SilverBow Resources: ~$200 Million In Projected 2023 FCF (SBOW)

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Silver Bow Resources (NYSE:SBOW) is aiming to grow production significantly in 2023, aiming for total production growth around 25% to 30% above Q4 2022 levels and potentially over 40% oil growth.

The spending on production growth and past acquisitions (such as its recent $87 million bolt-on acquisition) results in its projected net debt being around $500 million at the end of 2023 without further acquisitions. SilverBow’s leverage still appears to be reasonable (at around 0.7x at the end of 2023 at current strip). However, it will need to be wary of increasing interest costs, as all its debt is variable rate.

Weaker 2023 commodity prices reduces SilverBow’s value slightly compared to when I looked at it in late August. However, I still believe that it is worth around $59 per share in a scenario where long-term (after 2023) commodity prices average $70 WTI oil and $4 Henry Hub natural gas.

Revised 2023 Outlook

SilverBow has increased its 2023 production expectations from 380 MMCFE per day to a range of 400 to 420 MMCFE per day. This increase is driven by its acquisition of a higher working interest in some liquids weighted assets as well as increased development with its gas assets.

I am thus now modeling SilverBow’s 2023 results at 410 MMCFE per day, including 14,500 barrels of oil production per day.

The current strip for 2023 is now around $85 WTI oil and $5.35 Henry Hub gas. At those commodity prices, SilverBow is projected to generate $1,034 billion in revenues before hedges. SilverBow’s 2023 hedges are projected to have negative $64 million in value at current strip.

I’ve assumed that SilverBow realizes approximately 93% of Henry Hub for its natural gas in 2023, compared to the roughly 95% to 96% that it expects to realize during 2022. (around $0.90 under Henry Hub), but this shouldn’t be as wide on average during 2023. SilverBow also has basis hedges covering close to half of its expected natural gas production in 2023.

Type Units $/unit $ Million
Oil (Barrels) 5,292,500 $85.00 $450
NGLs (Barrels) 2,774,000 $28.00 $78
Natural Gas [MCF] 101,251,000 $5.00 $506
Hedge Value -$64
Total Revenue $970

With SilverBow’s $500 million capital expenditure budget (at guidance midpoint) for 2023, it is projected to end up with $199 million in positive cash flow in 2023. SilverBow’s reinvestment rate in this scenario is approximately 67% of EBITDA.

$ Million
Lease Operating Expense + Workovers $97
Transportation & Processing $51
Taxes Other Than Income $62
Cash G&A $19
Cash Interest $42
Capital Expenditures $500
Total Expenses $771

Debt Situation

SilverBow had $699 million in net debt at the end of Q3 2022 (proforma for its recent bolt-on acquisition). It appears likely to end Q4 2022 with around the same amount of net debt as it spends (capital expenditures of $105 million at guidance midpoint) to grow production.

This would result in SilverBow ending 2023 with $500 million in net debt at current strip prices. SilverBow’s free cash flow in 2023 should benefit from increased production levels and a lower negative impact from hedges.

Other Notes

SilverBow is dealing with increasing interest costs as its debt is variable rate debt tied to rising benchmark rate. SilverBow’s credit facility had a 6.08% weighted average interest rate at the end of Q3 2022, while its $150 million in second-lien notes have an interest rate of LIBOR+7.5%. This works out to around a 12% interest rate currently. SilverBow’s interest burden isn’t that high at the moment, as it is projected to be around 6% of 2023 EBITDA. However, interest costs are something to keep an eye on.

Notes On Valuation

I’ve been valuing SilverBow at 3.0x unhedged EBITDAX using long-term (after 2023) prices of $70 WTI oil and $4 Henry Hub natural gas. Based on SilverBow’s 2023 production levels and projected year-end 2023 net debt of $500 million, that multiple would make SilverBow worth approximately $59 per share.

SilverBow’s current share price of near $37 per share would be only around 2.2x its unhedged EBITDAX (with 410 MMCFE per day in production) at $70 WTI oil and $4 Henry Hub natural gas if it can reduce its net debt to $500 million.

Conclusion

SilverBow is attempting to grow its production significantly in the future, with a target of 410 MMCFE per day in production in 2023 and potentially 500 MMCFE per day in production in 2024. It appears capable of paying down its net debt to around $500 million by the end of 2023 at current strip.

SilverBow appears to have upside to around $59 per share in a long-term (after 2023) $70 WTI oil and $4 Henry Hub natural gas scenario if it can successfully hit its production targets while reducing its net debt to around $500 million by the end of 2023.

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