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spk00: Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. THE END THE END THE END Ladies and gentlemen, thank you for standing by and welcome to the Silver Bell Resources second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, simply press star followed by the number one on your telephone keypad. Please be advised that today's call is being recorded. If you require any further assistance, please press star zero. Thank you. I would now like to hand the conference over to Jeff Magnus, Director of Finance and Investor Relations. Please go ahead.
spk03: Thank you, Hillary, and good morning, everyone. Thank you very much for joining us for our second quarter 2021 conference call. With me on the call today are Sean Wolverton, our CEO, Steve Adam, our COO, and Chris Abundance, our CFO. Yesterday afternoon, we posted the 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 in the 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.
spk06: Thank you, Jeff, and thank you, everyone, for joining our call this morning. Silver Bow's second quarter results continued our positive momentum from the first quarter. With the first half of the year now behind us, I would like to detail the progress we have made towards a number of our key objectives, which we show on slide seven of this presentation. Our first objective is to grow production in EBITDA while living within cash flow. Yesterday, we increased our full-year production guidance by 8% at the midpoint, which now implies 12% growth year over year. As oil production comes online in the third quarter, we anticipate that the second quarter should be the low-water mark for our EBITDA this year. We also increased our free cash flow guidance by 25% at the midpoint, to a range of $45 to $55 million. We accomplished these increases while remaining at an implied reinvestment rate of approximately 70%, inclusive of our revised capital budget range. Steve will further detail our cap ads and scheduling optimizations in his section. Our second objective is focused on expanding inventory through Austin Chalk delineation and accretive acquisitions. Our initial Austin Chalk well in Webb County continues to exhibit attractive economics, and we plan to drill additional appraisal wells this year. Subsequent to quarter end, we closed on an accretive bolt-on acquisition in our high-return La Mesa field. which included incremental working interest in our existing wellbores, as well as an additional section of new acreage directly offsetting our current position. We were able to fund this transaction using a combination of cash and stock. The deal provides us with $10 million per day of incremental production, as well as future inventory upside in the prolific Eagleford and Austin Chalk trends. As many of you know, our La Mesa wells over the last two years contributed to much of Silver Bow's success. Our third objective is to drive peer-leading capital efficiency and cost structure. Our total cash operating expenses for the second quarter were below $1 per MCFE. We have seen continued improvement in our cycle times and our total BNC cost per lateral foot. As Chris will detail, we lowered our full-year LOE and T&P guidance, given higher production and further cost efficiencies. Our cost structure allows us to continue generating attractive full-cycle returns, and Silver Bow is at the high end of our peers on free cash flow yield, which we show on slide 20 of our presentation. Last but not least, we seek to deliver our balance sheet through further debt reduction and accretive transactions. Year over year, we reduced our total debt by $72 million, and we have now paid down $92 million since the end of the first quarter of 2020. At quarter end, our leverage ratio was 1.9 times down from 2.5 at year end 2020 and ahead of our previous target of below two times by year end 2021. As we reduce debt and increase our liquidity, we better position ourselves to strategically deploy cash towards both on acquisitions, such as our recent La Mesa deal. Accretive transactions like these will be more than offset by our objectives to decrease leverage and grow reserves. I'm extremely proud of the progress Silverbow has made to date. Going forward, we see the opportunity to set even more ambitious targets. By year end, we believe our leverage ratio could be below 1.75 times. As we look into 2022, our preliminary forecast at a three-quarter rig pace and grow annual production by double digits. We project 2022 free cash flow above 2021 levels with an implied reinvestment rate below 70%. We may reinvest additional capital as warranted by our return thresholds, such as the New Eagleford and Austin Chalk locations acquired in our La Mesa acreage. Reinvesting at the right time in the right wells provides for increased EBITDA, sustained free cash flow, and lower leverage as we look to 2022 and beyond. With that said, I will turn the call over to Steve to provide an operational update. Steve, please go ahead.
