Small Gas Producer SilverBow Resources Still Attractive

Summary

  • Small SilverBow Resources, a $950 million enterprise-value Eagle Ford natural gas company, is worth investor consideration in this high-demand environment for natural gas.
  • The company does not pay a dividend.
  • Its partial hedges mean SilverBow will not realize all upside in current prices; however, its two complementary acquisitions are cash flow-accretive.
  • Looking for more investing ideas like this one? Get them exclusively at Econ-Based Energy Investing. Learn More »

Gas Stove from side (Blue Flames on Black)

Fentino/E+ via Getty Images

Last fall I rated SilverBow Resources (NYSE:SBOW) a rare strong buy.

Indeed, its stock price is up by 40% since then, from $22.77/share to $32.00/share on the back of stronger gas prices. I am now ranking the company as a "buy."

The ongoing global gas-short market means SilverBow is of particular interest. Its cash flow is healthy, it has just made two complementary Eagle Ford acquisitions, and it has a bargain price/earnings ratio of 5.0. I recommend SilverBow Resources as a speculative buy to investors looking for capital appreciation among natural gas producers.

SilverBow does not pay a dividend: it is not recommended to dividend-seekers.

(Close readers may notice in the October 2021 SilverBow article, the $785 million bullet point should have been labeled enterprise value rather than market cap.)

SilverBow's First Quarter 2022 Results and Guidance

In the first quarter of 2022, SilverBow Resources reported a net loss of -$64 million, or -$3.84/share, which included a net unrealized loss on derivative contracts of -$112 million. Net production was 226 million cubic feet of natural gas equivalent/day (MMCFe/D), of which 77% was natural gas, 13% oil, and 10% natural gas liquids.

Free cash flow, a non-GAAP measure, was $28 million and the company reduced total debt by $27 million. Adjusted EBITDA was $74 million.

SilverBow realized prices before derivatives of $92.59/bbl for oil, $4.96/MCF for natural gas, and $34.89/bbl for natural gas liquids, giving an average price of $6.38/MCFe (MCF-equivalent). The average realized price after derivatives ($62.55/bbl for oil, $4.12/MCF for natural gas, $28.78/bbl for natural gas liquids) was $4.99/MCFe.

In the first quarter, SilverBow also agreed to the acquire the assets of Sundance Energy, Inc. for total consideration of $354 million and SandPoint Operating for total consideration of about $71 million.

The company's leverage ratio at quarter-end was 1.24x; it is targeting a leverage ratio of 1.0x by year-end 2022. (SilverBow defines leverage ratio as total long-term debt, before unamortized discounts, divided by adjusted EBITDA for the trailing twelve-month period.)

CEO Sean Woolverton expects a big increase in production in June when the company brings 11 new wells online. The company is guiding to estimated production of 219-232 MMCFe/day in 2Q22, of which natural gas will comprise about 80%.

Pro Forma Including Sundance and SandPoint

Sundance reported January 2022 net production of 11,100 BOE/D (84% liquids, 65% oil). Its PV-10 of proved developed producing (PDP) properties is $277 million and it has 155 de-risked, high-return locations.

SandPoint has May 2022 estimated net production of 4650 BOE/D, 70% gas and 30% liquids and a PV-10 for its PDP properties of $89 million.

Sundance and SandPoint acquisitions are due to close later in the year. According to the company, full-year 2022 pro forma metrics (actuals will be lower since they will be from date of closing) for the combined assets is:

  • net production of 300-330 MMCFe/D (64% gas)
  • adjusted EBITDA of $490-$530 million
  • capital expenditures of $260-$300 million
  • free cash flow of $180-$250 million

Complementary acreage of acquisitions

sbow.com

US Natural Gas Production and Prices

Europe was already gas-short due to low inventories after requiring natural gas to back up the lack of summer wind for electricity generation. It has been importing about 40% of its requirements from Russia. When Russia invaded Ukraine in February 2022, European countries began reducing their Russian purchases of natural gas and oil, along with other sanctions, to avoid funding the attack.

