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spk00: Good day and thank you for standing by. Welcome to the Cerebral Resources first quarter 2021 conference call. At this time, our 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'll 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 0. I would now like to hand the conference over to your speaker for today, Jeff Maggots. Director of Finance and Investor Relations. Please go ahead.
spk02: Thank you, LaShonna, and good morning, everyone. Thank you very much for joining us for our first quarter 2021 conference call. With me on the call today are Sean Wolverton, our CEO, Steve Adam, our COO, and Chris Abundas, our CFO. Yesterday afternoon, we posted a new corporate presentation to our website, and we'll 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 the closest GAAP measure in the earnings press release. Our discussion today may include forward-looking statements which are subject to risk 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.
spk04: Thank you, Jeff, and thank you, everyone, for joining our call this morning. Silver Bow hit the ground running this year. Our first quarter results exceeded our expectations and positioned us to deliver on our key objectives this year and beyond. This morning, I will talk about our recent accomplishments and go-forward strategy. Maximizing free cash flow and paying down debt remain at the forefront of our business plan. First quarter free cash flow was 24 million, bringing our trailing 12 months free cash flow to 60 million. The primary use of free cash flow remains debt reduction. Silver Bowl paid down 30 million of RVL borrowings during the first quarter and 90 million of borrowings from a year ago. Due to continued efficiency gains, flexibility in our drill schedule, and favorable pricing, we raised our full year free cash flow guidance to a range of 30 to 50 million, a 33% increase at the midpoint from our prior range of 20 to 40 million. Furthermore, we anticipate our leverage ratio to drop below two times by the end of this year. I would also like to highlight the closing of our amended credit facility, which extends our maturity date out to 2024 and provides Silver Bow with the liquidity in Covenant Headroom to continue pursuing its business strategy. Chris will expand on this in his section, and I'd like to thank our Bait Syndicate, including both existing and new lenders, for their support. Core to Silver Bow's strategy is a well-balanced portfolio of high return inventory and the flexibility to optimize our D&C program real-time alongside dynamic commodity prices. This quarter's update is an example of the plug-and-play optionality we have at our disposal. Without changing our full year CapEx guidance of 100 to 110 million, we have accelerated and expanded our mid-year oil development program. This accomplishes two things. First, it increases Silver Bow's exposure to the recent strength in oil prices with volumes to come online late in the third quarter. Second, it furthers our appraisal of Austin Chalk potential across our acreage. Our initial test well is exceeding our expectations. This well is producing above our internal forecast, both with its cumulative production today and its low decline rate. The results we have seen and the improvements we are implementing on our next oxygen shock well provide line of sight to further DNC activity and inventory additions. We have meaningfully shifted our DNC allocation for the remainder of the year, while remaining within our original budget range. 60% of our full-year budget is now directed towards liquids development, as compared to just 30% in our original 2021 plans presented in March. With our expanded oil development program now underway, we have increased our full-year oil production guidance by 12% at the midpoint. Note that this increase really only captures partial year production contribution as these wells are planned to come online late in the third quarter. This shift in mix is a great demonstration of how Silver Bow is actively navigating the commodity price environment by employing our flexible, adaptable, and returns-focused approach. Looking ahead, we will continue living up to the operational efficiencies and low-cost platform that we are known for. We plan to focus on free cash flow generation and further debt reduction while living within a 70% to 80% reinvestment rate. In some instances, we may choose to reinvest additional capital as warranted by our returns threshold. Reinvesting at the right time in the right wells provides for increased EBITDA, sustained free cash flow, and lower leverage as we plan beyond 2021. Finally, we continue to be opportunistic, with small-scale A&D being a key factor to our success to date. Our demonstrated ability to reduce costs and increase efficiencies on such opportunities has driven greater returns for our stakeholders. As Silverbow establishes a consistent free cash flow platform and further strengthens its balance sheet, we will continue to evaluate accretive deals, both large and small. With our appraisal of the Austin Chalk ongoing, Silver Bow has multiple catalysts on the horizon. With that, I will turn the call over to Steve to provide an operational update. Steve, please go ahead.
