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spk01: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Silver Bowl Resources fourth quarter and year end 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. We do ask that you please limit your questions to one and one follow up. You may re-enter the queue for any additional questions that you might have. With that, I will turn the conference over to Jeff Maggott, Vice President Finance and Investor Relations. Please go ahead.
spk03: Thank you. Good morning, everyone. I'm joined today by our CEO, Sean Wolverton, and other members of our management team. Together, we will address your questions following our brief prepared remarks. By now, I hope you have had a chance to go through our earnings release and the slides posted to our website as we will refer to these materials this morning. Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings news 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. During Q&A, please limit your time to one question and one follow up. This allows us to get more of your questions in today. I will now turn the call over to Sean.
spk08: Thanks, Jeff, and good morning, everyone. We appreciate your time today and your interest in the Silver Boat story. Over the next few minutes, I want to talk about three things. First, the progress we made over the last year to build a stronger company is remarkable. It is important that you understand our strategy and how recent steps have positioned us to create value for shareholders. Next, I will highlight our 2023 results. All the details can be found in our materials. Our solid execution provides strong momentum as we enter this year. And lastly, I will cover our 2024 outlook. Our plan benefits from recent operational efficiency gains, and we enter this year with scale, a more durable asset base, and enhanced capital flexibility. With near-term weakness in natural gas prices, we are electing to cut gas-directed capital to maximize cash flow and maintain a strong balance sheet. Let's get started. Silver Boat has a proven and clear strategy to create value. Our 2023 accomplishments show the four key elements of this strategy in action. First, we have a scaled and durable portfolio. Last year, we increased our regional scale in the Eagleford through our South Texas acquisition. This was our largest deal to date. It established us as the largest public pure-play Eagleford operator and expanded our low-cost operating platform to drive synergies and unlock value. Silver Boat now has more than a decade of high return drilling opportunities across our 220,000 net acres. We are advantaged due to our low-cost structure, operational efficiencies, commodity optionality, existing infrastructure, and proximity to premium Gulf Coast markets. This combination yields one of the highest EBITDA margins in the peer group. Slide 7 in today's deck highlights our peer-leading cost structure and margin profile. The second element of our strategy is generating corporate efficiencies and enhancing margins. We have peer-leading margins, and we are unwavering in our commitment to improve on them. As you can see in today's deck, we are enhancing our returns through operational efficiencies. These include faster days to depth, more stages pumped per day, and increased pump times. More importantly, we accomplished these gains with lower cost per foot in drilling and completions. Slide 8. These gains are sustainable. Silver Boat continues to demonstrate that assets are better in our hands due to our proven operating platform. We have a low-cost structure and a culture that constantly looks for safe and innovative ways to create efficiencies. The Eagleford remains one of the most fragmented basins, and assets will continue to migrate to more efficient operators. Silver Boat is well positioned today. The third pillar of our strategy is to maintain a strong balance sheet. We have built scale through a creed of acquisitions that generate free cash flow that we use to reduce leverage and to fund our high return development program. Since year-end 2020, we have transacted on $1.4 billion in acquisitions while also increasing our liquidity and reducing leverage by one full turn. Our ability to maintain low leverage is a testament to the quality of our asset base and the high margins we generate as a low-cost operator. We remain on a clear path to reduce debt. In the three months alone since closing our South Texas acquisition, we have eliminated more than $80 million in debt. No doubt that 2023 and now 2024 have seen a challenging natural gas market. As we did last year, we are once again showcasing the flexibility in our capital allocation and are taking responsive actions to address low gas prices. While our longer-term outlook for gas is very constructive, we are reducing gas-directed capital investments this year by nearly 15% to maximize free cash flow and move towards our leverage target of below one turn. I'll talk more about this shortly. The fourth pillar of our strategy is profitable growth. We have shown that an E&P company can combine capital discipline, quality assets, and an unrelenting focus on efficiencies to profitably grow. Over the last three years, we have generated an average return on capital employed of 21%, reflecting the success of our long-term strategy. Let me quickly cover our fourth quarter and full-year