This created a sudden, large demand for non-Russian sources, such as liquefied natural gas from the US, and prices rose accordingly.

The NYMEX natural gas future prices for June 2022 delivery at Henry Hub, Louisiana was $7.04/MMBTU on May 7, 2022. The graph below, using historical month-ahead NYMEX gas futures prices, shows the extent of the gas price increase.

Gas demand is expected to remain strong as it increases to generate electricity for summer cooling and to refill storage in the US, Europe, and Asia.

US dry gas production was 94.2 BCF/D for the week ending May 4, 2022, so small SilverBow's 1Q22 gas production (excluding oil and natural gas liquids) of 174 MMCF/D represents only 0.18% of this total.

Chart
Data by YCharts

The Asian LNG cargo swap price averaged $23.93/MMBTU and $30.84/MMBTU at the European reference hub - the Title Transfer Facility in the Netherlands. On a heat-equivalent basis, the TTF price equates to oil at $185/barrel. A year ago, these LNG prices were $8.83/MMBTU and $8.35/MMBTU in Asia and Europe, respectively.

The chart below shows growth in US shale gas production and the mix between basins. The lighter blue stripe represents the Eagle Ford formation in Texas, SilverBow's primary area of production.

dry shale production

EIA

While multi-year LNG construction projects were already underway, Europe's sudden demand for so much LNG has given additional impetus to their completion. The US is currently exporting about 12.0 BCF/D or about 12% of total US natural gas supply of 100.3 BCF/D. (This total of 100.3 BCF/D includes our own imports of 6.0 BCF/D from Canada.) An example of the natural gas draw for a developing LNG project - here Calcasieu Pass which is supposed to reach a baseload of 1.3 BCF/D with peak capacity of 1.6 BCF/D - is shown below.

Natural gas deliveries to Calcasieu Pass LNG (Nov 2021-Apr 2022)

EIA

Hedges

It is typical that smaller companies have commodity hedges to allow predictability of cash flows. While this is a boon in lower-priced markets, it limits upside in a higher-priced environment like the current one.

At April 29, 2022, for the rest of 2022, SilverBow has hedged 131 MMCF/D of natural gas, 3929 BPD of oil, and 2780 BPD of natural gas liquids. This represents about 76% of estimated 2Q22 production for SilverBow alone, excluding volumes from Sundance and SandPoint acquisitions.

For 2023, it has hedged 134 MMCF/D of gas, 2873 BPD of oil, and 2250 BPD of NGLs.

Reserves

SilverBow's total proved reserves at December 31, 2021 were 1.42 trillion cubic feet of gas equivalent (TCFe), of which developed reserves were 658 billion cubic feet of gas equivalent (BCFe).

Most (81.6%) was natural gas; only 18.4% was natural gas liquids and oil.

The SEC PV-10 value of future net cash flows of proved reserves is $1.82 billion, up from $526 million at year-end 2020. The location-adjusted average 2021 prices used in the calculation were:

$3.75/MCF for natural gas (compared to $2.13/MCF last year);

$63.98/barrel for oil (compared to $37.83/barrel last year);

$25.29/barrel for natural gas liquids (compared to $11.62/barrel last year.

The map below shows the hydrocarbon windows in the south Texas Eagle Ford.

Map of Eagle Ford Producing Windows

sbow.com

The PV-10 calculation above does not include the Sundance and Sandpoint acquisitions. If their PV-10s are included (and note-these are only for proved developed, not proved undeveloped, so they are conservative), the total would be $2.19 billion.

Marketing and Competitors

In 2021, SilverBow's largest purchasers were:

  • Kinder Morgan 26%
  • Plains Marketing 10%
  • Twin Eagle 15%
  • Trafigura 16%
  • Shell Trading 12%

The company's headquarters is in Houston, Texas. Its larger Eagle Ford competitors include BP (BP), Chesapeake (CHK), ConocoPhillips (COP), EOG Resources (EOG), and Exxon Mobil (XOM). It also partners with/offsets to ConocoPhillips and Ranger Oil (ROCC).

