Q1 2020 Earnings Call

Thursday

in our day-to-day life

we continue to take the precautionary measures to safeguard our employees contractors vendors and other stakeholders in response to current market conditions, including the recent outbreak of covid-19, and the rapid decline in commodity prices and economic Outlook. We made strategic decisions to optimize our 2020 operating plan on June 1st from a capital standpoint. We elected to to Suzanne all drilling activity until at least the latter part of this year.

Ladies and gentlemen, thank you for standing by and welcome to the Silver Bow resources. First quarter 2020 earnings conference call all lines are currently on a listen-only mode after the speakers remarks. There will be a question-and-answer session. If you would like to ask a question at that time, you may do so by pressing star in the number one on your telephone keypad, as a reminder today's conference is being recorded. I know my pleasure to hand the conference over to Mister Jeff message, please go ahead sir. Thank you, Nicole and good morning everyone. Thank you very much for joining us for our first quarter twenty twenty-five. It's call with me on the call. Today are Sean Wolverton our CEO Steve Adam r c o o and Chris abundance 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.

We are returned stripping company in the commodity price Outlook did not support what was originally slated to be a liquid focused development plan.

We do believe Superior returns exist within the industry the highest of which will be unlocked through opportunistic A&D.

Second we have undertaken an effective production Management program.

We are ensuring economic returns through production curtailment in by aligning production with economically support of crisis in the future.

Third we took corrective measures in regards to our risk management program.

Please note that we make references to certain non-gaap Financial measures which are reconciled to their closest gaap measure in their earnings. Press release our discussion today may include forward-looking statements.

In March, we monetized excess oil derivatives over the remainder of 2020 and 2021 to bring forward $38 million of cash proceeds to bolster our bags for the near-term.

We decreased our net debt position by twenty-three million quarter-over-quarter, thereby, increasing our liquidity.

We have also taken advantage of the recent uplift and gas prices to layer on additional hedging into 2022.

This allows us to lock in returns ahead of future development.

While our budget next to the Outlook has changed our business strategy Remains the Same.

We are building a well-balanced portfolio and taking advantage of the relative outperformance and natural gas prices.

We are better suited to navigate near-term volatility in commodity prices compared to peers even the optionality built into our DNC program.

We focus on the variables in our control and look to generate sustainable returns across our portfolio with upside leverage to both oil and gas prices from given the current gas trip. We have the optionality to give it to gas development late this year and early next year.

Our low-cost gas acreage has always been a key lever in our Arsenal.

As we previously disclosed we recently doubled our gas acreage through an acquisition which closed just after quarter inch.

This provides silver bow with further upside should natural gas prices continue to improve.

We also divested non-core overriding royalty interests in Wyoming which we expect to close in the second quarter.

I'm very proud of our team's ability to execute on these will time transactions while working remotely.

We reduced our 2020 capex to a range of 80 to $95 million a decrease of approximately 55% or 100 million compared to our prior guidance range.

At current prices. We were targeting approximately forty to fifty million of free cash flow for full-year 2020

assuming no further drilling activity. We expect to generate free cash flow above that range from 2021.

As I mentioned earlier, we have optionality to generate High rates of return through the drill bit on our gas acreage.

Many of the opportunities we have today are the result of operational improvements and a and e transactions we have made in recent quarters.

Based upon the midpoint of our guidance and implied exit rate production levels for 2020. Our maintenance capex is in the range of 75 to 85 million per year.

In summary first quarter actions resulted in $26 million of free cash flow for the quarter $23 million of increase liquidity.

In the well-timed acquisition of offsetting acreage in Western eagleford gas window.

We have established a compelling risk-reward opportunity for our stakeholders over the next several years at current prices.

We are in the process of wrapping up our semiannual firing base redetermination.

Based on the current state of commodity prices and constructive conversations with our banking Syndicate. We expect a 15 to 20% reduction from our stated $400 billion borrowing basis.

Like this anticipated reduction we have sufficient liquidity to enact our go-forward business plan.

Finally navigating near-term headwinds will require a flexible strategy. That optimizes returns in real time.

