SilverBow Resources Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the SilverBow Resources First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. And finally, I would like to advise all participants that this call is being recorded. Thank you.

Operator

I'd now like to welcome Jeff Magids, Vice President of Finance and Investor Relations to begin the conference. Jeff, over to you.

Speaker 1

Thanks, operator, and good morning, everyone. Welcome to our Q1 2024 conference call. With me on the call today are Sean Woolverton, our CEO Steve Adam, our COO and Chris Abundis, our CFO. Yesterday, we posted a new presentation to our website and we will refer to it during this call. Please note that we may make references to certain non GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release.

Speaker 1

Our discussion today may include forward looking statements, which are subject to risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on our website. As a reminder, please limit your time during Q and A to one question, one follow-up. This will allow us to get more of your questions in this morning. With that, I will now turn the call over to Sean.

Speaker 2

Good morning, everyone. As you can see from our results, SilverBow is off to a very strong start in 2024. We continue to prove the merits of our long term business strategy and build on our effective track record of creating value for shareholders. Our call today will cover 3 primary topics. First, our year to date results, which are ahead of plan.

Speaker 2

Early this year, we optimized our 2024 operating plans, capitalizing on our diversified portfolio to reduce investments in dry gas and focus on our profitable liquids development. Our goal was to maximize free cash flow and rapidly strengthen our balance sheet. Our plan is working. Today, we are raising our full year free cash flow estimate and lowering our year end leverage ratio target to 1.25 times. More importantly, we now have line of sight to reach our target of 1 times leverage next year.

Speaker 2

2nd, we continue to see capital efficiency gains across our operations, delivering some significant operational achievements over the last few months, which we see as sustainable. Finally, we continue to strengthen our portfolio and recently completed the final stage of a multiyear effort to assemble a 25,000 acre position in the liquids window of the Eagle Ford. And we did this with no new capital. This is one of the last contiguous undeveloped areas of scale in the basin and we are excited about the high margin liquids exposure it adds to our portfolio. Listen, we are executing very well and it's apparent that our focus is squarely on running the company and adding value for our owners.

Speaker 2

I recognize there are likely questions related to our ongoing proxy contest, but I do not want to distract from our good news today. Before Q and A, I will make a few points about the governance changes we are proposing and remind you how important your vote is at our upcoming annual meeting. Let's get it started with a look at the Q1. We beat across the board this quarter. All the results are covered in our materials, but I will briefly hit the highlights.

Speaker 2

We generated $56,000,000 in free cash flow, much higher than expected in our original forecast, primarily due to continued gains in capital efficiencies and strong production and product pricing. We are seeing strong well productivity from our recent pad developments and the success of our refrac program. This has provided us with even more confidence in our forecast. Jay, we increased our Importantly, capital investments in the quarter were lower than planned and our team continues to exercise capital discipline while finding creative and safe ways to lower cash, operating costs and enhance margins. Our expectations for full year capital investments are unchanged.

Speaker 2

Said another way, we are offsetting faster cycle times with continued capital efficiency gains. As I have shared previously, our commitment to strengthening our balance sheet is unwavering and strong production and higher free cash flow have allowed for rapid debt repayment. Since closing the South Texas acquisition, we have repaid $178,000,000 in absolute debt. This represents a 15% debt pay down in just 5 months. Overall, our leverage ratio has recovered to the same level it was prior to the South Texas acquisition.

Speaker 2

This is further proof that we are following through when we say strengthening our balance sheet is a top priority. We expect to exit the year at approximately 1.25 times and to reach our goal of less than one times leverage in 2025. Turning our attention to our operational performance, there are 3 achievements I would like to highlight. 1st, we have known for some time that refracs had the potential to provide considerable upside value to us across our asset base as many of our legacy wells were completed with less than optimal completions when compared to today's standards. We initiated our refrac program this quarter and initial results clearly show that re stimulating existing wells with larger jobs and tighter cluster spacing can materially enhance well productivity.

Speaker 2

In our deck, we have a slide summarizing our results. Key takeaway, these wells reach payout in less than 10 months. We have more than 100 refrac opportunities across our portfolio and we are moving additional refrac into this year's program. We see our refrac program as a capital efficient way to maximize volumes while providing flexibility in a time of strong oil prices. Next, we recently drilled our 1st horseshoe well in the Austin shop.

Speaker 2

The well had a lateral length of nearly 9,000 feet and was drilled in place of 2 less than optimal shorter laterals. The well reduced total D and C costs by 25% and improved cycle times by 15% when compared to drilling 2 wells. Now that we have proven our ability to drill Horseshoe Wells, we can use this advanced technology across our asset base to enhance returns and capture incremental resource. We have identified more than 30 additional horseshoe wells to unlock value on what would have been stranded acreage. 3rd, let's talk about some recent success on our South Texas acquisition.

