SBOW (2021 - Q1)

Good day, and thank you for standing by. Welcome to the SilverBow Resources First quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Jeff Magids, Director of Finance and Investor Relations. Please go ahead. Jeff Mag

Thank you, Lashauna, and good morning, everyone. Thank you very much for joining us for our first quarter 2021 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 we'll 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. With that, I will turn the call over to Sean.

Thank you, Jeff, and thank you everyone for joining our call this morning. SilverBow hit the ground running this year. Our first quarter results exceeded our expectations in positioned us to deliver on our key objectives this year and beyond. This morning, I will talk about our recent accomplishments and go forward strategy. Maximizing free cash flow and paying down debt remain at the forefront of our business plan. First quarter free cash flow was $24 million, bringing our trailing 12-month free cash flow to $60 million. The primary use of free cash flow remains debt reduction. SilverBow paid down $30 million of RBL borrowings during the first quarter and $90 million of borrowings from a year ago. Due to continued efficiency gains, flexibility in our drill schedule and favorable pricing, we raise our full year free cash flow guidance to a range of $30 million to $50 million, a 33% increase at the midpoint from our prior range of $20 million to $40 million. Furthermore, we anticipate our leverage ratio to drop below two times by the end of this year. I would also like to highlight the closing of our amended credit facility, which extends our maturity date out to 2024 and provide SilverBow with the liquidity and covenant headroom to continue pursuing its business strategy. Chris will expand on this in his section and I'd like to thank our bank syndicate, including both existing and new lenders for their support. Core to SilverBow's strategy is a well-balanced portfolio of high return inventory and the flexibility to optimize our D&C program real-time alongside dynamic commodity prices. This quarter's update is an example of the plug-and-play optionality we have at our disposal. Without changing our full year CapEx guidance of $100 million to $110 million, we have accelerated and expanded our mid-year oil development program. This accomplishes two things. First, it increases SilverBow's exposure to the recent strength in oil prices with volumes to come online late in the third quarter. Second, it furthers our appraisal of Austin Chalk potential across our acreage. Our initial test well is exceeding our expectations. This well is producing above our internal forecast, both with its cumulative production to date and its slow decline rate. The results we have seen and the improvements we are implementing on our next Austin Chalk well provide line of sight to further D&C activity and inventory additions. We have meaningfully shifted our D&C allocation for the remainder of the year, while remaining within our original budget range. 60% of our full year budget is now directed towards liquids development, as compared to just 30% in our original 2021 plans presented in March. With our expanded oil development program now underway, we have increased our full year oil production guidance by 12% at the midpoint. Note, that this increase really only captures partial year production contribution as these wells are planned to come online late in the third quarter. This shift in mix is a great demonstration of how SilverBow is actively navigating the commodity price environment by employing our flexible, adaptable, and returns focused approach. Looking ahead, we'll continue living up to the operational efficiencies and low cost platform that we are known for. We plan to focus on free cash flow generation and further debt reduction, while living within a 70% to 80% reinvestment rate. In some instances, we may choose to reinvest additional capital as warranted by our returns peripherals. Reinvesting at the right time in the right wells provides for increased EBITDA, sustained free cash flow and lower leverage as we plan beyond 2021. Finally, we continue to be opportunistic with small-scale A&D being a key factor to our success to date. Our demonstrated ability to reduce costs and increase efficiencies on such opportunities has driven greater returns for our stakeholders. As SilverBow establishes a consistent free cash flow platform and further strengthens its balance sheet, we will continue to evaluate accretive deals, both large and small. With our appraisal of the Austin Chalk ongoing, SilverBow has multiple catalysts on the horizon. With that, I will turn the call over to Steve to provide an operational update. Steve, please go ahead.

