SBOW (2022 - Q1)

Good day and thank you for standing by. Welcome to SilverBow Resources First Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call over to your speaker today, Mr. Jeff Magids, Director of Finance and Investor Relations. Please go ahead. Jeff Mag

Thank you, Buena, and good morning, everyone. Thank you very much for joining us for our first quarter '22 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. With that, I will now turn the call over to Sean.

Thank you, Jeff, and thank you, everyone, for joining our call this morning. SilverBow is off to a strong start to the year. Our first quarter results, borrowing base increase, and recently announced transactions exemplify the winning strategy we have consistently executed on. The Sundance and SandPoint acquisitions marked the fourth and fifth transactions we have announced since August 21. Combined, we view these acquisitions as attractively valued at a purchase price of less than USD30,000 per flowing Boe per day of production -- of current production and at a cash flow multiple of 2.1x. We are excited about adding scale to our legacy position in the Western Eagle Ford, the efficiencies we stand to gain, and the projected growth from the combined asset base. For the past several quarters, we have outlined our strategic objectives. First, we are targeting double-digit production growth while living within cash flow. Second, we are focused on expanding our inventory through accretive acquisitions and organic leasing. Third, we want to lead our peers in capital efficiency and cost structure. And last, our fourth objective is to delever the balance sheet through debt reduction and cash flow generation. During the first quarter, we continued to progress these objectives. And in doing so, we are seeing strong performance in the equity. Year-to-date, our stock is up over 60%, and that is coming off a 300%-plus increase in '21. In the first quarter, we generated USD28 million of free cash flow and reduced our net debt by the same amount. We further reduced our leverage ratio quarter-over-quarter and ended 1Q with USD262 million of liquidity. Notably, our quarter-end liquidity position does not reflect the increase to our borrowing base, which went into effect on April 12. Operationally, we drilled 3 Austin Chalk wells at La Mesa in the quarter, with the first being a single well brought online earlier this year. The other 2 Austin Chalk wells were part of a 8-well La Mesa pad we drilled in the quarter, which is the largest pad drilled in our company's history and represents a shift towards full-scale development of our Austin Chalk assets. As shown on Slide 20, the Austin Chalk formation continues to exhibit some of the highest returns across our portfolio, and we plan to drill additional locations this year. Currently, we have 50-plus Austin Chalk locations in our inventory, and we are actively pursuing opportunities to add to that count. In April, we made several major announcements which enhanced SilverBow's shareholder value proposition going forward. First, we announced our spring redetermination results, which increased our borrowing base to USD525 million. The USD65 million increase further enhances our liquidity. Notably, we did not include any contribution or uplift from the pending acquisitions. We expect to receive consents from the bank group to substantially increase our borrowing base upon closing of the Sundance acquisition, which should further increase our RBL availability. Following the announcement of the borrowing base redetermination, we announced 2 accretive acquisitions for a combined transaction value of USD425 million. The SandPoint acquisition adds approximately 27,000 net acres in La Salle and McMullen counties with a PDP PV-10 value of USD89 million, which is USD18 million more than what we paid for the assets. With 2 new wells coming online, we anticipate these assets to contribute 5 MBoe per day with expected closing to occur later this month. The Sundance acquisition adds approximately 39,000 net acres with a PDP PV-10 value of USD277 million and significantly increases our oil-weighted production and inventory with approximately 200 gross locations. As of January, the Sundance assets were producing 11 MBoe per day. Combined, these deals have compelling industrial logic given the acreage overlap with our positions in La Salle and McMullen counties or what we refer to as our AWP and Artesia fields. The contiguous pro forma position shown on Slides 9 and 15 will provide synergistic opportunities for both OpEx and G&A as we achieve greater scale in areas in which SilverBow has extensive experience. On a pro forma basis, SilverBow will have ample high-return drilling locations, representing over 20 rig years. a PDP PV-10 value of USD1.6 billion, and an oil production mix of roughly 25%, which is a meaningful step change compared to the 11% oil mix in 2021. A core pillar of our strategy has focused on a balanced commodity portfolio, in which we quickly shift, which we can quickly shift between oil and gas development based upon prevailing commodity prices. We believe this has been and will continue to be a competitive advantage in generating greater returns in the long term compared to peers who do not have the same flexibility in their portfolios. The increase to our oil production and inventory is a transformational and, candidly, a much-needed shift ensuring SilverBow can benefit from the strength in liquids pricing moving forward, while at the same time we have a deep inventory of high rate of return gas locations, especially with the emergence of the Austin Chalk in Webb County. We have not published updated guidance for 2022 at this point. We anticipate closing the Sundance acquisition in June or July, at which time we'll release updated guidance. For reference, on Slide 14, we show the full year 2022 pro forma company projections, which conveyed the magnitude of the increase from these deals compared to standalone SilverBow. Additionally, on Slide 16, we highlight the accretion across key financial metrics, particularly free cash flow per share. Upon closing the Sundance acquisition, we anticipate adding a second