SilverBow Resources, Inc. (NYSE:SBOW) Q1 2024 Earnings Call Transcript

SilverBow Resources, Inc. (NYSE:SBOW) Q1 2024 Earnings Call Transcript May 2, 2024

SilverBow Resources, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the SilverBow Resources First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator instructions] And finally I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Jeff Magids, Vice President of Finance and Investor Relations, to begin the conference. Jeff, over to you.

Jeff Magids: Thanks, operator, and good morning, everyone. Welcome to our first quarter 2024 conference call. With me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Chris Abundis, our CFO. Yesterday, we posted a new presentation to our website, and we’ll refer to it during this call. Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release. Our discussion today may include forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on our website. As a reminder, please limit your time during Q&A to one question and one follow-up. This will allow us to get more of your questions in this morning. With that, I will now turn the call over to Sean.

Sean Woolverton: Good morning, everyone. As you can see from our results, SilverBow is off to a very strong start in 2024. We continue to prove the merits of our long-term business strategy and build on our effective track record of creating value for shareholders. Our call today will cover three primary topics. First, our year-to-date results, which are ahead of plan. Early this year, we optimized our 2024 operating plans, capitalizing on our diversified portfolio to reduce investments in dry gas and focus on our profitable liquids development. Our goal was to maximize free cash flow and rapidly strengthen our balance sheet. Our plan is working. Today, we are raising our full year free cash flow estimate and lowering our year-end leverage ratio target to 1.25 times.

More importantly, we now have line of sight to reach our target of one times leverage next year. Second, we continue to see capital efficiency gains across our operations, delivering some significant operational achievements over the last few months, which we see as sustainable. Finally, we continue to strengthen our portfolio, and recently completed the final stage of a multiyear effort to assemble a 25,000 acre position in the liquids window of the Eagle Ford, and we did this with no new capital. This is one of the last contiguous undeveloped areas of scale in the basin and we are excited about the high margin liquids exposure it adds to our portfolio. Listen, we are executing very well, and it’s apparent that our focus is squarely on running the company and adding value for our owners.

I recognize there are likely questions related to our ongoing proxy contest. But I do not want to distract from our good news today. Before Q&A, I will make a few points about the governance changes we are proposing and remind you how important your vote is at our upcoming Annual Meeting. Let’s get started with a look at the first quarter. We beat across the board this quarter. All the results are covered in our materials, but I will briefly hit the highlights. We generated $56 million in free cash flow, much higher than expected in our original forecast, primarily due to continued gains in capital efficiencies and strong production and product pricing. We are seeing strong well productivity from our recent pad developments and the success of our refrac program.

This has provided us with even more confidence in our forecast. Today, we increased our expectations for full year 2024 production as well as our outlook for free cash flow. Importantly, capital investments in the quarter were lower than planned and our team continues to exercise capital discipline, while finding creative and safe ways to lower cash, operating costs and enhance margins. Our expectations for full year capital investments are unchanged. Said another way, we are offsetting faster cycle times with continued capital efficiency gains. As I have shared previously, our commitment to strengthening our balance sheet is unwavering and strong production and higher free cash flow have allowed for rapid debt repayment. Since closing the South Texas acquisition, we have repaid $178 million in absolute debt.

This represents a 15% debt paydown in just five months. Overall, our leverage ratio has recovered to the same level it was prior to the South Texas acquisition. This is further proof that we are following through when we say strengthening our balance sheet is a top priority. We expect to exit the year at approximately 1.25 times and to reach our goal of less than one times leverage in 2025. Turning our attention to our operational performance. There are three achievements I would like to highlight. First, we have known for some time that refrac had the potential to provide considerable upside value to us across our asset base as many of our legacy wells were completed with less than optimal completions when compared to today’s standards. We initiated our refrac program this quarter and the initial results clearly show that restimulating existing wells with larger jobs in tiger cluster spacing can materially enhance well productivity.

In our deck, we have a slide summarizing our results. Key takeaways. These wells reach payout in less than 10 months. We have more than 100 refrac opportunities across our portfolio and we are moving additional refracs into this year’s program. We see our refrac program as a capital efficient way to maximize volumes while providing flexibility in a time of strong oil prices. Next, we recently drilled our first horseshoe well in the Austin Chalk. The well had a lateral length of nearly 9,000 feet and was drilled in place of two less than optimal shorter laterals. The well reduced total D&C costs by 25% and improved cycle times by 15% when compared to drilling two wells. Now that we have proven our ability to drill horseshoe wells, we can use this advanced technology across our asset base to enhance returns and capture incremental resource.