We will continue to assess the natural gas market dynamics including the impact of covid-19 and lower crude oil prices on the natural gas supply and demand Outlook.

currently we see an optimistic setup of supply and demand factors that support higher rates of return within our portfolio in very favorable free cash money for investors

we plan to provide the market with interim updates as necessary for pertaining to any material changes in our business plan

with that I will turn the call over to Steve to provide an operational update

please go ahead thank you Shawn reflect on the first quarter it has been one of Extreme as we work to ensure the safety of our employees contractors and their families at the same time we are adjusting our field operations to meet the economic impacts and to deliver best-in-class results

Before commenting on our quarterly highlights. We will share some key actions. We took to protect our balance sheet and maximize cash flow in mid-march. We enhance our work protocols to ensure we maintain a safe work environment for our office employees as well as our field Personnel that are the front line of our operation.

We elected to curtail existing production and do defer bringing on new production review this as a prudent action to preserve the economic value and our resource base wage. We have curtailed approximately fifty million cubic feet per day of net gas production and two thousand barrels per day of metal production wage to bring this production back online with improved pricing currently forecasted during the latter half of this year.

We also elect you to defer turning to sales 5. And previously and three previously completed wells in the McMullen oil area for a total of 8 Wells that we intend back online and the third quarter of this year.

Our updated production guidance of 115 to 140 million cubic feet equivalent per day for the second quarter and $164 to $185 billion cubic feet equivalent for the full year reflects and increasing mix of gas as Illustrated on flight eleven of our corporate presentations. We have demonstrated the ability to bring a significant amount of oil or gas production in a short time frame.

Since the beginning of 2019 we brought online 4,000 that barrels per day over the next over the span of six months as well as being a creeper day and as little as 45 days this further supports our ability to Pivot our development program becomes Oil and Gas locations, especially as we view the potential for gas in late 2028 and early 2021.

We continue our industry-leading focus on reducing operating expenses to a Drilling and completion efficiencies contingency schedule and workflow optimizations. We value the relationship. We've built with our service providers and continue to work with them as partners to ensure our mutual success.

as it were

To the first quarter, we drilled 11:00 completed eight and turned to sales five net. Wells are drilling results demonstrate an improvement in drilling efficiencies of more than eight hundred feet per day or 48% over 2019. This represents the cost reduction of $80 for lateral foot, which is a twenty 8% decrease over 2019. Our completions team continued its Improvement Trend as well. They successfully increase completed lateral link footages per day and routinely placed 9% more wage often per day than 2019 while maintaining similar / well costs.

In our ball and oil area. We drove eight completed five and turned the sales team that Wells the 12th had turned the sales yielded a very strong choke manage rate of 1700 barrels of oil per plan per day at 84% liquid across to ten thousand foot lateral.

As we look for the latter part of 2020. We are preparing to initiate a capital program the line with materially higher natural gas prices. We have the optionality for developing additional Webb County dry gas where we have ample inventory deep technical experience and predictable returns.

Given the updates to our operating plan. We are now targeting roughly ten million dollars in operating expense reduction this year across AT&T production taxes and DNA's. We expect to realize further cost savings as a result of working closely with our vendors implementing improved efficiencies and further leveraging our area expertise.

Finally, we are in the process of integrating our recent Eagle Ford acquisition which adds incremental TV production of approximately 10 million cubic feet per day across Wells at no additional overhead costs to realize operating expense energies on these assets that they are immediately offsetting our existing acreage. We are now assessing the best development stage of this large acreage position, which could include seeking a partner to find the development with higher gas prices in the future with that. I will turn it over to Chris.

Thanks Steve in my comments this morning. I will highlight our first-quarter financial results as well as our operating cost hedging program and capital structure off. Our first quarter Revenue was fifty three point four million dollars with natural gas representing 79% of production and 59% of Revenue.

Realized pricing for the quarter was ninety-eight percent of both nymex WTI and Henry Hub and 27% of WTI for NGL.

Although our realized prices have seen a slight pullback in recent quarters Gulf Coast markets consistently trade at a premium to other basins and our assets based benefits from this Competitive Edge competitive Advantage as shown on slide thirteen of our corporate presentation. We realize higher pricing on both oil and gas vs. In Basin peers.

Hedging gain on contracts for the quarter was approximately $13 not including the $38 million dollars from the Hedge monetization Sean previously mentioned.

Based on the midpoint of our guidance. Our total estimated production is 64% Hedge for the remainder of twenty-twenty. Our gas production is approximately 67,000 hedged with a weighted average price of $2.63 per mmbtu. And our oil production is approximately 81% hedge with the weighted average price off a $57.40 per barrel of oil.

