SBOW (2020 - Q3)

Ladies and gentlemen, thank you for standing by, and welcome to the SilverBow Resources Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jeff Magids, Director of Finance and Investor Relations. Thank you. Please go ahead sir. Jeff Mag

Thank you, Tabitha and good morning everyone. Thank you very much for joining us for our third quarter 2020 conference call. With me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Chris Abundis, our CFO. Yesterday afternoon, we posted a new corporate presentation to our website and will occasionally refer to it during this call. We encourage listeners to download the latest materials. 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 may 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 our website. And with that, I will turn the call over to Sean.

Thank you, Jeff and thank you everyone for joining our call this morning. First, we hope that everyone listening is well. I would like to thank our employees and our contractors, as well as our vendors and other key stakeholders for their dedication and resilience. We continue to take the necessary measures to ensure the health and well-being of all employees and contractors. Safety strong is of paramount importance. Let me start by saying I'm incredibly proud of our operational and financial results for the third quarter. SilverBow generated $9 million of free cash flow and paid down $17 million of debt. This marks our third consecutive quarter of generating positive free cash flow and brings our total debt repayment to $37 million since the end of the first quarter. Furthermore, we are on track to achieve full year free cash flow of approximately $50 million at the high end of our previously stated guidance. This increase to our full year 2020 free cash flow is driven by an increase to the midpoint of our full year production guidance and a decrease to the midpoint of our full year of CapEx guidance. As noted in our press release yesterday, our gas development program is now underway and focused on our high rate of return assets in West County. Additionally, the DUC completion activity in our McMullen oil area came in under budget and ahead of schedule during the quarter. SilverBow is favorably positioned going forward with upside to increasing gas prices next year within a strengthening Gulf Coast market. We believe SilverBow is one of the few non-Appalachian public companies that offers exposure to higher gas prices. Furthermore, SilverBow's low cost structure and competitively advantaged Gulf Coast differentials are driving deteriorating EBITDA margins and free cash flow yield, which we highlight on slide 24 of our corporate presentation. Looking into 2021, SilverBow is poised to generate meaningful free cash flow and benefit from stronger gas prices. At current strip pricing, we plan to spend at a reinvestment rate of 70% to 80%, growth production in the single-digit, and maintain similar EBITDA levels compared to 2020. Based upon our preliminary 2021 budget, free cash flow is estimated to be $20 million to $40 million with CapEx roughly flat year-over-year. We forecast our production growth to come from on gas assets with oil and NGLs approximately flat year-over-year. At our current share price, our guidance for 2020 implies 75% free cash flow yield and the greater than 50% free cash flow yield in 2021. We have unhedged volume along with upside exposure to improving gas prices through the use of collars in our hedging program. Next year's gas curve has now moved above $3, which bodes well for our future prospects. Not only do we have flush gas production expected to be online in early 2021, but we retain optionality to further exploit certain areas within our portfolio. As oil prices have recently pulled back below the $40 mark, and uncertainty percent over the near-term oil strip, we are well hedged on our oil production next year, which bolsters our cash flow outlook. As we work to formalize our 2021 budget, our strategy remains the same. Having a well-balanced portfolio provides us both drilling optionality and the opportunity to pursue accretive corporate and asset level transactions. We see oil and gas prices as inversely correlated and thus our counter cyclical bolt-on activity is a key differentiator for us. Furthermore, we're optimistic about underlying gas price fundamentals and continue to manage our balance sheet to provide us with the neatest running room to execute our plan. With that, I'll turn the call over to Steve to provide an operational update. Steve, please go ahead.

