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Global concerns (see Macro below) are swamping the market; however, with the downturn, it is worth determining what stocks might be value buys. This latter is affected by an investor’s overall contextual view of future interest rate moves and the likelihood of recession or deeper recession in the US and abroad.
I have previously rated SilverBow Resources (NYSE:SBOW) a ‘sell’ and its stock price has fallen -39% since then. Despite additional good results from 4Q22 and full-year 2022, the uncertainty around the conflict between SilverBow Resources’ shareholder rights provision (poison pill) and Kimmeridge Energy’s attempted takeover suggest this is not currently a stock for growth or value investors.
Indeed, Seeking Alpha itself brings up a warning from its quant rating system that SilverBow is at risk of performing badly due to signals like decelerating momentum and negative earnings per share (EPS) revisions.
SilverBow Resources has no plans to return capital to investors. The company does not pay a dividend, nor does it have a share repurchase program. The company’s shareholder rights provision, designed to fend off the Kimmeridge takeover, expires “the earliest of (i) the close of business on the first day following the date of the Company’s first annual meeting of its stockholders following the date of the rights plan and (ii) June 30, 2023, unless the rights are earlier redeemed or exchanged.”
The company has announced neither an annual meeting nor a rights redemption/exchange, so for now, the expiration of the shareholder rights plan is June 30, 2023.
SilverBow Resources is worth another look if it outlasts the battle with Kimmeridge Energy.
Macro
The biggest overall market influence, including for the energy sector in the US, is uncertainty about bank stability after the failures of Silicon Valley Bank (SIVB), Signature Bank (SBNY), and worries about others.
The focus will be the US Federal Reserve’s actions at its next meeting, which is Wednesday, March 22, 2023. The Fed’s inflation target is 2% and US inflation continues to run well above that target.
Concerns about global recession have also impacted the energy sector more specifically.
Kimmeridge Energy Investment
New York-based Kimmeridge Energy is an activist investor whose primary goal is to nudge companies toward net-zero (less carbon-intensive, e.g. less oil) production.
In 2022, Kimmeridge spent more than $100 million to acquire 14.7% of SilverBow’s shares. SilverBow’s board then adopted a limited-duration stockholder rights plan, allowing it to double its shares if Kimmeridge acquires 15% of its outstanding stock (thus diluting Kimmeridge to 7.5%). As noted above, the rights provision will expire June 30, 2023, at the latest.
Kimmeridge’s is an anti-growth strategy for (or really against) oil and gas companies. Investors with a different long-term view may wish to avoid co-investing with Kimmeridge or may wish to simply skip this particular corporate governance battle.
SilverBow’s 2022 Results, Strategy, and 2023 Guidance
In 2022, SilverBow Resources reported net income of $340 million, including a net loss on derivatives of -$74 million. Free cash flow was $22 million.
Fourth quarter production was 315 million cubic feet of natural gas equivalent/day (MMCFe/D), of which 66% was natural gas and the remaining 34% was oil and natural gas liquids.
The company’s average realized price for all production in 2022 was $7.65/MCFe; its average price after derivatives was $5.49/MCFe.
The average realized price of natural gas (alone) was $6.37/MCF; its average price after derivatives was $4.16/MCF.
At February 24, 2023, SilverBow had hedged 73% of its 2023 production. This comprised 89% of its expected natural gas production at $3.84/MCF, 51% of its expected oil production at $74.19/bbl, and 46% of its NGL production at $33.01/bbl.
The map below shows acreage from two of the four acquisitions SilverBow made in 2022.
sbow.com
Also reflected in its acquisitions strategy, the company is targeting its drilling to oil since oil wells produce better returns than natural gas wells and because Webb County gas will be transportation-constrained in 2023. Capital budget for the year is $450-$475 million with a direction of 60 gross (52 net) operated wells drilled compared to 47 gross (45 net) operated wells drilled in 2022. The drilling budget is allocated to the Central Oil (40%), Eastern Extension (22%), and Western Condensate (21%) areas.
Full-year 2023 production guidance suggests 25% production growth year-over-year, or 325-345 MMCFe/day.
First-quarter 2023 production is expected to be 295-316 MMCFe/day, with the oil portion at 10,500-11,500 BPD (roughly 20%). By 4Q23, the company’s liquids (oil and NGL) production is expected to be 45% of total production, up from 34% in 4Q22.
US Natural Gas Production and Prices
On March 17, 2023, the NYMEX natural gas future prices for April 2023 delivery at Henry Hub, Louisiana was $2.34/MMBTU. This is much lower than recent months.
US dry gas production was 101 BCF/D for the week ending March 15, 2023, so small SilverBow’s 4Q22 gas production of 208 MMCF/D represents only 0.21% of the total.
The chart shows growth in US shale gas production and the mix between basins. The lighter blue stripe represents the Eagle Ford formation in Texas, SilverBow’s primary area of production.
EIA
It is important to recall – and this is a point of contention between Kimmeridge and SilverBow – that about a third of SilverBow’s production is now oil and natural gas liquids, a percentage the company plans to expand.
SBOW and Starks Energy Economics, LLC
Reserves
SilverBow’s total proved reserves on December 31, 2022, were 2.2 trillion cubic feet of gas equivalent (TCFe), of which proved developed reserves were 43%.
Most (77.2%) are natural gas; only 22.8% are natural gas liquids and oil.
The SEC PV-10 standardized value of future net cash flows of proved reserves is $5.0 billion, up from $1.8 billion at year-end 2021. However, not only did a) SilverBow made four small acquisitions in 2022 that added reserve volumes, but b) location-adjusted average 2022 prices used in the calculation were higher:
$6.14/MCF for natural gas (compared to $3.75/MCF last year);
$94.36/barrel for oil (compared to $63.98/barrel last year);
$34.76/barrel for natural gas liquids (compared to $25.29/barrel last year).
