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Silverbow Resources Fourth Quarter, Full Year 2021 Results

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   |    Thursday,March 03,2022

SilverBow Resources, Inc. announced operating and financial results for the fourth quarter and full year 2021.

Highlights include:

• Reported net production of 250 million cubic feet of natural gas equivalent per day (“MMcfe/d”) (74% natural gas) for the fourth quarter of 2021, at the high end of guidance. Oil and gas sales increased 52% quarter-over-quarter driven by increased production and higher commodity prices

• Recorded net income of $114 million, Adjusted EBITDA of $82 million and free cash flow (“FCF”) of $53 million¹ for the fourth quarter of 2021. For full year 2021, SilverBow recorded net income of $87 million, Adjusted EBITDA of $246 million and FCF of $84 million¹, representing a FCF yield of 22%². Adjusted EBITDA and FCF are non-GAAP measures defined and reconciled in the tables below

• Delivered double digit growth for full year net production and Adjusted EBITDA, year-over-year, as the Company scales in an efficient manner

• Capital expenditures of $131 million, on an accrual basis, representing a full year 2021 re-investment rate of 60%³. This is the second consecutive year delivering a re-investment rate of approximately 60%

• Closed three accretive acquisitions during the second half of 2021 for a total consideration of $138 million, which significantly increased SilverBow's cash flow, its year-end reserves and its de-levering efforts. The acquisitions added over 215 net locations across a balanced commodity mix spanning both the Eagle Ford and Austin Chalk

• Increased borrowing base under the Company's senior secured revolving credit facility (“Credit Facility”) to $460 million, an increase of nearly 50%, and repaid $50 million of SilverBow's Senior Second Lien Notes (“Second Lien”) in the fourth quarter of 2021

• Reduced leverage ratio to 1.25x⁴ at year-end 2021, down from 2.5x at year-end 2020. Reduced outstanding long-term debt from $430 million to $377 million, a 12% decrease year-over-year

• Increased liquidity by more than $150 million, or nearly 200%, for full year 2021, with $233 million available under the Credit Facility as of December 31, 2021

• Deep inventory of high quality drilling locations providing over 10 years of development at a 1-rig pace

• Year-end 2021 total estimated proved reserves were 1.4 trillion cubic feet of gas equivalent (“Tcfe”) (46% proved developed; 82% natural gas), a Standardized Measure of $1.6 billion and a pre-tax present value of future net cash flows discounted at 10% (“PV-10 Value,” a non-GAAP measure)of $1.8 billion utilizing Securities and Exchange Commission (“SEC”) pricing. Proved reserves and PV-10 Value increased 28% and 245% year-over-year, respectively

Sean Woolverton, SilverBow’s Chief Executive Officer, commented, “This past year presented a number of challenges which SilverBow turned into opportunities. We were well positioned to take advantage of rising commodity prices given our lean cost structure and our hedge strategy utilizing more two-way collars to fulfill hedge requirements. As a result, we delivered record free cash flow of $84 million for the fiscal year, cut our leverage ratio in half to a conservative level of 1.25x and increased our liquidity by $150 million year-over-year. Furthermore, the three acquisitions we closed in the second half of the year allowed us to quickly scale our cash flow without having to expand our capital guidance for the year. Through organic development and the aforementioned acquisitions, we expanded our drilling inventory of high-return oil and gas wells across the Eagle Ford and Austin Chalk, the latter of which have shown promising returns within our portfolio. The market began to take note of our successes this year as SilverBow's share price increased over 300% in 2021.”

Mr. Woolverton stated further, “As we look to 2022 and beyond, there is a rich opportunity set for SilverBow. Our full year guidance implies a free cash flow yield of approximately 20%, which would fund our current development plan and provide for further debt reduction. SilverBow remains active in identifying opportunistic acquisitions that increase the Company's scale and bolster its inventory over the long-term. The momentum of our recent acquisition announcements and ability to consummate the right transactions at the right time and at the right price is a conduit for SilverBow to continue consolidating its South Texas position. Our decision to run at a full-rig pace for the entire year will result in further operational efficiencies and supports organic double-digit growth while re-investing approximately 70% of our cash flow. Our Webb County Austin Chalk and growing portfolio of liquids-rich assets will be a focal point of our 2022 operating plan. Maintaining a conservative balance sheet and leverage profile remain a top priority, and thus we expect to achieve a sub-1.0x leverage ratio by the end of the year.”