results. Again, all the details are in today's materials. We executed extremely well in 2023. We doubled our oil production and posted fourth quarter and full-year volumes at the upper half of guidance across all products. More importantly, we accomplished this with capital investments in the lower half of guidance. Full-year capital investments totaled approximately $410 million, excluding acquisitions. Production results were impressive, as were efficiency gains. Comparing 2023 to 2022, we drilled 13% more feet per day, completed 16% more stages per day, and improved average pump times by 13%. Completion costs per foot decreased 5% -over-year, and total well costs per foot declined 3%. Well costs decreased throughout 2023 as we benefited from a high-grade at-rig fleet, cost deflation, and faster cycle times. Fourth quarter 2023 DNC costs per foot decreased 20% -over-year, highlighting the magnitude of our cost efficiency gains throughout the year. Taken together, we delivered our 2023 wells 10% below planned costs. For the fourth quarter, our results exceeded expectations. We generated record-free cash flow of $74 million. Adjusted EBITDA also set a record, coming in at $172 million. Our net income was $183 million, or $12.63 per share. Our total production increased nearly 40% -over-year to approximately 72 MBOE per day. And oil production was up 74% to 19.3 thousand barrels per day. Capital investments of $79 million came in at the low end of our guide, and our operating expenses were $8.67 per BOE and in line with guidance. Our performance in 2023 created strong momentum as we enter this year. Our 2024 program builds on our strategy and is focused on maximizing free cash flow through disciplined developments. Today we have more flexibility in how we allocate our capital to achieve our desired outcomes. We have been proactive in response to near-term weakness in natural gas prices. Our advantage portfolio, which benefits from a low-cost structure, proximity to premium Gulf Coast markets, and peer-leading margins, provides optionality to respond to today's market. We recently took some decisive steps to reduce investments in dry natural gas projects. Let me outline these actions. We reduced -over-year investments by 13%, or $75 million, to a revised midpoint of $490 million. Activity reductions were solely focused on dry gas investments. We planned to run three operator rigs in the first half of the year and two in the second half. We now expect our full-year production to average 89 MBOE per day at the midpoint. Importantly, oil and liquids volumes are unchanged from previous guidance, and gas volumes will be about 13% lower when compared to prior guidance. Our total production will be up about 50% -over-year, with oil expected to increase 70% to nearly 25,000 barrels per day. For the year, we expect to drill 49 net wells and bring online 45 net wells. At recent strip prices, our plan will generate an estimated 125 to 150 million of free cash flow. We have high certainty in our cash flow estimates, with about 60% of our 2024 budget hedged at attractive prices. In fact, 75% of our gas is hedged at an average price above $3.80. Prioritizing cash flow will allow us to reduce debt and move toward our leverage target of less than one time. We will not sacrifice our balance sheet to pursue unprofitable gas production. We will preserve our valuable gas inventory for the future. Longer term, we remain bullish on the expanding LNG market and meeting energy needs within an evolving industry landscape. We are uniquely positioned along the Gulf Coast to grow into this emerging market, where exports are expected to increase significantly over the next several years. There are some impressive case studies in our deck today, showcasing the tremendous gains we have achieved. Our focus on maintaining a low-cost structure drives our peer-leading margins, including EBITDA margin and per-unit G&A costs. In our deck, we highlight our well performance on acquired assets compared to prior operators. On our Sundance assets acquired in 2022, we are seeing an average uplift of 25% in first year cumulative production compared to the prior operator. In our Teal Conoco area, which we put together through acquisitions in 2021 and 2022, early results show a 60% improvement in first year cumulative production. To summarize, our 2024 plan maximizes free cash flow, strengthens our balance sheet, and preserves valuable gas inventory for the future. We will also benefit from continued capital discipline and ongoing efficiency gains across our portfolio. Let me recap today's takeaways. First, our strategy is clear. It's proven and it's creating value for shareholders. We have quality assets and the scale we have created provides flexibility and optionality for us today. Second, we have a track record of creating sustainable operating efficiencies. Our teams are focused on execution today, constantly innovating to safely reduce costs. I can tell you they are excited to have their hands on our new South Texas assets. Finally, we optimized our 2024 plan to maximize free cash flow and maintain our commitment to a strong balance sheet. We reduced investment levels in dry gas areas by $75 million and maintained our oil and liquids production. We appreciate your time today as well as your investments in our company. And with that, operator, we are ready to take questions.
