Q3 2020 SilverBow Resources Inc Earnings Call
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Good morning, Ladies and gentlemen, this is the conference operator today's conference call is scheduled to begin momentarily until then your lives what again, we made on music hold and thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome to the Silver Bowl resources third quarter Twentytwenty earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
Good question during the session you will need to press star one on your telephone if you've acquired it further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today Mr., Jeff <unk> director of Finance. Thank you. Please go ahead Sir.
Thank you Tabitha and good morning, everyone. Thank you very much for joining us for our third quarter 2020 conference call with me on the call today are Sean Woolverton, our CEO, Steve Adam our CFO.
And Chris upon is 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 S. D C, which are also available on our website.
That I will turn the call over to Sean.
Thank you, Jeff and thank you everyone for joining our call. This morning.
First a we hope that everyone listening as well.
I would like to thank our employees and our contractors as well as our vendors and other key stakeholders for their dedication and resilient.
We continue to take the necessary measures to ensure the health and well being of all employees and contractors.
Safety strong is there is a paramount.
Important.
Let me start by saying I'm incredibly proud of our operational and financial results for the third quarter.
Silver bow generated 9 million of free cash flow and paid down 17 million of debt.
This marks our third consecutive quarter of generating positive free cash flow and brings our total debt repayment to $37 million since the end of the first quarter.
Furthermore, we are on track to achieve full year free cash flow of approximately 50 million at the high end of our previously stated guidance.
This increase to our full year 2020 free cash flow is driven by an increase to the midpoint of our full year production guidance and a decrease to the mid point of our full year Capex guidance.
Okay.
And a greater than 50% free cash flow yield and 21.
We have unhedged volume along with upside exposure.
To improving gas prices.
Through the use of colors and our hedging program next year's gas curve has now moved above $3, which bodes well for our future prospects.
Not only do we have flat flush gas production expected to be online and early 21, but we retain optionality to further exploit certain areas within our portfolio.
As oil prices have recently pulled back below the 40 dollar mark and uncertainty persists over the near term oil strip, we are well hedged on our oil production next year, which bolsters our cash flow outlook.
As we work to formalize, our 21 budget or strategy remains the same.
Having a well balanced portfolio provides us both drilling optionality and the opportunity to pursue accretive corporate and asset level transactions.
We see oil and gas prices as inversely correlated and thus are counter cyclical bolt on activity is a key differentiator for us.
Furthermore, we are optimistic about underlying gas price fundamentals and continue to manage our balance sheet to provide us with with the needed running room to execute our plan.
With that I'll turn the call over to Steve to provide an operational update.
<unk>. Please go ahead.
In conjunction with a 29% increase in production volumes, mostly higher cost liquids over the same time period.
On a per unit basis, our third quarter production expenses encompassing allo, we TMT and production taxes decreased by 14 cents per mcf compared to the second quarter.
Within our capital expenses service pricing remains in a deflationary environment and the team has been able to find incremental savings through selective de bundling of capital costs, such as rig and ancillary services Tubulars frac sand horsepower and chemicals.
In early October we added one drilling rig in Webb County targeting nine got dry gas wells spanning our fast and upper Eagle Ford and co developed for Macy's locations.
We plan to have the first three well pad online by year end and are targeting first production from the first six well amazed the pad in the first quarter of 2021.
The first Legg Mason pad was drilled and completed a year ago and through the technical learnings and best practices of that capital projects. We believe we can drive an additional 20% savings and drilling costs across this nine well development program.
From a completion standpoint silver mobile use believes it has adequately optimize the design of these wells. Furthermore, the team still expects to reduce completion costs by approximately 15% through existing vendor support and rigorous planning.
Silver Bowl continues to monitor and optimize the performance of wells, which were curtailed and subsequently returned to production.
Today wells that have been returned to sales have not experienced any degradation and in some cases have exhibited higher production rates compared to pre shut in levels.
Silver Bowl leaves that through conservative choke management practices aimed at optimizing the reservoir and preserving the wells Frac pack that team is maximizing the production profile and ultimate recovery of these wells.