Operations Highlights

During the fourth quarter of 2021, SilverBow completed and brought online five net wells. There was minimal drilling activity in the fourth quarter related to one gross non-operated well. For the full year, the Company drilled 18 net wells, completed 24 net wells and brought 24 net wells online.

The Company finished drilling one well in its Webb County Gas area January of 2021 and released its one drilling rig thereafter as part of a planned pause in development activity. In April 2021, SilverBow elected to accelerate and expand its planned mid-year liquids development program. This decision was based on favorable commodity prices and completion activity running ahead of schedule and under budget on development projects during the year. The Company’s liquids development was focused primarily on its La Salle Condensate and McMullen Oil areas and comprised 11 net wells drilled and completed during the year. Additionally, five net Webb County Gas wells were incorporated in the expanded mid-year development and were drilled in the third quarter of 2021. The drilling and completion activity over the second and third quarters drove production growth and higher cash flow in second half of year. SilverBow released its sole drilling rig in September, and had no operated activity until the resumption of drilling at its Webb County Gas area in late December.

In total the Company drilled six net operated wells in its Webb County Gas area in 2021. Of these, three net wells were in the Austin Chalk, a zone which the Company has been focused on proving up for future development. The Austin Chalk wells in Webb County continue to exceed expectations and exhibit strong commercial economics. SilverBow brought a fourth Austin Chalk well online in early 2022 in its Webb County Gas area, further enhancing its ability to deliver consistent and repeatable results across the position. The first well has produced approximately 3.7 billion cubic feet of natural gas in its first year. The Austin Chalk wells averaged 7,500 foot laterals with drilling and completion (“D&C”) costs of $727 per lateral foot, which compares favorably to recent Austin Chalk results from nearby operators. Given that D&C activity in the Austin Chalk to-date has focused on single-pad, delineation wells, SilverBow expects to realize greater cost efficiencies for future full-scale development. In the La Mesa and Fasken fields, multi-zone pad development efficiencies led to lower drilling and completion costs as the Company continued to leverage its technical experience and long operating history in the area. SilverBow also elected to participate in three gross non-operated wells in Webb County which were drilled in the third and fourth quarters of 2021 and will benefit from production in early 2022.

The Company closed three acquisitions in the second half of the year. From the closing of each of these respective acquisitions, in aggregate, SilverBow added 286 barrels per day (“Bbls/d”) of liquids and 4.5 million cubic feet per day (“MMcf/d”) to the Company’s full year net production. Additionally, the acquired assets provided SilverBow a deep runway of future oil and gas development locations in the Eagle Ford and Austin Chalk. The Company added more than 200 net drilling locations from acquired assets in 2021, with further inventory upside potential based on optimizations to well costs, spacing and lateral lengths given the highly contiguous lease footprints with SilverBow's existing acreage. The Company is working to integrate these new assets into its low cost structure and should benefit from greater operating cost synergies due to increased size and scale. The acquisition activity in 2021 reflects a continued focus on identifying opportunities to add to core positions in high-return areas.

SilverBow’s asset management program seeks to optimize recoverability and operating costs from producing wells. The Company proactively invests in workovers, compression and artificial lift installations and other enhancements to maintain production output, improve its base decline and lower field operating costs. Furthermore, SilverBow prioritizes operational safety and maintains a goal of zero total recordable incidents. The Company's production operations group recently celebrated its five year anniversary with zero OSHA recordable accidents.

