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SilverBow Resources, Inc. (NYSE:SBOW)
Q1 2019 Earnings Call
May. 09, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to this Silver Bow Resources first-quarter 2019 earnings conference call. [Operator instructions] I would now like to turn the call over to Mr.

Jeff Magids. Sir, please go ahead.

Jeff Magids -- Senior Manager Finance and Investor Relations

Thank you, Laura, and good morning, everyone. Thank you very much for joining us for our first-quarter 2019 conference call. Joining me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Gleeson Van Riet, our CFO. We posted a new corporate presentation onto our website and will occasionally refer to it during this call.

We encourage investors to review it. Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release. Our discussion today will include forward-looking statements, which are subject to risks 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.

And with that, I will turn the call over to Sean.

Sean Woolverton -- Chief Executive Officer

Thank you, Jeff and thank you everyone for joining us on our call this morning. We are pleased to report another solid quarter for the company. Our financial and operational results demonstrate our consistent ability to execute on multiple fronts. As we discussed on our last call and described in our corporate presentation, our key objectives for 2019 are free cash flow generation, corporate efficiency, portfolio expansion, and balance sheet strength.

We made great progress this quarter, and we delivered on all aspects of our guidance. As it stands today, I'm very proud of how our organization is performing. Let me share with you just a few highlights. First off, as it relates to free cash flow, we are holding our full-year production range of 225 to 239 MMcfe per day, which implies a 25% growth based upon the midpoint with the new wells recently brought online, and the increase in second-quarter production guidance, we remain on track to deliver full-year double digit EBITDA growth as well.

For the first quarter, our adjusted EBITDA of $53.7 million, represents a 49% increase compared to a year ago. On a per unit basis, our adjusted EBITDA continues to increase at $2.77 per MCP, we came in 11% hired in the first quarter of 2018. This is a key differentiator for us, when compared to our gas producing peers. Finally, we are holding our full-year capital budget range of $250 million to $260 million.

We expect to see our quarterly spend decrease in the second half of the year as a result of moving to a one-rig program in the second quarter, and completing our inventory of drilled but uncompleted wells from last year. On the corporate efficiency side, we continue to move our cost structure lower as evidenced by a 22% decline in lease operating expenses on a per unit basis compared to a year ago. We compared favorably to guidance on transportation and processing costs, and on production taxes as a percentage of revenue. All in, our cash operating expenses including G&A totaled $1.01 per Mcfe, making us one of the most competitive producers in the basin.

Our initiatives in the quarter included 100% utilization of regional sand, optimization of mud programs, and getting more stages pumped. We also added bolt-on acreage to drill longer laterals. Finally, we drilled two wells in the McMullen oil area with both wells having lateral length succeeding 11,000 feet, representing several BOEs longest laterals to date. These are all great examples of our efforts to drive more efficiency into our operations.

Turning to portfolio expansion. We continue to see active deal flow and are currently evaluating transactions of various sizes commodity mix, and geographic footprint within the basin. While we cannot predict the timing of our next acquisition, we are encouraged by the current activity level, and believe there will be opportunities for us to acquire quality assets at favorable valuations. From a leasing effort, we continue to pick up acreage with an attractive full cycle return mindset.

Our recent activity is predicated on small transactions that are opportunistic in nature as we move toward a more balanced production mix. We remain focused on low-cost drilling on core Eagle Ford acreage to sustain cash flow. We reported both strong oil and NGL production in the first quarter with overall liquids growth of 35% compared to the first quarter of 2018. Increasing our liquids net rate from 4,700 barrels today a -- 4,700 barrels per day to 6,400 barrels per day, which is a testament to our team's relentless pursuit of increasing our liquids production as a percentage of our overall portfolio.

Our goal is to have liquids comprise 25% of our overall production in the third quarter, which will increase our adjusted EBITDA and provide us with flexibility to take advantage of commodity price swings. Finally, from a balance sheet standpoint we continue to benefit from strong basis pricing in the Eagle Ford. To support our multi-year development plan, we remain disciplined about layering on commodity hedges to protect our returns. As prices dictate, we also recently reaffirmed our borrowing base at $410 million.

