SilverBow Resources Inc (SBOW) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SilverBow Resources Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

Now I'd like to hand the conference over to Mr. Jeff Magids, Director of Finance, Investor Relations. Please go ahead, sir.

Thank you, Angel, and good morning, everyone. Thank you very much for joining us for our fourth quarter and full year 2020 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 the SEC, which are also available on our website.

With that, I will turn the call over to Sean.

Thank you, Jeff, and thank you, everyone, for joining our call this morning. On behalf of SilverBow, I hope everyone who may have been affected by the weather-related events across the south are doing well. It has certainly been a challenging last few weeks. To start, and will review our impressive fourth quarter and full year results. I will then provide a brief overview of our 2021 business plan.

This past year showcased SilverBow's commitment towards our returns-based strategy. We entered 2020 with the target of growing oil volumes by 70% and generating free cash flow in the second half of the year. By March, the global pandemic in commodity price environment necessitated a different approach to maximize stakeholder value.

In response, we took immediate actions to revise our original 2020 program. Specifically, in the second quarter, we refocused our drilling schedule and temporarily altered our D&C spend. We curtailed production and deferred completion activity, thereby aligning our volumes with higher prices later in the year. By recognizing changes to our production profile over the next 24 months, we brought forward $38 million in cash by monetizing excess oil derivatives in March. Finally, amidst this disruption, we also closed on 2 A&D transactions in the second quarter. By year-end, we have reduced our capital budget by nearly $100 million and paid down $50 million of debt. SilverBow generated more than $60 million of free cash flow over 2020, ahead of the $50 million guidance we stated on our last call.

Fourth quarter free cash flow of $12 million marks 5 out of the last 6 quarters in which we were free cash flow positive. The impressive results were a testament to the hard work and dedication of our team who executed on our mission, even with disruptions to their daily lives. Our operations team renegotiated rates with our service providers and reviewed our cost from top to bottom to find incremental savings. Our corporate office implemented a work-from-home schedule to protect our employees and found new ways to streamline activities and increase our efficiencies going forward.

Thus far, we have identified $2.2 million of cash G&A cost savings for 2021. We also reached a critical milestone in operational safety with 0 total reportable incidents for the year. This is remarkable considering the pace of change within our operations. We are proud to set new standards for safety and efficiency here at SilverBow.

In addition, SilverBow was recognized as one of the top workplaces by the Houston Chronicle. On top of our safety achievements, SilverBow continued to set new operational efficiency records. This past year, we drilled more lateral feet and completed more stages per day, thereby reducing our capital costs per foot, per stage and per well. In face of all the headwinds in 2020, SilverBow delivered record free cash flow, absolute debt reduction and positioned itself to benefit from an improving commodity price outlook.

For the fourth quarter of 2020, net production averaged 178 million cubic feet of natural gas equivalents per day, above the midpoint of our guidance. Our 2020 CapEx of $95 million was at the low end of our guidance. And coupled with favorable pricing and production performance, we generated $12 million of free cash and paid down $23 million of absolute debt during the fourth quarter.

At year-end, the PV-10 value of our proved reserves at $50 oil and $2.75 gas was approximately $850 million, which equates to a $35 share price after backing out our debt. As we look ahead, we plan to hold our full year 2021 capital spend at similar levels to 2020.

Our capital budget range of $100 million to $110 million deliver single-digit production growth and continued debt paydown. Signature to SilverBow, we have the flexibility to adjust the cadence and hydrocarbon mix of our drill schedule and to maintain multiple playbooks to optimize real time. With strengthening gas prices, we are poised to generate another year of meaningful free cash flow and debt reduction. At current strip, we expect full year 2021 free cash flow to be in the range of $20 million to $40 million.

Our gas hedge position over the next 2 years utilizes a heavier mix of collars preserving our upside to improving gas price fundamentals. Given the constructive fundamentals for gas, approximately 40% of our 2021 gas volumes are unhedged. Included in our development plan this year is an Austin Chalk well, which is currently on flowback. We are encouraged by the early results from this test and see the potential for offset locations over our acreage position in Webb County.