Thank you, Sean. In the first quarter, we completed seven net wells all in our Webb County area. Six of these wells were drilled in the fourth quarter and comprised our second La Mesa pad. Our second pad delivered faster cycle times, pumped more stages per day and came in 13% below our planned capital costs. This La Mesa pad continues to perform in line with expectations and the efficiency learnings and pad design improvements will be carried forward into our future development plan. The seventh well completed in the first quarter was our first Austin chalk test well, which delivered an IP30 of 13 MMcf per day of dry gas and an estimated 90-day cumulative production of more than 1 billion cubic feet. This well had an all-in capital cost of $6 million, which we believe can be reduced to $5.5 million or a better in full scale development. In short, the Austin Chalk test was a success and we are optimistic about the future. For more details on the performance to date of our initial well, as well as our view of commercial economics, please refer to Slide 14 of our corporate presentation. We plan to upgrade additional wells this year to further understanding of the reservoir and the full development opportunity across our acreage. As Sean alluded to, we have accelerated and expanded our mid-year drilling program. We contracted a rig in April approximately one month ahead of schedule to start developing our liquids rich assets. This program encompasses 10 net wells in our La Salle Condensate and McMullen Oil areas, spanning the second and third quarters. Similar to the first quarter, we will briefly pause our drilling operations between August and November to allow SilverBow to fully assess its Austin Chalk results in current market conditions, and then further optimize our near term development. Currently, we expect resume drilling later in the fourth quarter targeting our natural gas assets, which sets up for a strong start to 2022. Although, we have seen slight increases in service pricing, we are proactively offsetting those increases through multiple levers. On the drilling side, SilverBow has been able to hold service costs flat based on vendor relationships and existing contracts. On the completion side, continue debundling of sand and other logistics and consumables that led to both pricing and efficiency gains. Additionally, the company has been enabled to lower facility costs by $40,000 per well to improve design processes and utilizing vendors with greater scale and volume discounting. Our first quarter production averaged 180 MMcfe per day, which was above the high end of our guidance range. In February, extreme cold weather conditions impacted much of the Southern portion of the U.S. and resulted in power outages and associated production shut-ins across the industry. We estimate the shut and impact on SilverBow’s first quarter production was approximately 2 MMcfe per day. Our storm preparation and pre-planning procedures helped mitigate production losses. For usual practice, SilverBow maintains a portion of natural gas sales tied to daily price indexes. Therefore, we did have some sales exposed to highly volatile prices for a brief period during the cold weather. February was a supply and demand event, and we do not expect the highly unusual conditions to recur going forward. Impressively, however, throughout the February disruptions, SilverBow continued at a streak of zero recordable incidents, a point of pride amongst our team. For the second quarter, we were guiding to a production range of 201 to 213 MMcfe per day with natural gas representing 82% of the midpoint. For full year 2021, our production guidance of 180 to 200 MMcfe per day is unchanged. And as Sean mentioned, the midpoint of our full year oil production increased 12%. This reflects the impact of our expanded midyear oil development program. We expect the initial oil volumes from this development to have only a partial impact on third quarter production, therefore, implying greater uplifts to our oil volumes in the second half of the year. Our guidance also assumes ethane recovery for the remainder of the year, although, we will continue to make monthly elections in accordance with commodity prices. Based on our latest guidance, we'd expect to deliver single digit production growth year-over-year on an equivalent basis. This will largely be driven by our gas volumes online in the first quarter, and to a lesser extent, the oil and NGL volumes coming online late this year. This current plan is aligned with prevailing prices and allows us to pivot between the strength of one commodity versus another. Our goal in the near term is to carryover the efficiency and production optimization learnings from our La Mesa pads, and to apply those to our current development programs. While volatility has proven to be constant of late, our diverse portfolio allows us to remain flexible and adaptable to market uncertainties in our operations. As such, we continue 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 first quarter financial results as well as our hedging program, price realizations, operating costs and capital structure. For the first quarter, revenue was $87 million, excluding derivatives with natural gas representing 78% of production and 73% of sales. For the quarter, our realized oil price was 96% of NYMEX WTI. Our realized gas price was 185% of NYMEX Henry Hub, and our realized NGL price was 39% of NYMEX WTI. As Steve mentioned earlier, natural gas spot prices experienced a brief yet significant spike in February. The spot price of Henry Hub natural gas closed at $23.86 per MMBTU on February 17, which compares to the January monthly average of $2.71. As such, SilverBow's first quarter realized natural gas price was significantly higher than both the benchmark Henry hub average and any recent historical period and should be considered a one-time event. Our realized hedging loss on contracts for the quarter was approximately $5 million. Based on the midpoint of our guidance and our hedge book as of April 30, our total estimated production is 60% hedge for the remainder of 2021. The company has 59% of natural gas production hedged, 77% of oil hedged and 48% of NGLs hedged. Assuming the midpoint of 2021 full year guidance has held flat through 2022. SilverBow has 41% of natural gas production hedged and 57% of oil hedged. The hedged of math are inclusive above swaps and collars. A detailed summary of our derivative contracts is contained in our corporate presentation and Form 10-Q filings for the first quarter of 2021, which we expect to file later today. Risk management is a key aspect of our business and we are proactive in adding oil and gas basis and calendar month average roll swaps to further supplement our hedging strategy. As shown on Slide 23 of our corporate presentation, we have historically realized prices close to NYMEX benchmarks. Turning to costs, lease operating expenses were $0.39 per MMcfe. Scheduled maintenance projects during the first quarter, as well as preventative storm preparation measures resulted in a slight increase to LOE compared to prior period. Transportation and processing costs were $0.31 per MMcfe. Production taxes were 4% of oil and gas sales. Oil production expenses were below the midpoint of our guidance or better. Adding our LOE, TNP and production taxes together, total production expenses were $0.91 per MMcfe. Continuing our trend of total production expenses of less than $1 per MMcfe. Cash G&A cost for the quarter were $4 million, a 20% decrease year-over-year. On a full year basis, we expect to reduce our 2021 cash G&A cost by approximately 10% year-over-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 $63 million, exclusive of amortized derivative contract gain. As reconciled in our earnings materials, we generated $24 million of free cash flow in the quarter. This marks six out of the last seven quarters of achieving positive free cash flow. Turning to our balance sheet, we further reduce our total debt by $30 million quarter-over-quarter and $90 million year-over-year. As of March 31, we had $200 million outstanding under our credit facility, approximately $3 million in cash on hand and $113 million of liquidity. Subsequent to quarter end and effective April 16, SilverBow amended his credit facility, which among other things we determined the borrowing base at $300 million and extended the maturity date to April of 2024. The maximum leverage ratio covenant is at 3.25 times through year end. Starting in 2022, the leverage covenant reduces to 3.0 times. As Sean alluded to, we are very appreciative of our syndicate of banks, which we believe we have strengthened during this unique time in the industry. For further information, please see the company's current report on Form 8-K filed with the SEC on April 19. At the end of the first quarter, we were in compliance with our financial covenants and had sufficient headroom. Our cash interest expense was down 20% from a year ago, primarily due to decreased borrowing. We expect our cash interest to continue trending lower throughout the year, as we pay down additional debt. Capital expenditures totaled $33 million on an accrual basis. The vast majority of our capital was devoted to finishing our Webb County development program. Thanks to further capital expense savings and efficiencies identified by our team. Our full year capital budget guidance is unchanged with the range of $100 million to $110 million. The remainder of our 2021 capital budget is approximately 85% weighted towards our liquid rich assets. The remaining 15% of our D&C spend targets late year development of our Webb County gas asset. In conjunction with unwinding oil derivative contracts related to production periods in 2020 and 2021, SilverBow was able to amortize the $38 million it received in March of 2020 as add back gain in discreet amounts, extending from April 2020 through December of 2021. The amortized hedge gains factored into SilverBow's adjusted EBITDA calculation for covenant purposes over the same time period, and therefore important for our investors and research analysts to understand when tracking our leverage ratio. For the first quarter, the add-back was approximately $4 million. On a last 12-month basis, the add-back totaled approximately $29 million, bringing our last 12 months adjusted EBITDA for covenant purposes to $292 million and our quarter end leverage ratio to 2.1 times. At the time period of the original unwind rolls off, our full year 2021 adjusted EBITDA will receive a benefit of approximately $14 million 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 generated meaningful free cash flow and paid down 13% of its revolver borrowings in the first quarter. The company is positioned to continue generating free cash flow and paying down debt for the remainder of 2021 and into 2022. We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices and the recent improvement in oil prices broaden the optionality of our high return inventory. As evidenced by the shift in this year schedule towards that higher oil mix. We expect SilverBow to continue to outperform other small cap peers. Over the past month, expo has been the second best performing stock across all large cap and small cap EMPs. Our winning strategy is focused on solid execution, efficient operations, financial resilience, and a low cost structure. This sets us up favorably given our current outlook for crisis continued strengthening of our balance sheet and positive momentum on Austin Chalk delineation. Our strategy remains intact with multiple catalysts for the future. We look forward to providing further updates on our next call. And with that, I'll turn the call back to the Operator for questions.