Speaker 2

Please take a look at Slide 12, where we show just how far we are outperforming the previous operator. We are completing a 10 well pad to develop 4 stacked horizons and expect to have initial production late this quarter. In just a few short months, our enhancements have decreased gross drilling costs, drilling days and cost per foot across the Upper Eagle Ford, Lower Eagle Ford and Austin Chalk. Early results here combined with what we've delivered on previous acquisitions further demonstrate assets are better in SilverBow's hands and clearly show the operational excellence and capital efficiency our team can bring to an asset. Let's now shift gears and talk about how our strategy is creating value through acquisitions as we build a scale and durable portfolio.

Speaker 2

Our latest accomplishment is a 3 year effort encompassing contributions from our technical, business development and land teams. Through a series of transactions culminating in a recent land trade, we have assembled a contiguous 25,000 acre position across LaSalle and McMullen Counties in the liquids window of the Eagle Ford. Our subsurface team specifically targeted this area because of its high rock quality and a lack of modern day completions. In addition, many of the legacy wells were drilled out of zone. Importantly, over the last 12 months, we brought online 6 wells in the area, which have delivered rates of return greater than 100% with productivity far exceeding our expected type curve.

Speaker 2

With an estimated 150 long lateral locations to develop in the area, we see this as a powerful liquids lever to pull in our diversified portfolio. Before we go to Q and A, let me address our upcoming annual meeting and the importance of your vote. I firmly believe today's results speak for themselves. Our strategy to create value is working. Furthermore, we are proposing governance changes that we feel are in the interest of shareholders.

Speaker 2

We are asking for your vote to declassify our Board, adopt a majority voting standard and eliminate super majority vote requirements. We continue to strengthen our board through ongoing refreshment. Recently, we appointed Lee Jordan as the new highly qualified Director with a demonstrated track record in international and domestic LNG markets, natural gas trading, business development and most recently as Chief Diversity Officer at Chevron. Lee is an excellent addition to our board and represents the 4th new director to join our board since January 2023. Through multiple communications with you over the past few weeks, we've clearly laid out our extensive engagement with Kimridge over the last 2 plus years.

Speaker 2

There is more than enough material for you to review, But make no mistake, their end game is to force a very dilutive transaction with Kimmerich Texas Gas. I would encourage you to take the time to read through our materials and get educated on the facts. A vote for our skilled board and new governance enhancements is a vote for truth and transparency. We welcome a dialogue with any shareholder. Please reach out.

Speaker 2

Vote with the Board, that's 4 on the white proxy card. In closing, I am proud of our team and their relentless pursuit of safely executing our strategy in establishing SilverBow as the operator of choice in South Texas. We sit in an enviable position today. We have scalable scale and durability built through a history of doing smart transactions and have demonstrated our ability to unlock significant value behind acquisitions. Our assets provide us with flexibility and how we allocate capital today to deliver strong results.

Speaker 2

We are not reliant on near term acquisitions to enhance our inventory. Our capital structure is strong and getting stronger. With our increased outlook for free cash flow, we now expect to achieve our leverage target of less than 1 times in 2025. Most importantly, we are executing a business plan that has proven to create value and we are confident that we will close the significant value gap we see in our equity today. We look forward to reporting on our progress as we continue to focus on creating value for all SilverBow shareholders.

Speaker 2

Operator, we are now ready to address questions.

Operator

And your first question comes from the line of Tim Rezvan from KeyBanc. Your line is open.

Speaker 3

Good morning, folks. Thanks for taking my question. I'll stick with ops here. So my first question, the trade you did kind of core up that LaSalle and McMullen acreage. You talked about 10 to 12 additional wells planned for this year.

Speaker 3

Are those wells you're not drilling elsewhere? I'm trying to understand how this trade maybe changed your drilling plans for the year. And then just a follow-up, was there any production that came with that trade that impacted the production guide for the year? Thanks.

Speaker 2

Yes. Hey, Tim. Appreciate the question. And yes, we're really excited about it. In terms of production, I think there was about 500 Mcf a day that was divested of in the trade and then the rest of it was all on acreage.

Speaker 2

Would tell you that this is a great example of how you have a larger portfolio and you can take advantage of it to unlock value. This block in its entirety, we paid no dollars to acquire 150 locations. In terms of activity, what we're really excited about is the 2 wells we drilled last year, the 4 wells we brought on this year. And those 4 wells this year responsible for some of the upward tick that we put into our production guidance. What we're doing is reallocating capital from other parts of the capital plan to this area.

Speaker 2

So it's not additive to the capital plan. It just gives us more optionality to shift capital to higher rate of return projects.

Speaker 3

Okay. Okay. So those wells there are wells you're not drilling elsewhere this year?

Speaker 2

Correct.

