Q1 2022 SilverBow Resources Inc Earnings Call
[music].
Good day and thank you for standing by welcome to the Silver Bowl resources first quarter 2022 earnings Conference call. At this time all participants lines are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask the question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the call over to your speaker today, Mr. Jeff baggage director of Finance and Investor Relations. Please go ahead.
Thank you Brenda and good morning, everyone. Thank you very much for joining us for our first quarter 'twenty Two conference call with me on the call today are Sean Woolverton, our CEO , Steve Adam our CFO and Chris <unk> 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.
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 on our dock in our documents on file with the SEC, which are also available on our website with that I will now turn the call over to Sean.
Thank you, Jeff and thank you everyone for joining our call. This morning.
Silver <unk> was off to a strong start to the year, our first quarter results borrowing base increase and recently announced transactions exemplify the winning strategy we have consistently executed on.
The Sundance and Sandpoint acquisitions marked a fourth and fifth transactions, we have announced since August 21.
Combined we view these acquisitions as attractively valued at a purchase price of less than $30000 per flowing Boe.
Per day of production of current production and it is a cash flow multiple of two one times.
Yes.
We are excited about adding scale to our legacy position in the Western Eagle Ford the efficiencies, we stand to gain and the projected growth from the combined asset base.
For the past several quarters, we've outlined our strategic objectives.
First we are targeting double digit production growth while living within cash flow.
Second we are focused on expanding our inventory through accretive acquisitions and organic leasing.
Third we want to lead our peers in capital efficiency and cost structure.
And last our fourth objective is to delever, the balance sheet through debt reduction and cash flow generation.
During the first quarter, we continued to progress these objectives and in doing so we are seeing strong performance in the equity.
Year to date, our stock is up over 60%.
And that is coming off a 300% plus increase in 'twenty one.
In the first quarter, we generated $28 million of free cash flow and reduced our net debt by the same amount.
We further reduced our leverage ratio quarter over quarter.
And ended <unk> with $262 million of liquidity.
Notably, notably our quarter end liquidity position does not reflect the increase to our borrowing base.
Which went into effect on April 12.
Operationally, we drilled three Austin chalk wells at La Mesa in the quarter with the first being a single well brought online earlier this year.
The other two Austin chalk wells were part of an eight well la Mesa pad, we drilled in the quarter, which is the largest pad drilled in our company's history and represents a shift towards full scale development of our Austin chalk assets.
As shown on slide 20, the Austin Chalk formation continues to exhibit some of the highest returns across our portfolio and.
And we plan to drill additional locations this year.
Currently we have 50, plus Austin chalk locations in our inventory and we are actively pursuing opportunities to add to that Ken.
In April we made several major announcements, which enhanced silver both shareholder value proposition going forward.
First we announced our spring Redetermination results.
Which increased our borrowing base to $525 million.
The $65 million increase further enhances our liquidity.
Notably we did not include any contribution or uplift from the pending acquisitions.
We expect to receive consents from the bank group to substantially increase our borrowing base upon closing of the Sundance acquisition.
Which should further increase our RVO availability.
Following the announcement of the borrowing base Redetermination, we announced two accretive acquisitions for a combined transaction value.
$425 million.
The standpoint acquisition adds approximately 27000 net acres in Lasalle and Mcmullen counties with a PDP PV 10 value.
Of of $89 million.
Which is $18 million more than what we paid for the assets.
With two new wells coming online, we anticipate these assets to contribute five mbo.
BOE per day.
With expected closing to occur later this month.
The Sundance acquisition adds approximately 39000 net acres with a PDP PV 10 value of $277 million.
And significantly increases our oil weighted production and inventory with approximately 200 gross locations.
As of January the Sundance assets will producing 11 Boe per day.
Combined these deals have compelling industrial logic, given the acreage overlap with our positions in Lasalle and Mcmullen counties.
Or what we refer to as our AWP and our teacher fields.
The contiguous pro forma position.
