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Silverbow Resources First Quarter 2021 Results

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   |    Friday,May 07,2021

SilverBow Resources, Inc. announced operating and financial results for the first quarter of 2021.

Highlights include:

• Net production averaged approximately 180 million cubic feet of natural gas equivalent per day ("MMcfe/d"), above the high end of guidance
• Reported net income of $28 million, Adjusted EBITDA of $63 million and free cash flow ("FCF") of $24 million. Adjusted EBITDA and FCF are non-GAAP measures defined and reconciled in the tables below
• Increased full year 2021 FCF guidance range by $10 million at the midpoint to a range of $30-$50 million¹
• Reduced total debt by $30 million quarter-over-quarter and by $90 million year-over-year; leverage ratio of 2.1x² and liquidity of $113 million at quarter-end. Anticipated year-end 2021 leverage ratio below 2.0x²
• Success of first Austin Chalk well supports further delineation across SilverBow's acreage in 2021; potential to expand existing inventory with additional high-return locations
• The Company's second La Mesa pad, as pre-released, achieved a peak pad production rate of 90 million cubic feet of natural gas per day ("MMcf/d"), further reduced drilling times by 10%, and capital costs were 13% below authorization for expenditure ("AFE")
• Extended the maturity of SilverBow's $600 million senior secured revolving credit facility (the "Credit Facility"), governed by a borrowing base of $300 million, to April 2024; provides ample liquidity to execute business strategy
• Expanded and accelerated mid-year liquids-focused drilling program beginning in April with incremental oil locations added; corresponding production uplift expected in the third quarter of 2021
• Full year 2021 total production guidance range unchanged at 180-200 MMcfe/d; expected full year 2021 oil production increased by 12% at the midpoint reflecting the shift in mid-year development
• Full year 2021 capital guidance unchanged at $100-$110 million, inclusive of expanded oil drill schedule

Sean Woolverton, SilverBow's Chief Executive Officer, commented, "In April, we provided a preview of our stellar results for the quarter. We paid down $30 million of debt, or 13% of our revolver borrowings, and reduced our leverage ratio to 2.1x. We successfully renegotiated and extended our Credit Facility, which provides us the runway to expand our development program and pursue our strategic objectives. We generated free cash flow for the fifth consecutive quarter and raised the midpoint of our 2021 free cash flow guidance to $40 million, a $10 million increase from our prior guidance. Operationally, we continue to see strong performance from our first Webb County Austin Chalk well and plan to drill additional appraisal wells this year, with the goal of increasing our inventory with incremental, high-return locations. The continued capital efficiency gains we demonstrated on our second La Mesa pad should support further upside potential to our stakeholder returns as we apply those learnings and efficiencies across our balanced portfolio."

Mr. Woolverton commented further, "Our plan entering 2021 intentionally included breaks in our drilling program to allow us to assess market conditions and optimize our development plan real-time. With the significant improvement in oil prices over the first quarter, we have allocated capital to drill more oil locations this year than initially planned. This shift in capital will drive improved cash flows. We recently picked up a drilling rig, ahead of our planned summer schedule. Our capital budget remains at $105 million at the midpoint while factoring in our expanded oil development. This is made possible by the improved efficiencies and strong returns we have delivered to-date, and the application of those efficiency learnings going forward. By year-end, we anticipate our leverage ratio to be below 2.0x. As always, our strategy is based on the flexibility to quickly adapt our development toward the highest rate of return opportunities. SilverBow has positioned itself as an in-basin leader generating sustainable free cash flow and strengthening its balance sheet in the pursuit of accretive deals, both large and small."

Ops Highlights

During the first quarter of 2021, the Company drilled one well and completed seven wells in its Webb County Gas area. Six of these completed wells comprised SilverBow's second La Mesa pad, which was drilled in fourth quarter of 2020. The pad's total drilling and completion ("D&C") costs came in 13%, or $5 million, below AFE and 15% below the Company's first La Mesa pad. The cost efficiency gains were a result of further applied learnings from the first pad. The wells were brought online approximately 15 days ahead of schedule and achieved an average pad production rate of 84 MMcf/d over the first 30 days of production ("IP30"). Importantly, both La Mesa pads co-developed the upper and lower Eagle Ford, which supports SilverBow's understanding of constructive interference and minimal-to-no impact from offset well interference and parent-child well performance degradation. The efficiency gains from 2020 carried into the first quarter of 2021 with the faster cycle times on the La Mesa pad and lower AFE costs. These efficiencies ultimately provided SilverBow with both the time and capital to add the Webb County Austin Chalk test during the first quarter of 2021. The Company's Austin Chalk well achieved an IP30 of 13 MMcf/d, exceeding initial expectations and commercial criteria. Given the strong performance and competitive economics exhibited to date, SilverBow plans to drill additional Austin Chalk wells this year.

