SilverBow Resources Inc (SBOW) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SilverBow Resources Third Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Jeff Magids, Director of Finance. Thank you. Please go ahead, sir.

Thank you, Tabitha, and good morning, everyone. Thank you very much for joining us for our third quarter 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 material. 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. First, we hope that everyone listening is well. I would like to thank our employees and our contractors as well as our vendors and other key stakeholders for their dedication and resilience. We continue to take the necessary measures to ensure the health and well-being of all employees and contractors. Safety strong is of paramount importance.

Let me start by saying I'm incredibly proud of our operational and financial results for the third quarter. SilverBow generated $9 million of free cash flow and paid down $17 million of debt. This marks our third consecutive quarter of generating positive free cash flow and brings our total debt repayment to $37 million since the end of the first quarter.

Furthermore, we are on track to achieve full year free cash flow of approximately $50 million at the high end of our previously stated guidance. This increase to our full year 2020 free cash flow is driven by an increase to the midpoint of our full year production guidance and a decrease to the midpoint of our full year CapEx guidance.

As noted in our press release yesterday, our gas development program is now underway and focused on our high rate of return assets in West County. Additionally, the DUC completion activity in our McMullen Oil area came in under budget and ahead of schedule during the quarter.

SilverBow is favorably positioned going forward with upside to increasing gas prices next year within a strengthening Gulf Coast market. We believe SilverBow is one of a few non-Appalachian public companies that offers exposure to higher gas prices. Furthermore, SilverBow's low-cost structure and competitively advantaged Gulf Coast differentials are driving peer-leading EBITDA margins and free cash flow yields, which we highlight on Slide 24 of our corporate presentation. Looking into 2021, SilverBow is poised to generate meaningful free cash flow and benefit from stronger gas prices.

At current strip pricing, we plan to spend at a reinvestment rate of 70% to 80%, grow production in the same single digits and maintain similar EBITDA levels compared to 2020. Based upon our preliminary '21 budget, free cash flow is estimated to be $20 million to $40 million, with CapEx roughly flat year-over-year. We forecast our production growth to come from our gas assets, with oil and NGLs approximately flat year-over-year.

At our current share price, our guidance for 2020 implies 75% free cash flow yield and a greater than 50% free cash flow yield in '21. We have unhedged volume, along with upside exposure to improving gas prices through the use of collars in our hedging program. The next year's gas curve has now moved above $3, which bodes well for our future prospects.

Not only do we have flush gas production expected to be online in early '21, but we retained optionality to further exploit certain areas within our portfolio. As oil prices have recently pulled back below the $40 mark and uncertainty persists over the near-term oil strip, we are well-hedged on our oil production next year, which bolsters our cash flow outlook.

As we work to formalize our '21 budget, our strategy remains the same. Having a well-balanced portfolio provides us both drilling optionality and the opportunity to pursue accretive corporate and asset-level transactions. We see oil and gas prices as inversely correlated and, thus, our countercyclical bolt-on activity is a key differentiator for us. Furthermore, we are optimistic about underlying gas price fundamentals and continue to manage our balance sheet to provide us with the needed running room to execute our plan.

With that, I'll turn the call over to Steve to provide an operational update. Steve, please go ahead.

Thank you, Sean. In the third quarter, we resumed completion activity in our McMullen Oil area. We brought online 8 new wells. 5 of these wells were DUCs from the first quarter and we were able to complete them nearly 1 month ahead of schedule. SilverBow's total well costs for the 5 DUCs were $8 million below budget collectively. The remaining 3 wells were already completed during the first quarter. However, we deferred bringing them online due to prevailing market conditions.

At the end of the third quarter, we had approximately 20 MMcf per day of net gas production shut-in as part of our strategic curtailment program. In late October, we returned this remaining gas production to sales to align with favorable prices. Thus, our third quarter production levels benefited from the return of a majority of our remaining production curtailments as well as flush production from the wells in our McMullen Oil area.

As noted in our earnings release, SilverBow carried out significant preplanning and contingency practices, also -- and also engaged in rigorous vendor-bidding activities. This helped ensure continuation of our low-cost platform and operational efficiencies, given the activity hiatus in the second quarter. As such, we were able to successfully execute our DUC activities under budget and ahead of schedule. SilverBow continues to identify further cost savings opportunities across both our operating and capital expenses.

