SilverBow Resources (SBOW) Update - Feb 1

[dan_s]

I have updated my forecast for SBOW and it will be posted to the EPG website this afternoon.

SilverBow is an aggressive growth company that is funding all D&C capex with operating cash flow.
> Production growth was 17.2% in 2021, followed by 26.8% in 2022 and their guidance is for at least 50% growth in 2023.
> It is a pure play on the Eagle Ford / Austin Chalk play in South Texas, which has good pipeline access.
> 2022 production mix was 73% natural gas, 16% crude oil and 11% NGLs.
> 2022 realized revenues (net of cash settlements on hedges and differentials) were 56% from natural gas.
> 2023 drilling program to focus on areas with more oil, so the majority of 2023 revenues will be from liquid sales.
> More than 50% of their 2023 natural gas is hedged at an average price of approximately $4.00/mcf.
> My 2023 model shows that realized commodity prices should be $3.82 for ngas, $77.12 for oil and $29.00 for NGLs.
> Operating cash flow should be over $500 million and I expect this year's drilling program to be around $400 million (was $340 million in 2022)
> My current valuation is $81.00 based on 3.5 X operating cash flow per share.

TipRanks' operating cash flow forecast for 2023 is $24.16/share, which compares to my forecast of $22.73/share.

[Fraser921]

I will have to play with that model. I come up with 35.

How about 2.50 ng 75 oil and 3 x on next year cash flow only. Last year cash flow shouldn't be relevant. We had 10 NG and before Biden solved the energy crisis

We need a base case, a worst case , and a best case. I think the current models are way too optimistic and based on what the SHOULD be and not WHAT they are. ie current market valuations are about 3 x at best

But that's why your models are so useful, we all can model anything we want and I find great value in that

[ChuckGeb]

You have made several comments recently regarding SBOW's focus or lack of focus on gas going forward. In their most recent public comments in November (3rd quarter earnings release) they stated that they were moving both of their rigs to Webb county to focus on their gas play there and they in fact had increased their WI in those wells due to the other WI participant going non-consent. The only reason I can think of for your shift to an oil company is that the oil-gas price ratio has dropped so significantly that revenues will be primarily liquids based. Is that your thinking on this one? I follow this company closely and I would expect that they will soon shift their rigs to more of their new acreage that is oil weighted but have heard no public comment to this effect since their comments in November. Have you heard something different?

[Fraser921]

Good question. Is it a gasser or is it oily?

Its not a gasser anymore as the gas is worthless

[ChuckGeb]

It’s very unfortunate that so many of the bulls leading the herd were well bullish on gas. But as RJ has acknowledged, their call was dead wrong. So was the timing of SBOW. Nonetheless their gas position in Webb County will stand the test of time. They hedged what appears to be half of gas production with floors that will get them through. They have the ability to shift rigs to their liquids rich plays. However when a small company is drilling pads I don’t think that happens as fast as investors would like. We will soon see with their upcoming all and release. I am long SBOW as I think their game plan has been solid. Just an unfortunate recent turnover near the end zone.

[dan_s]

Take a look at the bottom of my forecast model for SilverBow. Their gas in definitely not "worthless" since their operating expenses and transportation & gas processing expenses are less than $1.00/mcfe. Plus, ~60% of their 2023 forecast natural gas production is hedged average prices of more than $4.00.

My updated valuation is $79/share, primarily based on the midpoint of their 2023 production guidance of 410,000 mcfepd (68,333 Boepd).

SilverBow is going to report strong Q4 2022 results, including a big increase in production, and updated guidance on March 1st.

FWIW 2 analysts have submitted 2023 forecasts to First Call (Reuters):
> Their revenue forecasts are $826.3 to $1,002 million, which compares to my 2023 revenue forecast of $765.3 million. < $353.6 million in 2022
> Their Net Income per share forecasts are $12.77 and $14.78, which compares to my 2023 EPS estimate of $9.29. < $9.97 EPS in 2022
> TipRanks' operating CFPS forecast is $24.16 for 2023. My forecast is now $21.51 operating cash flow per share. < $15.85 CFPS in 2022

We'll know a lot more about this very profitable small-cap after March 1st.