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.

Sean Woolverton: Yes. Yes, you bet. This is an area that saw activity stating probably in that 2010, 2014 time frame. Part of the position was owned by Pioneer back then. The trade that we did was controlled by a large operator that hasn’t done much in the area for quite a bit of time. And then the other position was a smaller operator. Just to clarify on it, we put the position together through two acquisitions, again, paid nothing for the inventory. And then the last piece was a trade. Historically, from a drilling perspective, lateral is shorter as you really saw during that time frame. And most of the time, wells were probably drilled in zone anywhere from about 50% to 75%. When we do our look backs on the drilling, we’re probably in zone 98% plus.

So that’s a big part of it is keeping the bit in the wellbore in what’s the most high-quality rock. From a completion standpoint, we almost can look at the refracs numbers that we provide on Slide 10 to get a sense of how these wells were originally fracked. Many of them had cluster spacing of 50 to 100 feet and pretty big significant stage spacing and had proppant intensities probably in the 1,200 pounds per foot or less. So that’s what gets into the area. One thing that we’re doing is we’ve actually started our third and fourth refrac for the year, and those two happen to fall on this block of acreage. So it kind of speaks to how we kind of keyed in here.

Charles Meade: Got it. And then my second — I’m sorry, were you done there, Sean?

Sean Woolverton: I am, yes.

Charles Meade: Okay, good. Yes. My second question is about this proxy fight you have with Kimmeridge. From the outside looking in, one of the obvious things that has worked and kind of continues to work in the E&P space right now is increased scale and that increased scale, there’s lower financing costs, there’s more investors that you can look at you. There’s a number of things that are benefits to increase scale. And that’s one of the most kind of obvious potential benefits of a combination with Kimmeridge Texas Gas. But what are the — what is — what’s on the other side of the seesaw that makes this not an attractive prospect for SilverBow and its shareholders in your eyes?

Sean Woolverton: Yes. No, I appreciate the question. Maybe I’ll start with, hey, listen after probably two-plus years of discussions with Kimmeridge and through analysis with our financial and legal advisers, looking at this would have been the third time we’ve engaged with them. We’re confident that the deal they proposed was not a good deal for our shareholders. It was clear they significantly underestimated the value of SilverBow and simultaneously substantially over evaluated their value on KTG. What I’d say is we’ve repeatedly demonstrated our willingness to discuss potential combinations with any and all parties. And I think we have a compelling path to accelerate our value recognition for the benefit of all of our shareholders.

I mentioned this in my comments, we have an enviable asset base in the basin. In this basin, we’re — we agree with you, we’re big believers in scale. And this basin is rapidly consolidating. We regularly entertain discussions with interested parties. And I’m not going to discuss any specific discussions, but I can tell you that our Board understands its fiduciary duties to do what’s best — what’s in the best interest of all of our shareholders. And our Board and management’s interest, they’re aligned with shareholders. So I’ll kind of say that — maybe I’ll continue on a little bit. We are firm believers in the merits of consolidation and the market is rewarding companies like you said, that have the key ingredients to deliver sustainable value through all cycles.

And we’ve kind of outlined what we have and what we present in terms of that opportunity. The scale we have, the asset quality, the free cash flow generation, our last two quarters, we’ve demonstrated that significant free cash flow that this asset base has. And we have a balance sheet that I think would work well in any combination. So we feel like today we check nearly all the boxes to earn a premium valuation. Listen, we really transformed our asset base and demonstrated our ability to capture value-adding deals to create the scale I mentioned. And at the same time, we’re executing capital discipline to ensure we generate free cash flow. We’re committed to having less than a 75% reinvestment rate in order to maintain that strong balance sheet.

So I guess, I’ll just say, in short, I think we have the right strategy, and we’ll continue to evaluate, and I’ll say this loud and clear any and all paths to deliver value for our shareholders.

Charles Meade: Got it. That’s helpful elaboration. Thank you, Sean.

Sean Woolverton: Thank you.

Operator: Your next question comes from the line of Leo Mariani from ROTH MKM. Your line is open.