spk01: At this time, I would like to remind everyone in order to ask a question, press star followed by the number one on your telephone keypad. We do ask that you please limit your questions to one in one follow-up and then re-answer the queue for any additional questions that you might have. Our first question will come from the line of Neil Dingman with Truist. Please go ahead.
spk04: Hey, good morning, guys. On the first question, I just want to highlight your free cash flow use. I think you're making it pretty clear that you're going to divert most of the free cash flow to the debt repayment. It looks like you even did some in one queue, but I would assume you're also still on the outlook, you know, the lookout for acquisitions. So, just trying to get a temperature check on the priorities. Does an acquisition maybe need to have a PDP component so that it doesn't impact the leverage or, you know, could a right inventory package make sense?
spk08: No, thanks for the question. Yeah, first and foremost, a core strategy for us is protecting our balance sheet. We have a stated goal of getting to a long-term leverage target of less than one times.
spk00: So,
spk08: our free cash flow for now is dedicated towards debt pay down. I will tell you that we will remain, you know, active in the M&A market looking for accretive opportunities we have in the past and will continue to use our standard checklist of what we look for in acquisitions. And that includes it must make sense from an industrial logic standpoint. It must add to the quality of our inventory and compete for capital immediately. And it has to be accretive to our shareholders in terms of how we finance it. The focus for this year though is on bringing down our debt and protecting our balance sheet and demonstrating the quality of our durable and scaled portfolio.
spk04: That makes a lot of sense. And then my follow-up is on slide 11, you outlined a pretty impressive uplift versus the prior operators on the acreage. I was just wondering if you wanted, you know, on the drilling or the completion items, which ones stand out? And then maybe can you apply those techniques to the Chesapeake assets or is that not applicable?
spk08: I appreciate the question. And, you know, we are very dedicated towards driving efficiency and enhancing our returns. And so the examples that we lay out really demonstrate that where we're able to achieve improved performance in properties that we acquire very much focus around drilling wells in zone. That's a key focus for our operating team. And we've greatly enhanced that over prior operators as well as improving our completion designs. We believe our completion designs are optimized over historical operations. So, yeah, we have a demonstrated track record. The examples that we lay out that you pointed to show that. And yes, we're very excited to apply our expertise and our efficiencies onto the Chesapeake assets. We just recently moved in a drill and rig onto those properties. So we're out of the gate quick on that asset. The first well we drilled, we TD'd ahead of schedule and significantly improved on cycle times from the prior operators. So we're looking forward to sharing some more results on that property in the coming quarters.
spk01: Your next question comes from the line of Leo Mariani with Roth NKM. Please go ahead.
spk05: Hey guys, I wanted to just maybe stay on the Chesapeake asset here at this point in time. I know it's only been a handful of months since you kind of took this under your belt, but I wanted to see if you can kind of comment on the performance of the base production on the asset. How is that trended versus your internal forecast? And I know it's early, but have you been kind of able to get out there and make some operational improvements such as maybe trying to improve run time? Or lower LOE or anything like that? Obviously I know it's a pretty good chunk of the overall company production. So obviously you talked about the drilling a minute ago being early, but just any kind of comments you can give us around the base production and plans for that here as we roll into 2024.