spk04: Thank you, Sean. In the second quarter, we drilled 10 net wells, nine of which were in our LaSalle condensate area. Our team continued to increase efficiencies and reduce cycle times, as our drilling cycle times averaged seven days per well in the second quarter. Our fastest drill time was 4.2 days, with a measured total depth of over 17,000 feet with an 8,000-foot lateral. As a result of these drilling efficiencies, we moved up three wells originally scheduled to be drilled in the third quarter. As shown on slide 16 and 17 of our presentation, year-to-date, we drilled 20% more feet per day and reduced our drilling costs by 2% per lateral foot compared to 2020. On the completion side, we completed 17% more stages per day and reduced completion costs per well by 2%. Taken together, we reduced our total D&C costs per lateral foot by 5% year-to-date compared to 2020. Our Austin Chalk Well in Webb County is demonstrating very attractive economics. The well continues to produce above 10 mm CF per day, and cumulative production is more than 1 BCF to date. For more details on the performance and economics of our Austin Chalk Well, please refer to slide 14 of our corporate presentation. We plan to test and appraise additional Austin Chalk wells this year to further enhance our understanding of the reservoir and the full development opportunity across our acreage. Additionally, we recently closed on a bolt-on acquisition at our La Mesa property. The deal adds 12.5% to 20% working interest to our producing wellbores and future locations on our existing lease, as well as a 640 net acre section directly adjacent to our position. This results in 17 net high return locations added across the upper and lower Eagleford and Austin Chalk Zones and bolsters our drilling schedule heading into 2022 and beyond. Production management is a key focus area of our business. The maintenance and optimization projects we executed during supported the strong performance we saw in the second quarter. We added numerous compression and artificial lift installations across various assets. With a favorable commodity price backdrop, we have identified a number of opportunities to work over legacy assets. In our SMR area, we completed two such opportunities to bring online incremental oil production at a very attractive cost. Proactively managing our production base is a cost-effective way to drive higher volumes and flatter declines. Our second quarter production averaged 213 MMCFE per day, which was at the high end of our guidance. Strong performance from our base production, aided by our maintenance and optimization projects, and full quarter contributions from our second La Mesa pad in Austin Chalkwell contributed to the production beat. Silver Bow has also continued its streak of zero recordable incidents, a point of pride amongst our team. For the third quarter, we are guiding to a production range of 200 to 215 mm CFE per day, with natural gas representing 78% at the midpoint. For full year 2021, we are increasing our production guidance to a range of 200 to 210 mm CFE per day. This assumes ethane recovery for the remainder of the year, although we will continue to make monthly elections in accordance with commodity prices. Our guidance also includes incremental working interest we acquired in our La Mesa field subsequent to quarter end. Based on our latest guidance, we expect to deliver 12% production growth year over year on an equivalent basis. Service and supply costs are now expected to see various pockets of inflation for select markets through year end and into 2022. Much of this inflation is centered around the completion side of the business for horsepower and logistics, and on the drilling side for tubular goods. That said, many of these cost increases will be offset by improved operating efficiencies and previously agreed contracts with favorable terms. Again, maintaining a low cost structure has been critical to Silverboro's success, and we expect to continue this competitive cost structure for the foreseeable future, even as a limited number of contracts roll off late this year and into 2022. Capital dollars for the second quarter totaled $26 million on an accrual basis. As Sean mentioned, we increased our free cash flow guidance to $45 to $55 million. Included in our increased free cash flow is our updated CapEx guidance of $115 to $130 million. We are proactively aligning our activity this year to maximize our returns, given the recent strength in commodity prices. Due to improved cycle times and being able to drill ahead of schedule, we now expect to finish planned D&C activity by early fourth quarter. Included in our third quarter schedule is the completion of our midyear oil development, the addition of gas drilling originally scheduled for the fourth quarter, as well as one net non-operated gas well we elected to participate in. This contrasts to our prior plan to pause drilling from August to November, and resume gas drilling thereafter into year end. With the majority of our remaining CapEx occurring in the third quarter, we anticipate an outspend in the third quarter, followed by a significant amount of free cash flow in the fourth quarter. The scheduling changes accelerate our capital timing and maximize our free cash flow generation. Furthermore, it increases our optionality heading into 2022. Our balanced portfolio allows us to remain flexible and adaptable to market conditions. As always, we continue to operate with a strict returns-driven mindset in regards to any future development. With that, I'll end this.
