SilverBow Resources, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the SilverBow Resources First quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Jeff Magids, Director of Finance and Investor Relations. Please go ahead.

[Jeff Magids:]

Thank you, Lashauna, and good morning, everyone. Thank you very much for joining us for our first quarter 2021 conference call. With me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Chris Abundis, our CFO.

[Sean Woolverton:]

Thank you, Jeff, and thank you everyone for joining our call this morning. SilverBow hit the ground running this year. Our first quarter results exceeded our expectations in positioned us to deliver on our key objectives this year and beyond. This morning, I will talk about our recent accomplishments and go forward strategy. Maximizing free cash flow and paying down debt remain at the forefront of our business plan. First quarter free cash flow was $24 million, bringing our trailing 12-month free cash flow to $60 million. The primary use of free cash flow remains debt reduction. SilverBow paid down $30 million of RBL borrowings during the first quarter and $90 million of borrowings from a year ago. Due to continued efficiency gains, flexibility in our drill schedule and favorable pricing, we raise our full year free cash flow guidance to a range of $30 million to $50 million, a 33% increase at the midpoint from our prior range of $20 million to $40 million. Furthermore, we anticipate our leverage ratio to drop below two times by the end of this year. I would also like to highlight the closing of our amended credit facility, which extends our maturity date out to 2024 and provide SilverBow with the liquidity and covenant headroom to continue pursuing its business strategy. Chris will expand on this in his section and I'd like to thank our bank syndicate, including both existing and new lenders for their support. Core to SilverBow's strategy is a well-balanced portfolio of high return inventory and the flexibility to optimize our D&C program real-time alongside dynamic commodity prices. This quarter's update is an example of the plug-and-play optionality we have at our disposal. Without changing our full year CapEx guidance of $100 million to $110 million, we have accelerated and expanded our mid-year oil development program. This accomplishes two things.

[Steve Adam:]

Thank you, Sean. In the first quarter, we completed seven net wells all in our Webb County area. Six of these wells were drilled in the fourth quarter and comprised our second La Mesa pad. Our second pad delivered faster cycle times, pumped more stages per day and came in 13% below our planned capital costs. This La Mesa pad continues to perform in line with expectations and the efficiency learnings and pad design improvements will be carried forward into our future development plan.

[Chris Abundis:]

Thanks, Steve, and good morning, everyone. In my comments this morning, I will highlight our first quarter financial results as well as our hedging program, price realizations, operating costs and capital structure. For the first quarter, revenue was $87 million, excluding derivatives with natural gas representing 78% of production and 73% of sales. For the quarter, our realized oil price was 96% of NYMEX WTI. Our realized gas price was 185% of NYMEX Henry Hub, and our realized NGL price was 39% of NYMEX WTI.

[Sean Woolverton:]

Thanks, Chris. To summarize SilverBow generated meaningful free cash flow and paid down 13% of its revolver borrowings in the first quarter. The company is positioned to continue generating free cash flow and paying down debt for the remainder of 2021 and into 2022. We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices and the recent improvement in oil prices broaden the optionality of our high return inventory. As evidenced by the shift in this year schedule towards that higher oil mix. We expect SilverBow to continue to outperform other small cap peers. Over the past month, expo has been the second best performing stock across all large cap and small cap EMPs. Our winning strategy is focused on solid execution, efficient operations, financial resilience, and a low cost structure. This sets us up favorably given our current outlook for crisis continued strengthening of our balance sheet and positive momentum on Austin Chalk delineation. Our strategy remains intact with multiple catalysts for the future. We look forward to providing further updates on our next call. And with that, I'll turn the call back to the Operator for questions.

[Operator:]

Your first question comes from the line of Neal Dingmann with Truist Securities.

[Neal Dingmann:]

Good morning, guys. Could you talk a bit about maybe potential upside activity and just overall what could happen on that Austin Chalk on that Austin Chalk? And if you continue to have successful results there?

[Sean Woolverton:]

Yes. Good morning, Neal. Good to hear from you. We're going to continue to look at our returns based upon commodity prices and generated cash flows. We remain really committed to live within 70% to 80% of our cash flow in generating free cash flow in excess of $30 million to $50 million. So if our well performance and commodity prices generate more free cash, we could envision expanding our capital program a little bit and keeping our rig running through the full year and in conjunction with that as we plan to drill more Austin Chalk wealth this year, if we see similar success that we saw in our first well, that would also support probably additional drilling to really take advantage of the high returns that the Austin chalk has shown capable of.

[Neal Dingmann:]

And then -- Sean my follow up is it kind of an either or, I mean, if you start, would have fortunately continue to have success there. Would that capital continue to be reallocated from other areas? Or are you pretty set on the spend issue? Could you all talk around that?

[Sean Woolverton:]

Yes. We can tell you that we're very flexible and efficient in reallocating capital. So we're always looking to reallocate capital to our highest rate of return projects. So, as we came into the year, our gas project was supposed to be the best as oils move significantly higher, we've allocated to more liquids programs. But as we look at the Austin Chalk, if we continue to see the follow up wells perform like the first well, our capital costs start to move towards our desired goal of $5.5 million, I think the returns of those projects can actually start to exceed our oil projects. So probably shift our capital back into the Austin Chalk program.