On slides nine and 15 will provide synergistic opportunities for both Opex and G&A as we achieve greater scale in areas in which silver Bowl has extensive experience.
On a pro forma basis Silver Bowl will have ample high return drilling locations representing over 20 rig years.
Our PDP PV 10 value of $1 6 billion.
And and.
And in oil production mix of roughly 25%.
Which is a meaningful step change compared to the 11% oil mix in 2021.
A core pillar of our strategy has focused on balanced commodity on a balanced commodity portfolio and which we quickly shift which we can quickly shift between oil and gas development based upon prevailing commodity prices.
We believe this has been and will continue to be a competitive advantage in generating greater returns in the long term compared to peers, who do not have the same flexibility in their portfolios.
The increase to our oil production and inventory is a transformational and candidly a much needed shift ensuring silver Bo can benefit from the strength in liquids pricing moving forward.
While at the same time, we have a deep inventory of high rate of return gas locations, especially with the emergence of the Austin chalk in Webb County.
We have not published updated guidance for 2022 at this point.
We anticipate closing the Sundance acquisition in June or July at which time, we'll release updated guidance.
For reference on Slide 14, we show the full year of 2022 pro forma company projections.
Which convey the magnitude of the increase from these deals compared to Standalone silver belt.
Additionally, on slide 16, we highlight the accretion across key financial metrics, particularly free cash flow per share.
Upon closing the Sundance acquisition, we anticipate adding a second rig which will primarily focus on those assets.
Our near term plan is to allocate capital 50, 50 between our oil and gas inventory.
We essentially will have one drilling rig for oil and one drilling.
Gas full time.
Which should drive greater efficiencies and full utilization of our Frac crew.
The optimized development plan, we can pursue with our pro forma asset base will enable continued double digit production growth annually.
In fact, we are now projecting 20% to 30% growth over the next few years.
We can.
<unk> the growth with a reinvestment rate below 60%.
While driving free cash flow greater than $1 billion through 2024.
Assuming latest strip pricing, we have line of sight towards $700 million of adjusted EBITDA in 2023.
An incredible pace of growth compared to adjusted EBITDA of just under $250 million in 2021.
At the same time, we expect to accelerate Delevering.
And achieve our year end 2022 leverage ratio target of less than one times.
Silver Bose value creation proposition, thus far has focused on growth through the drill bit while converting enterprise value from debt to equity through free cash flow generation.
With the accretive acquisitions, we have made over the last year silver bow has rapidly scaled its cash flows within a favorable commodity price environment and improved its balance sheet and per share metrics.
For the near term our focus will remain on the successful closing and integration of the acquisitions.
In a strong commodity price environment environment. It is easy to forget where prices were just a year ago and Furthermore, we are seeing continued inflationary pressures across all services.
Therefore capital discipline operational efficiencies and prudent risk management will remain critical towards realizing the full value of our growth strategy.
We have optionally given our balance sheet.
Have optionality, given our balance sheet and strong cash flow outlook.
Which will allow silver bow to remain active in further consolidation opportunities.
Right now two things are clear to us first pro forma silver bow is set up to deliver strong growth in the coming years.
Which will bolster our portfolio and drive stakeholder value.
And second the Eagle Ford is ripe for consolidation and silver bow has a track record and capabilities to lead the charge.
With that I will turn the call over to Steve to provide an operational update.
Steve. Please go ahead.
Thank you sign in the first quarter, we drilled nine net wells completed one net well and brought one net well online.
Essentially all of our D&C activity within our Webb County gas area, where we drilled one lamesa Austin chalk well at a lateral length of approximately 9800 feet. The longest talk well we have drilled today.
Additionally, we drill them began completing an eight well lamesa pad, which is the largest pad in company history.
The La Mesa pad targeted three locations in the upper Eagle Ford three in the lower Eagle Ford and two in the Austin chalk.
The co development of these wells utilize a wine rack approach and extended spacing for the Austin chalk.