Leo Mariani: Yeah, hi. I was hoping you could maybe just elaborate a little bit on sort of the plan to close the value gap. Obviously, you just kind of spoke about scale being important and critical in the sector and that you’re open to the right types of consolidation. But apart from sort of consolidating with another entity, what do you kind of see as kind of the pivotal things the company can do to try to close the value gap in its shares here?

Sean Woolverton: Yes. No, I appreciate that question, Leo. Scale is definitely a criteria that investors are looking for. We feel like the transactions that we’ve done over the last two years have put us into a new level of scale. And obviously, it has attracted interest in the company for that reason. But it’s important to also have a demonstrated inventory of high-quality drilling locations, and for us, even adding to that high rate of return refracs now. So purchasers are looking for deep inventory and public investors are as well. They want to see scale that you have run rate over a long period of time. I think we’re showing that, I think, our low margins, our low cost platform is another ingredient that investors are looking for.

So where do we go now? I think it’s — we’re very disciplined in how we’ve grown to this scale. We primarily leveraged debt to do that. And we’re now aggressively showing the cash flow capabilities of the company in paying down that debt rapidly. And when I say we use debt, we’ve really never been over 1.5 times leverage over the last couple of years, and we’ve taken the company from 2.5 times levered at the start of all these acquisitions. So I think what the market wants to see is demonstration on the scale. Quarter was a record EBITDA quarter. So at $200 million for the quarter, we now have a run rate of $800 million annual. We’re paying down debt quickly. We’re on track to get to one times that — just with no re-rating in the market. Just our conversion of debt to equity should start to attract investors.

And I think we have other levers to pull in front of us, our cost of capital. I think the scale of the company, we can start to look at cheaper forms of cost of capital. And then last but not least, the ingredient that we’re going to look at as we get the balance sheet below one times is a shareholder return program. We think we put all that together. And we think that people should — investors should really be looking at the company and looking at some of our peers and see the upside here.

Leo Mariani: Okay. That’s helpful for sure. And I guess I was hoping you could also maybe just discuss in a little bit more detail the confidence of the company to kind of come out and raise the production guidance after kind of only one quarter here with kind of three quarters to left on the year. Can you maybe just talk about the key things that are allowing you to raise the guidance this year?

Sean Woolverton: Yes. It’s something that it’s always a great position to be in, right? It’s the base is performing well. We have a very active team that’s ensuring that we’re minimizing the decline of the base. So that’s where it starts. And then it’s looking at the capital program. And we think we put a series of slides in the deck and maybe I’ll reference a couple of them. But we continue to drill and complete faster. Slide 13 is a great demonstration of that. And I’ll tell you we’re just really crushing it is on the completion side. Our completion team is now probably getting 80% — 75% to 80% efficiencies meaning that we’re pumping 18 to 19 hours a day. So that accelerated time frame to bring wells on brings more production into the year.

But like I mentioned in my comments, it’s also at a lower cost because of those efficiencies. So it just gives us more capital to work with. So base, capital efficiency, then well performance. We’ve got a couple of slides, Slide 19 and 17 in the slide deck that show wells that we brought on this year that are significantly exceeding our historical well performance or I shouldn’t say our historical well performance, but operators — positions we have acquired from other operators. We point out the production and we’ve already talked a little bit about it on the block, the 25,000 acre block. We’re way outperforming there. Those wells through April now have just really exceeded the expectations. In our Central Oil area that we acquired from Sundance, we’ve had great performance.

That’s shown on Slide 17. And in the Eastern Extension, that was that great deal we did where we put Teal, a private operator, together with the position from Conoco to consolidate that block. We call it Eastern Extension. We brought on some great wells there, and you can see how we’re outperforming historical performance. So base, capital, well performance, we throw in refracs, and we have capital savings that we’re demonstrating from the capital program that are going to allow us to put more refracs in the year. We think we’ll probably do 8 to 10 of those a year. So we’ll do more of them as capital becomes available. If the team continues to save capital quarter-over-quarter that will free us up. And I’ll just say we’ll remain committed, though there’re only a 75% reinvestment rate.