Speaker 3

Okay. Okay. I appreciate that. Yes. We look forward to the updates there.

Speaker 3

Then a follow-up either for you or for Chris on hedges. The company is shrinking the balance sheet. You're on the cusp of getting kind of leverage to that one times goal. And I know that there's potential options with the high yield market out there. And farther down the line, just thinking about cash returns, I thought we would have might see you all layering in some more hedges with the strip having kind of moved like it did.

Speaker 3

So how do you think about hedging as you kind of get closer to the finish line on the deleveraging initiatives?

Speaker 2

Yes. No, I appreciate it. During the quarter and since the last time we spoke to everyone, we did layer on some incremental hedges, topping off some oil this year in the second half of the year when it was above 80% and then putting some hedges on it in 25%. We're essentially 75% hedged for 2024 and we're about with 75% of that gas, 67% of it oil. And then next year we have a pretty strong hedge book as well.

Speaker 2

Consistent with what we've done in the past as we start to move closer towards 2025, we'll be opportunistic to start layering in more hedges as the plan for 2025 becomes more clear. And typically by the time like we where we're at this year, by the time we get into the drilling program for 2025, I'm sure we'll be at 2 thirds hedged or higher. I think to your point and it's one that as we delever the balance sheet, we'll start to have more flexibility and not hedging as much. But for now we're committed to a pretty conservative hedge program. I think you raised a good point in terms of the accelerated debt pay down giving us optionality.

Speaker 2

One of the things we did with our 2nd lien is we have an amortization structure to it. So we're able to pay some of that absolute second lien down throughout the year, which will essentially move debt to our cheaper cost of debt in the RBL. But it also allows us to think about starting to explore the high yield market and where we're at as a company with the transactions that we did last year with the South Texas acquisition, it really positioned us from a size and scale standpoint, a commodity mix and a balance sheet that puts us in a good position to access the public market. So obviously that market is hot and it's something that we're keeping a close eye on as we go forward.

Speaker 3

Okay. I appreciate those comments. If I could sneak one last one in. You bet. You gave some comments on the refracs here.

Speaker 3

To be blunt, refracs have been sort of a mixed bag for the industry over the last sort of 8 to 10 years. And the comments generally you hear from Shale is that you get a stout initial rate and then massive decline. You talked about 10 month paybacks. What gives you confidence on that? And can you talk about just what the cost is for these refracs?

Speaker 3

And that's all I have. Thank you.

Speaker 2

Yes. Thanks, Tim. Your comment around refracs historically and mentioning of 8 to 10 years in my 35 years in the business, I've seen probably 2 or 3 generations of refracs come and go. And to your point exactly, oftentimes you'll see production ramp and then come right back down. I would tell you that we've been probably a little cautious in jumping into refracs.

Speaker 2

We watched a number of the larger operators in the basins perform them. Conoco has had a very aggressive program. Devin, I know has been out talking to the market about the refracs over in the Eagle Ford over the last couple of years. So we did our first two, learned a lot from what those operators have done. Essentially, we're going back in cementing in a brand new liner and starting over in terms of the completion.

Speaker 2

Why we have confidence is we've got the long term production from other operators that have done it over the last couple of years using similar techniques there that they used on ours. And then we've got 60 plus days, 45 to 60 days of production thus far and production is actually holding fairly steady. One of the things that we are doing is right from the start hitting it with artificial lift to make sure that we don't have that fall off. I think well fall off. So we're being very proactive on lift.

Speaker 2

Thank you. Operator, we'll take our next question.

Operator

Your next question comes from the line of Charles Meade of Johnson Rice. Your line is open.

Speaker 4

Good morning, Sean, to you and the whole Silvaro team there. I wonder if we could go back to the Slide 9 and you've talked quite a bit about assembling this position, but I want to talk about the well designs. So that graph you have on the upper right, I recognize it's early days, but that's a huge uplift in productivity. So the question is, can you talk about what the deltas are of these 4 wells that you're graphing there with respect to targeting either different zones or even inside a zone and in different approaches to the completion design?

Speaker 2

Yes, you bet. This is an area that saw activity stating probably in that 2010, 2014 timeframe. Part of the position was owned by Pioneer back then. The trade that we did was controlled by a large operator that hasn't done much in the area for quite a bit of time. And then the other position was a smaller operator.

Speaker 2

Just to clarify on it, we put the position together through 2 acquisitions, again paid nothing for the inventory and then the last piece was a trade. Historically, from a drilling perspective, laterals shorter as you really saw during that timeframe. And most of the time, wells were probably drilled in zone anywhere from about 50% to 75%. When we do our look back on the drilling, we're probably in zone 98% plus. So that's a big part of it is keeping the bit in the wellbore in what's the most high quality rock.

