realization to approximately 25% of WTI for the third quarter. We continue to monitor NGL pricing month-to-month to make informed decisions regarding product recoveries. Our hedging gain on contracts covering production for the quarter was approximately $4.3 million. In support of our multiyear development plan, we are minimizing our downside risks through disciplined and opportunistic layering of hedges as prices remain volatile. Based on the midpoint of our full year guidance, our total estimated production is 68% hedged for the remainder of 2019. Our gas production is approximately 75% hedged, with a weighted average price of $2.85 per MMBtu. Our oil production is approximately 57% hedged with a weighted average price of $60.02 per barrel of oil, and our NGL production is approximately 37% hedged with a weighted average price of $27.93 per barrel of NGL. Assuming the midpoint of our 2019 full year guidance is held flat to 2020, our gas production is 43% hedged, with a weighted average price of $2.68 per MMBtu and our oil production is 42% hedged with a weighted average price of $57.85 per barrel of oil. Note that 2020 figures are inclusive of gas hedges entered into subsequent to quarter end. In addition, we have also used oil and gas basis swaps to manage our exposure to differentials. For the remainder of 2019, we have gas basis hedges of 159 MMcf per day, priced approximately flat to NYMEX. For 2020, we have gas basis hedges of 129 MMcf per day, with a weighted average differential of negative $0.04. As new pipeline capacity towards the Gulf is coming online, we anticipate slightly lower basis premiums going forward. Turning to costs. Lease operating expenses were $0.23 per Mcfe, down 11% compared to a year ago, primarily driven by our continued cost-reduction initiatives. Transportation and processing cost for the quarter were $0.31 per Mcfe, while production taxes for the quarter were 5.3% of oil and gas revenue, both coming in below the midpoint of our guidance range. Adding our LOE, T&P and production taxes together, we achieved total production expense of $0.73 per Mcfe which we believe stands out amongst our peers. Cash G&A of $5 million was in line versus guidance of $5.1 million. For the third quarter, we are guiding for cash G&A of 5 – $4.8 million to $5.2 million. Our cash operating expenses, including G&A, totaled $0.96 per Mcfe in the quarter compared to $1.12 a year ago. We remain on-track to reach our 2019 all-in cash operating expense target of $1 per Mcfe. In total, strong liquids production and efficient operations resulted in an adjusted EBITDA of $58.4. At $2.73 per Mcfe, our adjusted EBITDA per unit continues to benefit from higher liquids production mix, albeit slightly below first quarter levels on a per unit basis as gas and NGL prices retreated. On a GAAP basis, the company reported net income of $64.7 million for the second quarter, which includes an unrealized gain on the value of the company’s hedged portfolio of $24.9 million and a $21 million net deferred tax benefit, resulting from the release of a valuation allowance against our net deferred tax assets. Looking ahead, we’re guiding for third quarter production of 236 to 240 MMcfe per day and tightening our full-year guidance range to 230 to 234 MMcfe per day, which is unchanged at the midpoint. However, we have increased full-year oil productions guidance by 23% and total liquids productions guidance by 10% compared to prior guidance. Additionally, we have reduced our full-year LOE range to $0.24 to $0.26 per Mcfe, a 21% reduction at the midpoint compared to prior guidance, as Steve and his operations team continued to perform at a high level. Please refer to our corporate presentation for the full breakdown of our latest guidance. Turning to our balance sheet. We had $273 million outstanding under our revolving credit facility at the end of the quarter, and our liquidity position was approximately $140 million. We expect to fully fund our 2019 capital program with cash generated from operations and borrowings on our credit facility. At the end of the second quarter, we were in full compliance with all our financial covenants and have significant headroom. And with that, I will turn it over to Sean to wrap up our prepared remarks.

Thanks, Gleeson. To summarize, the second quarter illustrated the company’s ability to execute on its goals. The SilverBow team continues to add high-quality inventory, increase operational efficiencies and capitalize on opportunities that strengthen our competitive position as a best-in-class operator. Our borrowing base provides us the liquidity to continue assembling our balanced commodity mixed portfolio and to pursue our low-cost development program. As we think about the second half of 2019 and beyond, we are moving towards a more liquids-weighted portfolio while retaining the advantage of our low-cost gas optionality. Our plan is to continue increasing liquids production as a percent of our overall production, with an eye towards consolidating quality assets at attractive valuations. In that regard, we are evaluating investments on a dollars in, dollars out basis, with development dictated by prevailing commodity prices. There are a number of catalysts that could expedite or shift the timing of our goal to further diversify our portfolios commodity mix as we become the partner of choice in the Eagle Ford and continue to strive towards sustainable free cash flow. We appreciate the support of our shareholders and look forward to providing an update to our business in the coming quarters, building on the success of the first half of the year. And at this point, I will turn the call back to the operator for the Q&A session of our call.