So a lot of detail there, but hopefully it gives you how we view our line of sight and confidence on the forecast.

Leo Mariani: Yes, that’s very helpful for sure. And then just on governance, you spoke to that in terms of some of the changes that you’re making or that you’re planning to make here. What’s kind of the team’s current thinking on the poison pill that’s in place?

Sean Woolverton: The poison pill is something that, hopefully, through all the information that’s been put out there, gives investors some clarity on why it’s there. We’ve got a shareholder that is trying to really force an asset on to our shareholders that they have significant value destruction around. So we were — I’ve been asked this question quite a bit over the last couple of years. This proxy fight has allowed a lot of the, hopefully, information around why it’s out there to give clarity to shareholders. It continues to be something, well, I guess I’ll say, the Board will always evaluate what’s in best interest for our shareholders and we’ll continue to do that. I’ll probably close with saying the poison pill is due to expire the day after our upcoming Shareholder Meeting.

On that front, what we’ve heard from the activist investor is that the poison pills in place to keep management entrenched and that we wouldn’t do a deal around it. It’s been the exact opposite. With the pill in place, we negotiated a deal, went almost to the finish line with that activist investor and they didn’t close. So I think that’s proof that the pill isn’t restricting management or Board from doing a deal. In fact, it brought a deal to the table. So maybe I’ll close with that.

Leo Mariani: Thanks for all the color.

Sean Woolverton: Yes, appreciate the question.

Operator: Your next question comes from the line of Kevin MacCurdy from Pickering Energy Partners. Your line is open.

Kevin MacCurdy: Hey, good morning. Just looking at the 2Q guide, it looks like oil production is kind of flattish after growing significantly in the first quarter and then the full year guide implies more growth. Just kind of curious how the activity plays into that trajectory? And is there any effect from the activity restrictions on the Chesapeake acreage?

Sean Woolverton: Hey, Kevin, good morning. Yes, let me, maybe walk you through some of it. We came into the quarter, brought on a third rig in the early part of the first quarter. Brought on, I think, was it, Jeff, 12 wells in the quarter. But in February, we moved two of the rigs onto a 10 well pad on the Chesapeake asset. So as you might expect, the till turn for second quarter is lower as we complete that 10 well pad. So for the second quarter, we’re anticipating bringing on seven tills for the quarter. So 2Q will be the low. We’re moving in and starting to frac that 10 well pad as we speak. You think about that. These are long laterals. We have well over 500 stages that we’re going to frac there. So with all the frac efficiencies, the team will probably exceed expectations again.

And right now, we’re scheduled to bring that pad on late in 2Q, but maybe we can, with efficiencies, pull it up a little bit. But 2Q will definitely be kind of the low in tills, and then 3Q will ramp as — and 4Q kind of flattens out. We will drop down to two rigs in the second half of the year. So that’s why you start to see 4Q kind of flatten and layer out. The only lever we have to pull and I mentioned it on the question from Leo is we have some refracs that we could do more of those if we want to if we have CapEx that becomes available.

Kevin MacCurdy: Great. And there’s obviously a lot of attention around the shareholder vote and you’ve been pretty clear about your views on the valuation of the KTG asset. Just kind of curious, I mean, you’ve kind of touched on this on your view on M&A and the other transactions you’ve done, but what kind of scale do you foresee being able to add from M&A just instead of the KTG assets?

Sean Woolverton: I probably won’t speak to any specific layer or maybe target there. Would tell you and I think everyone knows this, we’ve been the most aggressive acquirer in the basin with eight deals done over the last couple of years and there’s still plenty to do. So as you look at consolidation in the basin, I think, there’s plenty of opportunities. We’re very diligent around what those deals must look like. We’ve been very vocal around our criteria. It needs to have industrial logic. It needs to deepen our inventory and compete for capital immediately. One of the things that we struggled with the KTG proposal is we haven’t been drilling gas down in Webb county or limited amounts for the past two years. It just doesn’t compete for capital in a 250 world.