Within our operating expenses, labor, compression, saltwater disposal and chemicals have been areas of focus for incremental cost-saving opportunities. Our third quarter LOE on an absolute dollar basis increased by only 4% quarter-over-quarter, in conjunction with a 29% increase in production volumes, mostly higher cost liquids over the same time period.

On a per unit basis, our third quarter production expenses, encompassing LOE, T&P and production taxes, decreased by $0.14 per Mcfe compared to the second quarter.

Within our capital expenses, service pricing remains in a deflationary environment, and the team has been able to find incremental savings through selective debundling of capital costs, such as rig and ancillary services, tubulars, frac sand, horsepower and chemicals. In early October, we added 1 drilling rig in Webb County, targeting 9 dry gas wells spanning our Fasken Upper Eagle Ford and codeveloped La Mesa locations. We plan to have the first 3 well pad online by year-end and are targeting first production from the first 6 well La Mesa pad in the first quarter of 2021.

The first La Mesa pad was drilled and completed a year ago, and through the technical learnings and best practices of that capital project, we believe we can drive an additional 20% savings in drilling costs across this 9-well development program.

From a completion standpoint, SilverBow believes it has adequately optimized the design of these wells. Furthermore, the team still expects to reduce completion costs by approximately 15% through existing vendor support and rigorous planning.

SilverBow continues to monitor and optimize the performance of wells, which were curtailed and subsequently returned to production. To date, wells that have been returned to sales have not experienced any degradation, and in some cases, have exhibited higher production rates compared to pre-shut-in levels.

SilverBow believes that through conservative health management practices aimed at optimizing the reservoir and preserving the wells' frac pack, the team is maximizing the production profile and ultimate recovery of these wells. This positive trend is further supported by data, which has shown wells to be outperforming through the first 120 days after returning to production. We show these results on Slide 17 of our latest corporate presentation.

As a result of cost efficiencies and project execution, as Sean mentioned, we expect to deliver full year 2020 free cash flow of approximately $50 million. Our third quarter production averaged 183 MMcfe per day, which is above the high end of our guidance range. All of the wells that we had planned to bring online during the quarter were producing by the end of August, nearly one month ahead of schedule. This was attributable in part to the operational efficiency gains discussed earlier as well as the elected timing of projects to coincide with favorable market agreements we were able to secure.

For the fourth quarter, we are guiding to a production range of 170 to 183 MMcfe per day, with natural gas representing 73% at the midpoint.

For full year 2020, we are tightening our production guidance to a range of 181 to 184 MMcfe per day, with natural gas representing 76% at the midpoint. Our guidance assumes ethane recovery in October and rejection in November and December, although we will continue to make monthly elections in accordance with commodity prices.

Looking into 2021, we have not committed to any development plans with our vendors outside of the current Webb County gas project. However, based on the latest indications from our budget forecast, we believe we will deliver single-digit production growth on an equivalent basis. This will largely be driven by our gas volumes and holding oil and NGL production flat. We plan to do this on a capital budget similar to 2020 levels, with free cash flow in the range of $20 million to $40 million.

Our goal in the near-term is to repeat the timing, savings and well performance demonstrated with our first 6-well La Mesa pad over the current 9-well development project. While we view oil and gas prices to be inversely correlated over the near term, our diverse portfolio allows us to remain flexible and adaptable to market uncertainties in our operations. As such, we continue to operate with a returns-driven mindset in regards to any future development.

With that, I will turn it over to Chris.

Thanks, Steve, and good morning, everyone. In my comments this morning, I will highlight our third quarter financial results as well as our hedging program, price realizations, operating costs and capital structure.

For the third quarter, revenue was $46 million, excluding derivatives, with natural gas representing 71% of production and 51% of sales. During the quarter, our realized oil price was 92% for NYMEX WTI, our realized gas price was 100% of NYMEX Henry Hub and our realized NGL price was 31% of NYMEX WTI. Our realized hedging gain on contracts for the quarter was approximately $8 million.

Based on the midpoint of our guidance and our hedge book as of October 28, our total estimated production is 71% hedged for the remainder of 2020. Our gas production is 74% hedged with a weighted average price of $2.67 per MMBtu, and our oil production was fully hedged with a weighted average price of approximately $44.88 per barrel. Assuming the midpoint of our 2020 full year guidance is held flat through 2021, our gas production is 48% hedged, with a weighted average price of $2.87 per MMBtu. And our oil production is 79% hedged, with a weighted average price of $47.43 per barrel.