Our balance sheet and debt metrics will continue to be a focal point for us, as we navigate 2019 and look to generate free cash flow. And with, that I will hand the call over to Steve.

Steve Adam -- Chief Operating Officer

Thank, you Sean. Moving onto our operational results. First-quarter production of 215 MMcfe per day came in above the midpoint of our guidance, representing nearly 34% growth compared to a year ago. The decrease from the fourth-quarter production was due to the previously guided delays in starting the 2019 completion program.

For the first quarter, we reported both strong oil and NGL production with oil coming in 6% higher than the midpoint of our guidance range. These results further validate our oil and liquids production potential, which we look to increase as a percentage of our overall portfolio during the course of 2019. Over the first quarter, we drilled 10 net wells while completing seven net wells, and bringing four net wells online. In the Webb County gas area, we completed a two well pad in the quarter, with one of the wells being drilled in 2018.

While it is early in the life of these wells, performance thus far, is in line with expectations. In the LaSalle condensate area, we drilled seven wells and completed a three-well pad with those wells being brought online in early March. We delivered sub 10-day drill times, averaging nine days for the first quarter. In the southern Eagle Ford gas area, we drilled and completed a two-well pad with both wells being brought online in late April.

These wells which utilize a three-string casing design are expected to have all in costs of $6.6 million each, representing a significant savings over the previous two wells drilled in the area. In the McMullen oil area where we have been deploying more capital, we brought three wells online last year with all three having 30-day IPEs of 145-BOE per day per 1000-foot lateral. Based on early results in this area, the operations team drilled two additional wells in the fourth quarter. Each wells lateral length exceed 11000 feet with one being a Silver Bow record lateral of 11,400 feet.

These two wells came on line in early second quarter and combined have shown an initial well-head production rates over 2,400 BOE per day. These results further support our enthusiasm for new generation in-fill development on our legacy liquids-rich acreage. Across our portfolio, we continue to strategically employ customized fit for purpose completion techniques. We utilize hybrid designs in the majority of wells completed in the first quarter.

We averaged a completion at intensity of 2,400 lbs of proppant, and 50 barrels of fluid per foot lateral. We continue to assess the performance of our completion designs, applying them according to reservoir fluid system and class of well, parent or infill. We also continue to drive efficiencies into our operations as demonstrated by pumping 363 stages in 54 days or just under seven stages per day, which represents, a 39% increase over similar jobs compared to the prior quarter. Furthermore, we brought on two frack spreads in early March, which were able to reduce cycle times and thereby accelerate production.

As such, we expect to see an increase in production in the second quarter over first-quarter results. Specific to our 2019 budget, we are reiterating our capital budget range of $250 million to $260 million. We ran two drilling rigs for most of the first quarter and have recently sat down to one super spec rig for the remainder of the year. This rig will focus on the liquids-rich areas of McMullen and LaSalle counties.

We expect to drill 26 to 27 net wells and complete 30 to 32 net wells, where the majority of the completions are occurring in the first half of the year given the nature of pad drilling. To recap, the first quarter marked our return to proven technology and a shift in activity to the liquids-rich window of our portfolio. We look forward to the second quarter. We expect to see a significant increase in overall production along with more liquids weighted results.

With that, I'll turn it over to Gleason.

Gleeson Van Riet -- Chief Financial Officer

Thanks, Steve. In my comments this morning, I will highlight our first-quarter financial results, as well as our operating costs, hedging program, and capital structure. First-quarter revenue was $72.1 million with natural gas, representing 82% of production and 71% of revenue. During the quarter, I realized pricing was 104% of nymex WTI, 102% of nymex Henry Hub, and 35% of nymex WTI for NGLs.

With the exception of natural gasoline, second-quarter NGL prices have retreated from first-quarter levels while WTI prices have increased. As a result, we are now guiding our NGL price realization to be 29% of WTI for the second quarter. Our hedging gain on contract covering production for the quarter is approximately $1 million. We continue to be active with our hedging program.

