SilverBow Resorces, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Silver Bowl Resources Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero or star one. Now I'd like to hand the conference over to Mr. Jeff Magnus, Director of Finance Investor Relations. Please go ahead, sir.

Thank you, Angel, and good morning, everyone. Thank you very much for joining us for our fourth quarter and full year 2020 conference call. With me on the call today are Sean Wolverton, our CEO, Steve Adam, our COO, and Chris Abundus, our CFO. Yesterday afternoon, we posted a new corporate presentation to our website and will occasionally refer to it during this call. We encourage listeners to download the latest materials. Please note that we may make references to certain non-GAAP financial measures which are reconciled to their closest GAAP measure and earnings press release. Our discussion today may 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. With that, I will turn the call over to Sean. Thank you, Jeff, and thank you, everyone, for joining our call this morning. On behalf of Silver Bow, I hope everyone who may have been affected by the weather-related events across the South are doing well. It has certainly been a challenging last few weeks. To start, I will review our impressive fourth quarter and full year results. I will then provide a brief overview of our 2021 business plan. This past year showcased Silver Bow's commitment towards our return space strategy. we entered 2020 with the target of growing oil volumes by 70% and generating free cash flow in the second half of the year. By March, the global pandemic and commodity price environment necessitated a different approach to maximize stakeholder value. In response, we took immediate actions to revise our original 2020 program. Specifically, in the second quarter, we refocused our drilling schedule and temporarily halted our DNC spend. We curtailed production and deferred completion activity, thereby aligning our volumes with higher prices later in the year. By recognizing changes to our production profile over the next 24 months, we brought forward $38 million in cash by monetizing excess oil derivatives in March Finally, amidst this disruption, we also closed on two A&D transactions in the second quarter. By year end, we have reduced our capital budget by nearly $100 million and paid down $50 million of debt. Silver Bow generated more than $60 million of free cash flow over 2020, ahead of the $50 million guidance we stated on our last call. Fourth quarter free cash flow of $12 million marks five out of the last six quarters in which we were free cash flow positive. The impressive results were a testament to the hard work and dedication of our team who executed on our mission, even with disruptions to their daily lives. Our operations team renegotiated rates with our service providers and reviewed our costs from top to bottom to find incremental savings. Our corporate office implemented a work-from-home schedule to protect our employees and found new ways to streamline activities and increase our efficiencies going forward. Thus far, we have identified $2.2 million of cash G&A cost savings for 2021. We also reached a critical milestone in operational safety with zero total reportable incidents for the year. This is remarkable considering the pace of change within our operations. We are proud to set new standards for safety and efficiency here at Silver Bow. In addition, Silver Bow was recognized as one of the top workplaces by the Houston Chronicle. On top of our safety achievements, Silver Bow continues to set new operational efficiency records. This past year, we drilled more lateral feet and completed more stages per day, thereby reducing our capital costs per foot, per stage, and per well. In face of all the headwinds in 2020, Silver Bowl delivered record-free cash flow, absolute debt reduction, and positioned itself to benefit from an improving commodity price outlook. For the fourth quarter of 2020, net production averaged 178 million cubic feet of natural gas equivalent per day, above the midpoint of our guidance. Our 2020 CapEx of 95 million was at the low end of our guidance, and coupled with favorable pricing and production performance, we generated 12 million of free cash and paid down 23 million of absolute debt during the fourth quarter. At year end, the PV10 value of our approved reserves at $50 oil and 275 gas was approximately $850 million, which equates to a $35 share price after backing out our debt. As we look ahead, we plan to hold our full year 2021 capital spend at similar levels to 2020. Our capital budget range of $100 to $110 million delivers single-digit production growth and continued debt paydown. Signature to Silver Bow, we have the flexibility to adjust the cadence and hydrocarbon mix of our drill schedule and to maintain multiple playboats to optimize real-time. With strengthening gas prices, we are poised to generate another year of meaningful free cash flow and debt reduction. At current strip, we expect full-year 2021 free cash flow to be in the range of $20 to $40 million. Our gas hedge position over the next two years utilizes a heavier mix of callers, preserving our upside to improving gas price fundamentals. Given the constructive fundamentals for gas, approximately 40% of our 2021 gas volumes are unhedged. Included in our development plan this year is an Austin Chalkwell, which is currently on flow back. We are encouraged by the early results from this test and see the potential for offset locations over our acreage position in Webb