SBOW (2021 - Q4)

Good morning and welcome to the SilverBow Resources Fourth Quarter and Full Year 2021 Conference Call. Please note this event is being recorded. I will now turn the call over to Jeff Magids, Director of Finance and Investor Relations for SilverBow Resources. Please go ahead, sir. Jeff Mag

Thank you, Sheryl, and good morning, everyone. Thank you very much for joining us for our fourth quarter and full year 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 the 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. 2021 was the year in which we turn challenges into opportunities. We delivered on our key objectives SilverBow records were named as one of Houston's top workplaces and realized an incredible shareholder return of more than 300%. In addition to our many accomplishments this year, the company is well-positioned to realize further upside through numerous catalysts in 2022 including production and EBITDA growth, inventory expansion through further Austin Chalk delineation, a third year of significant free cash flow, and a balance sheet that is less than one-times levered with substantial liquidity. With that as an introduction, I will start by providing some additional color on our 2021 results before turning to our outlook for 2022 and beyond. Our first objective for 2021 was to grow our production and EBITDA, while living within cash flow. We achieved this by increasing production by 17% and adjusted EBITDA by 68% year-over-year. We generated $84 million free cash flow, the highest marked in SilverBow's history, all while operating with a reinvestment rate of approximately 60%. Our full year cash flow represents more than a 20% free cash flow yield based upon our recent share price. Our second objective was to expand our high return inventory. We were able to do this through a mix of Austin Chalk delineation and accretive acquisitions. The returns demonstrated by our three chalk wells drilled in 2021 and our core Webb County gas area have exceeded our expectations. We are very pleased with the overall success of the play. In fact, Webb County is now the most active county in the Eagle Ford trend with 14 drilling wells. Last year, we closed three accretive acquisitions, which added multiple Webb spanning both oil and gas windows. All-in-all, we exited 2021 with over 10 rig years of core high return drilling locations. Our third objective was to maintain and improve our capital efficiencies and cost structure. Our team lowered drilling and completion costs per well and further reduced D&C costs per lateral foot by 13% year-over-year. As a result, we realize $10 million in CapEx savings compared to our planned costs, which equates to nearly 10% of our full year capital spend. Last but not least, our fourth objective was to further enhance our balance sheet. The $84 million in free cash flow was allocated to pay down $53 million of debt, an equivalent of over $3 per share, while the remaining $31 million was used to fund acquisitions. For the year, we cut our leverage ratio in half down to 1.25 times and increased our liquidity to $234 million, up more than $150 million from the prior year. Looking ahead to 2022 and beyond, we expect to deliver double-digit production in EBITDA growth, while maintaining a conservative reinvestment rate. The midpoint of our 2022 guidance calls for $85 million of free cash flow and $190 million of CapEx, which implies another year of greater than 20% free cash flow yield at a 70% reinvestment rate. Our growth objective of 10% to 20% will drive shareholder returns through multiple avenues, while increasing SilverBow size and scale. Near-term, we plan to use free cash flow to convert enterprise value from debt to equity. Our 2022 free cash flow guidance of $85 million equates to over $5 per share of net debt reduction. Our decade of premium drilling inventory supports a multi-year outlook of annual free cash flow above recent levels. Additionally, increasing our EBITDA, in tandem with debt reduction, should provide for greater overall equity value. That being said, I will add that our capital budget is not just focused on one year. We are growing production and EBITDA, expanding our -- expanding inventory and net asset value, driving capital efficiencies and further strengthening our balance sheet. Our team has established a track record of delivering on key objectives in the face of volatility and industry headwinds. We have been successful on a number of fronts, including accretive acquisitions. We see a robust pipeline of opportunities going forward. Our ability to transact at the right time and at the right price is a proven strategy that has and will continue to unlock value for our stakeholders. With that, I will hand the call over to Steve.