Any inventory additions add incremental value to both our future reserves and our borrowing base. Our ground game leasing strategy is focused on accretive A&D opportunities to add locations and extend lateral lengths. Finally, we remain disciplined on larger scale M&A. We believe that the recent move up in commodity prices have brought both buyers and sellers closer to the table.

Before turning the call over, I will add that our 2021 budget is not focused on just 1 year. We are taking the necessary steps to grow production and EBITDA, expand inventory, drive capital efficiencies and delever the balance sheet. Our organizational culture is focused on empowering our team to drive incremental value in everything they do on a daily basis. We have demonstrated a track record of meeting or exceeding our objectives, and we look forward to continue to deliver on our corporate strategy in the years ahead.

And with that, I'll hand the call over to Steve.

Thank you, Sean. Moving on to our operational results. This year, amidst all the disruptions of 2020, our team set new high watermarks in both safety and efficiency. First, I would like to congratulate the team for a recordable incident rate of 0 in 2020, which is not just a milestone, but is now a go-forward standard. At the same time, our team also continued to drive operational efficiencies and recognize cost savings. As shown on slides 19 and 20 of our presentation, we drilled 44% more feet per day and reduced our drilling costs by 32% per foot compared to 2019. On the completion side, we completed 8% more stages per day and reduced completion costs per well by 13%.

In the fourth quarter, we drilled and completed 3 Fasken wells and began drilling our second 6-well La Mesa pad. The Fasken pad achieved a record-setting 18 stages per day and was brought online in December, $3 million under budget. With regards to our second La Mesa pad, we benefited significantly from the process improvement and cost efficiencies we learned from our first La Mesa pad, reducing drilling cycle times by 28%. In short, our team continues to demonstrate its track record of operational execution.

As Sean mentioned, during the second quarter of 2020, we made strategic decisions to curtail volumes and deferred completions. All curtailed wells were back online in the fourth quarter, and we're producing as expected. On a full year basis, we estimate curtailment program amounted to 11 MMcf per day of net gas production and 340 barrels per day of net oil production, which is approximately 8% of both our oil and gas production for 2020.

For the full year 2020, we drilled 19 net wells and completed 15 net wells. Our drilling focus shifted from oil development in the early part of the year to gas development in the second half of the year. Looking forward to 2021, we plan to drill 50 net wells and complete 19 net wells. Our near-term focus over the first half of the year will be on our Webb County gas asset.

Over the summer, we plan to allocate capital to liquids-weighted opportunities in our La Salle condensate area. Later in the year, we plan to shift capital back to our Webb County gas area. As Sean noted, our full year capital budget range is $100 million to $110 million, which we expect to deliver single-digit production growth, positive free cash flow and further debt reduction. From an investment standpoint, we expect our capital incurred to be higher in the first quarter as we complete our remaining La Mesa wells and bring on the Austin Chalk desk.

Having the flexibility to optimize our development program and capture the highest returns throughout the year remains core to our strategy. For the first quarter of 2021, we are guiding to average production of 168 to 179 MMcfe per day with gas comprising approximately 78% of production at the midpoint. For the full year, average production guidance is 180 to 200 MMcf per day with gas comprising approximately 79% of production, up from 76% in 2020. At the midpoint, our full year production guidance targets a 5% increase in production year-over-year. Note that our first quarter gas production has only a few weeks of contribution from our recent La Mesa pad.

Furthermore, we anticipate our oil production to pick back up in the third quarter as our La Salle wells are brought online. While we rejected ethane in January, we switched to full recovery in February and March, and we'll continue to use our optionality to make monthly elections for the remainder of the year to optimize value.

On the cost front, we have several expense projects related to maintenance and production optimization of a portion of our production base, which will result in slightly higher LOE per unit in the first quarter. For a breakdown of our 2021 guidance, please review our latest press release and our corporate presentation on our website.

As we progress through the year, our goal is to continue to improve upon our efficiencies while maintaining safe and environmentally responsible operations. As shown on Slide 6 in our corporate presentation, SilverBow ranks amongst the lowest equivalent emission intensity operators in the Eagle Ford, both public and private. Our incident-free record -- or excuse me, our incident-free safety record now stands at over 1,000 days in county.

