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Silverbow Resources Second Quarter 2021 Results

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   |    Monday,August 23,2021

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

Highlights include:

  • Net production of 213 million cubic feet of natural gas equivalent per day ("MMcfe/d"), at high end of guidance
  • Full year 2021 production guidance range increased to 200-210 MMcfe/d, an 8% increase at the midpoint
  • Full year 2021 free cash flow ("FCF") guidance range increased to $45-$55 million1, a 25% increase at the midpoint
  • Full year 2021 capital guidance range revised to $115-$130 million; selective allocation of FCF towards high-return inventory provides for a re-investment rate of approximately 70%2
  • Lease operating expenses ("LOE") of $0.29 per million cubic feet of natural gas equivalent ("Mcfe"), transportation and processing expenses ("T&P") of $0.32 per Mcfe, net general and administrative ("net G&A") expenses of $4.8 million and cash general and administrative ("cash G&A") (a non-GAAP measure) expenses of $3.6 million. LOE, T&P and cash G&A expenses were all below the low end of guidance for the second quarter of 2021
  • Reduced full year 2021 LOE and T&P per unit guidance on anticipated cost savings and efficiencies
  • Reported a net loss of $20 million, Adjusted EBITDA of $43 million and FCF of $7 million. Adjusted EBITDA and FCF are non-GAAP measures defined and reconciled in the tables below
  • Reduced total debt by $2 million quarter-over-quarter and by $72 million year-over-year; leverage ratio of 1.93x3 and liquidity of $104 million at quarter-end. Anticipate year-end 2021 leverage ratio below 1.75x3
  • Acquired non-operated working interest in SilverBow operated La Mesa property; adds 10 million cubic feet of natural gas per day ("MMcf/d") of net production, 850 net acres, and 20 gross (17 net) drilling locations in the prolific Eagle Ford and Austin Chalk trends for a total consideration of $24 million

Sean Woolverton, SilverBow's Chief Executive Officer, commented, "During the second quarter we generated $7 million of free cash flow while further reducing our total debt and leverage ratio. At quarter-end, our leverage ratio was 1.9x compared to 2.5x at year-end 2020. This is a result of increasing operational efficiencies, lowering costs and realizing favorable prices across all products. The SilverBow team continued to streamline our cost structure, with total cash operating expenses below $1.00 per Mcfe this quarter, at the same time as achieving another quarter of zero recordable incidents. Our first Austin Chalk well in Webb County continues to exceed expectations and we are now drilling additional wells across the Company's acreage to further define our potential drilling inventory in this emerging play. Furthermore, we continue to add to our portfolio through accretive acquisitions, with our announced La Mesa transaction bolstering our Eagle Ford and Austin Chalk opportunity set.

"We are capitalizing on the strength in commodity prices to increase free cash flow, further reduce debt, accelerate the de-levering of the Company and expand our high-return inventory over the next 18 months. Inclusive of our revised capital program, we are increasing our 2021 free cash flow guide by 25% to a range of $45-$55 million. Additionally, our preliminary 2022 outlook shows the potential to deliver free cash flow above 2021 levels. We believe that reducing leverage, increasing liquidity and generating free cash flow best positions SilverBow to be active in strategic opportunities and to drive greater shareholder returns."

Operations Highlights

During the second quarter of 2021, SilverBow drilled 10 wells, completed one well and brought one well online. Drilling and completion ("D&C") spending during the quarter was primarily related to drilling activity in the liquids-rich La Salle Condensate area. As previously planned, the Company accelerated activity of its mid-year oil development program. Due to further reduced drilling cycle times and efficiencies, SilverBow was able to drill three additional wells in the second quarter. Notably, the Company drilled a four well pad in approximately 25 days, or six days per well on average. First production from the nine La Salle Condensate wells is expected in the third quarter of 2021. SilverBow is reviewing early data and appraising its Austin Chalk acreage through the one well completed in the second quarter.

SilverBow continues to further its capital and operational efficiencies across its operating areas. Year-to-date, the Company drilled 20% more lateral feet per day and reduced drilling costs by 9% compared to 2020. On the completion side, SilverBow completed 17% more stages per day, pumped 8% more proppant per day and reduced completion costs by 2%. Taken altogether, D&C costs per lateral foot are 5% lower in 2021 as compared to 2020.

Production management remains a key focus area for the Company, and the maintenance and optimization projects executed during the first quarter of 2021 continue to support strong performance from the developed production base. In the second quarter of 2021, further base production optimizations were realized through expanded compression and artificial lift installations. This focus on base production management is driving production uplifts with shallower declines. The continued outperformance of SilverBow's initial Austin Chalk well, which came online in February 2021, further supported its production base during the second quarter. As of the date of this news release, the well is still producing above 10 MMcf/d and has produced a cumulative 1.9 billion cubic feet ("Bcf") over the first five months.

For the third quarter of 2021, SilverBow plans to drill six net wells across the McMullen Oil and Webb County Gas areas, and complete and bring online 11 net wells across the La Salle Condensate, McMullen Oil and Webb County Gas areas. The development program reflects the acceleration of liquids-rich wells planned earlier this year, as well as a balancing of high-rate gas wells to capture favorable prices heading into year-end. Not included in the well counts are three gross (one net) non-operated wells in the Webb Count Gas area, which the Company has elected to participate in during the third quarter of 2021, and which adds approximately $5 million to the full year capital budget. By early fourth quarter 2021, SilverBow expects substantially all its D&C activity for the year to be incurred.