We have identified more than 30 additional horseshoe wells to unlock value on what would have been stranded acreage. Third, let’s talk about some recent success on our South Texas acquisition. Please take a look at Slide 12, where we show just how far we are outperforming the previous operator. We are completing a 10-well pad to develop four stacked horizons and expect to have initial production late this quarter. In just a few short months, our enhancements have decreased gross drilling costs, drilling days and cost per foot across the Upper Eagle Ford, Lower Eagle Ford and Austin Chalk. Early results here, combined with what we’ve delivered on previous acquisitions, further demonstrate assets are better in SilverBow’s hands and clearly show the operational excellence and capital efficiency our team can bring to an asset.

Let’s now shift gears to talk about how our strategy is creating value through acquisitions as we build a scale and durable portfolio. Our latest accomplishment is a three-year effort encompassing contributions from our technical, business development and land teams. Through a series of transactions, culminating in a recent land trade, we have assembled a contiguous 25,000 acre position across La Salle and McMullen counties in the liquids window of the Eagle Ford. Our subsurface team specifically targeted this area because of its high rock quality and a lack of modern day completions. In addition, many of the legacy wells were drilled out of zone. Importantly, over the last 12 months, we brought online six wells in the area, which have delivered rates of return greater than 100% with productivity far exceeding our expected type curve.

With an estimated 150 long lateral locations to develop in the area, we see this as a powerful liquids lever to pull in our diversified portfolio. Before we go to Q&A, let me address our upcoming Annual Meeting and the importance of your vote. I firmly believe today’s results speak for themselves. Our strategy to create value is working. Furthermore, we are proposing governance changes that we feel are in the interest of shareholders. We are asking for your vote to declassify our Board, adopt a majority voting standard and eliminate super majority vote requirements. We continue to strengthen our Board through ongoing refreshment. Recently, we appointed Lee Jourdan as a new highly qualified director with a demonstrated track record in international and domestic LNG markets, natural gas trading, business development and most recently as Chief Diversity Officer at Chevron.

Lee is an excellent addition to our Board and represents the fourth new director to join our Board since January 2023. Through multiple communications with you over the past few weeks, we’ve clearly laid out our extensive engagement with Kimmeridge over the last two-plus years. There is more than enough material for you to review. But make no mistake, their end game is to force a very dilutive transaction with Kimmeridge Texas Gas. I would encourage you to take the time to read through our materials and get educated on the facts. A vote for your — a vote for our skilled Board and new governance enhancements is a vote for truth and transparency. We welcome a dialogue with any shareholder, please reach out. Vote with the Board. That’s four on the white proxy card.

In closing, I am proud of our team and their relentless pursuit of safely executing our strategy and establishing SilverBow as the operator of choice in South Texas. We sit in an enviable position today. We have a scale and durability built through a history of doing smart transactions and have demonstrated our ability to unlock significant value behind acquisitions. Our assets provide us with flexibility and how we allocate capital today to deliver strong results. We are not reliant on near-term acquisitions to enhance our inventory. Our capital structure is strong and getting stronger. With our increased outlook for free cash flow, we now expect to achieve our leverage target of less than one times in 2025. Most importantly, we are executing a business plan that has proven to create value and we are confident that we will close the significant value gap we see in our equity today.

We look forward to reporting on our progress as we continue to focus on creating value for all SilverBow’s shareholders. Operator, we are now ready to address questions.

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Q&A Session

Operator: [Operator instructions] And your first question comes to the line of Tim Rezvan from KeyBanc. Your line is open.

Tim Rezvan: Good morning, folks. Thanks for taking my question. I’ll stick with ops here. So my first question, the trade you did kind of core up that La Salle and McMullen acreage. You talked about 10 to 12 additional wells planned for this year. Are those wells you’re not drilling elsewhere. I’m just trying to understand how this trade maybe changed your drilling plans for the year? And then just a follow-up, was there any production that came with that trade that impacted the production guide for the year? Thanks.

Sean Woolverton: Yes. Hey, Tim. I appreciate the question. And yes, we’re really excited about it. In terms of production, I think there was about 500 Mcf a day that was divested off in the trade and then the rest of it was all on acreage. I would tell you that this is a great example of how you have a larger portfolio and you can take advantage of it to unlock value. This block in its entirety, we paid no dollars to acquire 150 locations. In terms of activity, what we’re really excited about is the two wells we drilled last year, the four wells we brought on this year. And those four wells this year are actually responsible for some of the upward tick that we put into our production guidance. What we’re doing is reallocating capital from other parts of the capital plan to this area. So it’s not additive to the capital plan. It just gives us more optionality to shift capital to higher rate of return projects.