spk08: I appreciate the question. I think what I'll start and highlight is since closing the acquisition on December 1st, we have paid down approximately $80 million of debt from that timeframe. So came in, exited the year and came into the year generating some strong free cash flow. And a lot of that is coming from the base performance on that asset. We were seeing the asset performing in line with what we modeled during our underwrite of the acquisition. So we exited the year where we were expecting and come in really with having our hands on the asset for 30 days with a lot of ideas, including getting some work over rigs onto the property to try to enhance that base production. We had identified a number of workovers to be completed. So no results to speak to today, but we like what we're seeing thus far. We've been very excited to bring on the employees that worked the asset prior. They bring in a lot of knowledge and I know they're excited to be working on an asset now that is a core for Silver Bow. So still early days. We like what we see thus far and we look forward to giving more details on not just the base performance, but in the coming quarters really how the capital programs performing as well. This year we'll have about 30% of our capital dedicated to that asset. So to your point, it is a big part of our business and we're excited to own this property.
spk05: Okay, I appreciate that color. And I also just wanted to see if you guys had any kind of just general response to some of the recent board of director elections. I know that's something that will get flushed out more fully at the annual meeting, but just kind of how are you sort of thinking about the situation at this point?
spk08: Yeah, I'll tell you that we really want to focus our call today on just the strong performance that we exhibited in 2023 and our outlook for 2024. But what I will say is that Silver Bow's management team and our board are committed to working for all of our shareholders to deliver shareholder value. So that's all I really want to comment on this call and want to stay focused on what the company has going on and what we're excited about for 2024.
spk01: Our next question will come from the line of Charles Mead with Johnson Rice. Please go ahead.
spk09: Good morning, Sean. To you and the rest of the Silver Bow team there. Hey, good morning, Charles. So I think it's a positive move that you guys had cut back on the natural gas activity. And I think that that's worked well for other operators. But I wondered if you could characterize how much natural gas activity is still in the plan and what the rationale for it might be, whether it's lease maintenance or concept testing. Just tell us what you do have that's going to be dedicated to natural gas in 2024.
spk08: Yeah, appreciate it. I would tell you, right, this is the second year that the company's really enacted this strategy to defer much investment into our gas assets. We think it really demonstrates the strategy that we started to employ several years ago. So, you know, as much as we'd like to see higher gas prices, we are reacting appropriately to it. In terms of our plan for this year, approximately 15% of our capital is dedicated to Webb County dry gas. We did come into the year when prices were higher, having drilled several wells. So we completed those late last year and early part of this year. So there's some capital early on dedicated to the gas that those wells are online and producing now. And then late in the year, we have a number of wells that are slated to be drilled, really twofold. One is to meet lease commitments on those wells. And then the second is to drill into what we anticipate stronger gas prices in 2025. Got it. So the
spk09: message of the natural gas activity is really back half of the year.
spk08: It is, with the completion
spk09: done early. Right, got it. And then second, I think a simple one. Just some some guesses or maybe some indications around Q1 capex. If I look at, you know, just let's pick 500 for a for kind of a middle of the road number for the year. And you're going to be running three rigs in the first half of the year. And I think you mentioned you just picked up a rig. So we should be thinking maybe for one Q, maybe 150, 160. Is that reasonable?
spk08: Yeah, I think that is pretty close to being reasonable, maybe a little bit less than the 150 number. We did pick up the third rig February 1st, so won't have three rigs for the for the full first half of the year. So that's probably probably the difference. We anticipated bringing it on first of January, but a prior operator had some problems on the rig. So we got a little later than anticipated to guide, give a little bit more guidance for the first half of the year. We're anticipating probably 55 percent of our spend in the first half of the year and 45 percent in the second half.
spk01: Your next question will come from the line of Tim Resven with KeyBank. Please go ahead.
spk07: Hi, this is John Mardini on for Tim. Hey, good morning, John. Hey, good morning. I know your team's focused on your early acres this year, but can you just speak to the state of natural gas takeaway in Lepp County today? We spoke a little bit about it, but just wondering if gas prices warrant an increased capital allocation to the area if you're confident, whether there's enough capacity to really flow your gas.