Through the first half of 2021, the Company maintained zero recordable incidents. Safety is core to SilverBow's operations and the Company has demonstrated a commitment to delivering high-returns through its industry-leading safety environment.

Production Volumes, Operating Costs, Etc.

SilverBow's total net production for the second quarter averaged approximately 213 MMcfe/d. Production mix for the second quarter consisted of approximately 82% natural gas, 8% oil and 10% natural gas liquids ("NGLs"). Natural gas comprised 67% of total oil and gas sales for the second quarter, compared to 73% in the second quarter of 2020.

LOE was $0.29 per Mcfe for the second quarter, a $0.10 per Mcfe reduction compared to the previous quarter and year ago comparable periods. T&P was $0.32 per Mcfe and production and ad valorem taxes were 5.1% of oil and gas sales for the second quarter. Total production expenses, which include LOE, T&P and production taxes, were $0.79 per Mcfe for the second quarter. Net G&A expenses for the second quarter were $4.8 million, or $0.25 per Mcfe. After deducting $1.2 million of non-cash compensation expense, cash G&A (a non-GAAP measure) expenses were $3.6 million for the second quarter, with a per unit cash cost of $0.19 per Mcfe. The Company's total cash operating costs (a non-GAAP measure) for the second quarter, which includes total production expenses and cash G&A expenses, were $0.98 per Mcfe. SilverBow anticipates total cash operating costs to trend flat to slightly higher through the remainder of the year as oil production increases, which typically carries higher per unit costs.

The Company continues to benefit from strong basis pricing in the Eagle Ford. Crude oil and natural gas realizations in the second quarter were 96% of West Texas Intermediate ("WTI") and 104% of Henry Hub, respectively, excluding hedging. The Company's average realized natural gas price for the second quarter, excluding hedging, was $2.95 per thousand cubic feet of natural gas ("Mcf") compared to $1.70 per Mcf in the second quarter of 2020. The average realized crude oil selling price in the second quarter, excluding hedging, was $63.62 per barrel compared to $23.82 per barrel in the second quarter of 2020. The average realized NGL selling price in the second quarter, excluding hedging, was $21.65 per barrel (33% of WTI benchmark) compared to $9.49 per barrel (34% of WTI benchmark) in the second quarter of 2020.


For the second quarter, SilverBow reported total oil and gas sales of $69.9 million and a net loss of $20.0 million, which includes a net unrealized loss on the value of the Company's derivative contracts of $35.6 million.

For the second quarter, SilverBow generated Adjusted EBITDA (a non-GAAP measure) of $42.8 million and FCF (a non-GAAP measure) of $7.4 million. The Company's Adjusted EBITDA for Leverage Ratio (a non-GAAP measure) was $46.7 million for the second quarter, which, in accordance with the Leverage Ratio calculation in its Credit Facility, includes gains for the period related to previously unwound derivative contracts totaling $3.9 million.

Capital expenditures incurred during the second quarter of 2021 totaled $26.2 million on an accrual basis.

2021 Capital Program & Guidance

For the third quarter of 2021, SilverBow is guiding to estimated production of 200-215 MMcfe/d, with natural gas volumes expected to comprise 156-168 MMcf/d or 78% of total production at the midpoint. For the full year 2021, the Company is guiding to a production range of 200-210 MMcfe/d, an 8% increase at the midpoint compared to prior guidance. Production guidance is inclusive of the incremental working interest acquired at La Mesa subsequent to quarter-end.

For the full year 2021, SilverBow anticipates FCF to be $45-$55 million1, a 25% increase at the midpoint compared to prior guidance. The Company revised its full year capital budget to $115-$130 million, which reflects accelerated mid-year oil development and opportunistic gas drilling. The changes to the program provide for inventory expansion, further delineation and participation in high-return wells while continuing to maintain a re-investment rate of approximately 70%2.

From a timing perspective, substantially all of the remaining 2021 D&C spending should be incurred by early fourth quarter. Thus, SilverBow expects to outspend in the third quarter of 2021 and generate the balance of its full year 2021 FCF during the fourth quarter 2021.

The Company's preliminary 2022 outlook assumes development remains at approximately a 3/4 rig pace. 2022 production is anticipated to grow greater than 10% year-over-year given the additional La Mesa working interest and high-return inventory additions. Free cash flow is forecasted above 2021 levels with an implied re-investment rate lower than 2021.

Additional detail concerning the Company's third quarter and full year 2021 guidance can be found in the table included with today's news release and the Corporate Presentation in the Investor Relations section of SilverBow'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 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 July 30, 2021, SilverBow had 66% of total estimated production volumes hedged for the remainder of 2021. For the remainder of 2021, the Company has 107 MMcf/d (66% of guidance) of natural gas production hedged, 3,509 Bbls/d (79% of guidance) of oil hedged and 2,090 Bbls/d (48% of guidance) of NGLs hedged. For 2022, SilverBow has 97 MMcf/d of natural gas production hedged, 2,593 Bbls/d of oil hedged and 623 Bbls/d of NGLs 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 second quarter of 2021, which the Company expects to file on Thursday, August 5, 2021, for a detailed summary of its derivative contracts.

Capital Structure & Liquidity

As of June 30, 2021, SilverBow's liquidity position was $104.1 million, consisting of $2.1 million of cash and $102.0 million of availability under the senior secured revolving credit facility ("Credit Facility"). The Company's net debt as of June 30, 2021 was $395.9 million, calculated as total long-term debt of $398.0 million less $2.1 million of cash, a $31.9 million, or 7%, decrease from December 31, 2020.

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

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