Thank you, Sean. In the third quarter, we resumed completion activity in our McMullen oil area. We brought online eight new wells, five of these wells were DUCs in the first quarter, and we were able to complete them nearly one month ahead of schedule. SilverBow's total well cost for the five DUCs were $8 million below budget collectively. The remaining three wells were already completed during the first quarter. However, we deferred bringing them online due to prevailing market conditions. At the end of the third quarter, we had approximately 20 MMcf per day of net gas production shut-in as part of our strategic curtailment program. In late October, we returned this remaining gas production to sales to align with favorable prices. Thus our third quarter production levels have benefited from the return of a majority of our remaining production curtailments as well as plus production from the wells in our McMullen oil area. As noted in our earnings release, SilverBow carried out significant pre-planning and contingency practices also engaged -- and also engaged in rigorous vendor bidding activities. This helps to ensure a continuation of our low cost platform and operational efficiencies, given the activity hiatus in the second quarter. As such, we were able to successfully execute our DUC activities under budget and ahead of schedule. SilverBow continues to identify further cost savings opportunities across both our operating and capital expenses. Within our operating expenses, labor, compression, salt water disposal, and chemicals have been areas of focus for incremental cost saving opportunities. Our third quarter LOE on an absolute dollar basis increased by only 4% quarter-over-quarter in conjunction with a 29% increase in production volumes, mostly higher cost liquids over the same time period. On a per unit basis, our third quarter production expenses encompassing LOE, T&P and production taxes decreased by $0.14 per MCF compared to the second quarter. Within our capital expenses, service pricing remains in a deflationary environment and the team has been able to find incremental savings through selective de-bundling of capital costs such as rig and ancillary services, tubular frac, and horsepower and chemicals. In early October, we added one drilling rig in Webb County targeting nine gas -- dry gas wells spanning our Fasken Upper Eagle Ford and co-developed La Mesa locations. We plan to have the first three well pad online by year end and are targeting first production from the first six well La Mesa pad in the first quarter of 2021. The first La Mesa pad was drilled and completed a year ago and through the technical learnings and best practices of that capital project, we believe we can drive an additional 20% savings in drilling costs across this nine well development program. From a completion standpoint, SilverBow believes it has adequately optimized the design of these wells. Furthermore, the team still expects to reduce completion costs by approximately 15% through existing vendor support and rigorous planning. SilverBow continues to monitor and optimize the performance of wells with curtailed and subsequently returned to production. Today, wells that have been returned to sales have not experienced any degradation and in some cases, have exhibited higher production rates compared to pre-starting levels. SilverBow believes that through conservative tough management practices aimed at optimizing the reservoir and preserving the well's frac pad, the team is maximizing the production profile and ultimate recovery of these wells. This positive trend is further supported by data which is showing wells to be outperforming to the first 120 days after returning to production. We show these results on slide 17 of our latest corporate presentation. As a result of cost efficiencies and project execution, as Sean mentioned, we expect to deliver full year 2020 free cash flow of approximately $50 million. Our third quarter production averaged 183 MMcf per day, which is above the high end of our guidance range. All of the wells that we have planned to bring online during the quarter we're producing by the end of August, nearly one month ahead of schedule. This was attributable in part to the operational efficiencies gained this gains discussed earlier, as well as the elected timing of projects to coincide with favorable market agreements we were able to secure. For the fourth quarter, we're guiding to a production range of 170 MMcf to 183 MMcf per day, with natural gas representing 73% of the midpoint. For full year 2020, we're tightening our production guidance to a range of 181 MMcf to 184 MMcf per day, with natural gas representing 76% of the midpoint. Our guidance sustains ethane recovery in October and rejection in November and December, although we will continue to make monthly elections in accordance with commodity prices. Looking into 2021 we have not committed to any development plans with our vendors outside of the current Webb County gas project. However, based on the latest indications from our budget forecast, we believe we will deliver single-digit production growth on an equivalent basis. This will largely be driven by our gas volumes and holding oil and NGL production flat. We plan to do this on a capital budget similar to 2020 levels with free cash flow in the range of $20 million to $40 million. Our goal in the near-term is to repeat the timing, savings, and well performance demonstrated with our first six Le Mesa pad over the current nine well development project. While we view oil and gas prices to be inversely correlated over the near-term, our diverse portfolio allows us to remain flexible and adaptable to market uncertainties in our operation. As such, we continue to operate with a returns-driven mindset in regards to any future development. With that, I will turn it over to Chris.