[Operator Instructions] Your first question comes from the line of Neal Dingmann with Truist Securities.

Good morning, guys. Could you talk a bit about maybe potential upside activity and just overall what could happen on that Austin Chalk on that Austin Chalk? And if you continue to have successful results there?

Yes. Good morning, Neal. Good to hear from you. We're going to continue to look at our returns based upon commodity prices and generated cash flows. We remain really committed to live within 70% to 80% of our cash flow in generating free cash flow in excess of $30 million to $50 million. So if our well performance and commodity prices generate more free cash, we could envision expanding our capital program a little bit and keeping our rig running through the full year and in conjunction with that as we plan to drill more Austin Chalk wealth this year, if we see similar success that we saw in our first well, that would also support probably additional drilling to really take advantage of the high returns that the Austin chalk has shown capable of.

And then -- Sean my follow up is it kind of an either or, I mean, if you start, would have fortunately continue to have success there. Would that capital continue to be reallocated from other areas? Or are you pretty set on the spend issue? Could you all talk around that?

Yes. We can tell you that we're very flexible and efficient in reallocating capital. So we're always looking to reallocate capital to our highest rate of return projects. So, as we came into the year, our gas project was supposed to be the best as oils move significantly higher, we've allocated to more liquids programs. But as we look at the Austin Chalk, if we continue to see the follow up wells perform like the first well, our capital costs start to move towards our desired goal of $5.5 million, I think the returns of those projects can actually start to exceed our oil projects. So probably shift our capital back into the Austin Chalk program.

