Q2 2022 SilverBow Resources Inc Earnings Call
<unk> ending the quarter with more liquidity than we had at the end of the first quarter.
On slide 11 of our presentation, we outlined silver Bose strategic objectives.
Which are the roadmap for our business.
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 greater cash flows.
We expect to grow our production approximately 30% in both 2022 and 2023.
Our second quarter production increased as we brought online production from new wells and contribution from the standpoint assets.
Upon closing Sundance, we added a rig to develop our recently acquired oil inventory.
Taken together the step up in drilling activity and contribution from acquired production will drive meaningful growth going forward with second half production approximately 35% higher than the first half of this year.
Our second strategic objective is to expand our inventory and we made significant progress on this front during the quarter.
The sandpoint and Sundance acquisitions added approximately 200 net drilling locations to our portfolio and we now have over 600 high return locations across a balanced mix of both oil and gas.
This supports more than a decade of drilling at our current two rig pace.
Our third objective is to lead our peers in capital efficiency and cost structure.
Our growth next year is underpinned by a reinvestment rate of approximately 60% and our free cash flow yield greater than 25%.
Our efficiencies have offset some inflationary cost pressures and we have been able to deliver on our planned capex targets.
As Steve will further detail, we also expect to realize cost synergies as the team integrates the acquisitions into our low cost platform.
Our cash margins will continue to increase as a higher oil production mix captures higher realized pricing on an equivalent unit basis.
Last but not least our fourth objective is to delever the balance sheet through debt reduction and greater cash flows.
Year to date, we've announced approximately $425 million in acquisition value, while remaining on track to achieve a one times leverage ratio by the end of this year.
Our leverage ratio for the second quarter was reflective of cash timing of closing the transactions, but we expect to quickly reduce our debt balance using free cash flow.
Our debt balance at the end of July was $613 million.
$31 million reduction since the end of June .
Furthermore, our liquidity position at the end of July exceeded $300 million, providing silver bow the dry powder it needs to continue to pursue accretive opportunities.
Looking.
Beyond this year, our preliminary 2023 outlook calls for roughly $700 million of EBITDA and $250 million of free cash flow.
This represents a significant amount of cash generation above and beyond the requirements to fund our growth and Delevering objectives.
Combined with our growth plans over the next 18 months, we see a compelling valuation based upon EBITDA leverage and cash flow yields.
We continue to see the highest reinvestment opportunities through either the drill bit or accretive acquisitions.
It will likely continue to be a combination of both given the pipeline of opportunities to further consolidate the Eagle Ford.
With that I will turn the call over to Steve to provide an operational update Steve. Please go ahead.
Thank you Sean in the second quarter, we drilled seven net wells and completed and brought online 15 net wells. This compares to just one well we brought online in the first quarter and as Sean mentioned, our second quarter production should Mark an inflection point in our go forward growth profile.
And our Webb County gas area, we completed and brought online an eight well lamesa pad.
This is the largest pads silver bowl has developed to date.
In the face of supply chain constraints and inflationary cost pressures our team successfully achieved A&P costs by delivering pressure pumping utilization rates north of 80% and completing more than 11 stages with over $4 6 million pounds of sand pumped per day.
Of the eight wells two were Austin chalk three were upper Eagle Ford and two were lower Eagle Ford to two Austin chalk wells on this pad are the best performing chalk wells, we have drilled to date when normalized for lateral foot.
They also represent our first spacing test with the chalk formation as compared to the single well Delineations, we've brought online previously.
This confirms our view of unlocking additional inventory in the Austin chalk as we transition to full scale development.
As we show on slide 16 of our presentation, our Austin chalk wells payback in less than a year and generate rates of return well above 100%.
In our central oral oil area, we completed and brought online a three well pad. This pad had an IP 30 of 'twenty 200, Boe per day, and a 90% liquids mix.
And our western condensate area, we completed and brought online another three well pad with an IP 30 of 3800 Boe per day, and a 60% liquids mix.