This positive trend is further supported by data, which has shown wells to be outperforming through the first 120 days after returning to production.
We show these results on slide 17 of our latest corporate presentation.
As a result of cost efficiencies in project execution as Sean mentioned, we expect to deliver full year 2020 free cash flow of approximately $50 million.
Our third quarter production averaged 183 Mmcf per day, which is above the high end of our guidance range.
All of the wells, we had planned to bring online during the quarter were producing by the end of August nearly one month ahead of schedule.
This was attributable in part to the operational efficiencies gained gains discussed earlier as well as the elected timing of projects to coincide with favorable market agreement agreements, we were able to secure.
For the fourth quarter, we are guiding to a production range of 170 to 183 Mmcf per day with natural gas representing 73% at the midpoint.
For full year 2020, we are tightening our production guidance to a range of 181 to 184 Mmcf per day with natural gas representing 76% at the midpoint.
Our guidance assumes ethane recovery in October and rejection in November and December although we will continue to make monthly elections in accordance with commodity prices.
Looking into 2021, we have not committed to any development plans with our vendors outside of the current Webb County gas project.
However, based on the latest indications from our budget forecast, we believe we will deliver single digit production growth on an equivalent basis.
This will largely be driven by our gas volumes and holding oil and NGL production flat.
We plan to do this on a capital budget similar to 2020 levels with free cash flow in the range of $20 million to $40 million.
Our goal in the near term is to repeat the timing savings and well performance demonstrated with our first six while the Mason pad over the current nine well development project.
While we view oil and gas prices to be inversely correlated over the near term.
Our diverse portfolio allows us to remain flexible and adaptable to market uncertainties in our operations as such we continue to operate with a returns driven mindset in regards to any future development.
With that I will turn it over to Chris.
Thanks, Steve and good morning, everyone. In my comments. This morning, I will highlight our third quarter financial results as well as our hedging program price realizations operating cost and capital structure.
For the third quarter revenue was $46 million, excluding direct derivatives with natural gas, representing 71% of production and 51% of sales.
During the quarter.
Our realized oil price was 92% of Nymex WT.
Our realized gas price was 100% of Nymex Henry hub, and our realized NGL price was 31% of Nymex Wtf.
Our realized hedging gain on contracts for the quarter was approximately $8 million.
Based on the midpoint of our guidance and our hedge book as of October 28, our total estimated production is 71% hedged for the remainder of 2020.
Our gas production is 74% hedged with a weighted average price of $2.67 per M. MBT UCC and our oil production is fully hedged with a weighted average price of approximately $44.88 per barrel assumed.
Assuming the midpoint of our 2020 full year guidance is held flat through 2021, our gas production is 48% hedged with a weighted average price of $2.87 per MBT EU and our oil production is 79% hedged with a weighted average price of $47.43 per barrel.
Notably our hedges are a combination of swaps and collars with a weighted average price factoring in the ceiling price.
Risk management is a key aspect of our business and we are proactive in hedging we.
We are proactive in adding oil and gas bases in calendar month average roll swaps to further supplement our hedging strategies in fact.
Silver Bowl as one of only a handful of companies that hedge the CMO role before the recent downturn in oil prices.
In order in order to protect the returns of our future gas projects, we layered on gas basis swaps subsequent to quarter end, extending our protection into 2022.
Silver both hedges also provided relief from a third from third quarter benchmark prices.
Excluding the impact of hedges, we realized an average gas price of $1.98 cents per Mcf.
And average oil price of $37.45 per barrel and a total equivalent price of $2.72 per Mcf fee income.
Including the hedge impact of cash settled derivatives, our average realized prices were $2.37 per mcf for gas.
$44.36 per barrel for oil and $3.19 per Mcf fee on a total equivalency basis a.
A combination of several both hedges and actual volume produced during the quarter resulted in a 39 cents uplift in our realized gas price and a seven dollar uplift in realized oil price.
As shown on slide 14 of the corporate presentation, we consistently realized prices close to Nymex benchmarks.
Turning to costs.
Lease operating expenses were 31 cents per Mcf.
Transportation and processing cost were 30 cents per Mcf per.
