SilverBow Resources (SBOW) Valuation Update - Feb 2

[dan_s]

On 2-1-2024 Nitin Kumar CFA, an energy sector analyst at Mizuho Securities initiated coverage on SBOW, rating it a BUY with a price target of $40 per share. Nitin has a 5 Star rating by TipRanks. Neal Dingmann at Truist Financial, also a 5 Star energy sector analyst, rates it a BUY with a price target of $47 per share.

SBOW was trading for $26.14 this morning.

SilverBow's production mix is currently close to 59% natural gas, 25% crude oil and 16% NGLs. Based on my forecast with lower natural gas prices shows that the Company's Q1 revenues should be approximately $273 million, with 67% from the sale of oil & NGLs.

SilverBow's 2024 drilling program will focus on their more oil-prone development drilling locations.

Using my lower price deck for natural gas, my valuation adjusts lower by $3 to $57 per share. < Based on just 2.5 X annualized operating cash flow.

SilverBow is an "Aggressive Growth" company spending most of its operating cash flow to grow production and proven reserves, so not much free cash flow. Year-over-year production growth has been 26% in 2022, 31% in 2023 and my forecast of 64.5% YOY production growth in 2024. Most of the 2024 production growth comes from their Chesapeake South Texas acquisition, which closed on 11-30-2024. It added ~32,000 Boepd (60% crude oil and NGLs).

Neal Dingmann and NItin Kumar are the only highly respected analyst that cover SBOW. With production now approaching 100,000 Boepd, SilverBow deserves a lot more coverage.

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

[dan_s]

SBOW is now trading at just 1X TipRanks' operating CFPS forecast of $26.08.

[ChuckGeb]

How much of 24 growth is coming from CHK acquisition and how much from their drilling? Important to know this if their FCF is nil.

[ChuckGeb]

In SBOW’s November 23 presentation in connection with Chesapeake acquisition they stress “leading FCF yield” and “meaningful FCF” for 2024. So they must have different cash flow projections than yours. Time will tell.

[dan_s]

Which line number in my forecast model do you think might be wrong?

Note that TipRanks' operating CFPS forecast for 2024 is higher than my forecast. I hope they are correct, but it will take higher production volumes than my forecast or lower capex than SilverBow's guidance to make it a lot more FCF positive.

Regardless, there is nothing that I can see which justifies SBOW trading at 1X CFPS.

[ChuckGeb]

Not saying anything wrong.SBOW has done so many acquisitions it’s hard to keep up. Their comments in recent presentations without any projections tout their free cash flow. Your projections do reflect some free cash flow but your initial comments suggested not much. My hope is that they will focus on growing free cash flow since that is what the market seems to value more than pure growth. I appreciate the work you do on projections.

[dan_s]

SilverBow made the free cash flow prediction when the outlook for natural gas prices was higher than it is today.

They are only going to run 2 or 3 rigs and focus on oil prone areas this year. They should be free cash flow positive and hopefully increase oil production.

Aggressive M&A companies are harder to forecast, which contributes to the Wall Street Gangs more conservative forecasts. Neal Dingmann at Truist Financial is one of the best energy sector analysts that knows how to model companies like SilverBow.