Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Hedging | Capital Markets | Capital Expenditure | Drilling Activity | 2020 Guidance

Silverbow Resources Second Quarter 2020 Results

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   |    Wednesday,August 05,2020

SilverBow Resources, Inc. reported its Q2 2020 results.

Highlights include:

• Net production averaged approximately 142 MMcfe/d, above the high end of guidance

• Returned approximately 50 MMcfe/d of previously curtailed net production to sales in June; approximately 50 MMcfe/d of net production remains shut-in

• Closed divestiture of non-core Wyoming assets for approximately $5 million of total proceeds

• Reported a net loss of $306 million primarily due to a $260 million non-cash impairment write-down on a pre-tax basis, Adjusted EBITDA of $26 million and free cash flow ("FCF") of $14 million¹. Adjusted EBITDA and FCF are non-GAAP measures defined and reconciled in the tables included with today's news release

• Anticipate $40-$50 million of FCF(a non-GAAP measure) for full year 2020, inclusive of a gas development program planned for the fourth quarter

• $20 million reduction in revolver borrowings compared to prior quarter; leverage ratio² of 2.4x and liquidity of $67 million at quarter-end

• Active hedging program to combat price volatility; primed for gas development in late 2020

Sean Woolverton, SilverBow's Chief Executive Officer, commented, "Over the course of the second quarter, the SilverBow team was focused on production management, cost reduction initiatives and optimizing multiple playbooks for various commodity price scenarios. The second quarter will mark the low point in our production profile for 2020. Looking forward to the remainder of the year, we will be returning the remainder of our curtailed volumes to sales and are currently in the process of bringing online our inventory of drilled but uncompleted wells ("DUCs") in the third quarter. Our plan is to restart our drilling program during the fourth quarter of 2020, targeting the development of our high rate of return gas projects. Over the next 18 months, our goal remains to maximize our free cash flow generation and protect our balance sheet. We are on track to achieve our stated objective of $40-$50 million of free cash flow for full year 2020, inclusive of the additional gas development expenditures we have allocated to our capital budget. The planned increase in capital expenditures in the fourth quarter of 2020 bolsters our preliminary 2021 free cash flow target of $20-$40 million at current strip prices, with potential tailwinds from higher gas prices this winter and through next year. Our visibility into cash flows over the near-term is supported by our hedged position on oil, which covers a substantial portion of our forecasted oil production through year-end 2021, as well as our gas hedging strategy, which has utilized a heavier weighting of two-way collars next year and intentionally preserves meaningful upside exposure to any improvement in 2021 gas strip from current levels. Additionally, at the midpoint of our production guidance, we would reach quarterly highs on our oil production combined with rising gas production rates as we exit the year. Moving into 2021, we have the flexibility to allocate capital across a well-balanced portfolio of gas and liquids development locations.

"I want to thank our employees, contractors and vendors who continue to find innovative solutions to drive value amidst ongoing disruptions to our daily lives. As I have stated before, our employees are our greatest asset. We have an established track record of executing on our goals, and continue to deploy a winning strategy that is returns-focused and risk-mitigated. As the economy starts to find equal footing, we expect natural gas prices to increase. Our business strategy remains the same. Specifically, we focus on owning high-quality assets with proximity to premium markets, maintaining a balanced commodity mix, and driving shareholder returns through our strong margins and low-cost structure. Proactive balance sheet management and operational agility will remain critical in managing the near term. We believe that our success in identifying attractive acquisition and divestiture opportunities and locking in returns through our active hedging program will continue to differentiate SilverBow from its peers. We are well positioned to capitalize on an expanding merger and acquisition landscape over the next several years, creating a favorable risk-reward for stakeholders with the ultimate goal of sustainable growth in shareholder returns."

Q2 Operational Update

During the second quarter of 2020, SilverBow had essentially no drilling and completion ("D&C") activity as a result of releasing its super spec rig at the beginning of April. In addition to temporarily suspending its D&C program, the Company curtailed an average of 57 million cubic feet per day ("MMcf/d") of net natural gas and 1,930 barrels per day ("Bbls/d") of net oil production during the quarter. SilverBow commenced voluntary well shut-ins in March, and increased the amount of shut-in production in April. Working with our midstream partners, approximately 2,750 Bbls/d of curtailed net oil production was returned to sales ahead of schedule in June, driving oil and natural gas liquids ("NGL") volumes above the second quarter guidance range. As the year unfolds, the Company will continue assessing optimal production timing in response to the evolving commodity price environment.

The wells that have been returned to production to-date have not experienced degradation and have exhibited higher production rates compared to pre-shut-in levels. The Company is analyzing the performance of these wells in real-time to optimize choke management strategy and maximize production profiles and estimated ultimate recoveries.

On the expense management front, SilverBow is actively engaging in further cost savings initiatives, primarily related to chemicals, rentals and other ancillary services. The Company values its strong vendor relationships and is working together with them to ensure mutual success. As it pertains to SilverBow's recent acquisition, the Company has already identified a number of cost saving measures primarily through the use of existing infrastructure. SilverBow continues to analyze the subsurface characteristics of the new acreage to plan for future capital investment.

Consistent with the Company's strategy to align production start dates with higher prices, SilverBow intends to bring eight wells in the McMullen Oil area online over the second half of 2020. The Company secured favorable service pricing for the five wells it intends to complete in the third quarter, driving down capital costs by approximately 30% compared to initial estimates. SilverBow's procurement initiatives are laying the groundwork for the resumption of the Company's drilling program in the fourth quarter.