[Operator Instructions] Your first question is from Dun McIntosh [Johnson Rice & Company LLC].

Hey, good morning, guys. You talked a little bit about further bolt-ons and really impressed with what you were able to get done at Fasken and 12 more locations, I know that’s been one of your better areas, especially on the dry gas side. I was wondering if you could provide a little more color around where specifically you’re looking. I mean, obviously, you’ve got a big focus on – to build up your liquids exposure. But any color, additional color will be appreciated.

Hey, Dun. I appreciate the question, this is Sean. I’ll start by kind of a macro view of the Eagle Ford. We think the Eagle Ford is in a position to be consolidated. We’ve built an understanding of the subsurface and operations across the entire basin. We have a very active BD team that works with our technical team in our assessment of opportunities. Our focus primarily, though, is on the western side of the basin. We are looking, like I said, primarily at liquids opportunities, and we’re looking at a wide range of opportunities from grassroots leasing to bolt-on acquisition leasing nearby our existing operations as well as large transformational type deals. So, I’d tell you that the primary focus is on the west side of the basin. We think there’s a tremendous opportunity to expand our portfolio in that part of the basin. It would have a lot of synergies with our existing operations.

Okay, great. Thanks. And then I know you haven’t provided 2020 guidance. Again, I’ll focus on the liquids, but one that – running one rig currently, what does that – maybe some goalpost around 2020? Kind of do you go into more into of maintenance mode in 2020 as you saw some growth with one rig, any color there?

Yes, yes. Kind of early on in terms of 2020 planning, we really start to focus in on 2,000 budgets in the third quarter. Of course, we’re always looking forward in thinking through a number of strategies. I would tell you for now, depending upon commodity pricing, we’re targeting probably a one-rig program with the focus continuing being on liquids. So this year, we had a 75-25 percent split in our D&C, with 75% towards liquid. So I will say our first pass in 2020 will have a similar type of capital allocation with one rig. Now, what does that do for us in terms of year-over-year growth? We probably envisioned single-digit growth occurring with that one rig and still would be targeting free cash flow, again, dependent upon commodity prices and having the optionality to either cut back or accelerate capital to – depending upon our returns.

Okay, great. Thanks. And then just one more kind of macro high-level question around gas and NGLs have obviously been challenged, but specifically, as it kind of relates to, you’ve been in the Eagle Ford, differentiated from what you had in the Appalachia, and you’re closer to Mexico and Mexican exports, so anything around there?

In terms of – are we continuing to see strong gas and NGL realizations in our area, is that the question?

Exactly, yes, yes.

No. we continue to see strong realizations. In fact, on the gas side, in-market – or in-basin pricing has been strong as some new facilities, pipelines have come online and have looked for increased gas to get those up and operating. So we took advantage of that and continue to do that within the basin. As we do look forward into the out years, we recognize that there’s a tremendous amount of gas coming online or scheduled to come online, coming out of West Texas. So I think Gleeson outlined that we’re very proactive on hedging our basis this year and through next year. We’ll see basis hedges lined out to be really in line with the NYMEX. So we’re really focused on supply and demand issues, still see the Eagle Ford, South Texas being in premium markets now and going forward.

Great. Thanks and congrats on the strong quarter.

I appreciate the questions. Thank you.

Your next question is from Jeff Grampp of Northland Capital.

Good morning, guys.

Good morning, Jeff.

Curious on your comments, you seemed to indicate in the prepared remarks some optimism on the acquisition front. I guess, first, I wanted to confirm if that’s kind of your view of things right now? And then just broadly, obviously, opportunity-dependent, but how are you guys kind of thinking about funding any larger acquisitions in terms of kind of, obviously, stocks not where we all want and you don’t want to take excessive leverage to just kind of balancing I guess kind of those goalposts from a funding standpoint?

Yes. Your question definitely outlines the challenges that not only SilverBow faces but many other folks face in today’s environment. So, let me start with why do we think there’s opportunities out there? We’ve seen some pretty strong deal flows throughout the year. Our BD team has been and remains very active. They’ve looked at over 40 opportunities this year alone, and we’ve taken those – a number of those down through actual bids. There still remains, surprisingly, some split between sellers’ expectations and buyers’ expectations. But we think different situations will ultimately drive deals to get done. And then like you outlined the challenges, how do you fund those deals? And in addition to looking at our BD team being very active, our finance group is very active. I’m looking at creative ways to fund deals from utilizing stock, all of that would be a challenge, like you laid out, and this price see to – taking – bringing in our partners to participate in a deal flow. So we think that difficult markets, but a lot of times, difficult markets create opportunities and we need to be able to take advantage of those.