Notably, our hedges are a combination of swaps and collars with a weighted average price factoring in the ceiling price. Risk management is a key aspect of our business, and we are proactive in hedging -- we are proactive in adding oil and gas bases and calendar month average roll swaps to further supplement our hedging strategy. In fact, SilverBow is one of only a handful of companies that hedged the CMA role before the recent downturn in oil prices.

In order to protect the returns of our future gas projects, we layered on gas basis swaps subsequent to quarter end, extending our protection into 2022. SilverBow's hedges also provides relief from the third -- from third quarter benchmark prices. Excluding the impact of hedges, we realized an average gas price of $1.98 per Mcf, an average oil price of $37.45 per barrel and a total equivalent price of $2.72 per Mcfe. Including the hedge impact of cash settled derivatives, our average realized prices were $2.37 per Mcf for gas, $44.36 per barrel for oil and $3.19 per Mcfe on a total equivalency basis. A combination of SilverBow's hedges and actual volume produced during the quarter resulted in a $0.39 uplift in our realized gas price and a $7 uplift in realized oil price. As shown on Slide 14 of the corporate presentation, we consistently realize prices close to 9x benchmarks.

Turning to costs. Lease operating expenses were $0.31 per Mcfe. Transportation and processing costs were $0.30 per Mcfe. Production taxes were 5.5% of oil and gas sales. Adding our LOE, T&P and production taxes together, total production expenses were $0.76 per Mcfe, continuing our trend of total production expenses of less than $1 per Mcfe.

Cash G&A costs for the quarter were $5 million, a 5% decrease from the prior quarter. In September, SilverBow implemented corporate cost reduction initiatives. As a result, we expect to save approximately $2.5 million in annualized G&A cost on a go-forward basis or a 14% decrease over the next calendar year. We consider our lean cost structure to be a competitive advantage, allowing SilverBow to sustain profitability during periods of volatile commodity prices.

Adjusted EBITDA for the quarter was $36 million. As reconciled in our earnings materials, we've generated $9 million of free cash flow. As Sean said earlier, we have reported positive free cash flow for 3 consecutive quarters, and I would add, this marks 4 out of the last 5 quarters of achieving free cash flow.

Turning to our balance sheet. We've further reduced our total debt by $17 million during the quarter and have now paid down $37 million of borrowings under our revolving credit facility since the first quarter of this year. As of September 30, we had $253 million outstanding under our credit facility, approximately $1 million in cash on hand and $78 million of liquidity.

Subsequent to quarter end and effective November 2, we completed our semi-annual redetermination of our credit facility. The net impact was a 6% reduction in the total borrowing capacity from $330 million to $310 million. Additionally, the maximum leverage ratio covenant was amended to 3.5x. I would like to thank our lead bank, JPMorgan and our full bank syndicate for their continued support.

At the end of the third quarter, on a pro forma basis for the credit facility changes, we were in full compliance with our financial covenants and had sufficient headroom to execute our strategy. Our cash interest expense was down approximately 20% from a year ago primarily due to lower interest rates and decreased volumes, which we expect to continue into 2021.

At the end of the third quarter, our net working capital deficit was $8 million, a $1 million cash inflow quarter-over-quarter. Given the restart of our drilling and completions activity, we continue to manage our cash needs meticulously from a recept and disbursement standpoint. Please note, changes in working capital are excluded from our free cash flow calculation.

Capital expenditures totaled $20 million on an accrual basis. The bulk of our capital spend in the quarter was associated with the completion of our remaining McMullen Oil wells. Thanks to further capital expense savings identified by our team, we have highlighted our full year capital budget guidance to a range of $95 million to $100 million or a $2.5 million decrease to the midpoint of our previous guidance range.

The remainder of our 2020 capital budget is earmarked for D&C activity in Webb County in the fourth quarter. As we work to finalize our budget for the next year, our preliminary expectation is that our 2021 capital budget will remain approximately flat year-over-year.

In conjunction with unwinding oil derivative contracts in 2020 and 2021, SilverBow was able to amortize $38 million it received in March in discrete amounts extending from April 2020 through December 2021. The amortized hedge gains factor into SilverBow adjusted EBITDA calculation for covenant purposes over the same time period.