Thanks Steve and good morning everyone. In my comments this morning, I will highlight our third quarter financial results as well as our hedging program, price realizations, operating costs and capital structure. For the third quarter, revenue was $46 million, excluding derivatives, with natural gas representing 71% of production and 51% of sales. During the quarter, our realized oil price was 92% of NYMEX WTI. Our realized gas price was 100% of NYMEX Henry Hub, and our realized NGL price was 31% of NYMEX WTI. Our realized hedging gain on contracts for the quarter was approximately $8 million. Based on the midpoint of our guidance and our hedge book as of October 28, our total estimated production is 71% hedge for the remainder of 2020. Our gas production is 74% hedged with the weighted average price of $2.67 per MMBtu and our oil production is fully hedged with a weighted average price of approximately $44.88 cents per barrel. Assuming the midpoint of our 2020 full year guidance is held flat through 2021, our gas production is 48% hedged with a weighted average price of $2.87 per MMBtu and oil production is 79% hedged with a weighted average price of $47.43 per barrel. Notably, our hedges are a combination of swaps and collars with a weighted average price factoring into ceiling price. Risk management is a key aspect of our business and we are proactive in hedging -- we are proactive in adding oil and gas basis in calendar month average role swaps to further supplement our hedging strategies. In fact, SilverBow is one of only a handful of companies that has the CMA role before the recent downturn in oil prices. In order to protect the returns of our future gas projects, we layered on gas basis slots subsequent to quarter end, extending our protection into 2022. SilverBow's hedges also provided a lead from third quarter benchmark prices. Excluding the impact of hedges, we realized an average gas price of $1.98 per Mcf and average oil price of $37.45 per barrel, and a total equivalent price of $2.72 per Mcfe. Including the hedge impact of cash at our derivative, our average realized prices were $2.37 per Mcf for gas, $44.36 per barrel of oil, and $3.19 per Mcfe on a total equivalency basis. A combination of both hedges and actual volume produced during the quarter resulted in a $0.39 uplift in our realized gas price and a $7 uplift in realized oil price. As shown on slide 14 of the corporate presentation, we consistently realized prices close to NYMEX benchmarks. Turning the cost, lease operating expenses were $0.31 per Mcfe. Transportation & Processing costs were $0.30 per Mcfe. Production taxes were 5.5% of oil and gas sales. Adding our LOE, T&P and production taxes together, total production expenses were $0.76 per Mcfe, continuing our trend of total production expenses of less than $1 per Mcfe. Cash G&A for the quarter was $5 million, a 5% decrease from the prior quarter. In September, SilverBow implemented corporate cost reduction initiative; as a result, we expect to save approximately $2.5 million in annualized G&A costs on a go-forward basis, or a 14% decrease over the next calendar year. We consider our lean cost structure to be a competitive advantage allowing SilverBow to sustain profitability during periods of volatile commodity prices. Adjusted EBITDA for the quarter was $36 million. As reconciled in our earnings materials, we generated $9 million of free cash flow. As Sean said earlier, we have reported positive free cash flow for three consecutive quarters and I would add this marks four out of the last five quarters of achieving free cash flow. Turning to our balance sheet, we reduced total debt by $17 million during the quarter and have now payed down $37 million of borrowings under our revolving credit facility since the first quarter of this year. As of September 30th, we had $253 million outstanding under our credit facility, approximately $1 million in cash on hand, and $78 million of liquidity. Subsequent to a quarter end and effective November 2nd, we completed our semiannual redetermination of our credit facility. The net impact was a 6% reduction in the total buying capacity from $330 million to $310 million. Additionally, the maximum leverage ratio covenant was amended to 3.5 times. I would like to thank our lead bank JP Morgan and our full bank syndicate for their continued support. At the end of the third quarter and on a pro forma basis for the credit facility changes, we were in full compliance with our financial covenants and had sufficient headroom to execute our strategy. Our cash interest expense was down approximately 20% from a year ago, primarily due to lower interest rates and decreased volume, which we expect to continue into 2021. At the end of the third quarter, our net working capital deficit was $8 million, a $1 million cash inflow quarter-over-quarter. Given the restart of our drilling and completions activity, we continue to manage our cash meticulously under [Indiscernible] disbursement standpoint. Please note changes in working capital are excluded from our free cash flow calculation. Capital expenditures totaled $20 million on an accrual basis. The bulk of our capital spend in the quarter was associated with the completion of our remaining McMullen oil wells. Thanks to further capital expense savings identified by our team. We have highlighted our full year capital budget guidance to a range of $95 million to 100 million or a $2.5 million decrease for the midpoint of our previous guidance range. The remainder of our 2020 capital budget is earmarked for D&C activity in Webb County in the fourth quarter. As we work to finalize our budget for next year, our preliminary expectation is that our 2021 capital budget will remain approximately flat year-over-year. In conjunction with unwinding our other derivative contracts in 2020 and 2021, SilverBow was able to amortize $38 million it received in March in discrete amounts extending from April 2020 through December 2021. The amortized hedge gain factor into SilverBow's adjusted EBITDA calculation for covenant purposes over the same time period. For the third quarter, the addback was approximately $9 million. On the last 12-month basis, the addback was approximately $60 million, bringing our 12-month adjusted EBITDA for covenant purposes to $181 million and our leverage ratio to 2.5 times. In total, we will see the benefit of approximately $12.5 million in 2020 and $14 million in 2021 for purposes of calculating our leverage ratio. And with that, I will turn it over to Sean to wrap-up our prepared remarks..