Speaker 2

From a completion standpoint, we almost can look at the refracs numbers that we provide on Slide 10 to get a sense of how these wells were originally fracked. Many of them had cluster spacing of 50 to 100 feet and pretty big significant stage spacing and had proppant intensities probably in the £1200 per foot or less. So that's what get us into the area. One thing that we're doing is we've actually started our 3rd and 4th refrac for the year and those 2 happened to fall on this block of acreage. So it kind of speaks to how we kind of keyed in here.

Speaker 5

Got

Speaker 4

it. And then my second I'm sorry, were you done there Sean?

Speaker 2

I am. Yes. Okay, good question.

Speaker 4

My second question is about this proxy file you have with Cambridge. From the outside looking in, one of the obvious things that has worked and kind of continues to work in the E and P space right now is increased scale. And that increased scale, there's lower financing costs, there's more investors who can look at you. There's a number of things that are benefits to increase scale. And that's one of the most kind of obvious potential benefits of a combination with Kimmer's Texas Gas.

Speaker 4

But what are the what's on the other side of the seesaw that makes this not an attractive not an attractive prospect for Silverado and its shareholders in your eyes?

Speaker 2

Yes. No, appreciate the question. Maybe I'll start with, hey, listen, after probably 2 plus years of discussions with Kimmeridge and through analysis with our financial and legal advisors, looking at this would have been the 3rd time we've engaged with them. We're confident that the deal they proposed was not a good deal for our shareholders. It was clear they significantly underestimated the value of SilverBow and simultaneously substantially over evaluated their value on KTG.

Speaker 2

What I'd say is, we've repeatedly demonstrated our willingness to discuss potential combinations with any and all parties. And I think we have a compelling path to accelerate our value recognition for the benefit of all of our shareholders. I mentioned this in my comments, we have an enviable asset base in the basin. In this basin, we're we agree with you. We're big believers in scale and this basin is rapidly consolidating.

Speaker 2

We regularly entertain discussions with interested parties and I'm not going to discuss any specific discussions, but I can tell you that our board understands its fiduciary duties to do what's in the best interest of all of our shareholders. And our board and management's interest, they're aligned with shareholders. So I'll kind of say that maybe I'll continue on a little bit. We are firm believers in the merits of consolidation and the market is rewarding companies like you said that have the key ingredients to deliver sustainable value through all cycles. And we've kind of outlined what we have and what we present in terms of that opportunity.

Speaker 2

The scale we have, the asset quality, the free cash flow generation, our last two quarters we've demonstrated that significant free cash flow that this asset base has. And we have a balance sheet that I think would work well in any combination. So we feel like today we check nearly all the boxes to earn a premium valuation. Listen, we really transformed our asset base and demonstrated our ability to capture value

Speaker 6

We're committed to have in less than a 75% reinvestment

Speaker 2

rate in We're committed to have in less than a 75% reinvestment rate in order to maintain that strong balance sheet. So I guess I'll just say, in short, I think we have the right strategy and we'll continue to evaluate and I'll say this loud and clear, any and all paths to deliver value for our shareholders.

Speaker 4

Got it. That's helpful elaboration. Thank you, Sean.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Leo Maroney from Roth MKM. Your line is open.

Speaker 7

Yes. Hi. I was hoping you could maybe just elaborate a little bit on sort of the plan to close the value gap. Obviously, you just kind of spoke about scale being important and critical in the sector and that you're open to the right types of consolidation. But apart from sort of consolidating with another entity, what do you kind of see as kind of the pivotal things the company can do to try to close the value gap in its shares here?

Speaker 2

Yes. No, I appreciate that question, Leo. Scale is definitely a criteria that investors are looking for. We feel like the transactions that we've done over the last 2 years have put us into a new level of scale and obviously it has attracted interest in the company for that reason. But it's important to also have a demonstrated inventory of high quality drilling locations and for us even adding to that high rate of return refracs now.

Speaker 2

So purchasers are looking for deep inventory and public investors are as well. They want to see scale that you have run rate over a long period of time. I think we're showing that. I think our low margins, our low cost platform is another ingredient that investors are looking for. So where do we go now?

Speaker 2

I think it's we were very disciplined in how we've grown to this scale. We primarily leveraged debt to do that and we're now aggressively showing the cash flow capabilities of the company in paying down that debt rapidly. And when I say we use the debt, we've really never been over 1.5 times leverage over the last couple of years and we've taken the company from 2.5 times levered at the start of all these acquisitions. So I think what the market wants to see is demonstration on the scale. Quarter was a record EBITDA quarter.

Speaker 2

So at $200,000,000 for the quarter, we now have a run rate of $800,000,000 annual. We're paying down debt quickly. We're on track to get to one times that just with no rerating in the market, just our conversion of debt to equity should start to attract investors. And I think we have other levers to pull in front of us, our cost of capital. I think the scale of the company, we can start to look at cheaper forms of cost of capital.

