SilverBow Resources, Inc. (SBOW) is the Eagle Ford's largest independent oil and gas company, headquartered in Houston, Texas. The company's proven strategy to create value is focused on acquiring and developing assets in South Texas, where it has assembled approximately 220,000 net acres in the Eagle Ford and Austin Chalk formations. SilverBow's average operated interest is 82%, allowing the company to control how it prioritizes development across its acreage position.
SilverBow is differentiated from its peers through a diverse portfolio of assets that provides commodity optionality. The company's results are enhanced by the Eagle Ford's proximity to premium Gulf Coast markets, which allows SilverBow to capture higher margins. In the first quarter of 2024, the company reported revenue of $256.7 million, a significant increase from $140.0 million in the prior year's comparable period. Net income for the quarter was a loss of $15.5 million, compared to net income of $94.5 million in the first quarter of 2023. The decrease in net income was primarily driven by a net loss on the company's commodity derivatives.
For the full year 2023, SilverBow reported annual revenue of $652.4 million and net income of $297.7 million. The company's annual operating cash flow was $447.1 million, while free cash flow was a negative $579.1 million, as the company continued to invest in its growth through strategic acquisitions.
Operational Results and Strategy
Average net production for the first quarter of 2024 increased 80% over the prior year's comparable period to 91.4 MBoe/d. Oil production averaged 24.5 thousand barrels of oil per day, up nearly 116% over the comparable period. Production mix for the quarter consisted of 54% natural gas, 27% crude oil, and 19% NGLs. The significant increase in production is primarily related to SilverBow's transformative South Texas Acquisition in late 2023 and continued gains in well productivity.
In early 2024, the company made significant changes in reaction to recent, low natural gas prices. To maximize cash flow, planned capital investments in natural gas assets were reduced by $75 million, and such capital was shifted to liquids-rich development. As a result, first quarter financial and operating results reflected better than expected production and cash flow during the period, which allowed SilverBow to reduce debt and lower its quarter-end leverage ratio. Since the closing of the company's South Texas Acquisition in late 2023, SilverBow has reduced its total debt by $178 million as of April 30, 2024.
During the first quarter of 2024, SilverBow drilled 12 net wells, completed 12 net wells, and brought online 12 net wells. The company operated three drilling rigs during the quarter. First quarter capital investments were $109 million on an accrual basis. Development drilling has been primarily focused on the liquids-rich acreage from the South Texas Acquisition in late 2023. Base production and operational cycle times on the company's new assets are in-line with expectations. SilverBow plans to operate three drilling rigs through May 2024, then reduce activity to two rigs. The company plans to continue to optimize its drilling schedule based on commodity prices, returns on investment, and strategically proving up inventory within its portfolio.
Liquidity
SilverBow's primary use of cash has been to fund capital expenditures to develop its oil and gas properties, fund acquisitions, and repay Credit Facility borrowings. The company uses cash generated from operating activities and borrowings under its Credit Facility as its primary source of liquidity. As of March 31, 2024, the company's liquidity consisted of $1.4 million of cash-on-hand and $604 million of available borrowings under its Credit Facility, which had a $1.2 billion borrowing base.
SilverBow's 2024 capital budget range of $470 - $510 million is expected to be funded primarily from operating cash flow. Management believes the company has robust liquidity to meet all near-term obligations and execute its long-term development plans. In the future, SilverBow may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity, fund acquisitions, or refinance debt.
Business Overview
SilverBow is the Eagle Ford's largest independent oil and gas company, with a focus on acquiring and developing assets in South Texas. The company has assembled approximately 220,000 net acres in the Eagle Ford and Austin Chalk formations, with an average operated interest of 82%. This allows SilverBow to control the development of its acreage and prioritize the most attractive drilling opportunities.
The company's diverse portfolio of assets provides commodity optionality, with a production mix of 54% natural gas, 27% crude oil, and 19% NGLs in the first quarter of 2024. SilverBow's proximity to premium Gulf Coast markets enhances its ability to capture higher margins on its production.
SilverBow has a proven track record of executing strategic acquisitions to expand its scale and inventory. In late 2023, the company completed the transformative South Texas Acquisition, which significantly increased its production, reserves, and acreage position. The company has demonstrated its ability to unlock value from acquired assets through operational improvements and capital efficiency gains.
Financials
For the full year 2023, SilverBow reported annual revenue of $652.4 million and net income of $297.7 million. The company's annual operating cash flow was $447.1 million, while free cash flow was a negative $579.1 million, as the company continued to invest in its growth through strategic acquisitions.
In the first quarter of 2024, the company reported revenue of $256.7 million, a significant increase from $140.0 million in the prior year's comparable period. Net income for the quarter was a loss of $15.5 million, compared to net income of $94.5 million in the first quarter of 2023. The decrease in net income was primarily driven by a net loss on the company's commodity derivatives.
SilverBow's financial performance has been enhanced by its focus on capital efficiency and cost control. The company has demonstrated its ability to drill and complete wells faster, with lower costs, which has allowed it to offset faster cycle times with continued capital efficiency gains. This has enabled SilverBow to maintain its capital budget while increasing production and cash flow.
Liquidity and Leverage
As of March 31, 2024, SilverBow's liquidity consisted of $1.4 million of cash-on-hand and $604 million of available borrowings under its $1.2 billion Credit Facility. The company's 2024 capital budget range of $470 - $510 million is expected to be funded primarily from operating cash flow, and management believes the company has robust liquidity to meet all near-term obligations and execute its long-term development plans.
Since the closing of the South Texas Acquisition in late 2023, SilverBow has reduced its total debt by $178 million as of April 30, 2024. The company's leverage ratio has recovered to the same level it was prior to the acquisition, and it expects to exit 2024 at approximately 1.25x leverage and reach its goal of less than 1x leverage in 2025.
Risks and Challenges
SilverBow's financial performance is subject to commodity price volatility, as the company's revenue is primarily derived from the sale of oil, natural gas, and NGLs. The company utilizes derivative instruments to mitigate price risk, but it remains exposed to fluctuations in commodity prices.
The company's operations are also subject to various environmental, health, and safety regulations, which could result in increased costs or operational disruptions. Additionally, SilverBow's ability to execute its growth strategy is dependent on its ability to successfully integrate acquired assets and realize the expected synergies.
Outlook
For the full year 2024, SilverBow has increased its production guidance and expects to generate significant free cash flow. The company now forecasts annual production of 95 - 100 MBoe/d, up from its previous guidance of 90 - 95 MBoe/d. Additionally, the company has raised its full-year free cash flow estimate and lowered its year-end leverage ratio target to 1.25x.
Conclusion
SilverBow Resources, Inc. (SBOW) is the Eagle Ford's largest independent oil and gas company, with a proven strategy focused on acquiring and developing assets in South Texas. The company's diverse portfolio of assets, operational excellence, and strategic acquisitions have positioned it for continued success.
In the first quarter of 2024, SilverBow reported strong operational and financial results, with a significant increase in production and revenue compared to the prior year. The company has demonstrated its ability to drive capital efficiency gains, which have allowed it to offset faster cycle times and maintain its capital budget while increasing cash flow.
SilverBow's robust liquidity and deleveraging efforts have positioned the company to execute its long-term development plans and potentially pursue additional strategic acquisitions. While the company faces risks related to commodity price volatility and regulatory compliance, its focus on operational excellence and value-accretive transactions has positioned it as a leading player in the Eagle Ford basin.