spk03: Thank you, Sean. In the first quarter, we completed seven net wells all in our Webb County area. Six of these wells were drilled in the fourth quarter and comprised our second La Mesa pad. Our second pad delivered faster cycle times pumped more stages per day, and came in 13% below our planned capital costs. This La Mesa pad continues to perform in line with expectations, and the efficiency learnings and pad design improvements will be carried forward into our future development plan. The seventh well completed in the first quarter was our first Austin Chalk test well, which delivered an IP30 of 13 mmCF per day of dry gas and an estimated 90-day cumulative production of more than 1 billion cubic feet. This well had an all-in capital cost of $6 million, which we believe can be reduced to $5.5 million or better in full-scale development. In short, the Austin Chalk Test was a success, and we are optimistic about the future. For more details on the performance to date of our initial well, as well as our view of commercial economics, please refer to slide 14 of our corporate presentation. We plan to appraise additional wells this year to further our understanding of the reservoir and the full development opportunity across our acreage. As Sean alluded to, we have accelerated and expanded our mid-year drilling program. We contracted a rig in April. approximately one month ahead of schedule, to start developing our liquids-rich assets. This program encompasses 10 net wells in our LaFalle condensate and McMullen oil areas, spanning the second and third quarters. Similar to the first quarter, we will briefly pause our drilling operations between August and November to allow Silverbow to fully assess its austen chalk results in current market conditions, and then further optimize our near-term development. Currently, we expect to resume drilling later in the fourth quarter, targeting our natural gas assets, which sets up for a strong start to 2022. Although we have seen slight increases in service pricing, we are proactively offsetting those increases through multiple levers. On the drilling side, Silverbow has been able to hold service costs flat based on vendor relationships and existing contracts. On the completion side, continued debundling of sand and other logistics and consumables have led to both pricing and efficiency gains. Additionally, the company has been able to lower facility costs by $40,000 per well through improved design processes and utilizing vendors with greater scale and volume discounting. Our first quarter production averaged 180 MMCFE per day, which was above the high end of our guidance range. In February, extreme cold weather conditions impacted much of the southern portion of the U.S. and resulted in power outages and associated production shut-ins across the industry. We estimate the shut-in impact on Silverwell's first quarter production was approximately 2 mm CFE per day. Our storm preparation and pre-planning procedures helped mitigate production losses. For usual practice, Silver Bowl maintains a portion of natural gas sales tied to daily price indexes. Therefore, we did have some sales exposed to highly volatile prices for a brief period during the cold weather. February was a supply and demand event, and we do not expect the highly unusual conditions to recur going forward. Impressively, however, throughout the February disruptions, Silver Bowl continued its streak of zero recordable incidents, a point of pride amongst our team. For the second quarter, we were guiding to a production range of 201 to 213 MMCFE per day, with natural gas representing 82% at the midpoint. For full year 2021, our production guidance of 180 to 200 mm CFE per day is unchanged. And as Sean mentioned, the midpoint of our full year oil production increased 12%. This reflects the impact of our expanded mid-year oil development program. We expect the initial oil volumes from this development to have only a partial impact on third quarter production, therefore implying greater uplift to our oil volumes in the second half of the year. Our guidance also assumes ethane recovery for the remainder of the year, although we will continue to make monthly elections in accordance with commodity prices. Based on our latest guidance, we expect to deliver single-digit production growth year-over-year on an equivalent basis. This will largely be driven by our gas volumes online in the first quarter, and to a lesser extent, the oil and NGL volumes coming online late this year. This current plan is aligned with prevailing prices and allows us to pivot between the strength of one commodity versus another. Our goal in the near term is to carry over the efficiency and production optimization learnings from our La Mesa paths and to apply those to our current development programs. While volatility has proven to be constant of late, our diverse portfolio allows us to remain flexible and adaptable to market uncertainties in our operations. We continue to operate with a returns-driven mindset in regards to any future development. With that, I will turn it over to Chris.