Based on the midpoint of our full-year guidance, our total estimated production is 68% hedged for 2019 at attractive prices. In addition, we've also used oil and gas basis swaps to manage our exposure to differentials. For 2019, we have executed gas-basis hedges of 158 MMCfe per day priced flat to nymex. For 2020, we have gas-basis hedges on 129 MMCfe per day with a weighted average differential of negative $0.04.

Turning to costs. Lease operating expenses were $0.27 per MCfe, down 22% compared to the first quarter of 2018, primarily driven by continued cost reduction initiatives. Transportation and processing cost of the first quarter were $0.33 per MCfe while production taxes for the quarter were 4.6% of oil and gas revenue coming in below the low end of our guidance. Adding our LOE, TNP and production taxes together, we achieved total production expenses of $0.77 per MCfe, which we believe stands out among our gas producing peers.

Cash G&A of $4.6 million compared favorably to guidance of $5.5 million, and came in lower across multiple categories. For the second quarter, we're guiding for cash G&A of $4.8 million to $5.3 million. As Sean mentioned, our cash operating expenses including G&A, totaled $1.01 per MCfe in the quarter, compared to $1.19 in the first quarter of 2018. We remain on track to reach our 2019 all-in cash operating expense target of $1 per MCfe.

In total, strong liquids production and efficient operations resulted in adjusted EBITDA of $53.7 million. At $2.77 per MCfe, our adjusted EBITDA per unit continues to improve. For the quarter, cash interest expense was $8.4 million, which is reflective of increased borrowings on our credit facility. Turning to guidance.

We're guiding for second-quarter production of 224 to 231 MMCfe per day, and reiterating our full-year guidance of 225 to 235 MMCfe per day. Please refer to our corporate presentation for our latest guidance. Turning to our balance sheet. We had $231 million outstanding on our revolving credit facility at the end of the quarter, and our liquidity position was approximately $180 million.

We recently completed our semiannual redetermination where our borrowing base was reaffirmed at $410 million and I would like to thank our banking syndicate for their continued support. We expect to fully fund our 2019 capital program with cash re -- generated from operations and borrowings on our credit facility. At the end of the first quarter, we were in full compliance with all our financial covenants, and had significant headroom. And with that, I'll turn it over to Sean to wrap up our prepared remarks.

Sean Woolverton -- Chief Executive Officer

Thanks, Gleason. So to summarize the first quarter was a strong start to the year for the company. Our operational and financial performance continues to demonstrate our ability to consistently execute, control our costs, and capitalize on opportunities that strengthen our competitive position. Our recently reaffirmed borrowing base provides us with ample liquidity and running room to continue expanding our portfolio and building a balanced commodity asset base.

As such, as we think about the second quarter and beyond, we're moving toward a more liquid-weighted portfolio in a rising oil price environment. We look to build on our oil production beat in the first quarter by concentrating on areas with the most room for growth and stellar returns. I will close by saying that without a doubt the first quarter was a challenging one for our industry with wide swings in commodity prices. At Silver Bow, we are committed to building a portfolio that has product diversification, a low cost structure, and is well-positioned in premium markets.

We believe this is a long term winning strategy in a portfolio that will perform well in any type of commodity market. As we move into the second quarter, we look to continue executing on this strategy. At this point, I will turn the call back to the operator for the Q and A portion of our call.

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Ron Mills of Johnson Rice.

Ron Mills -- Johnson Rice -- Analyst

Good morning, Sean. Quick question as it relates to your clearly looking to grow -- it's been a project or a target of yours for quite some time. You mentioned a fairly robust market right now. Can you provide a little bit of color in terms of the types of opportunities you're seeing and whether they're more corporate type deals? Or are they property deals? Are you focused, you know kind of -- are the acquisition efforts also focused more on liquids, if not even due to the oily part of the play.

Just trying to get a better sense as to what it's like out there and how that fits with what your stated goals are?

