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Silverbow Resources Third Quarter 2021 Results

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   |    Thursday,November 11,2021

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

Highlights include:

• Net production of 212 million cubic feet of natural gas equivalent per day ("MMcfe/d"). Net oil production of 4,000 barrels per day ("Bbls/d"), above the high end of guidance and a 46% increase quarter-over-quarter
• Full year 2021 production guidance range increased to 210-215 MMcfe/d, a 4% increase at the midpoint
• Full year 2021 free cash flow ("FCF") guidance range increased to $80-$90 million¹ from $45-$55 million previously, a 70% increase at the midpoint. Full year guidance implies a FCF yield of approximately 20%²
• Full year 2021 capital guidance range unchanged at $115-$130 million; 2021 re-investment rate of 60%³
• Reported a net loss of $36 million, which includes a net unrealized loss on the value of the Company's derivative contracts of $61 million, and Adjusted EBITDA of $58 million. Adjusted EBITDA is a non-GAAP measure defined and reconciled in the table below
• Reduced total debt by $55 million year-over-year; further reduced leverage ratio to 1.73x⁴. Targeting year-end 2021 leverage ratio of approximately 1.25x⁴
• SilverBow's Austin Chalk wells in Webb County continue to exceed expectations. The second Austin Chalk well brought on during the third quarter produced over 12 million cubic feet of natural gas per day ("MMcf/d") through the first 60 days, or more than 0.6 billion cubic feet of natural gas ("Bcf") cumulative. The first Austin Chalk well has produced approximately 11 MMcf/d through the first 250 days, or approximately 2.7 Bcf cumulative
• Three acquisitions announced since August 2021 together add approximately 60,000 net acres, over 5,700 barrels of oil equivalent per day ("Boe/d") of production and more than 215 oil and gas locations spanning both the Eagle Ford and Austin Chalk. Acquisitions will be immediately accretive on all key financial metrics

Sean Woolverton, SilverBow's Chief Executive Officer, commented, "SilverBow has been active on the M&A front since our last update. We announced three accretive acquisitions since August which increase our production base, expand our Austin Chalk development and add more than five rig-years of drilling inventory. For the third quarter, oil production increased almost 50% sequentially and is expected to increase into year-end as we capitalize on our mid-year liquids development program. In our Webb County area, our second Austin Chalk well continues to outperform its type curve. Year-to-date, we have added approximately 50 high-return Austin Chalk locations through successful delineation across our acreage position."

Mr. Woolverton commented further, "For the full year, production is expected to increase by over 15%. We raised our 2021 free cash flow guidance by $35 million at the midpoint to a range $80-$90 million, which implies a re-investment rate of 60%. As we look to 2022 and inclusive of the recent acquisitions, we expect to see double digit production growth with a re-investment rate of approximately 75% and a meaningful free cash flow yield. We anticipate running a full rig for the calendar year which immediately incorporates locations acquired through recent acquisitions, as well as additional Austin Chalk development. Operating at a continuous one-rig pace maximizes our field efficiencies and generates greater returns in today's environment. As we have demonstrated in recent years, we will remain flexible and adaptable in our activity levels and capital allocation framework to reduce leverage, increase liquidity and maximize returns for our stakeholders."

Operational Highlights

During the third quarter of 2021, SilverBow drilled six net wells, completed 11 wells and brought 11 wells online. As expected, the Company concluded its mid-year liquids development program with the majority of completion activity focused in its La Salle Condensate and McMullen Oil areas. As a result of strong well performance, oil production increased nearly 50% quarter-over-quarter. In the La Salle Condensate area, SilverBow brought online a Briggs Knolle two-well pad which produced a 30-day average of 2,524 Boe/d (72% liquids), and a Briggs Knolle four-well pad which produced a 30-day average of 4,202 Boe/d (78% liquids).

Across the 11 total well completions during the quarter, the Company realized $9 million of cost savings due to reduced cycle times for both drilling and completion ("D&C") operations along with various well design and construction optimizations. Year-to-date, D&C costs per lateral foot are 14% lower compared to 2020. Additionally, SilverBow extended its streak of zero total recordable incidents on a rolling twelve month basis from the beginning of 2020 through the third quarter of 2021. Safety is core to SilverBow's operations and the Company has demonstrated a commitment to delivering high-returns without compromising on its industry-leading safety environment.

