Q4 2023 SilverBow Resources Inc Earnings Call
Participants
Jeff Magids; VP of Finance & IR; SilverBow Resources, Inc.
Sean Woolverton; CEO; SilverBow Resources, Inc.
Neal Dingmann; Analyst; Truist Securities
Leo Mariani; Analyst; Roth MKM
Charles Meade; Analyst; Johnson Rice & Company
Tim Rezvan; Analyst; KeyBanc
Paul Diamond; Analyst; Citi
Donovan Schafer; Analyst; Northland Capital
Noel Parks; Analyst; Tuohy Brothers
Presentation
Operator
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the SilverBow Resources fourth quarter and year end 2023 earnings conference call. (Operato Instructions) With that, I will turn the conference over to Jeff Magids, Vice President, Finance and Investor Relations.
Jeff Magids
Thank you. Good morning, everyone. I'm joined today by our CEO, Sean Woolverton, and other members of our management team. Together, we will address your questions following our brief prepared remarks. By now, I hope you have had a chance to go through our earnings release and the slides posted to our website as we will refer to these materials this morning.
Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure and the earnings news release. Our discussion today may include forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on our website.
During Q&A, please limit your time to one question and one follow-up. This allows us to get more of your questions in today. I will now turn the call over to Sean.
Sean Woolverton
Thanks, Jeff, and good morning, everyone. We appreciate your time today and your interest in the SilverBow story over the next few minutes, I want to talk about three things. First, the progress we made over the last year to build a stronger company is remarkable. It is important that you understand our strategy and how recent steps have positioned us to create value for shareholders.
Next, I will highlight our 2023 results all the details can be found in our materials. Our solid execution provides strong momentum as we enter this year. And lastly, I will cover our 2024 outlook. Our planned benefits from recent operational efficiencies will get efficiency gains. And we enter this year with scale a more durable asset base and enhanced capital flexibility with near term weakness in natural gas prices. We are electing to cut gas-directed capital to maximize cash flow and maintain a strong balance sheet.
Let's get started. Silverbow has a proven and clear strategy to create value. Our 2023 accomplishments show the four key elements of this strategy in action. First, we have a scaled and durable portfolio. Last year, we increased our regional scale in the Eagle Ford through our South Texas acquisition. This was our largest deal to date. It established us as the largest public pure play Eagle Ford operator and expanded our low-cost operating platform to drive synergies and unlock value. Silverbow now has more than a decade of high return drilling opportunities across our 220,000 net acres. We are advantaged due to our low cost structure, operational efficiencies, commodity optionality, existing infrastructure and proximity to premium Gulf Coast markets. This combination yields one of the highest EBITDA margins in the peer group.
Slide 7 in today's deck highlights our peer-leading cost structure and margin profile. The second element of our strategy is generating corporate efficiencies and enhancing margins. We have peer-leading margins, and we are unwavering in our commitment to improve on them. As you can see in today's deck, we are enhancing our returns through operational efficiencies. These include faster days to death, more stages pumped per day and increased pump times. More importantly, we accomplished these gains with lower cost per foot in drilling and completions. These gains are sustainable. Silverbow continues to demonstrate that assets are better in our hands due to our offer due to our proven operating platform, we have a low cost structure and a culture that constantly looks for safe and innovative ways to create efficiencies the Eagle Ford remains one of the most fragmented basins and assets will continue to migrate to more efficient operators. Silverbow is well positioned today.
The third pillar of our strategy is to maintain a strong balance sheet. We have built scale through accretive acquisitions that generate free cash flow that we use to reduce leverage and to fund our high return development program. Since year end 2020, we have transacted on $1.4 billion in acquisitions, while also increasing our liquidity and reducing leverage by one full turn our ability to maintain low leverage is a testament to the quality of our asset base and the high margins we generate as a low-cost operator, we remain on a clear path to reduce debt in the three months alone. Since closing our South Texas acquisition, we have eliminated more than $80 million in debt. No doubt that 2023 and now 2024 have seen a challenging natural gas market as we did last year. We are once again showcasing the flexibility in our capital allocation and are taking responsive actions to address low gas prices while our longer term outlook for gas is very constructive. We are reducing gas-directed capital investments this year by nearly 15% to maximize free cash flow and move towards our leverage target of below one turn, I'll talk more about this shortly.