This is our first spacing test of the chalk formation as compared to the single Delineations, we have brought online to date.
As shown on slide 20, our Austin chalk results have outperformed our expectations and are exhibiting strong commercial returns.
These wells are showing payback periods of less than a year and at current strip prices that payback periods in NPV per well or even better.
First quarter production averaged 226 <unk> per day right at the midpoint of our guidance range.
Our oil and NGL volumes came in at the low end of their guidance ranges as weather related issues and non operated well performance impacted initial expectations.
The current up cycle in the industry has caused a tight labor market in the service sector.
We observed this with the rig we brought in earlier this year.
Those efficiency losses prove temporary and our drilling and service rig fleets have returned to their prior efficiency levels.
We expect the gains we have made operationally over the last few years to continue going forward.
Furthermore, we intend to add a rig on the Sundance assets. This summer.
This will provide us with greater size and scale and the efficiencies of utilizing a level loaded frac crews.
All of this is to say that silver Bowl will have greater abilities to mitigate rising costs as we work to provide our service partners with higher utilization across the asset base.
For the second quarter, we are guiding to production of 225, MMC FTE per day at the midpoint on a standalone basis with natural gas representing approximately 80% of our production mix.
This is roughly flat to our production to our first quarter production.
Due to minimal D&C activity in the fourth quarter of last year, and the size and timing of the eight well pad we developed over the first quarter of 'twenty two months of production in the second quarter should decline sequentially before hitting a strong production ramp in June as first production from our Lamesa pad is brought online.
Furthermore, we have optimized over both drilling schedule to maximize returns based on well selections and also accelerate the timing of first production of subsequent wells for the remainder of the year.
This should drive on a standalone basis daily production rates to average 15% higher in the second half of the year as compared to the first half.
Given the two acquisition announcements, which meaningfully impact our production levels. We are withholding full year 'twenty two guidance until closing the <unk> acquisition.
It is worth noting on a standalone basis silver bodes capex budget for this year remains unchanged as our team continues to identify efficiencies from a full rig.
We remain committed to a flexible and adaptable development program, which provides for such changes in short time periods.
This has allowed us to stay within our original budget.
As we are actively offsetting cost inflation.
Increasing our field efficiencies and pulling forward the first production timing of our highest rate of return.
Yes.
Specific to cost inflation proppant horsepower diesel fuel tubular goods and labor are areas, where the market is experiencing the most constraints.
On the drilling side utilizing a cost effective spudder rig on our pads has helped to maintain cycle time efficiencies and reduced the number of drilling days needed from our super spec rig.
On the completion side, we have been primarily focused on landed sand costs at the well site.
As such we have utilized a blend of regional and imported sands along with other logistical trade offs to help offset the inflationary effects of our stimulations.
We are also working with our completion providers to further reduce time from rig release to first stage pumped.
Again, as we grow the size of our program, we're able to provide greater utilization to service partners, who in turn are able to provide greater cost efficiencies to us.
Looking ahead, our drilling rig has moved to our liquids weighted assets and will target locations, we acquired with the three acquisitions last year.
In total there are 13 locations, we will drill in 2022 from last year's acquisitions.
Assuming a standalone silver both scenario.
This rig would shift back to gas drilling in Webb County in the fourth quarter.
From a timing standpoint, we expect to incur roughly $70 million of Capex in the second quarter and again on a standalone basis. This should result in a slight cash flow deficit for the quarter.
However, the pulling forward of higher return wells and production timing will set us up for significant free cash flow due to the second half of the year.
With that I'll turn it over to Chris.
Thanks, Steve and.
And good morning, everyone.
In my comments. This morning, I will highlight our first quarter financial results as well as our price realizations hedging program operating cost and capital structure.
First quarter oil and gas sales were $130 million excluding.
<unk> with natural gas, representing 77% of production and 60% of sales.
During the quarter, our realized oil price was 98% of Nymex <unk>.