Thank you, Sean. Moving on to our operational results. First, I would like to congratulate our cross-functional teams for another year of exceptional performance. Additionally, our production operations team recently celebrated its five-year anniversary with zero OSHA recordable accidents, a remarkable achievement when comparing against peers across the space. Fourth quarter D&C activity consisted of four net Rio Bravo wells completed in our Webb County gas area. Additionally, we participated in three gross non-operated wells also located in Webb County. For the full year we drilled 18 net wells, completed 24 net wells, and average roughly a three quarter rig activity pace. As detailed in our earnings materials, we entered 2021 with a disciplined yet flexible development program. We finished grilling in completing our six well La Mesa pad and first Austin Chalk well early in the first quarter of 2021. Subsequently, we released our drilling rig as part of a plan to pause in activity to prudently assess market conditions. Early in the second quarter, we elected to accelerate and expand our mid-year liquids development program and also include some Webb County gas targets later in the year. This decision was based on favorable commodity prices and also due to our operations team running ahead of schedule and under budget. Our liquids development focused primarily in our La Salle condensate and McMullen oil areas, and was comprised of 11 net wells drilled and completed this past summer. The five net Webb County wells we elected to add to the schedule were drilled in the third quarter. The drilling and completion activity over the second and third quarters drove production and cash flow expansion through the second half of the year, and corresponded favorably with rising commodity prices. SilverBow released its sole drilling rig in September and had no operated activity until the resumption of drilling at our Webb County gas area in late December. With respect to last year's liquids development program, we're seeing strong well performance across all our respective assets, including our La Salle condensate area and McMillan oil area. The Austin Chalk was a key focus area for SilverBow and 2021 and given the strong results from our initial gas wells, it will remain an integral part of our go-forward development plans. Last month, SilverBow brought online is fourth Austin Chalk well in Webb County. As we have mentioned in prior updates, these wells continue to exhibit strong commercial economics and we see a runway of future development across our existing acreage position. In 2021, we added 50 proved locations to our inventory and see additional upside as we continue to prove up chalk acreage. Our first Austin Chalk well average over 10 MMcfe per day through its first year of production. As shown on slide 17 of our corporate presentation, we are seeing consistently strong results from our other Austin Chalk wells. The second and third chalk wells average IP30 of 13 MMcf per day and 10 MMcf per day respectively. Going forward, we expect to achieve average well costs of roughly $5.3 million for a 7,500 foot lateral, or total D&C costs below $730 per lateral foot. This represents paybacks of less than a year. The Austin Chalk has been an emerging upside play of late among South Texas operators. Our well results compare favorably to offsetting operators in the dry gas window. As Sean noted, SilverBow executed on three accretive acquisitions in the back half of 2021. The company added more than 200 net drilling locations from these acquired assets. Given these deals closed later in the year, their contribution to full year 2021 production was a modest. As expected producing base from these assets will be fully reflected in our go-forward results. Furthermore, our team has integrated these assets into SilverBow's low cost structure and expects to realize operating synergies due to increased scale. In addition to greater purchasing price power with our vendors, we have identified numerous lift and operational efficiencies which will further optimize the base production of these properties and increase our cash margins at the field level. On the capital efficiency side, our operation's teams continue to drill faster and reduce well costs, which ultimately pushed our D&C costs lower. As shown on slide 18 of our corporate presentation, we've reduced our total D&C cost per lateral foot by 13% compared to 2020. This is a direct result of our operational and supply chain teams working with our vendor partners to negotiate prices and logistical considerations that better support our overall commercial objectives. In total, we realize $10 million of capital savings compared to our plan costs. For the full year 2021, our capital expenditures totaled $130 million on an accrual basis excluding payments related to acquisitions. For 2022, our capital budget guidance of $180 million to $200 million reflects a full rig running throughout the year in provides for 33 net wells drilled and 30 net wells completed. Of these we currently anticipate to drill 21 net wells in our Webb County gas area, three net wells in our La Salle condensate area, seven to eight net wells in our McMullen oil area, and one to two net wells in our newly established Eastern Eagle Ford area, which was added to the portfolio from one of our acquisitions last year. Of the wells to be drilled in our Webb County gas area, eight net wells are targeting the Austin Chalk. The year-over-year increase to our capital budget in 2022 is primarily driven by higher activity levels as we step-up from a three quarter rig pace to a full rig pace. Additionally, we are drilling a greater number of single well pads as part of our ongoing Austin Chalk delineation, which will carry over efficiency levels versus larger multi well pads which will carry over lower efficiency levels, I might add, versus larger multi well pads. Activity increases and drill schedules change account for roughly 90% of the year-over-year spending increase. Remaining 10% of the increase is attributable to inflationary pressure on costs -- on well costs. Specific to our operating costs, we are planning for a net increase of 3% to 5% in 2022. The primary drivers of this inflation continue to be production chemicals, well servicing, and labor. This is partially reflected in the recent uptick of our LOE unit costs as well as our LOE guidance. As mentioned earlier, the other components of higher forecasted LOE is the addition of our acquired assets, which carry higher OpEx typical of more liquid-weighted assets. As always, maintaining a low cost structure is core to SilverBow's culture. We continue to operate our assets with the goal of maximizing field level margins as if commodity prices were much lower. To wrap-up our first quarter production guidance of 220 to 232 MMcfe per day is down sequentially as we had minimal D&C activity in the fourth quarter and are currently drilling and completing an eight well pad at La Mesa. First sales from this La Mesa pad are expected towards the end of the second quarter. Our full year production guidance of 235 to 255 MMcfe per day reflects flush production expected mid-year and higher production rates in the second half of 2022. Similar to recent years, we expect our first quarter drilling to focus on gas development, our second and third quarters to focus more heavily on liquids-rich development, and our fourth quarter to return to gas development. Furthermore, given the expected timing of our CapEx and first sales from wells this year, our quarterly production is expected to decline slightly, before ramping up sequentially in the third and fourth quarters. Second quarter cash flows will likely be at a deficit due to the timing of the accrued CapEx. It is important to note that the current drill schedule was designed to optimize our full year free cash flow as we remain opportunistic and flexible throughout the balance of the year. With that, I'll turn the call over to Chris.

