SilverBow Resources: A Look At Potential 2022 Results

Summary

SilverBow expects double-digit production growth in 2022.

At current strip, that scenario could result in around $92 million in positive cash flow.

SilverBow’s debt situation looks good with its second-lien note maturity pushed back to 2026 and its credit facility borrowing base increased to $460 million.

Shares should have decent upside in a long-term $3.25 NYMEX gas scenario.

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masterzphotois/iStock via Getty Images SilverBow Resources (NYSE: SBOW ) is aiming for double-digit production growth in 2022. This scenario could result in it generating around $92 million in positive cash flow at current strip prices of roughly $70 WTI oil and $3.75 NYMEX gas.

SilverBow’s debt situation looks solid with its credit facility borrowing base being increased to $460 million and its second-lien note maturity being pushed back to December 2026. I believe that its shares have decent upside from current levels in a long-term $3.25 NYMEX gas scenario as well. 2022 Outlook At $70 Oil and $3.75 Gas

SilverBow now expects to operate a one rig development program in 2022, which would result in double-digit production growth (along with the help from a full-year of contributions from its various acquisitions). I am thus modeling 2022 production at around Q4 2021 levels, which represents a roughly 15% increase in total production from SilverBow’s expected 2021 production.

At roughly $70 WTI oil and $3.75 NYMEX gas, SilverBow would be projected to generate $424 million in oil and gas revenues before hedges, while its hedges would have negative $41 million in value. Type Units $/Unit $ Million Oil (Barrels) 1,934,500 $68.00 $132 NGLs (Barrels) 1,752,000 $26.00 $46 Natural Gas [MCF] 67,342,500 $3.65 $246 Hedge Value -$41 Total Revenue $383 Source: Author’s Work

SilverBow would be projected to generate $92 million in positive cash flow in 2022, which assuming modest levels of cost inflation . $ Million Lease Operating Expense $34 Transportation & Processing $29 Taxes Other Than Income $19 Cash G&A $17 Cash Interest $22 Capital Expenditures $170 Total Expenses $291 Source: Author’s Work Debt Situation

SilverBow’s debt situation looks pretty decent now. It looks capable of reducing its net debt to around $250 million by the end of 2022 if it completes its equity distribution program, which would leave it with under 1.0x leverage at current strip prices.

SilverBow also had its credit facility borrowing base increased from $300 million to $460 million while its second-lien notes have been reduced to $150 million (with the maturity extended to December 2026). Valuation

Although 2022 natural gas prices have weakened considerably (particularly for Q1 2022) since late November, SilverBow looks relatively cheap now. I haven’t changed my expectations around long-term oil and gas prices, and am still modeling that around $65 to $70 WTI oil and $3.25 to $3.50 NYMEX gas.

At long-term $65 WTI oil and $3.25 NYMEX gas, I now believe that SilverBow is worth approximately $27 per share, while at long-term $70 WTI oil and $3.50 NYMEX gas I would value it at approximately $32 per share.

SilverBow’s estimated value fluctuates a bit based on changes in near-term cash flow estimates (which are affected by movements in strip prices). However, assuming that NYMEX gas averages around $3.25 beyond 2022, SilverBow should have decent upside from its current share price. Conclusion

SilverBow’s acquisitions have pushed its production up to 245 MMcfe per day in Q4 2021 and at that level of production in 2022 it looks capable of generating $92 million in positive cash flow despite some cost inflation.

Although SilverBow has added a fair bit of oil production with its most recent acquisition, it remains more of a natural gas producer and natural gas should provide the majority of its revenue next year. I was neutral on SilverBow when it was around $29 in late October, but believe that it has decent upside now at $23 despite some reduction in near-term commodity pricing expectations.

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