Working to ensure the safety of our employees, contractors and service personnel is of paramount importance. This along with a balanced mix of our inventory and the flexibility of our development program, we're integral to our success in 2020 and will continue to be at the core of our strategy moving forward.

With that, I'll turn the call over to Chris.

Thanks, Steve. In my comments this morning, I will highlight our fourth quarter and full year financial results as well as our operating costs, hedging program and capital structure. Fourth quarter oil and gas sales were $53 million, excluding derivatives, with natural gas representing 73% of production and 60% of sales.

During the quarter, our realized oil price was 91% of NYMEX WTI. Our realized gas price was 101% of NYMEX Henry Hub and our realized NGL price was 37% of NYMEX WTI. Due to higher commodity prices, our realized price, excluding hedges, was $3.21 per Mcfe, an increase from $2.72 per Mcfe in the third quarter of 2020 and $3.24 per Mcfe in the fourth quarter of 2019.

Our cash gain on settled hedge contracts was $1 million for the fourth quarter and $78 million for the full year, inclusive of the monetized derivative contract. As of February 26, SilverBow had 63% of total estimated production volumes hedged for the full year 2021, using the midpoint of production guidance. Our expected oil production is 91% hedged with a weighted average price of $46.91 per barrel of oil.

Our expected gas production is 61% hedged with a weighted average price of $2.90 per MMBtu. Our expected NGL production is 46% hedged with a weighted average price of $23.94 per barrel of NGL. Our hedges are a combination of swaps and collars with the weighted average price factoring in the ceiling price for the collars. Risk management is a key aspect of our business, and we are proactive in adding oil and gas basis and calendar month average roll swaps to further supplement our hedging strategy. We continue to use basis swaps to manage our exposure to differentials. For 2021, we have gas basis hedges on 110 MMcf per day with a weighted average differential of negative $0.02.

SilverBow's hedges also provided relief from full year 2020 benchmark prices. Excluding the impact of hedges, we realized an average gas price of $2.06 per Mcf and average oil price of $37.89 per barrel, and a total equivalent price of $2.66 per Mcfe. Including the hedge impact of cash settled derivatives, our average realized prices were $2.44 per Mcf for gas, $51.16 per barrel for oil and $3.25 per Mcfe on a total equivalency basis.

A combination of SilverBow's hedges and production timing resulted in a $0.38 uplift in our realized gas price and a $13 uplift in our realized oil price for the full year. This does not include the impact of our hedge monetization of $38 million received during the first quarter of 2020. While we are encouraged by the relative improvement in benchmark pricing during the fourth quarter and early in 2021, we plan to remain conservative in our capital investment and judicious in locking in favorable return. As shown on Slide 16 of the corporate presentation, we consistently realize prices close to NYMEX benchmarks and maintain favorable basis premiums. This is a key competitive advantage of our Gulf Coast asset base.

Turning to cost and expenses. LOE was $0.33 per Mcfe for the fourth quarter. Transportation and processing costs were $0.27 per Mcfe for the fourth quarter, while production taxes were 5.6% of sales, or $0.18 per Mcfe. All of these costs compared favorably to our guidance ranges. Adding our LOE, T&P and production taxes together, we achieved total production expenses of $0.78 per Mcfe. Continuing our trend of total production expenses of less than $1 per Mcfe, and which we believe stands out amongst our gas-producing peers.

Cash G&A of $3.6 million for the fourth quarter, which excludes stock-based compensation, was below the midpoint of guidance of $4.3 million and more than a 20% reduction compared to the prior quarter and prior year period. Total cash operating expenses, including total production expenses and cash G&A, totaled $1 per Mcfe for the quarter.

For full year 2021, we are guiding for cash G&A of $16.35 million at the midpoint, a 12% decrease from full year 2020. We consider our lean cost structure to be a competitive advantage, which allows us to sustain profitability during periods of volatile commodity prices. As we move through 2021, we intend to identify further savings.

Adjusted EBITDA for the fourth quarter was $38 million. Adjusted EBITDA for purposes of calculating our leverage ratio was $48 million, which includes amortized derivative add backs of approximately $9 million.