The extreme cold weather during February 2021 temporarily impacted first quarter production by approximately 2 MMcfe/d. SilverBow was able to mitigate the effect of the storm through numerous pre-planning procedures and existing storm response procedures in place. Per normal practice, the Company maintains a portion of its natural gas sales tied to daily gas indexes. Therefore, the Company did have some natural gas sales exposed to the unprecedented volatility in daily spot prices during the cold weather event in February 2021, resulting in unusually high realized natural gas prices in the first quarter of 2021. The impact of these factors on SilverBow's financial results for the first quarter of 2021 is not expected to recur at this magnitude in future quarters. Notably, the Company continues to operate at a zero total recordable incident rate ("TRIR") despite the weather events in the field.

Scheduled maintenance projects during the first quarter of 2021 resulted in a slight increase to lease operating expenses ("LOE"). Additionally, measures taken to prepare for and recover from the storm resulted in higher than typical expenses. For the first quarter of 2021, the Company offset minor service pricing increases in its D&C activities. On the drilling side, SilverBow has been able to hold service costs flat based on close vendor relationships and existing contracts. On the completions side, costs remain mostly flat as service price inflation has primarily been offset through continued de-bundling of sand and other logistics and consumables. Additionally, the Company has been able to lower facility hookup costs per well by $40,000 on average through improved design processes and utilizing vendors with greater scale and volume discounting.

In mid-April 2021, the Company began its mid-year drilling program targeting liquids-rich opportunities across its McMullen Oil and La Salle Condensate area. SilverBow's expectation is to release the drilling rig in August 2021, and for the wells to be brought online toward the end of the third quarter 2021. The Company then plans to resume its drilling program in the fourth quarter of 2021 with a focus on its high-return gas assets. SilverBow's Austin Chalk well provides compelling economics, and based on initial learnings, the Company plans to drill additional Austin Chalk wells in the second half of 2021 with the ultimate goal of achieving full-scale development that competes with SilverBow's existing inventory portfolio.

Production, Costs and Realized Prices

SilverBow's total net production for the first quarter of 2021 averaged approximately 180 MMcfe/d. Production mix for the first quarter consisted of approximately 78% natural gas, 12% oil and 10% natural gas liquids ("NGLs"). Natural gas comprised 73% of total oil and gas sales for the first quarter, compared to 60% in the fourth quarter of 2020.

LOE was $0.39 per million cubic feet of natural gas equivalent ("Mcfe") for the first quarter. Net general and administrative ("G&A") expenses for the first quarter were $4.8 million, or $0.29 per Mcfe. After deducting $1.1 million of non-cash compensation expense, cash G&A (a non-GAAP measure) expenses were $3.7 million for the first quarter of 2021, with a per unit cash cost of $0.23 per Mcfe. Transportation and processing expenses ("T&P") came in at $0.31 per Mcfe and production and ad valorem taxes were 4.0% of oil and gas revenue for the first quarter of 2021. Total production expenses, which include LOE, T&P and production taxes, were $0.91 per Mcfe for the first quarter of 2021. The Company's total cash operating costs (a non-GAAP measure) for the first quarter of 2021, which includes total production expenses and cash G&A expenses, were $1.14 per Mcfe. SilverBow anticipates total cash operating costs to trend downward throughout the year despite the typical higher unit costs associated with oil production.

The Company continues to benefit from strong basis pricing in the Eagle Ford, while recent conditions have impacted historical averages. Crude oil and natural gas realizations in the first quarter were 96% of West Texas Intermediate ("WTI") and 185% of Henry Hub, respectively, excluding hedging. In February 2021, extreme cold weather conditions across much of the southern U.S. resulted in unusually high spot prices for natural gas. SilverBow's standard practice is to maintain a portion of natural gas volumes tied to daily price indexes, and therefore first quarter realized natural gas prices were unusually high due to unforeseen volatility, and such price fluctuations are not expected to recur. The Company's average realized natural gas price for the first quarter of 2021, excluding the effect of hedging, was $4.98 per thousand cubic feet of natural gas ("Mcf") compared to $1.91 per Mcf in the first quarter of 2020. The average realized crude oil selling price in the first quarter, excluding the effect of hedging, was $55.49 per barrel compared to $45.05 per barrel in the first quarter of 2020. The average realized NGLs selling price in the first quarter was $22.30 per barrel (39% of WTI benchmark) compared to $12.35 per barrel (27% of WTI benchmark) in the first quarter of 2020.