Thanks Steve. In my comments this morning, I will highlight our fourth quarter and full year financial results as well as our operating costs, hedging program, and capital structure. Fourth quarter oil and gas sales were $151 million excluding derivatives with natural gas representing 74% of production and 63% of sales. During the quarter, our realized oil price was 98% of NYMEX WTI, our realized gas price was 97% of NYMEX Henry Hub, and our realized net NGL price was 43% of NYMEX WTI. Due to higher commodity prices, our fourth quarter realized price excluding hedges was $6.58 per Mcfe, an increase from $5.08 in the third quarter and $3.27 year-over-year. Our realized hedging loss on derivative contracts was $41 million for the fourth quarter and $73 million for the full year. Based on the midpoint of our guidance and our hedge book as of February 25th, SilverBow has 62% of total estimated production volumes hedged for 2022. Broken down by commodity, the company has 65% of natural gas production hedged, 60% of oil hedged, and 48% of NGLs hedged for 2022. Assuming our production guidance is held flat in 2023, our total production is approximately 30% hedged. The hedged amounts are a combination of swaps and collars. A detailed summary of our derivative contracts is contained in our presentation and Form 10-K filing, 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 in calendar month average role swaps to further supplement our hedging strategy. As shown on slide 22 of the corporate presentation, we have historically realized prices close to NYMEX benchmarks. This is a key competitive advantage of our South Texas asset base. For this year, we have gas basis hedges on over 50 MMcf per day at a positive weighted average differential. While we are encouraged by the strength of the current strip, we remain conservative in our capital investment and judicious in locking in favorable returns. Turning to costs and expenses. Fourth quarter LOE was $0.37, transportation and processing costs were $0.30, and production taxes were 4.8% of sales, or $0.32 per Mcfe. All of these costs items were within our guidance ranges. Adding our LOE, T&P, and production tax together, we achieved total production expenses of $0.99 per Mcfe. Cash G&A which excludes stock-based compensation was $5.7 million for the fourth quarter, slightly higher than our guidance range due to burdens and professional fees. For 2022, we are guiding for cash G&A of $15.8 million at the midpoint, an 8% decrease from 2021. I would note that our G&A is lower year-over-year inclusive of our recent acquisitions. We successfully closed all three transactions without having to add any incremental G&A. We consider our lean cost structure to be a competitive advantage, which allows us to sustain profitability during periods of volatile commodity prices. Additionally, we expect identify further OpEx synergies with our cost structure as we operate our acquired assets. Adjusted EBITDA for the fourth quarter was $82 million, exclusive of amortized derivative contracts and pro forma contributions from acquisitions. As reconciled in our earnings materials, we generated $53 million of free cash flow in the fourth quarter, driven by increased production, higher realized prices, and lower D&C spend relative to the third quarter. For the full year 2021, SilverBow generated $84 million of free cash flow, which was right at the midpoint of our guidance range. With a continued focus on our balance sheet and free cash flow generation, we expect a leverage ratio below one-times by year end 2022. As previously mentioned, we closed three accretive acquisitions in the second half of 2021. Total consideration for the transactions was $138 million. This reflects a combination of cash and stock used for the acquisitions and transaction-related fees, valued at the time of close and net of purchase price adjustments. Notably, the cash consideration of these deals after giving effect to purchase price adjustments totaled just over $50 million. CapEx on an accrual basis, totaled $20 million for the quarter and $131 million for the full year, excluding payment for acquisitions. Nearly all of our capital investment in the fourth quarter was associated with our Webb County gas drilling and non-op activity. Our 2022 CapEx guidance of $180 million to $200 million, which Steve detailed in his comments is based on a full rig drilling pace throughout the year and a reinvestment rate of approximately 70%. Our year end proved reserves using SEC pricing were 1.4 Tcfe, 82% of which were natural gas and 46% of which were proved developed producing. Total PV-10 was $1.8 billion and our PDP PV-10 was $1 billion, an increase of 245% and 170% respectively. It is worth noting that our enterprise value trades at a 20% discount to our PDP PV-10 value. Turning to our balance sheet. We executed several initiatives in 2021, which allowed us to extend our debt maturities, increase liquidity, refinance higher cost debt, and self-fund acquisitions. In April, we extended the maturity date of our credit facility by two years out to 2024. In November, we repaid $50 million of our $200 million second lien facility and extended the maturity date by two years out to 2026. Also in November, with the full support of our bank syndicate, SilverBow's borrowing base was increased from $300 million to $460 million. SilverBow initiated its ATM program in August and through the end of the year, we had issued roughly 1.2 million shares and raised $27 million in net proceeds. The proceeds supplemented our ability to execute on acquisitions, while simultaneously refinancing a portion of our second lien debt with lower cost RBL borrowings. In aggregate, SilverBow reduced its debt by $53 million year-over-year to $377 million and increase its liquidity by $152 million to $234 million at year end. In conjunction with unwinding oil derivative contracts related to production periods in 2020 and 2021, SilverBow amortized $38 million it received in March of 2020, as add banc gains and discrete amounts extending from April 2020 through December of 2021. The amortized hedged 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. Additionally, SilverBow includes pro forma contributions from acquired assets and adjusted EBITDA for purposes of calculating its leverage ratio. On a last 12-month basis or full year 2021 basis, the add backs totaled approximately $55 million, bringing our LTM adjusted EBITDA for leverage ratio to $301 million and our year end leverage ratio to 1.25 times. Beginning with the first quarter of 2022 and thereafter, amortized hedge gains will not be included in the leverage ratio calculation. At year-end 2021, we were in full compliance with our financial covenants and had sufficient headroom to execute our business strategy. We expect to reach a sub one times leverage ratio by year end 2022, continued debt reduction this year will also increase liquidity and provide SilverBow with a greater dry powder to execute future accretive acquisitions. And with that, I will turn it over to Sean to wrap-up our prepared remarks.

Thanks Chris. To summarize, SilverBow is set up for double-digit growth while generating a free cash flow yield in excess of 20%. This will drive further debt reduction and increase liquidity translating into further delivering over the course of the year. Our business strategy is focused on a balanced portfolio, efficient operations, low leverage, and a peer-leading cost structure. Our Austin Chalk development, core Webb County gas assets, and acquired liquids-rich wells will be the near-term drivers of our production and EBITDA growth and we will pursue additional opportunities to expand our drilling inventory and increase our liquidity through the year. While we are encouraged by the strong commodity price outlook, we are positioned to maximize profitability in all environments, given our balanced portfolio and hedging strategy. Thank you for joining our call this morning and allowing us to share our results. We would like to thank our stakeholders who have taken a vested interest in SilverBow and who believe in our value creation strategy. With the positive momentum we have, we are excited about the prospects that lie ahead and look forward to providing further updates on our next call. And with that, I will turn the call back to the operator for questions.

Thank you. [Operator Instructions] The first question is from Neal Dingmann of Truist. Please go ahead, your line is open.

Morning all. Thanks for all the details. My question [indiscernible] for you Steve just could you talk a bit about my -- around the operational efficiencies and where I'm going with this is you talked about the Austin Chalk and just wondering between you two if you could talk about multi-formational potential and again, you you've got some I know bigger pads ahead. Could you just talk about maybe how your development plans for the rest of the year? And, again, how it encompasses some of this maybe multi-formation and other efficiencies you can tie into that?

Yes, you bet. Neal thanks for the question. I'll start and then Steve can add some additional color as he sees fit. Yes, as we think about development -- and let's talk about the Austin Chalk area first out in Webb County, we're actually in the middle of a cube development on our La Mesa pad. This is our first eight well pad, an increase of two wells from our largest historical padded of six wells previously. And so on that pad, we're drilling three lower Eagle Ford, three upper Eagle Ford, and two Austin Chalk. So, we are shifting to more of a stacked zone development out in Webb County. As we move forward in that area later in the year in the second half of the year, we'll come back and drill similar combination of all three zones. In some instances where we've already developed the lower, we'll come back in and drill upper and Austin Chalk together. We are moving more from single well developments to pad developments in that area and as we think about the Austin Chalk and consider facing development, that's really the next evolution for us and other operators in the area. We're seeing development in the Austin Chalk as well as a reconfiguration of our spacing in the Upper Eagle Ford to over 1,000 foot between inner well in zone spacing. And then as we think about other areas of development in our liquids areas, we're really focusing in around two to three well pads throughout the year. So, definitely our move to a full rig as well as to more pad development is increasing capital efficiencies, which is helping offset some of the inflationary pressures that we're seeing.

Yes--

Yes, and Sean--

Go ahead Steve. I'm sorry.

Just as real quick, that's a great piece on the development part and where we have open acreage and where we delineate and we have an opportunity for some multi horizon work, we've kind of changed gears and we now take advantage of those multi horizons even when we're delineating on new acreage. And then you further that with the one rig efficiency versus the three quarter rig efficiencies and that's what's been able to basically allowed us to hold serve on the budget that we previously announced.

Could one of you all hit -- Sean, you were getting into this in the inner well, just talk about the spacing that you're seeing or the change in spacing you're seeing?

Yes. As we -- the three wells that we drilled in the Austin Chalk in 2021 were all standalone wells. We've watched offset operators that are very active in the area come in and start to drill multi-well Austin Chalk development. And we've seen tests in and around anywhere from 660 foot inner well spacing in zone up to 1,250. We think that the Austin Chalk does have more permeability than the Eagle Ford, thicker as well as more hydrocarbon in place. And so right now that's where we're targeting probably to the high side of that inner well spacing. It's interesting, the wells that we've drilled to-date are exhibiting shallower and declines in the Eagle ford, which I think further supports our view of greater permeability in the zone and thus the greater inner well spacing.

Great color. And then lastly, could you just talk about -- you mentioned, I know, you guys have done a good job estimating costs in place. I'm just wondering between you and Steve, again, everything you're seeing out there, is there anything that would cause delays or the likes or -- again, I know, we're seeing a lot of things with drill pipe or casing or what have you. I'm just wondering, is there anything around in that area that's causing any unforeseen delays or anything like that remainder of the year? Thank you.