spk08: Yeah, no, no, appreciate the question. And as you recall, remind listeners that during 2022 under strong gas prices, activity in Webb really grew significantly and outpaced takeaway capacity. For us, that issue was resolved starting November of 2023 with our mystery provider bringing on an expanded pipe in the area that more than meets our needs and our capacity. So, you know, for for Silver Bow takeaway capacity out of Webb County is no longer an issue.
spk07: Okay, great. Thanks. Just another one in the in the past, you mentioned mixed awesome chalk results on your Eastern extension or Lake Ridge. Just looking into 2024, is there any, you know, any more delineation or spacing initiatives you're pursuing over there or is it just going to be purely a year of development drilling?
spk08: Yeah, no, thanks for that question as well. The Eastern extension area, we drilled four Austin chalk wells there in 2023. Would tell you that we're going to probably defer drilling additional chalk wells in the Eastern extension, at least for the first half of 2024 as we assess the long term decline profiles. IPs came in lower than what we were anticipating there, but we're seeing very flat declines. So we want to, you know, give give those wells a little more time to assess what the economics look like in light of a kind of a different decline profile than what we were anticipating. What we are excited about for that area is the Eagleford has really exceeded our expectations. Putting those two assets together, it has allowed us to drill much longer laterals and the Eagleford is really exceeding expectations. In fact, you know, we were coming into the year with one of the three rigs planned to be drilling in Webb County gas. We actually shifted that rig onto the Eastern extension properties and drilled a two well pad there that's coming on as we speak. So we love the Eagleford over there. Austin chalk. It's kind of a wait and see for us at this point.
spk01: Your next question comes from the line of Paul Diamond with Citi. Please go ahead.
spk10: Thank you. Good morning. Thanks for taking my call. Good morning. Good morning. I just want to talk quickly about inventory life. Over the last year and the guidance this year, you guys talk about commodity optionality. I just want to see how inventory management over the longer term kind of affects or influences that decision making process.
spk08: Yeah, you know, we've identified just around 1000 drilling locations on our assets. We still think there's more inventory to find. Our teams continue to look at the stack pay potential. We're looking at obviously lower Eagleford, but upper Eagleford still remains perspective for us. And Austin chalk still has stack pay with lower and middle Austin chalk having an opportunity set. So we think that the 1000 locations is kind of where it's at today and it'll probably expand. And then we think there's some up hold potential. We actually plan to drill a couple almost wells later in the year. So definitely as we've gotten bigger, we're finding that the stacked opportunity within the basin is really rich. All that said in terms of your question, right now, probably 70 percent of that inventory is oil liquids weighted and 30 percent gas. So, you know, as we think about long term, the inventory, our goal is to maintain a 10 year inventory at current rate pace. We drill approximately 25 wells per year to give you kind of a burn rate there. But, you know, inventory aside, our focus is generating the best returns. So if we find that gas prices are really strong, we would be willing to accelerate the development of that inventory if it makes sense. So it's a multiple lever decision, but returns is the key driver of it, you know, at the same time maintaining inventory. But that's kind of a secondary driver.
spk10: Understood. Thanks for the clarity. Just one quick follow up. As you guys think about your hedging book, doming forward as you progress towards your leverage target and gain scale over time, how do you anticipate that strategy evolving? You maintain it at the high level it's been or will that tick down over time?
spk08: I think, you know, as we do reduce leverage, the ability to, you know, maintain or protect the balance sheet, we'd be able to take on a little more risk. So I think, you know, as time evolves, we find ourselves in a lower leverage position, probably lower than one times. We revisit our hedging strategy. We've been very successful with that strategy. We're very systematic around it. Typically, we're hedging out our next year program late in the year prior to the program, and that's worked well for us. But to your point, I think exposure to quantity prices with a lower leverage profile is something that we'll strongly consider.
spk01: Your next question will come from the line of Donovan Schaefer with Northland Capital. Please go ahead.