Financials

SilverBow reported total oil and gas sales of $86.7 million for the first quarter of 2021. The Company reported net income of $28.4 million for the first quarter of 2021, which includes a net unrealized loss on the value of SilverBow's derivative contracts of $13.3 million.

For the first quarter, the Company generated Adjusted EBITDA (a non-GAAP measure) of $63.4 million and FCF (a non-GAAP measure) of $24.0 million. SilverBow's Adjusted EBITDA for Leverage Ratio (a non-GAAP measure) of $66.9 million for the first quarter of 2021, which, in accordance with the Leverage Ratio calculation in its Credit Facility, includes gains for the period related to previously unwound derivative contracts totaling $3.5 million.

Capital expenditures incurred during the first quarter of 2021 totaled $33.0 million on an accrual basis.

2021 Guidance

For the full year 2021, SilverBow's capital budget range of $100-$110 million is unchanged. The Company added a rig in April 2021, one month ahead of schedule, to pursue an accelerated and expanded oil development program. The program, which has already commenced, will extend into the third quarter of 2021.

For the second quarter of 2021, SilverBow is guiding to estimated production of 201-213 MMcfe/d, with natural gas volumes expected to comprise 165-175 MMcf/d or 82% of total production at the midpoint. For the full year, the Company is guiding to a production range of 180-200 MMcfe/d, with oil production of 3,500-3,900 barrels per day ("Bbls/d"), a 12% increase in oil production at the midpoint compared to prior guidance.

SilverBow anticipates full year FCF to be $30-$50 million¹, a 33% increase at the midpoint compared to prior guidance. Additional detail concerning the Company's second quarter and full year 2021 guidance can be found in the table included with today's news release and the Corporate Presentation uploaded to the Investor Relations section of SilverBow's website.

Hedging

Hedging continues to be an important element of SilverBow's strategy to protect cash flow. The Company's active hedging program provides greater predictability of cash flows and preserves exposure to higher commodity prices. In conjunction with unwinding oil derivative contracts related to production periods in 2020 and 2021, SilverBow is amortizing the $38 million of cash inflow it received in discrete amounts each month over the same time period that the derivative contracts would have settled. The amortized hedge gains will factor into the Company's calculation of Adjusted EBITDA for covenant compliance purposes through the end of 2021.

As of April 30, 2021, SilverBow had 60% of total estimated production volumes hedged for the remainder of 2021. For the remainder of 2021, the Company has 88 MMcf/d (59% of guidance) of natural gas production hedged, 2,916 Bbls/d (77% of guidance) of oil hedged and 1,590 Bbls/d (48% of guidance) of NGLs hedged. For 2022, SilverBow has 61 MMcf/d of natural gas production hedged and 2,093 Bbls/d of oil hedged. The hedged amounts are inclusive of both swaps and collars, and the percent hedged amounts are based on the midpoint of production guidance.

Please see SilverBow's Corporate Presentation and Form 10-Q filing for the first quarter of 2021, which the Company expects to file on Thursday, May 6, 2021, for a detailed summary of its derivative contracts.

Liquidity

As of March 31, 2021, SilverBow's liquidity position was $113.4 million, consisting of $3.4 million of cash and $110.0 million of availability under the Credit Facility, which had a $310 million borrowing base as of such date prior to the April 16, 2021 redetermination. The Company's net debt as of March 31, 2021 was $396.6 million, calculated as total long-term debt of $400.0 million less $3.4 million of cash, a 7% decrease from December 31, 2020.

In conjunction with its regularly scheduled semi-annual redetermination, SilverBow entered into the Seventh Amendment to the Credit Facility, effective April 16, 2021, which among other things, redetermined the borrowing base under the Credit Facility to $300 million and extended the maturity date to April 19, 2024. For further information, please see the Company's current report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on April 19, 2021.

As of April 30, 2021, SilverBow had 12.2 million total common shares outstanding.

Office Relocation

Effective May 17, 2021, SilverBow will be relocating its corporate headquarters to the Memorial City area in Houston, TX. SilverBow's progressive approach towards adopting new work-place trends and identifying ways to further streamline efficiencies are core to its culture. The new office space will span half the square footage of its previous space, while providing offices for the same number of employees based on a new, permanent flex schedule going forward. Below are SilverBow's current headquarters address and new address: