Analysis of Silverbow Q1 results

[Petroleum economist]

Silverbow published solid Q1 results, with growing production and a good profit. The balance sheet is weak. Silverbow therefore will not provide shareholder returns in 2024/2025.

Production
• Q1 production (91.8 K BoE/d) was near the top of the outlook (86.5-93.3 K BoE/d). Due to the Eagleford acquisition, production is 27% above Q4 2023 (72.1 K BoE/d).
• Q2 outlook (90.8-95.1 K BoE/d) indicates a growing production.
• The 2024 outlook (90.0-97.3 K BoE/d) was increased by 4%. The 2024 mid-point is 58% above 2023 (59.4 K BoE/d)
• Silverbow proven reserves of 446 M BoE (2.675 tcf) are equivalent to 13.5 years of 2024 production. This is well above industry average (9.5-10 years). The reserves allow production in 2025 and beyond to grow with 3-4% per year.
• Liquid production (oil 28.1%, NGL 17.9%) in Q1 was almost half of the total.
• Production over time will become more gassier as the reserves composition (21/10/69) is not aligned with the Q1 production (28/18/54).

Balance sheet
• Debt reduced by $ 134 M from $ 1,174 M (late 2023) to $ 1,040 M (Q1 2024). Debt/EBITDA ratio late 2024 will be a highish 1.2-1.4.
• Due to non-cash hedging losses, the net value of hedging positions on the balance sheet reduced from +$ 55 M to +$ 5 M.
• Solvency improved from 43.5% (late 2023) to 43.6% (Q1).
• Solvency is too low and debt/EBITDA too high for shareholder returns. In 2024/2025 free cash flows therefore needs to be directed towards the balance sheet.
• Late 2025 solvency will have improved to 55% and debt/EBITDA to <1.0, allowing shareholder returns to start in 2026.

Profitability
• Adjusted profit in Q1 was a solid $ 54 M (eps $ 2.09).
• Net loss was -$ 16.0 M, equivalent to an eps of -$ 0.61. The net loss included -$ 90 M of non-cash hedging losses. As these reflect changes in the value future hedging positions and I absorb them in future 2024, 205 and 2026 profit/loss calculations, I ignore these. They do show up in the balance sheet.
• Q1 free cash flow was a good $ 56 M. 2024 free cash flow is estimated to be $ 175-200 M
• Silverbow has hedged 75% of the 2024 oil production, mostly in swaps at $ 76-78/bbl. Silverbow is protected against oil price reductions. Silverbow also hedged 67% of the gas production.
• Out of the 2025 gas production 57% is hedged, mostly in swaps at $ 4.10/MM Btu, thus ensuring 2025 profits.
• Q1 results bode well for the rest of 2024. With WTI oil prices at $ 80-85/bbl, I expect a 2024 net profit of $ 235-245 M (eps $ 9.35-9.70). The PE is very low at 3.2-3.3.
• Profits in 2025 should increase due to a higher production.

Shareholder returns
• Silverbow did not pay any dividends or bought back any shares in Q1.
• Due to the weakness of the balance sheet, I expect that shareholder returns in 2024 and 2025 will be nil.
• In 2026 shareholders returns can start, as the balance sheet has been reinforced with the 2024 -2025 free cash flows.
• 2026 returns could be $ 3.00-3.50, equivalent to a yield of 10-12%.

Conclusion
Silverbow is an attractive investment but requires patience.

In my oil and gas companies ranking, Silverbow ranks 6th out of 72 companies. The low PE, the growing production and the high yield after 2025 help. I use risk factors in my oil and gas company ranking. for setting discount rates for future earnings. Those for Silverbow are a mixed bag:

Solvency: LM, Free cash flow: LM, Liabilities: M, Unit costs: H, Reserves: LM, Market Value: MH, Composition: MH.
(L = Low risk, LM =medium low risk, M = medium risk, MH = Medium High, H = High risk)

If you want to know more on the ranking system or the results, than please drop me a private message with your email address. I will send you a set of PowerPoint slides with details and the latest ranking.

Kimmeridge
I saved Kimmeridge for last.
Kimmeridge has nothing to do with Q1 results. Kimmeridge took its merger proposal for Silverbow with KTG from the table, but is still trying to get three people on the supervisory board. The result of this will become clear at the annual meeting 21st of May.

The Q1 results prove that Silverbow can survive without Kimmeridge.

[dan_s]

Good work. I'm heading home today. Should be back at my desk by 3pm.
Silverbow's results are in line with my forecast. This year's drilling program is focused on increasing oil production.

[dan_s]

Bad weather has caused our flight to arrive an hour late. If I don't get to Silverbow's forecast today, I will update it tomorrow.