In conjunction with unwinding oil derivative contracts related to production periods in 2020 and 2021, SilverBow was able to amortize the $38 million it received in March of 2020 as add-back gains in discrete amounts extending from April 2020 through December of 2021. The amortized hedge gains factor into SilverBow's adjusted EBITDA calculation for covenant purposes over the same time period and, therefore, important for investors and research analysts to understand when tracking our leverage ratio. On our last 12-month or full year 2020 basis, the add-back was approximately $25 million, and our LTM adjusted EBITDA per leverage ratio was $171 million.

Our year-end leverage ratio was 2.5x. In 2021, we will receive an add-back benefit of approximately $14 million for purposes of calculating our leverage ratio. With the continued focus on our balance sheet and free cash flow generation, we are targeting closer to 2x leverage exiting 2021.

As reconciled in our earnings materials, we generated $12 million of free cash flow. As Sean noted earlier, this marks 5 out of the last 6 quarters of positive free cash flow. For the full year, SilverBow generated $61 million of free cash flow, more than $10 million above guidance.

Our net working capital deficit at year-end was $18 million and $11 million cash inflow quarter-over-quarter. Please note that changes in working capital are excluded from our free cash flow calculation. We continue to manage our cash needs from a receipt and disbursement standpoint as we optimize the balance between development activity timing and our liquidity. CapEx on an accrual basis totaled $20 million for the quarter and $95 million for the full year, representing a 64% reduction in full year CapEx year-over-year.

Nearly all of our capital investment in the fourth quarter was associated with our Webb County dry gas drilling. Our 2021 guidance, which Steve detailed in his comments, targets capital spend at similar levels to 2020 with a modest production growth spurred on by the gas wells that have recently come online. Based on our current plan, our 2021 reinvestment rate is between 70% and 80%.

Our fourth quarter cash interest expense of $7 million was down approximately 20% from a year ago, and our full year cash interest expense was down 17% compared to full year 2019. These reductions were due to lower borrowings, effective cash and LIBOR tranche management and favorable interest rates. In 2021, we expect our overhead to continue to decline as we prioritize debt paydown and realize further G&A savings.

Turning to our balance sheet. We've further reduced our total debt by $23 million during the quarter, totaling approximately $50 million of reductions under our revolving credit facility compared to the end of 2020. As of December 31, we had $230 million outstanding under our credit facility, approximately $2 million of cash on hand and $82 million of liquidity. As it relates to our credit facility, there have been positive discussions and active dialogue with our lenders to extend the maturity date of our credit facility in conjunction with our semiannual redetermination. I would like to thank JPMorgan and our full bank syndicate for their continued support. We plan to provide additional details on our first quarter conference call. At year-end, we were in full compliance with our financial covenants and had sufficient headroom to execute our strategy.

And with that, I will turn it over to Sean to wrap up our prepared remarks.

Thanks, Chris. To summarize, SilverBow is set up for growth with similar CapEx to 2020, which leads to free cash flow and debt reduction in '21. We expect SilverBow to continue to outperform other small-cap peers. Our winning strategy is focused on a balanced portfolio, efficient operations, debt reduction and a low-cost structure. We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices. Encouraging results from our Austin Chalk test as well as higher oil prices expand our drilling inventory as well as our strategic playbook over the next several years.

Thank you for joining our call this morning and allowing us to share our results. In the face of uncertainty, we are focused on factors within our control. By concentrating on capital discipline, strengthening our balance sheet and cash-on-cash returns, SilverBow is positioned for greater stakeholder returns. 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.

(Operator Instructions) And our first question comes from the line of Dun McIntosh with JR Co.

I just wanted to kind of start big picture. Congrats on getting the debt down in 2020. It was a particularly challenging year. But what are some of the things that give you confidence that in the repeatability of that program for 2021? And as we kind of think a little longer term for SilverBow, I mean, mid-single-digit growth, paying down debt, is that kind of what we should expect to see from you all going forward? And because we kind of start there?

