SBOW (2021 - Q2)

Welcome to the SilverBow Resources Second Quarter 2021 Earnings Conference Call [Operator Instructions]. Please be advised that today's call is being recorded [Operator Instructions]. I would now like to hand the conference over to Jeff Magids, Director of Finance and Investor Relations. Please go ahead. Jeff Mag

Thank you, Hillary, and good morning, everyone. Thank you very much for joining us for our Second 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 the 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. With that, I will turn the call over to Sean.

Thank you, Jeff, and thank you, everyone, for joining our call this morning. SilverBow's second quarter results continued our positive momentum from the first quarter. With the first half of the year now behind us, I would like to detail the progress we have made towards a number of our key objectives, which we show on Slide 7 of the presentation. Our first objective is to grow production and EBITDA while living within cash flow. Yesterday, we increased our full year production guidance by 8% at the midpoint, which now implies 12% growth year-over-year. As oil production comes online in the third quarter, we anticipate that the second quarter should be the low watermark for our EBITDA this year. We also increased our free cash flow guidance by 25% at the midpoint to a range of $45 million to $55 million. We accomplished these increases while remaining at an implied reinvestment rate of approximately 70%, inclusive of our revised capital budget range. Steve will further detail our CapEx and scheduling optimizations in his section. Our second objective is focused on expanding inventory through Austin Chalk delineation and accretive acquisitions. Our initial Austin Chalk well in Webb County continues to exhibit attractive economics, and we plan to drill additional appraisal wells this year. Subsequent to quarter end, we closed on an accretive bolt-on acquisition and our high-return La Mesa field, which included incremental working interest in our existing well bores as well as an additional section of new acreage directly offsetting our current position. We were able to fund this transaction using a combination of cash and stock. The deal provides us with $10 million per day of incremental production as well as future inventory upside in the prolific Eagle Ford and Austin Chalk trends. As many of you know, our La Mesa wells over the last 2 years contributed to much of SilverBow's success. Our third objective is to drive peer-leading capital efficiency and cost structure. Our total cash operating expenses for the second quarter were below $1 per Mcfe. We have seen continued improvement in our cycle times and our total D&C cost per lateral foot. As Chris will detail, we lowered our full year LOE and T&P guidance given higher production and further cost efficiencies. Our cost structure allows us to continue generating attractive full-cycle returns, and SilverBow is at the high end of our peers on free cash flow yield, which we show on Slide 20 of our presentation. Last but not least, we seek to delever our balance sheet through further debt reduction and accretive transactions. Year-over-year, we reduced our total debt by $72 million, and we have now paid down $92 million of [Technical Difficulty] since the end of the first quarter of 2020. At quarter end, our leverage ratio was 1.9x, down from 2.5x at year-end 2020 and ahead of our previous target of below 2x by year-end 2021. As we reduce debt and increase our liquidity, we better position ourselves to strategically deploy cash towards bolt-on acquisitions, such as our recent La Mesa deal. Accretive transactions like these will be more than offset by our objective to decrease leverage and grow reserves. I'm extremely proud of the progress SilverBow has made to date. Going forward, we see the opportunity to set even more ambitious targets. By year-end, we believe our leverage ratio could be below 1.75x. As we look into 2022, our preliminary forecast at a 3-quarter rig pace and grow annual production by double digits. We project 2022 free cash flow above 2021 levels with an implied reinvestment rate below 70%. We may reinvest additional capital as warranted by a return threshold, such as the new Eagle Ford and Austin Chalk locations acquired in our La Mesa acreage. Reinvesting at the right time and the right wells provides for increased EBITDA, sustained free cash flow and lower leverage as we look to '22 and beyond. With that said, I will turn the call over to Steve to provide an operational update. Steve, Please go ahead.