[Neal Dingmann:]

Good to hear. And then just lastly, on talking about kind of on a go forward, I guess, can you talk about M&A a little bit, opportunities you see now what just given the position you're in and just kind of what the market looks like out there.

[Sean Woolverton:]

Yes. As you know, we continue to look for opportunities in the M&A market, both large and small over the past couple of years, we closed a number of smaller transactions, but we'll tell you that we're seeing more activity in the market today than we've seen over the last 24 months. So I think there are opportunities out there with higher prices, more sellers are coming to the market looking to transact. And so we're going to continue to be diligent on the right transaction, but we feel like there's more opportunities in front of us today than there was 12, 24 months ago.

[Neal Dingmann:]

Thanks, Sean.

[Operator:]

You have a question from the line of Charles Meade, Johnson Rice.

[Charles Meade:]

Yes. Good morning Sean to you and your team there. I want to ask a question about the trajectory of debt pay down for the year, and maybe it's also kind of related to the move in the natural gas strip. You guys made a big, made progress in a big chunk in 1Q and you had obviously had that benefit from the onetime storm pricing, I guess you'd call it. But as we look at the remainder of the year, a month ago, I would've said that your next big slug of debt pay down would come in Q4. But, in the last month, the strip for the back half of the year's moved up by $0.25, $0.30 on natural gas. And so it looks like you actually, you will be able to make some progress incrementally 2Q and 3Q, but can you give a sense of what your planning price deck is and what kind of progress you see under that planning price deck?

[Sean Woolverton:]

Yes, yes. We set up the cadence of our capital program, such that we'll see quarter-to-quarter positive cash flows as we come out of the capital spend timeframe. And then as we bring everything back in, we'll see, obviously spend, go up. So the cadence of our program this year probably has us seeing debt that paid down in the second quarter. It'll probably stay flat or move up a little bit in the third quarter, as we have a significant amount of spend around our completion activity of the program that we're currently drilling. And then we'll see a drop again as we enter into the fourth quarter. We are looking at the second half of the year, really seeing exposure to oil. You talk about the move up in oil prices and what our targets are there, we were heavily hedged through the first half of this year on oil. One of the things that attracted us to increase our oil capital allocation is just being exposed to those new volumes, to the higher oil price. And some of that's not hedged in yet. So I do think that if oil continues to move north of $60 where it stands, that we're going to see beneficial cash flows that will help us drive down debt even further. And lastly, I'll tell you, we're really definitely on track to remain – or to move below two times the leverage we stated publicly that it will be by end of year, but we see a pathway there even sooner.

[Charles Meade:]

Right. Right. And then a question about the Austin Chalk and specifically your Slide 24. I see where you guys have your first well, that's southwest -- I don't want to say corner, but maybe edge of Webb County. But you've got this big slug of acreage there in eastern Webb that spans into southern LaSalle. And then that falls outside of I believe that's EOG's outline for what they're calling their Dorado Play, which is that Austin Chalk. Can you talk about what you see technically about whether that big acreage position you have is going to be perspective? Or what are the questions you have on whether that could be a part of the Austin Chalk story for you guys?

[Sean Woolverton:]

Yes, yes. You're correct. The outline of the play on the map on Slide 14 is EOG's Dorado play outline. I will tell you that we do have some logs that cover west of there and east of there, but not really a good detail subsurface information on that larger block. We do know that as you move west to east, the Austin Chalk thins. So that block is still perspective, but comes with risk as it's transitioning from thicker, more pervasive Austin Chalk to a thinner Austin Chalk. So we're still considering, do we conduct some tests there or watch and see what other activity in the immediate area comes about to help de-risk it. But there's potential there, but probably a little bit more risk as you move east of the Dorado line.

[Charles Meade:]

Got it. And just to put some numbers to that, my understanding is, as you said, it's all thick and as you move southwest and down where you guys are, I want to say it's like 400 feet thick. Is that a -- or maybe even more than that and so could you quantify that, how thick it is where you are and what you expect in that in your block further east Webb county?

[Sean Woolverton:]

Yes. Why don't I give Steve the opportunity to answer that question?

[Steve Adam:]

Okay. Thank you, Charles. Down in our area there in the Southwest, the overall chalk, and if we were to consider that to be A, B, C, and D levels, the entire interval, we see it to be close to 700 to 750 feet thick with a little bit of a trending down as you head towards the east it's largely well north of 700 feet. And then when you get down into the more productive intervals, the C and D intervals, you're looking those to be anywhere from 150 to over 200 feet thick combined.

[Charles Meade:]

Got it. So that's a real thick section, but I recognize that as a recognize that as a call up in it. It's going to act differently. But thank you for that detail.

[Sean Woolverton:]

Yes, no, definitely appreciate it. Like we said, there's still some more work to be done. And part of that work over time, both by us and probably others will be is there stack pay potential across this big zone? So we're excited about the hydrocarbon that's in place in determining what the most economic way is to get into the ground.

[Charles Meade:]

Thank you, gentlemen.

[Operator:]

There are no other questions in queue. I'll turn it back over to management for closing remarks.

[Sean Woolverton:]

Thank you for everyone for joining our call this morning and look forward to providing an update in August. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.