Yes. Yes, I think you characterized our long-term strategy spot on. Our plan is to deliver modest growth, probably in the 5% to 10% range. That's both on production and EBITDA, while spending within probably 70% to 80% of our cash flow and then using proceeds from the remaining cash flow to pay down debt as we think that's the best way to return value to the shareholders.

Okay. Great. And then, I guess, if you could provide a little more color on the Austin Chalk, guess, what kind of running room do you think you could add there? What do you see in early days that gives you -- that you found encouraging so far?

Yes. No. We're extremely excited about adding the staff pay potential of the Austin Chalk into our inventory and expanding our inventory, specifically in the dry gas window of the Webb County. We're starting to see more and more operators come out in the Western Eagle Ford with Austin Chalk success. Both EOG and SM Energy have had successful delineation programs and are now shifting to development, and SilverBow is fast on that same path.

So we drilled our first delineation well. Capital came in as expected, naturally below what other operators are signaling their target costs are. So we think we continue to lead as the low-cost operator in the basin, and we'll do that on the Austin Chalk.

Results thus far, we're in very early days of flowback, but we're already exceeding our IP expectation on the well. And so we think that this first test is a success and plan to drill additional delineation wells across our position in Webb County. And we think, conservatively, it adds probably another 50 to 75 locations that will be high rates of return projects in the future years at strip pricing.

All right. That's great. And then I guess just for one last one. If you could kind of give some color on what you're seeing in the M&A landscape, some of your smaller cap peers? We're successful in getting deals done in the fourth quarter and at the beginning of the year. And I guess, a little bit on that. But then if you could kind of put it in context with your current inventory and how comfortable you feel there, that'd be great?

Yes. No, I appreciate that. I think we continue to focus on existing asset base, but do believe that our platform of being one of the low-cost operators and one of the few publicly-traded companies that solely focuses on the Eagle Ford assists ourselves as a company that can participate in the consolidation of the Eagle Ford, both in the privates that are looking for exits out of the basin as well as public. We're firm believers in that gaining more scale is critical to driving down our costs and generating returns for our stakeholders.

So that's our strategy. I do think, as I noted in my comments, that more stability in commodity prices is bringing folks closer together on bids and asks. So we continue to be active in the market, continue to talk with a lot of people across the Eagle Ford and we'll, at the right time, get the right valuations. We'll do deals if it makes sense to SilverBow.

(Operator Instructions) Our next question comes from the line of Neal Dingmann with Truist.

Sean, just a quick one, what Dun was saying this. With the -- just one -- not with the bolt-ons with M&A. Remind me, what's your approximate for a lot of your Webb in your other bigger areas, what your kind of NRI or your working interest? And is there opportunities to continue to add more interest on some of that? Is that possible for M&A? What is our -- is that you just can't get out of the hands of folks that have it?

Yes. To be honest with you, across just about all of our positions, we hold 100% working interest. So not much in terms of nonoperated positions to acquire. The one area, the one asset where we have slightly below 100% working interest is on our Fasken property where we're partners with Saka, and they continue to be, I think, very pleased with the asset and have given no interest of selling at this point in time. So we'd love to acquire more nonop position. I think it's the most efficient way to do acquisitions, but at this point, we control and own just about 100% of everything that we own.

Okay. And then I think you had mentioned in maybe press release or maybe we were talking last night, you talked a little bit about potential -- some OFS inflation. I'm just wondering, one, maybe just talk about that a little bit more, what are you expecting for the rest of the year versus maybe what do you see right now?

And then with your rigs and fracs, I know one -- a couple of the Permian -- larger Permian guys suggest that they still kind of call the goldilocks where the prices and inflation is still staying pretty low, but the availability is still very high. So I'm just kind of curious if you wanted to sort of move that a little bit? Or do you have to lock in on some longer rigs and frac operations, so both on the cost and availability?

Yes. And it's probably everyone's different. We were one of the early movers in terms of completing our DUCs. We started completing our DUCs back in July. And then brought our drilling rig on in October. So the reference point all go from is maybe at the low of the market, where others waited until later in the fourth quarter and early this year to pick their activity back up.

So what we're seeing relative to where we were at in the fourth quarter is probably increases in the 5% to 10% range relative, again, to what we did midyear of 2020 and fourth quarter of 2020. And we're just seeing activity starting to pick up across the space and expect that inflation is just a reality.