County. Any inventory additions at incremental value to both our future reserves and our borrowing base. Our ground game leasing strategy is focused on accretive A&D opportunities to add locations and extend lateral links. Finally, we remain disciplined on larger scale M&A. We believe that the recent move up in commodity prices have brought both buyers and sellers closer to the table. Before turning the call over, I will add that our 2021 budget is not focused on just one year. we are taking the necessary steps to grow production in EBITDA, expand inventory, drive capital efficiencies, and deliver the balance sheet. Our organizational culture is focused on empowering our team to drive incremental value in everything they do on a daily basis. We have demonstrated a track record of meeting or exceeding our objectives, and we look forward to continue to deliver on our corporate strategy in the years ahead. And with that, I'll hand the call over to Steve. Thank you, Sean. Moving on to our operational results. This year, amidst all the disruptions of 2020, our team set new high watermarks in both safety and efficiency. First, I would like to congratulate the team for a recordable incident rate of zero in 2020, which is not just a milestone, but is now a go-forward standard. At the same time, our team also continued to drive operational efficiencies and recognize cost savings. As shown on slides 19 and 20 of our presentation, we drilled 44% more feet per day and reduced our drilling costs by 32% per foot compared to 2019. On the completion side, we completed 8% more stages per day and reduced completion costs per well by 13%. In the fourth quarter, we drilled and completed three Faskin wells and began drilling our second six-wall La Mesa pad. The Faskin pad achieved a record-setting 18 stages per day and was brought online in December, $3 million under budget. With regards to our second La Mesa pad, we benefited significantly from the process improvement and cost efficiencies we learned from our first La Mesa pad, reducing drilling cycle times by 28%. In short, our team continues to demonstrate its track record of operational execution. As Sean mentioned during the second quarter of 2020, we made strategic decisions to curtail volumes and defer completions. All curtailed wells were back online in the fourth quarter and were producing as expected. On a full year basis, we estimate the curtailment program amounted to 11 MMCF per day of net gas production and 340 barrels per day of net oil production, which is approximately 8% of both our oil and gas production for 2020. For the full year of 2020, we drilled 19 net wells and completed 15 net wells. Our drilling focus shifted from oil development in the early part of the year to gas development in the second half of the year. Looking forward to 2021, we plan to drill 15 net wells and complete 19 net wells. Our near-term focus over the first half of the year will be on our Webb County gas assets. Over the summer, we plan to allocate capital to liquids-weighted opportunities in our LaSalle condensate area. Later in the year, we plan to shift capital back to our Webb County gas area. As Sean noted, our full-year capital budget range is $100 to $110 million, which we expect to deliver single-digit production growth, positive free cash flow, and further debt reduction. From an investment standpoint, we expect our capital incurred to be higher in the first quarter as we complete our remaining La Mesa wells and bring on the Austin Chalk Desk. Having the flexibility to optimize our development program and capture the highest returns throughout the year remains core to our strategy. For the first quarter of 2021, we are guiding to average production of 168 to 179 MMCFE per day, with gas comprising approximately 78% of production at the midpoint. For the full year, average production guidance is 180 to 200 MMCF per day, with gas comprising approximately 79% of production, up from 76% in 2020. At the midpoint, our full year production guidance targets a 5% increase in production year over year. Note that our first quarter gas production has only a few weeks of contribution from our recent La Mesa path. Furthermore, we anticipate our oil production to pick back up in the third quarter as our LaSalle wells are brought online. While we rejected ethane in January, we switched to full recovery in February and March and will continue to use our optionality to make monthly elections for the remainder of the year to optimize value. On the cost front, we have several expense projects related to maintenance and production optimization of a portion of our production base, which will result in slightly higher LOE per unit in the first quarter. For a breakdown of our 2021 guidance, please review our latest press release and our corporate presentation on our website. As we progress through the year, our goal is to continue to improve upon our efficiencies while maintaining safe and environmentally responsible operations. As shown on slide six in our corporate presentation, Silver Bowl ranks amongst the lowest equivalent emission intensity operators in the Eagle Fork, both public and private. Our incident-free safety record now stands at over 1,000 days and counting. Working to ensure the safety of our employees, contractors, and service personnel is of paramount importance. This, along with a balanced mix of our inventory and the flexibility of our development program, were integral to our success in 2020 and will continue to be at the core of our strategy moving forward. With that, I'll turn the call over to Chris.