Our realized gas price was 100% of Nymex Henry hub, and our realized NGL price was 37% of Nymex WTS, notably.
Notably our realized gas price was <unk> <unk> per mcf higher than benchmark Henry hub prices, highlighting the attractiveness of operating and Gulf Coast markets.
Our realized hedging loss on contracts for the quarter was approximately $28 million.
Based on our hedge book as of April 29th for the remainder of 2022, we have 131 Mcf per day of natural gas hedge 3929 barrels per day of oil hedged in 2000, and 780 barrels per day of Ngls hedged.
2023, we have approximately 134 Mcf per day of natural gas hedged 2900 barrels per day of oil hedged in.
And just over 2200 barrels per day of Ngls hedged the hedged amount are inclusive of both swaps and collars and do not include the pending acquisitions.
A detailed summary of our derivative contracts is contained in our corporate presentation and 10-Q filing for the first quarter of 2022, which we expect to file later today.
Turning to cost.
Lease operating expenses were <unk> 48 per Mcf transportation and processing costs were <unk> 31 per Mcf production taxes were 6% of oil and gas sales.
We anticipate our unit LOE cost to increase due to higher cost liquids production much of which was acquired over the last year.
Yes.
Cash G&A, which exclude stock based compensation was $3 7 million for the first quarter, a 1% decrease year over year as we continue to add the size and scale of the company.
A function of both organic and acquisitive growth, we do not anticipate a meaningful increase to G&A, rather we expect G&A on a per unit basis to decline compared to historical ranges, we consider our lean cost structure to be a competitive advantage, allowing silver botha sustaining profitability during periods of volatile commodity.
Prices.
Adjusted EBITDA for the first quarter was $74 million.
As reconciled in our earnings materials, we generated $28 million of free cash flow during the quarter as Steve noted we remain on track with our original Capex budget range on a standalone basis, particularly as scheduling optimization and full rig efficiencies have helped mitigate service cost inflation.
Turning to our balance sheet.
Reduced total debt by $27 million quarter over quarter strong price realizations allowed us to reduce debt in the quarter in which we pulled forward nearly $10 million of accrued capex, which totaled approximately $40 million.
As of March 31, we had $200 million outstanding under our credit facility.
Approximately $2 million of cash on hand, and $262 million of liquidity as Sean mentioned, our spring Redetermination in April resulted in a borrowing base of $525 million I would like to thank our admin agent as well as the rest of our bank Syndicate, which included two new member banks for their support.
We look forward to constructively working together as we close our pending acquisitions and further our consolidation efforts.
Silver bow in accordance with our credit facility includes contributions from closed acquisitions for the entirety of the LTM adjusted EBITDA period, which is used for the leverage ratio calculation on an LTM basis for the period ending with the first quarter of 2022, the contributions from acquired assets totaled approximately $25 million.
Bringing our LTM adjusted EBITDA for covenant purposes to $281 million in quarter end leverage ratio to 124 times.
At the end of the first quarter, we were in full compliance with our financial covenants and had sufficient headroom and with that I will turn it over to Sean to wrap up our prepared remarks.
Yes.
Thanks, Chris.
Silver bow has taken actions over the last 12 months that have grown the company and resulted in significant value creation.
With the latest acquisitions, we are set to increase silver boats float and liquidity, which combined with greater cash flow potential going forward should garner increased investor attention.
A key milestone for silver both to reach was $500 million.
In annualized EBITDA.
And next year, we have line of sight to over $700 million of EBITDA.
As we continue to find ways to scale, our cash flows and pay down debt, we still see the highest return on investment through the drill bit and accretive transactions.
Our plan is to integrate the new assets and identify additional synergies.
Furthermore, we will accelerate growth through our expanded two rig program.
The growth will drive significant EBITDA and free cash flow above current levels as we move into 2023.
The narrative surrounding silver Bose value proposition has meaningfully changed in a short amount of time.
I want to thank our stakeholders for their continued support.