spk02: Thanks, Steve, and good morning, everyone. In my comments this morning, I will highlight our second quarter financial results as well as our price realizations, hedging program, operating costs, and capital structure. For the second quarter, revenue was $70 million, excluding derivatives, with natural gas representing 82% of production and 67% of oil and gas sales. For the quarter, our realized oil price was 96% of NYMEX WTI. Our realized gas price was 104% of NYMEX Henry Hub, and our realized NGL price was 33% of NYMEX WTI. Notably, our realized gas price was $0.12 per MCF higher than the benchmark Henry Hub prices, highlighting the attractiveness of operating in the Gulf Coast markets. Our realized hedging loss on contracts for the quarter was approximately $8 million. Based on the midpoint of our guidance and our hedge book as of July 30th, our total estimated production is 66% hedged for the remainder of 2021. The company has 66% of natural gas production hedged, 79% of oil hedged, and 48% of NGLs hedged. Assuming the midpoint of 2021 full-year guidance is held flat through 2022, Silver Bowl has 61% of natural gas production hedged and 69% 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 for the second 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 24 of our presentation, we have historically realized prices close to 9x benchmarks. Turning to cost. Lease operating expenses were $0.29 per MCFE. Transportation and processing costs were $0.32 per MCFE. Production taxes were 5% of oil and gas sales. All production expenses were below the midpoint of guidance or better. Adding our LOE, T&P, and production taxes together, total production expenses were $0.79 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 27% decrease year over year. Adding our production expenses and cash G&A together, our total cash operating expenses for the second quarter were $0.98 per MCFE. We consider our lean cost structure to be a competitive advantage, allowing Silver Bowl to... profitability during periods of volatile commodity prices. Adjusted EBITDA for the quarter was $43 million, exclusive of amortized derivative contract gains. As reconciled in our earnings materials, we generated $7 million of free cash flow in the quarter. This marks seven out of the last eight quarters of achieving positive free cash flow. As Sean alluded to, we are lowering our per-unit LOE and T&P guidance for the year, given higher production and further cost efficiencies. For 2021, we anticipate our LOE to be in the range of $0.31 to $0.35 per MCFE, down from $0.34 to $0.38 previously. We anticipate our T&P to be in the range of $0.29 to $0.33 per MCFE, down from $0.30 to $0.34 previously. Turning to our balance sheet, we total debt by $2 million quarter over quarter and $72 million year over year. As of June 30th, we had $198 million outstanding under our credit facility, approximately $2 million of cash on hand, and $104 million of liquidity. Our cash interest expense this quarter included $2 million of one-time expenses related to the extension of our credit facility. We expect our quarterly cash interest to trend lower going forward as we pay down additional debt. In conjunction with the unwinding of oil derivative contracts related to production periods in 2020 and 2021, Silver Bow is able to amortize $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 Silver Bow's adjusted EBITDA calculation for covenant purposes over the same time period and therefore it is important for our investors and research analysts to understand when tracking our leverage ratio. For the second quarter of 2021, the add-back was approximately $4 million. On a last 12-month basis, the add-back totaled approximately $26 million, bringing our LTM adjusted EBITDA for covenant purposes to $206 million and our quarter-end leverage ratio to 1.9 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 year-end leverage ratio. At the end of the quarter, we were in full compliance with our financial covenant and had sufficient headroom. And with that, I will turn it over to Sean to wrap up our prepared remarks.