In fact, I think KTG may be one of the only companies down there drilling. Others have all pulled their rigs out. So deal has to have inventory that competes for capital and it has to be accretive to our shareholders. So those are the type of deals we’re looking for. And what I’ll tell you is, hey, we recognize that scale is important for either the public investor or for companies looking to do acquisitions. And we’re open to consolidate. We’re open to be a buyer and open to be a seller. So I think that Eagle Ford has a great future in front of it as other basins get consolidated. This one should be the next basin up in our minds.

Kevin MacCurdy: Great. Thank you for the answer.

Sean Woolverton: Yes.

Operator: Your next question comes from the line of Paul Diamond from Citi. Your line is open.

Paul Diamond: Good morning. Thanks for taking my call. Just a quick one I want to touch on Slide 13. The operational plan for the rest of the year, how much of the, I guess, further improvement in some of these metrics are you all expecting? Or is it a kind of run rate from here?

Sean Woolverton: Good question, Paul. I keep thinking that, hey, can you get any more efficient. On the completion side, we’re down to trying to find 5, 10 minute slots. So when you’re fracking 20 hours a day, you do have time where you have to fuel engines back up and run tools in the hole. We’re getting down to where, boy, can you get more efficient. And I’ll tell you all that completion efficiency, we haven’t changed our design in terms of going to smaller stage design. In fact, we’re continuing to enhance it. So completions, team always surprises. Drilling, I think with the scale that we have, we continue to get large the balance sheet, the inventory allows us to do larger pads that generate some efficiency from a drilling standpoint just being on larger pads.

We still think probably optimal for us right now is in that four to six wells range, but there could be efficiencies there. And then having just again the opportunity to go to different inventory, be it gas or oil, we can always and we’ve proven to be very effective on allocating capital to the right returns. So there’s kind of my thoughts. One area that we could add some efficiency gains on is just leveraging the existing infrastructures scale that we have. A lot of the assets that we’ve acquired had infrastructure already there and we’re going back in over the top of them. We’re doing that significantly where we’re drilling Austin Chalk wells over the top of Eagle Ford. So that has some cycle time efficiencies where you don’t have to go back in and build pads, roads and put in new pipes.

So maybe a combination of a lot of things. It’s getting harder and harder, but we’ll keep on grinding at it.

Paul Diamond: Understood. Thanks for clarity. And just one quick follow-up on the refrac opportunity. 100 plus potential targets, how should we think about the economics of those in just a run rate basis? Should we expect or are you expecting similar kind of decreased cluster spacing, proppant intensities like how homogeneous is that opportunity versus a well by well kind of what works best?

Sean Woolverton: Yes. No, great question. Obviously, we’ve done two thus far. We’ve looked at other operators to see how their wells performed to kind of put a risk percentage on consistent performance. We’ll see if we can prove that up. But we’re seeing a pretty high performance from well to well. You do run into risks around mechanical issues going back into wells, but in talking with other operators, they’re seeing high percentage there. So I think it’s probably 75%, 80% plus in terms of mechanical as well as well performance. Would tell you the 100 inventory — the 100 refracs we’ve identified, we’ve looked thus far mainly on our oil assets. We’ve yet to look at our gas assets. And what’s really good and I will keep on saying this is, all these refracs are on assets that we’ve acquired.

The one that we really need to tear into is the Chesapeake asset. Those areas — a big chunk of those wells were done in the 12 to 16 range, kind of where they were just going in and doing the same design again and again and again. So we’re really excited about pulling the onion back there some more. And what’s always great when you do acquisitions is when you unlock even more value on than what you paid for.

Paul Diamond: Understood. Thanks for the clarity.

Sean Woolverton: Yes. Thanks, Paul. Appreciate you. Have a good day.

Operator: [Operator instructions] And your next question comes from the line of Donovan Schafer of Northland Capital. Your line is open.

