Q2 2021 SilverBow Resources Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Silver Bell resources second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' remarks, there will be a question and answer session to ask a question. During this session simply press star and number 1 on your telephone keypad.
Please be advised on today's call is being recorded.
If you require any further assistance. Please press star zero and thank you I would now like to hand, the conference over to Jeff Matthews Director of Finance and Investor Relations. Please go ahead.
Thank you Hillary and good morning, everyone. Thank you very much for joining us for our second quarter 2021 conference call with me on the call today are Sean Woolverton, our CEO.
Steve Adam.
And Chris <unk>, our CFO, yes.
Yesterday afternoon, we price.
The presentation to our website and will occasionally refer to and 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 and 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 and our documents on file with the SEC.
Which are also available on our website.
With that I'll turn the call over to Sean.
<unk>.
Thank you, Jeff and thank you everyone for joining our call. This morning.
Silver both second quarter results continued our positive momentum from the first quarter.
With the first half of the year now behind Us I would like to detail. The progress we have made towards a number of our key objectives, which we show on slide 7.
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Our first objective is to grow production and EBITDA, while living within cash flow.
Yesterday, we increased our full year production guidance by 8% at the midpoint.
Which now on slide 12% growth year over year.
And the oil production comes online and the third quarter, we anticipate that the second quarter should be the low watermark for EBITDA this year.
We also increased our free cash flow guidance by 25% at the midpoint to a range of $45 million to $55 million.
We accomplished these increases while remaining at an implied reinvestment rate of approximately 70%.
Inclusive of our revised capital budget range.
Steve will further detail on Capex and scheduling optimization and his section.
Our second objective is focused on expanding inventory through Austin chalk delineation and accretive acquisitions.
Our initial Austin chalk well and web County continues to exhibit attractive economics, and we plan to drill additional appraisal wells this year.
Subsequent to quarter and we closed on an accretive bolt on acquisition and our high return low makes the field, which included incremental working interest and our existing well bores as well as an additional section of new acreage directly offsetting our current position.
We were able to fund this transaction using a combination of cash and stock.
The deal provides us with 10 million per day of incremental production as well as future inventory upside in the prolific Eagle Ford and Austin chalk trend.
As many of you know our lamesa wells over the last 2 years contributed to much of silver both success.
And third objective is to drive peer leading capital efficiency and cost structure.
Our total offer our total cash operating expenses for the second quarter were below $1 per Mcf.
We have seen continued improvement and our cycle times and our total D&C cost per lateral foot.
As Chris will detail, we lowered our full year low and TNT guidance, given higher production and further cost efficiencies.
Our cost structure allows us to continue generating attractive full cycle returns and silver bow is at the high end of our peers on free cash flow yield, which we show on slide 20 of our presentation.
Last but not least we seek to delever, our balance sheet through further debt reduction and accretive transactions.
Year over year, we reduced our total debt by 72 million and and and we have now paid down $92 million.
Since the end of the first quarter of 2020.
At quarter, and our leverage ratio was 1.9 times down from 2.5 at year end 2020, and ahead of our previous target of below 2 times by year end 2021.
As we reduce debt and increase our liquidity, we better position ourselves to strategically deploy cash towards bolt on acquisitions, such as our recent low Mesa deal.
Accretive transactions like these will be more than offset by our objective to decrease leverage and grow reserves.
I am extremely proud of the progress <unk> has made to date.
Going forward, we see the opportunity to set even more ambitious targets.
And by year, and we believe our leverage ratio could be below 175 times.
As we look into 2022, our preliminary forecast.
And a 3 quarter rig pace and grow annual production by double digits.
We project 2022 free cash flow above 2021 levels.
With an implied reinvestment rate and below 70%.
We may reinvest additional capital as warranted by our return thresholds such as the new Eagle Ford and Austin chalk locations acquired and our Lamesa acreage.
Reinvesting at the right time, and the right wells and provides for increased EBITDA and sustained free cash flow and lower leverage as we look to <unk> to 'twenty 2 and beyond.
With that said I will turn the call over to Steve to provide an operational update.
Steve. Please go ahead.
Thank you, Sean and the second quarter, we drilled 10, net wells 9 of which were and our Lasalle condensate area.