spk06: Thanks, Chris. To summarize, Silver Bow is positioned to create and expand inventory while generating substantial free cash flow and further deliver the balance sheet. The recent strength in commodity prices broadens the optionality of our high return inventory, as evidenced by the real-time optimizations we make to our development program. Year to date, Silver Bow has been one of the best performing stocks across large cap and small cap E&Ps. With that said, we expect Silver Bow to continue to outperform its small cap peers. We will continue to deliver on accretive and organic growth in shareholder value while remaining opportunistic in the market. Our winning strategy is built on solid execution, efficient operations, financial resilience, and a low cost structure. We see additional tailwinds to our outlook given the safe environment, continued strengthening of our balance sheet, and ongoing Eagleford expansion and Austin Chalk delineation. 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: Thank you. At this time, if you'd like to ask an audio question, press star followed by the number one on your telephone keypad. Again, that is star one for questions. Your first question comes from the line of Neil Dingman with Truist Securities.
spk05: Morning, all. Nice quarter. Excuse me, nice quarter. So if you talk a little bit about, I know you guys have been showing really nice, what I would call regionally operational flexibility based on commodity price. And I'm just wondering, again, will you continue to do that? It looks like the answer is yes, but maybe just talk about how actively you'll continue to do that. And then the sort of follow-up with that is, you know, how long does it take once you pivot or do something like that to, you know, the timing of the associated activity or production around that? How long does it take?
spk06: Yeah, no more than Neil. Appreciate the question. Yeah, we're in this environment where we're seeing strong commodity prices across the all all components, oil, NGOs and gas. So our inventory is working well. We do want to continue to grow a balanced commodity production profile, so we expect as we look into 22 to drill both in the gas and oil window. Near term, we have nine wells coming on in August, all in the Artesia area, which is the blend of about a third oil, third gas, third MGL. So we really like that area. In September, we have one well coming on in our McMullen oil area, so a little oily. And then in September, we expect to bring on another Austin Chalkwell down in our Faskin area, which is dry gas. So it gives you a feel of how we're allocating our capital in this point in time. In terms of how quickly we pivot, this year was another great example. We went into the year expecting to drill gas through most of the year. As oil really moved up as we entered in the first quarter, we adjusted our program such that we began drilling oil really in the May timeframe. So it took us about 45 days to pivot to a more oily mix.
spk05: Great details. And then just to follow up, you guys talked about a lot of the even lower LOE and different things you're seeing with efficiencies, which is great to see. Maybe just talk about, you know, on a go forward, your thoughts about, you think that, can you continue to do that and offset? We've heard about inflation. I know one of the, you know, Rocky's companies bumped up their, you know, guidance today on, you know, higher inflation, both on LOE and overall cost. So just maybe talk about, Sean, cost inflation versus efficiencies.
spk06: Yeah, I can start and then let Steve maybe follow on. Yeah, I think we're, as Steve made comments in his remarks, starting to see inflation come into the sector, especially in certain pockets. We expect that to continue, you know, especially as labor shortages persist. We're seeing increases associated with that as well as materials. Can we drive more efficiencies in? It's been a trend that we've been working on now for probably 36 months, and I would tell you every quarter the operations team continues to surprise and find more efficiencies that I think it really reflects our culture of just continuously turning over the next stone and seeing what we can find. So those are my comments. Steve, I don't know if you want to add any additional comments.
spk04: Yeah, thank you, Sean. Yes, Neil, we're seeing some added and compression opportunities that we're able to capitalize on that have high returns. And in addition to that, we're also seeing some artificial lift, both new as well as some legacy opportunities there that are even showing even higher returns. That said, and as you know, oil has a little bit more expense to it than the gas side of the business. But that said, we have a lot of new oil coming on. So really, that only affects the later life gas. When you look at the cost structure, though, relative to OPEX, we're really only seeing very slight to no declines, especially in the more local markets. We're not seeing a whole lot of increase in the local markets, a little bit more on the regional side. But by and large, the biggest increase we have so far on the OPEX side is labor. That compares, though, however, it pales in comparison to what we're seeing on some of the select markets for CapEx. Thank you so much.
spk00: Thanks, Neil. Your next question comes from the line of Austin O'Coin with Johnson Rice.