spk05: Thanks, Steve, and good morning, everyone. In my comments this morning, I will highlight our first quarter financial results, as well as our hedging program, price realization, operating costs, and capital structure. For the first quarter, revenue was $87 million, excluding derivatives, with natural gas representing 78% of production and 73% of sales. For the quarter, our realized oil price was 96% of NYMEX WTI. Our realized gas price was 185% of NYMEX Henry Hub, and our realized NGL price was 39% of NYMEX WTI. As Steve mentioned earlier, natural gas spot prices experienced a brief yet significant spike in February. The spot price of Henry Hub natural gas closed at $23.86 per MMBTU on February 17th, which compares to the January monthly average of $2.71. As such, Silver Bow's first quarter realized natural gas price was significantly higher than both the benchmark Henry Hub average in any recent historical period and should be considered a one-time event. A realized hedging loss on contracts for the quarter was approximately $5 million. Based on the midpoint of our guidance and our hedge book as of April 30th, our total estimated production is 60% hedged for the remainder of 2021. The company has 59% of natural gas production hedged, 77% of oil hedged, and 48% of NGLs hedged. Assuming the midpoint of 2021 full-year guidance is held flat through 2022, Silver Bowl has 41% of natural gas production hedged and 57% of oil hedged. The hedged amounts are inclusive of both swaps and collars. A detailed summary of our derivative contracts is contained in our corporate presentation and Form 10-Q filing for the first quarter of 2021, which we expect to file later today. Risk management is a key aspect of our business, and we are proactive in adding oil and gas basis and calendar month average role swaps to further supplement our hedging strategy. As shown on slide 23 of our corporate presentation, we have historically realized prices close to 9x benchmarks. Turning to costs. Leased operating expenses were $0.39 per NCFE. Scheduled maintenance projects during the first quarter, as well as preventative storm preparation measures, resulted in a slight increase to LOE compared to prior periods. Transportation and processing costs were $0.31 per NCFE. Production taxes were 4% of oil and gas sales. All production expenses were below the midpoint of our guidance or better. Adding our LOE, T&P, and production taxes together, total production expenses were $0.91 per MCFE, continuing our trend of total production expenses of less than $1 per MCFE. Cash G&A costs for the quarter were $4 million, a 20% decrease year over year. On a full year basis, we expect to reduce our 2021 cash G&A costs by approximately 10% year over year. We consider our lean cost structure to be a competitive advantage, allowing Silver Bowl to sustain profitability during periods of volatile commodity prices. Adjusted EBITDA for the quarter was $63 million, exclusive of amortized derivative contract gains. As reconciled in our earnings materials, we generated $24 million of free cash flow in the quarter. This marks six out of the last seven quarters of achieving positive free cash flow. Turning to our balance sheet, we further reduced our total debt by $30 million quarter over quarter and $90 million year over year. As of March 31st, we had $200 million outstanding under our credit facility, approximately $3 million in cash on hand, and $113 million of liquidity. Subsequent to quarter end and effective April 16th, Silver Bowl amended its credit facility, which, among other things, redetermined the borrowing base to $300 million and extended the maturity date to April of 2024. The maximum leverage ratio covenant is at 3.25 times through year-end. Starting in 2022, the leverage covenant reduces to 3.0 times. As Sean alluded to, we are very appreciative of our syndicate of banks, which we believe we have strengthened during this unique time in the industry. For further information, please see the company's current report on Form 8K filed with the SEC on April 19th. At the end of the first quarter, we were in compliance with our financial covenants and had sufficient headroom. Our cash interest expense was down 20% from a year ago, primarily due to decreased borrowing. We expect our cash interest to continue trending lower throughout the year as we pay down additional debt. Capital expenditures totaled $33 million on an accrual basis. The vast majority of our capital was devoted to finishing our Webb County development program. Thanks to further capital expense savings and efficiencies identified by our team, our full year capital budget guidance is unchanged with the range of $100 to $110 million. The remainder of our 2021 capital budget is approximately 85% weighted towards our liquid rich assets. The remaining 15% of our DNC spend targets late-year development of our Webb County gas assets. In conjunction with unwinding oil derivative contracts related to production periods in 2020 and 2021, Silver Bow was able to amortize the $38 million it received in March of 2020 as at-bat gains in discrete amounts extending from April 2020 through December of 2021. The amortized hedge gains factor into Silver Bow's adjusted EBITDA calculation for covenant purposes over the same time period, and therefore important for our investors and research analysts to understand when tracking our leverage ratio. For the first quarter, the add-back was approximately $4 million. On a last 12-month basis, the add-back totaled approximately $29 million, bringing our last 12 months adjusted EBITDA for covenant purposes to $192 million and our quarter-end leverage ratio to 2.1 times. As the time period of the original unwind rolls off, our full year 2021 adjusted EBITDA will receive a benefit of approximately $14 million for purposes of calculating our leverage ratio. And with that, I will turn it over to Sean to wrap up our prepared remarks.