Thanks Chris. To summarize, SilverBow is set up to generate meaningful free cash flow for the remainder of 2020 and through 2021. We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices, particularly if oil prices remain subdued given the decline in associated gas production and self-imposed limitations across the industry on drilling and completion reinvestment rate. Due to our relative staying power and cash flow visibility, we expect SilverBow to continue to outperform other small cap peers. Our winning strategy is focused on solid execution, efficient operations, financial resilience, and a low cost structure. This steps up favorably given our current outlook, as well as the potential to consolidate and operate a larger asset base. Our strategy remains intact with multiple playbooks for the future. Thank you for joining our call this morning and allowing us to share our results. In the face of uncertainty, we are focused on factors within our control by concentrating on capital discipline, preservation of our balance sheet, and cash on cash returns, SilverBow is positioned for greater shareholder returns. We look forward to providing further updates on our next call. And with that, I will turn the call back to the operator for questions.

[Operator Instructions] And your first question is from the line of Dun McIntosh with Johnson Rice & Company. Mr. McIntosh, your line is open, sir.

Sorry, I was on mute. Good morning. I had a question around -- maybe get some more color around 2021. It sounds like you've got the next nine gas wells coming on should give you a strong entry point to good tape. But where does that rig go kind of after that? Or what you're thinking about now anyway? And is the focus is going to be predominantly on dry gas? And then maybe one step further, what did you choose pretty impressive savings during the third quarter? Does that kind of allow you to run a single rig for the entire year? And is there a point at which you would think about putting the second rig out there? Is that kind of predicated on your reinvestment ratio -- reinvestment numbers kind of 70% to 80% cash flow?

Yes, thanks for the question Dun. Yes, for now, our strategy is staying at a reinvestment rate that spends about 70% to 80% of our free cash flow. Assuming gas prices move up higher, that would give us additional cash flow to continue to run the one rig for the full year and obviously, based upon performance or lower cost if that improves our balance sheet position even more, we'd look at a secondary, but for now, we're going to say consistent of being disciplined around our spin. We think that growing at single-digit to low teen rates is appropriate for companies of our size, and we want to continue to return value to the shareholders right now for the debt paydown.

Okay, great. Thanks. And then next question would just be on M&A or A&D, I know that you all are always looking. There have been quite a number of larger transactions, but there has been some interesting smaller deals too here in the past few weeks. How do you think about -- are there certain small private equity assets that could be interesting that might want to -- you can never use your stock for just how what's going on the M&A front?

Yes, I think we are strong believers that consolidation needs to occur within each basin in the U.S. and we feel strongly that SilverBow could be a strong consolidator of basin champion for the Eagle Ford. So, we have and continue to be active in looking at opportunities. I would say that there's really two things that we look at, first is valuation. And so we're not willing to acquire assets just for the sake of getting scale, we always want to make sure that we're acquiring assets at a fair value and at a value that's favorable to our go-forward plans. The second is accessing capital; capital remains stingy within the space. We're not going to -- we're not willing to step out and pay excessive capital fees to secure an asset acquisition. So, those are the two things that we continue to look at is valuation and cost of capital to get a transaction done.

All right. Thank you.

Thanks Dun. Have a good day.

And so your next question is from the line of Neal Dingmann with Truist Securities.

Morning guys. First question just on -- it seems like there's DUCs you brought on certainly were quite clean, and quite a bit cheaper than expectations is when was the -- it was the largest driver? It's more in efficiencies or fast cost, I'm just curious on some details, you get a nice job there.

Yes, much of that's under the direction of Steve's leadership. So, I'll give him the pleasure of giving you a response.

Well, thank you, Sean. First of all, I want to complement our -- and thank you all to Neil, for the question. I want to complement our team and our vendor support for being able to pick up after the hiatus, we were able to take the efficiencies we had and even improve upon them from there. To be more specific to your question and even to give a little background, last conference call, we guided to around 35% of those structural costs being savings and now we're in a position where it's a little over 50% of those savings not only gaining structure but being sustainable from a go-forward opportunity. And so to bring down to your question out, specifically, Neal, around half of those cost savings were advancements in efficiencies that Sean alluded to earlier in the prepared remarks. And then about 30% to 40% of the remaining of that is all predicated to unit costs, and how we'd selectively de-bundled loads. So, that's what's getting us through and now a weighted average of more than 50% of the runway forward for the sustainability. And when I talk about de-bundled services, we're talking about some basin costs that were the cheapest that I've seen in the history in terms of horsepower and chemicals and then when you look at some of the logistics and handling scenarios, relative to stand on an de-bundle basis, we were able to get it lower than on average, $0.028 per pound and in some cases down to $0.022 per pound. So, that's what's giving us the confidence now and going forward on some of the unit cost that are sustainable and obviously the process advancements.