Our team continued to increase efficiencies and reduce cycle times as our drilling cycle times average 7 days per well and the second quarter.
Our fastest drill time was for 2 days with a major total depth of over 17000 feet with and 8000 foot lateral.
As a result of these drilling efficiencies, we moved up 3 wells originally scheduled to be drilled and the third quarter.
As shown on slide 16, and 17 of our presentation year to date, we drilled 20% more feet per day and reduced our drilling cost by 2% per lateral foot compared to 2020.
On the completion side, we completed 17% more stages per day, and reduce completion cost per well by 2%.
Taken together, we reduced our total D&C costs per lateral foot by 5% year to date compared to 2020.
And our Austin chalk well and web county is demonstrating very attractive economics to well continues to produce above 10, and Mcf per day and cumulative production is more than 1.
<unk> to date.
For more details on the performance and economics of our Austin chalk well. Please refer to slide 14 of our corporate presentation.
We plan to test and appraise additional Austin chalk wells this year to further enhance our understanding of the reservoir and the full development opportunity across our acreage. Additionally.
Additionally, we recently closed on a bolt on acquisition at our La Mesa property. The deal at 12, 5% to 20% working interest to our producing well bores and future locations on our existing lease as well as a 640 net acres section directly adjacent to our position.
This results and 17 net high return locations added across the upper and lower Eagle Ford and Austin chalk zones, and bolsters, our drilling schedule heading into 2022 and beyond.
Production management is a key focus area of our business and the maintenance and optimization projects and we executed on.
Supported the strong performance, we saw on the second quarter.
We added numerous compression and artificial lift installations across various assets.
And with a favorable commodity price backdrop, we have identified a number of opportunities to work over legacy assets.
And our <unk> area, we completed 2 such opportunities to bring online and incremental oil production and a very attractive cost per.
We're actively managing our production base as a cost effective way to drive higher volumes and flatter declines.
Our second quarter production averaged 213 MMC P per day, which was at the high end of our guidance strong performance from our base production aided by our maintenance and optimization projects and full quarter contributions from our second La Mesa pad and Austin chalk well contribute.
Added to the production base.
<unk> has also continued its streak and zero recordable incidents a point of pride amongst our team.
For the third quarter, we are guiding to a production range of 200 to 215, and Mems Cfe per day with natural gas representing 78% at the midpoint.
For full year 2021, we are increasing our production guidance to a range of 200 to 210 Mcf per day.
This assumes ethane recovery for the remainder of the year, Although we will continue to make monthly elections in accordance with commodity prices.
Our guidance also includes incremental working interest, we acquired and our La Mesa field subsequent to quarter and.
Based on our latest guidance, we expect to deliver 12% production growth year over year on an equivalent basis.
Service and supply costs are now expected to see various pockets of inflation for select markets through year end and into 2022 much of this inflation is centered around the completion side of the business for a horsepower and logistics and <unk>.
Drilling side for tubular goods.
That said many of these cost increases will be offset by improved operating efficiencies and previously agreed contracts with favorable terms.
Again, maintaining our low cost structure has been critical to civil growth success, and we expect to continue this competitive cost structure for the foreseeable future even as a limited number of contracts roll off late this year and into 2022.
Capital dollars for the second quarter totaled $26 million on on accrual basis.
As Sean mentioned, we increased our free cash flow guidance to $45 to $55 million and.
Included in our increased free cash flow is our updated capex guidance of $115 million to $130 million.
We are proactively aligning our activity this year to maximize our returns given the recent strength and commodity prices.
Due to improved cycle times, and being able to drill ahead of schedule and we now expect to finish on planned D&C activity by early fourth quarter.
And our third quarter included in our third quarter schedule as the completion of our midyear oil development and the addition of gas drilling originally scheduled for the fourth quarter as well as 1 net non operated gas well, we elected to participate in.
This contrast to our prior plan to pause drilling from August and November and resume gas drilling thereafter into year end.
With the majority of our remaining capex occurring and the third quarter, we anticipate and outspend and the third quarter, followed by a significant amount of free cash flow and the fourth quarter.
The scheduling changes accelerate our capital timing and maximize our free cash flow generation. Furthermore, it increases our optionality heading into 2022.