The fourth pillar of our strategy is profitable growth. We have shown that an E&P company can combine capital discipline, quality assets and an unrelenting focus on efficiencies to profitably grow. Over the last three years, we have generated an average for return on capital employed of 21%, reflecting the success of our long term strategy.
Let me quickly cover our fourth quarter and full-year results. Again, all the details are in today's materials. We executed extremely well in 2023. We doubled our oil production and posted fourth quarter and full year volumes at the upper half of guidance across all products. More importantly, we accomplished this with capital investments in the lower half of guidance. Full year capital investments totaled approximately $410 million. Excluding acquisitions, production results were impressive as were efficiency gains comparing 2023 to 2022 we drilled 13% more feet per day, completed 16% more stages per day and improved average pump times by 13%. Completion cost per foot decreased 5% year over year and total well cost per foot declined 3%, while cost decreased throughout 2023 as we benefited from a high grade at rig fleet cost deflation, faster cycle times fourth quarter 23 D&C cost per foot decreased 20% year over year, highlighting the magnitude of our cost efficiency gains throughout the year. Taken together, we delivered our 2023 wells, 10% below planned costs. For the fourth quarter, our results exceeded expectations.
We generated record free cash flow of $74 million. Adjusted EBITDA will also set a record coming in at $172 million. Our net income was $183 million or $12.63 per share. Our total production increased nearly 40% year over year to approximately 72 MBOE per day. And oil production was up 74% to 19,300 barrels per day.
Capital investments of $79 million came in at the low end of our guide, and our operating expenses were $8.67 per BOE and in line with guidance, our performance in 2023 created strong momentum as we enter this year. Our 2024 program builds on our strategy and is focused on maximizing free cash flow through disciplined developments.
Today, we have more flexibility in how we allocate our capital to achieve our desired outcomes. We have been proactive in response to near term weakness in natural gas prices. Our advantaged portfolio, which benefit benefits from a low cost structure, proximity to premium Gulf Coast markets and a peer-leading peer-leading margins provides optionality to respond to today's market. We recently took some decisive steps to reduce investments in dry natural gas projects. Let me outline these actions.
We reduced year-over-year investments by 13% or $75 million to a revised midpoint of 490 million activity reductions were solely focused on dry gas investments. We plan to run three operating rates in the first half of the year and two in the second half. We now expect our full year production to average 89 MBOE per day at the midpoint. And importantly, oil and liquids volumes are unchanged from previous guidance and gas volumes will be about 13% lower when compared to prior guidance.
Total production will be up about 50% year over year, with oil expected to increased 70% to nearly 25,000 barrels per day for the year. We expect to drill 49 net wells and bring online 45 net wells. At recent strip prices, our plan will generate an estimated $125 million to $150 million of free cash flow. We have high certainty in our cash flow estimates with about 60% of our 2024 budget hedged at attractive prices. In fact, 75%, our gas is hedged at an average price above $3.80.
Prioritizing cash flow will allow us to reduce debt and move toward our leverage target of less than one times. We will not sacrifice our balance sheet to pursue unprofitable gas production. We will preserve our valuable gas inventory for the future.
Longer term, we remain bullish on the expanding LNG market and meeting energy needs within an evolving industry landscape. We are uniquely positioned along the Gulf Coast to grow into this emerging market where exports are expected to increase significantly over the next several years.
There are some impressive case studies in our deck today, showcasing the tremendous gains we have achieved our focus on maintaining a low cost structure, drives our peer-leading margins, including EBITDA margin and peer set, including EBITDA margin and per unit G&A costs. In our deck, we highlight our well performance on acquired assets compared to prior operators on our Sundance and Sundance assets acquired in 2022, we are seeing an average uplift of 25% in first year cumulative production compared to the prior operator in our teal clinical area, which we put together through acquisitions in 2021 and 2022, early results show a 60% improvement in first year cumulative production.