spk04: Thanks, Chris. To summarize, Silver Bow generated meaningful free cash flow and paid down 13% of its revolver borrowings in the first quarter. The company is positioned to continue generating free cash flow and paying down debt for the remainder of 2021 and into 2022. We hold a constructive outlook of domestic supply and demand dynamics that support higher gas prices and the recent improvement in oil prices broaden the optionality of our high-return inventory, as evidenced by the shift in this year's schedule towards a higher oil mix. We expect Silver Bowl to continue to outperform other small-cap peers. Over the past month, ESPO has been the second-best-performing stock across all large-cap and small-cap E&Ps. Our winning strategy is focused on solid execution, efficient operations, financial resilience, and a low-cost structure. This sets us up favorably given our current outlook for prices, continued strengthening of our balance sheet, and positive momentum on Austin Chalk delineation. Our strategy remains intact with multiple catalysts for the future. We look forward to providing further updates on our next call And with that, I will turn the call back to the operator for questions.
spk00: At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press the pound key. Please pass by while we compile the Q&A roster. Your first question comes from the line of Neil Dingman with Truist SEC.
spk03: Morning, guys. Could you talk a bit about maybe potential upside activity and just overall what could happen on that Austin Chalk and Web if you continue to have successful results there?
spk04: Yeah. Morning, Neil. Good to hear from you. You know, we're going to continue to look at our returns based upon commodity prices and generated cash flows. We remain really committed to live within 70 to 80 percent of our cash flow. and generate, you know, free cash flow in excess of $30 to $50 million. So, if our well performance and commodity prices generate more free cash, we could envision, you know, expanding our capital program a little bit and keeping our rig running through the full year. And in conjunction with that, as we plan to drill more Austin Chalkwell this year, if If we see, you know, similar success that we saw in our first will, that would also support probably additional drilling to really take advantage of the high returns that Austin Chalk is showing that it's capable of.
spk03: And then, so my follow-up is that, is it kind of an either or? I mean, if you start, you know, have fortune and continue to have success there, would that continue, that capital continue to be reallocated from other areas? Or, you know, are you pretty certain Could you all talk around that?
spk04: Yeah, we'd tell you that we're very flexible and efficient in reallocating capital. So we're always looking to reallocate capital to our highest rate of return projects. So as we came into the year, our gas projects looked to be the best. As oils moved significantly higher, we've allocated to more liquids programs. But as we look at the Austin shock, If we continue to see the follow-up wells perform like the first well, our capital costs start to move towards our desired goal of $5.5 million. I think the returns of those projects actually start to exceed our oil projects, so probably shift our capital back into the Austin Chalk Program.
spk03: Now, it's good to hear. And then just lastly on oil, You know, talking about kind of on a go forward, I guess, can you talk about M&A a little bit, opportunities you see now, you know, just given the position you're in and just kind of what the market looks like out there? Yeah.
spk04: As you know, we continue to look for opportunities in the M&A market, both large and small. Over the past couple of years, we've closed a number of smaller transactions. But we'll tell you that we're seeing more activity in the market today than we've seen over the last 24 months. So I think there are opportunities out there with higher prices. You know, more sellers are coming to the market looking to transact. And so we're going to continue to be diligent on the right transactions, but do you feel like there's more opportunities in front of us today than there was, you know, 12, 24 months ago?
spk03: Thanks, John.
spk04: Appreciate the questions, Neil.
spk03: Have a good day.
spk00: Once again, ladies and gentlemen, if you have a question, please press star followed by the number one on your telephone keypad. You have a question from the line of Charles Meade, Johnson Price.
