SilverBow Resources (SBOW) Valuation Update - Aug 14

[dan_s]

I have updated my forecast/valuation model for SilverBow based on information that the Company provided this morning.

My valuation of SBOW increases by $12 to $80/share.

The "Chesapeake South Texas Acquisition" will be immediately accretive to SilverBow's financial results. It is a pure cash deal, so the per share results will be "stunning". Plus, it adds a lot of high-quality "running room".
> My valuation is still based on just 3.25 X annualized operating cash flow, which includes 2022 - 2024 CFPS of $15.82 in 2022, $20.84 in 2023 and $40.97 in 2024. Guess what happens to the stock valuation when my model roll forward another year?

Here is the upside. If:
> Q3 and Q4 results match my forecast,
> the Chesapeake Acquisition closes in November and
> if 2024 guidance matches my forecast assumptions then
a valuation multiple of 4X operating CFPS should be justified.

This is a VERY BIG DEAL for a Company of this size. Based on my experience at Hess, this is going to be a major task for SilverBow's back office people. They will need to hire a lot of the field people that now work for Chesapeake. When lots of people are involved, it complicates deals of this size. SilverBow's staff does have lots of acquisition experience, which is a big plus.

If all goes well, SBOW should be a BIG WINNER for us.

[Fraser921]

That’s an increase in valuation of close to a billion for assets purchase

700 cash/debt
250 equity
=
1000 increase in valuation

So, they should stop drilling and keep rolling up companies as their value goes up 250 m /$12sh every 700 m spent

I like the deal, I bought today . I will be ecstatic if it goes to $50

[knusser58]

Hi Dan,
for this deal SBOW needs to take on a lot of debt. The new Debt/Equity ratio will be high. How will the market view this vs all of the positives of the deal?
Also, what is your 2024 forecast for capex for SBOW? How much FCF will they generate in order to pay down Debt?
Regards,
Klaus

[ChuckGeb]

They are buying the assets for 2.3 times EBITDA which approximates cash flow. Their Enterprise Value divided by NTM EBITDAis 2.6 times . Their identified peer group has EV/ntm ebitda of 3.4 (most) to 4.9. Enterprise Value obviously includes value if stock plus their debt. How do you justify 3.25 times cash flow upon announcement of deal going to 4 times for just stock? Seems like the market including those at top of the class indicate something less. Do you consider the current market conditions in you making your valuations? It seems like real transactions seem to provide substantial validation of lower multiples. I think this is a great stock but not now worth 2 times current price.

[ChuckGeb]

Just eyeballing the SBOW acquisition slide deck seems to reflect that majority of new acreage is in the “wet gas” window. Thus despite being 60% liquids weighted, I assuming the majority of liquids are ngls and not black oil. Anyone have an opportunity to listen to the call? They snuck it in a bit early today and I haven’t yet seen a replay link.

[dan_s]

Update from Neal Dingmann at Truist Financial. His price target is $59.
---------------------------------------
Dated 8-14-2023

SilverBow Resources, Inc. (SBOW)
Transformational Accretive Deal

SilverBow announced an increase in its Eagle Ford position with the acquisition of
Chesapeake’s (CHK, Buy) Rich Gas assets for $700mm (excl. contingency). We believe the
transaction boosts SBOW’s scale to a level that will help benefit future D&C efficiencies.
Further, the mid-two times deal value is lower than what we have seen for other notable
acquisitions in recent months. We estimate future FCF to improve given existing and
potential upside production for a number of wells that can be completed relatively soon. We
look forward to integration updates and future potential synergies. We are raising our price
target to $59 from $51.

Acquisition Details, Per The Company
• Production of 31-33 Mboepd, 42k net acres
• ~300 potential drilling locations, two-thirds in the Austin Chalk, one-third in the Eagle Ford
• Acquisition cost of $700MM, $650MM in up-front cash payment, $50MM deferred
payment, and a $50MM additional contingent cash consideration based on future oil
prices of $75-80/b (additional $25MM cash consideration) and $80/b (additional $50MM
cash consideration)

Expanded Capex Program Drives ~$300MM+ Incremental EBITDA for ‘24
We expect the newly acquired assets to compete for capital immediately, and given our belief
that SBOW continues with its 2-rig/1-frac program for its legacy assets, we are forecasting a
FY24 ~1-rig/1-frac program for the acquired assets. Our estimate is drilling front-end loaded
through 1H24 with completions expected through 2Q24 and 3Q24. Correspondingly, we
believe the incremental gain in revenue will also be complimented by operational synergies
and cost improvements in the field through scaling of the operations and improved OFS
pricing. As a result, we anticipate incremental EBITDA to meet or exceed $300MM for 2024.

Accretive Acquisition Scales SBOW’s Eagle Ford Acreage Position
SBOW is currently operating a 2-rig/1-frac crew D&C program across its oil-weighted Eagle
Ford position and upon deal close in early 2024, the CHK-acquired assets will immediately
compete for Capex against its legacy asset base. The acquired acreage equates to ~300
future drilling locations with a 67/33 split between the acquired Austin Chalk/Eagle Ford
locations. We expect development to begin upon closing with D&C activity to be liquids
driven. The acquisition grows SBOW’s South Texas acreage position to 60,000 net acres,
and with spacing considerations of 1,200 ft. for the Austin Chalk wells, and 800 ft. for the
Eagle Ford drilling locations. The acquired asset creates contiguous land positions to scale
future drilling activity and grow incremental cash flows.

Updating Estimates, Increasing PT to $59 from $51
We have updated our model to account for the acquisition, and have increased our FY24
capital program to account for an additional ~1-rig/<1-frac program for the newly acquired
asset. Our $59 price target is derived from two equally weighted methodologies with the
first being our ’24 EV/EBITDAX multiple of 3.5x (3.9x peer group average) applied to our
2024E EBITDAX estimate of $1,033MM ($660MM consensus) and the second being a FCF/
EV Yield assumption of 14.0%.

[dan_s]

IMO Neal's 2024 forecast looks a bit too "gassy", because I think SilverBow will keep its two operated drilling rigs working in the oil prone areas. If natural gas prices do move firmly over $3.50, the Company might add a rig in Webb County to accelerate their ngas production in 2H 2024, which would be a good change for my 2H 2024 forecast.

Send me an email if you'd like to see Neal's full report, which does include a detailed forecast by quarter for 2024.
My direct email is dmsteffens@comcast.net