To summarize, our 2024 plan, maximizes free cash flow, strengthens our balance sheet, and preserves valuable gas inventory for the future. We will also benefit from continued capital discipline and ongoing efficiency gains across our portfolio.
Let me recap today's takeaways. First, our strategy is clear. It's proven and it's creating value for shareholders. We have quality assets and the scale we have created provides flexibility and optionality for us today.
Second, we have a track record of creating sustained sustainable operating efficiencies. Our teams are focused on execution today, constantly innovating to safely reduce costs. I can tell you they're excited to have their hands on our new South Texas assets.
Finally, we optimized our 2024 plan to maximize free cash flow and maintain our commitment to a strong balance sheet. We reduced investment levels in dry gas areas by $75 million and maintain our oil and liquids production. We appreciate your time today as well as your investments in our company. And with that, operator, we are ready to take questions at this time.
Question and Answer Session
Operator
(Operator Instructions) Neal Dingmann, Truist.
Neal Dingmann
Hey, good morning, guys. On the first question, I just wanted to highlight your your free cash flow use. I think you're making it pretty clear that you're going to divert most of the free cash flow to debt repayment, let's say even did some in 1Q, but I would assume you're also still on the outlook, the lookout for acquisitions. So just trying to get a temperature check on the priorities because does an acquisition maybe need to have a PDP component so that it doesn't impact the leverage or the right inventory package, if that makes sense.
Sean Woolverton
No, thanks for the question. First and foremost, a core strategy for us is protecting our balance sheet. We have a stated goal of getting to a long-term leverage target of less than one times. Our free cash flow, for now, is dedicated towards debt paydown.
I will tell you that we will remain active in the M&A market looking for accretive opportunities. We have in the past and will continue to use our standard checklist of what we look for in acquisitions. And that includes It must make sense from an industrial logic standpoint, it must add to the quality of our inventory and compete for capital immediately. It has to be accretive to our shareholders in terms of how we finance it. Focus for this year, though, is on bringing down our debt and protecting our balance sheet and demonstrating the quality of our durable and debt scaled portfolio.
Neal Dingmann
That makes a lot of sense. And then my follow-up is on slide 11. You outlined a pretty impressive uplift versus the prior operators on the acreage. I was just wondering if you want to on the drilling or the completion items which ones stand out? And then maybe can you apply those techniques to the Chesapeake asset, sorry, or is that not applicable?
Sean Woolverton
No, I appreciate the question. And we are very dedicated towards driving efficiency and enhancing our returns. And so the examples that we lay out really demonstrate that where we're able to achieve improved performance in properties that we acquire very much focused around drilling wells in zone. That's a key focus for our operating team, and we've greatly enhanced that over prior operators as well as improving our completion designs. We believe our completion designs are Optimiz over historical operations. So yes, we have a demonstrated track record. The examples that we laid out that you pointed to show that, yes, we're very excited to apply our expertise in our efficiencies onto the Chesapeake assets. We just recently moved in a drilling rig onto those properties. So we're out of the gate quick on that asset the first well we drilled, we TD'd ahead of schedule and significantly improved on cycle times from the prior operator. So we're looking forward to sharing some of our some some more results on that property in the coming quarters.
Operator
Leo Mariani, Rod MKM.
Leo Mariani
I just wanted to just maybe to stay on the Chesapeake asset here at this point in time. I know it's only been a handful of months since you kind of took this under your belt, but wanted to see if you can kind of comment on the performance of the base production on the asset, how has that trended, you know, versus your internal forecasts? And I know it's early, but have you been kind of able to get out there and make some operational improvements such as you know, maybe trying to improve runtime or lower LOE or anything like that?
Obviously, I know it's a pretty good chunk of the overall company production. So obviously, you talked about the drilling a minute a minute ago being early, but just any kind of comments you can give us around the base production and plans for that here as we roll into '24 Nouvelles, they appreciate the question.