Thank you, Sean. In the second quarter, we drilled 10 net wells, 9 of which were in our La Salle condensate area. Our team continued to increase efficiencies and reduce cycle times as our drilling cycle times averaged about seven days per well in the second quarter. Our fastest drill time was 4.2 days, with a major total depth of over 17,000 feet with an 8,000 foot lateral. As a result of these drilling efficiencies, we moved up three wells originally scheduled to be drilled in the third quarter. As shown on Slides 16 and 17 of our presentation, year-to-date, we drilled 20% more feet per day and reduced our drilling costs by 2% per lateral foot compared to 2020. On the completion side, we completed 17% more stages per day and reduced completion cost per well by 2%. Taken together, we reduced our total D&C cost per lateral foot by 5% year-to-date compared to 2020. Our Austin Chalk well in Webb County is demonstrating very attractive economics. The well continues to produce above 10 MMcf per day and cumulative production is more than [1 Bcf] to date. For more details on the performance and economics of our Austin Chalk well, please refer to Slide 14 of our corporate presentation. We plan to test and appraise additional Austin Chalk wells this year to further enhance our understanding of the reservoir and the full development opportunity across our acreage. Additionally, we recently closed on a bolt-on acquisition at our La Mesa property. The deal adds 12.5% to 20% working interest to our producing well bores and future locations on our existing lease as well as a 640 net acre section directly adjacent to our position. This results in 17 net high-return locations added across the upper and lower Eagle Ford and Austin Chalk zones and bolsters our drilling schedule heading into 2022 and beyond. Production management is a key focus area of our business. The maintenance and optimization projects we executed during the [Technical Difficulty] supported the strong performance we saw in the second quarter. We added numerous compression and artificial lift installations across various assets. With a favorable commodity price backdrop, we have identified a number of opportunities to work over legacy assets. In our SMR area, we completed 2 such opportunities to bring online incremental oil production at a very attractive cost. Proactively managing our production base is a cost-effective way to drive higher volumes and flatter declines. Our second quarter production averaged 213 Mmcfe per day, which was at the high end of our guidance. Strong performance from our base production, aided by our maintenance and optimization projects and full quarter contributions from our second La Mesa pad in Austin Chalk well contributed to the production beat. SilverBow has also continued its streak of 0 recordable incidents, a point of pride amongst our team. For the third quarter, we are guiding to a production range of 200 to 215 MMcfe per day, with natural gas representing 78% at the midpoint. For full year 2021, we are increasing our production guidance to a range of 200 to 210 MMcfe per day. This assumes ethane recovery for the remainder of the year, although we will continue to make monthly elections in accordance with commodity prices. Our guidance also includes incremental working interest we acquired in our La Mesa field subsequent to quarter end. Based on our latest guidance, we expect to deliver 12% production growth year-over-year on an equivalent basis. Service and supply costs are now expected to see various pockets of inflation for select markets through year-end and into 2022. Much of this inflation is centered around the completion side of the business for horsepower and logistics and on the drilling side for tubular goods. That said, many of these cost increases will be offset by improved operating efficiencies and previously agreed contracts with favorable terms. Again, maintaining a low-cost structure has been critical to SilverBow's success, and we expect to continue this competitive cost structure for the foreseeable future, even as a limited number of contracts roll off late this year and into 2022. Capital dollars for the second quarter totaled $26 million on an accrual basis. As Sean mentioned, we increased our free cash flow guidance to $45 million to $55 million. Included in our increased free cash flow is our updated CapEx guidance of $115 million to $130 million. We are proactively aligning our activity this year to maximize our returns, given the recent strength in commodity prices. Due to improved cycle times and being able to drill ahead of schedule, we now expect to finish planned D&C activity by early fourth quarter. In our third quarter, included in our third quarter schedule is the completion of our midyear oil development. The addition of gas drilling originally scheduled for the fourth quarter as well as 1 net non-operated gas well we elected to participate in. This contrasts to our prior plan to pause drilling from August to November and resume gas drilling thereafter into year-end. With the majority of our remaining CapEx occurring in the third quarter, we anticipate an outspend in the third quarter, followed by a significant amount of free cash flow in the fourth quarter. The scheduling changes accelerate our capital timing and maximize our free cash flow generation. Furthermore, it increases our optionality heading into 2022. Our balanced portfolio allows us to remain flexible and adaptable to market conditions. As always, we continue to operate with a strict returns-driven mindset in regards to any future development. With that, I'll [indiscernible]