Production taxes were 5.5% of oil and gas sales, adding our allo, we Tempe and production taxes together total production expenses were 76 cents per mcf feet, continuing our trend of total production expenses of less than a dollar per mcf.
Cash DNA costs for the quarter were $5 million, a 5% decrease from the prior quarter.
In September Silverado implemented corporate cost reduction initiatives as a result, we expect to save approximately $2.5 million in annualized DNA cost on a go forward basis or a 14% decrease over the next calendar year.
We consider our lean cost structure to be a competitive advantage, allowing silver abode a sustained profit profitability.
During periods of volatile commodity prices.
Adjusted EBITDA for the quarter was $36 million as reconciled in our earnings materials, we generated $9 million of free cash flow.
As Sean said earlier, we have reported positive free cash flow.
For three consecutive quarters.
And I would add this marks four out of the last five quarters of achieving free cash flow.
Turning to our balance sheet, we further reduced our total debt by $17 million during the quarter and have now paid down $37 million of borrowings under our revolving credit facility since the first quarter of this year.
As of September Thirtyth, we had $253 million outstanding under our credit facility.
Approximately $1 million in cash on hand, and $78 million of liquidity.
Subsequent to quarter end and effective November 2nd we completed our semi annual Redetermination of our credit facility. The net in the net impact was a 6% reduction in the total borrowing capacity from $330 million to $310 million.
Additionally, the Max the maximum leverage ratio Covenant was amended to 3.5 times I would like to thank our lead bank JP Morgan and our full bank syndicate for their continued support.
At the end of the third quarter on a pro forma basis for the credit facility changes.
We were in full compliance with our financial covenants and had sufficient headroom to execute our strategy. Our cash interest expense was down approximately 20% from a year ago, primarily due to lower interest rates and decreased borrowings, which we expect to continue into 2021.
At the end of the third quarter, our net working capital deficit was $8 million, a $1 million cash inflow quarter over quarter.
Given the restart of our drilling and completions activity, we continue to manage our cash needs meticulously from receipts and disbursements standpoint. Please note changes in working capital are excluded from our free cash flow calculation.
Capital expenditures totaled $20 million on an accrual basis, the bulk of our capital spend in the quarter was associated with the completion of our remaining Mcmillan oil wells.
Thanks to further capital expense savings identified by our team we have highlighted our full year capital budget guidance.
To range to a range of $95 million to $100 million for a $2.5 million decrease to the mid point of our previous guidance range.
The remainder of our 2020 capital budget is earmarked for DNC activity in Webb County in the fourth quarter.
As we work to finalize our budget for the next year.
Our preliminary expectation is that our 2021 capital budget will remain approximately flat year over year.
In conjunction with unwinding oil derivative contracts in 2020, and 2021 silver bow is able to amortize $38 million. It received in March in discrete amounts extending from April 2020 through December 2021.
The amortize hedge gains factor into silver both adjusted EBITDA calculation for covenant purposes over the same time period.
For the third quarter, the add back was approximately $9 million.
On a last 12 month basis, the add back was approximately $16 million, bringing our last 12 month adjusted EBITDA for covenant purposes to $181 million and our leverage ratio to 2.5 times.
In total we will receive a benefit of approximately 12 $25 million in 2020 and $14 million in 2021 for purposes of calculating our leverage ratio.
And with that I will turn it over to Sean to wrap up our prepared remarks.
Thanks, Chris to summarize silver bow is set up to generate meaningful free cash flow for the remainder of 2020 and through 2021.
We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices.
Particularly if oil prices remain subdue given the decline in associated gas production in self imposed limitations across the industry on drilling and completion reinvestment rates.
Due to our relative staying power and cash flow visibility, we expect silver voted continued to outperform outperform other small cap peers.
Our winning strategy is focused on solid execution efficient operations financial resilience in a low cost structure.
This steps as Favourably, given our current outlook as.
As well as the potential to consolidate and operate a larger asset base.
Our strategy remains intact with multiple playbooks for the future.
Thank you for joining our call this morning, and allowing us to share our results.
In the face of uncertainty we are focused on factors within our control.