Speaker 2

And then last but not least, the ingredient that we're going to look at as we get the balance sheet below one times as a shareholder return program. We think we put all that together and we think that people should investors should really be looking at the company and looking at some of our peers and see the upside here.

Speaker 7

Okay. That's helpful for sure. And I guess I was hoping you could also maybe just discuss in a little bit more detail the confidence of the company to kind of come out and raise the production guidance after kind of only 1 quarter here with kind of 3 quarters to left on the year? Can you maybe just talk about the key things that are allowing you to raise the guidance this year?

Speaker 2

Yes. It's something that it's always a great position to be in, right. It's the base is performing well. We have a very active team that's ensuring that we're minimizing the decline of the base. So that's where it starts.

Speaker 2

And then it's looking at the capital program. And we think we put a series of slides in the deck and maybe I'll reference a couple of them, but we continue to drill and complete completion side. Our completion team is now probably getting 70 5 percent to 80 percent efficiencies, meaning that we're pumping 18 to 19 hours a day. So that accelerated timeframe to bring wells on, it brings more production into the year. But like I mentioned in my comments, it's also at a lower cost because of those efficiencies.

Speaker 2

So it just gives us more capital to work with. So base, capital efficiency, then well performance. We've got a couple of slides, Slide 19 and 17 in the slide deck that show wells that we've brought on this year that are significantly exceeding our historical well performance or I shouldn't say our historical well performance, but operators that positions we have acquired from other operators. We point out the production and we've already talked a little bit about it on the block, the 25,000 Acre Block. We're way outperforming there.

Speaker 2

Those wells through April now have just really exceeded the expectations. In our Central L'Oreal area that we acquired from Sundance, we've had great performance that's shown on Slide 17. And in the Eastern extension that was that great deal we did where we put teal, a private operator together with the position from Conoco to consolidate that block. We call it Eastern Extension. We brought on some great wells there and you can see how we're outperforming historical performance.

Speaker 2

So base capital, well performance, we throw in refracs and we have capital savings that we're demonstrating from the capital program that are going to allow us to put more refracs into the year. We think we'll probably do 8 to 10 of those a year. So we'll do more of them as capital becomes available if the team continues to save capital quarter over quarter that will free us up. And I'll just say we'll remain committed though to only a 75% reinvestment rate. So a lot of detail there, but hopefully it gives you how we view our line of sight and confidence on the forecast.

Speaker 7

Yes. That's very helpful for sure. And then just on governance, you spoke to that in terms of some of the changes that you're making, at least you're planning to make here. What's kind of the team's current thinking on the poison pill that's in place?

Speaker 2

The poison pill is something that hopefully through all the information that's been put out there gives investors some clarity on why it's there. We've got a shareholder that is trying to really force an asset on to our shareholders that they're have significant value destruction around. So we were I've been asked this question quite a bit over the last couple of years. This proxy fight has allowed a lot of the hopefully information around why it's it's out there to give clarity to shareholders. It continues to be something, what I guess I'll say, Board will always evaluate what's in best interest for our shareholders and we'll continue to do that.

Speaker 2

I'll probably close with saying the poison pill is due to expire the day after our upcoming shareholder meeting. Okay. Thanks, front, what we've heard from the activist investor is that the poison pills in place to keep management entrenched and that we wouldn't do a deal around it. It's been the exact opposite. With the pill in place, we negotiated a deal went almost to the finish line with that activist investor and they didn't close.

Speaker 2

So I think that's proof that the pill isn't restricting management or board from doing the deal. In fact, it brought a deal to the table. So maybe I'll close with that.

Speaker 7

Thanks for all the color.

Speaker 2

Yes. Appreciate the question.

Operator

Your next question comes from the line of Kevin McCarty from Pickering Energy Partners. Your line is open.

Speaker 8

Hey, good morning. Just looking at the 2Q guide, it looks like oil production is kind of flattish after growing significantly in the Q1 and then the full year guide implies more growth. Just kind of curious how the activity plays into that trajectory and is there any effect from the activity restrictions on the Chesapeake acreage?

Speaker 2

Hey, Kevin, good morning. Yes, let me maybe walk you through some of it. We came into the quarter, brought on a 3rd rig in the early part of the first quarter, brought on, I think was it Jeff, 12 wells in the quarter. But in February, we moved 2 of the rigs onto a 10 well pad on the Chesapeake asset. So as you might expect, the Till turn for Q2 is lower as we complete that 10 well pad.

Speaker 2

So for the Q2, we're anticipating bringing on 7 TILs for the quarter. So 2Q will be the low. We're moving in and starting to frac that 10 well pad as we speak. You think about that, these are long laterals. We have well over 500 stages that we're going to frac there.