Thanks, Steve, and good morning, everyone. In my comments this morning, I will highlight our second quarter financial results as well as our price realizations, hedging program, operating cost and capital structure. For the second quarter, revenue was $70 million, excluding derivatives, with natural gas representing 82% of production and 60% -- 67% of oil and gas sales. For the quarter, our realized oil price was 96% of NYMEX WTI. Our realized gas price was 104% of NYMEX Henry Hub and our realized NGL price was 33% of NYMEX WTI. Notably, our realized gas price was $0.12 per Mcf higher than the benchmark Henry Hub prices, highlighting the attractiveness of operating in the Gulf Coast markets. Our realized hedging loss on contracts for the quarter was approximately $8 million. Based on the midpoint of our guidance and our hedge book as of July 30, our total estimated production is 66% hedged for the remainder of 2021. The company has 66% of natural gas production hedged, 79% of oil hedged and 48% of NGLs hedged. Assuming the midpoint of 2021 full year guidance is held flat through 2022, SilverBow has 61% of natural gas production hedged and 69% of oil hedged. The hedged amounts are inclusive of both swaps and collars. A detailed summary of our derivative contracts is contained in our corporate presentation and Form 10-Q for the second 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 bases and calendar month average roll swaps to further supplement our hedging strategy. As shown on Slide 24 of our presentation, we have historically realized prices close to NYMEX benchmarks. Turning to cost. Lease operating expenses were $0.29 per Mcfe. Transportation and processing costs were $0.32 per Mcfe. Production taxes were 5% of oil and gas sales. All production expenses were below the midpoint of guidance or better. Adding our LOE, T&P and production taxes together, total production expenses were $0.79 per Mcfe, continuing our trend of total production expenses of less than $1 per Mcfe. Cash G&A costs for the quarter were $4 million, a 27% decrease year-over-year. Adding our production expenses and cash G&A together, our total cash operating expenses for the second quarter were $0.98 per Mcfe. We consider our lean cost structure to be a competitive advantage, allowing SilverBow to profitability during periods of volatile commodity prices. Adjusted EBITDA for the quarter was $43 million, exclusive of amortized derivative contract gains. As reconciled in our earnings materials, we generated $7 million of free cash flow in the quarter. This marks 7 out of the last 8 quarters of achieving positive free cash flow. As Sean alluded to, we are lowering our per unit LOE and T&P guidance for the year, given higher production and further cost efficiencies. For 2021, we anticipate our LOE to be in the range of $0.31 to $0.35 per Mcfe, down from $0.34 to $0.38 previously. We anticipate our T&P to be in the range of $0.29 to $0.33 per Mcfe, down from $0.30 to $0.34 previously. Turning to our balance sheet. [Technical Difficulty] total debt by $2 million quarter-over-quarter and $72 million year-over-year. As of June 30, we had $198 million outstanding under our credit facility, approximately $2 million of cash on hand and $104 million of liquidity. Our cash interest expense this quarter included $2 million of onetime expenses related to the extension of our credit facility. We expect our quarterly cash interest to trend lower going forward as we pay down additional debt. In conjunction with the unwinding of oil derivative contracts related to production periods in 2020 and 2021, SilverBow was able to amortize $38 million it received in March of 2020 as add-back gains in discrete amounts extending from April 2020 through December of 2021. The amortized hedge gains factor into SilverBow's adjusted EBITDA calculation for covenant purposes over the same time period, and therefore, it is important for our investors and research analysts to understand when tracking our leverage ratio. For the second quarter of 2021, the add-back was approximately $4 million. On a last 12-month basis, the add-back totaled approximately $26 million, bringing our LTM adjusted EBITDA for covenant purposes to $206 million and our quarter end leverage ratio to 1.9x. As 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 year-end leverage ratio. At the end of the quarter, we were in full compliance with our financial covenants and had sufficient headroom. And with that, I will turn it over to Sean to wrap up our prepared remarks.