The map below shows the hydrocarbon windows in the South Texas Eagle Ford.
EIA
Competitors and Eagle Ford M&A
SilverBow’s headquarters is in Houston, Texas.
The Eagle Ford has seen more than usual merger and acquisition activity in the last few months.
SilverBow’s larger Eagle Ford competitors include BP (BP), Baytex (BTE) – which just bought Ranger Oil and has offset to SilverBow – ConocoPhillips (COP), Chevron (CVX), Devon Energy (DVN), EOG Resources (EOG), Earthstone Energy (ESTE), INEOS (through acquisition of part of Chesapeake’s (CHK) Eagle Ford assets), Marathon Oil (MRO), and Exxon Mobil (XOM).
South Texas Eagle Ford production competes with all US gas basins – especially the enormous Appalachian reserves, those in the Louisiana Haynesville – especially those directed toward nearby LNG export – and associated (must-be-produced) gas from the west Texas Permian.
As companies reduce gas flaring and emissions, they are capturing and reselling incremental natural gas (increasing supply). Finally, as oil fields like the Permian age, they become gassier, that is, gas becomes a larger percentage of the production.
Governance
At March 1, 2023, Institutional Shareholder Services ranked SilverBow’s overall governance a 6, with sub-scores of audit (1), board (6), shareholder rights (9), and compensation (6).
In this ranking, a 1 indicates lower governance risk and a 10 indicates higher governance risk.
Approximately 11.9% of the floated stock is shorted and insiders own 2.8% of the stock.
Beta is 2.35. This is considerably more volatile than the overall market but matches the company’s status as a gas producer in a turbulent energy pricing environment, and that Kimmeridge Energy launched a takeover bid for SilverBow, so SilverBow responded with a poison pill.
As of December 30, 2022, Strategic Value Partners, LLC owned 18.3% of the company’s stock. Per Crunchbase, Strategic Value Partners “is a global alternative investment firm focused on distressed and deep value opportunities.”
At December 30, 2022, the next largest holders were Kimmeridge Energy at 14.6%, Post Oak Energy (8.3%), State Street (STT) (5.9%), Ares Management (ARES) (4.8%), BlackRock (BLK) (4.1%), Fidelity/FMR (4.1%), and Vanguard (3.2%).
Ares Management is an alternative investment manager.
BlackRock and State Street (but no longer Vanguard) are signatories to the Net Zero Asset Managers, a group that as of December 31, 2022, manages $59 trillion in assets worldwide and which (despite less energy supply due to reduced Russian exports to Europe) limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.
SilverBow’s Financial and Stock Highlights
SilverBow’s market capitalization is $470 million at the November 17th, 2023 stock closing price of $20.98 per share.
Its 52-week trading range is $20.15-$49.91/share, so the current price is 42% of the high and 41% of the one-year target price of $51.25.
Trailing twelve-month EPS is $16.53 for a very bargain current price-earnings ratio of 1.3. The averages of analysts’ expected EPS for 2023 and 2024 are $13.12 and $17.56, respectively, giving a similar very bargain forward price-earnings ratio range of 1.2-1.6.
Trailing twelve months’ operating cash flow is $331 million and levered free cash flow is -$297 million.
The company’s trailing twelve-month returns on assets and equity are excellent at 19.3% and 62.8%, respectively.
As of December 31, 2022, the company has $924 million in liabilities, including $689 million of long-term debt.
SilverBow has $1.72 billion of assets, for a liability-to-asset ratio of 54%. The ratio of debt to EBITDA is 1.3.
Book value per share of $35.48 is above market value, indicating negative investor sentiment.
With an enterprise value of $1.16 billion, the company’s EV/EBITDA ratio is a very investor-attractive 2.2. Because natural gas production tends to be lower-valued than oil production, SilverBow’s market capitalization per flowing BOE is a tiny $8970/BOE, one of the lowest measured and about 60% of its level in November 2022.
Summary comparison: market capitalization is $470 million, enterprise value is $1.16 billion, and PV-10 of reserves (at higher 2022 prices) is $5.0 billion.
SilverBow Resources does not pay a dividend and has no share repurchase program.
The mean analyst rating from four analysts is a 2.0, or “buy.” One analyst considers it significantly undervalued.
Positive and Negative Risks
Other than general stock market conditions and the recessionary risks affecting gas and oil prices, the biggest driver is likely to be the outcome of the Kimmeridge takeover battle, including actions SilverBow takes to counter it.
Within the general factors are inflation in all costs and the Federal Reserve’s continuing interest rate raises.
Potential investors should consider their US natural gas price expectations, particularly in the South Texas Eagle Ford basin, as a key factor most likely to affect SilverBow. As with all commodity-driven companies, it is subject to price fluctuations which are only partially offset by hedging.
The company also has positive uplift from its oil and natural gas liquids production.
Recommendations for SilverBow Resources
I do not recommend buying SilverBow Resources until its governance battle is resolved. However, day traders and speculators may find SBOW stock of interest.
While it is well-managed and has stellar trailing and forward price-earnings ratios, good hedges, and an oil-focused drilling program, the only way to realize a return is to bet on stock price appreciation since it has no dividend or share repurchase program.
The goals of long-term, value-seeking, and dividend/capital return-seeking investors may not be met by SilverBow Resources given the differing goals of its largest equity holders and managers. The conflict and potential for conflict between SilverBow management with its poison pill, 18%-owner Strategic Value Partners, net-zero activist Kimmeridge Energy, and others do not favor long-term or individual investors.