Gleeson Van Riet -- Chief Financial Officer

Hey, Ron, it's Gleeson. Thanks for the question let me -- let me take a crack at that and maybe hand to Sean afterwards. But you know we are very focused on the Eagle Ford as you know. We think the basin is kind of ripe for consolidation, and one nice thing for us is there's a lot of opportunity for liquids as you kind of remarked upon.

You know when you see the wide swings in prices which we've seen, which kind of started into last year. There's always sort of a pause in M&A activity until seller's expectations kind of, you know, kind of match up more with kind where the buyers are. So you know given that pause, you know now we've seen a bit of time behind it. Maybe you saw that earlier this week, you know pioneer enough deals so we're starting to see kind of more activity kind of kick up.

A nice thing for us when we think about being folks on a base and, you know not only we're very focused on kind of low cost from that base and but are also very focused on the M&A things there. So we've got a very, I think robust BD team. We've got dialogues with every one of our competitors out there. So I don't think there's a transaction that have that -- that goes by, that we don't look at.

So as you pointed out, you know right now with -- where commodity prices are with our significant out of gas inventory, you know we've got a bias more toward the liquids part of the window and that's where we've been spending our time. The nice thing for us is because we've got this low pop -- low-cost platform, we're going to operate -- operations team that can really execute on that. It's got a lot of great ability to scale up more than just one rig. We think that this sets us really -- sets up really well, well that's for acid acquisitions or corporate opportunities or we can kind of really drive value in the assets on kind of enhance shareholder returns.

So you know, we look at a wide variety of deal sizes. We look at both corporate deals and asset deals. You know the only thing we can't control is the timing and what deals do come for sale. So I guess I could say, that if it's an Eagle Ford and [Inaudible] the only window we're kind of looking at it.

But as far as the timing when that happens, it's a little bit more out of our control. But with time, we think you no longer get quality at bats. Eventually, we're going to win the deals we should win. So -- Sean, if you want to add more to that?

Sean Woolverton -- Chief Executive Officer

No. I think Gleeson touched on our strategy well. We do think that there's opportunity, solid eight within the Eagle Ford, and we're positioned well to to look at those transactions and they will continue to manage our balance sheet accordingly to put ourselves in a position to transact.

Ron Mills -- Johnson Rice -- Analyst

OK. Great. And in terms of comfort level is there -- you know do you have any kind of particular size-type transaction that you think is in your wheelhouse? Or you know are there any limitations? You know some deals I imagine are are more sizable. But are -- you know what what kind of size transactions are you comfortable looking at?

Sean Woolverton -- Chief Executive Officer

Yeah, Ron. This is Sean. You know I think for us it's -- we're not limiting ourselves to any specific size. Our goal is to create a more scalable organization, more scalable company that will attract greater investor interest.

So we're looking at all deals and depending upon the size of the deal, we'll have to really gear or modify how we would fund that acquisition. And so as we are active in the BD market we're also active in managing the balance sheet, and looking at a wide range of ways to fund that. And so so we're trying to set up the funding mechanisms in parallel or even in advance of doing deals. So I'm not going to you know, really hone in on any specific deal size.

I would tell you that we're in the market for all size, and our goal long term is to create more scalability here.

Ron Mills -- Johnson Rice -- Analyst

Great. And the last one just on that on the activity shifting over to Lasalle and McMullen County. It looks like you even shifted some planned wells from Lasalle to McMullen. Here [Inaudible] would you think about your inventory in the liquids-rich areas.

Would we -- should we expect kind of more focus on the McMullen oil areas since it's a little bit deeper inventory? Or how would you -- how would you think you would wait activity between those two, and that's all. Thank you.

Steve Adam -- Chief Operating Officer

Yeah. Well, thanks. Thank, you Ron. This is Steve, and I'll start and perhaps Gleason and Sean might want to chime in at the end.

Right now, we've been very very focused on on our shift to oil and, you know we see -- we see about an inventory of around four to five years of drilling at kind of a one rig pace. And and as you know our team has been a heavy area and also for us, and we've been able to capture some of the more volatile oil opportunities that McMullen. We're confident in our ability to replenish on our inventory, you know via active leasing and small acquisitions. We also believe, you know by and large there's some further upside to capture from from not only the existing liquid assets in those two areas as we go back and forth.