For 20 21, we have $66 per day of gas hedge at a weighted average price of $2.33 per mmbtu inclusive of floor prices or off or our gas collars.

Our gas collars next year represent approximately 85% of our hedge positions and have a weighted average ceiling price of $2.91 per mmbtu preserving material outside exposure to natural gas prices. Additionally we have over 2,000 barrels per day of oil hedged at a weighted average price of $51.85 per barrel. Please note this reflects our hedge book as of May 4th.

We have taken advantage of the recent strength and gas prices to layer on additional downside protection over the next 24 months.

Inclusive of the changes made to our budget. We now have sixty million dollars in gas Revenue secured for the remainder of 20 twenty and fifty six million dollars for full-year 20-21 risk management is a key aspect of our business and we have been proactively adding oil basis and monthly roll hedges.

Turning the cost lease operating expenses were $0.28 per mcf transportation and processing costs were $0.32 per mcf e production taxes were 5.6% of oil and gas up adding r l o e t m p and production taxes together total production expenses were $0.74 per mcf fee.

Cast DNA for the quarter was four point seven million dollars.

or cash operating expenses including GNA totaled $0.97 per mcf compared to

$1.01 a year ago.

We proactively manage G&A to maximize our efficiency and maintain our low cost structure. Our cost structure allows us to remain profitable at low ends of the price curve and we believe gives us a distinct competitive advantage to our peers.

Adjusted ebitda for the quarter was forty-six million dollars as Sean noted earlier. We took prudent measures toward the end of the quarter to protect our balance sheet and maximize free cash flow.

Inclusive of the cash proceeds from from the Hedge and wine. We generated approximately twenty-six million dollars of free cash flow for the quarter.

Yes.

When the uncertainty surrounding macroeconomic factors and commodity prices, we are temporarily suspending our cost guidance on a per-unit basis.

Finally turning to our balance sheet. We reduce net debt by twenty-three million dollars during the quarter as of March 31st. We had $290 outstanding under our revolving credit facility approximately $36 in cash and the liquidity position of approximately $146. We reduced our net debt leverage from 2.3 x 2 x year-over-year. This better position positions us to offset the impact of lower pricing on our adjusted ebitda in the near-term.

Starting in the second quarter. It is important to note that her Covenant calculation purposes. We will be able to recognize the 38 million dollars of cash proceeds from the Unwound transactions off the month. They would have settled as if they had not been Unwound this provides us with $25 million dollars in 2020 and 14 million dollars in twenty Twenty-One to be added to our adjusted ebitda purposes purposes of calculating our leverage ratio as Sean mentioned earlier, we expect our borrowing base redetermination be finalized in the next week and believe we have sufficient liquid to meet all our obligations.

I would like to thank our banking Syndicate for their continued support at the end of the first quarter. We were in full compliance with our financial covenants and had significant heavens. And with that I will turn it off to wrap up our prepared remarks.

Thanks, Chris.

To summarize Silver Bow is set up to generate meaningful free cash flow for the remainder of 2020 and 2021.

We estimate that for every $0.10 per mcf increase in gas price. We will realize an incremental four million dollars of annualized free cash flow.

Our team continues executing our strategic objectives and optimizing our go-forward plan.

As a result, we are prepared to Pivot to gas development later this year and we can and we hold a constructive Outlook of domestic supply and demand dynamics that support higher gas prices as always. We are returns focused.

Additional spending in today's environment will be supported by a strong hedge position and improving Capital efficiency.

As the year unfolds, we will make further improvements to our plan to generate the highest rates of return for our stakeholders.

We Believe strategic A&D will play a critical role in our future success and we will continue to bolster our portfolio with favorable opportunities.

Thank you for joining us for today's call and for allowing us to share our results.

We look forward to providing you further updates as the year progresses.

Listening. I hope that you and your families are staying safe. And well, I look forward to seeing you in person in the near future.

With that I will turn the call back to the operator for the Q&A portion of the call.

As a reminder if you would like to ask an audio question, you may do so by pressing star in the number one on your telephone keypad. Again, that is star one will pause for just a moment.

The first question will come from the line is Ben McIntosh with Jonathan Ryan.

Good morning, Shawn.