Sean Woolverton
I think what I'll start and highlight is since closing the acquisition on December first, we have paid down approximately $80 million of debt from a from that timeframe. So it came in exiting the year and came into the year, generating some strong free cash flow. And a lot of that is coming from the base performance on that asset, where we're seeing the asset performing in line with what we've modeled during our underwrite of the acquisition. So we exited the year where we were expecting and come in really with it will having our hands on the asset for 30 days with a lot of ideas, including getting some workover rigs onto the property that tried to enhance that base production.
We had identified a number of workovers to be completed. So no results to speak to today, but we like what we're seeing thus far. We've been very excited to bring on the employees that worked the asset prior. They bring a lot of knowledge, and I know they're excited to we're working on an asset now that is a core for SilverBow. So still early days. We like what we see thus far and we look forward to giving more details on not just the base performance, but in the coming quarters, really how how the capital programs it's performing as well. This year will have about 30% of our capital dedicated to that asset. So to your point, it is a big part of our business and we're excited to own this property.
Leo Mariani
Okay. I appreciate that color. And I also just wanted to see if you guys had any kind of just general response to some of the the recent Board of Director elections. And I know that's something that will get flushed out more fully at the annual meeting. But just kind of how are you sort of thinking about the situation at this point?
Sean Woolverton
Yes. I'll tell you that we really want to focus our call today on just the strong performance that we exhibited in 2023 and our outlook for 2024. But what I will say is that SilverBow, the management team and our Board are committed to working for all of our shareholders to look to deliver shareholder value. So that's all I really want to comment on this call and wanted to stay focused on what the company has going on and what we're excited about for 2024.
Operator
Charles Meade, Johnson Rice.
Charles Meade
Good morning, Sean, to you and the rest of the routine there and good morning, Charles. So I think it's a positive move that you guys cut back on the natural gas activity. And I think that that's worked well for other operators. But I wondered if you could characterize some of the how much natural gas activity is still in the plan and what the rationale for it might be, whether it's lease maintenance or concept testing and just tell us what you do have that's going to dedicated natural gas in 2040?
Sean Woolverton
Yes. No appreciated it. Would tell you, right. This is the second year that the company's really enacted this strategy to defer much investment into our gas assets. We think it really demonstrates that the strategy that we started to employ several years ago so that you'd buy as much as we'd like to see higher gas prices and we are reacting appropriately to it.
In terms of our plan for this year, of approximately 15% of our capital is dedicated to Webb County dry gas. We did come into the year when prices were higher, having drilled several wells. So we completed those late last year and early part of this year. So there's some capital early on dedicated to the gas. Those wells are online and producing now and then late in the year, we have a number of wells that are slated to be drilled really twofold. One is to meet lease commitments on those wells. And then the second is to drill into what we anticipate stronger gas prices in 2025.
Charles Meade
Got it. So so then the message of the net natural gas activity is really back half of the year.
Sean Woolverton
It encouraged with it of the completions done early.
Charles Meade
Right, got it. And then a second what I think is a simple one, just some some guesses or maybe some indications around Q1 CapEx. If I look at just let's pick 500 for a kind of a middle-of-the-road number for the year and you're going to be running three rigs in the first half of the year. And I think you mentioned you just picked up a rig. So we should be thinking maybe for 1Q, maybe one 51 60, is that reasonable?
Sean Woolverton
Yes, I think that is pretty close to being reasonable, maybe a little bit less than the one 50 number. We did pick up the third rig on February first. So won't have three rigs for the for the full first half of the year. So that's probably probably the difference we anticipated bringing on the 1st of January, but a prior operator had some problems on the rig. So we got a little later than anticipated to guide or give a little bit more guidance for first half of the year. We're anticipating probably 55% of our spend in the first half of the year and 45% in the second half.
Operator
Tim Rezvan, KeyBanc.