Yes, another good question, something that we've been very focused on. We, having been very active in the area over the last several years, maintained and built very strong relationships with our service providers. So, as we've tried to get in front of the drilling program, have commitments arrangements in place that really have services locked in from a commitment standpoint, not necessarily a contractual standpoint through the year. So, that includes our drilling rig, pumping services, and tubulars. One area that we saw during the latter part of last year and into this year that's really created some cycle-time issues is around trucking. That continues to be a challenge for us as we move the rig around as well as during frac jobs moving equipment around as well as sand. What we've done is adjusted for that by staging materials more closer to the pad, i.e. primarily sand so that it's driving down delivery times from going from the sand mines to location. So, I think we have a plan in place to try to mitigate the trucking shortages that we have seen and in part continuing to see. And, Steve, I don't know, if you have any more color to add there?

Yes, really, in terms of availability and crew competencies, we've been working through that, like everybody in the sector of the industry has. But furthermore, we've just tightened up and worked our unit costs and further increased the performance efficiency on our process costs. And then couple that with the one rig opportunity to not only level load that with a trailing frac spread. Again, that's why I say I think we've been able to hold serve on our cost.

Great details. Thank you all.

Thanks Neal. Appreciate the questions.

Your next question is from Charles Meade of Johnson Rice. Please go ahead, your line is open.

Good morning Sean and Steve and Chris and the rest of the crew there. Steve, I want to go back to some of your prepared comments on the quarterly cadence of production. And I think I got most of it, but I just wanted to make sure I'm picking up the right pieces. Looking just at your what you guys talked about on your completion schedule and where you're going to have rig across your asset base, it seems to me that we're going to see a big uptick in gas primarily 2Q and that more of the liquids growth is going to be in 3Q and 4Q, is that about what you said in your prepared comments or -- could you clarify that?

Yes. Thank you, Charles. Charles, you're spot on. It's a big gas uptick with the eight well pad that we're bringing on at La Mesa and then as I mentioned, we convert to our high quality oil opportunities in Q2, Q3 with much of that production coming on in Q -- later Q2 and Q3.

Okay.

And then again, revert gas -- revert back to a gas in the latter part of the year, but still remain opportunistic on the oil side if we have to.

Okay. And when you talk about reverting back to gas, you're more talking about where your activity is, as opposed to where the where the arrow of production is going?

That is correct. That is correct. With the understanding, there's that trailing production and we try to be relatively thoughtful around the commerciality of where gas prices might be seasonally.

Right, right. Okay, great. That all makes sense. And then Sean, if I could ask a question about -- what you guys are seeing in A&D market, obviously, 2021 was a great year for you guys. And in general, that we saw a lot of consolidation, but all other things being equal, you look at past cycles when commodity prices run up, usually the deal flow slows down. But I'm curious are -- what are you seeing right now in opportunities to consolidate Eagle Ford?

Appreciate the question, Charles. Yes, maybe let me back up, start with our big picture view of the Eagle Ford. We continue to believe that the Eagle Ford creates and has a rich opportunity set for acquisitions, there remains a number of companies that are privately held, that have been in their investment in Eagle Ford for multiple years and are finding themselves in a good pricing environment to probably look to transact. So, I don't think we're seeing any -- we're still strong believers that the Eagle Ford is ripe for consolidation. But to your point, we are seeing that seller and buyer, expectations are starting to diverge. And typical of what we see in high volatile pricing environment, we're starting to see some of that come to fruition right now and in that there's kind of a pay -- let's pause and wait and see just where oil prices go, as well as gas prices. Gas prices are very strong as well. So, we're -- have been active in the market for four or five years now, have built a lot of strong relationships, continue to have an active dialogues. But you'll see the volatility and prices go up being a little bit of an impediment to getting trans transactions done until there's a settling out or a balancing or stabilization, I guess, is the word I'm looking for on commodity prices.

Got it Sean. That is helpful insight. Appreciate it. Thanks.

Thanks for the questions, Charles.

There are no further questions at this time. I will now turn the call over to Sean Woolverton for closing remarks.

Thank you, Sheryl. And just to reiterate, appreciate everyone's interest in SilverBow. We feel very strongly where the company sits today. We believe it's well-positioned and has momentum moving forward. So, look forward to sharing more of our results in successes as we host the call later in the second quarter to share first quarter results. So, thank you, everyone.

Thanks.

This concludes today's conference call. Thank you for your participation. You may now disconnect.