rig, which will primarily focus on those assets. Our near-term plan is to allocate capital 50-50 between our oil and gas inventory. We essentially will have one drilling rig for oil and one drilling for gas full time, which should drive greater efficiencies and full utilization of a frac crew. The optimized development plan we can pursue with our pro forma asset base will enable continued double-digit production growth annually. In fact, we are now projecting 20% to 30% growth over the next few years. We can achieve the growth with a reinvestment rate below 60%, while driving free cash flow greater than USD1 billion through 2024. Assuming latest strip pricing, we have line of sight towards USD700 million of adjusted EBITDA in 2023, an incredible pace of growth compared to adjusted EBITDA of just under USD250 million in 2021. At the same time, we expect to accelerate delevering and achieve our year-end 2022 leverage ratio target of less than 1x. SilverBow's value creation proposition thus far has focused on growth through the drill bit while converting enterprise value from debt to equity through free cash flow generation. With the accretive acquisitions we have made over the last year, SilverBow has rapidly scaled its cash flows within a favorable commodity price environment and improved its balance sheet and per share metrics. For the near term, our focus will remain on the successful closing and integration of the acquisitions. In a strong commodity price environment, it is easy to forget where prices were just a year ago. And furthermore, we are seeing continued inflationary pressures across all services. Therefore, capital discipline, operational efficiencies, and prudent risk management will remain critical towards realizing the full value of our growth strategy. We have optionally given our balance -- we have optionality given our balance sheet and strong cash flow outlook, which will allow SilverBow to remain active in further consolidation opportunities. Right now, 2 things are clear to us. First, pro forma SilverBow is set up to deliver strong growth in the coming years, which will bolster our portfolio and drive stakeholder value. And second, the Eagle Ford is ripe for consolidation and SilverBow has a track record and capabilities to lead the charge. 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 drilled 9 net wells, completed 1 net well, and brought 1 net well online. Essentially, all of our D&C activity was in our Webb County gas area where we drilled 1 La Mesa Austin Chalk well at a lateral length of approximately 9,800 feet, the longest chalk well we have drilled to date. Additionally, we drilled and began completing an 8-well La Mesa pad, which is the largest pad in company history. The La Mesa pad targeted 3 locations in the Upper Eagle Ford, 3 in the Lower Eagle Ford, and 2 in the Austin Chalk. The co-development of these wells utilized a wine-rack approach and extended spacing for the Austin Chalk. This is our first spacing test of the Chalk formation as compared to the single delineations we have brought online to date. As shown on Slide 20, our Austin Chalk results have outperformed our expectations and are exhibiting strong commercial returns. These wells are showing payback periods of less than a year and at current strip prices, the payback periods and NPVs per well are even better. First quarter production averaged 226 MMcfe per day, right at the midpoint of our guidance range. Our oil and NGL volumes came in at the low end of their guidance ranges as weather-related issues and nonoperated well performance impacted initial expectations. The current upcycle in the industry has caused a tight labor market in the service sector. We observed this with the rate we brought in earlier this year. Those efficiency losses prove temporary, and our drilling and surface rig fleets have returned to their prior efficiency levels. We expect the gains we have made operationally over the last few years to continue going forward. Furthermore, we intend to add a rig on the Sundance assets this summer. This will provide us with greater size and scale and the efficiencies of utilizing a level-loaded frac crew. All of this is to say that SilverBow will have greater abilities to mitigate rising costs as we work to provide our service partners with higher utilization across the asset base. For the second quarter, we are guiding to production of 225 MMcfe per day at the midpoint on a standalone basis with natural gas representing approximately 80% of our production mix. This is roughly flat to our production -- to our first quarter production. Due to minimal D&C activity in the fourth quarter of last year and the size and timing of the 8-well pad we developed over the first quarter of '22, monthly production in the second quarter should decline sequentially before hitting a strong production ramp in June as first production from our La Mesa pad is brought online. Furthermore, we have optimized SilverBow's drilling schedule to maximize returns based on well selections and also accelerate the timing of first production of subsequent wells for the remainder of the year. This should drive on a standalone basis daily production rates to average 15% higher in the second half of the year as compared to the first half. Given the 2 acquisition announcements, which meaningfully impact our production levels, we are withholding full year '22 guidance until closing the Sundance acquisition. It is worth noting on a standalone basis, SilverBow's CapEx budget for this year remains unchanged as our team continues to identify efficiencies from a full rig. We remain committed to a flexible and adaptable development program, which provides for such changes in short time periods. This has allowed us to stay within our original budget as we are actively offsetting cost inflation, increasing our field efficiencies, and pulling forward the first production timing of our highest rate of return wells. Specific to cost inflation, proppant, horsepower, diesel fuel, tubular goods, and labor are areas where the market is experiencing the most constraints. On the drilling side, utilizing a cost-effective spudder rig on our pads has helped to