SilverBow Resources, Inc. (NYSE:SBOW) Q3 2023 Earnings Call Transcript

SilverBow Resources, Inc. (NYSE:SBOW) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Thank you for standing by. At this time, I would like to welcome everyone to the SilverBow Resources Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And at this time, I would like to turn the call over to Jeff Magids, Vice President of Finance and Investor Relations. Jeff, please go ahead.

Jeff Magids: Thank you, Greg, and good morning, everyone. Thank you very much for joining us for our third quarter 2023 conference call. With me on the call today are Sean Woolverton, our CEO, Steve Adam, our COO, and Chris Abundis, 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 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 SEC which are also available on our website. With that, I will now turn the call over to Sean.

Sean Woolverton: Thank you, Jeff, and thank you everyone for joining our call this morning. Third quarter results highlight the success of SilverBow’s growth strategy. Production increased approximately 20% compared to a year ago and exceeded the high-end of guidance. Our oil focused development program has resulted in a year-over-year increase of 80% in oil and a 25% increase in NGL production. Driven by the increase in our liquids production, adjusted EBITDA of $141 million with the highest quarterly EBITDA in SilverBow’s history. At the same time, we generated $18 million of free cash flow and reduced debt by $78 million during the quarter. Finally, our operational performance year-to-date is allowing us to further increase our full year free cash flow guidance to a range of $20 million to $40 million, while at the same time maintaining our full year CapEx guidance.

An overhead view of an oil rig from an offshore drilling platform.

Our results in 3Q provide us with an attractive outlook. Guidance for our base assets excluding any contribution from the Chesapeake acquisition implies a 10% increase in fourth quarter oil production and we anticipate significant free cash generation through year end. With prices now above $3 and with key and with takeaway constraints from Webb County being alleviated. We are once again investing capital in our gas assets. We are currently flowing back a recently completed four well DUC pad in Webb County. And we recently moved one of our two drilling rigs to this gas area. Our fourth quarter investment will set up well for uplift to our gas production in early ’24. Overall, our strong operating platform position SilverBow to continue to grow through multiple avenues.

We have championed the need for validation within the Eagle Ford and recent M&A announcements around the industry have supported this thesis. In August, we announced an agreement to acquire certain oil and gas assets in South Texas from Chesapeake for $700 million. This marks our eighth and largest acquisition over the last two years. The Chesapeake transaction checked all the boxes we look for in an accretive acquisition. First, it enhances scale within our core focus area in the Western Eagle Ford and upon close SilverBow will become the largest pure play public Eagle Ford operator by production. The growth from these assets position SilverBow to exceed a 25% annual growth target in the coming years. Second, we’re acquiring the assets at a discounted PDP valuation, while adding roughly 300 high confidence locations at essentially no cost.

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Q&A Session

This contains our decade plus inventory life, and as locations that will immediately compete for capital in 2024. Third, the production base further expands our commodity exposure with a mix of assets that are spread evenly across oil, gas and NGLS. Finally, we’re financing the transaction accretively through an upsize to our revolver and second lien notes as well as our September equity offering, which will add to our cash funding sources. We see a clear path towards delevering below one times by year end 2024. To wrap up my prepared remarks, SilverBow continues to execute on its differentiated growth strategy, while generating significant cash flow. Our liquids production growth this year, combined with plans to ramp gas production into next year, position SilverBow as a leading Gulf Coast operating platform with the ability to further consolidate and benefit from the pending LNG expansion projects.

Our team has an established track record of delivering on our key objectives through commodity cycles. And I’m very excited about both the near and long-term prospects for the company. With that said, I will hand the call over to Steve.

SteveAdam: Thank you, Sean. In the third quarter, we drilled 10 net wells completed nine net wells and brought nine net wells online. D&C activity was focused on our eastern extension and central oil areas. The team continues to execute on our 23 development programs. And our operational efficiency gains are driving improvements in downtime footage per day and overall well costs. On the drilling side, we continue to see ongoing cost deflation. Casing prices are down approximately 25% to 30% year-to-date, and rig rates have dropped by roughly 20%. As for year-to-date, drilling efficiencies, cost per foot are down 13% or $22 per foot compared to ’22. On the completion side, year-to-date pumping efficiencies are averaging 20% higher compared to ’22 and in the third quarter, we achieved the highest quarterly pumping efficiency so far for ’23.

These gains have been driven by reductions in equipment downtime and other non-productive events. As a result, we’re completing approximately 10% more stages per day on a same-store basis and completing 10% more lateral feet per day as compared to ’22. In aggregate, our total D&C cost in ’23 have been delivered 2% below AFE. We estimate that realized D&C savings are roughly 10% to 15% to-date, with leading edge market rates continuing to indicate further reductions through year end. Specific to oil, which has been the focus of our development program this year, strong well performance continues to drive oil production to new highs. Third quarter oil production increased 24% compared to last quarter, and 80% compared to a year ago. Much of our oil development has focused on properties we acquired over the last two years.

And well performance on these assets is exceeding expectations. Furthermore, ongoing Austin Chalk delineation across our oily acreage adds to inventory upside and possible co-development opportunities with Eagle Ford formation. In our Webb County gas area, we were able to sell into some interruptible capacity during the third quarter. We believe gas capacity constraints are currently being alleviated and expect new pipeline capacity to come online in November. The multi-year takeaway agreements we secured earlier this year setup for continued development in this core area. We remain bullish on longer term natural gas prices and LNG demand growth. As such, we view our Webb County gas area as a cornerstone and continue to expand our inventory through Austin Chalk delineation and organic leasing.

We have now assembled nearly 20,000 net acres with 200 identified drilling locations in one of the most profitable natural gas plays in the nation. Turning to results and outlook. Our third quarter production of 357 MMcfe per day was above the high-end of guidance and represents a 19% increase in production year-over-year. For the fourth quarter, we are guiding to production of 364 MMcfe per day at the midpoint, a 2% increase quarter-over-quarter. We tightened our full year ’23 production guidance to a range of 336 to 342 MMcfe per day, which implies overall production growth of 26% and oil production growth of 94% year-over-year. All forward-looking estimates exclude any contribution from specific assets. Specific to our capital budget, our previously lowered guidance of $400 million to $425 million remains unchanged.