Our balance portfolio allows us to remain flexible and adaptable to market conditions as always we continue to operate with a strict returns driven mindset and regards to any future development.
With that now.
Yes.
Thanks, Steve and good morning, everyone.
And my comments. This morning, I will highlight our second quarter financial results as well as our price realizations and hedging program operating cost and capital structure.
For the second quarter revenue was $70 million ex.
Excluding derivatives with natural gas, representing 82% of production and 60% 67% of oil and gas sales.
For the quarter, our realized oil price was 96% of Nymex <unk> UTI.
Our realized gas price was 104% of Nymex Henry hub, and our realized NGL price was 33% of Nymex WTS.
Notably our realized gas price was 12 per mcf higher than the benchmark Henry hub prices, highlighting the attractiveness of operating and the Gulf Coast markets.
Our realized hedging loss on contracts for the quarter was approximately $8 million.
Based on the midpoint of our guidance and our hedge book as of July 30, our total estimated production and 66% hedged for the remainder of 2021.
The company had 66% of natural gas production hedged, 79% of oil hedged and 48% of Ngls hedged.
Assuming the midpoint of 2021 full year guidance is held flat through 2022, silver bow at 61% of natural gas production hedged and 69% of oil hedged.
The hedged amount are inclusive of both swaps and collars.
A detailed summary of our derivative contracts is contained in our corporate presentation and form 10-Q for the second quarter of 2021, which we expect to file later today.
Risk management is a key aspect of our business and we are proactive and adding on oil and gas basis and calendar month average roll slops to further supplement our hedging strategy.
As shown on slide 24 of our presentation, we have historically realized prices close to Nymex benchmarks.
Turning to costs.
Lease operating expenses were 29 per Mcf transportation.
Transportation and processing costs were <unk> 32 per Mcf production taxes were 5% of oil and gas sales.
Oil production expenses were below the midpoint of guidance or better.
Adding our low Pnp and production taxes together total production expenses were 79 per Mcf per day.
Continuing our trend of total production expenses of less than 1 dollar per Mcf.
Cash G&A costs for the quarter were $4 million, a 27% decrease year over year, adding our production expenses and cash G&A together, our total cash operating expenses for the second quarter were <unk> 98 per Mcf.
We consider our lean cost structure to be a competitive advantage and allowing silver bow.
Profitability during periods of volatile commodity prices.
Adjusted EBITDA for the quarter was $43 million exclusive of amortize derivative contract gains as reconciled in our earnings materials, we generated $7 million of free cash flow and the quarter. This marks 7 out of the last 8 quarters of achieving positive free cash flow.
As Sean alluded to we are lowering our per unit LOE and <unk> guidance for the year, given higher production and further cost efficiencies.
For 2021, we anticipate our low to be and the range of 31 to 35 per Mcf.
Down from 34 to 38 previously.
We anticipate our TNT to be and the range of 29 to 33 per Mcf down from 30 to 34 previously.
Turning to our balance sheet.
Total debt by $2 million quarter over quarter and $72 million year over year.
As of June 30, we had $198 million outstanding under our credit facility approximately $2 million of cash on hand, and $104 million of liquidity.
Our cash interest expense this quarter included $2 million of 1 time expenses related to the extension of our credit facility, we expect our quarterly cash interest to trend lower going forward as we pay down additional debt.
In conjunction with the unwinding of oil derivative contracts related to production periods in 2020, and 2021 silver bow is able to amortize $38 million. It received in March of 2020 as add back gains and discrete amounts extending from April 2020 through December of 2021.
The amortized hedge gains factor into silver both adjusted EBITDA calculation for covenant purposes over the same time period and therefore, it is important for our investors and research analysts to understand when tracking our leverage ratio.
And.
For the second quarter of 2021, and the add back was approximately $4 million.
On a last 12 month basis, the add back total total of approximately $26 million, bringing.
Bringing our LTM adjusted EBITDA for covenant purposes to $206 million and our quarter and leverage ratio to 1.9 times.
As the time period of the and of the original unwind rolls off.
Our full year 2021, adjusted EBITDA, we will receive a benefit of approximately $14 million for purposes of calculating our year end leverage ratio.
At the end of the 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.
To summarize silver bow is positioned.