Great details. And then just a follow-up, Sean you talk about it, it seems like -- sounds to me like that 2021 plan certainly going to focus mostly on Webb, is that likely to be the sole focus or is being [Indiscernible] again driven by your free cash flow or are there are prices -- I'm just wondering, can you maybe -- I know you haven't said too much more on the Webb, I'm just wondering if any more details you could shed on 2021?

Yes, the strongest return in our portfolio at current pricing, both on the gas and liquid side, definitely are in Webb County. So, we're going to get this nine well program implemented, we'll pause, kind of look and see what gas prices, how they're shaping up for the second half of 2021. Assuming that they hold our loop, even stronger, we'll go pick a rig back up and go back into Webb. We also have some strong returns in southwest that mix of liquids and gas, so we may end up spending some capital there as well. Then obviously, your portfolio allows us if there's for some unforeseen reason to shift to much higher oil prices, we may readjust that plan and big back up into either on [Indiscernible] asset or McMullen oil asset.

Very good. Thank you.

Thanks Neal.

[Operator Instructions] And your next question is from the line of Ed [Indiscernible], Private Investor.

Good morning, gentlemen. I'm just trying to reconcile the amazing significant increases, you're going to put on in production both first quarter from that three well pad and then essentially second quarter from the six well pad La Mesa to your comment, in the conclusion -- in conclusion you still project that your production will increase by just single-digits next year. When I look at the numbers that would be making reasonable estimates of what would be coming on just from those two projects. I don't know how you could bring those on and still only have single-digit production gains. I don't know if you can help me with that?

Yes. No, appreciate the question for sure. Year-over-year, we're reflecting that the single-digit growth. Keep in mind that we're looking to hold liquid flat and we'll get a strong boost in gas production, especially like you commented on early in the year from this nine well pad. But as we look at our shallower base decline and then the higher declines that we'll expect out for these new well, definitely we're coming up with -- we'd reiterate that typically we're conservative and our forecast and want to make sure that we hit the guidance that we give to stream that quarter-over-quarter year-over-year. So, we'll adjust those forecasts if we're seeing things differently, but for now, our best estimate is the single-digit growth.

Okay, thank you. That's very helpful. One other question. On the on the capital side, there's been some movement. I know it's still tough on the bond front, but there has been at least some movement with larger companies such as, Comstock that did some very successful bond financings? I know they're much larger than you, but your numbers -- you have better debt metrics than they do, right. And so the question I'm wondering is how far away do you think you might be? And if it does open up to the possibility of trying to do an unsecured bond issue with the goals of paying down your revolver significantly, such that you don't have to keep playing these quarterly -- or semiannual games of sweating out the redetermination and all that and just pay the whole thing -- much of it down anyway, let's say $100 million and $120 million of it down all in one shot, get an unsecured note, and go in that direction. Is there any thought about that? Or -- is that a way to open up, would you think along those lines or not?

Yes. No, no, definitely. We are always the thoughtful around our balance sheet and how to structure it that gives us -- it's that trade-off of liquidity versus the cost of capital. So, company our size, we'd have to look at our credit rating that we could secure and what the cost of capital would be for the bond. But what you've laid out there as a thesis is definitely something we would consider and think it's -- we'd have to measure what the cost of that would be versus the risk of getting it executed. I would tell you that for now, we feel comfortable where we're at in terms of our debt structure. Our second lien isn't maturing until late 2024. So, we have significant time there and we continue to have a very strong constructive relationship with our bank group. So, we're comfortable with where we're with that, but we're always looking at the market in assessing what's the best thing for our balance sheet.

Excellent. Thank you very much.

Yes. Thanks for the call. Appreciate it.

And sir, there are no further questions, do you have any final comments?

Again, I would appreciate the opportunity to share those some of our stories with the investor groups and folks that have dialed in and look forward to giving you an update on our next call. Thank you, everybody.

Thank you.

Ladies and gentlemen, this concludes today's conference Call. You may now disconnect.