We look forward to providing further updates on our next call.
And with that I will turn the call back to the operator for questions.
Thank you Sir as you reminder, to ask a question you will need to press star one on your telephone to withdraw it.
Question for us to death.
And please standby, while we compile the Q&A roster.
Your first question is from Charles Meade of Johnson Rice. Your line is open.
Hi, Good morning, this is Michael <unk> filling in for Charles.
Hey, good morning, Michael.
So in regards to the eight well la Mesa pad.
And that the wine rack configuration targets three lower Eagle Ford.
The Eagle Ford and two Austin chalk wells.
Could you provide a little bit further detail on why that configuration was chosen and if there are further opportunities for other large pads similar to this one.
Okay.
Yes, Michael this is Steve.
The reason that that particular configuration was chosen as in that greater Baskin area. We have a history of high development and learnings going forward, we've been able to work our appropriate 880 spacing in the lower Eagle Ford as well as in the upper Eagle Ford, which has been.
Demonstrated time and again.
Obviously heavy density and the lower Eagle Ford and continuing to grow density in the upper Eagle Ford that said, we've also been doing as you know that delineation testing in the Austin chalk and using that as well as offset data information, we've been able to get as well we know that.
Typically want to be right now at this stage of the development somewhere in that 11% to 112 500 foot spacing. So therefore it.
It provided quite readily and handily.
For a wine rack development with offsetting vertical takes all the way from the lower Eagle Ford looking up to the chalk.
Yeah, Michael I'd, just add that as we move forward are probably optimized.
Pat Count is closer to three to four versus eight.
We do have a couple.
On larger pads six to eight but.
The majority of our development plan moving forward will probably be in the three to four range.
Yes.
Great. Thank you.
So it sounds like that eight well pad has been.
Fully drilled so at this point to provide some more detail.
Based upon the number of wells that are completed and sort of some of the timing going forward.
Yes from a drilling perspective, youre right everythings been TD at this point everything has been Fracked and we're in the early stages of flowback.
So expect to see a significant production ramp in the next few weeks as you are aware wells down in this area both through all zones.
Lower upper.
Eagle Ford and Austin, chalk and have Ips ranging from anywhere in the $12 million to $18 million a day range, so with bringing on.
On eight wells that we're going to see significant ramp in our production.
Okay. Thank you then.
From a timing perspective couldn't be any better with gas prices.
Above $8.
No doubt about that.
All right. My second question is centered around the Sundance at standpoint acquisitions, So standpoints expected to close in the second quarter with Sundance in the third quarter.
At this point.
Do you see any like major hurdles to closing these transactions or anything that could potentially.
Potentially.
That's what the timing related to the anticipated close of the deals.
Hello.
Ben.
Working on both transactions.
We have a track record now to demonstrate the ability to get these transactions closed.
Everything remains on schedule as planned.
And you mentioned standpoint closing in.
Second quarter that should be here in the very near future.
Sundance were targeting late in the quarter early third quarter.
The one difference between the two is the Sundance transaction requires a shareholder vote, which is scheduled.
Preliminarily universe for June 'twenty, one so that just kind of the timing pivot point around getting the Sundance transaction closed.
Great. Thank you that's very helpful. Thank you for taking my questions I appreciate.
Thanks.
Your next question is from Don just curious your line is open.
Hey, good morning, guys.
In your prepared remarks, you kind of indicated youre not done pursuing acquisition.
You talked how the how the market looks some somewhat with our operators in other basins have taken a step back with volatile oil prices are you guys approaching it differently or maybe because youre using equity for some of the acquisitions you can maybe take a little off the strip and leave some upside for sellers.
Yes.
Let me kind of walk you through what we're seeing.
Been very active.
In the Eagle Ford looking for opportunities for quite a while now so the transactions that we've actually done over the last 12 months have been based upon longer term relationships that we've built with the sellers.