First off. Thanks for the detailed guys forbid second quarter and twenty20 know it's a tough environment to guide in with so much uncertainty out there right now, It really appreciate all kind of giving us an idea of how you're looking at at the rest of the year. My question is, you know, the ranges you provided both in the second quarter and twenty are pretty wide and and understandably obviously month. So if you can maybe talk about some of the scenarios so it kind of put you may be towards the lower or the higher end of that range. If you know what's kind of baked into in there with assumptions around curtailments and bringing those volumes back on any cover there would be appreciated. Thanks. I appreciate the the question down in the comments as well definitely difficult environment to provide guidance. We felt that that we understand our business our business enough that we wanted to at least get some ranges out there specific to the ranges in the guidance what we are anticipating.

Is continued curtailment through the second quarter both with the oil that we've commented on in our our release as well as the gas for now offer guidance anticipates that will return those volumes back to production at the start of the third quarter. Of course, we're going to maintain flexibility and we'll adjust that plan either up or down relative to our net realized prices as you know, not only our top-line prices lower but also differentials in gathering fees lower as well. So we definitely are looking at the net realized Wellhead prices to make our decision.

All right, great. Thanks. And then as we kind of look out into next year and the end of this year as you shift your focus back onto guess you're kind of any color. You said you're thinking about it Twenty One program, you know in the opening remarks. Are you all mentioned the possibility for maybe a drillco on the newly aquired positions. So just maybe a little more color there would be great.

Yeah, you know no doubt 20/20 is going to be a year that at least for the second and third quarter will be viewed as almost lost quarters. So I'm not active is really to position the company as we get into Twenty-One and through 21 to be at a a position operationally financially that it was prior to coming in to the current macro environment. We do anticipate, you know, potentially picking a rigged up towards the end of this year and then drilling into next year. And as we mentioned we would do that on our our gas position in terms of the amount of gas acreage that we now hold we would look to bring a partner in over the years. We've built relationships with a number of players both domestic and international date of expressed interest in silver Bose gas assets and with the move towards higher gas prices as well as the expanded position. We're looking forward to age.

Restarting those discussed.

As we expect there will be a interest, you know, our plan is to continue to only drill with a capital program that supported by cash flows one thing Steve and his operational team have done is become so efficient that we can drill Thirty to forty percent more in terms of footage and Wells each year and month is in terms of living within cash flow. That's where we envision bringing in a partner to help support that very Capital efficient program.

All right, great. Thanks for taking my questions and look forward to following along. Thanks.

The next question will come from the line of male demon with SunTrust.

Hey Shana team, it's Jordan Levi calling in for Neil just looking into the the curtailed volumes. Just trying to get a sense of what sort of took the decision, you know, as it relates to both the gas and you know, obviously we've seen a lot of operators in the oil side, but less so on the gas shut in and you know, what what component of that is easier or we talking about both dry gas window and oil window wells or kind of just the associated, you know to screen production from some of the mix volumes.

Good morning, Jordan. Yeah, I'll start on that one in terms of curtailment we shut in both oil wells that reduce some gas production wage. But we also did make the decision to shed in some dry gas production. So of the 50 million a day, I would say probably eighty 85% of it is associated with dry gas. Yeah, well with the remaining 15% plus or minus associated with oil producing Wells and we did that just looking at the you know economic and the economic position of gas prices being low and we anticipate gas prices will be low over the next couple of months off. But do you see a significant strengthening prices in the strips already bearing that out as the shut-in on oil and the reduction in capital investment by the industry in oil well

Will really bear out over the latter half of this year and we're anticipating really coming out of next year's withdrawal season being at very low with our inventory number. So that should really set gas up. Well strong for the whole part of Twenty-One and even into 22

absolutely great great color and just one more if I could just just thinking more broadly about kind of the the m&a environment knowing that it's definitely a challenge right now, but you could just you know highlight some of the things that some of the characteristics you guys liked and the in the last deal y'all just executed on and and what sort of characteristics, you know would fax the bill for you guys going forward as it relates to a creative deals.

