Q1 2021 SilverBow Resources Inc Earnings Call

Current market conditions, and then further optimize our near term development.

Currently we expect to resume drilling later in the fourth quarter targeting our natural gas assets, which sets up for a strong start to 2022.

Although we have seen slight increases in service pricing, we are proactively offsetting those increases through multiple levers.

On the drilling side Silver Bowl has been able to hold service costs flat based on vendor relationships and existing contracts.

On the completion side continue to be bundling of sand and other logistics and consumables have led to both pricing and efficiency gains.

Additionally, the company has been able to lower facility costs by $40 per well to improved design processes and utilizing vendors with greater scale and volume discount.

Our first quarter production averaged 180 <unk> per day, which was above the high end of our guidance range.

In February the extreme cold weather conditions impacted much of the southern portion of the U S and resulted in power outages and associated production shut ins across the industry.

We estimate that shut in impacts on silver was first quarter production was approximately two mcf per day.

Our storm preparation and pre planning procedures to help mitigate production losses.

Per usual practice silver gold maintains a portion of natural gas sales pace per daily price indexes.

Therefore, we did have some sales exposed to highly volatile prices for a brief period during the cold weather.

February was a supply and demand event and we do not expect the highly unusual conditions recur going forward from <unk>.

However throughout the February disruptions Silver Bowl continued its streak of zero recordable incidents a point of pride amongst our team.

For the second quarter, we are guiding to a production range of 201 to 213 Mcf per day with natural gas representing 82% at the midpoint.

For full year 2021, our production guidance of 180 to 200 MMC FTE per day is unchanged and as Sean mentioned, the midpoint of our full year oil production increased 12%.

This reflects the impact of our expanded midyear oil development program.

We expect the initial oil volumes from this development to have only a partial impact on third quarter production, therefore, implying greater uplift through our oil volumes in the second half of the year.

Our guidance also assumes ethane recovery for the remainder of the year, Although we will continue to make monthly elections in accordance with commodity prices.

Based on our latest guidance, we expect to deliver single digit production growth year over year on an equivalent basis.

This will largely be driven by our gas volumes online in the first quarter and to a lesser extent the oil and NGL volumes coming online late this year.

The current plan is aligned with the prevailing prices and allows us to pivot between the strength of one commodity versus another.

Our goal in the near term is to carry over the efficiency and production optimization learnings from our lamesa pads and to apply those to our current development programs.

While volatility has proven to be constant of late our diverse portfolio allows us to remain flexible and adaptable to market uncertainties in our operations.

As such we continue 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 first quarter financial results as well as our hedging program price realization operating cost and capital structure.

For the first quarter revenue was $87 million, excluding derivative with natural gas, representing 78% of production and 73% of sales.

For the quarter, our realized oil price was 96% of Nymex <unk> price.

Our realized gas price was 185% of Nymex Henry hub, and our realized NGL price was 39% of Nymex WTS.

As Steve mentioned earlier natural gas spot prices experienced a brief you had significant spike in February.

Price of Henry hub natural gas closed at $23 86 per ml Btu on February 17th.

This compares to the January monthly average of $2 71.

As such.

Both first quarter realized natural gas price was significantly higher than both the benchmark Henry hub average and any recent historical period and should be considered a one time event.

Our realized hedging loss on contracts for the quarter was approximately $5 million.

Based on the midpoint of our guidance and our hedge book as of April 30, our total estimated production is 60% hedged for the remainder of 2021.

The company has 59% of natural gas production hedged, 77% of oil hedges and 48% of Ngls hedged assuming the midpoint of 2021 full year guidance is held flat through 2022, silver Bell has 41% of natural gas production hedged and 57% of oil hedges.

The hedged amount are inclusive of both swaps and collars.

A detailed summary of our derivative contracts is contained in our corporate presentation and.

And form 10-Q filings for the first quarter of 2021, which we expect to file later today.

Risk management is a key aspect of our business and we are proactive in adding oil and gas basis in calendar month average roll swaps to further supplement our hedging strategy as shown on slide 23 of our corporate presentation, we had historically realized prices close to Nymex benchmark.

Turning to costs.

Lease operating expenses were <unk> 39 per Mcf scheduled maintenance projects during the first quarter as well as preventative storm preparation measures resulted in a slight increase to <unk> compared to prior period.

Transportation and processing costs were <unk> 31 per Mcf production taxes were 4% of oil and gas sales.

All production expenses were below the midpoint of our guidance or better adding.

Adding our LOE <unk>.

N P and production taxes together total production expenses were <unk> 91 per Mcf.

Continuing our trend of total production expenses of less than $1 per Mcf.

Cash G&A costs for the quarter were $4 million.

A 20% decrease year over year on a full year basis, we expect to reduce our 2021 cash G&A costs by approximately 10% year over year over year.

We consider our lean cost structure to be a competitive advantage, allowing silver vote of sustained profitability during periods of volatile commodity price.

Adjusted EBITDA for the quarter was $63 million.