Thanks, Chris. To summarize, SilverBow is positioned to [Indiscernible] and expand inventory while generating substantial free cash flow and further delever the balance sheet. The recent strength in commodity prices broadened the optionality of our high-return inventory as evidenced by the real-time optimizations we make to our development program. Year-to-date, SilverBow has been one of the best-performing stocks across large cap and small cap E&PS. With that said, we expect SilverBow to continue to outperform its small cap peers. We will continue to deliver on accretive and organic growth and shareholder value while remaining opportunistic in the market. Our winning strategy is built on solid execution, efficient operations, financial resilience and a low-cost structure. We see additional tailwinds to our outlook given the [Indiscernible] environment, continued strengthening of our balance sheet and ongoing Eagle Ford expansion and Austin Chalk delineation. 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] Your first question comes from the line of Neal Dingmann with Truist Securities.

Sean, you talked a little bit about -- I know you guys have been showing really nice, what I would call regionally operational flexibility based on commodity price. And I'm just wondering, again, will you continue to do that? It looks like, I think the answer is yes. But maybe just talk about how actively you'll continue to do that. And then the sort of follow-up with that is, how long does it take once you pivot or do something like that to the timing of the associated activity or production around that? How long does it take?

Neal, I appreciate the question. Yes, we're in this environment where we're seeing strong commodity prices across all components, oil, NGLs and gas. So our inventory is working well. We do want to continue to grow a balanced commodity production profile. So we expect as we look into '22, to drill both in the gas and oil window. Near term, we have nine wells coming on in August, all in the Artesia area, which is the blend of about 1/3 oil, 1/3 gas, 1/3 NGL. So we really like that area. In September, we have one well coming on in our McMullen oil area, so a little oily. And then in September, we expect to bring on another Austin Chalk well down in our Fasken area, which is dry gas. So it gives you a feel of how we're allocating our capital in this point in time. In terms of how quickly we pivot. This year was another great example. We went into the year expecting to drill gas through most of the year as oil really moved up as we entered in the first quarter, we adjusted our program such that we began drilling oil really in the May time frame. So it took us about 45 days to pivot to a more oily mix.

And then just a follow-up. You guys talked about a lot of the even lower LOE and different things you're seeing with efficiencies, which is great to see. Maybe just talk about, on a go-forward, your thoughts about you think that -- can you continue to do that and offset, we've heard about inflation. I know one of the Rockies companies bumped up their guidance today on higher inflation both on LOE and overall cost. So just maybe talk about, Sean, cost inflation versus efficiencies.

I can start and then let Steve maybe follow-on. Yes, I think we're, as Steve made comments in his remarks, starting to see inflation come into the sector, especially in certain pockets. We expect that to continue. Especially as labor shortages persist, we're seeing increases associated with that as well as materials. Can we drive more efficiencies in? It's been a trend that we've been working on now for probably 36 months, and I tell you every quarter the operations team continues to surprise and find more efficiencies that I think it really reflects our culture of just continuously turning over the next stone and seeing what we can find. So those are my comments. Steve, I don't know if you want to add any additional comments.

Neal, we're seeing some added and compression opportunities that we're able to capitalize on that have high returns. And in addition to that, we're also seeing some artificial lift, both new as well as some legacy opportunities there that are even showing even higher returns. That said, and as you know, oil has a little bit more expense to it than the gas side of the business. But that said, we have a lot of new oil coming on. So really that only affects the later life gas. When you look at the cost structure though, relative to OpEx, we're really only seeing very slight to no declines, especially in the more local markets. We're not seeing a whole lot of increase in the local markets, a little bit more on the regional side. But by and large, the biggest increase we have so far on the OpEx side is labor. That compares though, however it pales in comparison to, what we're seeing on some of the select markets for CapEx.

