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Silverbow Resources First Quarter 2020 Results

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   |    Thursday,May 07,2020

SilverBow Resources, Inc. announced revised full year plans and first quarter of 2020 operating and financial results.

Strategic Highlights:

• Revised 2020 capital budget of $80-$95 million, a decrease of approximately 55% or $100 million, compared to prior guidance range
• Approximately $10 million of operating expense reductions identified for 2020, with additional initiatives underway for potential further expense reductions
• Curtailed approximately 50 million cubic feet per day ("MMcf/d") of natural gas production and approximately 2,000 barrels per day ("Bbls/d") of oil production beginning in mid-March; assessing further curtailments as a result of deteriorating commodity markets and the supporting production economics
• Risk management program includes a mark-to-market ("MTM") value of approximately $45 million as of May 4, 2020, majority of 2020 revenue protected at greater than $57.00 per barrel and $2.60 per million British thermal units ("MMBtu"), and a realization of approximately $38 million in cash from hedge unwinds occurring in the first quarter
• Subsequent to quarter-end, SilverBow closed an acquisition directly offsetting the Company's existing assets bringing SilverBow's combined leasehold to approximately 200,000 net acres in the Eagle Ford

Operating and Financial Highlights:

• Free cash flow ("FCF") of $25.5 million (a non-GAAP measure defined and reconciled below); targeting $40-50 million of FCF for full year 2020
• Net production averaged approximately 228 million cubic feet of natural gas equivalent per day ("MMcfe/d"), with production curtailments implemented mid-March
• Total cash operating expenses of $0.97 per thousand cubic feet of gas equivalent ("Mcfe") (a non-GAAP measure defined below) for the quarter, a 4% decrease from the same period in 2019
• Oil and gas sales of $53.4 million (excluding hedge impact), net loss of $5.9 million, and Adjusted EBITDA (a non-GAAP measure defined and reconciled below) of $46.0 million
• Adjusted EBITDA Margin (a non-GAAP measure defined and reconciled below) of 70%, driven by early operational success to start 2020, partially offset by benchmark pricing declines and production curtailments
• Net debt-to-Adjusted EBITDA (a non-GAAP measure defined and reconciled below) was reduced to 2.02 times

Sean Woolverton, SilverBow's Chief Executive Officer, commented, "Due to ongoing market conditions, we made immediate and decisive changes to our 2020 budget and operating plan. In this market, our focus is on maximizing cash flows, preserving future value and deleveraging the balance sheet. SilverBow's strategy of building a well-balanced mix of both oil and gas locations within a low-cost, single basin remains the same. We continue to take a returns-focused approach to our decision making, by taking near-term actions that align with the current environment our industry is facing while at the same time focusing on long-term shareholder value creation.

"During 2020 and 2021, we plan to significantly increase our cash flow generation, and are targeting FCF of $40-50 million in 2020 and more than $50 million in 2021 based on current strip pricing. With an operating cost structure of less than $1.00 per Mcfe and a hedge portfolio that protects the majority of our revenue for the remainder of the year, we are positioned to navigate the coming quarters with a disciplined approach. Although we anticipate a decline in production and revenue over the next two quarters, our plan is to shift capital allocation to development of our high-quality dry gas assets starting in the fourth quarter assuming economic and industry conditions begin to return to more normalized conditions. Our plan is to ramp up gas production in alignment with improving natural gas prices starting towards the end of this year and continuing into 2021. This strategy will position the Company to efficiently return to operating and financial levels prior to the disruption brought on by the novel coronavirus ("COVID-19") pandemic and the related economic repercussions that have created significant volatility, uncertainty and turmoil in the oil and gas industry.

"At SilverBow our greatest asset is our people. Our proven execution throughout 2019 and into 2020 has solidified our position not just as a cost-and-efficiency-focused company, but as a team with a winning strategy. I want to thank our entire organization for their relentless determination over the past two months. There is no doubt many challenges remain in the months ahead, but because of our employees' and contractors' dedication, we are positioned to weather these challenges and continue to create value for all of our stakeholders."

