Energy Prospectus

Its pretty cool when the 600 lb. gorilla ganders over to your 'hood. That's what happened yesterday, when, in conjunction with announcing its 3Q earnings, EOG announced that it has entered a "new" gas play in south Texas, Webb County to be exact, and will be drilling long lateral gas wells there in both the Austin Chalk and the Eagle Ford. In EOG's presentation they espouse the tremendous economics of this play. They say they now have about 163K acres there.

This area happens to be the same area that SBOW operates in and is actively drilling out as we speak. SBOW has about 120K acres in the gas window of the Eagle Ford, and about another 40K acres to the north, in the oil window.

With a market cap > $20B, EOG needs to get a substantial amount of acreage in any particular play in order for it to ever "move the needle" on its total company production. This has me wondering whether EOG might try to acquire SBOW. A whale does not usually bother going after a minnow but this whale just went through a lot of time & effort to amass an acreage position in this minnow's backyard, and now that they put out a PR on it it will be difficult for them to keep building on that position by just acquiring more acreage directly. Could the next step for EOG be to acquire SBOW?

As an interesting aside, in the same PR that EOG announced entry into Webb County, they announced the closing of their exit from the Marcellus. They ended up getting $130M for their assets there, which per the financials appears to have resulted in a $70M loss.

Even ignoring the EOG development, SBOW is absurdly undervalued. They are trading at an Enterprise Value of about 3.5 X EBITDA, a multiple typically reserved for companies that are struggling financially. SBOW is not struggling but is thriving -- they are on track to generate free cash flow of about $50M this year, which is only slightly less than their current market cap.

SBOW is guiding to single-digit production growth next year but when you look at their gas development plan its pretty obvious that they will blow right past that guidance. They produced 183 mmcfe/d last quarter and they are planning to put online a 3 well pad right around the end of the year, and then a 6 well pad around the end of 1Q of next year. These wells typically come on at around 15-17 mmcf/d each, so even taking into account base production declines SBOW is going to be producing a helluva lot more gas next year than they are now.

The location of SBOW's play allows it to enjoy the highest gas prices in the country. Their realized gas price is typically right around, or at most just a few pennies under, Henry Hub. This really helps their economics obviously. About 3/4ths of their production is gas, as measured on a btu-equivalent basis. This mix will probably skew more toward gas next year.

Their debt, while a bit on the high side, is comfortable -- other than their RBL there is no debt due for the next 4 years. They keep steadily paying down their RBL from the free cash flow they are generating so there should be no problems with them maxing that line out. If they were going to have problems with that, it would have happened earlier this year, when natty prices crashed.

I believe this stock has a good chance of doubling over the next year, maybe sooner. This is not all that much of a stretch when you see that all that would entail would be to have its EV/EBITDA multiple expand to a mere 4:1, which remains an absurdly low multiple for a company that is about to grow its production as much as SBOW is.

Hopefully Dan will consider adding SBOW to his Small Cap portfolio after GPOR declares bankruptcy.

SBOW is on my Watch List.

Great to hear that Dan -- just curious what it would take for you to consider moving them up? If their Webb County acreage ends up to be good for the Austin Chalk in addition to the Eagle Ford, as is apparently the case for EOG's acreage there, that should blast this thing to the stratosphere. I know Austin Chalk has a bad rep in the industry but below is a copy of a post I made about this on the IV Energy board:

Wilk, I probably shouldn't have even mentioned Austin Chalk in a discussion about SBOW since they have never brought that formation up as being prospective on their acreage. Not sure whether the reason(s) for this is that their acreage is depth-restricted to the Eagle Ford only, or if not, whether its just that they have never tried drilling a well in that formation.

I suspect that the reason is the latter, which would make sense given the general impression that the industry has about this formation, which you and others here have so eloquently described. (For one thing, it had previously been my understanding the the Chalk was primarily an oil formation, not a gas formation, yet EOG describes it as being just gas, in Webb County.)

But once I looked into what EOG had to say about their little "experiment" I think they may be on to something.

