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Silverbow Resources Third Quarter 2020 Results

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   |    Wednesday,November 04,2020

SilverBow Resources, Inc. announced operating and financial results for the third quarter of 2020.

2021 Outlook

While still finalizing the 2021 budget, SilverBow is planning for single digit production growth, capital expenditures consistent with 2020 levels, and FCF1 generation of $20-$40 million, implying a greater than 50% FCF yield with strip pricing.

Highlights include:

  • Net production averaged approximately 183 MMcfe/d, above the high end of guidance
  • Reported a net loss of approximately $7 million, Adjusted EBITDA of $36 million and free cash flow ("FCF") of $9 million. Adjusted EBITDA and FCF are non-GAAP measures defined and reconciled in the tables below
  • Anticipate full year 2020 FCF of approximately $50 million, a $5 million increase at the midpoint from previously stated guidance range of $40-$50 million1
  • Reduced total debt by $17 million compared to prior quarter and $37 million compared to first quarter 2020; leverage ratio2 of 2.5x and liquidity of $78 million at quarter-end
  • Completed and brought online eight deferred wells one month ahead of schedule due to operational efficiency gains and timing of favorable marketing agreements. Drilling and completion costs for five drilled but uncompleted ("DUC") wells $8 million below budget
  • All previously curtailed net oil production returned to sales. Approximately 20 million cubic feet per day ("MMcf/d") of net gas production remained shut-in at quarter-end, but was brought back online in late October
  • Commenced nine-well gas development program on October 1st; poised to capture favorable gas prices in 2021
  • Implemented corporate cost reduction initiatives representing annualized savings of $2.5 million starting in 2021
  • Cash general and administrative ("G&A") costs of $4.8 million (a non-GAAP measure calculated as $5.8 million in net G&A costs less $1.1 million of share-based compensation), a 5% decrease from the prior quarter

Sean Woolverton, SilverBow's Chief Executive Officer, commented, "As year-end quickly approaches, SilverBow is well-positioned to benefit from higher natural gas prices with exposure to unconstrained, premium Gulf Coast markets. Our team continues to execute on the factors within our control by driving down costs, optimizing our production and generating free cash flow to reduce absolute debt. 2020 has presented unique challenges to the oil and gas industry due to the ongoing global pandemic and extreme volatility in commodity prices, and these challenges are not likely to abate in the near term. In the face of it all, SilverBow generated $9 million of free cash flow during the third quarter, marking our third consecutive quarter of positive free cash flow, and we are on pace to deliver full year free cash flow of approximately $50 million. During the third quarter, we completed and turned to sales eight wells one month ahead of schedule. Compared to the first quarter of 2020, we have reduced our revolver borrowings by $37 million to $253 million at quarter-end."

Mr. Woolverton commented further, "As we look ahead, we began our nine-well gas development program in October, targeting our high-rate-of-return Webb County dry gas assets. Our strategy of maintaining a balanced portfolio and low-cost structure has allowed us to generate significant free cash flow and pay down debt while organically funding these high-return gas projects. We see favorable underlying supply and demand factors supporting a sustained improvement of natural gas prices and stand to benefit from our gas development, mix of collars, and unhedged production. Our returns-focused mindset remains at the core of our business strategy. Given our current scale and balance sheet, we will continue to prioritize debt reduction as our primary use of cash flow over the near-term. Based on preliminary estimates for next year, we expect to achieve modest production growth, sustain a maintenance level of capex, and generate a meaningful amount of free cash flow. As always, we are opportunistic in identifying accretive transactions, large or small, that further support our mission to be the premier Eagle Ford oil and gas company. I want to thank our stakeholders who underpin SilverBow's success."

Operations Highlights

During the third quarter of 2020, SilverBow resumed completion activity by bringing online eight wells in its McMullen Oil area. The Company completed three of these wells in the first quarter of 2020, but deferred bringing them online due to prevailing market conditions. The remaining five wells were drilled but uncompleted during the first quarter of 2020. As planned, all eight of these oil-weighted wells were placed on production in the third quarter of 2020, with the five DUCs completed nearly one month ahead of schedule. SilverBow's total well costs for the five DUCs were $8 million below budget, collectively. In addition to resuming capital activity, all remaining curtailed oil volumes were returned to sales during the third quarter. Approximately 20 MMcf/d of net gas production remained shut-in at quarter-end. The Company recently returned these volumes to production in late October to align with favorable natural gas prices.

To date, wells that have been returned to sales have not experienced any degradation and in some cases have exhibited higher production rates compared to pre-shut-in levels, as noted last quarter. SilverBow continues to monitor and analyze well data in real-time and implement choke management practices that optimize and preserve the integrity of each well. The Company believes these are primary drivers for the strong performance of the wells returned to sales.

The operations team carried out significant pre-planning and contingency practices, and engaged in rigorous vendor bidding activities, to ensure continuation of the Company's low-cost platform and operational efficiencies given the activity hiatus in the second quarter of 2020. The team also performed regular, in-depth reviews of operating and capital costs. On the operating cost side, labor, compression, salt-water disposal and chemicals were the notable areas that led to further lease operating expense ("LOE") savings. On the capital side, service-pricing remains in a deflationary environment and the SilverBow team has been able to capture further savings through selective de-bundling of capital costs and process efficiencies.