The Company continues to drill and appraise the Austin Chalk and is reviewing early and encouraging results from its second Austin Chalk well in Webb County. The Fasken 201H, which came online in August, produced over 12 MMcf/d on average over the first 60 days, and thus far is producing in-line with SilverBow's first Austin Chalk well at Rio Bravo. Both wells are exceeding offset type curves in the area and are exhibiting some of the highest commercial economics in the Company's portfolio. SilverBow is also assessing the initial results of a third Webb County Austin Chalk well which started producing in October.

The Company currently does not have a drilling rig active, but plans to add one rig in December which will drill one net La Mesa well by year-end. As previously discussed, the Company has elected to participate in three gross (one net) non-operated Webb County wells which are expected to be brought online during the fourth quarter.

Production, Operating Costs & Realized Prices

SilverBow's total net production for the third quarter averaged approximately 212 MMcfe/d. Production mix for the third quarter consisted of approximately 77% natural gas, 11% oil and 12% natural gas liquids ("NGLs"). Natural gas comprised 63% of total oil and gas sales for the third quarter, compared to 51% in the third quarter of 2020.

For the third quarter, lease operating expenses ("LOE") were $0.38 per Mcfe, transportation and processing expenses ("T&P") were $0.30 per Mcfe and production and ad valorem taxes were 4.9% of oil and gas sales. Total production expenses, which include LOE, T&P and production taxes, were $0.93 per Mcfe for the third quarter. Net general and administrative ("net G&A") expenses for the third quarter were $5.3 million, or $0.27 per Mcfe. After deducting $1.2 million of non-cash compensation expense, cash general and administrative ("cash G&A") (a non-GAAP measure) expenses were $4.1 million for the third quarter, or $0.21 per Mcfe. The Company's total cash operating costs (a non-GAAP measure) for the third quarter, which includes total production expenses and cash G&A expenses, were $1.14 per Mcfe. SilverBow anticipates total cash operating costs to remain flat from third quarter levels through the remainder of the year as oil production increases, which typically carries higher per unit costs, and as production taxes increase as a function of higher realized pricing compared to prior quarters.

The Company continues to benefit from strong basis pricing in the Eagle Ford. Crude oil and natural gas realizations in the third quarter were 97% of West Texas Intermediate ("WTI") and 103% of Henry Hub, respectively, excluding hedging. The Company's average realized natural gas price for the third quarter, excluding hedging, was $4.14 per thousand cubic feet of natural gas ("Mcf") compared to $1.98 per Mcf in the third quarter of 2020. The average realized crude oil selling price in the third quarter, excluding hedging, was $68.54 per barrel compared to $37.45 per barrel in the third quarter of 2020. The average realized NGL selling price in the third quarter, excluding hedging, was $30.92 per barrel (44% of WTI benchmark) compared to $12.79 per barrel (31% of WTI benchmark) in the third quarter of 2020.

Financials

For the third quarter, SilverBow reported total oil and gas sales of $99.2 million and a net loss of $35.9 million, which includes a net unrealized loss on the value of the Company's derivative contracts of $61.2 million.

For the third quarter, SilverBow generated Adjusted EBITDA (a non-GAAP measure) of $57.6 million. The Company's Adjusted EBITDA for Leverage Ratio (a non-GAAP measure) was $62.5 million for the third quarter. In accordance with the Leverage Ratio calculation for SilverBow's senior secured revolving credit facility ("Credit Facility"), the Company includes certain adjustments for its calculation of Adjusted EBITDA. For the three months ended September 30, 2021, SilverBow included gains related to previously unwound derivative contracts totaling $4.0 million. Additionally, the Company included pro forma EBITDA contributions related to closed acquisitions, which reflect the results of operations of the acquired assets for referenced time periods preceding the acquisition close date, totaling $0.8 million. Adjusted EBITDA for Leverage Ratio for the twelve months ended September 30, 2021 was $229.5 million, which includes $20.7 million related to the amortization of previously unwound derivative contracts and $6.6 million related to the pro forma EBITDA contribution related to closed acquisitions.