First, EOG had this to say in their PR:

" The five initial Austin Chalk wells produced an average of 3.5 billion cubic feet (Bcf) of natural gas per well in the first year of production, with an average lateral length of 6,600 feet per well. EOG expects to complete approximately 15 wells in the Austin Chalk in 2021. A typical Austin Chalk well is expected to recover 22 Bcf of natural gas, or 18 Bcf net after royalty, from a 9,000 foot lateral at a targeted well cost of $7.0 million per well."

Then in their earnings CC they provided some more background on what they think and why they think it:

"We first identified the potential of the Austin Chalk formation as an oil play on top of our Eagle Ford footprint back in 2016. We have since completed about 100 gross Austin Chalk oil wells in that area, capturing 59 million barrels of oil equivalent of reserve potential, net to EOG. Shortly following that discovery, we began evaluating the Austin Chalk formation in the Gulf Coast Basin and identified its potential as a dry natural gas play in Webb County. Our current 163,000 net acre position is a combination of legacy acreage and new acreage captured through low-cost organic leasing, trades, and a bolt-on property acquisition.

We believe our position covers the majority of the sweet spot of the play. We completed our first two wells in Dorado in January of 2019, targeting the Austin Chalk in the Eagle Ford. To further delineate the play and collect more data, we completed 15 more wells over the remainder of 2019. We paused our drilling activity during 2020 to evaluate both the production results and the significant amount of technical data we collected from cores, petrophysical logs, and 3D seismic surveys.

This data, including a year's worth of production history from our drilled wells, has generated a robust reservoir model, giving us confidence in our resource estimates and projections for well performance. We are leveraging our proprietary knowledge built from prior plays to move quickly down the cost curve with our initial development. We currently estimate a finding cost of $0.39 per Mcf in the Austin Chalk and $0.41 in the Eagle Ford. Combined with EOG's low operating costs, an advantaged market position located close to a number of major sales hubs in South Texas, access to pipelines to Mexico, and several LNG export terminals, Dorado is in an ideal position to supply low-cost natural gas into markets with long-term growth potential."

When you figure that these first 5 Austin Chalk wells cost $7M a piece to drill, the initial "experiment" by EOG cost it around $35M, a sum that would be far out of reach for SBOW to ever try, but a rounding error for a company with a $20B market cap. The fact that these first 5 wells produced an average of 3.5 bcf of gas in their first year seems, to me and EOG at least, to lead to the conclusion that it is now worth taking this experiment into the beta phase, which EOG is doing, with plans to complete another 15 wells in the Austin Chalk next year. The apparent success of this experiment will now open the possibility of SBOW maybe trying its own Austin Chalk well at some point, the success of which would bode very well for the company.

It will be the end of November before I can take a hard look at SilverBow. Northland is the only research firm that I can find that has commented on their Q3 results.

SILVERBOW RESOURCES (SBOW) RECEIVES A BUY FROM NORTHLAND SECURITIES
November 6, 2020

Northland Securities analyst Jeff Grampp maintained a Buy rating on SilverBow Resources (SBOW – Research Report) today and set a price target of $7.00. The company’s shares closed last Thursday at $4.74.

SilverBow Resources, Inc. is a growth-oriented independent oil and gas company. It engages in the acquiring and developing assets in the Eagle Ford Shale. The company was founded on October 11, 1979 and is headquartered in Houston, TX.

Actually December would be a great time for you to write up these guys IMO. There is a lot of tax loss selling that is probably going to happen with this stock over the next few weeks -- it was selling at $10 less than a year ago. It has rallied a bit recently but I believe that there is a good chance that these gains will fail to hold up unless the weather gets a lot colder than is currently being projected.

The fact that there is so little analyst coverage of this stock is a big positive IMO. That plus the fact that the market cap is still well under $100M is a big clue that the big boys are obviously not buying it. This leaves the coast clear for the retail investors such as most EPG members to do their own analysis of the stock (with your help of course), and buy it based on that work.

Also, I believe that there is a decent chance that one or more analysts may initiate coverage of this stock over the coming year. Once they show that they can both increase production and pay down debt significantly at the same time (a la GDP -- thanks for bring that one to my attention), I would think some analysts would find them of great interest.

I'm up to my gills with work and I need to update lots of forecast/valuation models before I can start working the November newsletter. Keep posting any news on SBOW here.