Exclusive of amortized derivative contract gain.

As reconciled in our earnings materials, we generated $24 million of free cash flow in the quarter. This March six out of the last seven quarters of achieving positive free cash flow.

Turning to our balance sheet, we further reduced our total debt by $30 million quarter over quarter and $90 million year over year as of March 31, we had $200 million outstanding under our credit facility.

Approximately $3 million in cash on hand, and $113 million of liquidity.

Subsequent to quarter end and effective April 16th Silverado amended its credit facility, which among other things re determined our borrowing base at $300 million and extended the maturity date to April of 2024.

The maximum leverage ratio covenant is at 325 times through year end.

Starting in 2022, the leverage covenant and reduces to three nine times.

<unk>.

As Sean alluded to we are very appreciative of our syndicate of banks, which we believe we have strengthened during this unique time in the industry.

For further information please see the company's current report on form 8-K.

Filed with the SEC on April 19.

At the end of the first quarter, we were in compliance with our financial covenants and have sufficient headroom.

Our cash interest expense was down 20% from a year ago, primarily due to decreased borrowings.

We expect our cash interest to continue trending lower throughout the year as we pay down additional debt.

Capital expenditures totaled $33 million on an accrual basis.

Vast majority of our capital was devoted to finishing our web County development program.

Thanks to further capital expense savings and efficiencies identified by our team our full year capital budget guidance is unchanged with a range of $100 million to $110 million.

The remainder of our 2021 capital budget is approximately 85% weighted towards our liquid rich assets. The remaining 15% of our D&C spend targets late year development of our Webb County gas asset.

In conjunction with unwinding oil derivative contracts related to production period in 2020 and 2021.

<unk> was able to amortize the $38 million that received in March of 2020 as add back gain and discrete amounts extending from April 2020 through December of 2021.

The amortized hedge gain factor into silver both adjusted EBITDA calculation for covenant purposes over the same time period, and therefore important for our investors and research analysts to understand when tracking our leverage ratio.

For the first quarter, the add back of approximately $4 million on a last 12 month basis, the add back totaled approximately $29 million bring.

Bringing our last 12 months adjusted EBITDA for covenant purposes to $192 million and our quarter end leverage ratio to two one times.

At the time period of the original unwind rolled off our full year 2021 adjusted EBITDA.

We'll receive a benefit of approximately $14 million 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.

Summarizing several Boe generated meaningful free cash flow and paid down 13% of its revolver borrowings in the first quarter.

The company is positioned to continue generating free cash flow.

And paying down debt for the remainder of 2021 and into 2022.

We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices.

And the recent improvement in oil prices broadened the optionality of our high return inventory.

As evidenced by the shift in this year's schedule towards a higher oil mix.

We expect <unk> to continue to outperform outperform other small cap peers.

Over the past month <unk> has been the second best performing stock across all large cap and small cap e&ps.

Our winning strategy is focused on solid execution efficient operations financial resilience in a low cost structure.

This sets us up favorably given our current outlook for prices continued strengthening of our balance sheet and positive momentum on Austin chalk delineation.

Our strategy remains intact with multiple catalysts for the future.

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.

At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Where are your question Chris.

While we compile the Q&A roster.

Your first question comes from the line of Neil.

Curious.

Good morning, guys could you talk a bit about maybe potential upside activity and just overall what could have a net.

Net Austin chalk and glad to see it if you continue to have successful results there.

Yes.

Neil good to hear from you.

We're going to continue to.

Look at our returns based upon commodity prices and generated cash flows we remain really committed to live within 70% to 80% of our cash flow.

And the generation of free cash flow in excess of $30 million to $50 million.

So if our well performance and commodity prices that generate more free cash we could envision.

Expanding our capital program, a little bit and keeping our rigs running through the full year.

And in conjunction with that as we plan to drill more Austin chalk wells. This year, if we see similar success that we saw in our first well that would also support probably additional drilling.

To really take advantage of the high returns that debt off.

And chocolate shown that capable of.

And then my follow up is that is it kind of an either or I mean, if you start.

We have fortunate in continuing our successful.

With that continued at capital continue to be reallocated from other areas or are you pretty set on the spend this year could you could could you all talk around that.

Yes, we can.

Tell you that.

Very flip.

<unk> flexible and efficient and reallocating capital. So we're always looking to reallocate capital to our highest rate of return projects.

So as we came into the year.

Our gas projects looks to be the best.

And as oils move significantly higher.

<unk> allocated to the more liquids programs, but as we look at the Austin chalk.

If we continue to see the follow up wells perform like the first well our capital costs start to move towards our desired goal of five 5 million I think the returns of those projects actually start to exceed our our oil projects, so probably shift our capital back into the Austin Chalk program.

Now, let's get together and then just just lastly on.

Talking about kind of on a go forward I guess can you talk about M&A a little bit.

Opportunities you see now what.

Given the position you're in and just kind of what the market looks like out there.

Yes, yes.

As you know.