Tim Rezvan
Hi, this is John Martini on for Tim or John Hunter 18. So a morning. I know your team is focused on are the acres this year, but can you just speak the state of natural gas takeaway on Webb County today has spoken a little bit about it, but just wondering if gas prices were to increase capital allocation to the area, you're confident whether there's enough capital capacity to really flow?
Sean Woolverton
Yes. No, no, appreciate the question. And as you recall remind the listeners that during 2022 under strong gas prices, activity in web really grew significantly and outpaced takeaway capacity for us. That issue was resolved starting November of 2023 with our midstream provider, bringing on expanded pipe in the area that more than meets our needs and our capacity. So for SilverBow takeaway capacity out of Webb County is no longer an issue.
Tim Rezvan
Okay, great. Thanks. And another one in the past you mentioned mixed Austin Chalk results on your eastern extension oil acreage. You're looking into 2024. Is there any yes, the more delineation or spacing initiatives you're pursuing over there? Or is it just going to be purely a year of development drilling?
Sean Woolverton
Yes, yes. No, thanks for that question as well. The eastern extension area, we drilled four Austin Chalk wells there in 2023 would tell you that we're going to probably defer drilling additional Chalk wells in the eastern extension, at least for the first half of 24 as we assess the long-term decline profile, IPs came in lower than what we were anticipating there, but we're seeing very fast flat declines. So we wanted to give give those wells a little more time to assess what the the economics look like in light of a kind of a different decline profile than what we were anticipating. What we are excited about for that area is the Eagleford has really exceeded our expectations, putting those two assets together has allowed us to drill much longer laterals and the Eagleford is really exceeding expectations. In fact, we were coming into the year with one of the three rigs planned to be drilling in Webb County gas. We actually shifted that rig onto the eastern extension properties and drilled a two well pad there that's coming on as we speak. So we love the Eagle Ford over their Austin Chalk. It's kind of a wait and see for us at this point.
Operator
Paul Diamond, Citi.
Paul Diamond
Thank you and good morning, all. Thanks for taking my call. It's wonderful frequent inventory life over the last year last year, in guidance that you guys talk about commodity optionality. I'll just we like shifting away towards not because I was wondering the nature of you how inventory management over the longer term kind of effects influences that decision-making process?
Sean Woolverton
Yes, we've identified just around 1,000 drilling locations on our assets. We still think there's more inventory to find our teams continue to look at the stacked pay potential. We're looking at obviously lower Eagleford, but Upper Eagle Ford still remains prospective for us. In Austin Chalk still has stacked pay with lower and middle Austin Chalk as having an opportunity set. So we think the thousand locations is kind of where where it's at today and we will probably expand.
And then we think there's some up-hole potential. We actually plan to drill a couple of Olmos wells later in the year. So definitely, as we've gotten bigger, we're finding that the stacked opportunity within the basin is really rich, all that said, in terms of your question right now, probably 70% of that inventory is oil liquids weighted and 30% to gas. And so as we think about long-term inventory. Our goal is to maintain a 10-year inventory at current rig pace. We drill approximately 25 wells per year to give you kind of a burn rate there, but mill inventory aside, our focus is generating the best returns. So if we find that gas prices are really strong, we would be willing to accelerate the development of that inventory. If it makes sense. So it's a multiple liver decision, but returns is the key driver of it, but at the same time, maintaining inventory. But that's kind of a secondary driver.
Paul Diamond
Understood. Thanks for the clarity this Doug, one quick follow-up. As you think about your hedging book building for you progress towards your leverage target and gain scale over time, how do you anticipate that strategy evolving, you maintain it at the high level of spend? Or will that tick down over time?
Sean Woolverton
I think you know, as we do reduce leverage the ability to maintain or protect the balance sheet, we be able to take on a little more risk. So I think you as time evolves, we find ourselves in a lower leverage position, probably low lower than one times. We revisit our hedging strategy. We've been very successful with that strategy. We're very systematic around it. Typically, we're hedging out our next year program late in the year prior to the program, and that's worked well for us. But to your point, I think exposure to commodity prices with a lower leverage profile is something that will strongly consider.