Donovan Schafer: Hey, guys. Thanks for taking the questions and congratulations on the quarter. I have to admit, I feel like I’m going a little crazy here and pulling my hair out. So, I know you, you don’t want to dwell on the Kimmeridge stuff too much. But — and this is my own view. But, you know, they don’t seem to be, like, particularly good actors with respect to sincerely having interest for the rest of shareholders beyond their own 12% ownership. You put out a detailed chronicle of all of the interactions that you’ve had with them with dates and kind of like a journal or a log, if you will. And you shared that. I think that was part of a response letter you issued at one point, and that was included as, like, an appendix, and I think all of that was filed to the SEC.

So my impression is that is the type of thing that you would not put out there publicly if you weren’t prepared to back it in a court of law and, you know, provide that evidence, emails, whatever, and so forth. And, you know, they haven’t come at you as, like, a defamation lawsuit or something like that. So it doesn’t appear to be the case that they contest it. And that chronicle on its own seems pretty damning in my view in terms of, you know, at least — you know in terms of evidence or at least, just generally indications that these guys are not really people you — a lot of us would necessarily want to do business with. So my question is, am I right on that that chronicle that you put out in that appendix? Is that something that you guys would stand behind hypothetically in a court of law?

Because in my view that’s kind of all you would need to make your point here. But just could you answer that?

Sean Woolverton: Yes. No. Appreciate your thoughts there. A core value for our company is to really work with all stakeholders, from our employees, our service providers that we partner with, our mineral owners and our shareholders. And I would tell you something that we really pride ourselves on and we’ve received this feedback is, hey, we’re honest and transparent company and we view that’s how you do business and it’s really driven a lot of our success. So our focus is we want to stay really driven around adding value and engaging with all stakeholders in good faith and that’s we can stand on that and we think we can. That’s the way to deal with this type of situation. Stay focused on what you do and what you believe and the results will speak for themselves. And we think this quarter should more than demonstrate to investors the strength of the company. So appreciate that question and comment.

Donovan Schafer: Okay. And then turning to scale. So I do appreciate the point with respect to scale and so I’m not pooh poohing or discounting that. But it is — it’s not a perfect straight line in linear relationship, right? Like, you hit these sort of, step changes or inflection points where, if you’re so small, you can’t even keep a rig running on a continuous basis or — so then, like, the first threshold is hitting that point. And then, you know, hypothetically, someday, maybe there’s, like, a threshold where a company is so big it can validate or justify moving upstream or, I mean, downstream and having a refinery or something like. These big step changes, but it’s not this continuous linear thing. And here we’ve got, you said your own words, the completion team’s really crushing it.

So it sounds like you’ve got the scale for bargaining to get fantastic crews and teams and to keep them in your basin and to keep them busy, all these good things. And so, yes, like a 10x scale benefit, like, if you were acquired by an ExxonMobil or something, yes, they can squeeze other things out of it. But is there is there anything I’m missing in terms of is there some scale benefit, like, an uptick, that would just be sort of right around the corner that if you guys were only, you know, 50% bigger or whatever size you’d get with someone like Kimmeridge, like, that there’s just some genuinely thing that would be unlocked by that? Or is it at this size and scale going from one increment to the next? Does it really make such a difference?

Sean Woolverton: No, great question. I think it is the old argument of you just scale for the sake of scale. And I think that’s a dangerous approach to pursue. A company has to be very thoughtful and diligent around doing transactions. You don’t want to do transactions that are destructive to your balance sheet. We’ve said all along that, hey, if we do a deal and we use leverage to do it, we will have a leverage in and around 1.5 times. And we’ll only go to that level if you show a clear line of sight of bringing that leverage down. And that’s what we did with the Chesapeake transaction. We got to 1.6 for maybe 30 days and within a quarter brought it down two clicks. So you got to think about, hey, the way you do scaling is important.