Continue to look for opportunities in the M&A market, both large and small over the past couple of years, we've closed a number of smaller transactions.

But we would tell you that we're seeing more activity in the market today than we've seen.

Over the last 24 months.

So I think there are opportunities out there.

With higher prices.

More sellers are coming to the market looking to to transact.

So we're going to continue to be diligent on the REIT transaction, but you feel like theres more opportunities in front of us today than there was 12.

12, 24 months ago.

Thanks, Tom.

Appreciate the questions have a good day.

Once again, ladies and gentlemen, if you have a question. Please press star followed by the number one on your telephone keypad.

You have a question from the line of Charles Meade.

Price.

Good morning, Sean to you and your team there I wanted to ask a question about the trajectory of debt pay down from here and maybe it's also kind of relate to be up.

Moving to the natural gas strip you guys you guys made a big.

Progress is a big chunk in <unk> and you have obviously had that benefit from the one time.

One time storm pricing I guess you'd call it but.

Look at the remainder of the year.

A month ago I would've said debt your next big slug of debt Paydown would come in Q4, but nonetheless bumped up.

For the back half of the year has moved up by 25% 30 cents on natural gas and so.

It looks like you actually you will be able to make some progress incrementally two key <unk>, but can you can you give a sense of.

Of what Youre planning price deck is and what kind of progress you see under the planning price deck.

Yes.

We set up the cadence of our capital program such that we'll see.

Quarter to quarter.

Positive cash flows as we come out of the capital spend the timeframe and then as we.

Bring a rig back and we will see us obviously spend go up so the cadence of our program. This year probably has us.

<unk> net debt paid down in the second quarter.

It will probably stay flat or move up a little bit in the third quarter as we have a significant amount of spend around <unk>.

Felicia activity.

Program that we're currently drilling and then we'll see it.

Rafa again.

We enter into the fourth quarter.

We are looking at the second half of the year.

Really seeking exposure to oil.

You talked about the move up in oil prices and what our targets are there.

We are heavily hedged through the first half of this year on oil.

One of the things that.

<unk> us to increase our oil capital allocation is just being exposed to those new volumes to the higher oil price.

Some of Thats not hedged in yet so.

I do think that if oil continues to move from north <unk>.

60, where it stands that we're going to see beneficial cash flows debt.

It will help us drive down debt even further.

Got it.

Lastly, I'd tell you each day.

We're really definitely on track to remain or to move below two times leverage.

<unk> stated publicly that it will be by end of year, but we see a pathway there even sooner.

Right right.

Hey man.

Question about the Austin chalk and specifically your slide 14, I see where you guys.

You've had your first of all that southwest kind of once a quarter, but maybe edge of web county.

But you've got this big.

Ill give acreage there in eastern web right.

Expense in the southern Lasalle that falls outside of I believe that EOG has outlined for there.

From what they are calling their dorado play, which is that Austin Austin chalk can you.

Can you talk about what you see technically about whether that debt.

The bigger acreage position you have is going to be perspective or are one of the questions you have on whether that could be.

Part of the Austin Chalk story for you guys.

Yes, you are.

Correct the outline of the P.

<unk> on the map on slide 14 is Eog's Dorado play outline I would tell you that we do have some logs.

<unk> cover west of there in east of there, but not really good detail.

Surface information on that larger block.

We do know that as you move west to east in the Austin chalk themes.

So that block is still perspective.

It comes with risks as its transitioning from.

Thicker more pervasive Austin chalk to a thinner Austin chalk. So we're still considering do we conduct the test there.

Or watch and see what other activity in the immediate area comes about to help derisk, but.

There is potential there, but probably a little bit more risk as you move east of the Dorado line.

Got it.

To put some put some numbers to that my understanding is.

As you said.

The chart <unk>, South southwest and down where you guys are it's I want to say, it's like 400 feet thick is that about or maybe even more than that and so could you give can you quantify that how ticket is where you are and what you're expecting net.

And your your block further east in Webb County.

Dave.

Steve the opportunity to answer that question, yes, Okay. Thank you Charles down in our area there in the southwest.

The overall chalk.

Consider that at to be a b C and D levels the entire interval.

See it to be.

The 700 to 750 feet thick with.

With a little bit of a trending down as you head towards the east is largely well north of 700 feet and then when you get down into the more productive intervals.

The C and D intervals.

Looking those to be anywhere from 150 to over 200 feet thick combined.

Got it so.

Of real thick section, but I recognize that.

It's a carbonate it's going to act differently, but thank you for that detail.

Yes, no debt.

Really appreciate it.

There's still some more work to be done and part of that work over time, both by us and probably others will be is the stacked pay potential.

Across this thick zone.

We're excited about the hydrocarbon that's in place and determining what the most economic way is to get it on the ground.

Alright, Thank you gentlemen.

Thanks Charles.

There are no other questions in queue I'll turn it back over to management for closing remarks.

Thank you for everyone for joining our call. This morning, and look forward to providing an update in August.

Thanks.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.