Both of these pads are outperforming their respective type curves and achieved a FTE costs.
Additionally, we completed one DUC well from our standpoint acquisition in May, which we brought online during the quarter. This well as shown on slide 14 of our presentation is an exceptional gas well, which produced an IP 30 of 12 Mmm Cfe per day and highlights the assets quality of the ACA.
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Second quarter production averaged 238 <unk> per day, which was in line with our production update from last month.
This quarter's production included 50 days of contribution from the standpoint assets, but no contributions from the Sundance assets given the June 30 closing.
And our current industry up cycle.
Cost inflation continues to move operating and capital expenses higher.
We SMA costs are up approximately 25% year over year across all major basins.
On the drilling side, the largest cost increases are coming from casing day rates fuel and cement.
On the completion side horsepower chemicals sand and diesel are seeing the most pressure.
Furthermore of the labor market remains tight across the service sector, which typically results in service related challenges.
As noted on our last call. We observed this earlier in the year with the rig we activate it in December .
However, as a result of actions taken by our operations team in conjunction with our service providers.
Those efficiency losses have been corrected.
We experienced similar efficiency challenges with the rig we added from Sundance.
Now that we have taken control of operations. The rig is returning to the efficiency levels that are more in line with our expectations.
By continuing to implement silver bodes best practices. Our operations team has achieved <unk> targets and delivered costs in line with our business plan.
We expect our two rig drilling pace and the full utilization of our Frac crew to drive even greater cost synergies and improved cycle times going forward.
The team is addressing cost inflation through enhanced procurement initiatives and preordering key materials.
I would like to mention that even with the increase in our activity. The silver bow team has maintained its safety standards.
Year to date, we have achieved a total recordable incident rate of zero, which is a point of pride amongst the organization.
To all of our employees contractors and service partners.
Q4, upholding this core pillar of silver goes culture.
For the third quarter, we are guiding to production of 300 Mcf per day at the midpoint with natural gas, representing 68% of our production mix compared to 78% for the second quarter.
For full year 2022, we are guiding to production of 277 Mcf per day at the midpoint.
Our guidance implies a 25% product and inquiry increase sequentially in the third quarter and a 35% increase in the second half of 2022.
Our full year 2022, capex guidance is $300 million to $330 million.
Note that our production and Capex guidance is unchanged from our July update and represents our recent views on cost inflation and two rig schedule.
Looking to 2023, our preliminary production forecast is 380 <unk> per day, representing a 35% growth rate year over year.
As Sean mentioned, we are forecasting roughly $700 million of EBITDA and $250 million of free cash flow next year.
As always silver ball optimize its drilling schedule in real time to allocate capital to our highest returning projects based on prevailing commodity prices.
<unk> timing and expected rates of return.
As such our preliminary 2023 guide is subject to change based on further optimizations, we may make to maximize returns.
And with that I'll turn it over to Chris Thanks, Steve.
In my comments. This morning, I will highlight our second quarter financial results as well as our price realizations hedging program operating cost and capital structure.
Second quarter oil and gas sales were $183 million, excluding derivatives with natural gas, representing 78% of reduction and 68% of sales.
During the quarter, our realized oil price was 101% of Nymex Wty, our realized gas price was 102% of Nymex Henry hub and our realized NGL price was 36% of Nymex WTS.
Notably our realized gas price was <unk> 12.
Per mcf higher than benchmark Henry hub prices, highlighting silver both competitive advantage operating in the Gulf Coast market.
Our realized hedging loss on contracts for the quarter was approximately $66 million.
Based on our hedge book as of July $29 for the remainder of 2002.
We have 165 Mcf per day of natural gas hedged 8200 barrels per day of oil hedged.
And 3200 barrels per day of Ngls hedged for 2023, we have approximately 160 Mcf per day of natural gas hedged 7300 barrels per day of oil hedged in 2750 barrels per day of Ngls hedged.
