SilverBow Resources (SBOW) Valuation Update - May 4

[dan_s]

SBOW closed at $31.00 on May 3.

I have increased my valuation by $4 to $63.00 per share. < TipRanks' current price target is $43.25/share. The three most recent analysts updates all rate it a BUY.

SilverBow closed the Chesapeake South Texas Acquisition on 11/30/2023, so Q1 2024 is the first full quarter of combined results.
> Q1 production exceeded the Company's guidance, and they raised their full year production guidance.
> They will be completing ten wells in June that should results in higher 2H 2024 production than their updated guidance and what I've used in my forecast model. < My valuation model is based on the mid-point of their updated detailed guidance.
> The Company's hedging program will result in much higher realized natural gas prices than what was in my preliminary 2024 forecast. < This is the primary reason for my increased valuation.

SilverBow does have some work to do on the balance sheet, so this year's free cash flow will be used to pay down debt. The Company has no near-term debt problems and operating cash flow is more than enough to fund this year's drilling program. Year-over-year production growth was 32% in 2023 and based on the Company's updated guidance, production should be up ~58% YOY in 2024.

For its size, SilverBow has a lot of high quality "Running Room". Comments below are from their May 1 press release:
> Through multiple transactions over the last three years and culminating with a recent acreage trade, SilverBow has assembled a contiguous 25,000 gross acre position in the liquids-rich window of the Eagle Ford. The Company has drilled six wells on the position with well results and returns exceeding expectations. This position holds an estimated 150-plus high-return development locations. SilverBow plans to drill 10-12 additional wells on the asset this year
> Implemented a successful refrac program with initial wells demonstrating internal rates of return of more than 100%. SilverBow has identified more than 100 refrac opportunities and plans additional refracs in 2024
> The Company drilled its first horseshoe (U-shaped) well in the Austin Chalk, proving its ability to capture significant upside through development of complex acreage configurations. More than 30 horseshoe development locations have been identified
> Delivered significant operational achievements year-to-date which are expected to lead to sustainable capital efficiencies and recovery of additional resources.
> SilverBow's drilling performance on its first 10 wells on the South Texas acquisition acreage exceeds the prior operator's performance by 30%

2024 OUTLOOK

For the second quarter of 2024, SilverBow expects its production to be 90.8 - 95.4 MBoe/d, with oil volumes of 23.5 - 25.0 MBbls/d. For the full year 2024, the Company increased its production guidance to 90.0 - 97.3 MBoe/d. Based on the revised guidance, SilverBow's full year 2024 oil/liquids volumes are expected to comprise 48% of the Company's total production. Consistent with SilverBow's returns driven strategy, the Company's volume guidance assumes full ethane recovery in the NGL production stream for the remainder of 2024.

SilverBow increased its estimate for full year 2024 free cash flow to $175 - $200 million with estimated full year 2024 capital investments unchanged at $470 - $510 million. Additional detail on the Company's outlook can be found in the table included in this release.

RISK MANAGEMENT

SilverBow has a proven track record of effectively managing commodity price risks through the use of derivatives. As of April 26, 2024, the Company had 63% of total production hedged for the remainder of 2024, using the midpoint of guidance;
> 75% of natural gas production hedged at an average price of $3.78 per million British thermal units;
> 67% of oil hedged at an average price of $74.87 per barrel and 28% of NGLs hedged at an average price of $25.92 per barrel.
The hedged amounts are inclusive of both swaps and collars with the average price factoring in the floor price of the collars. Refer to the corporate presentation posted on SilverBow's website today for a detailed summary of the Company's derivative contracts.
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Bottomline: My $63 valuation is based on just 2.5 X annualized operating cash flow per share, which I believe is a conservative multiple for a Company with free cash flow and this much "Running Room". Kimmeridge Energy Management Company's failed attempt to take control of SilverBow is a "distraction" that, in my opinion, has created a buying opportunity on SBOW. Your next step is to carefully review the Company's updated presentation.

[grimaldi]

I would like to believe that Kimmeridge's attempt had failed but it seems like they are still fighting. I have gotten a half dozen ballot by email and snail mail and four phone calls, from actual humans, at home. It must be expensive to call every little stockholder, and this barrage of campaigning may cause some small retail holders to get confused and vote in unexpected ways.

[dan_s]

IMO it is highly unlikely that Kimmerridge will be able to take control of SilverBow, but even if they do it does not change the fact that SilverBow is a very profitable company that has a lot of high-quality "Running Room".
These situations just need to play out.

[ChuckGeb]

Kimmeridge has posted some direct critical points that SBOW management cannot ignore and virtually sets a new bar for them. While I voted against the Kimmeridge proxy I think they have served the shareholders well through their stick motivation for management to focus now on shareholder returns by development of the substantial assets they have acquired over last two years. Judging from their Q1 report I think management understood the memo.