spk02: Hi, this is Kailash for Donovan. Good morning. Good morning. So just wanted to know a bit about leverage ratio. So we just noticed that in your August presentation for the South Texas acquisition, So I think it's on slide 10 that you say that you can get to about a 1x leverage ratio by year in 2024. But we noticed that on the slide 8 of the February deck, you just say lesser than 1.5x in Q4 2024. So can you just help us understand what's changed? Is it just strictly a matter of lower natural gas prices or are there some drivers that they're not seeing there? Thanks.
spk08: Yeah, no good question. And it demonstrates, I think, the opportunity set, the upside that the company has. If you go back to early August, remind listeners, it was not just higher natural gas prices, but it was also higher oil prices. I think at the time, WTI was over $80 and 2024 gas prices were approximately $4. So that change is definitely a shift driven by commodity prices. But also, back then, we did envision three rigs running for the full year of 2024. So the flexibility that we're demonstrating in the asset base is, hey, react to lower prices, dial back activity, which slows that pay down a little bit, but we think it's the prudent thing to do.
spk02: Thanks. That's helpful. We'll take the rest offline. Hey, thank you. Have a good day.
spk01: Again, for any questions, press star one and our next question will come from the line of Noel Parks with Toy Brothers. Please go ahead.
spk06: Hi, good morning.
spk08: Hey, good morning.
spk06: So just a couple things. You know, with it being a second year of directing CAPEX away from your gasier areas in Webb County, I just wondered, could you talk a little bit about, you know, for yourselves and for the industry overall, the state of land and leasing out there. I'm just wondering if we have a couple years of lower activity, does that create any HBP issues or opportunistically might create issues like that for some of your competitors?
spk08: Yeah, yeah. You know, our position, I'll speak to that, we're over 80% HBP. So the majority of our acreage is held. However, where it is not necessarily and still in the primary term is in Webb County with that area really evolving since 2020. So, yeah, we'll have some capital that we'll need to dedicate there to maintain those leases. We'll, you know, be strategic in how we do that. We are still bullish on long term gas. So definitely something we want to do and keep that optionality in place, but minimize the capital outlay in the near term. Knowing that that's our situation, you know, I think it's safe to say others face the same situation as well. So it'll be something that we'll definitely watch. We've been very successful in on the ground leasing. We've built a ton of relationships with the mineral owners out in this part of the play and have a great reputation of, you know, implementing safe and prudent operations on their properties. So I think we're well positioned to take advantage of any acreage that does become available due to other companies letting their lands expire due to low prices.
spk06: Great, thanks. And I think the other thing I was wondering is as you look at bolt-ons and other potential acquisitions in the area, I'm just wondering if you have any updated thoughts on your current footprint and any additions you particularly would like to make to the to it and whether you if you could maybe characterize a little bit of what's out there that's on your wish list that would be exciting if you could shake it loose from somebody, I mean just in general terms.
spk08: Yeah, you know, when you look at the basins and where much of the M&A activity has occurred over the last 18 months, there's been quite a bit in the Eagleford but not near to the scale of consolidation that has occurred in other basins. So we still think there's a tremendous amount of M&A activity to be realized in the Eagleford. Where we've really focused has been on the western part of the play. That is the area that we like, that we know well and have a proven track record in. There remains still a number of opportunities that's in that area. And we've demonstrated right over the years that hey, putting bringing assets into our really efficient operating platform, we can unlock a ton of value. So not any specific ones that I would speak to but just tell you that there remains a strong inventory of consolidation to occur in the basin.
spk06: Okay, good enough.
spk08: Thanks. Thanks, Noel. Have a good day.
spk01: With that, I'll turn the call back to Sean Wolverton for any closing remarks.
spk08: Well, thank you everyone for joining our call today. We appreciate your interest in Silver Bow and your investments in the company and look forward to talking to you soon. Thank you.
spk01: Everyone, that will conclude our call for today. We thank you all for joining. You may now disconnect your lines.
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