The hedged amounts are inclusive of both swaps and collars and include the assumption of the existing hedge books from our recent acquisitions a detailed summary of our derivative contracts is contained in our presentation and 10-Q filing for the second quarter, which we expect to file later today.
Turning to cost.
Lease operating expenses were <unk> 47 per Mcf.
Transportation and processing costs were <unk> 31 per Mcf production taxes were 5% of oil and gas sales, we anticipate our unit LOE costs to be elevated going forward due to higher cost liquids production, which now.
Emprise is a much larger portion of our production base given the acquisitions, we have closed over the past year.
Cash G&A, which exclude stock based compensation was $4 million for the quarter as we continue to add scale to the company a function of both organic and acquisitive growth.
We do not anticipate meaningful increases 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 differentiator, allowing silver voted sustain profitability during periods of volatile commodity prices.
Adjusted EBITDA for the second quarter was $85 million.
As reconciled in our earnings materials, we generated a slight free cash flow deficit for the quarter. This includes one time bank fees of approximately $7 million associated with our recent borrowing base increase and credit facility extension.
Excluding these fees, we would have been free cash flow positive in the second quarter, and we expect to generate free cash flow for the second half of 2022.
Capital expenditures for the quarter on an accrual basis totaled approximately $74 million. This.
This excludes acquisition and divestiture activity.
Turning to our balance sheet total debt was $644 million.
Higher adjusted EBITDA in the second quarter was offset by cash payments for the Sundance in standpoint, axis acquisitions, which totaled just over $270 million. We funded these cash payments using our credit facility and operating cash flow.
As of June 30, we had $494 million outstanding under our credit facility $6 million of letters of credit and $9 million of cash on hand, resulting in $284 million of liquidity.
Sure.
<unk> in accordance with our credit facility includes contributions from closed acquisitions for the entirety of the LTM adjusted EBITDA period used for the leverage ratio calculation on an LTM basis for the period ending with the second quarter of 2022. The contributions from acquired properties totaled approximately 150.
$4 million.
Bringing our LTM adjusted EBITDA for covenant purposes to $453 million and our quarter end leverage ratio to 142 times.
Even with the cash outlay for acquisitions driving the quarter over quarter increase to our total debt our liquidity increased by $23 million.
As Sean mentioned, our bank group unanimously approved the increase to our borrowing base from 525 million to.
To $775 million.
Providing us with ample liquidity to continue executing our plan.
We remain on track to achieve our target leverage ratio of one times by year end, our year end leverage ratio will benefit from $86 million of pro forma EBITDA contributions from standpoint, and Sundance prior to their closing date.
I would like to thank our full bank syndicate, which includes three new member banks since April for their support we look forward to continuing to work together as opportunities come about.
At the end of the second 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.
<unk> continues to execute its strategy.
Between organic growth and in basin consolidation the company is positioned for significant value creation going forward.
We believe that the increased scale and cash flow potential will continue to garner a broader investor base.
One of our key milestones was to reach $500 million in annual EBITDA.
Given the aforementioned execution, we now have line of sight towards $700 million of EBITDA next year.
As we find ways to increase cash flow and pay down debt. We continue to see the highest return on investment through the drill bit and accretive acquisitions.
With production growth debt reduction and conservative conservative reinvestment rates, our liquidity position will expand over time, providing us the dry powder to stay opportunistic and further eagle Ford consolidation.
I want to thank all of 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.
At this time I would like to remind everyone in order to ask a question Chris Star then the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Bertrand Donna's with Truth Securities.
Okay.
Good morning, guys.
From your prepared remarks, it sounds like you had planned to be pretty active in the M&A market and the right price. So I'm just kind of wondering if the target of these transactions.
Pro forma leverage or is it free cash flow per share or is it to add some future inventory just trying to get an idea of what the priorities right.
Yes.
Thanks for the question and usually you lay out targets quite well there first and foremost.
Look for industrial logic.