SilverBow has spent last several years positioning its inventory and development plans to be flexible. This has allowed the Company to align with prevailing commodity prices, and to drive greater operational efficiencies by concentrating its efforts in areas in which the team possesses deep technical expertise and experience. Across all of its operating areas in the Eagle Ford in 2021, SilverBow drilled 10% more lateral footage per day while lowering completion costs per well by 17% as compared to 2020. The Company's demonstrated success in increasing field efficiencies, reducing cycle times and lowering costs is a direct result of its operational and supply teams working with vendors to negotiate prices and logistical considerations for the materials used in its operations. As a result, SilverBow's drilling and completion costs per lateral foot in 2021 decreased by 13% as compared to 2020. Although the rate of operational efficiency gains are anticipated to slow as the Company approaches field level limitations and focuses on developing newly acquired acreage requiring potentially longer transition times, maintaining and improving upon the efficiency gains to-date is core to SilverBow’s cost mitigation efforts within an inflationary service cost environment expected in its near-term outlook.

Production and Realized Prices

SilverBow's total net production for the fourth quarter of 2021 averaged 250 MMcfe/d, at the high end of guidance. Production mix for the fourth quarter consisted of 74% natural gas, 14% crude oil and 13% NGLs. Natural gas comprised 63% of total oil and gas sales for the fourth quarter of 2021, compared to 60% in the fourth quarter of 2020.

For the fourth quarter of 2021, lease operating expenses (“LOE”) were $0.37 per thousand cubic feet of natural gas equivalent (“Mcfe”). Transportation and processing expenses (“T&P”) were $0.30 per Mcfe and production and ad valorem taxes were 4.8% of oil and gas revenue for the fourth quarter of 2021. Total production expenses, which include LOE, T&P and production taxes, were $0.99 per Mcfe fourth quarter of 2021. Net general and administrative (“net G&A”) expenses for the fourth quarter were $6.9 million or $0.30 per Mcfe. After deducting $1.2 million of non-cash compensation expenses, cash general and administrative (“cash G&A”) (a non-GAAP measure) expenses were $5.7 million for the fourth quarter of 2021, or $0.25 per Mcfe. SilverBow closed three accretive asset acquisitions in the second half of 2021 without adding any incremental general and administrative expenses. Therefore, greater efficiencies are expected going forward on a per unit basis which supports the Company's leading low-cost structure.

The Company continues to benefit from strong basis pricing in the Eagle Ford, as well as improved benchmark prices. Crude oil and natural gas realizations in the fourth quarter of 2021 were 98% and 97% of West Texas Intermediate (“WTI”) and Henry Hub, respectively, excluding hedging. SilverBow's average realized natural gas price, excluding the effect of hedging, was $5.64 per Mcf in the fourth quarter of 2021 compared to $2.68 per Mcf in the fourth quarter of 2020. The average realized crude oil selling price, excluding the effect of hedging, was $75.65 per barrel in the fourth quarter of 2021 compared to $38.93 per barrel in the fourth quarter of 2020. The average realized NGL selling price in the fourth quarter of 2021 was $32.82 per barrel (43% of WTI benchmark), compared to $15.82 per barrel (37% of WTI benchmark) in the fourth quarter of 2020.

Year-End 2021 Reserves

SilverBow reported year-end estimated proved reserves of 1.4 Tcfe, a 28% increase over year-end 2020. Specific highlights from the Company’s year-end reserve report include:

• Standardized Measure of $1.6 billion, a 202% increase over year-end 2020

• PV-10 Value (non-GAAP measure) of $1.8 billion, a 245% increase over year-end 2020

• Proved developed producing (“PDP”) PV-10 Value (non-GAAP measure) of $1.0 billion, a 170% increase over year-end 2020

Proved developed reserves accounted for 46% of SilverBow's total estimated proved reserves at December 31, 2021. Total capital costs incurred during 2021 were $268 million, which included approximately $123 million for development costs, $7 million for leasehold acquisition and prospect costs, and $138 million for property acquisitions. The property acquisitions in 2021 reflect a combination of the final cash and stock consideration paid for acquisitions, valued at time of acquisition close and net of purchase price adjustments, as well as transaction related fees.