maintain cycle time efficiencies and reduce the number of drilling days needed from our super-spec rig. On the completion side, we have been primarily focused on land and sand costs at the well site. As such, we have utilized a blend of regional and imported sands along with other logistical tradeoffs to help offset the inflationary effects of our stimulations. We are also working with our completion providers to further reduce time from rig release to first stage pumped. Again, as we grow the size of our program, we're able to provide greater utilization to service partners who, in turn, are able to provide greater cost efficiencies to us. Looking ahead, our drilling rig has moved to our liquids weighted assets and will target locations we acquired with the 3 acquisitions last year. In total, there are 13 locations we will drill in 2022 from last year's acquisitions. Assuming a standalone SilverBow scenario, this rig would shift back to gas drilling in Webb County in the fourth quarter. From a timing standpoint, we expect to incur roughly USD70 million of CapEx in the second quarter. And again, on a standalone basis, this should result in a slight cash flow deficit for the quarter. However, the pulling forward of higher-return wells and production timing will set us up for significant free cash flow through the second half of the year. With that, I'll 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 price realizations, hedging program, operating costs, and capital structure. First quarter oil and gas sales were USD130 million, excluding derivatives, with natural gas representing 77% of production and 60% of sales. During the quarter, our realized oil price was 98% of NYMEX WTI. Our realized gas price was 100% of NYMEX Henry Hub and our realized NGL price was 37% of NYMEX WTI. Notably, our realized gas price was USD0.01 per Mcf higher than benchmark Henry Hub prices, highlighting the attractiveness of operating in Gulf Coast markets. Our realized hedging loss on contracts for the quarter was approximately USD28 million. Based on our hedge book as of April 29, for the remainder of 2022, we have 131 MMcf per day of natural gas hedged, 3,929 barrels per day of oil hedged, and 2,780 barrels per day of NGLs hedged. 2023, we have approximately 134 MMcf per day of natural gas hedged, 2,900 barrels per day of oil hedged, and just over 2,200 barrels per day of NGLs hedged. The hedged amounts are inclusive of both swaps and collars and do not include the pending acquisitions. A detailed summary of our derivative contracts is contained in our corporate presentation and 10-Q filing for the first quarter of 2022, which we expect to file later today. Turning to cost. Lease operating expenses were USD0.48 per Mcfe. Transportation and processing costs were USD0.31 per Mcfe. Production taxes were 6% of oil and gas sales. We anticipate our unit LOE cost to increase due to higher-cost liquids production, much of which was acquired over the last year. Cash G&A, which excludes stock-based compensation, was USD3.7 million for the first quarter, a 1% decrease year-over-year. As we continue to add the size and scale of the company, a function of both organic and acquisitive growth, we do not anticipate a meaningful increase to G&A. Rather, we expect G&A on a per unit basis to decline compared to historical ranges. 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 first quarter was USD74 million. As reconciled in our earnings materials, we generated USD28 million of free cash flow during the quarter. As Steve noted, we remain on track with our original CapEx budget range on a standalone basis, particularly as scheduling optimizations and full rig efficiencies have helped mitigate service cost inflation. Turning to our balance sheet. We reduced total debt by USD27 million quarter-over-quarter. Strong price realizations allowed us to reduce debt in a quarter in which we pulled forward nearly USD10 million of accrued CapEx, which totaled approximately USD40 million. As of March 31, we had USD200 million outstanding under our credit facility, approximately USD2 million of cash on hand, and USD262 million of liquidity. As Sean mentioned, our spring redetermination in April resulted in a borrowing base of USD525 million. I would like to thank our admin, agent as well as the rest of our bank syndicate, which included 2 new member banks, for their support. We look forward to constructively working together as we close our pending acquisitions and further our consolidation efforts. SilverBow, in accordance with our credit facility, includes contributions from closed acquisitions for the entirety of the LTM-adjusted EBITDA period, which is used for the leverage ratio calculation. On an LTM basis, for the period ending with the first quarter of 2022, the contributions from acquired assets totaled approximately USD25 million. bringing our LTM adjusted EBITDA for covenant purposes to USD281 million and quarter end leverage ratio to 1.24x. At the end of the first 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. SilverBow has taken actions over the last 12 months to have grown the company and resulted in significant value creation. With the latest acquisitions, we are set to increase SilverBow's float and liquidity, which combined with greater cash flow potential going forward, should garner increased investor attention. A key milestone for SilverBow to reach was USD500 million in annualized EBITDA. And next year, we have line of sight to over USD700 million of EBITDA. As we continue to find ways to scale our cash flows and pay down debt, we still see the highest return on investment through the drill bit and accretive transactions. Our plan is to integrate the new assets and identify additional synergies. Furthermore, we will accelerate growth through our expanded 2-rig program. The growth will drive significant EBITDA and free cash flow above current levels as we move into 2023. The narrative surrounding SilverBow's value proposition has meaningfully changed in a short amount of time. I want to thank our stakeholders for their continued support. 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 is from Charles Meade of Johnson Rice.