Got it. Appreciate those thoughts. For my follow-up, Steve, you talk about in your prepared remarks, looking at, I think, you used the term new generation of infill drilling in the McMullen Oil area. So, I was just hoping to get a little bit more details as far as kind of what does that exactly entail for you guys?

Yes. Thank you, Jeff. We have looked at this, as I had mentioned in prior calls, we’ve looked at this last year, and we saw opportunities there from all generation completions and spacing to capitalize on quality oil, not just in the Western Eagle Ford, basically quality oil throughout the Eagle Ford. And so we went ahead and kind of sharpened up our pencil and put the technical teams behind it. Looked at the history and looked at what was being currently done in terms of targeting today, where and how we can improve that targeting, and then furthermore, how can we put late generation completions on that, and not only have performance but exceed our performance and do it in such a way that we’re not incurring a bunch of lost production as well through frac interference. So that was the technique that was done, and the performance has been and even better. And then on top of that, we did it all within a cost metric that made sense.

Okay. And if I can just follow up on that. Is the upcoming wells that you guys are targeting for the back half of the year, are those going to change at all dramatically from the techniques you guys used in the first half of the wells that you kind of quoted in the release? Or are you guys sufficiently happy with those and just hoping to kind of replicate that type of performance?

It’s largely the latter. We’re pleased with what we’re doing. We’re pleased with the results and we’re looking to replicate that and gain further consistency across those acreage lots.

Got it, understood. I appreciate that guys.

Thank you, Jeff.

Your next question comes from Neal Dingmann [SunTrust Robinson Humphrey, Inc.].

Good morning, guys. Some of the question is – I’m just wondering, can you talk about, kind of two broad questions. My first is for you, Gleeson and the guys, how do you try prioritize, given this market, given kind of your debt load and everything, how you look at growth versus debt repayment versus stock purchases in today’s levels?

Hey, Neal. This is Sean. Maybe, I’ll start and then see if Gleeson wants to weigh in. For us, it’s really about returns. And so as we think about moving to free cash flow and debating on where to put those dollars to work, we’re going to prioritize returns. And so it’ll start first by looking at our drill bit on the returns best by putting those dollars to work there. Second would be looking at opportunistic acquisitions or leasing opportunities that further advance our liquids portfolio. Third and then fourth would be looking at debt repayment and equity buyback. So as we think through it, those were kind of the order we would look at. But again, the underpinning of it would be – it’s all returns based.

Yes, and an echo to that, and maybe just to add, obviously, when we look at our portfolio for the year and what we’re doing, a lot of things happen. Again, by the end of last year, prices were going to one way and also in December, gas has got a fine handle on it. And now gas in a different place. So, I think within all of these, you’ve seen our flexibility and ability to kind of ramp-up or pull back our activity, depending on where commodity prices are. I think we’re continuing monitoring those things as we look at returns, we can to decide where to put our capital. But I think we do try if they can hold a bit longer to determine kind of one day or one week or one month. So, we’re trying to build value for long term.

And Gleeson or Sean, sort of follow up right into that question. I know right now, I’m sort of – if you talk to them as well, investors are certainly asking for more sort of spending within cash flow, if you will. But I’m wondering, sort of given your cap size and given especially the returns that you’re seeing here recently on some of these La Salle wells, and other liquid wells. I’m just wondering would you all consider more of our short-term outspend in order to generate more incremental midterm cash flow? I mean I think you certainly have that opportunity, it’s just – I mean, it is a tough question, again, I’ve realized what were investors were asking. But I would cut it by saying that some smaller companies like yours might be better off to buck that trend especially given the returns on some of these wells.

Yes. No, something that we debate and think about often, the underlying strategy that we’ve always outlined is growth and returns. So that’s still our premise that we function under. And then prudent management of the balance sheet is there as well. So in the volatile markets that we’re in, I think, we’ll just have to assess the risks of that outspend versus our balance sheet and uncertainty around product prices. We obviously try to manage that risk through an active hedging program. But we try to put that all together. So what I would tell you is, really, what we’re thinking about as we look into 2020 and maybe 2021 is moderating our growth, moving more towards probably single-digit growth to low-teen growth and looking to stay within the free cash flow and balance – maintain good strong liquidity in our balance sheet. That’s how we’re doing it.

Got it. Thank you.

Yes. Thanks for the question.

[Operator Instructions] And there are no further questions at this time, sir.

Thank you, Amy, and thanks for everyone for dialing in. We’ll look forward to filling you again, next quarter. Thank you.

Thank you for participating in today’s teleconference. At this time, you may all disconnect.