Your next question comes from the line of Austin Aucoin with Johnson Rice.

I wanted to start with the La Mesa bolt-on acquisition. Going forward, how do you all plan to incorporate cash verse equity and future deals? And then piggyback off of that. What's the current pipeline for bolt-on A&D?

Yes, as we look at the opportunity set, the Eagle Ford has a large opportunity set of transactions similar to the one we announced yesterday. Many operators that are smaller in scale looking to benefit from a larger scale, more efficient company. And we're looking to do the same as well. So there are more opportunities out there. We've built a strong relationship with a number of operators in the basin. And so we look forward to bringing more assets like that into our mix here in the coming months and years. In terms of utilizing cash versus stock, we're always looking for an accretive deal and structuring it such that we're able to continue to delever our balance sheet. And so it's finding that right mix of those two components. Does the asset create drilling opportunities that grow EBITDA, so we can delever on that side or can we bring it in through the stock side so that the base EBITDA is accretive? So that's the way we're approaching it. Our stock, we think, still has a ton of room to run to -- but we also want to be thoughtful in our balance sheet. And I think other people, sellers in the basin look at our stock and our company and believe that there's upside as well. And so that's why we're seeing a willingness to take the stock.

And my follow-up is, what is your all's priority list for the use of cash? Is it debt reduction? More drilling? A&D? And also, is there a certain leverage ratio target that you are comfortable with?

Our focus over the last 12, 18 months has been debt pay down with the free cash flow. We've moved our leverage ratio down quite significantly over the last 12 months, taking it down below 2x now, announced in our comments that we're looking towards bringing it down below 1.75x by year-end. And with the strong free cash flow looking out in the next year, anticipate that goes even lower. Our target is probably looking at below 1.25x over the coming years and once we get to that level, thinking about what else we can do with the free cash flow. We've been hinging around a reinvestment rate of 70%. So as our revenues have grown with the improved pricing, we have elected selectively to take some of that free cash flow and drill some additional opportunities that came to us here this year. And so that's kind of the governor or the hinge point that I guess I would say we have is that 70% reinvestment rate. Anything above that just always we'll push towards debt for now.

And then my final question is, would the increased guide to your all's free cash flow and CapEx, I was curious how you thought through the increase in full year CapEx relative to the increasing of free cash flow projection?

It was really kind of around my prior comment there. As we looked at the expanded free cash flow and the reinvestment rate, it was going to push us lower. We were fine going lower on the reinvestment rate and pushing that towards debt pay down. But we had a couple of opportunities come to us through a non-operated position and it was kind of an opportunity to participate in the drilling of those wells. It was on a checker-boarded acreage position that we acquired last year from Vitruvian that's in the Webb County gas area, so an area that we really like. So that was one of the drivers is didn't want to miss out on the opportunity to allocate capital to drilling of wells that wouldn't be there if we didn't spend that capital. The other was looking to bring forward some capital into the year, primarily around drilling four wells down in our Rio Bravo asset in Webb County. We decided, as we got this really efficient drilling program going and the drilling [line] with us, that we'd go ahead and drill those. We had originally planned to drill those late in the year and a little bit into next year. So they're set up to be a 4 well DUC program right now, but we have the optionality to complete those towards the end of the year depending upon service costs, service availability and commodity prices. And that's why we gave a fairly large range of capital for the remainder for the full year because of we wanted optionality around those DUCS.

[Operator Instructions]

Hillary, it doesn't look like we have any more questions. Appreciate everyone's interest in the company and joining our call this morning and look forward to speaking with you on our third quarter call.

Thank you. This does conclude today's conference call. You may now disconnect.