South Texas Eagle Ford production competes with all US gas basins - especially the enormous Appalachian reserves, associated gas from the west Texas Permian, and the Louisiana Haynesville.

Governance

Approximately 3.7% of the floated stock is shorted and insiders own 3.0% of the stock.

Beta is 2.2. While this is considerably more volatile than the overall market it accords with the company's status as a small gas producer in the current still-turbulent environment.

As of March 30, 2022, Strategic Value Partners, LLC owned 26.6% of the company's stock. At December 30, 2021, the next largest holders were G.F.W. Energy XI at 8.1% (SilverBow is the fund's only holding), Fidelity/FMR at 6.4%, Adage Capital Partners--which manages investments for endowments and foundations--at 3.1%, and Vanguard at 2.6%.

Thus, at the end of March 2022, Strategic Value Partners owned about 27% of the outstanding stock and so can have a significant say in SilverBow's decisions.

SilverBow's Financial and Stock Highlights

SilverBow's market capitalization is $539 million at a May 9th, 2022, stock closing price of $32.00 per share.

Its 52-week trading range is $11.44-$40.50/share, so the current price is 79% of the 52-week high.

Trailing twelve-month earnings per share (EPS) is $6.42 for a bargain current price-earnings ratio of 5.0. The average of two analysts' expected EPS for 2022 is $12.90, giving an even-more-bargain forward price-earnings ratio of 2.5.

SilverBow's trailing twelve months' operating cash flow is $216 million and levered free cash flow is -$15 million.

The company's trailing twelve-month return on assets is 10.9% and its return on equity is an excellent 45.2%.

As of March 31, 2022, the company has $606 million in liabilities including $346 million of long-term debt and $832 million of assets, for a steep liability-to-asset ratio of 73%. The ratio of long-term debt to EBITDA is 2.0.

Chart
Data by YCharts

Book value per share is $17.59, about half of market value, indicating positive investor sentiment. With an enterprise value of $950 million, the company's EV/EBITDA ratio is an investor-attractive 5.0. Because natural gas production tends to be lower-valued than oil production, SilverBow's market capitalization per flowing BOE is only $14,310.

Summary comparison: enterprise value is $950 million, market capitalization is $539 million, and PV-10 of reserves is $1.82 billion.

SilverBow Resources does not pay a dividend.

The mean analyst rating from four analysts is a 2.0, or "buy."

Positive and Negative Risks

Potential investors should consider their US natural gas price expectations, particularly in the south Texas Eagle Ford basin, as the factor most likely to affect SilverBow. As with all commodity-driven companies, it is subject to price fluctuations which are only partially offset by hedging.

All companies are affected by the large uptick in inflation for labor, materials, and transportation - everything - as well as by expected increasing cost of debt as the Federal Reserve raises the Fed funds rate.

Globally and nationally, US natural gas demand is affected by competition with coal, electricity generation demand, seasonal heating, industrial use, and now, growing demand for LNG exports.

The company also has positive uplift from its oil and natural gas liquids production.

Recommendations for SilverBow Resources

SilverBow does not pay a dividend so is obviously not appropriate for dividend-seekers.

More than a quarter of its equity is owned by one fund, Strategic Value Partners, so the fund has a key role in decisions.

Also be aware of the company's steep liability-to-asset ratio of 73%, which could result in exposure as inflation-related debt costs rise. Indeed, all of the company's costs are expected to increase.

Nonetheless, SilverBow has a bargain price-earnings ratio of 5.0, positive cash flow, and a return on equity of 45%. It is integrating two accretive and complementary acquisitions that will add significant reserves, production and free cash flow.

I recommend SilverBow Resources as a speculative buy to investors looking for capital appreciation among US natural gas producers.

Logo for SilverBow Resources

sbow.com

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This article was written by

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Disclosure: I/we have a beneficial long position in the shares of SBOW, CHK, COP, EOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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