SilverBow Resources, Inc. (NYSE:SBOW) Q4 2023 Earnings Call Transcript
SilverBow Resources, Inc. (NYSE:SBOW) Q4 2023 Earnings Call Transcript February 29, 2024
SilverBow Resources, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] With that, I will turn the conference over to Jeff Magids, Vice President, Finance and Investor Relations. Please go ahead.
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 the 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 in the earnings news release. Our discussion today may include forward-looking statements which are subject to risk 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 plan benefits from recent operational efficiencies -- 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 seven 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 depth, more stages pumped per day and increased pump times. More importantly, we accomplish these gains with lower costs per foot in drilling and completions. These gains are sustainable. SilverBow continues to demonstrate that assets are better in our hands 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 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 costs per foot decreased 5% year-over-year and total well costs per foot declined 3%. Well costs decreased throughout 2023, as we benefited from a high-grade rig fleet, cost deflation and faster cycle times. Fourth quarter 2023 D&C costs 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 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 19.3000 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 advantage portfolio, which benefits from a low cost structure, proximity to premium Gulf Coast markets and 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 operated rigs 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. 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 increase 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% of 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 1 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 -- 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 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/Conoco 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 sustainable operating efficiencies. Our teams are focused on execution today, constantly innovating to safely reduce costs. I can tell you they are 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 maintained 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.
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