Ops Highlights

During the first quarter of 2020, SilverBow drilled 11 gross (11 net) wells while completing eight gross (eight net) wells and bringing five gross (five net) wells online. The Company carried forward its capital efficiency into 2020. For the first quarter, SilverBow realized a 48% improvement in lateral feet drilled per day over the full year 2019 average, resulting in a decrease in average cost per lateral foot of 28%. On the completions side, the Company averaged over nine stages per day while increasing the total proppant pumped per day to over 4.9 million pounds per day, a 9% increase over the full year 2019 average.

SilverBow has eight wells in the McMullen Oil area that it intends to complete and bring online based on the commodity price environment; currently these wells are planned to be brought online in the third quarter of 2020.

During the second half of March, the Company elected to curtail approximately 35 MMcf/d of natural gas production. In April, SilverBow elected to increase the amount of curtailed natural gas production to approximately 50 MMcf/d and curtailed approximately 2,000 Bbls/d of oil production. As the year unfolds, the Company will continue to assess and respond to the evolving commodity price environment. SilverBow is focused on optimizing its capital program by adjusting the cadence of its activity through the timing of production curtailment and drilling and completion expenditures. The Company is taking a measured approach to ensure return thresholds are met and preserve optionality in order to respond efficiently once market conditions show signs of recovery.

Production, Realized Prices, Operating Costs

SilverBow's total net production for the first quarter averaged approximately 228 MMcfe/d. Production mix for the first quarter consisted of approximately 79% natural gas, 12% oil and 9% natural gas liquids ("NGLs"). Natural gas comprised 59% of total oil and gas sales for the first quarter, compared to 55% in the fourth quarter of 2019.

Lease operating expenses ("LOE") were $0.28 per Mcfe for the first quarter. After deducting $1.2 million of non-cash compensation expense, cash general and administrative costs were $4.7 million for the first quarter, which compared favorably to guidance, with a per unit cash cost of $0.22 per Mcfe. Transportation and processing expenses ("T&P") came in at $0.32 per Mcfe and production and ad valorem taxes were 5.6% of oil and gas revenue for the first quarter. Both metrics were at or below the low end of guidance. Total production expenses, which include LOE, T&P and production taxes, were $0.74 per Mcfe for the quarter. SilverBow's all-in cash operating expenses for the quarter, which includes cash general and administrative costs, were $0.97 per Mcfe.

The Company continues to benefit from strong basis pricing in the Eagle Ford. Crude oil and natural gas realizations in the first quarter were each 98% of West Texas Intermediate ("WTI") and Henry Hub, respectively, excluding hedging. The Company's average realized natural gas price, excluding the effect of hedging, was $1.91 per thousand cubic feet of natural gas ("Mcf") compared to $3.22 per Mcf in the first quarter of 2019. The average realized crude oil selling price, excluding the effect of hedging, was $45.05 per barrel compared to $56.94 per barrel in the first quarter of 2019. The average realized NGL selling price in the quarter was $12.35 per barrel, compared to $19.30 per barrel in the first quarter of 2019.

Financial Results

SilverBow reported total oil and gas sales of $53.4 million for the first quarter. On a GAAP basis, the Company reported a net loss of $5.9 million for the first quarter. Due to the effects of pricing and timing of projects, the Company reported a non-cash impairment write-down, on a pre-tax basis, of $95.6 million on SilverBow's oil and natural gas properties in the first quarter. Additionally, included in the first quarter's net loss is an unrealized gain on the value of the Company's derivative contracts of $36.9 million and a $1.2 million net tax benefit.

SilverBow generated Adjusted EBITDA of $46.0 million for the first quarter. Adjusted EBITDA is a non-GAAP financial measure. Please see the tables included with today's news release for a reconciliation of net income to Adjusted EBITDA.