And expand inventory, while generating substantial free cash flow and further delever the balance sheet.
The recent strength and commodity prices broadened the optionality optionality of our high return inventory.
As evidenced by the real time optimization, we make to our development program.
Year to date, the orbital has been 1 of the best performing stocks across large cap and small cap e&ps.
With that said, we expect silver bow to continue to outperform its small cap peers.
We will continue to deliver on accretive and organic growth and shareholder value while remaining opportunistic in the market.
Our winning strategy is built on solid execution efficient operations financial resilience and a low cost structure.
We see additional tailwind to our outlook given the ex.
The environment continued strengthening of our balance sheet and ongoing Eagle Ford expansion and Austin chalk delineation.
We look forward to providing further updates on our next call.
And with that.
And I will turn the call back to the operator for questions.
And.
Thank you at this time, if you'd like to ask Antonio question Press Star followed by the number 1 on your telephone keypad.
And can that is star 1 for questions. Your first question comes from the line of Neal Dingmann with curious securities.
Hi, Good morning, nice quarter excuse me net Florida.
You talked a little bit about I know you guys have been showing really nice what I would call regionally operational flexibility based on commodity price and I'm. Just wondering again will you continue to do that it looks like I think the answer is yes, but maybe just talk about how actively you will continue to do that and then sort of follow up with that is.
And how long does it take once once you pivot or do something like that to the timing of the associated activity or production around that how long does it take.
Yes on margin.
Neil and I appreciate the question.
And yes, we're in this environment, where we're seeing strong commodity prices across all components of oil NGL and gas so.
And our inventories working well do you want to continue to.
Grow a balanced commodity production profile so.
We expect as we look into 'twenty 2 day to drill.
Drill bolt and the gas and oil window.
Near term and we have.
Have a non wells coming on in August and all in the Artesia area, which is the blend of a lot of third oil <unk> gas third NGL. So we really like that area.
In September we have 1 low coming on and our mcmullin oil area, So a little oily and.
And then in September we expect to bring on another Austin chalk well down and our fast and area, which is dry gas. So gives you a feel of how we're allocating our capital in this point and time in.
In terms of how quickly.
And we pivoted. This year was another Great example, and we went into the year expecting.
To drill gas through most of the year as oil really moved up as we entered in the first quarter we adjusted.
Our program such that we began drilling oil really and the may timeframe. So it took us about 45 days to pivot to a more oil mix.
Great details and then just a follow up you guys talked about a lot of the even lower low and different things youre seeing with efficiencies and which is great to see maybe just talk about on a go forward. Your thoughts about you think that can you continue to do that and offset we've heard about inflation I know 1 of the.
And Rockies companies and bumped up there.
Guidance today on.
Higher inflation and bolt on low and overall cost. So just maybe talk much on cost inflation versus efficiencies.
Yes, I can.
Start and then let Steve.
And follow on yes.
<unk>.
And as Steve made comments in his remarks, starting to see inflation come into to the sector.
Especially in certain pockets.
We expect net to continue.
Especially as labor shortages persist.
We're seeing increases associated with that as well as materials can we drive more efficiencies in.
It's been a trend that we've been working on now for probably 36 months and I.
And I would tell you every quarter the operations team continues to surprise and find more efficiencies there.
<unk>.
I think it really reflects our culture of just continuously turning over the next 1 and seeing what we can find so on.
Those are my comments, Steve I don't know if you want to add any additional color.
Yes, Thank you Shaun yes, Neal we're seeing.
Some added and compression opportunities that we're able to capitalize on that have high returns and in addition to that.
We're also seeing some artificial lift.
Both new as well as some legacy opportunities there that are even showing even higher returns.
That said and as you know oil has a little bit more expense than the gas side of the business, but that said, we have a lot of new oil coming on and so really that only affects the later life gas.
When you look at the cost structure, though relative to Opex.
We're really only seeing very slight to know declines, especially in the more local markets.
Seeing a whole lot of increase in our local markets a little bit more on the regional side, but by and large the biggest increase we have so far on the Opex side is labor.
That compares though however, it pales in comparison to what we're seeing on some of the select markets for Capex.
Thank you so much.
Yes, Thanks Nielsen.