spk05: Good morning, team. Thanks for taking my questions. I wanted to start with the La Mesa bolt-on acquisition. Going forward, how do you all plan to incorporate cash versus equity in future deals? And to piggyback off of that, what's the current pipeline for bolt-on A&D?
spk06: Hey, morning, Austin. Appreciate the question. Yeah, you know, as we look at the opportunity set, the Eagleford has a large opportunity set of transactions similar to the one we announced yesterday. Many operators that are smaller in scale looking to benefit from a larger scale, more efficient company. And we're looking to do the same as well. So there are more opportunities out there. We've built a strong relationship with a number of operators in the basin. And so we look forward to bringing more assets like that into our mix here in the coming months and years. In terms of utilizing cash versus stock, we're always looking for an accretive deal and structuring it such that we're able to continue to delever our balance sheet. And so it's finding that right mix of those two components. Does the asset create drilling opportunities that grow EBITDA so we can delever on that side or can we bring it in? through, you know, the stock side so that the base EBITDA is accretive. So that's the way we're approaching it. You know, our stock, we think, still has a ton of room to run, but we also want to be thoughtful in our balance sheet. And I think, you know, other sellers in the basement look at our stock and our company and believe that there's upside as well. And so that's why we're seeing a willingness to take the stock.
spk05: All right. Makes sense. Thank you for the call. And a follow-up is, what is y'all's priority list for the use of cash? Is it debt reduction, more drilling, A&D? And also, is there a certain leverage ratio target that y'all are comfortable with?
spk06: Yeah, you know, good question. Our focus over the last 12, 18 months has been debt pay down with the free cash flow. We've moved our leverage ratio down quite significantly over the last 12 months, taking it down below two times now. announced in our comments that we're looking towards bringing it down below 1.75 times by year end. And with the strong free cash flow looking out in the next year, I anticipate. you know, that goes even lower. Our target is probably looking at below 1.25 times over the coming years. And, you know, once we get to that level, thinking about, you know, what else we can do with the free cash flow. We've been hinging around a reinvestment rate of 70%. So as, you know, our revenues have grown with the improved pricing, We have elected selectively to take some of that pre-cash flow and drill some additional opportunities that came to us here this year. And so that's kind of the governor or the hinge point that I guess I would say we have is that 70% reinvestment rate. Anything above that just always will push towards debt for now.
spk05: Thank you. And my final question is, with the increased guide to free cash flow and CapEx, I was curious how you all thought through the increase in four-year CapEx relative to the increasing free cash flow projection?
spk06: Yeah, it was really kind of around my prior comment there. As we looked at the expanded free cash flow projection, And the reinvestment rate, it was going to push us lower. We were fine going lower on the reinvestment rate and pushing that towards debt paydown. But we had a couple of opportunities come to us through a non-operated position. And, you know, it was kind of an opportunity to participate in the drilling of those wells. It was on a checkered boarded acreage position that we acquired last year from Truvian that's in the Webb County gas area, so an area that we really like. So that was one of the drivers is didn't want to miss out on the opportunity to allocate capital to drilling of wells that wouldn't be there if we didn't spend that capital. The other was, you know, looking to bring forward some capital into the year primarily around drilling four wells down in our Rio Bravo asset in Webb County. We decided as we've got this really efficient drilling program going and the drilling with us that we'd go ahead and drill those. We had originally planned to drill those late in the year and a little bit into next year. So they're set up to be a four-well duct program right now, but we have the optionality to complete those – towards the end of the year, depending upon service costs, service availability, and commodity prices. And that's why we gave a fairly large range of capital for the remainder, for the full year, because we wanted optionality around those ducks.
spk05: Thank you very much. I appreciate the call.
spk06: Hey, Austin. Appreciate it. Thanks for your questions.
spk00: And again, if you would like to ask an audio question, press star followed by the number one on your telephone keypad. Again, that is star one for questions.
spk06: Okay, Hillary, it doesn't look like we have any more questions. Appreciate everyone's interest in the company and joining our call this morning and look forward to speaking with you on our third quarter call.
spk00: Thank you. This does conclude today's conference call. You may now disconnect.
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