Speaker 2

So with all the frac efficiencies, the team will probably exceed expectations again. And right now we're scheduled to bring that pad on late in 2Q, but maybe we can with efficiencies pull it up a little bit. But 2Q will definitely be kind of the low and tills and then 3Q will ramp and 4Q kind of flattens out. We will drop down to 2 rigs in the second half of the year. So that's why you start to see 4Q kind of flatten and let layer out.

Speaker 2

The only lever we have to pull and I mentioned it on the question from Leo is we have some refracs that we could do more of those if we want to if we have CapEx that becomes available.

Speaker 8

Great. And there's obviously a lot of attention around the shareholder vote and you've been pretty clear about your views on the valuation of the KTG asset. Just kind of curious, I mean, you've kind of touched on this on your view on M and A and the other transactions you've done. But what kind of scale do you foresee being able to add from M and A just instead of the KTG asset?

Speaker 2

I probably won't speak to any specific layer or maybe target there. I would tell you, I think everyone knows this. We've been the most aggressive acquirer in the basin with 8 deals done over the last couple of years and there's still plenty to do. So as you look at consolidation in the basin, I think there's plenty of opportunities. We're very diligent around what those deals must look like.

Speaker 2

We've been very vocal around our criteria. It needs to have industrial logic. It needs to deepen our inventory and compete for capital immediately. One of the things that we struggled with the KTG proposal is we haven't been drilling gas down in Webb County or limited amounts for the past 2 years. It just doesn't compete for capital in a 250 world.

Speaker 2

In fact, I think KTG may be one of the only companies down there drilling, others have all pulled their rigs out. So deal has to have inventory that competes for capital and it has to be accretive to our shareholders. So those are the type of deals we're looking for. And what I'll tell you is, hey, we recognize that scale is important for either the public investor or for companies looking to do acquisitions. And we're open to consolidate, we're open to be a buyer and open to be a seller.

Speaker 2

So I think the Eagle Ford has a great future in front of it as other basins get consolidated. This one should be the next basin up in our lines.

Speaker 8

Great. Thank you for the answer.

Speaker 3

Yes.

Operator

Your next question comes from the line of Paul Diamond from Citi. Your line is open.

Speaker 5

Good morning. Thanks for taking my call. Just a quick one. I want to touch on Slide 13. The operational plan for the rest of the year, how much of the, I guess, further improvement in some of these metrics are you all expecting?

Speaker 5

Or is it a kind of run rate from here?

Speaker 2

Good question, Paul. I keep thinking that, hey, can you get any more efficient? On the completion side, we're down to trying to find 5, 10 minute slots. So when you're fracking 20 hours a day, you do have time where you have to fuel engines back up and run tools in the hole. We're getting down to where, boy, can you get more efficient?

Speaker 2

And I'll tell you all that completion efficiency, we haven't changed our design in terms of going to smaller stage design. In fact, we're continuing to enhance it. So completions, team always surprises. Drilling, I think with the scale that we have, we continue to get large the balance sheet, the inventory allows us to do larger pads that generate some efficiency from a drilling standpoint just being on larger pads. We still think probably optimal for us right now is in that 4 to 6 wells range, but there could be efficiencies there.

Speaker 2

And then having just again the opportunity to go to different inventory be it gas or oil, we can always and we've proven to be very effective on allocating capital to the right returns. So there's kind of my thoughts. One area that we could add some efficiency gains on is just leveraging the existing infrastructure scale that we have. A lot of the assets that we've acquired had infrastructure already there and we're going back in over the top of them. We're doing that significantly where we're drilling Austin Chalk wells over the top of Eagle Ford.

Speaker 2

So that has some cycle time efficiencies where you don't have to go back in and build as roads and put in new pipe. So maybe a combination of a lot of things. It's getting harder and harder, but we'll keep on grinding at it.

Speaker 5

Understood. Thanks for clarity. And just one quick follow-up on the refrac opportunity. 100 plus potential targets. How should we think about the economics of those in just a run rate basis?

Speaker 5

Should we expect or are you expecting similar kind of decreased cluster spacing, proppant intensities like how homogenous is that opportunity versus a well by well kind of what works best?

Speaker 2

Yes. No, great question. Obviously, we've done 2 thus far. We've looked at other operators to see how their wells perform to kind of put a risk percentage on consistent performance. We'll see if we can prove that up, but we're seeing a pretty high performance from well to well.

Speaker 2

You do run into risks around mechanical issues going back into wells, but in talking with other operators, they're seeing high percentage there. So I think it's probably 75%, 80% plus in terms of mechanical as well as well performance. We'd tell you the 100 inventory, the 100 refracs we've identified. We've looked thus far mainly on our oil assets. We've yet to look at our gas assets.