At quarter-end, the Company's net debt was $454.4 million, calculated as total long-term debt of $490.0 million less $35.6 million of cash, a $23.2 million reduction compared to year-end 2019.

For the first quarter, SilverBow generated FCF of $25.5 million. FCF is a non-GAAP measure defined and reconciled at the end of this release.

Capital expenditures incurred during the first quarter totaled $51.0 million on an accrual basis.

2020 Guidance & Outlook

In response to deteriorating commodity markets, SilverBow has suspended its drilling and completions activity until prices warrant further investment. Production guidance for the second quarter assumes significant curtailments of both oil and gas volumes. Currently, the Company plans to return these volumes to sales over the course of the third and fourth quarter. For the second quarter, SilverBow is guiding for estimated production of 115-140 MMcfe/d, with natural gas volumes expected to comprise 105-120 MMcf/d, although additional curtailments necessitated by storage constraints, commodity prices or other impacts from the COVID-19 pandemic could result in lower second quarter production. As SilverBow released its drilling rig early in the second quarter, and has deferred bringing to production eight wells, second quarter capital expenditures on an accrual basis are expected to be minimal.

For the full year 2020, SilverBow is guiding to a revised 2020 capital budget of $80-$95 million. The timing of bringing curtailed production back online and turning the eight wells to sales will be optimized to align with higher prices. For the full year, the Company is guiding for estimated production of 164-185 MMcfe/d, with natural gas volumes expecting to comprise 130-145 MMcf/d. Based on current strip pricing, SilverBow is targeting FCF of $40-50 million for the full year, or greater than 75% free cash flow yield using the Company's trailing 30-day weighted average market capitalization. The revised plan provides SilverBow the ability to pivot to gas development in late 2020 and early 2021, with production hedged at prices above the Company's return threshold. This has the potential to generate a meaningful amount of Adjusted EBITDA and FCF for SilverBow in 2021. Regardless of commodity prices, the Company carefully balances the production economics and the net benefit to its borrowing base and its financial covenants before committing to a development program.

Additional details concerning SilverBow's second quarter and full year 2020 guidance can be found in the table included with today's news release and the Corporate Presentation uploaded to the Investor Relations section of the Company's website.

Hedging Update

Hedging continues to be an important element of SilverBow's strategy to protect cash flow. The Company maintains an active hedging program to provide predictable cash flows while still allowing for flexibility in capturing price increases. With the decrease in capital investment, SilverBow elected to tactically unwind a series of oil derivative contracts in 2020 and 2021 above its expected production, resulting in approximately $38 million of cash inflow before the end of the first quarter.

As of May 4, 2020, the Company had 64% of total estimated production volumes hedged for the remainder of 2020, using the midpoint of production guidance. For 2020, SilverBow has 83 MMcf/d hedged at an average price of $2.63 per MMBtu and 2,923 Bbls/d of oil hedged at an average price of $57.40 per barrel. For 2021, the Company has 66 MMcf/d hedged at an average price of $2.33 per MMBtu and 2,068 Bbls/d of oil hedged at an average price of $51.85 per barrel. As of May 4, 2020, the Company's MTM value of its hedge position was approximately $45 million.

Please see SilverBow's Form 10-Q filing for the first quarter of 2020, which the Company expects to file on Thursday, May 7, 2020, for a detailed summary of its derivative contracts.

Capital Structure & Liquidity

As of March 31, 2020, SilverBow's liquidity position was $145.6 million, consisting of $35.6 million of cash and $110.0 million of availability under the Company's credit facility. SilverBow's net debt was $454.4 million, calculated as total long-term debt of $490.0 million less $35.6 million of cash, a 5% decrease from December 31, 2019. As of May 1, 2020, SilverBow had 11.9 million total common shares outstanding. Based on informed discussions with certain of the lenders under SilverBow's Credit Facility, we anticipate a borrowing base reduction of approximately 15% to 20% from the current $400 million borrowing base in connection with the May redetermination.