Yes, you know like we've always said we're we're turns driven company in will look to capture returns be a through the the drill bit or through indeed transactions. So the recent deal that we did was a essentially a PDP purchase with some you know, with a tremendous amount of acreage and upside optionality associated with it off and the returns we felt like on the PDP basis competed favorably to our our drilling Capital. So that model will be one that we continue to employ in this environment and Thursday we're excited about and what we've been working hard on over the last couple of years is a single Basin low-cost strategy that really sets up. Well the current environment it's a margins business and the companies that keep their margins High continue to at least be profitable and he's low price environments and we think that the wage

For our competitors will unfortunately not be in that situation and will be forced to liquidate. So that will continue to look for A&D opportunities that compete for Capital a heads-up or even better than drill bit capital.

Clear color. Thanks so much.

Thanks. Have a good day.

Again to ask an audio question, please. Press * 1. Our next question will come from Joshua bison.

Hey, good morning, guys.

More than a couple of quick questions. So one there's been some debate out there in terms of the down whole impact too unconventional Wells when they're shut-in long. Can you talk a little bit about the analysis you guys did and what your view is on the well productivity when you turn these balls back on.

Yeah, I can start and then Steve if you're welcome to it to weigh in as well, you know, there is some some history track record of shutting wells in in the business both horizontal and change the oil shale wealth and you know infill development has occurred and you shut in Wells to protect against Frac interference. So we've had history of wage Wells being shut in for 4:30 plus de days. It will be interesting to see if shutting. Extend the significantly beyond that the industry really hasn't been in a extended shut-in. Well over probably fifteen twenty years. It was more common, you know back in preparation times in the eighties and early nineties and of course different environment where there are more vertical Wells. So what we're doing to Monitor and help us understand the reservoir is looking at shutting pressures how those

Those pressures are building and we'll we'll monitor those to assess it'll be great opportunity to assess Reservoir performance enhance our you are estimates but also look to to make decisions of when it's appropriate to open back up, but time will tell in terms of impact to long-term productivity. We feel comfortable on the dry gas side a little bit more caution think on the oil side Steve. I don't know if you'd grow up like to add in any of those comments. Sure just a couple of em one. We've been seeing a very strong Progressive build-up pressures. Secondly, you know, I kind of went remind everyone we're in the higher energy part of the Basin. So Thursday we have, you know, obviously dry gas and then we also have you know oil that's associated with gas and some cases retrograde. So the high-energy part of the base and helps us out with respect to Rome.

And then lastly just like Sean mentioned we'd have some Sensations where we've had to do some.

Rtps and in returning those production volumes back after anywhere 30 to 45 days of shut in some cases a little bit longer and we were pleasantly surprised with very strong suction for the better part of the week, but it does look favorably because right now it appears that they're tracking back to the ER position that they were prior to the curtailment so favorable so far and we're modeling accordingly.

I agree that's really helpful. And then for a second question, it's been interesting seeing the gas trip rise and the gas rig count actually fall including you guys. I guess what point do you see the strip as favorable enough? Is there a particular price that you target where you'd essentially go lock in more ugh gas on the forward curve for lock in the price and then I bring it right back on potentially ahead of that Q4 schedule. Like is there a price that you'd be looking for? That would make that make sense for you guys or you pretty set in terms of waiting until kind of like you for 2 to bring back on?

Yeah, in terms of pricing, you know in in Associated returns. We did add a slide tour or corporate office that looks at the gas plays across the country are position in Webb County competes. Very favorably we show a full cycle 15% off turn it to 70 would tell you that our corporate threshold is higher than that. We typically like to drill into 30 + rate of return projects. So we're looking for something really, you know, probably 292 $3 plus environment to start locking in prices in advance of a development program, you know, based upon our macro View and you know reviewing and assessing a lot of the the different folks out there that have put views forward for 21 and into 22 bath.

We think that $3 plus is going to be a realistic Target. And for now we're holding off waiting to to get to that level before we start hedging in anything. But what we will do is continue and we take a very old.

Logical progression in how we lock in our Hedges? We'll start with PDP first probably lock in those at the sub $3 level and then look to lock and the development program in stages as gas prices improve, and that's a strategy. We've employed in the past and it's been very successful with it. Great. Thank you.

Yes. Thanks for the call.

Is that what you're showing their further out of your questions at this time?

Okay, Jeff. You want to wrap wrap up the call? Yep. Thanks everyone for joining our first quarter call and look forward to providing an update for the second quarter in August.

Everyone in case something called we thank you for your participation in. Could you please disconnect your line?

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