By concentrating on capital discipline preservation of our balance sheet and cash on cash returns silver bow is positioned for greater shareholder returns.
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.
Ladies and gentlemen at this time.
Good question. Thanks.
Good luck.
Telephone keypad.
That is still one to ask a question.
For just a moment.
Thanks.
And your first question is from the line of John Mcintosh with Johnson Rice and company.
Thanks.
Mr. Mackintosh. Your line is open Sir Im sorry, sorry, I was on mute.
Morning.
Hi, good morning.
Got a question around maybe give some more color around 21, you know it sounds like you've got the.
This next non gas wells coming on should give you a strong entry point into a good take but where does that rig go kind of after that or what you're thinking about now anyway.
The focus is going to be predominantly on dry gas and then maybe one step further.
Yes.
Choosing a pretty impressive savings during the third quarter does that kind of allied to run a single rig for the entire year and is there a point at which you would think about putting the second rig out there is that kind of predicated on your reinvestment ratio reinvestment numbers kind of 70% to 80% cash flow.
Yes, thanks for the question done.
Good for now our strategy is staying at a reinvestment rate that generate that spends about those 70% to 80% of our our free cash flow assuming gas prices move move up higher.
That would give us additional cash flow.
We continue to run the one rate for the full year, and obviously based upon performance or lower cost if.
The improved our balance sheet position, even more we look at a second rig but for now we're going to stay consistent to being disciplined around our spend.
We think that.
Growing at single digit to low teen rates is appropriate for a company of our size and we want to continue to return.
Value to the shareholders right now for debt Paydown.
Okay, Great. Thanks, and then next question would just be on M&A, Randy I know that you all are are always looking.
I've been quite a number of larger transactions, but there's been some interesting smaller deals to here in the past few weeks how.
How do you think about our.
Are there certain small piece.
At equity assets that could be interesting that might want to you can maybe use your stock for just how what's the what's going on on the M&A front.
Yes, I think.
We are strong believers that consolidation needs to occur within each basin in the us and we feel strongly that silver both could be.
Strong consolidator of base and champion for the Eagleford. So were having continued to be active in looking at opportunities I would say that theres really two things that we look.
At first is.
Well you ration.
And so we're not willing to acquire assets just for the sake of getting scale, we will always want to make sure that we're acquiring acquiring assets at a fair value.
And at a value that is favorable to our go forward plans. The second is accessing capital.
Capital remains stingy within the space, we're not going to well, we're not willing to step out and pay excessive capital fees team.
Secure.
An asset acquisition. So those are the two things that we continue to look at is valuation and cost of capital that to get a transaction done.
All right. Thank you.
Thanks have a good day.
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And Sir your next question is from the line of Neal Dingmann with truth.
Okay.
Good morning, guys.
The first question just on it seems like Theres Ducs you brought on certainly we're quite keen in light of that quite a bit cheaper than expectations is what was the what was the largest driver was this morning efficiencies are authorized cost of just I'm. Just curious on details you did a nice job there.
Yes, much of that is under the direction of Steve's leadership, So I will give him the pleasure of giving you a response.
Well. Thank you Sean first of all I want to kind of complement our and thank you also Neil for the question I want to complement our team and our vendor support for being able to pick up.
After the hiatus, we were able to take the efficiencies that we had and even and even improve upon them from there.
To be more specific to your question and even to give a little background last last conference call, we guided to around 35% of those structural cost being savings and now we're in a position where it's it's a little over 50% of those savings not only being structural but being sustainable from a go forward opportunity.
Right.
And so to break down your question now specifically Neil around half of those those cost savings, where advancements inefficiencies that Sean alluded to earlier in the prepared remarks, and then about.
About 30% to 40% of the remaining of that is all predicated to unit costs and how we've selectively be bundle lows. So thats whats getting us to now a weighted average of more than 50% as a run way forward for the sustainability and when I talk about these de bundled services.
We're talking about some base unit costs that were the cheapest that I've seen in the history in terms of horsepower in chemicals and then when you look at some of the logistics and handling scenarios relative to stand on a d. bundled basis, we were able to get it lower than on average 2.8 cents per pound and in some cases down to 2.2 cents.