But also by assessing the stack play development opportunities both not in the Lower Eagle Ford, as well as in the Upper Eagle Ford and then who knows even up top in the Austin Chalk. So additionally, yeah, we'd like our ability to add to the existing portfolio. And we also like the added focus that our team, our operations team has been doing as it relates to improving our base production. And we've been doing that through a number of means, but primarily looking at opportunities in both workover and refrack opportunities.

Sean Woolverton -- Chief Executive Officer

Yeah. We'll take our next call.

Operator

OK. Our next question comes from Neil Dingmann and SunTrust.

Jordan Levy -- SunTrust Robinson Humphrey -- Analyst

Guys, it's actually Jordan Levy for Neil. Just a quick question. Knowing that you don't have formal 2020 guidance out. Could you just speak to how you guys are thinking about, you know potentially maybe adding a second rig back down the line versus kind of entering more tempered growth mode, and you know focusing on free cash flow.

Obviously, commodity dependent.

Sean Woolverton -- Chief Executive Officer

Yeah. Hey, this is Sean. Why don't I take that -- this question. I guess what I would tell you is that we really have a returns-based strategy and we're focused in the Eagle Ford.

Our goal is obviously to expand our scale while we really diligently manage our balance sheet. You know and I think we've done a great job over the last couple of years, really establishing the company as a low cost capital efficient organization. So as we think about where we take the organization from here will really let the returns dictate our pace of activity. And really, determine those returns how we allocate capital between the drill bit and potentially adding a second rig in the future or shifting that capital allocation toward accretive acquisitions.

So we have a lot of flexibility in how we dictate our capital allocation between the bit and acquisitions. So that's kind of how we view the next 12 to 24 months.

Jordan Levy -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks, guys. And then just a quick follow up. Kind of going on what Ron was asking earlier.

Just thinking about McMullen and LaSalle, the McMullen and LaSalle positions, and your current inventory, and you know the upside potential with that. Is the kind of -- would it be kind of, you know one-rig program between the two areas be what you kind of view as the optimal pace of development right now. And you know, I guess you know kind of expanding on the potential for that to change down the line.

Sean Woolverton -- Chief Executive Officer

Yeah. You know what -- Jordan, I appreciate the second question. What we really like about the Eagle Ford is the ability to be in a single basin, have a very efficient cost platform, have a technical team that knows the rock, knows operations, knows the surface regulatory environment, and so as we think about McMullen and Artesia in the near term returns they're favorable driven by higher commodity prices on the liquids side. As we think about what our inventory provides this is the ability to shift capital to gas or into the liquids depending upon what what the returns are and what prices dictate.

So you know right now, we'll stay focused the on the Artesia-McMullin rig -- prices are dictating higher returns there. But I would tell you that we're in a great position in that, if gas prices move back up probably in that $3-plus range and we have the ability to reallocate and start drilling our extensive gas inventory as well.

Jordan Levy -- SunTrust Robinson Humphrey -- Analyst

Absolutely. Great color. Thanks, guys.

Sean Woolverton -- Chief Executive Officer

Thanks, Jordan.

Operator

[Operator instructions]

Steve Adam -- Chief Operating Officer

Thanks, Laura.

Operator

And we have no questions, now sir.

Steve Adam -- Chief Operating Officer

OK. Great. I'm going to turn it back over to Sean.

Sean Woolverton -- Chief Executive Officer

Yeah, so why don't I wrap the call up. I appreciate everyone's continued interested in the company. We look forward to speaking to you again when we held our second-quarter call out in August. And thank you, and have a nice day.

Thanks, Laura.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Jeff Magids -- Senior Manager Finance and Investor Relations

Sean Woolverton -- Chief Executive Officer

Steve Adam -- Chief Operating Officer

Gleeson Van Riet -- Chief Financial Officer

Ron Mills -- Johnson Rice -- Analyst

Jordan Levy -- SunTrust Robinson Humphrey -- Analyst

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