SilverBow Resources (SBOW) Valuation Update - Oct 18

[dan_s]

Today I will be updating my forecast/valuation models for SBOW, Earthstone Energy (ESTE) and Permian Basin (PR). I expect the merger of ESTE into PR to close on October 31st. So, my Q4 forecast for PR will be based on the assumption that 2/3rds of ESTE's production will be reported by PR in Q4.
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My SilverBow model is based on the assumption that the Chesapeake South Texas Acquisition that was announced on August 14th closes on November 15th. The actual Closing Date does not impact cash flow because the Effective Date of the deal is 2-1-2023. Operating cash flow from the Effective Date to the Closing Date is just a purchase price adjustment. The Closing Date does impact the Income Statement because production is only recorded by the acquiring company after the deal closes. SilverBow said the deal will close in Q4, so I just picked the mid-point of the quarter.

SilverBow has told the market that their 2023 exit rate should be 99,000 Boepd (50% liquids).

My 2024 forecast is based on full-year production of 105,000 Boepd, which I believe is a very conservative estimate because this company has a strong track record of adding production through the drillbit. My forecast is based on a 2024 production mix of 49% natural gas, 31% crude oil, and 20% NGLs because their current two rig drilling program is focused on oil prone areas. < One of the reasons I am so high on this company is that they have the flexibility to focus their drilling program on oil or gas depending on commodity prices. SilverBow does hold SIGNIFICANT natural gas potential in Webb County, which is what originally got my attention.

I have tweaked a few of the line items in the forecast model, but SilverBow does provide detailed guidance, so other than realized commodity prices the Q3 results should be very close to my forecast. My Q3 forecast of $4.90 operating CFPS compares to TipRanks' forecast of $5.01 CFPS.

My 2024 forecast of $16.32 EPS and $35.56 operating cash flow per share compares to TipRanks' forecasts of $15.89 and $35.38. < There is nothing that justifies SBOW trading at less than 3 X operating CFPS.

SBOW closed at $36.00 on October 17. My valuation increases by $1 to $79 per share, which is just 3.5 X annualized operating cash flow per share. < Closing of the Chesapeake acquisition will justify a higher valuation multiple.

TipRanks: "In mid-August (after the Chesapeake Acquisition was announced), 3 ranked analysts set 12-month price targets for SBOW. The average price target among the analysts is $54.67." < Note that since August 17th none of the analysts covering SBOW have updated their price targets. Their price targets are based on much lower oil & gas prices than we have today.

Neal Dingmann at Truist Financial is the only 5-Star analyst that covers SBOW. His price target (updated on 8/15) was $59 per share.

Closing of the Chesapeake Acquisition will draw a lot more attention to this stock.