Thanks, Steve. In my comments this morning, I will highlight our fourth quarter and full-year financial results, as well as our operating costs, hedging program, and capital structure. Fourth quarter oil and gas sales were $53 million, excluding derivatives, with natural gas representing 73% of production and 60% of sales. During the quarter, our realized oil price was 91% of NYMEX WTI, our realized gas price was 101% of NYMEX Henry Hub, and our realized NGL price was 37% of NYMEX WTI. Due to higher commodity prices, our realized price, excluding hedges, was $3.21 per MCFE, an increase from $2.72 per MCFE in the third quarter of 2020 and $3.24 per MCFE in the fourth quarter of 2019. Our cash gain on settled hedge contracts was $1 million for the fourth quarter and $78 million for the full year, inclusive of the monetized derivative contract. As of February 26, Silver Bowl had 63% of total estimated production volumes hedged for the full year 2021, using the midpoint of production guidance. Our expected oil production is 91% hedged with a weighted average price of $46.91 per barrel of oil. Our expected gas production is 61% hedged with a weighted average price of $2.90 per MMBTU. Our expected NGL production is 46% hedged with a weighted average price of $23.94 per barrel of NGL. Our hedges are a combination of swaps and collars with a weighted average price factoring in the ceiling price for the collars. Risk management is a key aspect of our business, and we are proactive in adding oil and gas basis and calendar month average roll swaps to further supplement our hedging strategy. We continue to use basis swaps to manage our exposure to differentials. For 2021, we have gas basis hedges on 110 MCF per day, with a weighted average differential of negative 2 cents. Silver boats hedges also provided relief from full-year 2020 benchmark prices. Excluding the impact of hedges, we realized an average gas price of $2.06 per MCF, an average oil price of $37.89 per barrel, and a total equivalent price of $2.66 per MCFE. Including the hedge impact of cash settled derivatives, our average realized prices were $2.44 per MCF for gas, $51.16 per barrel for oil, and $3.25 per MCFE on a total equivalency basis. A combination of Silver Boats hedges and production timing resulted in a $0.38 uplift in our realized gas price and a $13 uplift in our realized oil price for the full year. This does not include the impact of our hedge monetization of $38 million received during the first quarter of 2020. While we are encouraged by the relative improvement in benchmark pricing during the fourth quarter and early in 2021, we plan to remain conservative in our capital investment and judicious in locking in favorable returns. As shown on slide 16 of the corporate presentation, we consistently realize prices close to NYMEX benchmarks and maintain favorable basis premiums. This is a key competitive advantage of our Gulf Coast asset base. Turning to cost and expenses, LOE was $0.33 per MCFE for the fourth quarter. Transportation and processing costs were $0.27 per MCFE for the fourth quarter, while production taxes were 5.6% of sales, or $0.18 per MCFE. All of these costs compared favorably to our guidance ranges. Adding our LOE, T&P, and production taxes together We achieved total production expenses of $0.78 per MCFE, continuing our trend of total production expenses of less than $1 per MCFE, and which we believe stands out amongst our gas-producing peers. Cash G&A of $3.6 million for the fourth quarter, which excludes stock-based compensation, was below the midpoint of guidance of $4.3 million. and more than a 20% reduction compared to the prior quarter and prior year periods. Total cash operating expenses, including total production expenses and cash G&A, totaled $1 per MCFE for the quarter. For full year 2021, we are guiding for cash G&A of $16.5 million at the midpoint, a 12% decrease from full year 2020. We consider our lean cost structure to be a competitive advantage, which allows us to sustain profitability during periods of volatile commodity prices. As we move through 2021, we intend to identify further savings. Adjusted EBITDA for the fourth quarter was $38 million. Adjusted EBITDA for purposes of calculating our leverage ratio was $48 million, which includes amortized derivative add-backs of approximately $9 million. In conjunction with unwinding oil derivative contracts related to production periods in 2020 and 2021, Silver Bow is able to amortize the $38 million it received in March of 2020 as add-back gains in discrete amounts extending from April 2020 through December of 2021. The amortized hedge gains factor into Silverboat's adjusted EBITDA calculation for covenant purposes over the same time period and therefore important for investors and research analysts to understand when tracking our leverage ratio. On our last 12 months, or full-year 2020 basis, the add-back was approximately $25 million, and our LTM adjusted EBITDA for leverage ratio was $171 million. Our year-end leverage ratio was 2.5 times. In 2021, we will receive an add-back benefit of approximately $14 million for purposes of calculating our leverage ratio. With the continued focus on our balance sheet and free cash flow generation, we are targeting closer to two times leverage exiting 2021. As reconciled in our earnings materials, we generated $12 million of free cash flow. As Sean noted earlier, this marks five out of the last six quarters of positive free cash flow. For the full year, Silver Bow generated $61 million of free cash flow, more than $10 million above guidance. Our net working capital deficit at year-end was $18 million and $11 million cash inflow quarter over quarter. Please note that changes in working capital are excluded from our free cash flow calculation. We continue to manage our cash needs from a receipts and disbursement standpoint as we optimize the balance between development activity timing and our liquidity. CapEx on an accrual basis totaled $20 million for the quarter and $95 million for the full year, representing a 64% reduction in full-year CapEx year over year. Nearly all of our capital investment in the fourth quarter was associated with our Webb County dry gas drilling. Our 2021 guidance, which Steve detailed in his comments, targets capital spend at similar levels to 2020 with the modest production growth spurred on by the gas wells that have recently come online. Based on our current plan, our 2021 reinvestment rate is between 70% and 80%. Our fourth quarter cash interest expense of $7 million was down approximately 20% from a year ago, and our full-year cash interest expense was down 17% compared to full-year 2019. These reductions were due to lower borrowings, effective cash and LIBOR tranche management, and favorable interest rates. In 2021, we expect our overhead to continue to decline as we prioritize debt paydown and realize further G&A savings. Turning to our balance sheet, we further reduce our total debt by $23 million during the quarter, totaling approximately $50 million of reductions under our revolving credit facility compared to the end of 2020. As of December 31st, we had $230 million outstanding under our credit facility, approximately $2 million of cash on hand, and $82 million of liquidity. As it relates to our credit facility, there have been positive discussions and active dialogue with our lenders to extend the maturity date of our credit facility in conjunction with our semiannual redetermination. I would like to thank J.P. Morgan and our full bank syndicate for their continued support. We plan to provide additional details on our first quarter conference call. At year end, we were in full compliance with our financial covenants and had sufficient headroom to execute our strategy. And with that, I will turn it over to Sean to wrap up our prepared remarks.