Tim Rezvan: Okay. So those wells there, wells you’re not drilling elsewhere this year?

Sean Woolverton: Correct.

Tim Rezvan: Okay. I appreciate that. We look forward to the updates there. Then a follow-up either for you or for Chris on hedges. The company is shrinking the balance sheet, you’re on the cusp of getting kind of leverage to that one times goal. And I know that there’s potential options with the high-yield market out there. And further down the line, just thinking about cash returns. I thought we would have — might see you are layering in some more hedges with the — this trip having kind of moved like it did. So how do you think about hedging as you kind of get closer to the finish line on the deleveraging initiatives?

Sean Woolverton: Yes. No, I appreciate it. During the quarter and since the last time we spoke to everyone, we did layer on some incremental hedges, topping off some oil this year at — in the second half of the year when it was above 80 and then putting some hedges on in ’25. We’re essentially 75% hedged for ’24, and we’re about with 75% of that gas, 67% of its oil. And then next year, we have a pretty strong hedge book as well. Consistent with what we’ve done in the past is, we start to move closer towards ’25, we’ll be opportunistic to start layering in more hedges as the plan for ’25 becomes more clear. Then typically, by the time like where we’re at this year, by the time we get into the drilling program for 2025, I’m sure we’ll be at two-thirds hedged or higher.

I think to your point, and it’s one that as we delever the balance sheet, we’ll start to have more flexibility and not hedging as much. But for now, we’re committed to a pretty conservative hedge program. I think you raised a good point in terms of the accelerated debt paydown giving us optionality. One of the things we did with our second lien is we have an amortization structure to it. So we’re able to pay some of that absolute second lien down throughout the year, which will essentially move debt to our cheaper cost of debt in the RBL. But it also allows us to think about starting to explore the high-yield market. And where we’re at as a company with the transactions that we did last year with the South Texas acquisition, it really positioned us from a size and scale standpoint, a commodity mix and the balance sheet that puts us in a good position to access the public market.

So obviously, that market is hot and it’s something that we’re keeping a close eye on as we go forward.

Tim Rezvan: Okay. I appreciate those comments. If I could sneak one last one in.

Sean Woolverton: You bet.

Tim Rezvan: You gave some comments on the refracs here. To be blunt, refracs have been sort of a mixed bag for the industry over the last sort of 8 to 10 years. And the comments generally you hear from Shale is that you get a stout initial rate and then massive decline. You talked about 10-month paybacks. What gives you confidence on that? And can you talk about what the cost is for these refracs? And that’s all I have. Thank you.

Sean Woolverton: Yes. Thanks, Tim. Your comment around refracs historically and mentioning of 8 to 10 years in my 35 years in the business, I’ve seen probably two or three generations of refracs come and go. And to your point, exactly, oftentimes, you’ll see production ramp and then come right back down. I would tell you that we’ve been probably a little cautious in jumping into refracs. We watched a number of the large operators in the basin perform them. Conoco has had a very aggressive program. Devon, I know has been out talking to the market about the refracs over — in the Eagle Ford over the last couple of years. So we did our first two, learned a lot from what those operators have done. Essentially, we’re going back in, cementing in a brand-new liner and starting over in terms of the completion.

Why we have confidence is, we’ve got the long-term production from other operators that have done it over the last couple of years using similar techniques there that they used on ours. And then we’ve got 60 plus days — about 45 to 60 days of production thus far and production is actually holding fairly steady. One of the things that we are doing is right from the start hitting it with artificial lift to make sure we don’t have that fall off. And I think a mistake many operators make is they implement the capital program and then let the well fall off. So we’re being very proactive on lift. Thank you. Operator, we’ll take our next question.

Operator: Your next question comes from the line of Charles Meade of Johnson Rice. Your line is open.

Charles Meade: Good morning, Sean, to you and the whole SilverBow team there. I wonder if we can go back to this Slide 9 and you’ve talked quite a bit about assembling this position, but I want to talk about the well designs. So that graph you have on the upper right, and I recognize its early days, but that’s a huge uplift in productivity. So the question is, can you talk about what the deltas are of these four wells that you’re graphing there with respect to targeting either different zones or even inside a zone and in different approaches to the completion design.