SilverBow Resources (SBOW) Update - Dec 2

[dan_s]

SilverBow Resources Announces Closing of Chesapeake Acquisition and Provides Updated 2023 Guidance & Preliminary 2024 Outlook

Completed transformational acquisition of Chesapeake’s remaining South Texas assets

Preliminary 2024 outlook of 551-611 MMcfe/d; liquids to comprise ~40% of production mix

Anticipated 2024 capex of $550-$580 million supports 3-rig drilling program

The Company now holds over 220,000 net acres with 1,000 drilling locations identified

Capital structure provides for ~$500 million of liquidity by year-end 2023 and extended maturity

HOUSTON, November 30, 2023--(BUSINESS WIRE)--SilverBow Resources, Inc. (NYSE: SBOW) ("SilverBow" or "the Company") announced today the closing of its acquisition of Chesapeake Energy Corporation’s ("Chesapeake") oil and gas assets in South Texas for a purchase price of $700 million, comprised of a $650 million upfront cash payment paid at closing and an additional $50 million deferred cash payment due 12 months post close, subject to customary adjustments (the "Chesapeake Transaction"). Consideration for the purchase was funded with cash on hand, borrowings under the Credit Facility (as defined below) and proceeds from the sale of additional second lien notes. Chesapeake may also receive up to $50 million in additional contingent cash consideration based on future commodity prices. In addition, the Company provided updated 2023 guidance and a preliminary 2024 outlook.

MANAGEMENT COMMENTS

Sean Woolverton, SilverBow’s Chief Executive Officer, commented, "We are excited to close the Chesapeake Transaction, which materially increases our scale in South Texas and transforms SilverBow into the largest public pure-play Eagle Ford operator. Our differentiated growth and acquisition strategy has positioned us with a stronger balance sheet, a broader commodity mix and a portfolio of locations across a single, geographically advantaged basin. The acquired Chesapeake assets further enhance our optionality to continue allocating capital to our highest return projects and will immediately compete for capital."

Mr. Woolverton commented further, "The SilverBow team looks forward to extending its proven track record of integrating and growing assets in South Texas through a combination of its existing team and the new employees recently hired from Chesapeake. We plan to expand our capital program to develop the high return inventory acquired, with three rigs running across our portfolio in 2024. Our current expectation is to run two rigs on our liquids properties and one rig on our dry gas properties. As always, our development plan and capital allocation remain flexible based on prevailing commodity prices. Strong production growth is expected to generate significant free cash flow which will allow us to pay down debt, reduce leverage to 1.0x and below and stay opportunistic towards our strategic objectives."

RISK MANAGEMENT

To help manage the impacts of commodity price movements, SilverBow utilizes various financial derivative contracts to reduce the volatility of its revenues. For 2024, the Company has entered into hedges on approximately 55% of its estimated total production. SilverBow has 217 million cubic feet per day ("MMcf/d") (65% of guidance) of natural gas production hedged at an average floor price of $3.83 per million British thermal units ("MMBtu") and at an average ceiling price of $4.21 per MMBtu. The Company has 12,775 Bbls/d (51% of guidance) of oil production hedged at an average floor price of $74.02 per barrel and at an average ceiling price of $76.46 per barrel. SilverBow has 4,400 Bbls/d (34% of guidance) of NGLs hedged at an average price of $25.92 per barrel. The hedged amounts are as of November 30, 2023 and are inclusive of swaps and collars.

CAPITAL STRUCTURE & LIQUIDITY

In connection with the closing the Chesapeake Transaction, SilverBow increased the borrowing base and aggregate elected commitment amount under the Company’s First Amended and Restated Senior Secured Revolving Credit Agreement, dated as of April 19, 2017, and amended by the Eleventh Amendment as of November 30, 2023 (the "Credit Facility"), among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the lenders from $775 million to $1.2 billion. Further, SilverBow issued and sold under the Company’s Note Purchase Agreement, dated as of December 15, 2017, and amended by the Fourth Amendment as of November 30, 2023 (the "Note Purchase Agreement") an additional $350 million principal amount of second lien notes, resulting in $500 million aggregate principal amount of second lien notes outstanding. Additionally, the Company extended the maturity date of its second lien notes from December 15, 2026 to December 15, 2028 and modified certain other terms of the Note Purchase Agreement.

As of November 30, 2023, the Company had $449 million of undrawn capacity and approximately $15 million of cash resulting in approximately $464 million of liquidity.

[dan_s]

I have updated my forecast model for SilverBow based on their updated guidance for Q4 and 2024.

My 2024 forecast: $11.14 EPS, $27.81 Operating CFPS, Free Cash Flow of $144.2 million ($5.65/share)

First Call 2024 forecast which is based on the average of just two energy sector analysts
and only one has updated his forecast based on the fresh guidance: $13.90 EPS and $31.95 Operating CFPS.

My current valuation remains $82/share. If Q1 2024 actual results confirm my model assumptions, my valuation will increase just because I will be rolling forward all of the models through 2025.

My updated model will be posted to the EPG website this afternoon.

Size matters in this business, so with SilverBow's production soon to be over 100,000 Boepd they should draw a lot more attention from the Wall Street Gang. Neal Dingmann at Truist Financial does cover SilverBow. I look forward to seeing his updated price target. It was $55.00 on 11/6/2023.

[cmm3rd]

Neal Dingmann at Truist Financial does cover SilverBow. I look forward to seeing his updated price target. It was $55.00 on 11/6/2023.

According to a report today, Neal Dingman lowered his PT to $50 while maintaining a Buy rating. Do you have access to his report? Is he waiting to see how integration and Q1 2024 go?

[dan_s]

Neal probably lowered his oil & gas price decks for calculating NAV. $50 would be a nice gain for us.

The Chesapeake Acquisition is a REALLY BIG DEAL for a company as small as SilverBow. Closing the deal is just a first step. Taking over operations and the accounting work for so many wells at one time is real work. For deals of this significance, most of the Wall Street Gang wants to see at least one full quarter of post-acquisition results before updating price targets.

If SilverBow can keep a lot of the Chesapeake's field workers and some of their good accounting people it will make the transition easier.

When I was the General Accounting Manager at Hess we took over Transco's Gulf of Mexico subsidiary in the early 1990's and I could not get a single Transco accountant to except our job offers because none of them were willing to move to Tulsa, even though I told them we'd probably move to Houston within six months, which we did.

[Fraser921]

Truist cuts AR too from 37 to 28

As I stated before, over production and warm winter killing these guys. So much for discipline

Gassers are in for a world of hurt. Crude rolling over too. A couple of paper traders can't manipulate the market. The market is the market

[aja57]

SBOW getting pounded today on a secondary offering originally 1.7 million now 2.2 million shares. Likely drubbing magnified by oil under 69.

[dan_s]

500,000 additional shares has very little impact on my valuation. I will be adjusting all of the Sweet 16 valuations starting this weekend. I will put SBOW at the top of my list. Just back of the envelope guess: My valuation might drop from $82 to $75.

Take a hard look at SilverBow's hedged for 2024. ~50% of their ngas hedged at more than $4.00 for Q1 2024.

[ChuckGeb]

There aren’t any new shares being issued. One of their large institutional shareholders an affiliate of Strategic Value Partners, LLC selling shares in the secondary offering. What do they know?

[Cliff_N]

Chuck, good question. I understand they are still holding 900K shares. If they knew something negative, why would they still have a position? The other possibilities are better opportunities or they need cash. Please correct me if I am mistaken on 900K position. I read it a few days ago.