SilverBow Resources (NYSE:SBOW) met production expectations in Q1 2023, including delivering relatively strong oil production. It is dealing with higher production costs though, resulting in it bumping up its cost guidance for the full year.
This increases SilverBow’s projected cash burn to around $41 million at current strip as it attempts to grow oil production by over 30% from Q4 2022 levels.
I now estimate SilverBow’s value at approximately $33 per share due to its higher costs and increased cash burn compared to when I looked at it in March. SilverBow does still appear to have plenty of upside, but it will need to carefully manage its debt, with its credit facility projected to be at 75% utilization at the end of the year.
Q1 2023 Results
SilverBow’s Q1 2023 results largely met expectations. SilverBow averaged 304 MMCFE per day in production during Q1 2023, near the midpoint of its guidance range for the quarter. Its oil production ended up at 11,362 barrels per day, which was near the high end of its guidance range. SilverBow ended up reiterating its full-year guidance for production.
On the other hand, SilverBow’s costs ended up a bit higher than expected. SilverBow’s total production expenses ended up at $1.54 per Mcfe during the quarter, compared to its expectations for $1.40 to $1.53 per Mcfe.
SilverBow now expects its total production expenses to average approximately $1.50 per Mcfe during 2023 at its updated guidance midpoint. This compares to $1.32 per Mcfe based on its original guidance midpoint.
Updated 2023 Outlook
SilverBow continues to expect to average around 335 MMCFE per day in production during 2023, with production anticipated to continue increasing into the second half of the year.
Current strip is now around $73 to $74 WTI oil and $2.60 Henry Hub natural gas. At those commodity prices, SilverBow is projected to generate $684 million in revenues after hedges.
SilverBow mentioned (as of late April) that it had 72% of its production hedged for the rest of 2023, including 91% of its natural gas production, 48% of its oil production and 42% of its NGLs production. Thus SilverBow’s 2023 financial results will be most affected by changes in oil prices.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 5,246,875 | $70.25 | $369 |
| NGLs (Barrels) | 2,974,750 | $20.65 | $61 |
| Natural Gas [MCF] | 73,000,000 | $2.20 | $161 |
| Hedge Value | $93 | ||
| Total Revenue | $684 |
As mentioned above, SilverBow now expects higher production expenses in 2023. This results in a projection that it will end up with $41 million in cash burn during 2023.
| $ Million | |
| Lease Operating Expense | $92 |
| Transportation & Processing | $50 |
| Taxes Other Than Income | $41 |
| Cash G&A | $20 |
| Cash Interest | $60 |
| Capital Expenditures | $462 |
| Total Expenses | $725 |
SilverBow’s cash burn is largely due to its attempts to grow production (particularly for oil) significantly in 2023. Based on current strip, it may end up with a 96% reinvestment rate, while its leverage is projected at 1.5x at the end of 2023.
Debt Situation
With no working capital changes, SilverBow would end 2023 with around $732 million in net debt now. This would include $582 million in credit facility borrowings. SilverBow currently has a $775 million borrowing base for that credit facility, so there would be roughly 75% utilization at the end of 2023 if its borrowing base doesn’t change.
SilverBow will need to be careful to make sure that it maintains sufficient borrowing capacity under its credit facility, otherwise it may be forced to slash development capex and/or do an equity raise.
Estimated Valuation
I am now using $75 WTI oil and $3.75 NYMEX gas as my long-term commodity prices. At those prices, I estimate SilverBow’s value at around $33 per share (at the end of 2023). This is down several dollars from my previous estimate of SilverBow’s value due to its slightly higher cash burn in 2023 as well as its revised guidance around production costs.
Conclusion
SilverBow is still on track to grow its oil production by over 30% in 2023 compared to Q4 2022. It delivered oil production towards the high end of its guidance range for Q1 2023.
SilverBow is also dealing with increased costs though, leading it to revise its cost guidance upwards for the year. As a result of the increased costs, I now expect SilverBow to end up with $41 million in cash burn in 2023 as it spends to grow oil production.
SilverBow’s debt has not reached critical levels yet, although its leverage and credit facility utilization are a bit higher than ideal. Thus SilverBow will need to be careful about managing its debt.
SilverBow does have a fair amount of upside with an estimated value of approximately $33 per share if it can manage its debt without an equity offering.
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