Profound so thats whats, giving us the confidence now and going forward on some of the unit costs that are sustainable and obviously the process advancements.
Great details and then just a follow up Sean can you talk about it seems like it sounds to me like said 21 plan certainly is going to focus mostly on web is that is that likely to be the sole focus or as good as it is that again.
Even by your free cash flow or are there are prices I'm. Just wondering could you maybe I know you haven't said too much more on the web I am just wonder if you have any more details you could shed on 21.
Yeah, the strongest returns in our portfolio at current pricing both on the gas and liquids side definitely are in Webb County, So we're going to get this nine well program implemented will pause kind of look and see what gas prices, how they're shaping up for.
The second half of 21, assuming they hold or move even stronger and we will go well.
Pick a rig back up and go back into web. We also have some strong returns in southwest Lasalle.
It's a mix of liquids and gas. So we may end up spending some capital there as well.
Obviously, our portfolio allows us if there's some unforeseen reason the shift to much higher oil prices that we may readjust that plan and and move the rig back up in either our dimmit asset or our macmall in oil assets.
Very good thank you all.
Thanks Neil.
Again, ladies and gentlemen, if you would like to ask a question. Please thanks.
Number one on your telephone keypad.
And your next question is from the line of Ed.
Private investor.
Hi, good morning, gentlemen.
Im just trying to reconcile.
The amazing really significant increases youre going to put on and production both first quarter from the three well pad and then essentially second quarter from the six well pad La Mesa.
To your comment.
And that concludes in conclusion that you still project that your production.
Will increase by essentially just single digits next year when I look at the numbers that would be making reasonable estimates of what will be coming on just from those two projects.
I don't know.
How you could bring those on and still only have single digit production gains can I wonder if you can help me with that.
Yes.
I appreciate the question for sure.
You know a year over year, we're reflecting that single digit growth keep in mind that.
We're looking to hold liquids flat and we will get a strong boost in gas production.
Especially like he commented on early in the year from this nine well pad.
But as we look at our.
Our base decline and then the higher declines that we will expect to offer these new wells, that's what we're coming up with I would reiterate that typically we're conservative in our forecast.
And want to make sure that we hit the guidance that we give to the street quarter over quarter year over year. So.
We'll adjust those forecast if we're seeing things differently, but for now our best estimate is.
Single digit growth.
Okay. Thank you that's very helpful and I guess, one other question on that on the.
Capital side.
Okay.
There's been some movement I know it's still.
Tough.
On the bond front, but there has been at least some movement with larger companies such as.
Comstock did some some very successful bond financings I know they are much larger than you, but your numbers you have better debt metrics than they do I think.
So the question I'm wondering is.
How far away do you think you might be.
And if it does open up to the possibility of.
I'm trying to do an unsecured bond issue with the goal of paying down you'll revolver significantly such that you don't have to keep plan. These.
Quarterly or semi annual games sweating out the the re determination and all that and just just pay the whole thing over much of it down any way to let's say a $100 million to $200 million down all in one shot given unsecured note and go in that direction is there any any.
I thought about that or.
If that were to open up would you think along those lines or not.
Yes, no no definitely we are always thoughtful around our balance sheet and how to structure. It that gives us that trade off of.
Liquidity versus the cost of capital.
So.
Company our size.
We have to look at our credit rating that we could secure and what the cost of capital would be for the.
Bond, but what you've laid out there is that thesis is definitely something we would consider and think it's you know it's we'll we'll just have to measure what the cost of that would be versus the risk of getting it executed.
I would tell you that for now we feel comfortable where we're at in terms of our debt structure. Our second lien isn't maturing until late 2024. So we have significant time, there and we continue to have a very strong the constructive relationship with our bank group. So we're we're comfortable where it's at but we're always looking.
At the market and assessing what's the best thing for our balance sheet.
Excellent. Thank you very much yes, thanks for the call I appreciate it.
Yes.
And Sir there are no further questions do you have any final comments.
No again I always appreciate the opportunity to share. So we're both story with the investor groups in folks are dialed in and look forward to giving you updates.
And our next call.
Thank you everybody. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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