Good to hear. And then just lastly, on talking about kind of on a go forward, I guess, can you talk about M&A a little bit, opportunities you see now what just given the position you're in and just kind of what the market looks like out there.

Yes. As you know, we continue to look for opportunities in the M&A market, both large and small over the past couple of years, we closed a number of smaller transactions, but we'll tell you that we're seeing more activity in the market today than we've seen over the last 24 months. So I think there are opportunities out there with higher prices, more sellers are coming to the market looking to transact. And so we're going to continue to be diligent on the right transaction, but we feel like there's more opportunities in front of us today than there was 12, 24 months ago.

Thanks, Sean.

[Operator Instructions] You have a question from the line of Charles Meade, Johnson Rice.

Yes. Good morning Sean to you and your team there. I want to ask a question about the trajectory of debt pay down for the year, and maybe it's also kind of related to the move in the natural gas strip. You guys made a big, made progress in a big chunk in 1Q and you had obviously had that benefit from the onetime storm pricing, I guess you'd call it. But as we look at the remainder of the year, a month ago, I would've said that your next big slug of debt pay down would come in Q4. But, in the last month, the strip for the back half of the year's moved up by $0.25, $0.30 on natural gas. And so it looks like you actually, you will be able to make some progress incrementally 2Q and 3Q, but can you give a sense of what your planning price deck is and what kind of progress you see under that planning price deck?

Yes, yes. We set up the cadence of our capital program, such that we'll see quarter-to-quarter positive cash flows as we come out of the capital spend timeframe. And then as we bring everything back in, we'll see, obviously spend, go up. So the cadence of our program this year probably has us seeing debt that paid down in the second quarter. It'll probably stay flat or move up a little bit in the third quarter, as we have a significant amount of spend around our completion activity of the program that we're currently drilling. And then we'll see a drop again as we enter into the fourth quarter. We are looking at the second half of the year, really seeing exposure to oil. You talk about the move up in oil prices and what our targets are there, we were heavily hedged through the first half of this year on oil. One of the things that attracted us to increase our oil capital allocation is just being exposed to those new volumes, to the higher oil price. And some of that's not hedged in yet. So I do think that if oil continues to move north of $60 where it stands, that we're going to see beneficial cash flows that will help us drive down debt even further. And lastly, I'll tell you, we're really definitely on track to remain – or to move below two times the leverage we stated publicly that it will be by end of year, but we see a pathway there even sooner.

Right. Right. And then a question about the Austin Chalk and specifically your Slide 24. I see where you guys have your first well, that's southwest -- I don't want to say corner, but maybe edge of Webb County. But you've got this big slug of acreage there in eastern Webb that spans into southern LaSalle. And then that falls outside of I believe that's EOG's outline for what they're calling their Dorado Play, which is that Austin Chalk. Can you talk about what you see technically about whether that big acreage position you have is going to be perspective? Or what are the questions you have on whether that could be a part of the Austin Chalk story for you guys?

Yes, yes. You're correct. The outline of the play on the map on Slide 14 is EOG's Dorado play outline. I will tell you that we do have some logs that cover west of there and east of there, but not really a good detail subsurface information on that larger block. We do know that as you move west to east, the Austin Chalk thins. So that block is still perspective, but comes with risk as it's transitioning from thicker, more pervasive Austin Chalk to a thinner Austin Chalk. So we're still considering, do we conduct some tests there or watch and see what other activity in the immediate area comes about to help de-risk it. But there's potential there, but probably a little bit more risk as you move east of the Dorado line.

Got it. And just to put some numbers to that, my understanding is, as you said, it's all thick and as you move southwest and down where you guys are, I want to say it's like 400 feet thick. Is that a -- or maybe even more than that and so could you quantify that, how thick it is where you are and what you expect in that in your block further east Webb county?

Yes. Why don't I give Steve the opportunity to answer that question?

Okay. Thank you, Charles. Down in our area there in the Southwest, the overall chalk, and if we were to consider that to be A, B, C, and D levels, the entire interval, we see it to be close to 700 to 750 feet thick with a little bit of a trending down as you head towards the east it's largely well north of 700 feet. And then when you get down into the more productive intervals, the C and D intervals, you're looking those to be anywhere from 150 to over 200 feet thick combined.

Got it. So that's a real thick section, but I recognize that as a recognize that as a call up in it. It's going to act differently. But thank you for that detail.

Yes, no, definitely appreciate it. Like we said, there's still some more work to be done. And part of that work over time, both by us and probably others will be is there stack pay potential across this big zone? So we're excited about the hydrocarbon that's in place in determining what the most economic way is to get into the ground.

Thank you, gentlemen.

There are no other questions in queue. I'll turn it back over to management for closing remarks.

Thank you for everyone for joining our call this morning and look forward to providing an update in August. Thanks.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.