This is Michael Furrow filling in for Charles Meade. So in regards to the 8-well La Mesa pad, you'll mentioned that the wine-rack configuration targets 3 Lower Eagle Ford, 3 Upper Eagle Ford, and 2 Austin Chalk wells. Could you provide a little further detail on why that configuration was chosen? And if there are further opportunities for other large pads similar to this one?

Yes. Michael, this is Steve. The reason that, that particular configuration was chosen is in that greater Fasken area, we have a history of high development and learnings going forward. We've been able to work our appropriate 880 spacing in the Lower Eagle Ford as well as in the Upper Eagle Ford, which has been demonstrated time and again, obviously, heavy density in the Lower Eagle Ford and continuing to grow density in the Upper Eagle Ford. That said, we've also been doing, as you know, that delineation testing in the Austin Chalk and using that as well as offset data information we've been able to get as well. We know that we typically want to be right now at this stage in the development somewhere in that 1,100 foot to 1,200 foot spacing. So, therefore, it provided quite readily and handily for a wine-rack development with offsetting vertical takes all the way from the Lower Eagle Ford looking up to the Chalk.

Yes. And then Michael, I'd just add that as we move forward, our probably optimized pad count is closer to 3 to 4 versus 8. We do have a couple larger pads, 6 to 8, but the majority of our development plan moving forward will probably be in the 3% to 4% range.

Great. And so it sounds like that 8-well pad has been fully drilled. So at this point, can you provide some more detail based upon the number of wells that are completed and some of the timing going forward?

Yes. Yes. From a drilling perspective, you're right. Everything has been TDed. At this point, everything has been fracked, and we're in the early stages of flowback. So expect to see a significant production ramp in the next few weeks. As you're aware, wells down in this area, both -- through all zones, Lower, Upper Eagle Ford, and Austin Chalk have IPs ranging from anywhere in the 12 million to 18 million a day range. So with bringing on 8 wells, we're going to see a significant ramp in our production. And from a timing perspective, it couldn't be any better with gas prices above USD8 now.

No doubt about that. My second question is around the Sundance and SandPoint acquisition. So standpoint is expected to close in the second quarter with Sundance in the third quarter. At this point, do you see any like major hurdles to closing these transactions or anything that could potentially miss with the timing related to the anticipated close of the deals?

We've been working on both transactions. We have a track record now to demonstrate the ability to get these transactions closed. Everything remains on schedule as planned. And you mentioned SandPoint closing in the second quarter, that should be here in the very near future. Sundance we're targeting late in the quarter, early third quarter. The one difference between the 2 is the Sundance transaction requires a shareholder vote, which is scheduled preliminarily for June 21. So that's the timing pivot point around getting the Sundance transaction closed.