Speaker 2

And what's really good, didn't keep on saying this is all these refracs are on assets that we've acquired. The one that we really need to tear into is the Chesapeake asset. Those areas, a big chunk of those wells were done in the 12 to 16 range, kind of where they were just going in and doing the same design again and again and again. So we're really excited about pulling the onion back there some more. And what's always great when you do acquisitions is when you unlock even more value on them than what you paid for.

Speaker 5

Understood. Thanks for the clarity.

Speaker 2

Yes. Thanks, Paul. Appreciate you. Have a good day.

Operator

And your next question comes from the line of Jonathan Shaver of Northland Capital. Your line is open.

Speaker 6

Hey, guys. Thanks for taking the questions and congratulations on the quarter. I have to admit, I feel like I'm going a little crazy here and pulling my hair out. So I know you don't want to dwell on the Cambridge stuff too much, but, you know, and this is my own view, but they don't seem to be like particularly good actors with respect to sincerely having interest for the rest of shareholders beyond their own 12% ownership. You put out a detailed chronicle of all of the interactions that you've had with them, you know, with dates and, you know, kind of like a a journal or a log, if you will.

Speaker 6

And you shared that. You know, I think that was part of a response letter you issued at one point, and that was included as, like, an appendix. And I think all of that was filed to the SEC. So, you know, my impression is that is the type of thing that you would not put out there publicly if you weren't prepared to back it in a court of law and provide that evidence, emails, whatever and so forth. And they haven't come at you as like a defamation lawsuit or something like that.

Speaker 6

So it doesn't appear to be the case that they can test it. And that chronicle on its own seems pretty damning in my view in terms of evidence or at least just generally indications that these guys are not really people you a lot of us would necessarily want to do business with. So my question is, am I right on that chronicle that you put out in that appendix, is that something that you guys would stand behind hypothetically in a court of law? Because in my view, that's kind of all you would need to make your point here. But could you answer that?

Speaker 2

Yes. No, I appreciate your thoughts there. A core value for our company is to really work with all stakeholders from our employees, our service providers that we partner with, our mineral owners and our shareholders. And I would tell you something that we really pride ourselves on and we received this feedback is, hey, we're honest and transparent company and we view that's how you do business and it's really driven a lot of our success. So our focus is we want to stay really driven around adding value and engaging with all stakeholders and good faith and that's we can stand on that and we think we can.

Speaker 2

That's the way to deal with this type of situation. Stay focused on what you do and what you believe and the results will speak for themselves. And we think this quarter should more than demonstrate to investors the strength of the company. So appreciate that question and comment.

Speaker 6

Okay. And then turning to scale. So I do appreciate the point with respect to scale. And so I'm not pooh pooh ing or discounting that. But it is it's not a perfect straight line in linear relationship, right?

Speaker 6

Like you hit these sort of step changes or inflection points where, if you're so small, you can't even keep a rig running on a continuous basis or so then like the first threshold is hitting that point. And then hypothetically, someday, maybe there's like a threshold where a company is so big it can validate or justify moving upstream or I mean downstream and having a refinery or these big step changes, but it's not this continuous linear thing. And here we've got, you said in your own words, the completion team is really crushing it. So it sounds like you've got the scale for bargaining to get fantastic crews and teams and to keep them in your basin and to keep them busy, all these good things. And so, yes, like a 10x scale benefit, like if you were acquired by an ExxonMobil or something, yes, they can squeeze other things out of it.

Speaker 6

But is there anything I'm missing in terms of is there some scale benefit like an uptick that would just be sort of right around the corner that if you guys were only 50% bigger or whatever size you'd get with someone like Kimmeridge like that there's just some genuinely thing that would be unlocked by that? Or is it at this size and scale going from one increment to the next? Does it really make such a difference?

Speaker 2

No. Great question. I think it is the old argument of you just scale for the sake of scale. And I think that's a dangerous approach to pursue. A company has to be very thoughtful and diligent around doing transactions.

Speaker 2

You don't want to do transactions that are destructive to your balance sheet. We've said all along that, hey, if we do a deal and we use leverage to do it, we'll have a leverage in and around 1.5 times and we'll only go to that level if you show clear line of sight of bringing that leverage down. And that's what we did with the Chesapeake transaction. We got to 1.6 for maybe 30 days and within a quarter brought it down 2 clicks. So you got to think about, hey, the way you do scaling is important.

Speaker 2

You got to protect the balance sheet. It's got to bring you don't want to pay what we've really loved about our deals is we don't pay for locations. We look at some of the deals that are out there and some that have been proposed and people are wanting $2,000,000 to $4,000,000 a location or people are paying $2,000,000 to $4,000,000 a location for wells that you won't drill for 6, 7, 8 years as you're waiting for higher commodity prices. That's just destructive to a balance sheet to do that. So we've never paid for locations, which we think is imperative when you scale.