Your next question comes from the line of Austin Aucoin with Johnson Rice.
Hi, good morning team thanks for taking my questions.
I wanted to start with Paul on April bolt on acquisition going forward. How are you all planning on corporate cash versus equity and future deals and then piggyback off of that what's the current pipeline for bolt on A&D.
Hey, good morning Austin.
The question.
Yes.
We look at the opportunity set.
Eagle Ford.
As a large opportunity set of transaction similar to the 1 we announced yesterday.
Many operators that are smaller in scale looking too.
Benefit from a larger scale more efficient.
Company and we're.
Looking to do the same as well.
So there are more opportunities out there we've built a strong relationship with a number of operators and the basin.
And so so we look forward to bringing more and more assets like that into our mix here and in the coming months and years.
In terms of utilizing cash versus stock, we're always looking for and accretive deal and structuring it such that we're able to continue to delever our balance sheet.
And so it's finding that right mix.
Those 2 components.
Is the asset create drilling opportunities that grow EBITDA. So we can delever on that side or can we bring it in.
Through.
And the stock side, so that the base EBITDA is accretive.
And that's the way we're approaching it.
And our stock we think still has a ton of room to run.
And so but we also want to be thoughtful in our balance sheet and I think.
Other people and sellers and the base and look at our stock and our company and believe that there is upside as well and so that's why we're seeing a willingness to take the stock.
Alright expense.
Thank you for the color and.
And a follow up is what is the oil is priority list for the use of cash.
And more drilling A&D and also is there I guess is there a certain leverage ratio target that you all are comfortable with.
Yes.
Good question.
Our focus over the last 12.18 months has been debt paydown with the free cash flow, we've moved our leverage ratio down.
Quite significantly over the last 12 months, taking it down below 2 times now announced and our comments that we're going.
And we're looking towards bringing it down below 175 times by year end and with the.
Strong free cash flow looking out into next year and.
And anticipate.
And that goes even lower our target is probably looking at below 1.5 times.
Over the coming years.
And once we get to that level thinking about.
What else, we can do with the free cash flow.
We've been hinging around a reinvestment rate of 70%.
So as our revenues have grown with the improved pricing we have elected selectively too.
Some of that free cash flow and and drill some additional opportunities that came to us here this year.
And so that's kind of the governor or the hinge point that I guess I would say and we have at that 70% reinvestment rate.
Okay.
Anything above that just always will push towards that for now.
Alright. Thank you and then my final question is with the increased glad to tell on free cash flow and Capex I was curious how you thought through the and.
Increase from full year capex relative to the increasing free cash flow.
Projection.
Yes.
Really kind of around.
My prior comment there is we looked at the expanded free cash flow.
And the reinvestment rate it was going to push us lower.
Refined going lower on the reinvestment rate and pushing that towards debt paydown, but we had a couple of opportunities come to us.
Through non non operated position.
And that was kind of an opportunity to participate and the drilling of those wells. It was on a checker boarded the acreage position that we acquired last year from from <unk>, That's and the Webb County gas area sort of an area that we really like so.
And that was 1 of the drivers is didn't want to miss out on the opportunity to allocate capital.
And 2 drilling of wells that wouldn't be there if we didn't spend that capital.
Other was looking to bring forward.
Capital and of the year primarily around drilling.
And 4 wells down and our Rio Bravo asset and Webb County.
We decided as we've had we've got this really efficient drilling program going and the drilling on with US that we go ahead and drill those we had originally planned to drill those late in the year and a little bit into next year. So they're set up to be a 4 well program right now, but we have the optionality.
2.
Complete those.
Towards the end of the year, depending up on service costs service availability and oddity prices and.
That's why we gave a fairly large range of.
Capital for the remainder for the full year.
And if we wanted optionality around those docs.
Thank you very much I appreciate the color.
Hey, Austin appreciate it thanks, Thanks for your questions.
Sure.
And again, if you would like to ask your question Press Star followed by the number 1 on your telephone keypad again and star 1 for our questions.
Hey, Hillary doesn't look like we have any more questions.
And I appreciate everyones <unk>.
Interest and the company and joining our call. This morning, and look forward to speaking with you on our third quarter call.
Thank you. This does conclude today's conference call you may now disconnect.
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