Great. That's very helpful.

Your next question is from Bertrand Donnes of Truist.

In your prepared remarks, you indicated you're not done pursuing acquisitions. Can you talk how the market looks? Some other operators in other basins have taken a step back with volatile oil prices. Are you guys approaching it differently? Or it may be because you're using equity for some of the acquisitions, you can maybe take a little off the strip and lease some upside for sellers?

Yes. Let me walk you through what we're seeing. We've been very active in the Eagle Ford looking for opportunities for quite a while now. So the transactions that we've actually done over the last 12 months have been based upon longer-term relationships that we've built with the sellers. We believe the opportunity that we provide as a buyer. Offering both the combination of cash as well as stock provides the seller to participate in taking some value off the table through the cash component and then being exposed to upside with the stock. And we believe folks that have -- we've transacted with so far have recognized that value accretion. And so we do think that we're a logical acquirer of assets in the Eagle Ford. There's a tremendous amount of runway of opportunity sets out there with a number of private entities that are looking for opportunities to probably transact at these higher prices. Now with all that said, we want to continue to remain very disciplined. I think I mentioned in my opening remarks that across the 5 transactions, we've averaged a purchase price of about 30,000 Boe per day. We are seeing other buyers starting to push the high end of what we would consider probably overpaying for acquisitions in this volatile market, and it is going to continue to be a challenging environment at these high prices and the volatility until we get a stabilized go-forward strip. So we're going to continue to work it hard, but be very diligent in making smart transactions.

That all makes sense. And then maybe just shifting gears, on the new acquisitions, they make total sense, continuous with your acreage. And I assume part of the value was that you can run a more stable program. Is the second rig that you're -- or the additional rig you're bringing in, is that locked in already? Or is that going to be a game time decision based on what the costs look like when the acquisitions close?

We actually have that contract -- the second drilling rig firmed up. And it's -- our plan is to start drilling as soon as the acquisitions close. So it's a rig that's currently active, again, have good strong relationship with our service providers. And so work with them to work the timing on bringing the second rig right around the close of the Sundance transaction. So we're pretty excited that we're going to be able to hit the ground running. We're already working closely with the Sundance team to identify what they felt were the best opportunities to hit this year, and we're getting those locations teed up and ready to go so that we can hit the ground running.

That sounds great.

[Operator Instructions]. Your next question is from Geoff Jay of Daniel Energy Partners.

Just a follow-up to that. So the rig is already secured. What's the term on that? In other words, I guess, is that rig -- do you feel confident that, that rig will be locked into that rate for the next 6 months, a year? how should we think about potential for inflation down the line with that incremental rig?

Yes. Definitely, we're entering in an environment that we haven't seen for many years. We're moving from, over the last several years where contracts were pad to pad, now looking at more longer-term type contracts. From an operator's perspective, we're trying to lock in those rates where the service companies are now trying to keep them short, so they can try to capture upside in future pricing. So we're trying to balance that, right, and avoid mistakes that the industry has made in the past of getting too long commitments, knowing that prices can be volatile. So we've put in what we think is a reasonable amount of term agreeable to the drilling provider as well, both sides trying to balance, what makes sense for both entities. And then from an inflation standpoint, we are seeing it. We, over the last several years, have continued -- our operations teams have continued to find ways to drive costs lower. That becomes more and more challenging as you try to wring efficiencies out of the system. But what we're benefiting from is the increased scale. So all the things that come with that, having more purchasing power, having more ability to commit to longer-term type arrangements. But more importantly, just having consistency in the schedule going forward. Just 12 to 15 months ago, we were running at half a rig. So running 2 rigs will just allow us to be more efficient and, more importantly, commit to essentially almost a full frac utilization schedule. So we're pretty optimistic that we're going to be able to hold the line on capital, offset inflation through continued efficiencies from the scaled-up program. Operator, are there any additional calls in the queue? If not, we can wrap up the call for this morning.

No more questions, sir. Please continue.

Okay. Well, appreciate everyone joining us this morning. We look forward to providing additional updates as activity and news warrants it from us. So everyone, have a good morning.

And this concludes today's conference call. Thank you for participating. You may now disconnect.