For the third quarter, the add-back was approximately $9 million. On a last 12-month basis, the add-back was approximately $16 million, bringing our last 12-month adjusted EBITDA for its covenant purposes to $181 million and our leverage ratio to 2.5x. In total, we will receive a benefit of approximately $25 million in 2020 and $14 million in 2021 for purposes of calculating our leverage ratio.

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

Thanks, Chris. To summarize, SilverBow is set up to generate meaningful free cash flow for the remainder of 2020 and through 2021. We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices, particularly if oil prices remain subdued, given the decline in associated gas production and self-imposed limitations across the industry on drilling and completion reinvestment rates.

Due to our relative staying power and cash flow visibility, we expect SilverBow to continue to outperform other small-cap peers. 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 as well as the potential to consolidate and operate a larger asset base. Our strategy remains intact with multiple playbooks for the future.

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, preservation of our balance sheet and cash-on-cash returns, SilverBow is positioned for greater shareholder 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) The first question is from the line of Dun McIntosh with Johnson Rice & Company.

I had a question around -- maybe give some more color around '21. It sounds like you've got the next 9 gas wells coming on. It should give you a strong entry point into a good tape. But where does that rig go kind of after that? Or what you're thinking about now anyway? And is the focus going to be predominantly on dry gas?

And then maybe one step further, with the -- you achieved some pretty impressive savings during the third quarter. Does that kind of allow you to run a single rig for the entire year? And is there a point in which you would think about putting a second rig out there? Is that kind of predicated on your reinvestment ratio or reinvestment numbers, kind of 70% to 80% cash flow?

Yes. Yes, thanks for the question, Dun. Yes, for now, our strategy is staying at a reinvestment rate that spends about 70% to 80% of our free cash flow. Assuming gas prices move up higher that would give us additional cash flow to continue to run the 1 rig for the full year. And obviously, based upon performance on lower cost, if that improves our balance sheet position even more, we'd look at a second rig. But for now, we're going to stay consistent to being disciplined around our spend. We think that going at single-digit to low-teen rates is appropriate for a company of our size, and we want to continue to return value to the shareholders right now through debt paydown.

Okay. Great. And then next question will just be on M&A or A&D. I know that you are always looking. There have been quite a number of larger transactions, but there's been some interesting smaller deals, too, here in the past few weeks. How do you think about -- are there certain small private equity assets that could be interesting that you might want to -- you can maybe use your stock for? Just how -- what's going on, on the M&A front?

Yes. I think we are strong believers that consolidation needs to occur within each basin in the U.S., and we feel strongly that SilverBow could be a strong consolidator or basin champion for the Eagle Ford. So we have and continue to be active in looking at opportunities.

I would say that there's really 2 things that we looked at. First is valuation. And so we're not willing to acquire assets just for the sake of getting scale. We always want to make sure that we're acquiring assets at a fair value and at a value that's favorable to our go-forward plans.

The second is accessing capital. Capital remains stingy within the space. We're not willing to step out and pay excessive capital fees to secure an asset acquisition. So those are the 2 things that we continue to look at, is valuation and cost of capital to get a transaction done.

And sir, your next question is from the line of Neal Dingmann with Truist Securities.

Sean, my first question, just on -- it seems like these DUCs you brought on certainly were -- quite came in -- quite a bit cheaper than expectations. Just what was the largest driver? Is it more on efficiencies or OFS costs? I'm just curious. On details, you did a nice job there.

Yes. Much of that's under the direction of Steve's leadership, so I'll give him the pleasure of giving you a response.

Well, thank you, Sean. First of all, I want to complement our -- and thank you also, Neal, for the question. I want to complement our team and our vendor support for being able to pick up. After the hiatus, we were able to take the efficiencies we had and even improve upon them from there.

To be more specific to your question and even to give a little background, last conference call, we guided to around 35% of those structural costs being savings. And now we're in a position where it's a little over 50% of those savings, not only being structural but being sustainable from a go-forward opportunity.