Production, Realized Prices

SilverBow's total net production for the second quarter averaged approximately 142 MMcfe/d. Production mix for the second quarter consisted of approximately 82% natural gas, 10% oil and 8% NGL. Natural gas comprised 73% of total oil and gas sales for the second quarter, compared to 59% in the first quarter of 2020.

Lease operating expenses ("LOE") were $0.39 per Mcfe for the second quarter. After deducting $1.2 million of non-cash compensation expense, cash general and administrative costs were $5.0 million for the second quarter, with a per unit cash cost of $0.39 per Mcfe. Transportation and processing expenses ("T&P") came in at $0.35 per Mcfe and production and ad valorem taxes were 8.2% of oil and gas revenue for the second quarter. Total production expenses, which include LOE, T&P and production taxes, were $0.90 per Mcfe for the quarter. The Company's all-in cash operating expenses for the quarter, which includes cash general and administrative costs, were $1.29 per Mcfe.

SilverBow continues to benefit from strong basis pricing in the Eagle Ford, while recent conditions have impacted historical oil averages. Crude oil and natural gas realizations in the second quarter were 86% of West Texas Intermediate ("WTI") and 99% of Henry Hub, respectively, excluding hedging. The Company's average realized natural gas price, excluding the effect of hedging, was $1.70 per thousand cubic feet of natural gas ("Mcf") compared to $2.66 per Mcf in the second quarter of 2019. The average realized crude oil selling price, excluding the effect of hedging, was $23.82 per barrel compared to $61.60 per barrel in the second quarter of 2019. The average realized NGL selling price in the quarter was $9.49 per barrel (34% of WTI benchmark) compared to $14.53 per barrel (24% of WTI benchmark) in the second quarter of 2019.

Financial Results

SilverBow reported total oil and gas sales of $24.8 million for the second quarter. On a GAAP basis, the Company reported a net loss of $306.0 million for the second quarter. Due to the effects of pricing and timing of projects, SilverBow reported a non-cash impairment write-down, on a pre-tax basis, of $260.3 million on the Company's oil and natural gas properties in the second quarter. Additionally, included in the second quarter's net loss is an unrealized loss on the value of the SilverBow's derivative contracts of $26.5 million and a $22.4 million net tax provision.

For the second quarter, SilverBow generated Adjusted EBITDA (a non-GAAP measure) of $26.0 million and FCF (a non-GAAP measure) of $14.0 million.

At quarter-end, the Company's net debt was $463.4 million, calculated as total long-term debt of $470.0 million less $6.6 million of cash, a $14.3 million reduction compared to year-end 2019.

Capital expenditures during the second quarter, excluding acquisition and divestiture activity, totaled $4.8 million on an accrual basis.

2020 Guidance & Outlook

The third quarter marks the return to sales of the majority of the previously curtailed volumes and the completion of five DUCs. For the third quarter, SilverBow is guiding for estimated production of 173-180 MMcfe/d, with natural gas volumes expected to comprise 125-130 MMcf/d, although additional curtailments necessitated by storage constraints, commodity prices or other impacts from the COVID-19 pandemic could result in lower third quarter production. Regardless of commodity prices, the Company carefully considers the production economics and the net benefit to its borrowing base and its financials before committing to future capital investment.

For the full year 2020, SilverBow increased the midpoint of its 2020 capital budget by $12.5 million, with a revised range of $95-$105 million. The Company plans to add a rig in the fourth quarter and commence a nine-well gas development program in Webb County. For the full year, SilverBow is guiding to a production range of 176-184 MMcfe/d with natural gas volumes expected to comprise 135-140 MMcf/d. Additional curtailments necessitated by storage constraints, commodity prices or other impacts from the COVID-19 pandemic could result in lower full year production and adversely affect the Company's ability to achieve FCF and other guidance. SilverBow is reaffirming its FCF target of $40-$50 million for the full year, inclusive of the additional D&C activity planned for the fourth quarter. This gas development project in late 2020 accelerates the Company's ability to generate approximately $20-$40 million of free cash flow³ in 2021 while maintaining upside to higher gas prices by utilizing more two-way collars in its hedge strategy.

Additional detail concerning SilverBow's third 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's active hedging program provides greater predictability of cash flows and preserves exposure to higher commodity prices. In conjunction with unwinding oil derivative contracts in 2020 and 2021, SilverBow is amortizing the $38 million of cash inflow it received in discreet amounts for each month over the same time period. 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 July 31, 2020, the Company had 67% of total estimated production volumes hedged for the remainder of 2020, using the midpoint of production guidance. For the remainder of 2020, SilverBow has 87 MMcf/d hedged at an average price of $2.60 per million British thermal units ("MMBtu") and 4,811 Bbls/d of oil hedged at an average price of $45.34 per barrel. For 2021, the Company has 67 MMcf/d hedged at an average price of $2.34 per MMBtu and 3,364 Bbls/d of oil hedged at an average price of $45.19 per barrel. Notably, SilverBow's hedges are a combination of swaps and collars with the weighted average price factoring in the floor. As of July 31, 2020, the Company's mark-to-market value of its hedge portfolio was $11.8 million.

Please see SilverBow's Form 10-Q filing for the second quarter of 2020, which the Company expects to file on Wednesday, August 5, 2020, for a detailed summary of its derivative contracts.

Capital & Liquidity

As of June 30, 2020, SilverBow's liquidity position was $66.6 million, consisting of $6.6 million of cash and $60.0 million of availability under the Company's credit facility. SilverBow's net debt was $463.4 million, calculated as total long-term debt of $470.0 million less $6.6 million of cash, a 3% decrease from December 31, 2019. As of July 31, 2020, SilverBow had 11.9 million total common shares outstanding.