You got to protect the balance sheet. It’s got to bring — you don’t want to pay — what we’ve really loved about our deals is we don’t pay for locations. We look at some of the deals that are out there and some that have been proposed and people are wanting $2 million to $4 million a location or people are paying $2 million to $4 million a location for wells that you won’t drill for six, seven, eight years as you’re waiting for higher commodity prices. That’s just destructive to a balance sheet to do that. So we’ve never paid for locations, which we think is imperative when you scale. And it just has to improve margins and reduce costs. So those are the criteria that we have. I think if you do the right scaling, to your point, it starts to see that uplift and there is a clear trend that investors want scale and/or bigger companies looking to acquire one scale.

But the criteria I took through on an acquisition really successful companies employ that same thought process. So listen we’re going to continue to stay focused. We continue to be open to scale and big cheerleaders of scaling in the Eagle Ford. And we think SilverBow will play an active role in that as we move forward.

Donovan Schafer: Okay. And then if I can squeeze just one more question in. It’s around the idea or the notion of sort of valuation gap as a point of focus. So with public markets and the way the stocks are valued, there are sort of the things you can control and the things that you can’t control. And, I’ve seen — and I think a lot of us on this call, we’ve all seen cases in the past where focusing on “closing evaluation gap” as a point of focus turned out to be the wrong thing. Maybe something could be done for optics. The Whiting acquisition of Kodiak or merger with Kodiak comes to mind. I mean, that was, as far as I can tell, just so that they could say, hey, we are the largest producer in the Bakken. So they could leapfrog Continental and just get that, like, almost literally just for a headline, because they were at a discount to Continental.

And so I was like, look, if we get the headline that says we’re the biggest Bakken producer, we’re going to get that multiple. That was a disaster. So my question is and the depressed valuation, that is high. Gas prices are so low right now, and you got the hedging and everything, which is great. But the Eagle Ford of all basins, the Eagle Ford is somewhere that is just such a beast and can really shine. I mean just the raw quantity of energy that can come out of these wells that only gets economically reflected when gas prices are better. You know that’s like a there’s a sleeping giant component there. And so but you don’t have control, right? Like these valuation things and all that might change or just come around when natural gas prices come back.

And so the question is, is it even, do you think, honestly, sort of in your heart of hearts as a CEO, and maybe this is a sensitive question. But is it is it even right or fair? And let’s say is it fair to long-term shareholders? To shareholders who are looking past just a couple of quarters, is it fair to them to be thinking about, like, “valuation gap” right now at this moment in time?

Sean Woolverton: Yes, I think that’s what a lot of investors are looking for, right, that opportunity to invest in equity, a company that has clear long-term strategy to add value. We talked through on today’s call some of the key metrics of getting there and attracting more investors to the stock. I think SilverBow is on that cusp. We’re on a totally trajectory. We have a ton of momentum behind us. I think you raise an excellent point though. Short-term investors, investors that focus on 30 day type numbers, 60 day type numbers and how things trade over short period of times. They’re probably not seeing the bigger picture. We like to point to, hey, what have we shown in value creation over the long-term. On Slide 5 of our presentation, we lay out what our one year return is relative to our peers, our three year return, our five year return.

And that’s what long-term investors recognize is, hey, if you’re doing — building the right company, putting the right assets in place, having the right people to execute on those assets, and a real strong financial position, investors will come and recognize that value. So that’s where we’re focused on. And maybe I’ll close and just say that, hey, any — SilverBow is the largest public pure-play operator in the Eagle Ford. And so attention on the Eagle Ford, we really want it. Some of what probably what we’re doing right now is drawing attention to it. That’s great. Any further combinations that we do will even make a bigger pure-play Eagle Ford, if we chose to go that route. So anyway, I appreciate all your questions, Donovan.

Operator: There are no further questions at this time. So I’d like to hand the call back over to Sean.

Sean Woolverton: Thank you, Gavin. I appreciate everyone’s interest in the company. Hopefully, you’ll take away from this call that the company had a really great quarter and we have a ton of momentum and we look forward to sharing more information with you. And like I said in my comments, we’re always available. Please reach out if you have any questions that you’d like for us to address. Appreciate it.

Operator: That does conclude our conference for today. Thank you for participating. You may now all disconnect.