At the beginning of October, the Company resumed drilling activity in the Webb County Gas area. SilverBow drilled the first three wells in the Upper Eagle Ford at Fasken with first production expected towards year-end. The other six wells comprise the second, co-developed La Mesa pad. The first pad was drilled and completed last year and has demonstrated some of the strongest returns in the Company's portfolio. SilverBow expects to finish the drilling and completion of the six-well La Mesa pad in early 2021, with first sales expected by the end of the first quarter.

Production & Realized Prices

SilverBow's total net production for the third quarter averaged approximately 183 MMcfe/d. Production mix for the third quarter consisted of approximately 71% natural gas, 17% oil and 12% natural gas liquids ("NGLs"). Natural gas comprised 51% of total oil and gas sales for the third quarter, compared to 73% in the second quarter of 2020.

LOE were $0.31 per million cubic feet of natural gas equivalent ("Mcfe") for the third quarter. After deducting $1.1 million of non-cash compensation expense, cash G&A costs were $4.8 million for the third quarter, with a per unit cash cost of $0.28 per Mcfe. Transportation and processing expenses ("T&P") came in at $0.30 per Mcfe and production and ad valorem taxes were 5.5% of oil and gas revenue for the third quarter. Total production expenses, which include LOE, T&P and production taxes, were $0.76 per Mcfe for the quarter. The Company's all-in cash operating expenses for the quarter, which includes cash G&A costs, were $1.05 per Mcfe. Beginning in 2021, SilverBow expects to save approximately $2.5 million in annualized G&A costs as a result of corporate cost initiatives.

The Company 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 third quarter were 92% of West Texas Intermediate ("WTI") and 100% of Henry Hub, respectively, excluding hedging. SilverBow's average realized natural gas price, excluding the effect of hedging, was $1.98 per thousand cubic feet of natural gas ("Mcf") compared to $2.32 per Mcf in the third quarter of 2019. The average realized crude oil selling price, excluding the effect of hedging, was $37.45 per barrel compared to $57.14 per barrel in the third quarter of 2019. The average realized NGLs selling price in the quarter was $12.79 per barrel (31% of WTI benchmark) compared to $11.99 per barrel (21% of WTI benchmark) in the third quarter of 2019.

Financials

SilverBow reported total oil and gas sales of $45.7 million and a net loss of $6.9 million for the third quarter. Included in the third quarter's net loss is an unrealized loss on the value of the SilverBow's derivative contracts of $19.2 million and a $0.6 million net tax benefit.

For the third quarter, SilverBow generated Adjusted EBITDA (a non-GAAP measure) of $36.0 million and FCF (a non-GAAP measure) of $9.1 million.

At quarter-end, the Company's net debt was $451.8 million, calculated as total long-term debt of $453.0 million less $1.2 million of cash, a $25.9 million reduction compared to year-end 2019.

Capital expenditures during the third quarter, excluding acquisition and divestiture activity, totaled $20.2 million on an accrual basis.

2020 Guidance

For the fourth quarter, SilverBow is guiding for estimated production of 170-183 MMcfe/d, with natural gas volumes expected to comprise 125-133 MMcf/d, although commodity prices or other impacts from the Coronavirus Disease 2019 ("COVID-19") pandemic could affect production guidance. 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's capital expenditure guidance of $95-$100 million is $3 million lower at the midpoint compared to prior guidance of $95-$105 million. As planned, the Company added a rig at the beginning of the fourth quarter, commencing the nine-well gas development program in Webb County. For the full year, SilverBow is guiding to a production range of 181-184 MMcfe/d with natural gas volumes expected to comprise 138-140 MMcf/d. 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 anticipates FCF to be approximately $50 million, at the high end of its previously stated guidance range of $40-$50 million for the full year.

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 in 2020 and 2021, SilverBow is amortizing the $38 million of cash inflow it received in discrete 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 October 31, 2020, the Company had 71% of total estimated production volumes hedged for the remainder of 2020, using the midpoint of production guidance. For the remainder of 2020, SilverBow has 95 MMcf/d of natural gas production hedged at an average price of $2.67 per million British thermal units ("MMBtu") and 5,094 barrels per day ("Bbls/d") of oil hedged at an average price of $44.88 per barrel. For 2021, the Company has 67 MMcf/d of natural gas production hedged at an average price of $2.87 per MMBtu and 3,294 Bbls/d of oil hedged at an average price of $47.43 per barrel. Notably, SilverBow's hedges are a combination of swaps and collars with the weighted average price factoring in the ceiling price of the collars.

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

Capital & Liquidity

As of September 30, 2020, SilverBow's liquidity position was $78.2 million, consisting of $1.2 million of cash and $77.0 million of availability under the Company's credit facility, which had a $330 million borrowing base as of such date prior to the November 2, 2020 redetermination. SilverBow's net debt was $451.8 million, calculated as total long-term debt of $453.0 million less $1.2 million of cash, a 5% decrease from December 31, 2019. Subsequent to quarter end, the borrowing base under the Company's credit facility was redetermined as of November 2, 2020 to be $310 million, and the maximum leverage ratio2 was decreased to 3.5x from 4.0x. As of October 28, 2020, SilverBow had 11.9 million total common shares outstanding.


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