The SEC prices used for reporting the Company's year-end 2021 estimated proved reserves, which have been adjusted for basis and quality differentials, were $3.75 per Mcf for natural gas, $25.29 per barrel for natural gas liquids and $63.98 per barrel for crude oil compared to $2.13 per Mcf, $11.66 per barrel, and $37.83 per barrel in 2020. Using the SEC prices, SilverBow's year-end 2021 reserves had a Standardized Measure of $1.6 billion and a SEC PV-10 Value of $1.8 billion.

Financial Results

SilverBow reported total oil and gas sales of $151.3 million for the fourth quarter of 2021. The Company reported net income of $114.3 million for the fourth quarter of 2021, which includes a net gain on the value of SilverBow's derivatives portfolio of $29.9 million. For the full year 2021, the Company reported net income of $86.8 million.

For the fourth quarter of 2021, SilverBow reported Adjusted EBITDA (a non-GAAP measure) of $81.8 million and FCF (a non-GAAP measure) of $52.9 million. For the full year 2021, SilverBow reported Adjusted EBITDA of $245.6 million and FCF of $84.0 million. For the full year 2021, the Company reported Adjusted EBITDA for Leverage Ratio (a non-GAAP measure) of $300.7 million, which, in accordance with the Leverage Ratio calculation in its Credit Facility, includes gains for the period related to previously unwound derivative contracts totaling $14.1 million and pro forma contributions from acquired assets prior to their closing dates totaling $41.0 million.

Capital expenditures incurred during the fourth quarter of 2021 totaled $20.1 million on an accrual basis. For the full year 2021, capital expenditures totaled $130.5 million on an accrual basis.

Hedging

Hedging continues to be an important element of the Company's strategy to protect cash flow. SilverBow's active hedging program provides greater predictability of cash flow and preserves exposure to higher commodity prices. In conjunction with unwinding oil derivative contracts in 2020 related to production periods in 2020 and 2021, the Company 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 factor into SilverBow's calculation of Adjusted EBITDA for covenant compliance purposes through the end of 2021. Beginning in 2022 and thereafter, the Company will no longer include these amortized hedge gains in the calculation of last twelve month Adjusted EBITDA for covenant compliance purposes.

As of February 25, 2022, SilverBow had 62% of total estimated production volumes hedged for full year 2022, using the midpoint of production guidance. For 2022, the Company has 121 MMcf/d of natural gas production hedged at an average price of $3.34 per million British thermal units (“MMBtu”), 3,156 Bbls/d of oil hedged at an average price of $55.65 per barrel and 2,042 Bbls/d of natural gas liquids (“NGLs”) hedged at an average price of $30.05 per barrel. For 2023, SilverBow has 64 MMcf/d of natural gas production hedged and 1,688 Bbls/d of oil hedged. The Company's hedges consists of swaps and collars with the average price factoring in the ceiling price of the collars.

Capital Structure & Liquidity

SilverBow's liquidity as of December 31, 2021, was $234.1 million, consisting of $1.1 million of cash and $233.0 million of availability under its Credit Facility. The Company believes it has sufficient liquidity to meet its obligations for at least the next twelve months and execute its long-term development plans. SilverBow's net debt was $375.9 million, calculated as total long-term debt of $377.0 million less $1.1 million of cash, a 12% decrease from December 31, 2020.

During 2021 (from August 13, 2021 through December 31, 2021), the Company sold 1,222,209 shares of common stock through its at-the-market program (“ATM Program”) for net proceeds of $27.0 million after deducting sales agents' commissions and other related expenses. SilverBow intends to use the net proceeds from any sales through the ATM Program for general corporate purposes, including, but not limited to, financing of capital expenditures, repayment or refinancing of outstanding debt, financing acquisitions or investments, financing other business opportunities, and general working capital purposes.

As of January 31, 2022, the Company had 16.6 million total common shares outstanding.