And so to break down to your question now specifically, Neal, around half of those cost savings were advancements in efficiencies that Sean alluded to earlier in the prepared remarks, and then about 30% to 40% of the remaining of that is all predicated to unit costs and how we've selectively debundled those. So that's what's getting us to now a weighted average of more than 50% as a runway forward for the sustainabilities. And when I talk about these debundled services, we're talking about some base unit costs that were the cheapest that I've seen in the history in terms of horsepower and chemicals. And then when you look at some of the logistics and handling scenarios relative to -- expand on a debundle basis, we were able to get it lower than, on average, $0.028 per pound and in some cases, down to $0.022 per pound. So that's what's giving us the confidence now and going forward on some of the unit costs that are sustainable and, obviously, the process advancements.

Great details. And then just a follow-up. Sean, can you talk about -- it seems like -- it sounds to me like that '21 plan is certainly going to focus mostly on Webb. Is that likely to be the sole focus or is it again driven by your free cash flow? Or are there -- or prices? I'm just wondering, can you maybe -- I know you haven't said too much more on Webb. I'm just wondering if you can -- any more details you could shed on '21?

Yes. The strongest returns in our portfolio at current pricing, both on the gas and liquid side, definitely are in Webb County. So we're going to get this 9-well program implemented. We'll pause, kind of look and see what gas price is, how they're shaping up for the second half of '21, assuming that they hold or move even stronger. We'll go -- we'll pick a rig back up and go back into Webb.

We also have some strong returns in Southwest La Salle, that's a mix of liquids and gas. So we may end up spending some capital there as well. And obviously, our portfolio allows us if there's, for some unforeseen reason, a shift to much higher oil prices, we may readjust that plan and move the rig back up in either on Dimmit asset or McMullen Oil asset.

(Operator Instructions) And your next question is from the line of Ed Ajudier , private investor.

I'm just trying to reconcile the amazingly -- significant increases you're going to put on in production, both first quarter from the 3-well pad and then, essentially, second quarter from the 6-well pad La Mesa. To your comment in the -- in conclusion, that you still project that your production will increase by just single digits next year. When I look at the numbers, that would be making reasonable estimates of what would be coming on just from those 2 projects. I don't know. How you could bring those on and still only have single-digit production gains. I wonder if you can help me with that.

Yes. No, appreciate the question, for sure. Year-over-year, we're reflecting that single-digit growth. Keep in mind that we're looking to hold liquids flat and we'll get a strong boost in gas production, especially like you commented on early in the year from this 9-well pad. But as we look at our shallower base decline and then the higher declines that we'll expect up for these new wells, that's what we're coming up with. I would reiterate that typically, we're conservative in our forecast, and want to make sure that we hit the guidance that we give to the Street, that quarter-over-quarter, year-over-year. So we'll adjust those forecasts if we're seeing things differently. But for now, our best estimate is single-digit growth.

Okay. That's very helpful. One other question. On the capital side, there's been some -- I know it's still tough on the bond front, but there has been at least some movement with larger companies such -- Comstock did some very successful bond financings. I know they're much larger than you. But your numbers -- you have better debt metrics than they do, I think. So the question I'm wondering is, is how far away do you think you might be -- and if it does open up to the possibility of trying to do an unsecured bond issue with the goal of paying down your revolver significantly, such that you don't have to keep playing this quarterly or semiannual gains of sweating out the redetermination and all that and just pay the whole thing -- or much of it down anyway, say, $100 million or $200 million of it down all in one shot, get it -- unsecured note and go in that direction. Is there any thought about that? Or is it -- if that were to open up, would you think along those lines or not?

Yes. No, definitely. We are always thoughtful around our balance sheet and how to structure it that gives us -- it's a trade-off of liquidity versus the cost of capital. So company of our size -- we have to look at our credit rating that we could secure and what the cost of capital would be for that bond. But what you've laid out there is a thesis. That's definitely something we would consider. And I think it's -- we have to measure what the cost of that would be versus the risk of getting it executed.

I would tell you that for now, we feel comfortable where we're at in terms of our debt structure. Our second lien isn't maturing until late 2024, so we have significant time there. We continue to have a very strong and constructive relationship with our bank group. So we're comfortable where it's at, but we're always looking at the market and assessing what's the best thing for our balance sheet.

And sir, there are no further questions. Do you have any final comments?

No. Again, I always appreciate the opportunity to share the SilverBow story with the investor groups and folks that are dialed in. And look forward to giving you an update on our next call. Thank you, everybody.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.