As it makes sense with the existing asset base does it improve our capital efficiencies.
So that's the first primary target next is inventory will it improve enhance our inventory displace existing inventory or further expand it.
Okay.
After that we look at is it accretive to the existing shares.
Accretive cash flow is high on our list and then maintaining a conservative balance sheet along the way so.
As we've done in the past, we will look for opportunities too.
Buy assets at a discount.
Where we currently trade.
And look to funded through probably.
The combination of cash and stock quarter It makes sense.
Okay. It sounds like Youre looking to check all those boxes and then just moving.
Two the well results on the Austin chalk well it looked like they were a bit shorter on the lateral side.
But they came in at a lower cost than the 7500 foot wells that you have in your type curve, but one of them at least with still outperforming even on a nominal basis. So is the takeaway from that that you would like.
Lower cost and you want to have that increase productivity or is it maybe take the design that drove these well results and apply them to the longer lateral at the same price.
Yes.
The two laterals here.
That were shorter and this was part of an eight well pad was driven by primarily the lease configuration that we had and not necessarily that we were.
Exploring lower costs or different stimulation designs.
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Across the shorter lateral so going forward, our average lateral length will revert back to that 7500 foot.
Lateral length and will range anywhere from probably a mile to two mile laterals, depending upon the lease configuration.
That makes sense.
Nothing to read in there and that Hey, we were optimizing our changing our stimulation.
Our drilling configuration.
It was worth asking thanks, yes, yes, no I appreciate it.
Your next question comes from the line of Michael thorough with Johnson Rice.
Hi, good morning, Thanks for taking my questions.
You bet good morning, Michael good.
Alright, so just now the Sundance and standpoint acquisitions of close and the integration seems to be going smoothly.
Do you guys expect to these areas are going to see more activity going forward.
Just to make sure I understand the question are we increasing our capital investment in those areas are we seeing more acquisition activity.
Well honestly, both but the question was more on the.
Capital investment.
Activity going forward.
Yes, no I appreciate the question thanks for confirming it.
Yes.
At the close of the Sundance transaction, we added a second rig and the way we're allocating capital as we move forward is capital allocation to one rig will be on the historical silver bow assets that are primarily dry gas.
The other rig will be dedicated for the most part two drilling oil weighted liquids weighted locations that have come through primarily.
Through the Sundance in standpoint transactions, but as well as transactions that we closed late last year.
So we that was one of the targets we have on this.
These acquisitions is to add accretive inventory.
So as we look at doing deals we want to make sure it's either high grading the inventory <unk>.
Drilling equivalent rate of return projects. So that's important for us to dedicate capital to these new acquisitions as efficiently and quickly as possible.
Great that makes plenty of sense and very helpful.
My next question is just a follow up on the chalk.
Kind of hit on it a little bit already but it seems like you guys are having some pretty strong well results specifically at a web county.
So I was wondering if you could speak and provide a little detail on how these wells stack up to the rest of the portfolio.
Yes.
Yes, we've continued to delineate our acreage position.
The position that we currently have we have done that.
Steve mentioned.
<unk> done our first spacing test with the two well pad.
That we brought online in the second quarter.
So as we look at it we're now prepared to move into more development scenario drilling them on.
Third 50 foot spacing.
From a returns perspective.
Compete very favorably and in fact, they fall to a at the top of the list.
Our portfolio so as we move forward.
Planning to dedicate that quite a bit of our capital allocation on the gas rig two Austin chalk drilling.
Great I appreciate that color that's all for me.
Thank you Michael have a good day.
Hey, Joe.
Again, if you wish to ask a question. Please press Star then the number one.
There are no further questions at this time I will turn the conference over to Sean Woolverton for any closing remarks.
Thanks, Erika I appreciate everyone joining us this morning, and we look forward to providing further updates on our next quarterly call.
Thank you.
Yes.
Thank you for participating you may disconnect at this time.
Okay.
Okay.
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Yes.
Yeah.
Okay.