Speaker 2

And it just has to improve margins and reduce costs. So those are the criteria that we have. I think if you do the right scaling to your point, it starts to see that uplift and there's a clear trend that investors want scale and or bigger companies to looking to acquire 1 scale. But the criteria I took through on an acquisition, really successful companies employ that same thought process. So, listen, we're going to continue to stay focused.

Speaker 2

We continue to be open to scale and big cheerleaders of scaling in the Eagle Ford and we think SilverBowles will play an active role in that as we move forward.

Speaker 6

Okay. And then if I can squeeze just one more question. And It's around the idea or the notion of sort of valuation gap as a point of focus. So with public markets and the way the stocks are valued, there are sort of the things you can control and the things that you can't control. And I've seen and I think a lot of us on this call, we've all seen cases in the past where focusing on closing evaluation gap as a point of focus turned out to be the wrong thing.

Speaker 6

Maybe something could be done for optics. The Whiting acquisition of Kodiak or merger with Kodiak comes to mind. I mean, that was, as far as I can tell, just so that they could say, hey, we are the largest producer in the Bakken. So they could leapfrog Continental and just get that, like, almost literally just for a headline because they were at a discount to Continental. And so I was like, look, if we get the headline that says we're the biggest Bakken producer, we're going to get that multiple.

Speaker 6

That was a disaster. So my question is and the depressed valuation that is high. Gas prices are so low right now and you got the hedging and everything, which is great. But the Eagle Ford of all basins, the Eagle Ford is somewhere that is just such a beast and can really shine. I mean, just the raw quantity of energy that can come out of these wells that only gets economically reflected when gas prices are better.

Speaker 6

That's like a there's a sleeping giant component there. And so but you don't have control, right? Like these valuation things and all that might change or just come around when natural gas prices come back. And so the question is, is it even do you think honestly sort of in your heart of hearts as a CEO and maybe this is a sensitive question, but is it even right or fair? And let's say is it fair to long term shareholders?

Speaker 6

To shareholders, you are looking past just a couple of quarters. Is it fair to them to be thinking about like valuation gap right now at this moment in time?

Speaker 2

Yes. I think that's what a lot of investors are looking for, right, that opportunity to invest in equity, a company that has clear long term strategy to add value. We talked through on today's call some of the key metrics of getting there and attracting more investors to the stock. I think SilverBow is on that cusp. We're on a totally trajectory.

Speaker 2

We have a ton of momentum behind us. I think you raised an excellent point though. Short term investors, investors that focus on 30 day type numbers, 60 day type numbers and how things trade over a short period of times. They're probably not seeing the bigger picture. We like to point to, hey, what have we shown in value creation over the long term.

Speaker 2

On Slide 5 of our presentation, we lay out what our 1 year return is relative to our peers, our 3 year return, our 5 year return. And that's what long term investors recognize is, hey, if you're doing building the right company, putting the right assets in place, having the right people to execute on those assets and a real strong financial position, investors will come and recognize that value. So that's where we're focused on and maybe I'll close and just say that, hey, any SilverBow is the largest public peer play operator in the Eagle Ford. And so attention on the Eagle Ford, we really want it. Some of what probably what we're doing right now is drawing attention to it.

Speaker 2

That's great. Any further combinations that we do will even make a bigger pure play Eagle Ford, if we chose to go that route. So anyway, I appreciate all your questions, Donovan.

Operator

There are no further questions at this time. So I'd like to hand the call back over to Sean.

Speaker 2

Thank you, Gavin. Appreciate everyone's interest in the company. Hopefully, you'll take away from this call that the company had a really great quarter and we have a ton of momentum and we look forward to sharing more information with you. And like I said in my comments, we're always available. Please reach out if you have any questions that you'd like for us to address.

Speaker 7

Appreciate it.

Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.

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Key Takeaways

  • SilverBow generated $56 million in free cash flow in Q1 2024, prompting a raise to its full-year free cash flow guidance and a year-end leverage target lowered to 1.25×.
  • The company has repaid $178 million of debt (a 15% reduction) since the South Texas acquisition and now sees clear line-of-sight to achieve 1.0× leverage by 2025.
  • Operational excellence drove sustainable capital efficiency gains: the refrac program delivered payouts in under 10 months; a 9,000-ft “horseshoe” well cut D&C costs by 25% and cycle times by 15%; and a 10-well pad in South Texas outperformed the prior operator on cost and schedule.
  • SilverBow completed a cost-free, multi-year assembly of a 25,000-acre contiguous liquids window in the Eagle Ford, unlocking ~150 long-lateral locations that have yielded returns above 100% IRR.
  • The team continues to exercise capital discipline, offsetting faster cycle times with lower investment to maintain a sub-75% reinvestment rate and maximize shareholder returns.
AI Generated. May Contain Errors.
Earnings Conference Call
SilverBow Resources Q1 2024
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