Operator
Donovan Schafer, Northland Capital.
Donovan Schafer
Hi, this is Skyler for Donovan. Good morning. So I just wanted to know about a bit about leverage ratio. So from we just noticed that in your August presentation for the South Texas acquisition. So I think it's on slide 10 that you say that you can get to about a one times leverage ratio by year-end 2024. And but you notice that on the slide 8 of the February deck, you'll see a lesser than 1.5 times in Q4 2020, 24. So can you just help us understand what's changed? Is it just strictly a matter of lower natural gas prices or are there some drivers that they're not seeing? Thanks.
Sean Woolverton
Yes, no, good question is it demonstrates I think the opportunity set the upside that the company has if you go back to early August, there will remind listeners it was not just higher natural gas prices, but it was also higher oil prices. I think at the time oil was over WTI was over $80 and 2024 gas prices were approximately $4. So that change is definitely a shift driven by by commodity prices. But you also you back then we didn't envision three three rigs running for the full year of 2024. So the flexibility that we're demonstrating in the asset base, right, is, hey, react to lower prices, dial back activity, which slows that pay down a little bit, but we think it's the prudent thing to do.
Donovan Schafer
Thanks. That's helpful. We'll take the rest offline.
Sean Woolverton
(Operator Instructions) Noel Parks, Tuohy Brothers.
Noel Parks
Good morning and good morning. Just a couple of things. You know, well, it being a 2nd year of directing CapEx away from your gassier areas in Webb County. I just wondered, could you talk a little bit about that for yourselves and for the industry overall through the state of land and leasing out there. I'm just wondering if we have a couple of years of lower activity. It does that certainly HBP issues are opportunistic. We might have no credit issues like that for some of your competitors.
Sean Woolverton
Yes. Yes. I mean, our position and I'll speak to that we're over 80% HBP. So the majority of our acreage is held. However, where it is not necessarily is still in the primary term is in Webb County. With that area of really evolving since 2020. So yes, we'll have some capital that we'll need to dedicate there to maintain those leases will be strategic in how we do that. We are still bullish on long term gas. So definitely something we want to do and keep that optionality in place, but minimize the capital outlay in the near term, knowing that that that's our situation. So I think it's safe to say others face the same situation as well. So it will be something that we'll definitely watch. We've been very successful in on on the ground leasing. We've built a ton of relationships with the mineral owners out in this part of the play and have a great reputation of implementing safe and prudent operations on their properties. So I think we're well positioned to take advantage of any acreage that does become available due to other companies letting their lands expire due to low prices.
Noel Parks
Great. Thanks. And then one other thing I was wondering is on as you as you look at some bolt-ons and other other potential acquisitions in the area, I'm just wondering if you have any updated thoughts on your current footprint on any any additions you in particular would like to make to it and whether use if you could maybe characterize a little bit what's out there, that's the value and your wish list that would be exciting if you could check it loose from somebody, I think just in general terms, yes.
Sean Woolverton
Yes, no new when you look at the basins in where much of the M&A activity has occurred over the last 18 months, there's been quite a bit in the Eagleford, but not near to the scale of consolidation that has occurred in other basins. So we still think there's a tremendous amount of M&A activity to be realized in the Eagleford where we've really focused has been on the western part of the play. That is the area that we like that we know well, we have a proven track record in there remains a still a number of opportunity sets in that area. And we've demonstrated right over the years that, hey, putting bringing assets into our really efficient operating platform, we can unlock a ton of value. So not any specific ones that I would speak to, but just tell you that there remains a strong inventory of consolidation to occur in the basin.
Noel Parks
Okay. Good enough. Thanks.
Sean Woolverton
Thanks. And all have a good day.
Operator
With that, I'll turn the call back to Sean Woolverton for any closing remarks.
Sean Woolverton
We'll thank you, everyone, for joining our call today. We appreciate your interest in SilverBow and your investments in the Company and look forward to talking to you soon. Thank you, everyone.
Operator
That will conclude our call for today. We thank you all for joining You may now disconnect your lines.
