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SilverBow Resources (NYSE:SBOW) has provided updated guidance now that it has closed its acquisition of Sundance Energy. It anticipates growing production by around 60% in 2023 (compared to Q2 2022 levels). This growth is fueled by its recent acquisitions as well as organic production growth.
At current strip prices, SilverBow should be able to generate close to $300 million in positive cash flow in 2023, despite the continuing negative impact of its hedges.
I have made a positive revision to my view on long-term natural gas prices since I last looked at SilverBow. This doesn’t change its estimated cash flow in the near term, but improves the projections for beyond 2023. Since SilverBow is still primarily a natural gas producer (with 60+% of its production expected to be natural gas in 2023), its estimated value gets bumped up to around $61 per share in a long-term $70 WTI oil and $4.00 Henry Hub natural gas scenario.
Growing Production
SilverBow is growing its production substantially through the combination of acquisitions and increased development activity. It averaged 238 MMCFE per day in production in Q2 2022, including partial quarter production from its SandPoint Resources acquisition.
SilverBow expects to average approximately 300 MMCFE per day in production during Q3 2022 (including full quarter contributions from SandPoint Resources and Sundance Energy). It is now operating two drilling rigs and thus expects production to rise further to approximately 340 MMCFE per day in Q4 2022 and 380 MMCFE per day in 2023.
2H 2022 Outlook
The current strip for the second half of 2022 is approximately $95 to $96 WTI oil along with $8.90 Henry Hub natural gas. At those commodity prices, SilverBow can generate $584 million in oil and gas revenues during the second half of the year. SilverBow’s 2H 2022 hedges have an estimated value of negative $161 million. It has approximately 77% of its natural gas production and 72% of its oil production hedged for the second half of 2022.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 2,109,250 | $96.50 | $204 |
| NGLs (Barrels) | 1,170,250 | $33.50 | $39 |
| Natural Gas [MCF] | 39,400,000 | $8.65 | $341 |
| Hedge Value | -$161 | ||
| Total Revenue | $423 |
SilverBow is thus expected to generate $99 million in positive cash flow in 2H 2022. SilverBow’s capex budget for 2H 2022 appears to be around $200 million.
| $ Million | |
| Lease Operating Expense + Workovers | $43 |
| Transportation & Processing | $21 |
| Taxes Other Than Income | $32 |
| Cash G&A | $9 |
| Cash Interest | $19 |
| Capital Expenditures | $200 |
| Total Expenses | $324 |
2023 Outlook At Current Strip
SilverBow mentioned that it may average around 380 MMCFE per day in production during 2023. At $90 WTI oil and $4.75 Henry Hub gas, it expected to generate approximately $250 million in free cash flow during 2023.
The current strip for 2023 is around $87 WTI oil and $6.50 Henry Hub gas. At those prices, SilverBow is projected to generate $1.14 billion in oil and gas revenues before hedges, while SilverBow’s hedges would have negative $145 million in value for 2023.
SilverBow has hedges covering approximately 67% of its natural gas production for 2023 along with 46% of its oil production. This assumes that 63% of its 2023 production is natural gas and 25% of its 2023 production is oil.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 5,779,167 | $88.00 | $509 |
| NGLs (Barrels) | 2,774,000 | $30.50 | $85 |
| Natural Gas [MCF] | 87,381,000 | $6.25 | $546 |
| Hedge Value | -$145 | ||
| Total Revenue | $995 |
This results in a projection that SilverBow could generate $295 million in positive cash flow at current strip for 2023. This is $45 million higher than what SilverBow mentioned, and the increase is due to stronger natural gas prices (at strip) compared to SilverBow’s assumptions.
| $ Million | |
| Lease Operating Expense + Workovers | $105 |
| Transportation & Processing | $56 |
| Taxes Other Than Income | $62 |
| Cash G&A | $22 |
| Cash Interest | $30 |
| Capital Expenditures | $425 |
| Total Expenses | $700 |
Leverage And Valuation
SilverBow had $635 million in net debt at the end of Q2 2022 and should be able to reduce this to around $241 million by the end of 2023 at current strip. This would make its leverage a relatively low 0.3x at the end of 2023 without further spending on acquisitions.
I’ve bumped up my outlook for long-term (after 2023) natural gas prices to $4.00. Assuming that oil and gas prices follow current strip for 2023 and then revert back to long-term prices of $4.00 Henry Hub natural gas and $70 WTI oil after 2023, I estimate SilverBow’s value at approximately $61 per share.
Conclusion
SilverBow Resources is growing production through a combination of acquisitions and organic production growth. This is expected to result in its 2023 production averaging around 60% above Q2 2022 levels. Due to strong commodity prices (and despite its hedges), SilverBow appears capable of growing production while reducing its leverage to 0.3x by the end of 2023.
SilverBow’s oil percentage is increasing, but it still remains primarily a natural gas producer. With the improved long-term outlook (to $4.00 in my model) for natural gas prices, I’ve bumped SilverBow’s estimated value up to $61 per share.
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