spk01: Good morning, Sean, to you and your team there. I wanted to ask a question about the trajectory of debt pay down for the year, and maybe it's also kind of related to the pandemic. moving the natural gas trip. You guys made progress with a big chunk in 1Q, and you obviously had that benefit from the one-time storm pricing, I guess you'd call it. But as we look at the remainder of the year, a month ago I would have said that your next big slug at deck paydown would come in q4 but you know in the last month the you know the strip for the back half of the years move up by 25 30 cents uh on natural gas and so uh it looks like you actually you will be able to make some progress incrementally 2q and 3q but can you can you give a sense of uh of what your planning price deck is and what kind of what progress you see under that planning price deck
spk04: Yeah, you know, we set up the cadence of our capital program such that we'll see, you know, quarter to quarter positive cash flows as we come out of the capital spend timeframe. And then as we, you know, bring a rig back in, we'll see obviously spend go up. So the cadence of our program this year probably has us, seeing debt paid down in the second quarter. It'll probably stay flat or move up a little bit in the third quarter as we have a significant amount of spend around our completion activity of the program that we're currently drilling. And then we'll see a drop again as we enter into the fourth quarter. We are looking at the second half of the year, really seeing exposure to oil. You talk about the move up in oil prices and what our targets are there. We were heavily hedged through the first half of this year on oil. One of the things that, you know, attracted us to increase our oil capital allocation is just being exposed to those new volumes to the higher oil price. And some of that's not hedged in yet. So, you know, I do think that if oil continues to move north of 60 where it stands, we're going to see beneficial cash flows that will help us drive down debt even further. Got it. You know, and then lastly, I'd tell you, hey, we – We're really definitely on track to remain, or to move below two times the leverage. We stated publicly that it'll be by end of year, but we see a pathway there even sooner.
spk01: Right, right. And then a question about the Austin chalk, and specifically your slide 14. I see where you guys have, you've had your first well that's southwest, I don't want to say corner, but maybe edge of Webb County. But you've got this big slug of acreage there in Eastern Webb, right, that spans into southern LaSalle, and that falls outside of, I believe that's EOG's outline for their... for what they're calling their Dorado play, which is that Austin chalk. Can you talk about what you see technically about whether that big acreage position you have is going to be perspective, or what are the questions you have on whether that could be part of the Austin chalk story for you guys?
spk04: Yeah, you're correct. The outline of the the play on the map on slide 14 is the EOG's Dorado play outline. I would tell you that we do have some logs that cover west of there and east of there, but not really good detail subsurface information on that larger block. We do know that as you move west to east, the austen chalk thins, so that block is still perspective, But it comes with risk as it's transitioning from, you know, a thicker, more pervasive austen chalk to a thinner austen chalk. So we're, you know, still considering do we conduct a test there or watch and see what other activity in the immediate area comes about to help de-risk it. But there's potential there, but probably a little bit more risk as you move east of the Dorado line.
spk01: Got it. And just to put some numbers to that, my understanding is, as you said, the chalk thickens as you move southwest. And down where you guys are, I want to say it's like 400 feet thick, or maybe even more than that. And so could you quantify that, how thick it is where you are and what you expect in your block further east in Webb County?
spk03: Yeah, why don't I give Steve the opportunity to answer that question. Yeah, okay. Thank you, Charles. Down in our area there in the southwest, the overall chalk, if we were to consider that to be A, B, C, and D levels the entire interval, we see it to be close to 700 to 750 feet thick with the with a little bit of trending down as you head towards the east, largely well north of 700 feet. And then when you get down into the more productive intervals, the C and D intervals, you're looking those to be anywhere from 150 to over 200 feet thick combined.
spk01: Got it. So that's a real thick section, but I recognize that as a carbonate, it's going to act differently. But thank you for that detail.
spk04: Yeah, no, I definitely appreciate it. You know, like we said, there's still some more work to be done. And part of that work over time, both by us and probably others, will be is there snack pay potential across this thick zone. So we're excited about the hydrocarbon that's in place and determining what the most economic way is to get it out of the ground.
spk01: Thank you, gentlemen. Thanks, Charles.
spk00: There are no other questions in queue. I'll turn it back over to management for closing remarks.
spk02: Thank you, everyone, for joining our call this morning and look forward to providing an update in August. Thanks.
spk00: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.
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