We believe the opportunity that we provide as a buyer offering both the combination of cash as well as stock provides the seller to participate in taking some value off the table through the cash component and then being exposed to the upside with the stock.
Yeah.
We believe folks that we've transacted with so far have recognized that value accretion and so we do think that we're a logical acquirer of assets in the Eagle Ford There is a tremendous amount of runway of opportunity sets out there.
Number of private entities that are looking for opportunities to probably transact at these higher prices now with all that said we want to continue to remain remained very disciplined I think I've mentioned in my opening remarks that.
Across the five transactions we've averaged.
Purchase price of about 30000 BOE per day, we are seeing other buyers starting to push the high end.
We would consider probably overpaying for.
Acquisitions.
In this volatile market and it is going to continue to be a challenging environment at these high prices and the volatility and until we kind of get a stabilized go forward strip. So we're going to continue to work it hard but be very diligent and making smart transactions.
Yeah.
That all makes sense and then maybe just shifting gears on the.
The new acquisition, they made total sense contiguous with your acreage.
I assume part of the value that you can brought a more stable program is the second rig that you're or the additional rig you're bringing in is that locked in already or is that going to kind of be a game time decision on based on.
What the costs look like when the acquisition closed.
We actually have that contract.
Drilling rig firmed up.
And.
Our plan is to start drilling as soon as the acquisitions close so it's a rig that is currently active.
Have a good strong relationship with our service providers.
<unk> worked with them to work the timing on bringing a second rig in right right around the close of the Sundance transaction. So we're pretty excited that we're going to be able to hit the ground running we're already working closely with the Sundance team to identify.
What they felt where the best opportunities.
To hit this year and we're getting those locations kind of teed up and ready to go so that we can hit the ground running.
That sounds great. Thanks, guys.
I appreciate the questions.
Sure.
Okay. Once again to ask a question. Please press the Star then the number one on your telephone.
Your next question is from Jeff J, Daniel Energy Partners. Your line is open.
Thank you Hey, good morning, just a follow up to that so the rig is already.
Secured what's the term on that in other words I guess is that rig you feel confident that that rig will be kind of walked into that rate for the next <unk>.
Six months, a year kind of how should we think about sort of.
Potential for inflation down the line with an incremental rig.
Yes definitely.
Definitely we are in.
<unk>.
Environment.
We haven't seen for many years.
Moving from.
Over the last several years, where contracts were were pad to pad.
Now looking at more longer term type contracts from.
Operators perspective, we're trying to lock in those rates, where the service companies are now trying to kind of keep them short so they can try to capture upside in and future pricing. So we're trying to balance that right and avoid mistakes that the industry has made in the past of getting to longer commitments knowing that prices can be volatile. So we put in what we think.
A reasonable amount of term and agreeable to the drilling.
Provider as well kind of both both sides trying to balance.
It makes sense for both entities.
Good Thanks, Jeff.
And then from an inflation standpoint.
We are seeing it.
We over the last several years have continued our operations teams that have continued to find ways to drive costs lower.
That becomes more and more challenging as you try to ring ring efficiencies out of the system.
But what we're benefiting from is the increased scale.
So.
All the things that come with that.
Having more purchasing power.
Having more ability to commit to longer term type of arrangements.
But more importantly, just haven't consistency and the schedule going forward.
12, 15 months ago, we were running five rigs so running two rigs will just allow us to be more efficient.
More importantly, commit to essentially almost a full frac utilization schedule. So we're pretty.
Optimistic that we're going to be able to.
The line on capital.
Set inflation through continued efficiencies from the scaled up program.
Okay.
Okay I appreciate the question.
Yeah.
Okay.
Operator are there any additional calls in the queue. If not we can wrap up the call for this morning.
No more questions Sir please continue.
Okay, well I appreciate everyone. Joining us this morning, we look forward to providing additional updates as.
Activity in news warrants it.
From us so everyone have a good morning.
And this concludes today's conference call. Thank you for participating you may now disconnect.