In accordance with the Leverage Ratio calculation for SilverBow's Credit Facility, the Company includes certain adjustments to its calculation of Adjusted EBITDA. Adjusted EBITDA for Leverage Ratio is calculated as Adjusted EBITDA (defined above) plus (less) amortization of derivative contracts and pro forma EBITDA contributions related to closed acquisitions, in accordance with the covenant compliance calculations under SilverBow's Credit Agreement. The Company believes that Adjusted EBITDA for Leverage Ratio is useful to investors because it reflects the last twelve months EBITDA used by the administrative agent for SilverBow's Credit Facility in the calculation of its leverage ratio covenant.

Capital expenditures incurred during the third quarter of 2021 totaled $51.3 million on an accrual basis.

2021 Guidance & 2022 Outlook

For the fourth quarter of 2021, SilverBow is guiding to estimated production of 240-250 MMcfe/d, with natural gas volumes expected to comprise 180-189 MMcf/d or 75% of total production at the midpoint. For the full year 2021, the Company is guiding to a production range of 210-215 MMcfe/d, a 4% increase at the midpoint compared to prior guidance. Production guidance is inclusive of the two acquisitions which SilverBow announced in August 2021, both of which have since closed.

For the full year 2021, the Company anticipates FCF to be $80-$90 million¹, a $35 million or 70% increase at the midpoint compared to prior guidance. Full year capital budget guidance is unchanged at $115-$130 million, but now reflects four gas well completions, which were previously going to be deferred to early 2022, as a result of cost savings realized in the third quarter. The 2021 capital program is focused on inventory expansion, Austin Chalk delineation and free cash flow generation, and represents a re-investment rate of approximately 60%³.

Year-to-date, SilverBow has incurred $110 million, or approximately 90%, of its full year capital budget. Thus, based on full year guidance and cash flows generated through the third quarter, SilverBow expects to generate a significant amount of FCF¹ during the fourth quarter of 2021.

The Company expects to resume drilling at its La Mesa position in December 2021. The preliminary 2022 outlook assumes development remains at a one rig pace throughout the year, compared to approximately a 3/4 rig average in 2021. 2022 production is expected to increase by double digits, driven by increased rig activity as well as a full year contribution from acquisitions announced in the second half of 2021. The Company is currently in the process of finalizing its budget for next year and plans to release formal guidance in early 2022. As always, SilverBow maintains a high degree of flexibility in its drilling schedule and operates with a returns-focused mindset.

Additional detail concerning the Company's fourth 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 October 29, 2021, SilverBow had 64% of total estimated production volumes hedged for the remainder of 2021. For the remainder of 2021, the Company has 121 MMcf/d (66% of guidance) of natural gas production hedged, 3,884 Bbls/d (73% of guidance) of oil hedged and 2,090 Bbls/d (44% of guidance) of NGLs hedged. For 2022, SilverBow has 113 MMcf/d of natural gas production hedged, 3,093 Bbls/d of oil hedged and 1,623 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 third quarter of 2021, which the Company expects to file on Thursday, November 4, 2021, for a detailed summary of its derivative contracts.

Capital Structure & Liquidity

As of September 30, 2021, SilverBow's liquidity position was $103.0 million, consisting of $1.0 million of cash and $102.0 million of availability under the Credit Facility. The Company is currently in the process of its semi-annual borrowing base redetermination and anticipates a sizeable increase to the availability under its revolving credit line.

SilverBow's net debt as of September 30, 2021 was $397.0 million, calculated as total long-term debt of $398.0 million less $1.0 million of cash, a $30.9 million, or 7%, decrease from December 31, 2020.

On August 13, 2021, the Company entered into an equity distribution agreement under which it may sell from time to time shares of its common stock up to an aggregate offering price of $40.0 million (the "ATM Program"). For the three months ended September 30, 2021, SilverBow sold 0.7 million shares for net proceeds of $12.8 million after sales agents' commissions and other related expenses.

As of October 29, 2021, SilverBow had 14.7 million total common shares outstanding.