Got it. Got it. And then could you talk a little bit on -- you mentioned a little on hedging. I'm just wondering, looking quite a way forward, once you have -- it does appear like your free cash flow is continuing in order. So we do definitely think it'll be down around 2x or even better by end of the year. I'm just wondering if that's the case, with your hedging sort of policy still -- because certainly the banks are not going to be pushing to do as much, I'm just wondering if you're thinking about how -- maybe how you're thinking about sort of hedging next year if you are in a bit better leverage position, would you still have the same type of plan? Or would you think about it a bit differently?

Yes. See, it won't -- kind of the basis of our hedging strategy is to look at the returns of our drilling capital and make our allocation decisions based upon pricing that we think we can lock in over the first couple of years. So we always look in advance of our capital program to lock in the first 24 months. So 50% usually achieves that. And so I don't think that strategy is going to change for us. We're always going to look to lock in our returns and hedge the appropriate volumes over the first 24 months.

Okay. And maybe I can just get one more in. Just wondering Webb County continue to be a big area for you all. Could you give sort of your expectations, how you see it today just on returns when I look at maybe Webb versus La Salle? And I don't know if it's too early to have any expectations on the chart. I mean, my math says, I mean, I think even where gas is now, even though we've had a bit of a run-up in oil at $2.75, I think your returns are still quite strong in Webb. So I guess, Sean, that's what I'm getting at is just if you could give us maybe just some broad color on how you're thinking on just returns currently or go forward around, say, strip for Web and La Salle?

Yes. No, I appreciate that. The makeup of the commodity in Webb is essentially 100% dry gas. And at $2.75, returns there are north of 40% and even higher. So that's a good benchmark return for Webb County at $2.75. La Salle, the commodity mix is really 1/3, 1/3, 1/3 and we're seeing strong commodity prices on all phases, including a strong move up of NGL. So that's why we're planning to allocate our summer drilling season capital to our La Salle project. And that the returns there are north of probably 60% at the current commodity prices.

And our next question comes from the line of Jeff Robertson with Water Tower Research.

A question on the Austin Chalk. Is -- are there opportunities to leverage your existing surface infrastructure either gas processing or just drilling locations to enhance the returns if you move toward a development program in the Chalk?

Yes. Yes. Appreciate the question, Jeff. And definitely, one of the reasons we're excited about it is it's all stacked on top of our existing Eagle Ford development. So we're going to be able to leverage both our existing pads as well as the infrastructure, the gathering lines, the compressor stations that we have in place. So that enhances the returns there for sure.

Are there any gathering -- are there any constraints in gathering and processing, right, like dry gas so there's minimal processing? But are there any gathering constraints in that area? Or would you just manage how you would develop the Chalk versus how you would develop Fasken?

Yes. Yes. No, at this point in time, and something we've always said about why we like South Texas is there's plenty of infrastructure and takeaway points. And so with even increased development by us and other operators of the Austin Chalk, we think there's sufficient capacity to take away the growth in production that we could see from the play.

And then lastly, can you talk about any additional wells that would be in the 2021 capital program to target the Chalk?

Yes. I think what I mentioned is our CapEx, we're very pleased with. So as you know, you think about developing the new targets, the first thing you want to understand is that how are your expectations on capital, correct? We were very pleased with our performance on our first well. So we kind of check the box there.

Next is getting the IP. And I think I mentioned we're above our IP target. So now it's to understand the initial decline. We're probably going to give it at least 4 to 6 months of decline to see if we see similar declines, which in other operators, Austin Chalk wells have been flatter than Eagle Ford. And so as long as we exhibit that, we'll probably look to be backed out, drilling another Austin Chalk in the second half of the year. And we'll take a delineation-type approach across our Rio Bravo, Fasken, La Mesa and acreage that we acquired last year that sits in the north -- the east part of Webb.

And now I'd like to turn the conference back over to Sean Woolverton for any closing remarks.

Again, appreciate everyone's interest in SilverBow. I hope everyone is doing well and look forward to giving you an update when we speak again, sharing our first quarter results.

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